Southside Bancshares, Inc. (NASDAQ:SBSI)
Q4 2015 Results Earnings Conference Call
January 29, 2016, 10:00 AM ET
Deborah Wilkinson - EVP, IR
Sam Dawson - CEO
Lee Gibson - President and CFO
Brad Milsaps - Sandler O'Neill
Kevin Fitzsimmons - Hovde Group
Frank Barlow - KBW
Michael Young - SunTrust
Good day, ladies and gentlemen. And welcome to the Southside Bancshares' Incorporated Quarterly and Year End Investor Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded.
I would now like to introduce your host for today's conference, Ms. Deborah Wilkinson, Executive Vice President of Investor Relations. Ms. Wilkinson, you may begin.
Thank you, Andrea. Good morning, everyone. And thank you for joining Southside Bancshares' fourth quarter and year end 2015 earnings call. The purpose for this call is to discuss the company's results for the quarter and year just ended and our outlook for upcoming quarters. 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'll remind you that any forward-looking statements made are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release and in our Form 10-K.
Joining me today to review Southside Bancshares' fourth quarter 2015 results are, Sam Dawson, our CEO; and Lee Gibson, our President and CFO.
Our agenda today you will hear Lee discuss an overview of financial results for the fourth quarter and the year ended 2015, including loan growth, oil and gas exposure in our loan portfolio, and update on our securities portfolio, cost savings and the board authorized stock repurchase plan. Then Sam will share his comments on the quarter and the year.
I will now turn the call over to Lee.
Thank you, and good morning, everyone. Welcome to Southside Bancshares' fourth quarter and year end 2015 earnings call. We had another successful quarter, with net income of $11.7 million. We incurred onetime expenses in the fourth quarter of approximately $638,000 net of tax, related to branch closings, merger related expenses and an early retirement package.
For the year ended December 31, 2015 we reported net income of $44 million, an 111% increase over the same period in 2014. Our diluted earnings per share for the fourth quarter ended December 31, 2015 were $0.46.
Diluted earnings per share for the year 2015 increased 66% to a $1.73 compared to $1.04 in 2014. We reported 34.4% annualized loan growth during the fourth quarter of $192.6 million. This loan growth was diverse with construction loans increasing $96 million, other real estate increasing $98 million, municipal loans increasing $25.7 million and commercial loans increasing $14.9 million.
Loans for 1-4 family real estate decreased $22 million and loans to individuals decreased $19 million. For the year ended December 31, 2015 we reported 11.5% loan growth of $250.6 million.
Roll-off from the acquired indirect auto loan portfolio during the fourth quarter was approximately $15 million. Since December 31, 2014 the balance of this portfolio has decreased 48.3% to approximately $80 million at the end of 2015.
Because we're a Texas based bank, we're continually asked about the oil and gas exposure in our loan portfolio. I can tell you that it’s minimal and it’s our intention that it will remain minimal. Oil and gas exposure in the loan portfolio was 1.34% at the end of the quarter. At December 31 there were $2.7 million of oil and gas loans classified substandard with an 8% reserve. We did not have any oil and gas loans and non-accrual status at year end. Loan loss provision expense during the quarter of $2 million was commensurate with loan growth during the fourth quarter.
Next, I will provide a brief update on the securities portfolio. At the end of 2015, the securities portfolio reflected an increase of approximately $98 million from the prior quarter due primarily to an increase in U.S. treasuries.
The duration of the portfolio at the end of the year was 5 years up from the prior quarters' duration of 4.7 year. The average yield increased 7 basis points as premium amortization decreased approximately $530,000 during the fourth quarter due to a decrease in prepayments.
We anticipate continuing to utilize a barbell approach for our security purchases, using U.S. agency CMOs for the short end and U.S. agency CMBS and Texas municipal securities for the longer end.
Our net interest margin of 3.35% remained flat on a linked quarter basis. We believe that since 50% of our loan growth occurred in December and our loan pipeline for the first quarter of 2016 looks healthy, the margins should hold during the first quarter of 2016 or may improve, depending on loan growth.
