Southside Bancshares : Q4 2020 Earnings Call Transcript

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EDITED TRANSCRIPT

Q4 2020 Southside Bancshares Inc Earnings Call

EVENT DATE/TIME: JANUARY 27, 2021 / 3:00PM GMT

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JANUARY 27, 2021 / 3:00PM GMT, Q4 2020 Southside Bancshares Inc Earnings Call

CORPORATE PARTICIPANTS

Julie N. Shamburger Southside Bancshares, Inc. - CFO

Lee R. Gibson Southside Bancshares, Inc. - President, CEO & Director

Lindsey Bailes Southside Bancshares, Inc. - VP & IR Officer

CONFERENCE CALL PARTICIPANTS

Brett D. Rabatin Hovde Group, LLC, Research Division - Head of Research

Graham Conrad Dick Piper Sandler & Co., Research Division - Research Analyst

Michael Masters Young Truist Securities, Inc., Research Division - VP and Analyst

Wood Neblett Lay Keefe, Bruyette, & Woods, Inc., Research Division - Associate

PRESENTATION

Operator

Good morning, ladies and gentlemen. Welcome to the Southside Bancshares, Inc. Fourth quarter and year-end 2020 earnings call. (Operator Instructions) As a reminder, this conference call 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 Southside Bancshares, Inc. - VP & IR Officer

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 Southside Bancshares, Inc. - President, CEO & Director

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 2 in-store branches in East Texas that are in close proximity to other Southside branches and 1 leased 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 at extremely attractive yields during the short-term bond market liquidity crisis in March, combined with funding decisions were 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 noninterest income that was partially offset by a $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 surface. At year-end, our asset quality metrics improved slightly when compared to 2019, as nonperforming assets to total

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JANUARY 27, 2021 / 3:00PM GMT, Q4 2020 Southside Bancshares Inc Earnings Call

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 the 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 were 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 are 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 in-migration from other states and corporate relocations. Tyler, where we are headquartered, will soon be home to a new medical school that is projected to significantly enhance economic activity, much of which is slated 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 embraced 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 in making this recognition and our record results for 2020 a reality. I will now turn the call over to Julie.

Julie N. Shamburger Southside Bancshares, Inc. - CFO

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 a 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 a decrease 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

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JANUARY 27, 2021 / 3:00PM GMT, Q4 2020 Southside Bancshares Inc Earnings Call

believe loan growth may be challenged during the first quarter. Our credit quality metrics remained strong with nonperforming 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 nonperforming 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 and, to 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 category of 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 remained 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 bears interest at a fixed rate of 3.875% through November 14, 2025, and thereafter adjusts quarterly at a floating rate equal to 3-month SOFR plus 366 basis points. We believe the issuance of the subordinated notes strengthens our capital position as well as provides funding 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 was due to increased accretion recorded of $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 3 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 purchased 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 3 months ended December 31, noninterest income, excluding net gains/losses on sale of AFS Securities decreased $139,000 or 1.3% for the linked quarter. For the year ended December 31, noninterest expense increased $4 million or 3.4% and for the linked quarter decreased $301,000 or 1%.

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