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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