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Southside Bancshares, inc (NASDAQ:SBSI)
Q2 2021 Earnings Call
Jul 23, 2021, 12:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Southside Bancshares, Inc. Second Quarter 2021 Earnings Call. At this time all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker for today, Ms. Lindsey Bailes, Vice President of Investor Relations. Please go ahead.

Lindsey Bailes -- Vice President, Investor Relations

Thank you, Shane [Phonetic]. Good morning, everyone, and welcome to Southside Bancshares' second quarter 2021 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 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 and Chief Executive Officer

Good morning. And welcome to Southside Bancshares second quarter earnings call for 2021. This morning I'm pleased to report we had another solid quarter with net income of $21.3 million, earnings per share of $0.65 and an annualized ROI of 1.2%, and an annualized return on average tangible common equity of 13.13%. Our quarterly results included continued linked quarter deposit and loan growth, net of PPP loans and continued strong asset quality metrics.

The second quarter results included a provision for credit losses of $1.7 million due to a decline in the downside component of the economic forecast and its effects on macroeconomic factors used in the CECL model. Our strong asset quality metrics included non-accruing loans to total loans of 0.14% and non-performing assets to total assets of 0.21%. Our linked quarter loan growth, net of PPP loans of $14.5 million was partially offset by earlier than anticipated loan payoffs due to recently completed construction projects selling prior to stabilization at very low cap rates. A year ago, we were seeing construction projects typically so post stabilization.

Annualized loan growth as of June 30, 2021 was 4%. We continue to believe 7% loan growth for 2021 net of PPP loans is achievable as our loan pipeline remains very healthy, a trend we anticipate will continue throughout the year given the outlook for the high growth markets we serve. The $656,000 decrease in our net interest income linked quarter was due entirely to the decrease in PPP loan accretion during the quarter. Linked quarter, our net interest margin and spread decreased 14 basis points, primarily due to an 18 basis point increase [Phonetic] in the yield on earning assets. The average yield on loans decreased 16 basis points, half of which was due to the decrease in the combined PPP and purchase loan accretion. The average yield on securities decreased 18 basis points linked quarter, largely due to a 42 basis point decrease in the yield on mortgage-backed securities primarily result of higher prepays and a 23 basis point decrease in the yield on taxable securities primarily due to an increase in the average balance of a treasury position during the second quarter.

The mortgage backed securities position continues to decrease as a percentage of the overall securities portfolio. In addition, during July, we have sold approximately $57 million of our lower yielding mortgage-backed securities. On September 30, we anticipate the redemption of our 5.5% coupon $100 million sub-debt issue, pending regulatory approval, which will have a positive impact on both net interest income and the net interest margin beginning in the fourth quarter.

For the six months ended June 30, 2021, our net interest margin has increased 11 basis points when compared to the prior year.

During the second quarter, we continue to see a nice increase in non-maturity deposits, which represents our lowest cost interest bearing liabilities. Over the past 15 months, we have experienced significant growth in non-maturity deposits, which has allowed us to strategically lower our higher cost funding sources, CDs and FHLB borrowings.

Economic conditions in our market areas remain strong, bolstered by company relocations, expansions combined with population growth as the Texas economy continues to benefit from individuals and companies migrating from other states. The DFW and Austin markets that we serve, continue to be among the highest growth markets in the country.

I look forward to answering your questions following Julie's presentation. And 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 today. We reported net income of $21.3 million, linked quarter decrease of $12.8 million or 37.5% due primarily to an increase in provision expense of $11.8 million and a decrease in net security gains of $10 million.

Net income decreased $237,000 or 1.1% compared to the same period in 2020. For the quarter ended June 30, 2021, our diluted earnings per share were $0.65, unchanged when compared to the same period in 2020 and a decrease of $0.39, a 37.5% on a linked quarter basis. Linked quarter, net of the decrease in PPP loans of $88.8 million, our loan portfolio increased $14.5 million to $3.64 billion.

