SBSI
#Thank you, [Vicky].
Good morning everyone and thank you for joining Southside Bancshares first quarterly earnings call.
The purpose of our call is to discuss the Company's results for the quarter just ended and our outlook for upcoming quarters.
A transcript of today's call will be posted on southside.com under Investor Relations tab.
During today's call and in other disclosures and presentations, I'll remind you that any forward-looking statements made are subject to risks and uncertainties.
Factors that could materially change our current forward-looking assumptions are described in our earnings release and in our Form 10-K.
Joining me today to review Southside Bancshares' third quarter 2015 results are <UNK> <UNK>, President and CEO, and <UNK> <UNK>, Senior Executive Vice President and CFO.
Our agenda today is as follows.
First, you'll hear <UNK> discuss an overview of financial results for the quarter, including loan growth, oil and gas exposure in our loan portfolio, an update on our securities portfolio and an update on efficiency and cost savings subsequent to our merger with OmniAmerican Bank in December of 2014.
Then <UNK> will share his comments on the quarter.
I will now turn the call over to <UNK>.
Thank you and good morning everyone.
Welcome to Southside Bancshares third quarter 2015 earnings call.
We had another successful quarter with net income of $11.8 million, a 93% increase over the same period in 2014.
Net income for the nine months was $32.3 million, a 30% increase over the same period in 2014.
Our diluted earnings per share increased 48% to $0.46 per share for the quarter ended September 30, 2015 compared to 2014.
During the third quarter, we reported loan growth of $59.3 million or 10.8% on an annualized basis.
This is in line with our expectations for loan growth for the next several quarters.
It's important to note that over 65% of this loan growth occurred in September and as a result, we expect to realize the full net interest income benefits of this third quarter loan growth during the fourth quarter.
We continue to experience roll-off from the acquired indirect auto loan portfolio, which decreased approximately $18 million during the third quarter.
Since December 31, 2014, the balance of this portfolio has decreased 39% and was approximately $93 million at the end of the third quarter, and is declining at an average monthly rate of $6 million.
Because Southside is a Texas-based bank, we're continually asked about the oil and gas exposure in our loan portfolio.
I can tell you that it is minimal and that it is our intention that it will remain minimal.
The direct oil and gas exposure at the end of the quarter was $33.5 million or 1.48% of the loan portfolio.
Total direct and indirect oil and gas exposure at the end of the quarter was $61.1 million or 2.69% of the loan portfolio.
At the end of the quarter, we did not have any oil and gas loans in non-accrual status.
Loan loss provision expense during the quarter of $2.3 million was a little higher than we anticipated.
During the quarter, we renewed one purchased impaired credit that required an additional reserve of approximately $400,000.
At renewal, this purchased impaired credit was restructured and is now reflected in non-performing assets, which is the reason for the increase in non-performing assets this quarter.
We also determined during the third quarter that a credit placed on non-accrual during the first quarter required an additional reserve of approximately $600,000.
This combined with the reserves required with respect to $59 million of loan growth during the third quarter accounted for most of the provision expense.
Next, I'll provide a brief update on the securities portfolio.
At the end of the quarter, the securities portfolio reflected a decrease of approximately $75 million from the prior quarter.
The duration of the portfolio is 4.72 years, up just slightly from the prior quarter's duration of 4.69 years.
The average balance during the quarter increased $52 million from the second quarter and the yield increased 1 basis point as premium amortization decreased approximately $280,000 during the third quarter due to decreased pre-payments.
During August and September, we sold approximately $75 million of CMOs where continued prepayment risk was a concern and book yield was near zero.
We anticipate continuing to use a barbell approach for our purchases utilizing CMOs for the short end and US agency CMBS and Texas municipal securities for longer end.
Our net interest margin decreased 4 basis points on a linked quarter basis to 3.35% during the third quarter.
We believe that since a large portion of our loan growth occurred in the latter part of the third quarter and our loan pipeline for fourth quarter looks very healthy, combined with the changes we made in the securities portfolio during the third quarter by selling very low yielding CMO securities, the margins should hold in the fourth quarter or may improve depending on loan growth.
A couple of comments on non-interest expense.
During the third quarter, depreciation expense which is a part of occupancy expense, reflected a normalized level.
During the second quarter, we made an adjustment of approximately $600,000 reducing occupancy expense and non-interest income to adjust for the depreciation expense associated with the basis step-up of the leased building we acquired in Fort Worth.
