Southside Bancshares, Inc. (SBSI) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. And welcome to the Southside Bancshares, Inc. Third Quarter 2019 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] Please be advised today’s conference is being recorded. [Operator Instructions] I would like to hand the conference over to your speaker today, Ms. Bibby, Ms. Lindsey Bibby, Vice President of Investor Relations. Ma'am please go ahead.

Thank you, Michelle. Good morning everyone and welcome to Southside Bancshares' third quarter 2019 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 uncertainty. 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, Senior Executive Vice President and CFO. Our agenda today is as follows. First, you'll hear Julie discuss an overview of our financial results, then we will share his comments on the quarter and an update on our non-performing assets. I will now turn the call over to Julie.

Thank you, Lindsey. Good morning everyone and welcome to Southside Bancshares' third quarter 2019 earnings call. We reported net income of $19.8 million for the third quarter, an increase of $1.2 million or 6.4% on a linked-quarter basis and a decrease of $511,000 or 2.5% compared to the same period in 2018. For the quarter ended September 30th, 2019, our diluted earnings per share were $0.58, an increase of $0.03 on a linked-quarter basis and consistent with the same period in 2018. We’re pleased to report additional loan growth during the quarter with an increase of $39.8 million to $3.5 billion on a linked-quarter basis. The additional loan growth during the quarter brings our year-to-date loan growth to 5.6%. During the third quarter, we experienced most of the loan growth in our construction portfolio and to a lesser extent, growth in both our wonderful residential and municipal portfolios. Our allowance for loan loss increased $424,000 or 1.7% to $25.1 million from June 30, 2019. Our credit quality remains strong with a slight decrease in non-performing assets as a percentage of total assets to 0.45% at September 30 compared to 0.46% as of June 30 2019 with only a slight increase in non-performing assets of $384,000 or 1.3% to $29.7 million at the end of the third quarter. Our securities portfolio increased $145.5 million or 6.5% for the quarter ended September 30, 2019 due to purchases in our municipal and mortgage backed securities portfolios. At September 30, 2019 we had a net unrealized gain in the securities portfolio of $62.8 million in a duration of 4.7 years, a decrease from 5.8 years at the end of June due to the increase in prepayments of mortgage backed securities during the quarter. Our mix of loans and securities shifted slightly this quarter end with loans at 60% and securities at 40%, compared to a mix of 61% loans and 39% securities at the end of the second quarter. This flat shift was due to our growth in the securities portfolio outpacing our loan growth. Our net interest margin for the third quarter of 2019 decreased 14 basis points to 303 from 317 in the previous quarter. The net interest margin was compressed by lower interest rates resulting in a lower yield on average assets of 14 basis points. This decrease in the yield on average assets more than offset the one basis point decrease in the cost of interest bearing liabilities, resulting in the 13 basis point decrease in our net interest spread for the third quarter to 268 compared with 281 in the second quarter of 2019. Linked quarter, our net interest income decreased $758,000 or 1.8%, our loan accretion this quarter decreased $395,000 from the second quarter of 2019 resulting in $290,000 of loan accretion recorded during the quarter. The decrease in accretion reduced our NIM by three basis points as well as reducing net interest income. During the third quarter, we recorded provision for loan loss expanse of $1 million, a linked quarter decrease of $1.5 million. Linked quarter, our non-interest income excluding net security gains increased $231,000 or 2.1%. primarily due to increases in deposit services income, swap fee income and brokerage services. For the three months ended September 30, 2019 our non-interest expense decreased $674,000 or 2.3% primarily driven by the FDIC small bank assessment credit. We have approximately 1.2 million remaining in credits to be applied at some point in the future to our FDIC insurance. We experienced an improvement in our efficiency ratio down to 50.53% compared to 51.44% on a linked quarter basis due primarily to the decrease in non-interest expense. For the fourth quarter, absent the FDIC assessment credit, we estimate our non-interest expense will be consistent with the second quarter of 2019 approximately $29.7 million. Income tax expense increased $92,000 compared to the last quarter, reflecting an effective tax rate of 15.6% for the third quarter. We expect to end the year with an effective tax rate consistent with the third quarter at 15.6%. Thank you so much and I will now turn the call to Lee.

