Southside Bancshares, Inc. (NASDAQ:SBSI) Q1 2024 Earnings Conference Call April 25, 2024 12:00 PM ET
Company Participants
Lindsey Bailes – VP of IR
Lee Gibson – President and CEO
Julie Shamburger – CFO
Conference Call Participants
Brett Rabatin – Hovde Group
Matt Olney – Stephens
Woody Lay – KBW
Operator
Good day, and thank you for standing by. Welcome to the Southside Bancshares Fourth Quarter 2024 Earnings Call. At this time, all participants are in listen-only mode. After the speaker’s presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised.
To withdraw your question, please press star 11 again. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your first speaker today, Lindsey Bailes, Vice President, Investor Relations. Please go ahead.
Lindsey Bailes
Thank you, Marvin. Good morning, everyone, and welcome to Southside Bancshares first quarter 2024 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 in 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.
Lee Gibson
Thank you, Lindsey. Good morning, everyone, and welcome to Southside Bancshares first quarter 2024 earnings call. This morning, we reported first quarter net income of $21.5 million, earnings per share of $0.71, a return on average tangible common equity of 15.07%, and continued strong asset quality metric. Linked quarter, loans increased and annualized 4.7%, just slightly below our projected 5% loan growth for 2024. Our loan pipeline is solid, and the markets we serve remain healthy and continue to grow and perform well. Linked quarter, our net interest margin decreased 13 basis points.
During the Q3 of our lower interest rate cash flow swaps, totaling $120 million, matured, and the rate for that funding increased over 4%. Our BTFP funding renewed at a higher rate for an additional year, and we continue to experience deposit pricing pressures. We do not have any additional swaps maturing during 2024. While we anticipate ongoing deposit pricing pressure in the absence of the Fed cutting interest rates, we believe anticipated loan growth will help partially mitigate any further NIM compression.
During the quarter, we implemented several initiatives associated with our new five-year strategic plan. One of the initiatives is to carefully examine additional revenue as well as cost containment opportunities. The retirements, reduction in workforce, and attrition during the first quarter of 2024, we currently anticipate annualized cost savings of approximately $3.5 million, 80% of which should be reflected beginning in the third quarter of this year and 100% in 2025.
During the quarter, we expensed approximately $618,000 associated with these expense reductions. We continue to evaluate expenses as well as revenue opportunities, and we’ll update you on any further progress in future quarters. 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, and welcome to our first quarter call. We began the year with first quarter net income of $21.5 million, an increase of $4.2 million, or 24.2%, and diluted earnings per share of $0.71, an increase of 24.6% linked quarter. For the first quarter, we had loan growth of $52.9 million, or 1.2% linked quarter, and 4.7% annualized. The growth was driven primarily by increases of $244.9 million in commercial real estate loans, partially offset by decreases in construction loans of $190.3 million.
The interest rate of loans funded during the quarter was on average approximately 7.8%. As of March 31st, our loans with oil and gas industry exposure were $114 million, or 2.5% of total loans. Our allowance for credit losses decreased by $229,000 for the linked quarter to $46.4 million. Asset quality metrics remained strong, although our non-performing assets increased to $8 million from $4 million, or 0.10% of total assets on March 31st, compared to 0.05% at year end. The increase in non-performing assets was primarily related to two larger relationships, one commercial real estate and one commercial relationship, and not specific to any particular market or industry in our portfolio.
Since March 31st, 2024, we have received approximately $1.6 million combined of payments on the commercial loan relationship and the payoff of a larger existing residential real estate loan on non-accrual status. On March 31st, our allowance for loan losses as a percentage of total loans was 0.95%, a slight increase compared to 0.94% on December 31st. Our securities portfolio increased $108.8 million, or 4.2% on a linked quarter basis, driven by purchases of mortgage-backed securities during the first quarter.
There were no transfers of AFS securities during the first quarter, and as of March 31st, we had a net unrealized loss in the AFS securities portfolio of $48.8 million, compared to $36.2 million last quarter. As of March 31st, the unrealized gain on the fair value hedges on municipal securities was approximately $20.4 million, compared to $13.6 million linked quarter. This unrealized gain partially offsets the unrealized losses in the AFS securities portfolio.
Our AOCI on March 31st, 2024 was a net loss of $110.9 million, compared to a net loss of $113.5 million on December 31st, 2023. The net loss was comprised of net losses on our securities and swap derivatives of $92.2 million and $18.7 million related to our retirement plans. As of March 31st, the duration in the securities portfolio was 9.1 years, and the duration of the AFS portfolio was 6.9 years, an increase from 8.4 years and 5.8 years, respectively, on December 31st.
At quarter end, our mix of loans and securities changed slightly to 63% and 37%, respectively, compared to 64% and 36% on December 31st. Deposits decreased slightly by 0.06%, or $3.9 million, on a linked quarter basis. Our capital ratios remained strong, with all capital ratios well above the capital adequacy and well-capitalized threshold. Liquidity resources remained solid, with $2.3 billion in liquidity lines available as of March 31st.
