Southside Bancshares Inc Q1 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to Southside Bancshares, Inc. first quarter 2025 earnings call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To ensure your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Lindsey Bailes, Vice President, Investor Relations. Please go ahead.

Thank you, Lisa. Good morning, everyone, and welcome to Southside Bancshares, Inc. first quarter 2025 earnings call. A transcript of today's call will be posted on southside.com under investor relations. During today's call and other disclosures and presentations, I'll remind you that any forward-looking statements are subject to risk 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 CEO, Lee Gibson, President, Keith Donahoe, and CFO, Julie Shamburger. Firstly, Lee will start us off with his comments on the quarter, then Keith will discuss loans and credit, and then Julie will give an overview of our financial results. I will now turn the call over to Lee.

Thank you, Lindsey, and welcome to today's call. Overall, we had a solid first quarter with net income of $21.5 million resulting in diluted earnings per share of $0.71, an annualized return on average assets of 1.03%, and an annualized return on average tangible common equity of 14.14%. Linked quarter, we experienced a $94.4 million or 2% reduction in loans due to payoff activity primarily in our CRE portfolio that exceeded our original expectations. We do not believe the first quarter is indicative of where we will end 2025, as we still anticipate mid-single-digit loan growth this year. Keith will provide additional details related to the first quarter loan activity, our current loan pipeline, and perform non-performing assets. Linked quarter declines in loans and securities, a restructuring of $120 million in securities early in the first quarter combined with an increase in the net of brokered and public fund deposits resulted in a three basis point increase in our net interest margin to 2.86% and an increase in our net interest income of $145,000. Our ability to lower our overall funding costs more than offset cash flow swaps that matured in the first quarter that had an average weighted rate of 78 basis points. Based on discussions with our customers related to the recent uncertainty in the markets, surrounding tariff announcements and ongoing related negotiations, overall, we are optimistic. While it is too early to discern the likely outcome of these negotiations, we will remain vigilant. Currently, the markets we serve remain healthy and the Texas economy is anticipated to grow at a faster pace than the overall projected US growth rate. I look forward to answering your questions, and we'll now turn the call over to Keith.

Thank you, Lee. Our first quarter commercial loan production totaled approximately $142 million representing a 46% increase over the first quarter of 2024. Of the new loan production, only $52 million funded during the quarter. We expect the remaining portion to fund over the next nine quarters. First quarter payoffs exceeded our original expectations, mostly related to our CRE portfolio, which included 25 loans secured by a variety of commercial properties, including retail, multifamily, skilled nursing, and one hotel. Other than the skilled nursing facilities, which were sold, most of the remaining properties were refinanced by traditional long-term lenders, including agencies, condo lenders, and life insurance companies with lower spreads and leverage above our typical thresholds. Despite first quarter payoffs, we remain positive about loan growth. Currently, our loan pipeline exceeds $1.9 billion and represents our largest pipeline in the last 24 to 36 months. The pipeline is well balanced with approximately 45% term loans and 55% construction loans. Historically, we've closed between 25% and 30% of our pipeline. Based on lines in the pipeline identified as won but not yet closed, few projected payoffs, and funds on existing construction loans, we expect loan growth to exceed payoffs in the second quarter. Additionally, we're making progress on our C&I initiative, which now represents approximately 25% of our total pipeline. The expansion of our C&I efforts in Houston has contributed to the increase and is gaining momentum. The Houston C&I team expanded by two individuals during the first quarter with a budgeted expansion of two additional team members in the second half of 2025. Overall, credit quality remains strong despite the first quarter increase in non-performing assets and classified loans. The increase in non-performing assets was specifically related to a negotiated extension of one large loan triggering a modified loan status. The loan is secured by a newly built multifamily project with positive leasing activity and a sponsor that has demonstrated a willingness and financial capability to support. While a meaningful increase, our non-performing assets remain low at 0.39%. Our classified loans totaled $67 million on March 31 compared to $48 million on December 31, primarily due to a downgrade of a $17.9 million CRE loan in the first quarter. That loan subsequently paid off on April 4, 2025. I look forward to answering questions, and I'll now turn the call over to Julie.

