Good day and thank you for standing by. Welcome to the Southside Bancshares Inc. First Quarter 2021 Earnings Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session.
I would now like to hand the conference over to Lindsay Bales. Please go ahead.
Thank you, Ashley. Good morning, everyone, and welcome to Southside Bancshares' Q1 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 risks and uncertainties. Factors that could materially change our current forward looking assumptions are described in our earnings release and our Form 10 ks.
Joining me today are Lee Gibson, President and CEO and Julie Shamburger, CFO. First, Lee will share his comments on the quarter, then Julie will give an overview of our financial results. I will now turn the call over to Lee.
Good morning, and welcome to Southside Bancshares' Q1 earnings call for 2021. This morning, we reported that we had an excellent Q1, highlighted by record net income and earnings per share. Beginning the year on a strong note, the Q1 results included a partial reversal of provision for credit losses of $10,100,000 Our asset quality metrics remain strong as the ratio of non accruing loans to total loans linked quarter decreased to 0.14% from 0.21 percent and non performing assets to total assets decreased to 0.22% from 0.25%. Linked quarter, we did see a decrease in net interest income. Approximately half of this was due to a decrease in interest and accretion income related to PPP loans, with the rest due to the $200,000,000 decrease in average earning assets.
To give you a little more color about our Q1 average earning assets, there are 3 things I want to point out. First, during the quarter during the Q1, annualized loan growth net of PPP loans and payoffs increased 6.2%. A large percentage of the payoffs occurred during the first half of the quarter and approximately $97,000,000 of the loan growth net of PPP occurred during March. 2nd, we are actively participating in the 2nd round of PPP And as of April 21, we've originated a little over 1,000 loans totaling $105,000,000 Approximately $70,000,000 of these PPP originations occurred after mid February. 3rd, our net interest margin linked quarter was unchanged, while our net interest spread increased 1 basis point.
As for the rest of 2021, our loan pipeline remains very healthy, a trend we currently anticipate will continue throughout the year, given the outlook for the high growth markets we serve. We continue to anticipate 7% loan growth for 2021, net of PPP loans. During the Q1, we added 3 experienced commercial lenders, 2 in the DFW area and 1 in Austin that have hit the ground running, originating loans and bringing new relationships to Southside. In addition, on April 12, we opened our Houston LPO near the Galleria and this group of commercial lenders have been active originating loans and introducing new relationships to us as well. We continued to see a very healthy increase in our non maturity deposits during the Q1 due in part to the stimulus payments received by our customers combined with PPP loan funds being deposited in the Southside accounts.
These deposits allowed us to further reduce higher cost wholesale funding and time deposits. We previously disclosed plans to close 3 branches, 2 in East Texas that were in close proximity to other Southside branches and one lease branch in North Texas. These closures were completed in mid March. During the Q2, we will realize the full savings associated with these closures. Economic conditions in our market areas continue to improve, bolstered by company relocations and population growth due to individuals moving to Texas from other states.
The DFW and Austin markets continue to be among the highest growth markets in the country. I look forward to answering your questions following Julie's presentation. And I will now turn the call over to Julie.
Thank you, Lee. Good morning, everyone, and welcome to our call today. We are pleased with the solid start to 2021 with net income of 34 $100,000 an increase of $4,500,000 or 15.3 percent on a linked quarter basis, and our diluted earnings per share increased $0.15 or 16.9 percent to $1.04 per share on a linked quarter basis. When this quarter, our loan portfolio increased $58,800,000 or 1.6 percent to $3,720,000,000 driven primarily by an increase in commercial real estate loans of 50 $2,800,000 and construction loans of $23,700,000 partially offset by a decrease in 1 to 4 family residential loans of $19,500,000 As Lou mentioned in his remarks earlier, we are encouraged by the activity in our loan pipeline at this time. As of March 31, our PPP loans included in the commercial loan category totaled $220,900,000 including approximately $88,000,000 net of fees originated in connection with the 2nd round of the program.
