Thank you for standing by, and welcome to the Southside Bancshares, Inc. fourth quarter and year-end 2021 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. As a reminder, today's program is being recorded. Now I'd like to introduce your host for today's program, Lindsey Bailes, Vice President, Investor Relations. Please go ahead.
Thank you, Jonathan. Good morning, everyone, and welcome to Southside Bancshares fourth quarter and year-end 2021 earnings call. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call, and in other disclosures and presentations, I will remind you that any forward-looking statements are subject to risk and uncertainty.
Factors that could materially change our current forward-looking assumptions are described in our earnings release in our Form 10-K. Joining me today are Lee Gibson, President and CEO, and Julie Shamburger, CFO. First, Lee will share his comments on the quarter, and then Julie will give an overview of our financial results. I will now turn the call over to Lee.
Good morning, everyone, and welcome to Southside Bancshares fourth quarter and year-end earnings call for 2021. This morning, we reported exceptional results for the year and fourth quarter. I wanna start by recognizing and thanking the entire Southside team for their extraordinary contributions and efforts during 2021, without which these results would not have been possible.
Highlights for the quarter included earnings per share of $0.88, an ROATCE of 16.8%, annualized linked quarter deposit growth of 29.1%, annualized linked quarter loan growth, net of PPP, of 3.8%, an increase in the net interest margin to 3.23%, and continued strong asset quality with non-performing assets decreasing to 0.16% of total assets. Highlights for the full year included record net in
record net income of $113.4 million, record earnings per share of $3.47, an ROATCE of 17%, a 16% increase in deposits, a 5% increase in loans, net of PPP, an increase in the net interest margin of 9 basis points, and further improvement in our strong asset quality. The fourth quarter results included a reversal of provision for credit losses of $3.4 million.
Linked quarter, our net interest margin increased seven basis points. The average yield on securities increased eight basis points, and the rate on our interest-bearing liabilities decreased 13 basis points, 11 basis points of which resulted from the decrease in sub-debt expense. The average yield on loans decreased 12 basis points, largely due to the decrease in PPP loan accretion.
We were extremely pleased with our annualized linked quarter loan growth, net of PPP, of 3.8%, given the previously discussed anticipated large payoffs that occurred during the fourth quarter. As we begin 2022, our loan pipeline is extremely strong. What is especially encouraging is that the pipeline in each of our regions is very strong.
Given the excellent outlook for the high-growth markets we serve, as well as the growth occurring in our other markets, we anticipate solid loan demand will continue well into 2022. We are projecting 2022 loan growth, net of PPP loans, of 9%. During the fourth quarter, we continued to experience an increase in our average non-maturity deposits, which represent our lowest cost interest-bearing liabilities.
Over the past 24 months, non-maturity deposits have increased significantly, which has allowed us to strategically transform the funding base by significantly reducing dependence on higher cost and shorter duration CDs and unswapped FHLB and other wholesale borrowings. Currently, our swapped borrowings are $575 million, down $30 million since December 31.
The economic conditions in our markets remain strong, bolstered by continued company relocations and existing company expansions, combined with population growth resulting from continued migration from other states. The DFW and Austin markets that we serve continue to be among the highest growth markets in the country. I look forward to answering your questions following Julie's remarks, and I will now turn the call over to Julie.
Thank you, Lee. Good morning, everyone, and welcome to our call today. We ended 2021 with another strong quarter and record financial results for the year, with annual net income of $113.4 million and diluted earnings per common share of $3.47, a 40.5% increase from $2.47 for 2020.
We reported fourth quarter net income of $28.7 million, a linked quarter decrease of $619,000, or 2.1%, due to a lower reversal of provision for credit losses and a decrease in gain on sale of AFS securities, partially offset by a decrease in interest expense. For the quarter ended December 31, 2021, our diluted earnings per common share were $0.88, a decrease of $0.02, or 2.2% on a linked quarter basis.