Thank you, Keith. Good morning, everyone, and welcome to our first quarter call. We started the year with first quarter net income of $21.5 million, a decrease of $279,000 or 1.3% compared to the fourth quarter and diluted earnings per share of $0.71 for the first quarter of 2025, the same as the linked quarter. As of March 31, loans were $4.57 billion, a linked quarter decrease of $94.4 million or 2%. The linked quarter decrease was primarily driven by a decrease of $79.7 million in construction loans and $19.7 million in municipal loans, partially offset by an increase of $8.5 million in commercial loans. The average rate of loans funded during the first quarter was approximately 7.3%. As of March 31, our loans with oil and gas industry exposure were $111 million or 2.4% of total loans. Non-performing assets remain low at 0.39% of total assets. Our allowance for credit losses increased to $48.5 million for the linked quarter from $48 million on December 31, and our allowance for loan losses as a percentage of total loans increased to 0.98% compared to 0.96% at December 31. Our securities portfolio was $2.74 billion at March 31, a decrease of $76.9 million or 2.7% from $2.81 billion last quarter. The decrease was driven primarily by maturities and principal payments. Also, in an effort to reduce prepayment risk, we sold $120 million of mortgage-backed securities with 7% coupons and recorded a net realized loss of $554,000. We replaced the mortgage-backed securities sold with $121 million of low premium, 6% coupon mortgage-backed securities with less prepayment risk should rates decrease. As of March 31, we had a net unrealized loss in the AFS securities portfolio of $51.2 million, a decrease of $2.3 million compared to $53.5 million last quarter. There were no transfers of AFS securities during the first quarter. On March 31, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $8.6 million compared to $16.6 million linked quarter. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio. As of March 31, the duration of the total securities portfolio was nine years and the duration of the AFS portfolio was seven years, an increase from 8.2 and 5.7 years respectively as of December 31. At quarter end, our mix of loans and securities was 63% and 37% respectively, a slight shift from 62% and 38% last quarter. Deposits decreased $63.4 million or 1% on a linked quarter basis, primarily due to a decrease in broker deposits of $196.7 million or 26.5%, offset by an increase in public fund, commercial, and retail deposits. Our capital ratios remain strong with all capital ratios well above the thresholds for capital adequacy and well-capitalized. Liquidity resources remain solid with $2.29 billion in liquidity lines available as of March 31. We did not purchase any shares of our common stock during the first quarter. After quarter end and through April 25, we have repurchased 196,419 shares at an average price of $26.82 per share. We have approximately 387,000 shares remaining in the current repurchase authorization. Our tax equivalent net interest margin increased three basis points on a linked quarter basis to 2.86% from 2.83%. The tax equivalent net interest spread increased for the same period by eight basis points to 2.20% up from 2.12%. For the three months ended March 31, we had a slight increase in net interest income of $145,000 or 0.3% compared to the linked quarter. Non-interest income excluding the net loss on the sales of AFS Securities decreased $1.5 million or 12.2% for the linked quarter, primarily due to a decrease in swap fee income and mortgage servicing fee income. Non-interest expense decreased $1.1 million or 2.8% on a linked quarter basis to $37.1 million driven primarily by a decrease in salaries and employee benefits, net occupancy, professional fees, and other non-interest expense. During the call last quarter, I reported that we had budgeted a 5.7% increase in non-interest expense in 2025 over 2024 actual, primarily related to salary and employee benefits, retirement-related expense, software expense, and a one-time charge of $1 million related to the demolition of a currently occupied branch after completion of the new branch. This increase in terms of an expected run rate was approximately $38.4 million for the first quarter and approximately $39 million for the remaining quarters. We came in lower than our budget during the first quarter primarily due to lower salary and employee benefits, net occupancy, and software expenses. At this time, we are expecting to recognize the $1 million charge on the old branch in the second quarter. This will likely result in non-interest expense of approximately $39 million in the second quarter. Also, as certain items in our budget materialize later in the year, we expect to move closer to $39 million for the remaining quarters as well. Our fully taxable equivalent efficiency ratio increased to 55% as of March 31, from 54% as of December 31 due to a decrease in total revenue. We recorded income tax expense of $4.7 million, a slight increase of $62,000 compared to the fourth quarter. The effective tax rate was 18% for the first quarter, an increase compared to 17.6% last quarter. We are currently estimating an annual effective tax rate of 18% for 2025. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.

Hand is raised. Also ask that you please wait for your name and company to be announced before you proceed with your question. Moment while we compile the Q&A roster. The first question today will be coming from the line of Brett Rabatin of Hovde Group.

Hey. Good morning. It's Brett with Hovde Group.

Morning, Brett.