Our tax equivalent net interest margin decreased 13 basis points on a linked quarter basis to $286 from $299. The tax equivalent net interest spread decreased for the same period by 10 basis points to 216%, down from 2.26%. For the three months ending March 31st, net interest income decreased by 1.1 million, or 2.1%, compared to the linked quarter. The purchase loan accretion recorded this quarter was $42,000.
Non-interest income, excluding the net loss on the sales of AFS securities, decreased 30.1 million, or 24.4%, for the linked quarter, primarily due to the decrease in the linked income of $1.8 million due to a debt benefit realized in the fourth quarter, a loss on sale of loans, a decrease in deposit services income, and a loss in fair value of equity securities. Non-interest expense increased $1.7 million on a linked quarter basis to $36.9 million, driven by increases in salaries and employee benefits, which included approximately $618,000 associated with future cost reductions.
During last quarter’s earnings call, I reported our budget of $37.9 million quarterly for non-interest expense in 2024. As a result of the cost containment initiatives, we expect to realize approximately $400,000 of savings in the second quarter and $700,000 to $800,000 in the third and fourth quarters of the year. Our fully taxable equivalent efficiency ratio increased to 55.54% as of March 31st, from 50.86% as of December 31st. We recorded income tax expense of $4.6 million, an increase of $2.4 million compared to the fourth quarter.
The increase in tax expense was driven by a higher tax rate and increase in pre-tax income. Our effective tax rate increased to 17.7% for the first quarter, up from 11.3% in the previous quarter, due to a decrease in tax income as a percentage of pre-tax income. We currently estimate an annual effective tax rate of 17.7% for 2024. I will now turn the call over for questions.
Question-and-Answer Session
Operator
Thank you. At this time, we will conduct the question and answer session. [Operator Instructions] Our first question comes from the line of Brett Rabatin of Hovde Group Your line is now open.
Brett Rabatin
Hey, good morning, everyone.
Lee Gibson
Morning, Brett.
Brett Rabatin
I wanted to ask first, Lee or maybe Julie, on the expense reductions. Were those all personnel-related, or are there other things that you made an adjustment to? And then is this kind of the end of taking a look at that in terms of potentially reducing expenses?
Lee Gibson
These were largely — in fact, it’s not all personnel-related reductions. We are continuing to evaluate other areas in the expense area. As we come to further conclusions, we’ll report on that in future quarters. So far, these are the personnel reductions at this point.
Brett Rabatin
Okay. And then, Lee, you’ve always been very good with the bond portfolio, and I’m just curious with the tenure here over 470, kind of what you’re thinking about in terms of additional securities, any restructurings, what you think about the current level or term structure of interest rates, and what you might see from here in your view?
Lee Gibson
I think in terms of the Fed, which is not — I think their view of higher for longer is probably correct. We’re really not anticipating any more than one cut the rest of this year. At this point in time, I think initially we had factored in three cuts, unless the economy changes significantly. In terms of the long-term rates, I feel like they could go even just a little bit higher, but I think pressing 5% on the tenure would be equivalent to where it got to last year. And that might put some additional pressure on the economy that could allow the Fed to begin to decrease rates.
In terms of the bond portfolio, we’ll look for opportunities. We found a few minor ones in the first quarter, but with these higher rates and cheaper bond prices, I think there may be some additional opportunities as we take a look at those. But right now, we don’t have anything that we’re planning on doing at this point in time.
Brett Rabatin
Okay. That’s helpful. If I could sneak in one last one just around the margin, Julie. If I heard you correctly, you feel like there’s offsets to additional pressure from here, but I didn’t quite get the full body language there to comment around the positives for the margin from here. And then if I heard you correctly, maybe a little bit more pressure from here and then stabilization on the margin. Was that fair?
Lee Gibson
Yeah, I think that’s fair. The swaps that rolled off in the first quarter were pretty significant. We’ll see a little bit of that in the second quarter, but I think it’ll be pretty much on par with what we saw in the first quarter. The BTFP funding re-priced a little bit higher, and that’s locked in for a year, so we won’t have that pressure. But yeah, in terms of the margin going forward, we’re thinking that the anticipated loan growth will at least partially mitigate any further deposit pressures.
A large part of the funding pressures in the first quarter were due to the swap ETF and then to some extent the deposit pressure.
Brett Rabatin
Okay. That’s helpful. Thanks for the color.
Lee Gibson
All right.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Matt Olney from Stephens. Your line is now open.
Matt Olney
Hey, thanks, guys. Good morning.
Lee Gibson
Good morning, Matt.
Matt Olney
Wanted to ask about fees. I think the core fees took a step down in the first quarter. Anything to call out there as far as a step down, and then what’s the road look like to return to where we were for most of 2023 in that $10.8 million range for the core fees per quarter? Thanks.
Julie Shamburger
The deposit fees were down $320,000, and around $200,000 of that was due to debit card income. Overdraft fees and service charge fees were down a little, were the difference in that decrease, but most of it was debit card income.