Linked quarter, net of the decrease in PPP loans of $36.5 million, our loan portfolio increased $34 million to $3.61 billion. Our construction loans increased $25.8 million. Commercial loans, excluding the PPP forgiveness, increased $11.7 million.
We also experienced an increase in municipal loans of $15.8 million on a linked quarter basis. We had increased payoffs in commercial real estate, including several large loans between $24 million and $30 million. The weighted average rate in new loans funded during the fourth quarter was approximately 3.4%.
As of December 31, our PPP loans included in the commercial loan category totaled $31 million, down from $67.5 million at September 30, 2021. The average balance of PPP loans was approximately $53.6 million for the fourth quarter and $142.7 million for 2021. Currently, our remaining PPP loans are approximately $25 million. Our asset quality remains strong.
Non-performing assets decreased throughout 2021, with a total decrease of $5.9 million or 33.6% for 2021, or 0.16% of total assets, compared to 0.25% at December 31, 2020. On a linked quarter basis, non-performing assets decreased $815,000, or 6.6%. Linked quarter, our allowance for loan loss decreased $2.7 million or 7.2% to $35.3 million at December 31, due to recording a reversal of provision for credit losses on loans of $2.7 million in the fourth quarter of 2021. The reversal of provision for the fourth quarter was primarily due to an improved forecast for commercial real estate, as well as the impact of loan payoffs on the allowance.
As of December 31, our allowance for loan losses as a percentage of total loans was 0.97% and 0.98% when excluding PPP loans. Our allowance for off-balance sheet credit exposures at December 31 decreased to $2.4 million when compared to $3.1 million at September 30, 2021, due to a reversal of provision of $706,000 in the fourth quarter.
This, combined with the reversal of provision for credit losses on loans, the total reversal of provision for credit losses was $3.4 million for the three months ended December 31, 2021. As of December 31, our loans with oil and gas industry exposure was $69.7 million or 1.9% of total loans. Our securities portfolio increased $9.5 million or 0.3% on a linked quarter basis.
We recognized $463,000 in net security gains on the sale of AFS securities during the quarter, a decrease from the net gains of $1.4 million reported last quarter. At year-end, we had a net unrealized gain in the securities portfolio of $111.7 million, and the duration of the portfolio was 5.9 years, up from 5.8 years linked quarter and 4.7 years at the end of 2020.
O ur mix of loans and securities at December 31 was 56% and 44% respectively, remaining consistent on a linked quarter basis with a shift from 58% loans and 42% securities for the prior year-end. Our deposits increased $390.7 million or 7.3% compared to September 30, 2021.
This increase consisted of an increase in public fund deposits of $126.6 million or 14.7%. Public fund deposits normally increase in the fourth quarter each year. Additionally, broker deposits increased $181.3 million or 159.8%. In December, in order to obtain lower cost funding, we utilized $265 million in broker deposits for funding our cash flow hedge swaps and reduced FHLB advances.
During the first quarter of 2022, we plan to utilize broker deposits in place of FHLB advances on the remaining $310 million of cash flow hedge swaps. We expect this to reduce the overall funding cost on the swaps by approximately 10 basis points.
Our net interest margin increased seven basis points on a linked quarter basis to 3.23%, and the net interest spread increased nine basis points to 3.09%. The redemption of our subordinated notes on September 30th impacted the average rate paid on our interest-bearing liabilities by approximately 11 basis points for an impact of nine basis points on the NIM.
Approximately eight basis points of the net interest margin related to fees earned on PPP loans, compared to 18 basis points last quarter. For the three months ended December 31st, net interest income increased $1.2 million or 2.5% when compared to the linked quarter. We recorded approximately $1.4 million in net fees related to the PPP loans included in interest income this quarter compared to $3.1 million last quarter.
As of December 31, 2021, we had net deferred fees of approximately $935,000 remaining to be recognized as a yield adjustment over the terms of the loans. Additionally, we recorded $364,000 in purchase loan accretion this quarter, an increase of $168,000 from the prior quarter. For the three months ended December 31, 2021, non-interest income, excluding net gains on the sale of AFS securities, increased $160,000 or 1.4% for the linked quarter.