Hey. I wanted to start on the loans and I heard correct, the $1.9 billion pipeline sounded like that's the biggest it's been in two years. Can you guys just talk about, you know, pull through from that pipeline and then does the guidance for mid-single-digit loan growth encapsulate any portion of the longer end of the curve being as low as it is and maybe impacting the CRE book further from here?

Yeah. So on the pipeline itself, it is the largest we've seen in a while. We part of that, we've seen a tremendous amount of activity, a lot of it in the CRE space, but we are picking up some new opportunities in the C&I space, which we're really excited about. As far as what to expect, historically, we've closed between 25% and 30% of our pipeline. You know, as far as the effect on the CRE portfolio, we're hopeful that we continue to see some momentum in the C&I business so that we can moderate the heavy weight in our CRE portfolio. But a lot of the term stuff are investment real estate opportunities at this point.

Okay. And Keith, is it the two lenders that you had in Houston on the C&I side? Any color on their books that they might be able to bring over, know what their background?

Yeah. They're predominantly what we refer to as business bankers. They're in the small end to middle market. Focus right now. We're in a fairly greenfield for us. It's based in Houston. We’re anticipating that they do have books that they managed at other organizations that'll take a little bit of time to move that, but we do believe in their capabilities. The two that we have budgeted in the future are really replacing two former employees that left right at the end of last year. So we're going to backfill those. In the future, we're gonna be looking at other metro markets to expand the same presence there through hiring or lifting teams out of other markets.

Okay. Great. And then just maybe one last one on the margin. You know, I'm looking at the CD portfolio, $1.3 billion that costs 4.37. What seems like that replaces the margin could move higher. Any thoughts on the margin from here, how you guys see it playing out in the near term in particular?

Yeah. In that CD book, we have a little less than $300 million that matures over the next three months, and it has an average rate of 4.84. So we anticipate that that'll reprice down at least 40 basis points, if not 45. So that should have a positive impact on the margin. There'll be a little pull through residual of the swaps that rolled off in the first quarter. But we did put some new swaps on early in the second quarter. About $125 million that should also have a positive impact. That combined with the anticipated growth that we're expecting to see in the second quarter should have an overall positive impact on the margin. So overall, we're optimistic. I think we said we felt like we'd reached a trough, and most definitely, we would've reached the trough in the first quarter. We feel good about the margin moving forward.

Okay. Great. Appreciate all the color.

Thank you. One moment for the next question. And our next question will come from the line of Wood Lay of KBW. Your line is open.

Hey. Good morning, guys.

Good morning, Woody.

Maybe just to follow-up on margin real quick and with some of the swaps you've added, how do you view your current profile of sensitivity to rates right now?

You know, a lot of it depends on what the Fed does. But let's say the Fed stays on hold, I think overall, we're gonna see funding costs drift a little lower. On the asset side, I think we can see the overall asset yield increase. Obviously, if the Fed cuts rates, which right now appears there's a possibility they might do it in June, we'll see some shifting on both sides of the balance sheet. Overall, I think we're in a position where it'll be positive with rates going down. We continue to put some swaps on to protect us, should short-term rates especially move the other direction.

Got it. That's helpful. Maybe next wanted to follow-up on expenses. Expenses came in better this quarter. Were there any targeted reductions, or can you provide context on what allowed you to come under budget?

No. I would not say there were any targeted reductions. It was obviously the first quarter following all the budget preparation, so we didn't have anything specifically targeted. We did see a decrease in salaries and employee benefits that was about $578,000, and we had booked some additional expense in the fourth quarter for incentives that did not repeat this quarter. Also, some of our share-based equity expense decreased a little bit over $100,000. So those are some of the main things that drove it down this quarter. Net occupancy decreased due to a decrease in our depreciation expense, which is going to change here based on assets rolling off. I think our budget for depreciation this year is slightly higher due to putting on the new branch in Cleveland later in the year.

Got it. And then maybe last for me, just following up on credit. Any color you can give on the restructured CRE credit? I'm assuming it is a multifamily loan, and any color you can give on the geographic location of the credit?

Yeah. It's located in Austin, Texas. It was a negotiated extension that we picked up some credit enhancements, but the nature of the extension resulted in us needing to move it into a non-performing asset. The borrower has not missed any payments, and we don't anticipate them to miss any payments. The lease-up activity is positive; it's just slower than we originally budgeted. We're constantly monitoring these assets and feel good about their performance despite having to categorize it as non-performing.