A couple of comments on non-interest expense. During the fourth quarter, salaries and benefits increased primarily as a result of merger related cost, severance related to branch closings and expense recorded related to an early retirement package offer to 24 of our employees with an acceptance date of January 29, 2016 that was accepted by one employee in 2015.
An additional 15 have accepted the package in 2016 and we currently estimate we will record a one-time expense of $1.3 million net of tax during the first quarter. We estimate the annual cost savings associated with this early retirement plan will be approximately $1 million, net of tax.
Yesterday our Board of Directors approved a stock repurchase plan that authorized the repurchase from time to time of up to 5% of our issued and outstanding common stock or approximately 1.27 million shares in open market purchases and privately negotiated transactions at prevailing market prices. We believe repurchasing shares in a company we know quite well Southside Bank Shares Inc. at current market prices is prudent.
Thank you. And I will now turn the call over to Sam.
A strong year by any measure, earnings have recovered from 2014. Our efficiency ratio is moving in the right direction and our return on equity has seen a marked improvement. Loan demand is especially strong in all of our markets which is certainly positive. In fact loan growth of 11.5% was achieved in 2015 even with the headwind of our indirect auto portfolio rolling off at $5 million to $6 million a month. That portfolio at year end totaled $80 million.
Fortunately as Lee indicated earlier, our exposure to the oil industry is nominal. Neither the Austin, nor the Fort Worth economy is centered in oil production and as a result we have seen no deterioration in either market due to the current pricing downturn. However, if oil settles below $30 per barrel or attracted term we realize that the Texas economy including the real estate market may be affected.
We continue monitoring population growth, job growth, home prices and new housing starts in all of our markets as these are critical bell weathered numbers that give an indication of economic, direction and strength.
As we look at 2016 we see the potential for continued solid loan growth and increase in non-interest bearing deposit growth, a sharp focus on improving our operating efficiency and as a result strong profitability for the year. We’re positive regarding 2016 and trust that a diversified Texas economy will cushion the impact of any oil related slowdown. With the current Texas bank stock metrics and our stock price, an acquisition is not as appealing as it once was.
At this time, we will conclude our prepared remarks and open the lines for your questions.
[Operator Instructions] And our first question comes from the line of Brad Milsaps with Sandler O'Neill. Your line is open.
Sam or Lee, I was curious if you could give us an update on the larger non-accrual loan that you guys have, I think it was in the first quarter that one went into non-accrual and then just kind of how you’re thinking about your provision with all the moving parts as you move into 2016?
The non-accrual loan that we put in non-accrual in the first quarter continues to pay. We continue to monitor it very closely. We did not add an additional reserve in the fourth quarter related to that credit. I’d like to say it continues to pay and all the payments continue to go to principle.
So I guess every payment that comes in, it’s a little better and in terms of the provision expense for 2016, we’re going to continue to reserve like we've been reserving. I think our oil and gas loans we will probably continue to monitor those very closely and if we need to increase reserves on any of those, we will take a look at that but other than that we’re just going to monitor credits and take a look at them and reserve accordingly.
Sure, thanks Lee. And just a follow up on the expenses, I appreciate the guidance around the early retirement that you offered. I know you guys have talked about some other initiatives around the beginning of the year that you might undertake. Anything else above and beyond kind of you detailed here in terms of reducing costs or any other initiatives that you have in place? Just trying to get a better sense of kind of where your expenses could run the next several quarters.
We have a group of consultants in right now and they are looking at different operations areas, what we are looking at are trying to become more efficient in certain areas. And so we’re looking at those different areas and out of that will probably come some cost savings through attrition. And that will probably occur the latter half of the year but it's primarily in loan operations and on the branch side because of the foot traffic in the branches and things of that nature but we expect those cost savings to come through attrition.
On the revenue side, we are looking at some things that they have suggested to enhance some of our revenue generating programs that we have in place now and maybe putting some additional ones in place.
