SBSI
#Thank you and good morning.
Welcome to Southside Bancshares' 2016 first quarter earnings call.
We had a very successful quarter to start the year, with net income of $13.5 million.
During the first quarter, we had $1.3 million recovery of interest income due to the payoff of a long-term nonaccrual loan and $2.4 million of gains on sales of securities.
These were partially offset by one-time expenses of $2.1 million related to an early retirement package for 16 employees and $325,000 related to an early termination of a lease.
Our diluted earnings per share for the first quarter ended March 31, 2016 were $0.54, an increase of 45.9%, compared to the same period in 2015.
We reported an $11.5 million increase in loans during the first quarter.
Despite the lower than anticipated first quarter loan growth, we continue to believe our loan growth during 2016 will be solid based on the healthy loan demand we are seeing, especially in the DFW and Austin markets and our existing pipeline of approved unfunded loans.
At March 31, 2016 our loans with oil and gas industry exposure totaled 1.23% of our loans.
At March 31, $5.7 million of our oil and gas industry loans were classified substandard with a 4% reserve.
We did not have any oil and gas loans in nonaccrual status at quarter-end.
Loan loss provision expense during the first quarter was $2.3 million, almost all of which was related to one large impaired commercial loan that has been classified nonaccrual for over a year.
Next, I will provide a brief update on the securities portfolio.
The securities portfolio decreased approximately $128 million during the first quarter, primarily due to the sale of longer duration, lower yielding US treasury notes and mortgage-backed securities, as long-term interest rates declined significantly.
The net result was the duration of the securities portfolio at March 31, decreased to 4.8 years from the prior quarter's duration of five years and the average yield of the securities portfolio increased 13 basis points on a linked quarter basis.
We anticipate continuing to utilize a barbell approach for our security purchases using US agency CMOs for the short end and treasury notes, agency CMBS and Texas Municipal securities for the longer end.
During the first quarter, our net interest margin increased 16 basis points to 3.51%.
When the net interest margin is adjusted for the one-time interest income due to the nonaccrual loan payoff, the net interest margin for the first quarter was 3.4%, which represents a five basis point increase on a linked quarter basis.
I also want to provide some purchase accounting accretion and amortization numbers for the first quarter.
For loans we recorded $956,000 of accretion, for securities we recorded $127,000 of amortization and for CDs and FHLB advances we recorded $385,000 of accretion.
This resulted in a net accretion recorded for the quarter of $1.2 million, compared to net accretion recorded last quarter of $1 million related to purchase accounting.
As part of the Board of Directors' approved stock repurchase plan, we were able to purchase approximately 443,000 shares of our common stock during the first quarter at an average price of $23 per share.
I will now turn the call over to <UNK>.
Thank you, <UNK>.
The first quarter was a strong quarter for the Company.
Early forecast indicated 2015 could be a marginal year due to merger related activities.
Fortunately the merger and subsequent integration was successful and 2015 became a hallmark year.
Our projections also indicated that 2016 had the potential to be an outstanding year if we executed our game plan.
Results from the first quarter are indicative that our projections were on target and that our team's execution was on the mark.
The price of oil continues to have an impact on all public Texas bank stock valuations.
Our exposure to the oil and related services is minimal and yet we have seen our stock price closely follow the price of oil.
It appears that regardless of our financial performance, because we are a Texas bank, we are tied to oil, for better or worse.
Fortunately, the markets where we operate have not been negatively impacted by the price of oil and they are continuing to experience job growth, population growth and a demand for new homes.
In addition, the supply of homes in all three markets is at historic lows and home prices continue to escalate, especially in our North Texas market.
Presently, there is no sign of an economic slowdown.
Expanding the franchise through acquisitions is still a consideration, but realistically, until stock valuations return to more normal levels and they are moving in that direction and price expectations are more realistic, merger and acquisition activity will be a challenge.
Our primary initiatives focus on growing the bank organically by expanding our deposit relationship with our customers and continuing our efforts to grow the loan portfolio.
The first quarter loan growth fell short of expectations, but our target remains 8% to 10% for the year.
