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Southside Bancshares, inc (SBSI) Q2 2021 Earnings Call Transcript


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


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


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 BailesVice 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 IIIPresident 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. ShamburgerChief 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%…


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