Southside Bancshares Inc (SBSI) Q4 2020 Earnings Call Transcript

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Southside Bancshares Inc (SBSI 0.60%)
Q4 2020 Earnings Call
Jan 27, 2021, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Southside Bancshares, Inc. Fourth Quarter and Year End 2020 Earnings Call. [Operator Instructions] Later, we will contact a question-and-answer session, and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Lindsey Bailes, Vice President, Investor Relations. Please go ahead.

Lindsey Bailes -- Vice President, Investor Relations

Thank you, Tiffany. Good morning, everyone and welcome to Southside Bancshares' fourth quarter and year end 2020 earnings call. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call and 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; then Julie will give an overview of our financial results. I will now turn the call over to Lee.

Lee R. Gibson III -- President & Chief Executive Officer

Good morning, and welcome to Southside Bancshares' fourth quarter and year-end earnings call for 2020. This morning, we reported record annual and fourth quarter net income and earnings per share. Closing the year on a strong note, the fourth quarter results were largely driven by an increase in net interest income and a partial reversal of provision for credit losses. Additionally, during the quarter, we expensed approximately $1 million related to 3 branch closings. In March, we will close two in-store branches in East Texas that are in close proximity to other Southside branches and one lease branch in North Texas.

During the fourth quarter, our net interest margin increased 18 basis points, of which 14 basis points were attributable to additional accretion income on loans forgiven by the SBA. Overall, during 2020, our net interest margin increased 1 basis point to 3.07%, while our net interest spread increased 15 basis points. Increasing our NIM during 2020, given the relatively flat and historically low interest rate environment was a big contributor to the success we enjoyed during 2020. The decision to purchase $500 million of high-quality municipal bonds had extremely attractive yields during the short-term bond market liquidity crisis in March, combined with funding decisions are big contributors to maintaining the NIM.

For the year ended December 31, 2020, net income increased 10.2% to a record $82.2 million compared to $74.6 million in 2019. The increase was due to an increase in net interest income and non-interest income that was partially offset by $15 million increase in the provision for credit losses, largely due to the implementation during the same time when heightened economic uncertainties related to COVID-19 surfaced. At year end, our asset quality metrics improved slightly when compared to 2019 as non-performing assets to total assets decreased from 0.26% to 0.25%. COVID-19 modified loans have decreased to $35 million as of Monday of this total $32 million representing 2 loans on 3 hotels are expected to resume payments within the next 2 weeks, which will further reduce modified loans to $3 million.

We continue to diligently focus on asset quality, through ongoing monitoring of loan portfolio and the most at-risk categories. We just completed the latest deep dive into our loan portfolio this week. In addition to our normal procedures, we are reviewing more detailed reports by industry within the loan portfolio and as needed on an individual loan basis. Overall, we are encouraged and optimistic by what we've learned and observed as a result of this heightened scrutiny.

Our long established consistent credit underwriting standards are stress tested well by the pandemic and reaffirmed our belief that they are sound. Our loan pipeline has increased during 2021, a trend we anticipate will continue throughout the year given the outlook for the high growth markets we serve. After carefully considering potential loan growth for 2021, we are currently budgeting for 7% loan growth net of any PPP loans forgiven or originated.

During the fourth quarter, we successfully issued a $100 million sub-debt offering. This low cost capital provides further optionality to grow through acquisitions or organically. We believe during the next few years, bank consolidation in Texas will accelerate. As a result, utilizing the strength of our balance sheet, liquidity and capital position, we believe we are well positioned to actively pursue attractive bank acquisitions, while at the same time organically growing and expanding our Texas franchise in the coming years.

The Texas markets we serve continue to experience growth and increased economic activity, due to the end migration from other states and corporate relocations. Tyler, where we are headquartered, we will soon be home to a new medical school that is projected to significantly enhance economic activity, much of which is likely [Phonetic] to occur within a block from our main campus.

After what seemed like a very difficult and challenging start to the year, 2020 in my opinion, ultimately, turned out to be the best year in the 60-year history of Southside. During 2020, we all became better bankers and embrace technology at a new level. During 2021, we will invest in additional revenue producers, many of which have been identified and we will make continued investments in technology to enhance the customer experience and produce additional efficiencies.

