Good day. Thank you for standing by, and welcome to Southside Bancshares, Inc.'s fourth quarter and year-end 2022 earnings call. At this time, all participants are in listen only mode. After the speaker's presentation, there'll 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 hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lindsey Bailes, Vice President of Investor Relations. Please go ahead.
Thank you, Justin. Good morning, everyone, and welcome to Southside Bancshares' fourth quarter and year-end 2022 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 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, welcome to Southside Bancshares fourth quarter and year-end earnings call for 2022. This morning, we reported excellent fourth quarter and annual results for 2022. Highlights for the quarter included earnings per share of 0.87, a return on average assets of 1.47%, a return on average tangible common equity of 21.35%, annualized linked quarter loan growth of 8.2%, a linked quarter four basis point increase in our net interest margin, an efficiency ratio of 46.38%, continued strong asset quality metrics. During 2022, loans net of PPP loans increased 14.8% or 533.5 million. The net interest margin increased 16 basis points, the efficiency ratio decreased to 47.39%.
I want to thank the entire Southside team for their continued contributions and efforts, which made these results possible. We're extremely pleased with our continued solid loan growth during the fourth quarter of 2022. Our loan pipeline, while not currently as strong as it was this time last year, remains solid, and we are encouraged by the loan growth prospects for 2023. In addition, we are seeing advances in our construction portfolio increasing as loans that closed several quarters ago are now beginning to fund. Given the outlook for the markets we serve, we are budgeting for 9% loan growth during 2023. As previously mentioned, approximately 743 million of our available for sale municipal securities are hedged to the call date with fair value swaps designed to reduce the overall fair value volatility of these securities.
During the fourth quarter, this $743 million of fair value swaps began producing net interest income as the overnight SOFR rate we receive increased above the average fixed rate we pay. This was largely responsible for the linked quarter 31 basis point increase in the average yield on our tax-exempt municipal securities. For the month of December, we recorded approximately $645,000 of net interest income related to these swaps. During January 2023, we expect the net interest income associated with these swaps will increase to reflect the full effect of the mid-December increase in overnight SOFR, resulting from the increase in the federal funds rate. Should the Federal Reserve further increase the fed funds rate, we would anticipate a further increase in net interest income from these fair value swaps.
Conversely, should the Federal Reserve at some point decrease the federal funds rate, net interest income associated with these fair value swaps would decline, at which time we would likely unwind some or all of these fair value swaps. The economic conditions in our markets remain solid, bolstered by continued company relocations and existing company expansions, combined with population growth, a result of continued migration from other states. The combination of increased mortgage rates and high building costs has resulted in reduced housing starts and decreased margins, moving this market closer to pre-pandemic levels. We look forward to successfully executing on our business model and what we consider to be the best state in the country in which to operate. 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 are pleased to report a solid fourth quarter to end a strong year with 2022 net income of $105 million and diluted earnings per common share of $3.26. For the fourth quarter, we reported net income of 27.7 million, an increase of 717,000 on a linked quarter basis.
Diluted earnings per common share of 0.87, a 0.03 increase linked quarter. For 2022, we reported organic, record organic loan growth of 533.5 million, excluding PPP loans of 14.8% increase from 2021. This was driven by our real estate portfolio, with increases of 389.5 million in CRE, 111.8 million in construction, and 12.4 million in 1-4 family residential. Additionally, we had a $24 million increase in commercial loans excluding PPP. Our loan portfolio increased to $4.15 billion linked quarter. The increase was driven primarily by strong growth within our commercial real estate loan portfolio, with an increase of $85.8 million on a linked quarter basis.
The weighted average rate of new loans funded during the quarter was approximately 6.4%. We continue to experience strong asset quality metrics with non-performing assets of 10.9 million or 0.14% of total assets at December 31st, a decrease of $855,000 linked quarter. As of December 31st, our allowance for loan losses as a percentage of total loans was 0.88% compared to 0.90% at September 30th. Our allowance for off-balance sheet credit exposures increased to 3.7 million on a linked quarter basis due to a provision of 1.6 million compared to $200,000 in the last quarter. As of December 31st, our loans with oil and gas industry exposure were 111.3 million or 2.7% of total assets.
Of total loans, excuse me. Our securities portfolio increased $50 million or 1.9% on a linked-quarter basis. The increase was driven by a decrease in unrealized losses in the portfolio and to a lesser extent, purchases of securities. During the fourth quarter, we transferred additional available-for-sale securities with fair values of $175.8 million to held-to-maturity. At December 31st, we had a net unrealized loss in the AFS securities portfolio of 88.9 million compared to 168.3 million last quarter, a decrease of 79.5 million. As of December 31st, the unrealized gain on the hedged securities was approximately 21.6 million, partially offsetting the additional unrealized losses in the AFS securities portfolio.
