SBSI
#Thank you, <UNK>.
Good morning, everyone, and welcome to Southside Bancshares First Quarter 2018 Earnings Call.
We reported first quarter net income of $16.3 million compared to first quarter 2017 net income of $15 million, an 8.4% increase.
Our diluted earnings per share for the first quarter ended March 31, 2018, were $0.46 per share, a decrease of $0.05 or 9.8% compared to $0.51 per share for the same period last year.
During the first quarter, we experienced only a slight increase in total loans of $15.3 million on a linked-quarter basis due to higher-than-anticipated payoffs.
When compared to March 31, 2017, total loans increased by $770.7 million or 30.4%.
Approximately $621.3 million of the annual growth was a result of loans acquired in the acquisition of Diboll State Bancshares last quarter.
At March 31, 2017, our loans with oil and gas industry exposure remain minimal at 1.66% of our total loan portfolio.
We recorded loan loss provision expense during the first quarter of $3.7 million, an increase of $2.5 million compared to provision expense recorded in the fourth quarter.
As reported earlier today in our earnings release, the higher first quarter provision expense was a result of 2 commercial real estate loan relationships that were placed on nonaccrual status.
Nonperforming assets increased to $42.4 million or 0.67% of total assets during the quarter ended March 31, 2018, an increase of $32 million compared to $10.5 million or 0.16% of total assets at December 31, 2017, and $14.1 million or 0.25% at March 31, 2017.
Next, for a brief update on our securities portfolio.
On a linked-quarter basis, the size of the securities portfolio decreased $220.1 million during the first quarter, primarily due to the sales of lower-yielding CMOs and lower-yielding short-duration agency debentures.
The duration of the securities portfolio at March 31, 2018, increased to 5.3 years from 4.8 years at December 31, 2017, due primarily to the sale of the agency debentures.
At March 31, 2018, we had a net unrealized loss in the securities portfolio of $48.6 million.
Primarily as a result of the decrease in the securities portfolio this quarter and the loans acquired last quarter, the mix of our loans and securities increased to a 60/40 mix compared to a 57/43 mix at year-end, and a 52/48 percent mix at March 31, 2017, moving closer to our long-range goal of 70/30.
During the first quarter, our net interest margin increased 7 basis points to 3.19% and our net interest spread increased 4 basis points to 2.95% on a linked-quarter basis.
The increase in both the net interest margin and spread were primarily a result of the full quarter of purchase loan accretion from the Diboll portfolio, which positively impacted the average yield on our earning assets.
We recorded $1.2 million of loan accretion this quarter, higher than we expect on a recurring basis due to the early payoff of 3 purchase impaired loans, resulting in approximately $329,000 of accretion.
January 1, we adopted the accounting standard related to revenue recognition.
In connection with the adoption of this guidance, we netted debit card expense of $796,000 previously included in ATM and debit card expense with deposit services income.
And we also netted brokerage service expense of $151,000 previously included in other noninterest expense with brokerage services income.
Due to the guidance under the modified retrospective method, prior periods have not been adjusted and are not comparable.
During the 3 months ended March 31, 2018, our noninterest expense increased $1.7 million or 5.8% on a linked-quarter basis, primarily due to a full quarter of operational expenses associated with our acquisition late in the fourth quarter of 2017 and several other expense items recorded in the first quarter.
These additional expenses include acquisition expense of $832,000 in connection with our acquisition last quarter consisting of $652,000 of change in control, payment accruals and severance payments; and the remaining $180,000 included additional professional fees.
We also paid one-time $1,000 bonuses to certain employees in response to the benefits received from the Tax Cuts and Jobs Act totaling $744,000, $249,000 of cost related to the close of a grocery store branch within very close proximity of the branch acquired in the Diboll acquisition, and $827,000 of losses on the sale of securities in the first quarter.
Our amortization expense increased due to the additional intangible assets recorded last quarter in connection with the acquisition and a full quarter of amortization compared to only 1 month recorded in the fourth quarter related to the additional intangible assets.
On a linked-quarter basis, our efficiency ratio increased for the 3 months ended March 31, 2018, up 1.86% to 51.28% for the first quarter of 2018 from 49.42% for the quarter ended December 31, 2017, and decreased from 51.60% for the quarter ended March 31, 2017.
We expect to see additional efficiencies in future quarters as we complete the integration in Diboll.
The effective tax rate for the first quarter of 2018 was 11.4%.
We recorded a discrete tax credit of $88,000 associated with equity awards that decreased the rate by 48 basis points.
At this point, we expect an effective tax rate for 2018 of approximately 12%.
Thank you very much, and I will now turn the call over to <UNK>.
Thank you, <UNK>.
Overall, we experienced a good first quarter.
Our net interest margin increased 7 basis points and our efficiency ratio decreased compared to the first quarter of 2017, despite the significant reduction in the corporate tax rate that negatively impacted both.
As <UNK> reported, provision expense and nonperforming loans increased during the first quarter.
This was driven by 2 commercial real estate loan relationships, one of which was an acquired loan relationship in our 2014 acquisition.
We are not wavering on our underwriting standards, and we believe our asset quality remains solid.
This last weekend, we completed the core conversion related to the Diboll State Bancshares acquisition.
We are pleased at how smooth and seamless the integration has gone.
With the integration now virtually complete, we expect to realize additional synergies and cost savings.
Diboll's outstanding acquired deposit franchise was a significant factor in the linked-quarter improvement in net interest margin and spread.
The decrease in the securities portfolio during the first quarter, mostly to sale of lower-yielding securities, provides additional balance sheet flexibility in this higher interest rate environment.