This depreciation expense reduced that lease income.
In addition, during the third quarter, we converted all of our debit cards to another processor and incurred approximately $400,000 in unexpected losses during a short period of time.
The issue that caused these losses was corrected during the quarter.
This amount is reflected in other expense.
We are extremely pleased with the cost savings achieved as a result of the merger with OmniAmerican.
Cost savings realized to-date of approximately 37.5% have exceeded our initial projection of 30% to 35%.
We have also undertaken a project to identify other operational efficiencies, cost containment opportunities and non-interest income revenue generating opportunities which should be complete by the middle of 2016.
I will now turn the call over to <UNK>.
Thank you for joining us this morning.
As <UNK> just outlined, we have good news to share this quarter.
We're very pleased with the 10.8% annualized loan growth during the third quarter.
Our Fort Worth and Austin markets are doing exceptionally well and we continue to see strong quality loan demand from both of these markets.
Our East Texas market continues to grow but at a more measured pace and loan demand there remains good.
With the pace of the indirect auto portfolio roll-off slowing and the rate at which the loans we have committed are now funding, we believe annualized double-digit loan growth could be sustainable well into 2016.
Our third quarter loan growth was driven by $46.6 million increase in construction loans, $36.3 million increase in commercial real estate loans and $5.9 million increase in municipal loans.
Several of our construction loans have long-term leases from highly rated national tenants as collateral.
The growth experienced in both construction and commercial real estate loans is diversified among our market areas.
Our merger with OmniAmerican was approved in December 2014, and our systems conversion was completed in March of this year.
As with most bank mergers, we have made systems selections across the bank and through the hard work of our dedicated staff, it was a relatively smooth transition, completed only four months after closing date.
Basically, the merger transaction is complete and has gone far better than expected.
Again, it was hard work by our North Texas and East Texas teams that have made the transition go so well.
Not perfect, but I'll say close.
We knew there were significant synergies and a similar credit culture from the start.
And through this integration process, a true partnership has emerged as we worked closely together and analyzed various expenses and the appropriate centralization of several functions.
We continue to fine-tune processes to ensure quality customer service, as well as a focus on additional efficiency.
We are focused on loan growth with a long-term target of moving loans to comprise approximately 70% of balance sheet assets.
It may well take three to five years to accomplish this, but we are beginning to see through progress.
The indirect automobile portfolio [we've acquired] in the recent acquisition of OmniAmerican continues to roll off and the total balance outstanding now is under $100 million.
That roll-off clouds our actual loan growth numbers and obscures what we believe is solid loan growth, especially over the past several months.
Our target loan growth remains 10% to 12% annually.
Fortunately, as <UNK> indicated earlier, our exposure to oil and oil-related industries is nominal.
Neither the Austin nor the Fort Worth economies are centered in oil production and as a result, we have seen no deterioration in either market due to the current oil pricing downturn.
On the acquisition front, we anticipate beginning to look for opportunities in early 2016.
Our focus market for an acquisition remains a triangle from Tyler to Fort Worth to Austin and back to Tyler.
Our preferred target bank would be above $500 million in assets.
At this time we will conclude our prepared remarks and open the lines for your questions.
Vicky, if you would open the lines, please.
That's correct.
It just ---+ it looks like ---+ if you look at second quarter to third quarter, it looks like the expense ---+ non-interest income expense went up, and really, it just normalized because if you look at first quarter to second quarter, it went way down and it's back up but it's at a normalized level.
That's correct.
With the loan growth we're anticipating, it would certainly be higher than the second quarter's provisioning expense.
The credits that we had to ---+ to put additional reserves against our credits that we've been ---+ one of them is a credit that was from the merger that we had discounted fairly heavily coming in at merger date when we restructured it.
We [didn't] need to put an additional reserve on it and then the other one is the credit from first quarter.
So it's not new credits that are popping up.
It's those two credits.
So, at this point, we believe that the provision expense is going to be driven by loan growth.
For the most part, yes.
Yes, I think there is probably a little bit of shock on the part of the bankers right now also.
As you know, when we start looking, we kick a lot of tires.
We anticipate that we will start that process in '16.
We had not started yet.
Obviously, our focus has been on the transition of OmniAmerican and as we've said, it has gone very, very well.
But we will start to look.
We realized there is not a lot going on in the market right now because of the oil situation I think.
So we'll see what's out there.
We made an acquisition in 2007, we made our second acquisition in 2014.