Our commercial real estate loans increased $82.3 million, partially offset by decrease in construction loans of $77.5 million. Construction loans decreased due to several large and expected early payoffs in the second quarter and commercial loans, excluding the PPP forgiveness increased approximately $21 million during the second quarter. As of June 30, our PPP loans included in the commercial loan category totaled $132.1 million, down from $220.9 million at March 31, 2021. The average balance of our PPP loans for the three months ended June 30, 2021 was approximately $200.6 million.

Our asset quality remains strong as non-performing assets decreased slightly by $98,000 down to 0.21% of total assets compared to 0.22% at March 31, 2021. Linked quarter, our allowance for loan loss increased approximately $1.5 million or 3.5% to $42.9 million at June 30 due to recording a provision for credit losses on loans of $1.5 million in the second quarter of 2021, an increase of $8.9 million compared to the reversal of provision in the first quarter. The increase in the provision for the second quarter was primarily due to a decline in the S3 downside scenario in the Moody's economic forecast at June 30, 2021 and its effect on macroeconomic factors used in the CECL model.

On June 30, our allowance for loan losses as a percentage of total loans was 1.18%. And when excluding PPP loans, 1.22%. Our allowance for off balance sheet credit exposures at June 30 increased slightly to $3.8 million when compared to March 31, 2021 due entirely to provision expense of $157,000. Again compared to a reversal of provision of $2.8 million in the previous quarter. Combined with the provision expense for credit losses on loans, the provision for credit losses totaled $1.7 million for the three months ended June 30, 2021.

Our COVID-19 related deferrals have decreased to one remaining mortgage loan with an approximate balance of $158,000. As of June 30, our loans with oil and gas industry exposure were $94.3 million or 2.7% of total loans. Our securities portfolio increased $215.8 million or 8.2% on a linked quarter basis. We recognized $15,000 in net security gains on the sale of AFS securities during the quarter, a decrease of $2 million from the net gains reported last quarter.

As of June 30, 2021, we had a net unrealized gain in the securities portfolio of $136.4 million and the duration in the portfolio increased slightly to 5.4 years from 5.3 years at the end of the first quarter. Our mix of loans and securities at June 30 shifted to 56% loans and 44% securities from 58% and 42% respectively at March 31 due to the purchases in the securities portfolio. Our net interest margin and spread was 3.06 [Phonetic] and 2.89 [Phonetic] respectively with a linked-quarter decrease in both of 14 basis points, a results of the decrease in yield on interest earning assets.

Consistent with last quarter, approximately 10 basis points of the net interest margin related to interest and fees earned on the PPP loans. For the three months ended June 30, net interest income decreased $656,000 or 1.4%. We recorded approximately $1.7 million in net fees related to the PPP loans included in interest income this quarter compared to $2.6 million linked quarter.

As of June 30, 2021 we had net deferred fees of approximately $5.3 million remaining to be recognized as a yield adjustment over the terms of the loans. Additionally, we recorded $649,000 in purchase loan accretion this quarter, an increase of $234,000 from the prior period. For the three months ended June 30, 2021 non-interest income, excluding net gains on the sale of AFS securities decreased $702,000 or 6% for the linked quarter, which was primarily driven by decrease in other non-interest income, partially offset by an increase in deposit services income.

Our other non-interest income decreased primarily due to a decrease in swap fee income and a decrease in the fair value of mortgage servicing rights. An increase in debit card income was the primary driver of the increase in deposit services income. Additionally, we have experienced consistent increases in our trust fees and brokerage services income over each of the following two quarters since June 30, 2020 resulting in increases of 51% in brokerage services income and 14% interest fees for the six months ended June 30, 2021 when compared to the same period in 2020.

Linked quarter, non-interest expense decreased $535,000 or 1.7% to $30.7 million. For the third quarter of 2021, we expect non-interest expense to be approximately $31 million. Our fully taxable equivalent efficiency ratio decreased to 50.31% compared to 50.44% linked quarter. The decrease in the fully taxable equivalent efficiency ratio was due to the decrease in non-interest expense for the quarter.