New originations net of forgiveness payments resulted in a $6,000,000 increase in PPP loans for the linked quarter. Our quality metrics our credit quality metrics remain strong with non performing assets as a percentage of total assets decreasing to 0.22 percent at March 31 compared to 0.25 percent at December 31, 2020. On a linked quarter basis, total non performing assets decreased $2,100,000 or 12.1 percent to $15,400,000 Linked quarter, our allowance for loan loss decreased $7,600,000 or 15.4 percent to $41,500,000 at March 31 due to a reversal of provision for credit losses on loans of $7,400,000 in the Q1, the result of an improvement in the economic forecast. In addition, our allowance for off balance sheet credit exposures at March 31, 2021 was $3,600,000 a decrease from $6,400,000 at December 31, 2021, due to a reversal of provision for credit losses on off balance sheet exposures. Combined, these provision reversals totaled $10,100,000 At March 31, we reported an we reported our allowance for loan losses as a percentage of total loans at 1.12%, and when excluding PPP loans, 1.19%.
As of April 22, our COVID-nineteen related deferrals had decreased to $1,400,000 consisting primarily of mortgages. As of March 31, our loans with oil and gas industry exposure were $104,800,000 or 2.82 percent of total loans. There are no COVID-nineteen modifications in this category. Our securities portfolio decreased $51,200,000 or 1.9 percent on a linked quarter basis. We recognized approximately $2,000,000 in net security gains on the sale of AFS securities during the quarter, resulting from sales of municipal securities.
At quarter end, we had a net unrealized gain in the securities portfolio of $102,400,000 and the duration of the portfolio was 5.3 years, an increase from 4.7 years at the end of 2020. Our mix of loans and securities at March 31 remained consistent with December 2020 at 58% loans and 42% in securities. As of March 31, 2021, our treasury stock increased by 301,000 shares. Purchases of 427,000 shares of our stock at an average price of $35.60 were partially offset by 126,000 shares issued from treasury shares in connection with equity award transactions during the quarter. Year to date through April 22, we have purchased 518,000 shares at an average price of $36.10 Approximately 420,000 authorized shares remain under our current stock repurchase plan.
Our net interest margin remained consistent at 3.20 on a linked quarter basis, approximately 10 basis points of the net interest margin related to interest and fees earned on the PPP loans. The net interest spread increased to $303,000,000 for the Q1 of 2021 compared to $302,000,000 in the previous quarter. For the 3 months ended March 31, net interest income decreased $2,400,000 or 4 0.9 percent. We recorded $415,000 in purchase loan accretion this quarter, a decrease of $38,000 from the prior period. Additionally, we recorded approximately $2,600,000 in net fees related to the PPP loans included in interest income this quarter, of which $2,500,000 was related to round 1 of the program.
As of March 31, 2021, we had net deferred fees of approximately $5,250,000 remaining consisting of $1,750,000 on round 1 $3,500,000 on round 2 of the PPP loans. As of April 21 and based on approximately $105,000,000 originated on the 2nd round, we expect to recognize approximately $5,100,000 in total fees on round 2 as a yield adjustment over the terms of the loans. For the 3 months ended March 31, non interest income, excluding net gains on the sale of available for sale securities, increased $696,000 or 6.4 percent for the linked quarter, which was primarily driven by an increase in brokerage services and other non interest income. These increases were partially offset with decreases in deposit services and gain on sale of loans. Our other non interest income increased primarily due to an increase in swap fee income of $588,000 and increases in the fair value of mortgage servicing rights and mortgage rate locks.