Thank you, Julie. I would like to thank everyone for joining us on our call this morning. We enjoyed a very good third quarter that was highlighted by 4.6% linked quarter loan growth, a return on average tangible equity of 14% and an efficiency ratio that improved to 50.5%. We continue to experience solid third quarter loan growth in spite of the headwinds and several large loan prepayments that we experienced during the quarter. Annualized loan growth during the first three quarters was 5.9%, which is consistent with the revised loan growth guidance of 6% that we provided during last quarter’s earnings call. During the third quarter, we were successful in hiring additional lenders in the Austin and East Texas markets. Prospects for our fourth quarter loan growth appear promising, given our solid loan pipeline, the hiring of additional lenders, and few currently known fourth quarter loan prepayments. As Julie explained, we experienced a linked quarter 14 basis point decrease in our net interest margin. Third quarter average loan and security growth was largely funded by higher cost FHLB advances. In addition, during the third quarter prepayments on our mortgage backed securities increased as long-term interest rates declined significantly resulting in an increase in amortization expense. We anticipate our fourth quarter funding costs should benefit from the recent late third quarter and early fourth quarter decrease in short term interest rates. Since September 30, long-term treasury yields have increased slightly with the tenure up approximately 10 basis points. While the short term treasury yields have decreased, with the three months treasury yield down approximately 15 basis points, and overall shift in the yield curve of 25 basis points, which should benefit our fourth quarter cost of funds. Our more positively slowed yield curve during the fourth quarter combined with historically slower light fall and winter mortgage backed security prepayment speeds could also reduce our stabilized amortization expense. As a result, we anticipate our NIM should be stable to higher during the fourth quarter. Our credit quality remain solid, and we're not currently seeing additional areas of concern. One of our two largest nonaccrual loans reflected significant improvement during the third quarter as the real estate associated with this loan that was significantly damaged by Hurricane Harvey reopened for business last quarter. We will continue to monitor this loan for possible consideration for upgrade. Economic conditions in the Texas markets we serve remain solid with our Austin and DFW markets performing well above average. We anticipate continuing to add additional revenue producers during the coming quarters with a special focus in the higher growth Texas markets. We look forward to opening our newest branch in Kingwood, a high growth area just north of Houston next month. We continue to explore opportunities for further growth opportunities resulting from either an acquisition or through organic growth. I will now conclude my comments and we will open the lines for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is open. Please go ahead.

Hey, good morning.

Good morning, Brad.

Good morning.

Lee, I was writing quickly during your NIM commentary. I appreciate all the color, but want to make sure I kind of heard the final guidance, you kind of expect it to be stable to slightly up. I'm just curious if you could quantify the amount of amortization expense you had in the quarter on the bond portfolio maybe versus what it was in the second. And I'm sorry, if I missed that. I was trying to write everything down quickly?

We will have to get that number for you, Brad. And we will have that out. We'll send that out.

Okay.

I know it's up because I know the prepayments increased, and I know our amortization expense was up and it impacted the NIM. But we don't have that exact number right now.

Okay, great. And then yes that'd be great if we could follow-up on that. And then just in terms of repricing the Federal Home Loan Bank advances, I know you have updated info in the queue. But any anything major rolling off in the fourth quarter?

We have a lot of -- we've kept all the Home Loan Bank advances, not all that we have. We do have $260 million or $80 million hedge that we've had hedged for a long time. But all the rest we have kept relatively short. I don't know that we've gone out much past three months on anything. Most of it's been either overnight or 28 day advances. So it will reprice fairly quickly.

Okay, great. And then in terms of your commentary around loan growth, obviously it sounds like the fourth quarter will be a little bit better from a payout perspective. And it sounds like you hired some new lenders this quarter. Still feel comfortable kind of as you look at in the next year, kind of at that mid single digit pace, or might we see some acceleration with some of the folks you brought over?

I think right now we're looking at 6% for 2020. But we don't expect to revise that down for 2020. If anything, we might, when we come in January, we might have a slightly higher number, but it's not going to deviate from that very much.

Okay, great. Thank you guys. Really appreciate it.

All right. Thank you, Brad.

Thank you. And our next question comes from the line of Brett Rabatin with Piper Jaffray. Your line is open. Please go ahead.

Hey, good morning, everyone.

Good morning, Brett.

Wanted to just to go back to prepayments for a second. Could you quantify the amount of prepayments you had in the quarter and was that in commercial real estate and then just thinking about any visibility you might have into prepayments from here, I know that's been a bit of a challenge for you for growth?

Most of it was in the CRE portfolio. It's credits that moved out of construction and into a permanent and they sold properties and things of that nature, a little bit in the C&I space, but I think it was mostly centered in the CRE space. The magnitude it was probably close to $50 million, maybe as high as $60 million during the quarter versus we had very little in the second quarter.

Okay. And then Lee, as you look at your existing commercial real estate book from here, you kind of see a pipeline that might be susceptible to prepayments, or can you give us any color on how you think about that going forward?

Well, as you look at our construction book, some of that and we know that going in. Some of that wanted once they finish construction on the property and leave to that or stabilize the property. Some of our borrowers are going to hold it, and some of them are just simply going to sell it, which is and we know the ones that typically sell the properties going in. So, I anticipate that we’ll continue to see prepayments in future quarters, as to some quarters, it's heavier than others.