Alright. Thanks for taking my questions.

Thank you. One moment. If you would like to ask a question, please press. And our next question will be coming from the line of Tim Mitchell of Raymond James. Your line is open.

Hey. Good morning, everyone. Thanks for taking my question.

Good morning.

Just give me color. Last quarter you talked about lower swap income this quarter and still saw growth in wealth, and I understand, obviously, the market's giving a little pressure there, but just any outlook for free revenue for the rest of the year?

Yes. If you recall, and I'm pretty sure we said it, but we had about $1.4 million in swap fee income in the fourth quarter, which was a little extraordinary at the time. It was higher than some of the previous quarters. We did have some swap fee income this quarter, I think around $98,000. We typically don't budget for swap fee income, but we actually did budget some this year, around $600,000, because at the time of doing the budget, we had some loans in the pipeline and thought we could reasonably expect swap fee income on those. I believe that is still the case that we are expecting some upcoming swap fee income. Although the first quarter was only about $100,000. We did see an increase in our brokerage services income for the quarter, and our trust fees were pretty level with the fourth quarter but up quite a bit over the first quarter last year. We're budgeting around $7 million for trust fees this year, which would be about a 16% increase.

And as Julie mentioned, we have loans in the process of closing; getting the final legal documents together. We're projecting that the swap fee income will be much greater—not going to be the $1.4 million, but it will certainly be at least a few times the amount of swap income that we had in the first quarter. We are anticipating additional swap income in the second quarter.

Okay. For all the color there. And then just last for me on the buyback. Looks like you guys leaned in a little bit this early this month. Just with the sell-off and everything, and you still have around 400,000 shares left under the program. Any color on your appetite to continue leaning into that?

We had put a plan in place before we went into our quiet period. It reached the targeted level to where we repurchased. We're gonna be looking at that in the next few days to determine what, if any, repurchasing we're gonna do at the current prices. It’s something we're closely monitoring with the movements in all bank stocks due to the uncertainty out there.

Hey. Thanks. Good morning, guys. Just kind of on that last question around capital and the buyback. Just curious how you weigh stock repurchase activity along with that sub-debt security that becomes callable and reprises higher in the fourth quarter. I just need a bit of thoughts around that.

We are considering both of those things. We want to maintain enough to at least pay down the callable, probably half of what’s out there. I think there's $92 million left, so we’d like to be able to pay off at least $45 to $46 million without impacting capital too much. We believe we'll be able to do that. So we’re going to look at that in line with what we have available to purchase stock at around the levels we purchased it previously, without impacting our capital and our ability to grow.

Okay. Great. Thanks for that. And then going back to loan growth, you gave some really good color around the paydowns in the first quarter. I'm just trying to appreciate, were those paydowns generally expected later in the year that they were pulled forward a few months? Is this a timing issue? Is there something more than just timing as far as the paydowns?

The answer is yes and no. There were some that paid off earlier than we had anticipated. We had them in our payoff forecast coming into the year, but they occurred sooner than we expected in the first quarter. The skilled nursing facilities I mentioned were a bit unexpected as they were two separate operators that sold their operating business that had collateral of skilled nursing facilities. So it's a mixed bag. We anticipate some payoffs throughout the rest of the year. We’re projecting the second quarter to be lighter than what we experienced in the first quarter, which will help recover some of the loan reduction that occurred.

Okay. Appreciate that, Keith. And just regarding the full-year guidance, maintaining that mid-single-digit growth. Are there any offsets we should think about, if some of these loan paydowns were a surprise? Did the pipeline build more than expected, or was the original guidance in January overly conservative?

For comparison, coming into December, our pipeline was somewhere around $1.2 to $1.3 billion, so we've seen a significant increase in loans. We anticipate continued activity. The pipeline is dynamic, so it's not stale information. With the loans already run through our credit process, have been accepted by customers and are being documented, combined with funding on our existing construction lines, we feel pretty good about achieving positive loan growth in the second quarter.

Thank you. Does conclude today's Q&A session. I would like to turn the call over to Lee Gibson, Chief Executive Officer for closing remarks. Please go ahead.

Thank you everyone for joining us today. We appreciate your interest in Southside Bancshares, Inc. along with the opportunity to answer your questions. We're optimistic about 2025 and look forward to reporting second quarter results to you during our next earnings call in July. This concludes the call. Thank you again.

Thank you all for participating in today's conference call. You may now disconnect.