A decrease in overdraft income was the primary driver of the decrease in deposit services income, a result of stimulus check deposits during the quarter. For the 3 months ended March 31, non interest expense was consistent with the Q4 of 2020 with a slight decrease of $81,000 For the Q2 of 2021, we expect non interest expense to be consistent with this quarter at approximately $31,000,000 Our fully taxable equivalent efficiency ratio increased to 50.44% compared to 47.36 percent on a linked quarter basis. The increase in the fully taxable equivalent efficiency ratio was due to the decrease in net interest income as well as a decrease in non recurring branch closure expense compared to the prior quarter. Income tax expense increased $485,000 or 11.4 percent compared to the 3 months ended December 31, driven by the increase in pre tax income. Our effective tax rate decreased slightly to 12.2% for the Q1 from 12.6% last quarter due to $134,000 of Thank you for joining us today.
This concludes our comments, and we Thank you for joining us today. This concludes our comments and we will open the line for questions.
Your first question comes from the line of Brett Rabatin with Hovde Group. Your line is now open.
Good morning, guys. This is actually Ben Gollinger on for Brett.
Good morning.
I wonder if we can just start with loan growth overall. I guess that the guidance of 7% core loan growth is pretty strong. I know that the banking industry itself is kind of playing that the second half of the year is going to show significantly more growth. I was wondering how you guys are approaching it being that you're in Texas. There's a lot of people moving there, a lot of businesses moving there.
And then you also added those 2 lenders in Dallas and one in Austin, plus the Houston LPO. I was curious on how you guys foresee the rest of this year going kind of as a is it linear or is it back half weighted? And then from there with this additional team members, do you think they'll be fully ramped up within 12 months? Or is it something that has much longer legs and would work into 'twenty two?
Basically, in terms of the new lenders, they're extremely experienced lenders. They, I would say, are pretty much fully ramped up today. Some of them started earlier in the quarter and we had already anticipated that when we forecast the 7% loan growth that they would be a part of that. So do I expect additional in 2022? Yes, simply because we'll have a full 12 months in 2022, but I do anticipate that they're going to be a nice part of our loan growth this year.
As for the loan growth, I think it's going to be more linear. Right now, we're seeing a very good pipeline and a lot of that comes down to when loans actually close, especially on the commercial real estate loans, when we get appraisals, all sorts of different things. But right now, my guess would be that it would be not perfectly equally traded, weighted between the 3 quarters, but that we would see nice growth in each of the remaining 3 quarters. And as for the optimism, it just comes from being in the markets we're in. 2 of the markets we're in are among have been among the highest growth markets and continue to be in the country.
And they're having problems finding rooftops for people to live. So it's a good problem to have. Right.
That's helpful color. When you think about the different areas within Texas itself, I mean, you have multiple MSAs that are experiencing a lot of different kinds of growth and whether that be business or technology or anything to that extent, are there any areas that you feel like you might want to bolster up in, in terms of potentially doing an M and A or add additional lenders or how you're thinking about pockets within the state that you might not have the full capacity that you think you would want?
I'll say that Houston, DFW and Austin are massive markets. I don't know that we could hire enough lenders to fully cover those markets. So I think those three markets will continue to explore additional opportunities. And then there's a lot of good smaller markets throughout the state that if we're not in that we might through M and A explore entering some of those markets.
Got you. That's helpful. And then just on the expense guide of approximately 31, is it fair to assume that that's somewhat of a new core trend? Or do you think it works higher off of that 2Q level as we work into the second half of the year? I guess there's a lot of puts and takes with branch closures.
Just thinking from that core perspective, is it fair to assume that 31 is a new good run rate? Or is it a little bit of a low before we start ramping higher again?
I think it is probably a pretty I don't expect us to at this point, I don't expect this to get to 32%. So I think somewhere what we've seen these last couple of quarters should be indicative. I mean, we may have some a few ups and downs. There's a couple of areas. Advertising travel, we think that, that was actually down with Q4.
I think as we get out more, because we still haven't gotten out fully like we were accustomed to. So I think as those things happen more, we'll ramp up some in those areas. But I think yes, I think $31,000,000 up to $31,500,000 should be what we expect to see for the rest of the year. That's my thought at the moment.