Considering the health of our markets and the bank's financial position, 2016 could be an exceptional year.
We are now ready to take any questions.
Well, Brad, let me start and <UNK> can kind of clean it up what I mess up.
But in any event, our thought with the consultants is to have a hard look at all of the processes across the bank.
We felt now was a good time to do that, with the transitions through the merger, with OmniAmerican going so well, we found that some of our processes needed to smooth out and we really needed somebody to come in and take a look.
While they are doing that, they are looking to see how can we be more efficient.
Obviously, that's been a focus of ours for some time.
They are having good results.
We formed 10 or 12 teams of our people to dig into the process to look to see how we do business.
We feel like that, things are coming out from that.
We have seen several significant changes and more changes will be coming.
Hopefully we're moving to the best-of-breed, that's our focus.
And obviously, our focus is on the expense side, how do we sharpen that pencil and do a little bit better job there.
And I think we've made some good headway and we're beginning to see that results when we look at our efficiency ratio and the direction that it's been moving.
<UNK>, what would you add.
I know, I hit that from 30,000 feet.
Right.
And they have looked at some of the revenue side and I think they brought some good ideas on the fee income side, and so we expect to begin to realize some fee income increases probably beginning some of it slight in the second quarter, but heavier in the third and fourth quarter.
Exact numbers, we'll probably know better by the end of the second quarter.
And it could have a fairly nice impact on fee income.
And on the expense side, if some of the processes like on the loan process side, we're taking a look at that and we just needed to improve some of those processes.
We may actually need to increase expense a little bit there.
But in a lot of other places they've looked, we're going to be able to decrease expenses in a lot of those areas.
So overall, I think we're looking at an overall decrease in expense in the overall areas that they are looking at and a lot of that is coming together right now, and by the end of the second quarter, we should have a much better feel for the overall impact that that's going to have.
(multiple speakers) And we definitely can hold that for this quarter.
And I would anticipate it'll be lower in the third quarter.
And once the consulting fees roll out, it'll be considerably lower in the fourth quarter.
On the NIM, it really is going to come down to what loan growth, what occurs there.
And if we can have the loan growth occur and start funding some of these loans that have been approved, not have the payoffs in the second quarter that we had in the first quarter, then the NIM should continue to improve.
We did put some swaps on in the first quarter when rates hit a really low level.
So that did drive up some of our expense cost on the funding side.
But we think that some of those swaps are going to really pay some big dividends, because we put them on when rates hit almost the lows.
So it's one of those things where the NIM should begin to perform, because lower yielding securities will roll off, then the higher yielding loans will go on and the deposit costs will go up just a little bit, if the Fed increases rates.
If they don't, those deposit costs should stay fairly flat.
No.
Well, let me look here.
It had about $500,000 impact on the margin.
All in it was, in the first quarter, it was $4.5 million and in the fourth quarter it was almost $5.1 million and that's net of accretion.
You want just the amortization.
The amortization in the first quarter was $5.1 million, the amortization in the fourth quarter was $5,550,000 or $450,000 difference.
The reason we were buying the stock when we bought it was, it was accretive and I don't know, I will have to go run the math, but I don't think it's probably accretive at this point in time.
So I don't know if it's beneficial to the shareholders.
We look at indirect and our attorney has basically said, gosh, you are in Texas and for you to make the claim, when you're going to able to tell the readers what's indirect, you are taking a real risk there.
What we had included before was, we have an office building that's fully leased with some really solid tenants, one of which is one of the largest oil companies in the world and it's about a $16 million credit and it's an office building in Midland.
And so we were including that and I am trying to remember there was one or two other credits that we were including, but those were the type of credits that we were including.
And the other credits were fairly small.
That was the biggest that we were including.
All right.
Thank you very much.
We have had a very strong quarter.
We continue to focus on operational efficiencies, cost containment and revenue generating opportunities.
As we have said, our loan pipeline looks awfully good.
2016, as I said earlier, could be a very exceptional year and we look forward to it.
I'd like to thank all of you for joining us this morning.