As of December 31st, the duration of the entire securities portfolio was 10.7 million years, and the duration of the AFS portfolio was 9.3 years. Our mix of loans and securities remained consistent on a linked quarter basis at 61% and 39% respectively. Our deposits increased 16.9 million or 0.3% on a linked quarter basis. The linked quarter increase in deposits was due primarily to an increase in our public fund deposits, partially offset by a decrease in broker deposits. During the fourth quarter, we increased our stock repurchase plan authorization by 1 million shares. We purchased 608,976 shares during the fourth quarter at an average price per share of $35.03.
Since year-end and through January 24th of 2023, we have purchased 141,053 shares at an average price of 35.73. Our tax equivalent net interest margin increased on a linked quarter basis to 3.40% from 3.36%, driven by the increase in the average yield on loans of 54 basis points and 21 basis points on the securities portfolio, partially offset by an increase in the average yield on interest-bearing liabilities of 56 basis points. The tax equivalent net interest spread decreased for the same period to 2.95% from 3.08%. For the three months ended December 31st, net interest income increased 1.3 million or 2.4% compared to the linked quarter. We also recorded $55,000 in purchase loan accretion this quarter.
For the three months ended December 31st, 2022, non-interest income, excluding net loss on the sale of AFS securities, increased $398,000 or 3.8% for the linked quarter. The increase was driven primarily by increases in deposit services income, trust income, and swap fee income included in other non-interest income. For the same three-month period, non-interest expense was $33.6 million, a slight increase from the prior quarter. For 2023, we have budgeted approximately $35.5 million in non-interest expense each quarter.
The increase in the budgeted expense is primarily due to increases in salary expense, software expense, and the non-service component of our frozen retirement and restoration plan expense. Our fully taxable equivalent efficiency ratio at December 31st decreased to 46.38% from 47.42% as of September 30th, driven by the increase in net interest income. Income tax expense increased to 4.3 million compared to 3.9 million for the three months ended September 30th. Our effective tax rate increased to 13.4% for the fourth quarter from 12.6% in the previous quarter. At this time, we estimate an annual effective tax rate of 12.8% for 2023. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. One moment for our first question. Our first question comes from Woody Lay from KBW. Your line is now open.
Hey, great. Thanks. Good afternoon.
Afternoon. How are you doing?
Hey, we're doing well. Doing well. Lee, I just wanted to unpack this, you know, this swap contract you guys have that's coming on and going to start benefiting you guys. You're receiving variable but paying fixed. What is the fixed rate that you guys are paying? I guess the better question is what is, like, the net pickup in yield that you receive from this favorable swap contract?
When you say the favorable yield increase, Okay, I'm not sure I understand that part of the question. Basically, we have probably somewhere between 20 and 30 of these swaps, and they have... How many?
Eighty-four.
Oh, sorry. We have 84. They have different. You know, we started putting these on, I think, back in April of 2022, and the last one we put on was in early October. Each one of them have fixed rates that we're paying that are different. Obviously, the last ones we put on had the highest fixed rate. At this point in time, you know, I think almost all of them, we're in a positive position on. That's the reason, you know, basically, during, you know, November was the first time we saw it turn positive, where we actually had net interest income, and then it jumped to that 645,000 in December.
You know, there was a 50 basis point increase in SOFR, you know, that corresponded with the increase in Fed funds. That was mid-December, we anticipate the rest of that increase in that net interest income will occur in January. You know, should the Fed increase 25 basis points or whatever the amount is in February, then we'll continue to see increases. At this point, roughly that amount of our tax-free municipal securities are almost acting like a floating-rate security at this point in time. You know, for the quarter, it had a 31 basis point increase or reflected a 31 basis point increase in our yield on our tax, taxable municipal, excuse me, tax-free municipal securities.
So does that-
Yeah.
Does that-
That's very helpful.
Just-
Yeah, no. That's helpful.
Okay.
Thank you for walking through that. I'd imagine just with the majority of those being in a positive position that you would have, you know, a relatively sizable gain if you were to sell the swaps.
We do have an overall gain in the swaps right now. It's, I don't. It was 21 million at year-end. It changes, you know, based on the what happens with the longer-term rates because these are swapped to the call date of the municipal securities. I can give you the. They handed me the average fixed rate of our coupon that we are paying is a 3.21%.