Income tax expense decreased $1.9 million or 39.2% compared to the three months ended March 31, 2021, a result of the decrease in pre-tax income. Our effective tax rate decreased slightly to 11.9% for the second quarter from 12.2% last quarter due to an increase in tax exempt income as a percentage of pre-tax income. Additionally, we recorded $115,000 of discrete tax benefit in connection with equity award transactions during the second quarter. At this time, we are estimating an annualized effective tax rate of 12.5%.

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

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from line of Brad Milsaps from Piper Sandler.

Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst

Hey, good morning guys.

Julie N. Shamburger -- Chief Financial Officer

Good morning.

Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst

Lee, I was going to maybe start with the bond portfolio. I was kind of writing quickly, it looks like the average bond portfolio finished -- the year was around $2.6 billion, during the quarter you're closer to $2.9 billion at period end. I think you mentioned you sold some stuff, but just kind of curious what categories you did buy into, it sounds like you're continuing to letting BS run off? Did you go -- did you buy more tax-exempt or did that kind of the taxable book and then kind of what does that mean for your margin going forward?

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

Right. Primarily what we bought where municipals, some taxable, a lot of tax-free municipals. We bought a few sub debt deals, bank sub debt deals, but primarily it was in the municipal arena. We're just not finding any value in the mortgage arena at this point in time. In terms of the margin going forward, I think on the taxable side the treasury position wade on the -- on that yield, but we are not increasing that treasury position at this point in time. So I don't see that -- that being a -- of an issue. As for the other taxable purchases, they've typically been in the -- in the 250 [Phonetic] to 270 [Phonetic] range. On the tax free side, it really just depends what maturity you're buying, and what the call is, but for the really high quality stuff obviously whatever we put on, there is going to be a slight reduction in the [Indecipherable],

Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst

Okay, great. It sounds like you were more optimistic on loan growth picking back up in the back half, is that sort of lead you believe that maybe the NIM can maybe stabilize here above three or do you think there is more significant compression coming?

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

I think we'll see -- I don't know that we'll see a 14 basis point decrease in the NIM going forward, especially in the third quarter, but I do see some slight NIM compression. We just had a number of factors that caused it to be lower. We're anticipating that will begin to see some of the round two of PPP loans begin to be forgiven in the next six months to nine months for sure. So we'll be bringing that income in and then of course pending regulatory approval, if we -- when we call the sub debt deal that's going to take a lot of pressure off the NIM and it will go the other direction.

Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst

Great, thank you. And just one housekeeping question, Julie. Do you have now the average number of PPP loans in the quarter?

Julie N. Shamburger -- Chief Financial Officer

You want the average number or the average balance.

Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst

The balance, I apologize, the balance.

Julie N. Shamburger -- Chief Financial Officer

That's what I thought you meant. Yes, it's $200.6 million.

Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst

Okay, yeah. You said that. Great, thank you.

Operator

Your next question comes from Brett Rabatin with Hovde Group.

Brett Rabatin -- Hovde Group -- Analyst

Hey, good morning.

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

Good morning, Brett.

Brett Rabatin -- Hovde Group -- Analyst

Its interesting pronunciation, Hovde Group. Wanted to ask securities question different way maybe, Lee, how much do you guys have in cash flow coming that you have to reinvest maybe in the next few quarters and what would be the average rate? I guess I'm just trying to get to what you have to replace relative to the current portfolio going forward.

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

Yeah, the cash flow that comes in is almost exclusively related to the mortgage-backed securities portfolio. And it's probably averaging somewhere around $30 million a month at this point in time, with the -- with sale of some of those mortgage-backed securities that might decrease a little bit, but I would anticipate that we're looking at close to $90 million for this third quarter in redemptions there and that has an average yield of 2.2% and what's prepaying is typically the lower rate stuff. So for the most part, we should be able to put on securities that are closed, but it may cause a little bit of additional pressure and the overall yield of securities portfolio.

