Southside Bancshares, Inc. (SBSI) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the 2020 Southside Bancshares Annual Meeting of Shareholders. At this time, I'll turn the call over to Lee Gibson, President and CEO. Mr. Gibson, go ahead.

Thank you. It is my pleasure to welcome you to the 2020 Southside Bancshares Annual Meeting of Shareholders. I will be presiding over the annual meeting, as appointed by the Board of Directors. As you know, we traditionally hold our annual meeting in person. However, due to the COVID-19 pandemic and to ensure everyone's health and safety, this year's meeting is being held virtually. While this pandemic has caused disruption and change to our economy, our communities and our daily lives, Southside is proud to say one thing that has not changed is our commitment to serve and support our customers, communities, employees and shareholders as we navigate this unprecedented time. Following the business portion of the shareholders' meeting, there will be a short presentation followed by a question-and-answer session. Before we begin, I would like to recognize the directors that served as Southside Bancshares' directors this past year, all of which are participating in today's call, and thank each of the directors for their continued hard work and dedication. Chairman of the Board, Bob Garrett; Vice Chairman of the Board, Don Thedford; Elaine Anderson; Lawrence Anderson; Michael Bosworth; Herbert Buie; Patti Callan; Trey Henderson; Melvin Lovelady; Tony Morgan; John Sammons; Jay Shands; Bill Sheehy; Preston Smith. I would also like to acknowledge Shannon Dacus, who is a director nominee and participating in the meeting today. We look forward to Ms. Dacus joining the Board of Directors and benefiting from her vast experience and knowledge. Mark Bell and LaDana Washburn, partners with Ernst & Young, the company's independent auditor, are also on today's call and available for questions during the Q&A session. Since the meeting is being held virtually, we would like to inform shareholders that you can submit questions for the Q&A session at any time during the meeting in the space provided in the virtual webcast. Please take note of our rules of conduct, along with other materials posted in the Broadridge portal. I now call the shareholders' meeting to order to consider the items on the agenda. This meeting is held pursuant to the bylaws of the corporation and written notice to all shareholders. The Board previously appointed Julie Shamburger, Chief Financial Officer, to serve as judge of voting for today's meeting. Ms. Shamburger, do we have a quorum present?

Yes. Approximately 76.9% or 25,752,710 of our 33,488,095 shares outstanding as of the record date are presented in person or by proxy today.

Thank you. The polls are open for shareholders to vote. However, you do not need to vote at this meeting if you've already voted by proxy. If you wish to change your previously submitted vote, you may do so while the polls are open by following the instructions on the meeting website. The first item on the agenda is the proposal for the election of directors. Each nominees' qualifications are described in this year's proxy statement. Our articles of incorporation provide the Board will be divided into 3 classes as equal in size as possible. Based on the recommendation of the Nominating Committee, the Board has nominated the following persons for a term expiring 2023: Lawrence Anderson, M.D.; Melvin Lovelady, CPA; John Sammons, Jr.; H. J. Shands, III; William Sheehy; Preston Smith; for a term expiring 2022, Shannon Dacus. The second proposal is a nonbinding advisory vote on the compensation of the company's named executive officers. The third proposal is to ratify the appointment by our Audit Committee of Ernst & Young to serve as the independent registered public accounting firm for the company for the year ended December 31, 2020. We will now pause to allow time for voting. [Voting]

Thank you. Now that everyone has had a chance to vote, I now declare the polls closed. Based on the preliminary voting results, each of the proposals has passed with at least 95% of the votes cast in favor for each proposal. The final voting results of today's meeting will be reported on an 8-K filing with the SEC within the next 4 business days. Having covered all of the items on the agenda, I now declare the business portion of our shareholder meeting closed. I will now turn the call over to Julie Shamburger, the company's CFO, to begin today's presentation.