Okay. And then you mentioned buying municipals and buying securities during the quarter. Can you talk about what you bought average rate and then kind of how you're trying to insulate the securities portfolio from this environment?

We bought a lot of municipal securities, we also bought some mortgage backed securities. And we're kind of operating on both sides, we were able to find some mortgage backed securities that we’re paying 60%, 70% and buy them at reasonably nice yields and realizing that they probably will not continue to pay it 60%, 70% for very long and our downside is very, very small, versus the upsides really good. We have bought also some longer duration mortgage backed securities where the principal is locked out for a period of time, so that the amortization expense associated with that should prepayments kick up will be less. On the municipal side, we’re just continuing to buy good quality credits in here in Texas and our municipal book had decreased pretty significantly the first of the year, when we saw a lot of the really, really short stuff that was going to have called -- be called away pretty quickly. And we're replacing that with newer securities with eight to 10 year calls on them.

Okay, and one last housekeeping issue. What was the discount accretion for the quarter?

It was 2.90 and it was down about 3.95.

Okay.

And that accounted for three, three basis points of the 14 basis point decrease in the NIM.

Okay, great. I appreciate all the color.

All right, thank you.

Thank you. And our next question comes from the line of Woody Lay with KBW. Your line is open, please go ahead.

Good morning, guys.

Good morning.

Good morning.

It was nice to hear you think the NIM can remain flat to maybe up a couple of basis points. Do you think that would still hold true if we saw another rate cuts in the fourth quarter?

Yes, I did. And it's mainly because the slope of the yield curve has actually moved in the favor of banking, from the standpoint of it was heavily inverted, pretty much all the way along the yield curve except for the 30 year, and now it's, there's a positive slope to the yield curve. It's still partially inverted a few places but not anything like it was at the end of August or even in early September.

Got it. That's helpful. And then touching on the kind of accretion again. You think this is a pretty good run rate going forward or do you think we could see that number pickup next quarter and throughout 2020?

I expect that number to pickup, it was significantly lower than what we have seen historically the last two quarters. And in most of that, how that spread out through the quarter is, it was the very lowest, the lowest month of the quarter was the first month of the quarter, and it did pickup. So I do anticipate a pickup during, I believe it is well would have been July, we had several loans that paid off that actually had premiums on NIM. And so it was really that was really more the offsetting factor than necessarily having a decrease in accretion, but the result was a decrease. So it picked up as the quarter went on, so I would think closer to 400 to 500 is what my expectation would be, if I could, judge the last couple of months of the quarter.

Got it.

But, again, you never know for sure what's going to pay-off.

And then last from me just looking at that FDIC benefit. It’s nice to hear get more down the road. But I was just wondering if you could quantify how much you received in the third quarter?

We received a credit of $413,000 in this for the second quarter or for the third quarter. It was basically it's paid in a rear, so it is based on the prior quarters reserve ratio, but it was $413,000. So we would expect it to be about that much each month that we or each quarter that we get to use the credit.

Got it. All right, that is all for me. Thanks, guys.

All right, thank you.

Thank you. [Operator Instructions] Our next question comes from the line of Michael Young with SunTrust. Your line is open. Please go ahead.

Hey, good morning. This is Brandon King on from Michael Young.

Good morning, Brandon.

Good morning. And I wanted to touch expenses. So I know in prepared remarks, expenses are expected to be relatively stable going forward. But with the hiring of additional lenders, are you expecting to offset some of that hiring with cost fees in other areas or just want to get a picture of what the magnitude of hiring is going forward?

We do expect to see some cost saves first quarter. But beyond that, I don't know that will have a lot and so going into next year, the quarterly expense may start to move up slightly. But the hope would be that these revenue producers would produce additional net interest income and fees that would more than offset that.

Thank you. That's helpful and then going to share repurchase plan authorized in September saw you purchased 25,000 shares so far 4Q and share prices up around like 2% since you announced the repurchase plan. I just want to know if you plan on purchasing using all of that to this quarter or what the pace is going forward into next year if you plan on using some of that, I was stressing out to farther in 2020?

That really depends on what the stock does in price. It's the last time we did one of these stock repurchases in late 2018, it was very easy to find stock now, it's much more difficult to find it. So I don't anticipate at this point that we would use it all up in the fourth quarter. But it's hard to know. But we end up with another December like we did last year then who knows, we could.

Got you. Thank you very much. That's all I have for today.

All right. Thank you.

Thank you. And I'm showing no further questions. And I would like to turn the conference back over to President and CEO, Mr. Lee Gibson.

Thank you for joining us today. We look forward to being with you in January to report year-end and fourth quarter results. And this concludes our comments.

Ladies and gentlemen, thank you for participating in today's conference. You may all disconnect.