I doubt seriously [it'll be seven years] before we pull the trigger, but we do take a lot of time and we want to start looking ---+ because there might be opportunities and if there are, we want to be able to take advantage of that.
Well, it obviously could be in the middle (inaudible) that's just kind of a basic triangle we use ---+ we might slide outside of the triangle a little bit, but I doubt we would slide as far as Houston.
We want to stay in that triangle if we can.
We feel like we're in probably two of the strongest markets in the country, in Fort Worth and Austin, and so we don't want to get too far away from that.
I think so.
I think it is.
We have hired new lenders in Austin, so that skewed a little bit of the costs base, but that occurred during the third quarter and they are already beginning to produce and book loans but, yes, I think that is a good number to use.
Yes, I think it's a little too early to quantify that, but we do believe that there are some nice ---+ and quite frankly a lot of it is revenue-driven we believe in non-interest income.
So, but we think it's a little too early to quantify that.
Probably, we'll be able to do that sometime in the first quarter.
I would hope that if loan growth continues at this double-digit pace that we should see the margin start to gradually climb during 2016 as investments become a smaller percentage of the earning asset base and loans become a higher percentage of earning asset base.
I think they'll kind of remain stable for a while and then we'll see what happens in the marketplace and that will really be more driven by what the market dictates as far as securities go.
If it is the market dictates that we need to shrink the securities portfolio, then we will.
If we continue to have a really (inaudible) we may hold the securities portfolio where it is.
It's normalized also because basically the $600,000, $300,000 of it had to do with the first quarter and $300,000 had to do with second quarter because it was a basic adjustment on that building in December that basically we finalized during the second quarter and so the non-interest income is basically in more normalized level in the third quarter as well.
In 2016, I'm thinking that we will be in the high teens in 2016, most definitely.
The reason we're in this mid teens is really driven by the first two quarters when we have a lot of the merger costs still priced in and so that's basically an annualized tax rate, it goes close through all four quarters.
Let me jump in and then <UNK> can jump in after me, but I think we're hopeful that we will be able to achieve double-digit loan growth.
As we see the roll off continue and with the way things have been moving the past several months, I think we have a good shot at seeing double-digit loan growth.
With that, <UNK>, what are your ---+ any difference.
No, I think that's correct and that's really where we're anticipating that our growth is going to come from, unless something unusual happens in the marketplace.
I don't really see asset growth coming on the investment side to any great extend.
You might see a little bit but we could also see some decline and it really just depends what happens to the investment environment.
A lot of that were existing relationships that we had committed back, some in the first quarter and second quarter that we're just now ---+ they had put in their equity funding and we're just now starting to fund those projects.
I think <UNK> mentioned several of them have leases as collateral that are from highly rated corporations.
Lot of projects are very, very strong.
It's right around 8 basis points and I can get you the amount, but it's right around 8 basis points.
Probably, as we said, we're working with some national firms, lot of things that are coming out of the Austin market.
We are seeing a lot of flow I think too out of Fort Worth.
I think probably to talk about specifics, as we said, both of those markets have really shone brightly the last few years and so we are continuing to generate a lot of growth out of that.
Some of the projects are not necessarily in the State of Texas also.
Some of the projects maybe outside of the state.
So, I don't know if that really gives you the color you want.
<UNK>, you may be able amplify more on it.
I think most of the CRE projects are probably in the market that we're in and we have strong LTVs, strong debt coverage ratios, things of that nature, fully leased up, good solid tenants, that type of things.
The only project in terms of construction that we have I think outside of Texas are related to these national tenants that we have leases as a collateral that if we told you the name of the tenant, it's someone that we all know and we'll be very comfortable with.
So, those are the type of projects we're looking at.
It's really a combination of both.
Its office and retail.
We have a project down I think in the Austin area that is a retail project where ATB is anchor tenant in it and it's the big retail center, it's a great project and it's fully leased out and very successful.
So, it's a combination of both retail and office.
Yes.
It has to do with an updated not so much appraisal but re-evaluation of the collateral position and that was the reason for the additional provision expense.
Thank you, Vicky.
We would like to thank you for being on our first earnings call today.
The earnings are beginning to fall into place as we had hoped.
Our loan growth has started to ramp up and we expect it will continue.
The merger is in reality completed and it was far smoother than we anticipated.
Asset quality is strong.
We operate in two dynamic markets and one very stable solid market.
The fourth quarter looks promising.
And we're excited about 2016.
See you soon and thanks again for joining us.