In closing, a few weeks ago, we were honored to be recognized by Bank Director magazine as one of the top 10 Banking Powerhouses in America, as measured over the last 20 years, further confirming our commitment to our long-term business model and growth strategy. I want to thank all of our team members for their significant contributions. You're making this recognition and our record results for 2020 a reality.

I will now turn the call over to Julie.

Julie N. Shamburger -- Chief Financial Officer

Thank you, Lee. Good morning, everyone, and welcome to our call this morning. We ended the year strong with record fourth quarter net income of $29.6 million, an increase of $2.5 million or 9.2% on linked quarter basis, as well as, record annual net income of $82.2 million for 2020, an increase of $7.6 million or 10.2% compared to 2019. For the year ended December 31, 2020, our diluted earnings per share increased $0.27 or 12.3% to $2.47 per share. For the quarter ended December 31, 2020, our diluted earnings per share increased $0.07 or 8.5% to $0.89 per share compared to $0.82 per share on a linked quarter basis.

Linked quarter, our loan portfolio decreased $132.2 million or 3.5% to $3.66 billion, driven largely by decreased of $88 million of PPP loans. For the year ended 2020, we reported an increase in loans of $89.6 million or 2.5%, inclusive of approximately $214.8 million of PPP loans, net of deferred fees. Excluding PPP loans, our total loans decreased $125.3 million or 3.5% in 2020. Although our pipeline is beginning to increase, we believe the loan growth may be challenged during the first quarter.

Our credit quality metrics remained strong with non-performing assets as a percentage of total assets of 0.25% at year end compared to 0.26%, at December 31, 2019. On a linked quarter basis, total non-performing assets increased 3.9% or $658,000. Linked quarter, our allowance for loan loss decreased $6.1 million or 11.1% to $49 million at year end, due to a partial reversal of provision of $5.9 million in the fourth quarter, largely the result of an improvement in the economic forecast into a lesser extent, the decrease in the loan portfolio at year end.

At December 31, 2020, we reported our allowance as a percentage of total loans at 1.34% and when excluding the PPP loans 1.42%. As of January 25, our COVID-19 deferrals have decreased to $35 million, a decrease of approximately $291 million or 89%, since we reported $326 million on our second quarter earnings call. The largest categories remaining deferrals are hotels at $32.1 million; followed by mortgages at $2.9 million.

At December 31, our loans with oil and gas industry exposure were $104.5 million or 2.86% of total loans. There are no COVID-19 modifications with oil and gas industry exposure. Our securities portfolio decreased $52.3 million or 1.9% for the quarter ended December 31 compared to September 30. We recognized approximately $24,000 in net security losses on the sale of AFS securities during the quarter. At year end, we had a net unrealized gain in the securities portfolio of $156 million, and the duration of the portfolio was 4.7 years, an increase from 4.4 years at the end of 2019.

Our mix of loans and securities at year end shifted slightly to 58% and 42%, compared to 59% and 41% at 2019, primarily due to municipal bond purchases in the first quarter, the mix remain consistent on a linked quarter basis.

We are also pleased to mention that in November, we issued $100 million of 3.875% fixed-to-floating rate subordinated notes due in 2030. This debt initially bear interest at a fixed rate of 3.875% through November 14, 2025, and thereafter adjust quarterly at a floating rate equal to three-month SOFR plus 366 basis points. We believe the issuance and the subordinated notes strengthens our capital position, as well as provide spending for general corporate purposes in loan and franchise growth opportunities.

Since the end of September, we have purchased 175,118 shares of our stock at an average price of $30.97. Approximately, 930,000 authorized shares remain under our stock repurchase plan. Our net interest margin increased to 3.20%, an increase of 18 basis points from 3.02% on a linked quarter basis. Approximately, 14 basis points of this increase is due to increased accretion recorded at $2.2 million related to PPP loans forgiven during the quarter, and our net interest spread increased to 3.02% for the fourth quarter, an increase from 2.84% linked quarter.

On an annual basis, the net interest margin increased slightly to 3.07% from 3.06% at December 31, 2019, a result of lower deposit and funding costs, offsetting decreases in our average yield on earning assets. For the three months ended December 31, net interest income increased $2.1 million or 4.6% driven primarily by the increase in accretion during the quarter. We recorded $453,000 in purchase loan accretion this quarter, a decrease of $150,000 or 25% from the prior quarter. Additionally, we recorded approximately $3.5 million in net fees related to the PPP program, included in interest income this quarter.