For the fourth quarter, non-interest expense was $31.3 million. Excluding the loss on the redemption in the third quarter, non-interest expense increased $689,000 or 2.2% on a linked quarter basis. For 2022, we expect quarterly non-interest expense to be approximately $32.5 million.
We are pleased to report our fully taxable equivalent efficiency ratio for the three and 12 months ended December 31 was 47.61% and 49.03%, respectively. Income tax expense decreased $165,000 or 3.3% compared to the three months ended September 30, 2021.
Our effective tax rate decreased slightly to 14.4% for the fourth quarter. At this time, we are estimating an annual effective tax rate at 12% for 2022. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.
Certainly. Once again, ladies and gentlemen, if you have a question at this time, please press star then one. Our first question comes from the line of Graham Dick from Piper Sandler. Your question please.
Hey, good morning, everyone.
Good morning.
Just wanted to start on the bond portfolio. Do you guys have any plans to grow it from here? I know y'all talked about the addition of those broker deposits, but it looks like, you know, there might have been some seasonal funds in there as well. Overall deposit growth is pretty strong. Just wondering if you guys are planning to grow it any more from here.
No. I think for the year, we're budgeting just an ever so slight increase in the bond portfolio, $30 million-$40 million, somewhere in that range. No, we're really not. You know, that growth in brokered deposits were due to us changing the funding of our swap hedging from Federal Home Loan Bank to the brokered deposits so that we could save approximately 10 basis points.
Right. That sounded like a pretty good trade for you guys. I guess one last thing on the bond portfolio is just wondering if there's anything non-recurring driving the improvement in the MBS yields this quarter.
I think the increase had to do with less amortization expense on the mortgage-backed securities. We do you know we continue to have some prepayments where there's yield maintenance on some of those mortgage securities. I would anticipate with rates being up a little bit along in that you know we may see some further slowing of prepayment speeds that could possibly you know move the mortgage yield up a little bit.
Okay. That's kind of what I thought. And then just moving, I guess, more to asset sensitivity and looking at a higher rate environment. I wonder if you guys could provide just a little color on how you all are positioned heading into this. Maybe like broadly your NII shock scenarios or what percent of loans reprice immediately, and then even like what you guys might be expecting on the deposit paid up front would all that would be very helpful. Thank you.
Okay. You know, I think, you know, over the last really since the pandemic began and, deposits in all banks started growing, we basically utilized that deposit growth in non-maturity deposits to become significantly less dependent on the CDs, and to become significantly less dependent on unswapped wholesale funding, which right now we just don't have a lot of. You know, as the short-term interest rates increase, we don't feel like we're gonna have to raise our funding costs anywhere, you know, near what those increases are.
In fact, the first increase on some of the non-maturity deposits, there may not be any increase at all, but be a very small percentage increase of the going forward even throughout the year if it goes up the four rate increases that they're anticipating this year.
On the loan side, I think just a little less than 50%, and Julie probably has the number is in floating rate. Of that, probably 60% or 70% reprices immediately, but most of it reprices within six months to a year. Some of it's based off a three-month LIBOR, and some of it's one month, but a lot of it is overnight and immediate.
Okay. Appreciate that. Thanks, guys, and congrats on a solid quarter.
Thank you.
Thank you. Our next question comes from the line of Michael Young from Truist Securities. Your question, please.
Hey, good morning. Just wanted to touch on the loan growth outlook. You mentioned, I think, 9%. I assume that's, you know, kind of ex PPP, so just the core loan growth. I was just curious, you know, what areas you're seeing the most strength in, if it's kind of the historical construction bucket, and what the new yields are on loans that you might be putting on. Are they a good bit higher at this point than kind of the back book of what's rolling off?
We are seeing, you know, a fair amount of construction loans. You know, those are not typically, they're almost always floating. They're either tied to prime or they're tied to, you know, one-month LIBOR or SOFR at this point. They, you know, as rates move up, those construction loans will move up.