Brett Rabatin -- Hovde Group -- Analyst

Okay, that's good color. And then just on the payoffs you had in the construction portfolio, it sounds like those were unexpected, [Indecipherable] essentially projects where but even before the occupation was filed they got refinanced away from you or what maybe drove the decline that you weren't expecting in construction?

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

Yeah, we were expecting these to sell, but typically what we've seen is that the project, say it's a multifamily it will reach stabilization, which means it may be 90%, 95% occupied. What we were starting to see in the second quarter was they were able to sell these projects prior to stabilization. So they weren't -- they weren't leased up to stabilization and so they were prepaying anywhere from three to nine months faster than we originally anticipated that they would pay off.

Brett Rabatin -- Hovde Group -- Analyst

Okay. And I've heard, last question from me, I've had some contacts in the State tell me that the talks are picking up, and I know you've been thinking about doing M&A, was just curiously to get your QA freed on M&A for you. And if you were seeing some opportunities and you are hearing or having conversations with folks these days?

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

We are -- we are hearing more opportunities out there and having additional conversations and some of the opportunities that are out there are ones that we may not be interested in. But yes, we are definitely seeing an uptick in and opportunities to have conversations surrounding M&A.

Brett Rabatin -- Hovde Group -- Analyst

Okay. Great, thanks for all the color.

Operator

[Operator Instructions] Your next question line of Will Jones with KBW.

Will Jones -- Keefe Bruyette & Woods Inc. -- Analyst

Hey, good morning, how are you guys?

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

Great. How are you doing Will?

Will Jones -- Keefe Bruyette & Woods Inc. -- Analyst

We are doing good, so I just wanted to pivot back to loans and loan growth [Indecipherable] noticed is unfortunate that you guys had the pay downs burn growth this quarter, especially coming off a strong momentum in 1Q, but it does make some of the other so optimistic in the back half of the year. What's are you seeing in your markets today and where do you kind of anticipating most of that growth come from? I know you guys are in process of building on the Houston presence and even and some lenders in Dallas market. So just curious on the commentary around loan growth?

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

We're starting to see -- not starting, we've been saying a number of opportunities and -- in our current pipeline there are a number of full funders that were looking at this point in time, which gives us some encouragement about that 7% loan growth. And then some of our construction projects that we put on last year those are starting to fund up and so we're just anticipating that these early payoffs we may see a few more early payoffs, but those were ones we're really anticipating in the back half of this year, if not early next year. So with what we're seeing in our pipeline, the types of loans we're seeing and the fact that a number of them are offenders gives us confidence that barring unexpected payoffs at a large, large volume, we anticipate being able to get to that 7% or real close to it.

Will Jones -- Keefe Bruyette & Woods Inc. -- Analyst

Got you. That's great to hear. And then just on the hiring front, are you guys still active and seeking new lenders, are you guys still active in building out a different markets or maybe helping to do some lending talent within certain portfolio segments? Just curious on commentary around hiring efforts and what you guys are seeing out there?

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

We are definitely interested in hiring additional revenue producers, especially in our higher growth markets. And we're actively looking for some we did bring on three in the first quarter. That has worked out extremely well and we're just being very selective on what we do. But yes, we are continuing to look for additional revenue producers in those market areas.

Will Jones -- Keefe Bruyette & Woods Inc. -- Analyst

Just for my reference, what would you consider are your highest growth markets?

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

The Dallas-Fort Worth area, the Austin market, and Houston is while it may not be as high growth as the other two, it's still a growing market. And for us, we're just scratching the surface there. So there is -- there seems to be a lot of opportunity there for us. Even with maybe a little slower growth than we're seeing in some of the other markets.