As of December 31, 2020, we had net deferred fees of approximately $4.3 million remaining, and we are estimating approximately 75% will be recorded to income by the end of June 2021. For the three months ended December 31, non-interest income, excluding net gains and losses on sale of AFS securities decreased $139,000 or 1.3% for the linked quarter. For the year ended December 31, non-interest expense increased $4 million or 3.4% and for the linked quarter, decreased $301,000 or 1%. For the first quarter of 2021, we are estimating non-interest expense of approximately $31 million.

Our fully taxable-equivalent efficiency ratio decreased to 47.36% compared to 50.07% on a linked quarter basis and for the year ended December 31, 2020, we reported 49.36% compared to 52.36% for the comparable period in 2019. The decrease in the fully taxable-equivalent efficiency ratio for both periods was primarily due to the increase in net interest income for both periods.

Income tax expense increased $482,000 or 12.7% compared to the three months ended September 30, driven by the increase in pre-tax income. Our effective tax rate increased slightly to 12.6% for the fourth quarter from 12.3% in the previous quarter. For the year ended December 31, 2020, our effective tax rate was 12.1%. At this time, we are estimating an effective tax rate of 11% for the first quarter.

Thank you for joining us today. This concludes our comments and we will open the line for questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Brett Rabatin with Hovde Group.

Brett Rabatin -- Hovde Group

Good morning, everyone.

Lee R. Gibson III -- President & Chief Executive Officer

Good morning, Brett.

Brett Rabatin -- Hovde Group

I wanted to first ask, just -- we appreciate all the color around the core versus the stated margin. Just kind of given that you guys have a $1 billion of CD is still to reprice or the CDs of $1 billion, have a 91 basis point cost, it would seem like the core margin to continue to progress a little higher. Could you talk about maybe your thoughts on the core margin from here? And then with PPP, appreciate your color on the fees there. How active you think you might be with this next round of that program?

Lee R. Gibson III -- President & Chief Executive Officer

On the CDs, we do anticipate that we'll be able to reprice those down, some of those in the quarter were -- brokered CDs, which for the entire quarter were down linked quarter basis -- were down about $200 million. So yes, we do have some additional room there. On the PPP loans, we are taking applications right now. We expect to be active. We initiated $315 million in the first round back in April and May of 2020, different restrictions this time and less money available. So we're estimating somewhere in the $50 million range. That will originate, but we have a lot of activity at this point in time, but it's just difficult to pinpoint a number. And so we're estimating about $50 million.

Brett Rabatin -- Hovde Group

Okay, that's helpful. And then the guidance around the expense base going forward $31 million in the first quarter, you're closing some branches, does 1Q is that $31 million, would that be inclusive of any non-recurring expenses? And just how do we think about the trajectory, you've obviously manage expense as well the past year -- in 2 years really, do you have any tech investments you need to make. I'm just thinking about maybe the full year versus the first quarter, as you guys are doing your plans for the year.

Julie N. Shamburger -- Chief Financial Officer

We don't expect -- we took -- as Lee mentioned about $1 million in losses and rent-related and non-recurring items in the fourth quarter. So we don't expect in the first quarter any non-recurring items associated with those branch closures. Obviously, we will see some decline in rent compared to -- for those branches, compared to Q1 of 2020. But we do not expect any large expenses related to those closures. We took those once we made the announcement that we were doing it. We booked in the 2020 year because that's when we announced it.

Lee R. Gibson III -- President & Chief Executive Officer

We do anticipate that there'll be some personnel cost savings there. But we also are looking at bringing on some additional revenue producers. So I believe that will offset there. But long-term, I think that's going to be a real benefit for us as they will be producing additional revenue well above what any revenue those branches may have produced. And the 2 branches in East Texas, we expect to retain virtually. I'm not going to say, all, but at least 80% of the deposits, because of the close proximity to other branches. And obviously, we'll retain all the loans from the 3 branches.

