SBSI
#Thank you, Andrea.
Good morning, everyone, and thank you for joining Southside Bancshares' fourth-quarter and year-end 2015 earnings call.
The purpose for this call is to discuss the Company's results for the quarter and year just ended and our outlook for upcoming quarters.
A transcript of today's call will be posted on www.Southside.com under Investor Relations.
During today's call and in other disclosures and presentations, I'll remind you that any forward-looking statements made are subject to risk 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' fourth-quarter 2015 results are <UNK> <UNK>, our CEO, and <UNK> <UNK>, our President and CFO.
For our agenda today, you will hear <UNK> discuss an overview of financial results for the fourth quarter and the year ended 2015, including loan growth, oil and gas exposure in our loan portfolio, an update on our securities portfolio, cost savings, and the Board-authorized stock repurchase plan.
Then <UNK> will share his comments on the quarter and the year.
I will now turn the call over to <UNK>.
Thank you, and good morning, everyone.
Welcome to Southside Bancshares' fourth-quarter and year-end 2015 earnings call.
We had another successful quarter, with net income of $11.7 million.
We incurred one-time expenses in the fourth quarter of approximately $638,000 net of tax related to branch closings, merger-related expenses, and an early retirement package.
For the year ended December 31, 2015, we reported net income of $44 million, a 111% increase over the same period in 2014.
Our diluted earnings per share for the fourth quarter ended December 31, 2015 were $0.46.
Diluted earnings per share for the year 2015 increased 66% to $1.73 compared to $1.04 in 2014.
We reported 34.4% annualized loan growth during the fourth quarter of $192.6 million.
This loan growth was diverse with construction loans increasing $96 million, other real estate increasing $98 million, municipal loans increasing $25.7 million, and commercial loans increasing $14.9 million.
Loans for one- to four-family real estate decreased $22 million, and loans to individuals decreased $19 million.
For the year ended December 31, 2015, we reported 11.5% loan growth of $250.6 million.
Roll-off from the acquired indirect auto loan portfolio during the fourth quarter was approximately $15 million.
Since December 31, 2014, the balance of this portfolio has decreased 48.3% to approximately $80 million at the end of 2015.
Because we are a Texas-based bank, we are continually asked about the oil and gas exposure in our loan portfolio.
I can tell you that it is minimal and it is our intention that it will remain minimal.
Oil and gas exposure in the loan portfolio was 1.34% at the end of the quarter.
At December 31, there were $2.7 million of oil and gas loans classified sub-standard with an 8% reserve.
We did not have any oil and gas loans in non-accrual status at year end.
Loan-loss provision expense during the quarter of $2 million was commensurate with loan growth during the fourth quarter.
Next I will provide a brief update on the securities portfolio.
At the end of 2015, the securities portfolio reflected an increase of approximately $98 million from the prior quarter due primarily to an increase in US treasuries.
The duration of the portfolio at the end of the year was 5 years, up from the prior quarter's duration of 4.7 years.
The average yield increased 7 basis points as premium amortization decreased approximately $530,000 during the fourth quarter due to a decrease in pre-payments.
We anticipate continuing to utilize a barbell approach for our security purchases using US agency CMOs for the short end and US agency CMBS and Texas municipal securities for the longer end.
Our net interest margin of 3.35% remained flat on a linked-quarter basis.
We believe that since 50% of our loan growth occurred in December, and our loan pipeline for the first quarter of 2016 looks healthy, the margins should hold during the first quarter of 2016 or may improve depending on loan growth.
A couple of comments on non-interest expense.
During the fourth quarter, salaries and benefits increased, primarily as a result of merger-related costs, severance related to branch closings, and expense recorded related to an early retirement package offered to 24 of our employees with an acceptance date of January 29, 2016 that was accepted by one employee in 2015.
An additional 15 have accepted the package in 2016 and we currently estimate we will record a one-time expense of $1.3 million net of tax during the first quarter.
We estimate the annual cost savings associated with this early retirement plan will be approximately $1 million net of tax.
Yesterday, our Board of Directors approved a stock repurchase plan that authorized the repurchase from time to time of up to 5% of our issued and outstanding common stock, or approximately 1.27 million shares in open market purchases and privately negotiated transactions at prevailing market prices.