What's really encouraging is we're seeing a lot of full funders, and it's primarily on the commercial real estate side that we're seeing that. We're seeing, you know, some nice increases in municipal loans that we anticipate throughout the year. Does that kind of answer your question, Michael?
Yeah, I guess I'm trying to get at, you know, basically are the new loans you're putting on at higher rates and higher yields than what's running off and that it should be sort of accretive to loan yields? Or is it more, you know, in line or still kind of slightly dilutive?
I'd say the fixed funding that if we're fixing the fixed funding, they're at, you know, they're at slightly higher yields than what's rolling off. On the floating rate, they're probably at similar yields to what we have today. You know, they're gonna, you know, in March, I think everybody's anticipating at least 25 basis point increase.
You know, you'll see that across the board reflected in SOFR, LIBOR, and prime as that occurs. You know, those floating rate loans, you know, the spreads on those, you know, let's say we've got one at prime at 325, the real spread's gonna increase over what our cost of funds is pretty much, I wouldn't say the full 25 basis points, but it ought to.
It'll be in the 20s somewhere, 22 basis points-23 basis points that spread will increase.
Right. Okay. On the capital side, Lee, just sort of curious, you know, you guys are gonna have stronger loan growth, so, you know, wanted to just get your updated thoughts on capital returns, if share buybacks even still in the equation given, you know, where the stock is, and then, you know, what the outlook is for M&A.
Okay. In terms of, you know, stock buybacks, we do not have one at this point in time currently in place. But that's something that we're looking at and would anticipate that, you know, sometime during the first half of this year, you'll probably see something on that. In terms of, let's see, you mentioned capital. I mean, there, you know, we're-
Yeah, M&A dividends. Yeah.
M&A, we're actually, you know, having some more meaningful conversations with, you know, some potential partners that would be something we'd be interested in acquiring. You know, I don't look for anything to happen immediately, but I think, you know, I'm hopeful that sometime maybe during the first half or first three quarters of 2022, it may be possible that, you know, we're able to announce something. There's nothing sitting on the table exactly, you know, today, but just good conversations.
Okay, great. Thanks for the color. Appreciate it.
Mm-hmm.
Thank you. Our next question comes from the line of Brady Gailey from KBW. Your question, please.
Yeah. Thank you. Good morning, guys.
Hey, Brady. How are you doing?
I'm great. When I look at your fee income, you know, a lot of it is driven by service charges on deposits.
Mm-hmm.
Can you just talk about, you know, the industry is seeing some pressure on NSFs and overdrafts. Maybe just, you know, one, tell us how much NSF and overdraft was in 2021, and then, you know, how you guys are thinking about that going forward.
Julie’s grabbing the number for 2021. What I can tell you is that, you know, we're cognizant of that. Our budget for 2022, we basically have lowered it by 10% for the last nine months of the year. Is that correct?
Yes, sir.
Yeah. The only reason we're doing that is because if we, you know, look to make a change today on something, it could take a while for that to filter through. Really some of our lower months of overdraft income occurs in the first quarter, because of tax refunds and things of that nature. We are cognizant of that, and I think Julie has that number for 2021.
Yeah. Brady, the overdraft and return check charges together were about $9.2 million. The overdraft just by itself was $8.4 million. That was some decline from 2020 as well. Not significant, but some decline. Mainly due to the you know abundance of deposits in, probably, all institutions right now.
Yep. Moving to the expense base, you know, the guidance of $32.5 million, you know, is that more kind of the run rate in the first quarter, and you're gonna see some growth beyond that? Or is that more kind of the average run rate for the full year?
It's probably closer to an average for the full year based on budgeting.
Okay.
We've budgeted in some additional loan officer hires that likely we're gonna, you know, you'll see hopefully in the second and third quarter, possibly fourth quarter. So that's, you know, I think.
It may run a little lower in Q1.
It may run a little lower in Q1. I think you were guessing somewhere closer to $32 million, weren't you?
Right.
Yeah, in the first quarter. But on average, we think it's, you know, Julie's budgeting $32.5 million for the year, per quarter.