Lee Gibson
And then we did have a loss on a sale of a available for sale loan of about $500,000. So that caused a decrease there. You see the negative $436,000, and that loan, we have, like I say, a charge off around $500,000. We don’t anticipate that in the future…
Julie Shamburger
Yeah, extra $100,000 on that.
Lee Gibson
In fact, yeah, we’re going to recover another $100,000 in the second quarter on that loan. Trustees should be back up more in line with what we’ve seen on a quarterly basis going forward. And as Julie mentioned, the debit card income and the overdraft were down. I would anticipate the debit card income would come back, some — but the overdraft fees, we’ve made some changes along the lines of things that have come out from the CFPB associated with that.
And so the overdraft fees probably won’t come back significantly. First quarter, they’re typically down because of tax returns, so that they should come back maybe $100,000 to $150,000 per quarter. But other than that, those are the major things. So, I think we could get back up closer to that $10, maybe $10.5 million range moving forward.
Matt Olney
Thanks for the color on that. And on the overdraft fees kind of shift there, any color on just the overall impact we’ll see from the change in pricing that you mentioned?
Lee Gibson
Well, you’re seeing it. We made these changes last year. I think it was third quarter.
Julie Shamburger
Some happened late ‘22, and then some happened in early 2023.
Lee Gibson
So, you’re seeing it. And we did increase the amounts you have to be overdrawn in order to have an overdraft fee pretty significantly. So, I think you’re seeing the full result of any of that. And then like I say, the first quarter just typically is less because of tax returns, refunds that come in, and people aren’t overdrawn as much.
Matt Olney
Sure. Okay. Thanks for that. And then on the credit front, there was some commentary and prepared remarks about two large rating shifts during the quarter. I think you mentioned that there were some payoffs, or you received partial payments on some of those loans. Can you just go over that again as far as kind of the post, the movements post March 31st?
Julie Shamburger
Sure. So, one of the relationships, the commercial relationship was about a $1.5 million and it was securing equipment. And that particular client is going out of business and has been liquidating at better prices than the appraisals that we were expecting at the end of the quarter. And to date, that relationship is down to around $880,000. So, just in the last few weeks, as late as yesterday, received some payments on that. And then there was a one to four in the non-accrual status that was around $800 and I believe $69,000 that paid off during April.
So those are two of the large things I was referring to in the $1.6 million.
Lee Gibson
Yeah. So, of the $8 million in non-performing assets, we’ve had pay-downs of about $1.6 million. And the one commercial loan, Julie mentioned, we’re feeling a lot better about it right now than we did at quarter end based on the sales that have occurred in April.
Matt Olney
Okay. All right. Appreciate that. And then just lastly, I think you mentioned in prepared remarks, you know, the five-year strategic plan, resulted in some of those cost containment measures. Anything else notable in the five-year strategic plan that we should appreciate as we think about kind of longer term direction of the bank?
Lee Gibson
We’re looking at different revenue opportunities and I hope to report on something in either July or October related to additional revenue that we anticipate receiving in non-interest income. And then it’s just a lot of things that we’re going to be moving more towards IT related issues and software in the future and what we need the bank to look like. And what markets we want to be in and potentially expand into. And so, those are initiatives that are being kicked off and discussed.
And at this point, we don’t have anything significant to report. But we will update on a quarterly basis as we move forward.
Matt Olney
Okay. All right, guys. Thanks for taking my question.
Lee Gibson
You bet.
Operator
Thank you. One moment for our next question. Our next question comes from the line of Woody Lay of KBW. Your line is now open.
Woody Lay
Hey, good morning, guys.
Julie Shamburger
Good morning.
Woody Lay
I wanted to hit just real quick on that cash flow swap. So, when exactly did that mature in the quarter?
Lee Gibson
There were three of them that matured. Two of them were in February and one was in March, on March 11th. The overall rate that we had on those swaps was a little below 1%. I think it was like 0.98 or somewhere in that range. So, when that when those rolled off on that $120 million, we had to re-price at today’s rate, which is closer to $540. And so, that was pretty significant on that $120 million.
Woody Lay
Yeah. All right. That’s helpful color. And then last for me, we didn’t get any buybacks in the quarter. But if you look at where the stock is trading today, it’s below the range on where you bought back in 2023. Is it fair to expect that buybacks could pick up again in the second quarter?
Lee Gibson
We’re going to be evaluating that and just we’ll take a look at it and make an appropriate decision in conjunction with the board.
Woody Lay
Got it. Thanks guys.
Lee Gibson
All right. Thank you.
Operator
Thank you. This concludes the question and answer session. I would now like to turn it back to Lee Gibson, President and CEO, for closing remarks.
Lee Gibson
Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares, along with the opportunity to answer your questions. In closing, we’re looking forward to our prospects during 2024 and reporting our second quarter results to you during our next earnings call in July. Thank you again.
Operator
Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.