We believe repurchasing shares in a Company we know quite well, Southside Bancshares, Inc, at current market prices, is prudent.
Thank you and I will now turn the call over to <UNK>.
A strong year by any measure, earnings have recovered from 2014.
Our efficiency ratio is moving in the right direction and our return on equity has seen a marked improvement.
Loan demand is especially strong in all of our markets, which is certainly positive.
In fact, loan growth of 11.5% was achieved in 2015, even with the headwind of our indirect auto portfolio rolling off at $5 million to $6 million a month.
That portfolio at year end totaled $80 million.
Fortunately, as <UNK> indicated earlier, our exposure to the oil industry is nominal.
Neither the Austin nor the Fort Worth economy is centered in oil production, and as a result, we have seen no deterioration in either market due to the current pricing downturn.
However, if oil settles below $30 per barrel for a protracted term, we realize that the Texas economy, including the real estate market, may be affected.
We continue monitoring population growth, job growth, home prices, and new housing starts in all of our markets, as these are critical bellwether numbers that give an indication of economic direction and strength.
As we look at 2016, we see the potential for continued solid loan growth, an increase in non-interest-bearing deposit growth, a sharp focus on improving our operating efficiency, and as a result, stronger profitability for the year.
We're positive regarding 2016 and trust that a diversified Texas economy will cushion the impact of any of oil-related slowdown.
With the current Texas bank-stock metrics and our stock price, an acquisition is not as appealing as it once was.
At this time, we will conclude our prepared remarks and open the lines for your questions.
The nonaccrual loan that we put in nonaccrual in the first quarter continues to pay.
We continue to monitor it very closely.
We did not add an additional reserve in the fourth quarter related to that credit.
Like I say, it continues to pay, and all the payments continue to go to the to principal.
So every payment that comes in, it gets a little better.
And in terms of the provision expense for 2016, we are going to continue to reserve like we have been reserving.
Our oil and gas loans will probably continue to monitor those very closely, and if we need to increase reserves on any of those, we will take a look at that, but other than that, we are just going to monitor credits and take a look at them and reserve accordingly.
We have a group of consultants in right now and they are looking at different operations areas.
What we are looking at are trying to become more efficient in certain areas, and so we are just looking at those different areas, and out of that will probably come some cost savings through attrition and that will probably occur the latter half of the year.
But it is primarily in loan operations and on the branch side because of the foot traffic in the branches and things of that nature.
But we expect those cost savings to come through attrition.
On the revenue side, we are looking at some things that they have suggested to enhance some of our revenue-generating programs that we have in place now and then maybe putting some additional ones in place on the non-interest income side.
So we expect that, that probably will begin to generate some additional non-interest income revenue in the second half of the year also.
Yes.
I will probably let <UNK> give you a breakdown on it and he probably has that, but I want to say that probably at June 30, our loan growth was flat, and so it was backloaded the last six months of the year and especially the fourth quarter.
We have been ---+ it seems as though approving loans through the year on a fairly straightforward basis, but the fundings just had been held up, and so it was strange how they just fell into the last half of the year.
The growth generally came out of the three markets and <UNK> may have something that he can shed light on that a little bit more as to where the growth came.
Yes.
The predominant growth came in the DFW area, our Fort Worth markets, and our Austin markets.
Probably about $55 million to $60 million of that loan growth was in the Austin area.
I'm just trying to add it up here.
It looks like about $15 million of it was in the East Texas area and the rest of it was probably in the Dallas-Fort Worth area.
In terms of the types of loans, retail centers were about $45 million.
These are established retail centers, stable cash flows, very good LTVs; multi-family, this was in the DFW area, about $23 million; senior living facility in the DFW area, $15 million; assisted living facility in the DFW area, about $14 million; commercial loans, and these are all in East Texas, about $13 million, and that was fairly diversified.
Commercial real estate, an office building in downtown Dallas, about $15 million, a lot of equity and very stable cash flows on that; a municipal loan in Austin, that one has a permanent school fund guarantee on it; and then a single-family acquisition and development ---+ basically, builders and things of that nature, in the Dallas-Fort Worth area, about $24 million.