This additional flexibility and the resulting increase in loans as a percentage of earning assets to 60%, combined with the Diboll-acquired core deposit franchise, should enhance our future NIM prospects as the anticipated Fed interest rate increases occur.
We will continue to focus on cost containment and process improvement in an effort to further improve our efficiency ratio.
At this point, we believe the 2 areas that will yield the greatest future efficiencies are further process automation and continued rightsizing of our branches.
Economic conditions in the Texas markets we serve remain healthy.
The Austin and DFW markets, fueled primarily by ongoing job growth and company relocations, continued to perform exceptionally well.
We are excited about our prospects for 2018 given the completed integration of the newly-acquired balance sheet, benefits associated with reduced corporate tax rates, the dynamic markets we serve, our solid balance sheet, strong capital position and outstanding team members.
At this time, we will conclude the prepared remarks and open the lines for your questions.
They basically ---+ the 2 facilities just have not leased up as anticipated.
They are continuing to lease up, but they're not at the stage where they thought they'd be at this point in time.
So we felt it appropriate to go ahead and place them on nonaccrual and put some reserve against them.
But they are continuing to show some improvement on a quarterly basis, and that's why we said we'd reevaluate that on a quarterly basis.
Our pipeline looks healthy.
The issue is we continue to see some payoffs that are going to be coming down the road in the next several quarters.
Some of the construction projects have completed and some of those are going on the market.
So the pipeline is healthy, but we do anticipate some further drag as a result of payoffs.
I'd like to think that the mid-single digit is still achievable.
Instead of 7, it may be closer to 5.
But we do have a healthy pipeline.
We do have some construction loans that are going to continue ---+ starting to fund up right now.
So there are a lot of positive things that are happening and it really just depends, <UNK>, on the level of payoffs that we see during the year.
Well, if we look at the reclasses that we had, we had estimated around 32 for the run rate.
And if you take all the noise out, we would come out about 30.
And with the reclass, the expenses that we reclassed that to deposit services income that I mentioned, we would have been around $30,789,000.
And that include the onetime bonuses that was around $744,000 and a branch closure, so right there is $1 million.
We're thinking ---+ we talked a little bit about that yesterday, 30 to 31, probably.
And we would expect it to go down further as the year progresses, probably more in the third quarter even.
We'll have some expense related this next ---+ in the second quarter probably to conversion, additional travel and dissolve the expenses that come along with that function.
So we're thinking somewhere in the 30.8 range to 31 probably.
Right.
There was a new accounting pronouncement that allowed us to transfer some things ---+ transfer anything out of HTM that we wanted to AFS.
And we felt like with the changing interest rate environment, it made sense for us to move some of ---+ a lot of those items out of HTM to AFS so that we can restructure the securities portfolio as we deem appropriate in this higher interest rate environment right now.
So that's what drove that.
And basically, we transferred 700 ---+ about $740 million in securities out of HTM to ---+ and they were all callable securities, out of HTM to AFS.
Yes.
I think it's more of a wait and see in case ---+ depending on the interest rate environment.
We're actually glad to see interest rates move up.
And that's one of the reasons we sold a lot of securities, and about half of that was in the first month of this first quarter.
So we do feel like we have a lot of additional flexibility and we're going to continue to look at potential restructuring going forward.
The geography of the other CRE loan is in Little Rock.
It\
That is correct.
Yes.
Just one second, I'm ---+ <UNK>, we're going to have to get you that number.
It's not that significant.
There's not a lot of it.
And that particular loan is $13 million.
I do.
I was looking at the Omni accretion, and it's gone down but it's pretty flat the last 3 quarters.
It went ---+ it only went down around $9,000 this quarter from the fourth quarter, so I expect it to trickle down a little bit more.
But overall, I do think between $8,000 and $9,000.
There will be the payoffs and there's just no way to predict those at this point.
Well, at any point, actually.
But I do think that's reasonable.
I do.
I think there is potential for some additional lift, especially given the fact that the fed is planning on raising interest rates at least 2 more times this year.
Well, the total was around, let's see, $800,000 ---+ $950,000.
$796,000 was related to debit card and $151,000 was related to brokerage services.
So our deposit service still increased if you look at the year-over-year, and that's the result of having the acquisition largely.
And then the brokerage services, even with the net ---+ you will notice a decrease because of the netting.
But if you add back the $151,000 essentially to that, you all see an increase because the prior periods do not have it netted out.
And that should be fairly ---+ I would expect that to be fairly consistent.
This was our first full quarter with Diboll activity in it.
We just had 1 month of activity in the fourth quarter, so probably we'll be able to have a better feel for what that run rate on the debit card expense will be after another quarter.
The magnitude of the payoffs.
Gosh, I'd have to go back to fourth quarter and see what payoffs were then.
But I do think we did experience higher payoffs this quarter than we did in the fourth quarter and certainly, higher than what we had in the third quarter last year.
But I'd have to go back and check the exact dollar amounts.
It really is hard to determine.
Most of the 2 markets that we've lent a lot of money into, the Austin and the DFW markets, continue to be very, very healthy and there's a lot of continued sales of different properties that take place.
And as I tell the loan officers we agonize over are they going to pay off, and then we get upset when they do pay off.
So it's just part of a healthy economy, I think, that we are experiencing payoffs.
Thank you.
We believe Southside is well positioned for the future, and look forward to reporting the results for the remainder of 2018.
Thank you for being on the call today, and we look forward to hosting our next earnings call in July.