Brett Rabatin -- Hovde Group

Okay, that's helpful. And then if I can sneak in one last one, just curious on the buyback and capital, as you've got a little higher level now and it's really sounds like you're a little more optimistic on M&A happening. I'm just curious on what you're hearing in terms of conversations and then on the buyback if you intend to continue to be or intend to be active with the purchase plan?

Lee R. Gibson III -- President & Chief Executive Officer

Sure. We do expect to purchase additional shares in the coming months. We will be evaluating levels that we'll be purchasing at. On the acquisition front, we're hearing from a number of parties that there is -- it's going to be increased interest by sellers. I think the new administration and potential additional regulation, the opportunity to adopt CECL in a couple of years and a few things like that, combined with some of the aging boards and ownership groups among the large number of private banks in the State of Texas were all going to act to basically produce more acquisition opportunities.

Brett Rabatin -- Hovde Group

Okay, thanks. Appreciate all the color.

Operator

Your next question comes from the line of Michael Young with Truist Securities.

Michael Young -- Truist Securities

Good morning, Lee. How was it going?

Lee R. Gibson III -- President & Chief Executive Officer

Good morning, Mike.

Michael Young -- Truist Securities

Wanted to just kind of follow-up on the loan growth outlook, 7% organic ex kind of the PPP impacts, but kind of a soft first quarter, so should we expect it to be fairly backend loaded in the year, maybe more related to construction kind of resuming and funding up? Or is this more related to kind of the new hires?

Lee R. Gibson III -- President & Chief Executive Officer

Right. I think it's kind of all three. And then a little uncertainty about some loans that we have in the pipeline as to whether they'll close in the first quarter or the second quarter. But yes, I think for the most part, I would anticipate, most of the loan growth would occur second through fourth quarter of this year. As Julie mentioned, first quarter, it may be a little challenge. Certainly, we're going to be seeing a lot of additional PPP forgiveness during the first and second quarter. But overall, I think you're correct in assuming second through fourth quarters where we're going to see the majority of the increase.

Michael Young -- Truist Securities

And maybe really quickly just on loan pricing, could you talk about kind of the dynamics you're seeing. Is there stability there? Or is it actually better maybe than 2020, any kind of commentary given kind of that rise in the long into the curve?

Lee R. Gibson III -- President & Chief Executive Officer

For the high quality loans that most banks go after competition is pretty fares. You can give on credit quality. You can give on structure. You can give on pricing. We're not big on giving on credit quality at all. Structure is something we think it's pretty important. We'll give on that a little bit sometimes. So pricing is where it comes in and pricing is like all of the credit market is pretty tight right now. So we could probably get higher pricing, if we went after a different level of credit. But that's not what we historically have done.

Michael Young -- Truist Securities

Okay. And last one for me, just on the reserve, you still got over like 6 times coverage of non-performers, which is very high, but should we expect that level to still trend down with positive macro assumptions and kind of some of these hotel loans returning to normal or any other impacts or factors we should think about there?

Lee R. Gibson III -- President & Chief Executive Officer

Assuming the vaccine gets out to a large number of people and large number of people take it and we get what they call herd immunity going. I think the markets we're in are continuing to grow and they'll do nothing but probably grow faster and the economic activity will be stronger in those markets. So it's all dependent on when we kind of see COVID in the rearview mirror, but it's -- the outlook looks good at this point in time.

Michael Young -- Truist Securities

Okay, thanks.

Operator

Your next question comes from the line of Graham Dick with Piper Sandler.

Graham Dick -- Piper Sandler

Hey, guys, good morning.

Lee R. Gibson III -- President & Chief Executive Officer

Good morning, Graham.

Graham Dick -- Piper Sandler

So just a few quick ones here for me, I guess I'll start on the securities portfolio. Can you talk a little around the mortgage-backed securities book and what kind of drove those yields higher this quarter, relative to what we saw in 3Q?