Okay, great. That's really helpful color. I appreciate it. Congrats on great start to the year.
Thank you.
Your next question comes from Brady Gailey with KBW. Your line is now open.
Thank you. Good morning, guys.
Good morning.
When you look at the bond portfolio and if you look at it over the last 5 quarters, it has not been dramatic, but the bond portfolio just continues to tick down kind of little by little every quarter. When do you make the decision to stabilize, if not kind of grow the size of the bond book? Do you need a higher long
end of
the curve to do that? Or is this planned and you're really focusing on loan growth, so we should continue to expect the bond book to tick down and loans to tick up?
We're expecting loans to tick up. In terms of the decrease in the bond portfolio in the first half, probably 60% of it had to do with the sale of some municipal bonds that we were not anticipating selling and we sold simply because we were of uncertainty and they were related to different cities power, electric power subsidiaries that they had. And with the significant event that we had and power grid crisis in February associated with the weather, we just made the decision that from a credit standpoint, yes, they were down a couple of 3 points. But if things didn't go the way they might have gone, they could have gone. Our upside was maybe 2 or 3 points.
Our downside was pretty much unlimited. So that accounts for about 60% of that. You're correct on rates. As rates ticked up during the quarter and most of that occurred in the second half, we did become more active in purchasing and we've been more active in April. So it's not a planned thing.
It's just kind of where interest rates are and is the risk reward appropriate for us to make those buys.
Yes. All right. That makes sense. It was good to hear about the 3 lender hires. Lee, how active do you expect to be going forward on hiring lenders?
It sounds like you're making more and more of an investment in Houston, which is great to hear. But what should we expect continued LPOsbranches in Houston and continued lender hires? Or are you going to kind of stick with what you got, let that mature and kind of slow play it in Houston?
I would anticipate that we will begin to the lenders that we have there, we hired the first half of twenty twenty and obviously COVID hit. So we kind of slow played it a little bit and it was really the second half of the year where they got started, where they got active. I would anticipate that as things open up more that we're going to begin to look for additional lenders in Houston. The LPO we opened has additional capacity to house additional people. So I don't anticipate an additional LPO there right now because they're pretty well centrally located.
But it is something that in future 2022, 2023 maybe a real possibility. But if we can find good solid experienced lenders that have been successful at other places, then we're going to try to pull them out of those banks and get them to Southside.
And sticking with Houston, I know you just started there, so it's probably small, but what's your loan base right now in Houston? And then then how big do you think you could get that over time? What's the goal as far as the Houston loan portfolio?
Let's see. They're handing me some numbers here. Okay, but that's theirs, but he's asking about total Houston. I know we started Brady with probably $250,000,000 to $300,000,000 in loans in Houston. And Julie is searching for the number.
So we'll get it to you here in just a second. I'm sorry. In terms of what I think we can get it to, I think whatever it is today, I think we can fairly easily over time, it's certainly not going to happen this year, over time double in size, if not triple simply because of the size of the market area.
Yes. And then back on M and A, we it feels like things are picking up in Texas. I mean, the state is clearly back open for business and we saw a big transaction with BancorpSouth and Cadence and it feels like we're going to add more later on this year. But how do you think Southside fits into that? Do you think that realistically you guys will be active on the M and A front buying some smaller banks in Texas?
Yes. Those discussions have definitely picked up. And I do anticipate that sometime within the next 12 months, I would hope we're definitely active in that arena. And we're beginning to have additional discussions along those lines. So I think on the sales side, there are more people interested in talking about that.
And so we're definitely interested. And our focus continues to be basically east of I-thirty five going down through the state with maybe going out 40 or 50 miles to the west of 35.
And Lee, just remind us from a size point of view, I mean, you guys are $7,000,000,000 so you're getting somewhat close to the $10,000,000,000 mark. But from a size point of view, what would the ideal target look like?