That gets you about $172 million of that loan growth.
The rest of it was smaller loans, but I just wanted to give you a flavor for what kind of loan growth was occurring.
There was.
Because we had a lot of ---+ we expect their equity to go in upfront and so there was a lot of front-end equity going in to a lot of these deals and that is what caused a lot of this funding to take place.
But no, we are not projecting 34% loan growth in 2016 (laughter).
<UNK>, we would like to have that, but with the economy a little bit uncertain in Texas, I think we would be tickled to death with 10% loan growth.
Obviously, if it were 12 or 13%, that would be even better, but I don't know that our expectations are quite as high this year.
I don't know that we have seen anything yet, and we are looking for that, because again, you are exactly right, we don't have much oil exposure.
So you look to see where could it come next and we think probably real estate is obviously the thing.
And we are large community Bank and we do a lot of lending around real estate, and so we try to be cognizant of that, and as I said earlier, we just don't see it in Austin or in the Metroplex, and certainly in East Texas, we are not seeing that.
The old East Texas oil field, they are just not doing much pumping out of it at all and so it's just not a factor.
But we watch Austin and the Metroplex like a hawk and so far we just don't see any indication.
In fact, it's just almost counter to what maybe happened in Houston.
If anything, Dallas-Fort Worth seems to be just as strong as it can be.
<UNK>, you may have some color to shed on that.
And one of the things we watch for very carefully, <UNK>, is job growth.
And job growth in Austin continues to be strong, and in Dallas-Fort Worth, it continues to be solid.
It may be down in little bit, but it continues to be solid and so we are watching for those signs, but so far, we haven't seen those.
Probably, we would say, we wouldn't mind going a little bit higher.
It is difficult.
The uncertainty about the economic situation has a lot to bear on that, but I think with what we are projecting, we will see that continue to grow.
We monitor that carefully.
Obviously, we are concerned about that.
We know everything is cyclical.
We understand what oil is doing.
The real challenge is to know what oil is going to be doing a year from now, and quite frankly, our crystal ball, we just don't know, but I anticipate that we are going to continue to see loan growth in that area and that is not unwelcome.
Some of the construction we are putting on is tenant finish out and some of these retail centers in some of these office buildings and things of that nature.
So some of that will go away pretty quickly.
There is an actual structure in place and they may just be doing some tenant finish out in just a portion of the area for tenants that have signed leases on just a small portion of that retail center or that office building.
So it's not ---+ some of that construction is not ground up construction.
We will repurchase right now.
It's accretive to earnings.
As long as it's accretive to earnings, we will be repurchasing.
We're not going to set a price out there or anything, but right now, where it is, we feel like it is prudent to make an investment in our stock.
I will speak to the efficiency ratio.
I feel like that our target is probably mid- to lower 50%s.
I think, with where we came in 2015 that we are well on our way there.
We came in just under 60%, maybe at 59% and some change.
From where we were with the merger, we are pleased with that and we see things moving the right direction, especially at the last couple of quarters.
So that's on target.
I think, our earnings projections bode well for 2016.
We think that it can be an outstanding year for us.
And in terms of ROA projection, I would say it's definitely above 1%.
That is certainly a focus that we have.
We were able to do that last year in both our Austin and Fort Worth markets.
We continue to look for good talented people that can bring something to the table for us.
That will continue to be, like I say, a focus for us in 2016.
We haven't set any target out there for exactly how many we are looking for, but when we see talent, then that is something that we will move on.
<UNK>, did you say trust income.
I am not looking at those numbers, but I thought probably our revenue might have been ---+ is it up.
If I recall that we anticipate our revenue will probably be up about 10% next year.
We expect expenses there to be less than this year, so we feel like the trust operation probably will become more profitable for us.
Won't be significant, like I say, but it is obviously moving the right direction.
We took a severe hit in 2008, probably as a lot of people did, and we have gradually built that back.
So next year, we expect the trust department to add an additional 10% to the bottom line for us.
One second.
Let me send that to you.
I don't have it in basis points.
I am sorry.
I'll send it to you.
Thank you.
Asset quality is strong.
Loan growth is significant.
2016 looks promising.
Thank you for joining us today.