So the - on the non-interest income side and so we expect that that probably will begin to generate some additional non-interest income revenue in the second half of the year also.
Great. Thank you, guys.
Thank you. Our next question comes from the line of Kevin Fitzsimmons with Hovde Group. Your line is open.
The loan growth was really roust this quarter, just looking at it on the linked quarter basis, I know you talked about how it was very backend and loaded coming in December. Can you give a little more color drill down into what really drove that long growth in terms of either by geography whether its Austin, Fort Worth, Tyler and by the loan type and why you think it was so strong, was it more seasonal or is it just something unique that is going on in your region right now? Thanks.
Yes, I’ll probably let Lee give you a breakdown on it. I think he probably has there, but I want to say that probably June 30 our long growth was flat. And so it was back loaded the last six months a year and especially the fourth quarter.
We have been - it seems as though we're approving loans through the year on a fairly straight forward basis but the fundings just had been held up. And so it was kind of strange how they just fell into the last half of the year. I think the growth generally came out of the three markets and Lee may have something that we can shed light on that a little bit more as to where the growth came.
Yes, the predominant growth came in our DFW area Fort Worth markets and our Austin markets. Probably about $55 million to $60 million of that loan growth was in the Austin area. I'm just trying to add it up here it looks like about 15 million of it was in the east Texas area and the rest of it was probably in the Dallas Fort Worth area.
In terms of the types of loans, retail centers were about $45 million. These are established retail centers stable cash flows, very good LTV's, multi-family. This was in the DFW area about 23 million, senior loan facility in the DFW area, 15 million assisted living facility in the DFW area, about 14 million commercial loans and these are all on East Texas about 13 million and that was fairly diversified. Commercial real estate and office building in Downtown Dallas was about 15 million. A lot of equity and very stable cash flows on that.
Municipal loan in Austin, that one has a permanent school fund guarantee on it, and then single-family acquisition and development basically builder and things of that nature in the Dallas Fort Worth area. About 24 million that gets you about $172 million of that loan growth, the rest of it was smaller loans but I just kind of want to give you a flavor for what kind of loan growth was occurring.
That's very helpful and I guess your comment about the pipeline being good and the loans being backend loaded that kind of bodes well for the average loan growth link quarter and first quarter. But I would suspect you would say not to go out and project this kind of loan growth over the balance of '16. Just it seems like there was some catch-up in fundings that occurred late in the quarter -
We had a lot of the - we expect their equity to go in up front and so there was a lot of front end equity going in to a lot of these deals and that's what caused a lot of this funding to take place. But no we're not projecting 34% loan growth in '16.
Kevin we would like to have that. With the economy a little bit uncertain in Texas, I think we would be tickled there with 15% loan growth. Obviously if we've 13 that would be even better but I don’t know that our expectations are quite as high this year.
As a quick follow up, can you - I hear your comments about the direct energy exposure being very limited but can you talk about and I know you guys aren't in Austin and markets like that but can you talk about if you’re seeing anything or if you expect to see anything in terms of more indirect weakness or cracks in areas like commercial real estate or non energy commercial that have some kind of tie that’s not really direct just if you’re seeing anything there.
I don’t know that we've seen anything yet and we're looking for that because again you’re exactly right, we don’t have much oil exposure. So you look to see where could it come next and we think probably real estate is obviously the thing and we're large community bank and we do a lot of lending around real estate.
And so we try to be cognizant of that and as I said earlier, we just don’t see it in Austin or in the Metroplex and certainly in East Texas we're not seeing that. The old East Texas oil field, they’re just not doing much pumping out of it at all and so it’s just not a factor but we watch Austin and the Metroplex like a hawk and so far we just don’t see any indication.
In fact it's just almost accounted of what may be happening in Houston, if anything Dallas Fort Worth seems to be just as strong as it can be. Lee, you may add some -
And one of the things we watch very carefully Kevin is job growth and job growth in Austin continues to be strong and Dallas Fort Worth it continues to be solid. It may be down a little bit but it continues to be solid and so we are watching for those signs but so far we have not seen those.
