SBSI - NASDAQ

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 in 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 the 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 nonperforming assets and classified loans. The increase in nonperforming 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 nonperforming 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. Nonperforming 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. Noninterest income excluding 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. Noninterest 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 noninterest expense. During the call last quarter, I reported that we had budgeted a 5.7% increase in noninterest 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 noninterest 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. 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 does that, you know, encapsulate you know, any you know, portion of the longer end of the curve you know, 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 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, I went you know, historically, in in these things, have been slowed at 25% to 30% is what we've historically been coming out of our pipeline. You know, as far as the you know, how it affects the CRE portfolio, we're hopeful that we continue to see some momentum in the C&I business so that we can moderate you know, the the heavy weight in our CRE portfolio. But a lot of the term stuff are investment real estate opportunities at this point in time.

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

Yeah. They're predominantly, you know, what we refer to as business bankers. They're they're in the you know, small end to middle market. Focus right now. Those say, we're in a a fairly greenfield for us. It's based in the women's We're anticipating that they do have bricks that they managed at other organizations that'll take a little bit of time to move that, but we do in just And And then, you know, the two that we have budgeted in the future are really replacing two former windows that we had that left right at the end of last year. So we're we're gonna backfill those. And then in the future, you know, we're gonna be looking at other metro markets to expand the same that presence there through through hiring or lifting teams out of other markets. But for other organizations. That's the long term strategy.

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 what seem like is that replaces the margin could move higher. You know, any any thoughts on the margin from here, how you guys see it playing out in the near term in particular.

Yeah. In that 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 if not 45. So that should have a positive impact on the margin. There'll be a little little pull through residual of the the swaps that rolled off in the first first quarter. But we did put some new swaps on early in the second quarter. About $125 million that should also have a have a positive impact. That combined with you know, the anticipated home growth that we're expecting, to see in the in the second quarter, should should have an overall, you know, positive impact on the the margin. So overall, we're we're optimistic. I think we said we felt like, you know, we'd reached a trough and most definitely, we would've reached the trough in the first quarter. We feel good about the 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 recently added, how do you view your current how do you view your profile of 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, you know, I I think overall, we're gonna see funding costs drift a little lower And, you know, on the asset side, I think think we can see the overall asset spread, you know, in or not spread, but overall yield increase some, Obviously, if the Fed cuts rates, which right now, you know, it appears there's a possibility they might do it in June. You know, that we'll we'll see some some shifting on both sides of the balance sheet. But overall, I think you know, the you know, we're we're in a position where it'll be it'll be positive you know, with rates going down. We continue to put some swaps on to protect us, should should make, you know, short term rates as especially move the other direction.

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

No. There I I would not say there were any targeted reductions. I mean, it was obviously first quarter following, you know, all the budget per preparation, so we didn't have anything specifically targeted. Maybe. You know, we did see the 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 itself this this month. Or this quarter. And then also some of our share based or share based equity expense, you know, for equity awards. That actually we had a decrease in that for the first quarter link linked quarter a little bit over $100,000. So those are some of the main things that drove it down. This quarter. And, again, net occupancy, that was a function of a decrease in our depreciation expense. Which, you know, that's gonna that's gonna change here and there based on assets rolling off and I think our budget for depreciation this year is a little bit is slightly higher Just anticipating, you know, putting on the new branch and Cleveland that we're gonna be putting on later in the year. And things of that nature. But that that is the primary, deep reason for those decreases.

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

Yeah. It it's located in Austin, Texas. And, again, we it it was a negotiated extension that we picked up some credit enhancements but the nature in which we extended it resulted in us needing to move it into a nonperforming asset. The borrower has not missed any payments. We don't anticipate them to miss any payments. And the and the lease up activity is is positive. It's it's just slower than you know, originally budgeted. And so we're just like with all of our real estate assets, we're monitoring on a bill. Know, quick basis. We're we're constantly looking at these and getting up updates, and and we still feel good about the know, the performance of that asset in spite of having to put it into a nonperforming category.