Will Jones -- Keefe Bruyette & Woods Inc. -- Analyst

Awesome. That's great. And just lastly for me, I know that just looking at, it looks like the end of period shares were roughly flat quarter-over-quarter, but I know you guys were active on the buyback last quarter, did you guys buy back any shares this quarter and how is your appetite for the buyback as you go into this upcoming quarter? I know things stated to kind of pull back a little bit, is it possible to see you guys engage pretty heavily?

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

In terms of the future, yes. We're definitely looking to repurchase shares moving forward, especially at these prices. And in terms of what we purchased during the quarter, I'm going to let Julie answer that.

Julie N. Shamburger -- Chief Financial Officer

Yes, we purchased run at 91,000 shares in the first quarter. It was very early on in April, at an average price of $38.49. And like Lee said, we do plan to be back in there.

Will Jones -- Keefe Bruyette & Woods Inc. -- Analyst

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

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

All right, thank you.

Operator

Your next question is of Michael Young with Truist Securities.

Michael Young -- Truist Securities -- Analyst

Hey, thanks for taking the questions.

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

Good day Michael.

Michael Young -- Truist Securities -- Analyst

Wanted to ask just about interest rate sensitivity. You guys have historically been a little bit liability sensitive, but just wanted to kind of get your thoughts or any proactive measures that you may be taking to maybe be a little more neutral. If we think we're moving toward a higher rate environment or extending duration or shrinking duration as the case maybe?

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

Yeah, great question. Thanks. One of the things that we've been able to do over the last 15 months is utilize these -- this large growth in non-maturity deposits. And while we may see some run-off in it, it appears that the vast majority of it's going to remain fairly sticky. Those tend to be much longer duration liabilities than the liabilities that we let run off, which were the CDs and they FHLB borrowings. So we feel like our overall liabilities have lengthened pretty nicely in duration on the -- as a result of the growth in the non-maturity deposits. So that combined with, we have a lot of floating-rate loans on the loan side, where as we mentioned, we're getting a lot of cash flow on the mortgage side. At this point, I feel like we're pretty close to neutral because of that growth in the non-maturity deposits.

Michael Young -- Truist Securities -- Analyst

Okay, that's helpful. And then just maybe a bigger picture question on sort of the expensive infrastructure for the bank, you guys have done a good job of kind of pruning expenses to keep the efficiency ratio at an attractive level. But just curious now kind of looking back on the pandemic and the impacts and having a test run it maybe branches have been closed for a small period of time and sales activity through that period are even more confident and continuing to rationalize the branch network or pivoting the branch network to higher growth metro, just any kind of thoughts there would be helpful.

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

Yeah, we have -- we did in the last 12 months, I think we've closed six branches. I know in the last nine months, we've closed 6 branches. I'm trying to remember what we closed in the third quarter of last year, if any. And we have, we have opened a branch in -- well two branches, one was an LPO and it's now a full service branch and then we've opened a branch in Houston and one in the DFW area. So yes, we are looking at more branches in the higher growth markets, but still providing sufficient number of branches in our other markets, because they produce allotted low cost deposits. And so it's important that we make sure that those -- those areas are covered sufficiently with branches.

Michael Young -- Truist Securities -- Analyst

Okay, that's helpful. Thank you.

Operator

I will now turn the call back over to Mr. Gibson.

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

All right, thank you for joining us today. We appreciate the opportunity to answer your questions and your interest in Southside Bancshares.

In closing, given the positive economic conditions in our markets, our strong balance sheet, capital position, asset quality and core earnings, we are very encouraged and look forward to reporting results to you during our next earnings call in October. This concludes the call.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Lindsey Bailes -- Vice President, Investor Relations

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

Julie N. Shamburger -- Chief Financial Officer

Brad Milsaps -- Sandler O'Neill & Partners LP -- Analyst

Brett Rabatin -- Hovde Group -- Analyst

Will Jones -- Keefe Bruyette & Woods Inc. -- Analyst

Michael Young -- Truist Securities -- Analyst

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