Okay, great. That's perfect. That, yeah, that's what I was looking for really. Great. That's very helpful. Okay. You know, as we think about then, Lee, just, you know, the story of the margin as we move into 2023, you still saw a little bit of expansion this quarter. You know, deposit costs are ticking up a little bit. Do you feel like you still have leverage on, you know, the asset pricing side maybe to combat some of this, you know, accelerated or continuing deposit pressure that... Maybe we see, you know, the margin flatten out and just, you know, hold the line for the remainder of the year? Do you feel like there's any expansion left? Do you feel like this quarter was a peak? Just any commentary around the margin would be great.
Sure. you know, on loans, you know, we have a fair amount of floating rate loans. I think 46%, something like that, of our loans float. The new fixed rate loans, you know, that we are putting on, you know, for the most part, I'd say in the six is probably, you know, closer to six and a half. With this almost three-quarters of a billion in tax-exempt investment securities that float, that's, you know, that's going to help offset some of that. We are seeing, you know, pressure on the deposit side, you know, all the funding side. you know, we feel like the beta there is probably going to be somewhere between 30% and 35% going forward.
you know, margin, I think we stay where we are, you know, plus or minus five-six basis points, somewhere in that range. simply because if the future fed funds increases are in, you know, not in 75 basis point increments, then I think that there isn't going to be as much pressure moving forward to, you know, up those rates as significantly as when it was 75 basis points. I do, you know, I do think that, you know, we're going to continue to see a lot of pressure. Pricing for deposits is extremely competitive. I'm sure that doesn't come as any surprise. you know, there's no exception here at Southside to that.
Yeah, no, you're definitely not alone there. Just to clarify, Lee, that 30%-35% deposit beta, is that interest-bearing deposits or total deposits?
That would be, I'm thinking it's interest-bearing deposits.
Okay.
Is what we're, you know, what we're looking at at this point in time?
Awesome. Great. The last one, if I could just sneak one last one in here. Just what's the messaging on the buyback going forward? I mean, it's been, you know, notable for you guys this past quarter. Just what's your further appetite here?
you know, at this point, we'll just, you know, we'll see how we, how we work through the current allocation, and, you know, if the price is at such a point that we think it's appropriate for us to expand the buyback, we will at that time.
Okay. Very helpful. Thank you so much.
All right.
Thank you. One moment for our next question. Our next question comes from Brad Milsaps from Piper Sandler. Your line is now open.
Hey, good afternoon.
Hey, how are you, Brad?
Hey, Lee. How are you doing?
Good.
address, Good. Thanks for taking, thanks for taking my questions. We're just curious, you know, like some other banks, it looked like the period end balance of Federal Home Loan Bank advances were up, you know, maybe double or so over the average. Just are those mostly overnight or overnight advances? You know, would that be something you might likely lean into, you know, to the extent deposit funding doesn't come through? Just kinda trying to think about how you want to fund your 9% loan growth targets. Do you plan to stay levered and keep the bond book where it is or, you know, hopefully you can grow the deposits and do both? Just any color there would be helpful.
Sure. Last year in 2022, we were able to get some favorable pricing in the broker deposits, money market environment, and we replaced, you know, for our cash flow swaps, and we replaced a lot of the Home Loan Bank. In fact, I think at one point, we had all of it replaced with the Home Loan Bank. Now that has flipped. At this point in time, the more favorable funding is at the Home Loan Bank. What you're seeing there is, you know, mostly, you know, a flip from broker deposits to cover those cash flow swaps into the Home Loan Bank advances. At this point in time, we did have 30 million that rolled off in the first quarter of cash flow swaps.
I'm looking at our funding person to make sure. Okay. 25. Excuse me, 25 million. We're down to about 350 million in those cash flow swaps. When you take a look. Excuse me, 550 million in those cash flow swaps. When you look at our broker deposits and when you look at our Home Loan Bank advances, I think it's important to know that $550 million of that is basically fixed pricing on that. We do have some overnight funding at Home Loan Bank at this point in time, simply 'cause it's one of the cheaper places to go to get additional wholesale funding.
if my numbers-.
Is that as clear as mud?
Yeah, yeah. Well, I have those numbers in the queue. Like, you're paying, like, 113 basis points on those, on the 575 million. Is that correct?
That was correct at year-end.
9:30. September 30, yeah. Okay.
Yeah.
let me... Okay. Got it. Okay.
The one that rolled off, I think was at 140 something, wasn't it? Somewhere in that range. We'll find it and let you know.
Okay. Okay, great. Okay, great. Just on your loan growth, I mean, You know, 9%, you know, maybe that was a touch higher than maybe I expected, you know, given, you know, kind of what's going on in the market. It sounds like you've got a number of, you know, construction projects that you plan on funding up. Anything else in there as kind of a big driver, any new lenders? Just trying to kind of get a better sense of what's kind of driving your loan growth target.