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

Yes. If he don't know if you recall, and I'm pretty sure we said it, but we had, like, $1.4 million in swap fee income in the fourth quarter, which was you know, extra a little extraordinary at the time. It was higher than some of the previous quarters. And we did have some swap fee income this month. I think around $98,000 or this quarter, I keep saying month. And we typically don't budget for swap fee income, but we actually did budget some this year. I think around $600,000 just because at the time of doing the budget, we had some loans in the pipeline that though there were discussions around some of the a few of those loans that we felt like we could reasonably expect swap fee income on those. And I think I believe that is still the case that we are expecting some upcoming swap fee income. Although, first quarter was only about $100,000 or in the nineties. So we are expecting that. We did see an increase in our brokerage services income for the quarter. And also, I think our our trust fees were pretty level with fourth quarter but they were up quite a bit over first quarter last year. And I I point that out because we did do some fee adjustments in our trust fee area. In the later part of last year. So with the new team that we have there and those those increases in fees, I think we'll, you know, we'll continue to see growth in the trust fee area. Throughout the year. We you know, at some point in third or fourth quarter, we may not see as big of a increase year over year. But we are budgeting around $7 million for trust fees this year. So that's about a that would be about a 16% increase increase over our trust fees in 2024. So that is the main color, you know, with respect to brokerage and trust.

And and as Julie mentioned, you know, we have loans in the process of closing. You know, getting the final legal docs together and things of that nature. And the projected you know, we're we're projecting that the the swap fee income will be, you know, much greater not gonna be the $1.4 million, but it'll be it'll it'll be at least a you know, few times the the amount of swap income that we had in the first quarter. So 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, I think, around 400,000 shares left. Under the program. Just, you know, any color on your appetite to continue. Leaning into that.

We had put a plan in place before the before know, we went into our quiet period. And it reached the targeted level to where we repurchased We're gonna be looking at that in the next next few days to determine you know, what, if any, repurchasing we're gonna do at the hit current prices. But it it's something we're closely looking at with the movement really in all bank stocks as a result of the the uncertainty that's out there.

Okay. Sounds good. Thanks for taking my questions.

Thank you. And one moment for the next question. And our next question will be coming from the line of Matt Olney of Stephens. Your line is open.

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

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

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

The answer is yes and no. There were some that paid off early than we had anticipated. We we had them in our payoff forecast coming into the year, but they occurred. We thought they may occur in the second, third quarter, and they happened in the first. The skilled nursing facilities I mentioned, those were a little bit of a They were two separate operators that actually sold their operating business that had collateral of skilled nursing facilities. So those operators sold that we weren't anticipating that. So it's a it's a mixed bag. We we do continue to expect some payoffs throughout the rest of the year. Second quarter is gonna be lighter than at least what we're expecting is gonna be lighter than what occurred in the first quarter, which will help us kinda claw back some of the some of the loan reduction that happened in the first quarter.

Okay. Appreciate that, Keith. And just I guess, kinda going back to the full year guidance, kinda maintain that mid-single-digit Are there any offsets we should think about if if some of these loan paydowns were a surprise and, obviously, not all of them were, but some of them were surprised. You you you keep the kinda mid-single-digit guidance Did the pipeline build more than expected or was the original guidance in January, was it overly conservative trying to appreciate kind of what could the the bank maintaining that same full year guidance for the year?

I think the the quick answer is just for comparison, I think coming into, you know, December, our pipeline was somewhere around $1.2, $1.3 billion. So we've seen it pretty significant. Dollars So we are anticipating to see continued activity. It's a dynamic or a a pipeline, so it's not know, this is not stale date information. It's pretty dynamic. So we're we're encouraged by that. We also know that there are a number of loans that we have already run through our credit process, have a period on, and the customer has accepted them. And they are in the process of being documented. So with that, combined with the the the fundings on our existing construction lines, we feel pretty good about you know, showing loan positive loan growth in the second quarter. If we recapture anything it's yet to be seen. Some of it's tiny, We do anticipate a large portion of this to close in the second quarter Again, you know, sometimes loan negotiations can stretch out a couple weeks and that may make a break, you know, whether you close it on before June 30 or July know, the second week of July. So you have to you have to see, but we're we're pretty confident.

Okay. Thank you, guys.

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.