An ideal target would probably be at least $1,000,000,000 up to $2,000,000,000 getting much above $2,500,000,000 We could adjust our balance sheet by reducing securities if we wanted to. But if we get much above $2,500,000,000 we're right at $10,000,000,000 And while we're preparing to get there, I think it's probably going to be the end of the year before we're fully ready to be able to go over that $10,000,000,000 mark.
Yes. Great. Thank you for the color, guys.
All right. Thank you. And we'll get you the number on Houston.
Your next question comes from Brad Milsaps with Piper Sandler. Your line is now open.
Hey, guys. Good morning.
Good morning.
Hey, Lee, just wanted to follow-up on the bond portfolio discussion, maybe a different direction than the size, but it looks like the yield has actually stayed fairly stable year over year. I Just kind of curious if you can kind of talk about that, anything sort of out of the ordinary affecting the yield of late? Or is that just your typical working the bond portfolio really hard like you've done over time. Just to think it's very impressive that that's been able to stay relatively stable, yet we've seen obviously rates collapse around us. Just any additional color there would be helpful.
Sure. Basically the stuff that's been rolling off, we really haven't had a lot of municipals roll off other than those that we sold. The stuff that's been rolling off is in the mortgage backed arena. And typically they've been paying much faster up in that 35% to 45% CPR range. And they tend to have some of the lower yields in the portfolio as a result of those higher prepayment speeds and we own those at premium.
So I think we can largely attribute it to the lower stuff rolling off. And yes, we're not putting on it. I'd love to tell you we're putting on everything at 3% or higher, but we're not. But what we are putting on is higher than what's rolling on. So I think that's what you're saying.
Okay. Thank you. That's helpful. And then just on the other side of the equation, you guys had a lot of runoff in the time deposit category this quarter. I think averages were down almost $300,000,000 Just kind of curious how much more runoff you think you have to go there?
Do you think that's getting close to a pretty steady state? And then would that the same of the Federal Home Loan Bank advances? I think most of what you have left is swapped. So that may preclude you from kind of taking that any lower, but just any color on those two categories would be helpful.
Sure. You're correct on the home loan bank advances. We're pretty close to where everything is swapped. We do have one swap for I think $20,000,000 that rolls off in June that likely we won't replace. On the time deposits, most of the time deposit roll off has been related to public fund customers and also in the brokered CD arena.
And I don't know if we're at 0 on brokered CDs, but we're getting we're down to $45,000,000 on those. So those we anticipate may continue to run off with the excess funding that we have. And on the public fund side, we're getting down pretty close to what I call a core level where we're the depository for the institution. So, I would anticipate that that's going to slow quite a bit over the next several quarters.
And then just a couple of final ones. Curious where new loan yields are coming on the books. And then, Julie, not sure if you have average PPP loans for the quarter and then the contribution in dollars from purchase accounting this quarter be helpful? Thank you guys.
Okay. The average yield on loans going on the books without the PPP loans for the Q1 was a 3.32. We do anticipate with rates having moved up some that we may see a little higher rate in future quarters, but that was the average rate ex PPP loans. If you put the PPP loans in there, it was right around $2.90 And then the The
average balance on the PPP loans was 215,000,000
And then the purchase?
The purchase accretion was $415,000 It was down about $38,000 from last quarter.
Excellent. Thank you, guys. Really appreciate it.
All right. Thank you.
There are no further questions at this time. I will now turn the call back to Lee Gibson, CEO and President, for closing remarks.
Okay. As for Brady's question on total loans in Houston right now, in the Houston area, we have right around approximately $400,000,000 in loans in Houston. Our new loan group has provided new loans of about $70,000,000 of that $400,000,000 Closing remarks. Thank you for joining us today. Given the positive outlook for our markets, our strong balance sheet, capital position, asset quality and core earnings, we are very encouraged about 2021 and look forward to reporting results to you during our next earnings call in July.
Thank you for attending and this concludes the call.
This concludes today's conference call. Thank you for joining. You may now disconnect.