Lee R. Gibson III -- President & Chief Executive Officer

Well. As Julie mentioned, we did sell some securities in the fourth quarter, we went through and analyze some of the premium mortgage-backed securities that have continuing to prepay and look like they are not going to probably stop anytime in the near future. Those were obviously at the lowest yields. And so we did sell out the -- those securities that we didn't think there was really any significant hope of them recovering back to yield, we'd be happy with. So I think that partially drove it. It certainly wasn't a slowdown in prepayments. The prepayments continue to come in at a fairly fast rate. And we have -- we did have some prepayment penalties on some of our CMBS that helped. And then we're also getting down to the point where we have a lot of what I'd call locked out CMOs that probably won't pay regardless of what the prepays are for the year to 18 months. And then a lot in the -- most of the CMBS are either they can't prepay or they have yield maintenance on them. So that's kind of where we are at this point.

Graham Dick -- Piper Sandler

Okay, great. That's awesome color. And then I guess kind of going back to loan growth, what are you guys seeing from borrowers and in your economies that's giving you this, the confidence behind the 7% growth for 2021. I mean, you've seen a lot of pent-up demand, or is this just kind of like you talked about on relocations to Texas and the general positive trends surrounded in reopening in your economies?

Lee R. Gibson III -- President & Chief Executive Officer

Yes, when you look at the DFW area and especially the Austin area and even to some extent the Houston area. And you just look at the major corporation -- corporate relocations that are taking place and they've been announced even in the last few months. They're just bursting at the seams and there is -- the growth is reoccurring, there is an end user for it. And with that, the more people that move into those areas, the more Amazon facilities and all the other types of warehouses are required to be able to continue commerce in the way that that were experiencing commerce being done today. So it's just kind of a self-perpetuating engine. And fortunately, Texas is benefiting and we happen to be in the markets that are benefiting the most in Texas.

Graham Dick -- Piper Sandler

Okay, great. And then just one last housekeeping item for me here. Do you all happen to have the average PPP balance this quarter?

Lee R. Gibson III -- President & Chief Executive Officer

And you're talking about -- yes, for the fourth quarter.

Graham Dick -- Piper Sandler

No. Average loan balances in PPP for the fourth quarter.

Julie N. Shamburger -- Chief Financial Officer

Yes, the average was around $272 million.

Graham Dick -- Piper Sandler

Okay, great. Thank you guys, congrats on a great quarter.

Lee R. Gibson III -- President & Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Woody Lay with KBW.

Woody Lay -- Keefe Bruyette & Woods Inc.

Good morning, guys. Just wanted to go back to the core NIM and given the loan growth outlook. Do you think as we progress through 2021, we could see the core NIM remain stable or even possibly expanded slightly?

Lee R. Gibson III -- President & Chief Executive Officer

I think for the first couple of quarters, I expect to see it stay kind of in the general range where it is. Given the types of loans we're looking at, I'm not sure that the NIMs going to have any significant growth in 2021. And most of the heavy lifting on the funding side has been down, but there still is some to do there. So overall, I think we're looking at a NIM that's fairly stable for most of 2021.

Woody Lay -- Keefe Bruyette & Woods Inc.

Okay, that's helpful. And then last from me, on the M&A side. I was just curious, if there is any geographies within Texas that would be most attractive to acquire and for you all?

Lee R. Gibson III -- President & Chief Executive Officer

Basically, where we look for attractive acquisitions is along Interstate 35 to the East we'll go -- we look West of 35, which if you know Texas 35 goes down through Fort Worth down through Austin and then the San Antonio. We'll look West maybe 30-40 miles, but after you get past that it's a long way to the centers of population in West Texas. So that's kind of our geography, but that covers over 80% of the population in the State of Texas.

Woody Lay -- Keefe Bruyette & Woods Inc.

Okay, that's it from me. Thanks guys.

Operator

At this time, I'm currently showing no further questions in the queue. I would now like to turn the conference back over to Mr. Lee Gibson, President and CEO.

Lee R. Gibson III -- President & Chief Executive Officer

Well, thank you for joining us today. Given the outlook for our markets, our strong balance sheet, capital position and core earnings, we are very encouraged about 2021 and look forward to reporting results to you throughout the year and we look forward to the next earnings call in April of this year. Thank you for attending.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Lindsey Bailes -- Vice President, Investor Relations

Lee R. Gibson III -- President & Chief Executive Officer

Julie N. Shamburger -- Chief Financial Officer

Brett Rabatin -- Hovde Group

Michael Young -- Truist Securities

Graham Dick -- Piper Sandler

Woody Lay -- Keefe Bruyette & Woods Inc.

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