Okay. Lee, you know, it sounds like you're a little more active on M&A now than you have been the last couple years. Just remind us, you know, what geographies do you like and kind of what's the sweet spot from a size point of view for a bank target for Southside?
Geography, you know, basically we'd like to stay and at this point in time, we plan on staying along Interstate 35 to the east. We might go, you know, 50, 60 mi west of Interstate 35, but probably not much past that.
That encompasses about, you know, 85% of the population in the state and probably at least that percentage of the economy in the state. In terms of size, you know, ideal size would be somewhere between $1 billion and $2 billion. We start getting too much above $2 billion and we're touching on, you know, on $10 billion.
We'd like to, if we do an acquisition, we'd like to stay under that, unless, you know, we were to look at a really large acquisition that would take us at least $1 billion or $2 billion over $10 billion. You know, the sweet spot for us really is probably $1 billion-$2 billion.
All right. Then just on that topic, you know, Durbin, I know, you know, it sounds like you guys are going to stay under $10 billion for a while here. You know, if you do cross, remind us what the Durbin impact could be.
Our last estimate was around $8 million.
Yeah.
It probably does need to be refreshed, but that was, I think, last quarter.
Yep. Julie, that $8 million, is that $8 million on today's balance sheet or a $10 billion balance sheet?
That would be today's balance sheet.
Okay. All right, great. Thank you, guys.
All right. Thank you, Brady.
Thank you. Our next question comes from the line of Matt Olney from Stephens. Your question, please.
Yeah, thank you. Want to ask about the loan growth guidance that you guys provided of 9% for the full year ex PPP. It implies a nice pickup versus what we've seen over the last few quarters. Any more color on that improvement? I think you mentioned paydowns were heavier in the back half of 2021. Are you assuming a more moderate level of paydowns in 2022?
We certainly, you know, are not expecting, you know, paydowns like that in the first half of the year. We had a lot of, you know, there was some uncertainty about tax laws and things of that nature that probably drove a few of the payoffs that you know via some sales that occurred in the fourth quarter.
No, we, you know, we're not anticipating, you know, the volume. The main thing is our pipeline. Typically December and January are pretty slow months. You know, it's been fast and furious and, you know, we have not seen a start to the year like this in quite some time.
It's just, you know, very encouraging and it's not in just, you know, one or two regions, it's in all of our regions. You know, we just feel good. The economy's doing extremely well and, you know, growth is occurring and it's real growth. You know, it's real growth. It's new jobs, people moving in, companies moving in. It's just, you know, it's amazing what's going on.
You know, we're not talking about. We're talking about apartments that, you know, down in Austin, in the DFW area that, you know, we heard this week that there's bidding wars for apartments in Austin, you know, kind of like you see bidding wars for houses.
It's housing related, you know, it's company relocation related and a lot of warehouse or related type stuff. It's just really positive right now and you know we're beginning to see a real impact as a result of that on our pipeline.
That's helpful, Lee. Thank you for that. You also mentioned earlier optimism around hiring additional new producers for the year. Is loan production from those producers you expect later on this year also embedded in that 9%, or could that be potential upside even from the current guidance?
I think that could be a potential upside from the current guidance. You know, we're visiting actively with different lenders and you know feel good that over the you know especially the first three quarters that we're gonna you know land a few.
It always takes about a month for somebody to kind of get their feet on the ground and notify everybody that they've moved. You know, we expect you know we're hoping to get some additional you know lift out of loan officers that we hire that we're not including that in our 9% because that's you know not something we have in place today.
Yeah. Okay, great. Thank you, guys.
All right. Thank you.
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Lee Gibson for any further remarks.
Thank you for joining us today. We appreciate the opportunity to answer your questions and your interest in Southside Bancshares. In closing, given the positive economic conditions in our markets, our strong pipeline, balance sheet, capital position, core earnings and asset quality, we're excited about the prospects for 2022 and look forward to reporting first quarter results to you during our next earnings call in April. This concludes the call. Thank you.
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.