We do have some new lenders. Some of the lenders that came on in 2021, even 2020 and 2021, are really hitting their own. In Houston, approximately 300 million of our loan growth this year was in Houston. As you know, we opened an LPO down there in early 2020. You know, they weren't able to do much with the pandemic, but, you know, they've really come into their own in 2022. One of the other lenders, or two of the other lenders that we hired, had relationships in Houston as well. You know, we're anticipating that that's going to continue at this point in time. You know, we're not expecting that 14.8% loan growth.
You know, at this point in time, we feel like 9% is achievable. You know, if that changes, we will update that on future quarterly calls.
Got it. Just to follow up on my first question, we kind of got bogged down there in the, in the swap talk. Would the 9% loan growth target, do you think you can fund that fully with deposits? You know, aside from what's going on with swapping back and forth between brokered and FHLB, do you anticipate bringing the bond book down? Just, you know, kind of just want to think about the size of the balance sheet and, you know, kind of how you plan to fund it.
We could bring the bond portfolio down some. There's probably, depending on what happens to long-term rates, you know, a limit on what we'd be willing to do there. We could probably, you know, fairly easily fund a quarter of that loan growth by reducing the bond portfolio. You know, we are anticipating some deposit growth. You know, it's not going to be cheap if it's interest-bearing deposits, but, you know, we are looking at some other opportunities to be able to fund. What's this? I'm sorry. Oh, the January maturity, okay.
You know, if whatever the balance is that we don't, you know, we don't have, we would look to the brokered market or to the Home Loan Bank advances market, whichever, you know, was the better course for us to take for that additional funding.
Okay, perfect. All right. Thanks, Lee. I really appreciate it.
All right.
Thank you. If you would like to ask a question, that is star one one. Again, if you would like to ask a question, that is star one one. One moment while we compile the Q&A roster. One moment for our next question. Our next question comes from Brett Rabatin from Hovde Group. Your line is now open.
Hey, guys. This is Brian calling in for Brett. How's it going?
Good. How are you doing, Brian?
I have one. Oh, good, thanks. Could you just provide a little color on the remaining maturity profile of the book, securities book there? What do you have maturing in short term?
Gosh, maturing in the short term, I know you know, we have monthly amounts that come off the mortgage portfolio. They're not huge. I think we've got about $11 million or $12 million MBS pool that matures in March. It's at a fairly low rate. You know, other than that, then we'd have probably about, you know, $18 million-$20 million in municipals that while they're not going to mature, they will come up on their call dates and that have, you know, 4% or higher coupons. Even if they don't mature, we're going to see a nice pickup in yield on that. In terms of what's coming off on the MBS portfolio, it's probably about $2 million-$3 million a month, somewhere in that range.
Great. That's really helpful. One more, if I could. I just want to get your thoughts on CRE. Are you planning on doing any sort of credit review on that book? Also wanted to get your thoughts on office space as well.
Okay. In terms of credit reviews on CRE, really what we do, gosh, probably every six months or so, and we just did one in the fall. We'll have one coming up probably here in the spring, early spring. We go through and we take a look at all the credits above a certain dollar amount. I believe that dollar amount is $5 million. You know, we get an update from the officer on, you know, just about everything and, you know, take a look at, you know, what their average rents are, the vacancy rates, things of that nature, to see if there have been any changes, and then any changes in the financial condition of the borrower.
That's something we do, you know, at least twice a year. It's not just limited to CRE, but it's all of our credits. In terms of office, we're extremely careful on office. You know, I'm not saying we don't make office loans, but, you know, we look at the quality of the tenants that are in there. We look at how long they are tied up for when those leases come due. Those typically require a fair amount of equity going in. We look for really solid debt service coverage ratios. You know, office is not probably at the top of our list right now, but it's, you know, there are...
That there are some good office loans out there to make. You just have to be very selective and make sure that the borrower is somebody that, you know, has a lot of familiarity and experience in that area, and that the tenant role is such that you feel like, you know, you for the life of the loan, you're in pretty good shape. Those we look at extra hard.
Great. Thanks. That's a good call. Appreciate the questions.
All right. Thank you.
Thank you. I am showing no further questions. I would now like to turn the call back over to Lee Gibson, President and CEO, for closing remarks.
All right. Thank you very much to everyone for joining us today. We appreciate the opportunity to answer your questions, along with your interest in Southside Bancshares. In closing, we're excited about our prospects for 2023 and look forward to reporting first quarter results to you during our next earnings call in April. This concludes the call. Thank you again.
This concludes today's conference call. Thank you for participating. You may now disconnect.