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Southside Bancshares, Inc. (SBSI) Q4 2023 Earnings Call Transcript

Southside Bancshares, Inc. (SBSI)

Q4 2023 Earnings Call Transcript

Company Participants

Lindsey Bailes - VP of IR

Lee Gibson - President and CEO

Julie Shamburger - CFO

Conference Call Participants

Graham Dick - Piper Sandler

Mark Shutley - KBW

Matt Olney - Stephens Inc.

Presentation

Operator

Thank you for standing by, and welcome to Southside Bancshares Fourth Quarter and Year-End 2023 Earnings Conference 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] I would now like to hand the call over to VP of Investor Relations, Lindsey Bailes. Please go ahead.

Lindsey Bailes

Thank you, Latif. Good morning, everyone, and welcome to Southside Bancshares fourth quarter and year-end 2023 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 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 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 fourth quarter and year-end earnings call. This morning we reported fourth quarter net income of $17.3 million, earnings per share of $0.57, a return on average tangible common equity of 13.1% and continued strong asset quality metrics. During the fourth quarter, net income was impacted by a loss of $10.4 million or $0.27 per share due to a restructuring of a portion of the securities portfolio by selling approximately $388 million of lower-yielding AFS securities. The proceeds were largely reinvested in premium US Agency mortgage-backed securities with approximately 20% reinvested in loans. The restructuring is estimated to increase net interest income, resulting in a two-year payback of the loss.

Linked quarter, our net interest income increased $1.2 million and the net interest margin declined only 3 basis points, less than originally estimated. Given the restructuring of the securities portfolio, we believe the net interest margin is at or near the bottom and should begin to slowly move higher during 2024. Linked quarter, we continue to experience excellent loan growth with loans increasing $103.9 million or 2.3%. We ended the year with 9.1% loan growth, slightly exceeding our estimate. For 2024, we are currently budgeting for 5% loan growth. The markets we serve remain healthy and continue to grow and perform well.

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 fourth quarter and year-end call. We ended the year with net income of $86.7 million and diluted earnings per share of $2.82. For the fourth quarter, we reported net income of $17.3 million, a decrease of $1.1 million on a linked quarter basis, and diluted earnings per common share of $0.57, a decrease of $0.03 compared to September 30.

For 2023, we had loan growth of $376.8 million or 9.1%. The growth was driven primarily by increases of $230.1 million in construction loans and $180.7 million in commercial real estate loans. For the fourth quarter, we had loan growth of $103.9 million or 2.3% linked quarter, driven by increases in construction loans of $69.2 million and commercial real estate loans of $51.1 million. The interest rate of loans funded during the quarter was on average approximately 8%. As of December 31, our loans with oil and gas industry exposure were $94.5 million or 2.1% of total loans. Our allowance for credit losses increased by $1 million for the linked quarter to $46.6 million. The increase was driven by our loan loss provision of $2.2 million and a provision for off-balance sheet credit exposures of $79,000 for the fourth quarter. The provision on loan loss was primarily driven by the increase in loans during the fourth quarter.

Asset quality metrics remained strong with non-performing assets of $4 million or 0.05% of total assets on December 31. On December 31, our allowance for loan losses as a percentage of total loans was 0.94%, consistent on a linked quarter basis. Our securities portfolio decreased $40.1 million or 1.5% on a linked quarter basis, driven by sales of AFS securities in late December due to strategic opportunities related to a drop in treasury rates and reinvestment of proceeds, primarily into higher-yielding securities and to a lesser extent into loans. The sales resulted in a net realized loss of $10.4 million. There were no transfers of AFS securities during the fourth quarter or for the year ended December 31.

As of December 31, we had a net unrealized loss in the AFS securities portfolio of $36.2 million compared to $137 million last quarter, a decrease of $100.8 million, primarily in the municipal securities portfolio due to lower interest rates and to a lesser extent, the sale of securities. As of December 31, the unrealized gain on the fair value hedges on municipal securities was approximately $13.6 million compared to $42.2 million linked quarter, also driven by the lower interest rates. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio.

Our AOCI on December 31, 2023, was a net loss of $113.5 million compared to a net loss of $155 million on September 30, 2023. The net loss was comprised of net losses on our securities and swap derivatives of $94.7 million and $18.8 million related to our retirement plans. As of December 31, the duration in the total securities portfolio was 8.4 years and the duration of the AFS portfolio was 5.8 years, a decrease from 9.7 years and eight years respectively at September 30.

At quarter end, our mix of loans and securities increased slightly to 64% and 36% respectively, compared to 63% and 37% on September 30. Deposits increased $200.1 million or 3.2% on a linked quarter basis, driven primarily by an increase in public fund deposits of $145.4 million and broker deposits of $38.4 million. Our capital ratios remained strong with all capital ratios well above the capital adequacy and well-capitalized threshold. Liquidity resources remained solid with $2.2 billion in liquidity lines available as of December 31. During the fourth quarter, we purchased 146,580 shares of common stock at an average price of $28.54, pursuant to our stock repurchase plan. We have not repurchased any shares since the end of the year....

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