Got it. Okay, thank you, guys.
Thank you. Our next question comes from the line of Frank Barlow with KBW. Your line is open.
Just want to follow up on the loan growth. It looks like a little less than a half of the production this quarter was construction. If you just look at the concentration its gone from about 12% last year to about 18% a total loans this year. Can you talk about where you're comfortable taking that concentration to?
I think probably we would say, we wouldn't mind going a little bit higher. It’s difficult. The uncertainty about economic situation has a lot to bear on that but I think with what we're projecting we will see that continue to grow, and we monitor that carefully.
Obviously, we're concerned about that. We know everything is cyclical. We understand what oil is doing. The real challenge is to know what oil is going to be doing a year from now and quite frankly our crystal ball, we just don’t know but I anticipate that we're going to continue to see loan growth in that area and that's not on wealth.
And some f the construction we're putting on is tenant finish out in some of these retail centers and some of these office buildings and things of that nature. So some of that will go away pretty quickly and there in an actual structure in place and then maybe just be doing something to finish out and just a portion of the area for tenants that have signed leases on just a small portion of that retail center or that office building so it’s not - some of that constructions not ground construction.
Okay, that’s good color. And then it's nice to see the repurchase authorization but how aggressive should we expect you all to repurchase your shares at this level?
We will repurchase right now – its accredited earnings and as long as it’s accredited we will be repurchasing. We're not going to set a price out there or anything but right now where it is we feel like it’s prudent to make an investment in our stock.
Okay. And then lastly in terms of long term profitability metrics, can you remind us if you have a target ROA or efficiency and how long it will take you to get to that target?
A – Lee Gibson
I'll speak to the efficiency ratio, I feel like that our target is probably mid to lower 50. I think with where we came in '15 that we were well on our way there, I think we came in just under 60 maybe at 59 and some change. From where we were with the merger, I think we’re pleased with that and we see things moving the right direction especially in the last couple of quarters.
So that's on target. I think our earnings projections bode well for 2016. We think that it can be an outstanding year for us.
A – Sam Dawson
And in terms of ROA projection, I'd say it’s definitely above 1%.
All right, thank you.
Thank you. And we have a question from the line of line of Michael Young with SunTrust. Your line is open.
Why don't you give a sense you know maybe on the revenues side. Any thoughts there of initiatives you are undertaking and particularly maybe on the hiring side with the Southside story potentially being better now not subjective energy and Houston some of those risks, do you think you could attract more lenders, more talent this year?
I think there is certainly a focus that we have. We were able to do that last year in both our Austin and Forth Worth market. We continue to look for good talented people that can bring something to the table for us, so that will continue to be like I say a focus for us in 2016. We haven't set any target out there for exactly how many we are looking for but when we see talent then that is something that we'll move on.
Okay, great. And one last one just on the trust income, that one kind of never really bumped back following the acquisition, any thoughts there is this kind of the run rate we should expect going forward or that sort of build back over time?
Michael, did you say trust income?
Yes, the wealth management trust.
I'm not looking at those numbers but I thought probably our revenue might have been –
It was up this quarter but it took a little step down following the acquisition and I think there was some -
I think if I recall that we anticipate our revenue will probably up about 10%. Next year we expect expenses there to be less than this year. So we feel like the trust operation probably will become more profitable for us.
It won't be significant like I say but it's obviously moving the right direction. We took a severe hit in 2008 I think probably as a lot of people did and we had gradually build that back.
So, I think next year we expect the trust department to add additional 10% to the bottom line for us.
Okay, great. And one last one to be, Lee do you have an idea maybe the dollar amount basis points to NIM that the accretion - the per accounting benefited the margin this quarter?
One second. Let me send that to you. I don't have that in basis points. I’m sorry.
Thanks. I'll send it to you.
Thank you. And this does conclude the Q&A session for today. I would now like to turn the call back over to Sam Dawson for closing remarks.
Thank you. Asset quality is strong. Loan growth is significant. 2016 looks promising. Thank you for joining us today.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.
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