Good afternoon. During today's presentation, any forward-looking statements are subject to risks and uncertainties. Factors that could materially change our current forward-looking assumptions are described on this slide in our annual report on Form 10-K and other filings with the Securities and Exchange Commission. Thank you for joining our virtual meeting today. We had an excellent year, and I'm pleased to report our 2019 results. We reported net income of $74.6 million. Loans increased a solid 7.7%, and our earnings per share increased $0.09 per share or 4.3%. During 2019, nonperforming assets decreased $25.5 million or 59.3%, ending the year at a very solid 0.26% of total assets. Additionally, for 2019, we reported a return on average assets of 1.17% and a return on average tangible common equity of 13.8%, and our cash dividends increased 5% to $1.26 per share compared to 2018. Our first quarter results were largely driven by the provision for credit losses as a result of the implementation on January 1, 2020, of a new accounting standard for the measurement of credit losses often referred to as CECL. The CECL methodology is an expected loss method over the life of the loan as opposed to the incurred loss method previously used by the company for measuring credit losses. The CECL model results are heavily impacted by economic forecast. And as a result of CECL's methodology and largely related to the negative economic forecast resulting from the COVID-19 pandemic, we reported $25.2 million in provision for credit losses, which is why you will see our profitability metrics lower for March 31, 2020, compared to the same period last year. Net income for the quarter was $4 million after recording the provision for credit losses just mentioned. Diluted earnings per share were $0.12 per share compared to $0.56 per share for the same period last year. The decrease in net income also impacted both our return on average equity as well as our return on average assets. The following slide provides more detail of the change to the allowance for loan losses that resulted from implementing CECL. First, in connection with the implementation of CECL, we recorded a day-1 adjustment, increasing the allowance by $5.3 million, from $24.8 million at year-end, up to $30.1 million on day 1 of the implementation. This day-1 adjustment, together with the large provision expense recorded in the first quarter, increased Southside's allowance for loan losses to $53.6 million at March 31, 2020. We believe this significantly higher allowance further enhances our position to successfully navigate through the uncertainties of the current economic landscape. Several of our profitability measures are presented here beginning with 2015. Net income has continued to increase as well as our return on average assets. The significant increase in net income for 2018 was due to the acquisition of Diboll State Bancshares late in 2017. As mentioned earlier, the impact of the large provision for credit losses recognized this quarter resulted in the decrease in both the net income and the return on average assets as of March 31. Net interest income has trended upward as well as our earning assets have continued to grow. During the first quarter of 2020, our net interest income increased 8.7% to $44.7 million compared to $41.1 million for the same period last year, largely due to the decrease in interest expense. Twice in March of 2020, the Federal Reserve lowered the discount rate, a total of 150 basis points. This significantly reduced our funding cost during the last part of the first quarter, and we expect the lower funding costs to continue during the second quarter as well. Last, let me direct you to the efficiency ratio graph. The efficiency ratio measures the cost to generate $1 of revenue by dividing noninterest expense by income adjusted on a fully taxable equivalent basis. We have seen significant improvement in our efficiency over the years, and we're pleased to report 51.91% for the first quarter of 2020. This decrease was largely driven by the increase in our net interest income. Our largest earning asset components and funding sources are presented on this slide. Over the last several years, our balance sheet has shifted, and you can see the change in the assets and funding sources for the year ended 2015, prior to the Diboll acquisition, and the year ended 2019 and March 31, 2020. While we experienced some loan growth in the first quarter of 2020, we do not anticipate meaningful loan growth for the remainder of the year due to the current COVID-19-related economic forecast. The increase in the securities portfolio in the first quarter resulted from our reduced expectations for loan growth at this time. With respect to our funding sources, we continue to see an increase in the percentage of funding from deposits and a decrease in the percentage of funding from Federal Home Loan Bank borrowings when looking at 2015 through 2019. During the first quarter of 2020, we did, however, increase our Federal Home Loan Bank borrowings to fund the additional purchases of securities. Our deposit composition consists of these 5 major categories. The first 3 deposit categories in the table represent our lowest cost deposits and make up over 70% of our total deposits. Noninterest-bearing deposits, designated in the light-blue portion of the graph, increased to $1.07 billion for the first quarter, a 2.5% increase compared to year-end, and they represent 23% of our total deposits compared to 22% at year-end. Our loan portfolio composition is shown on this next slide. Loans secured by real estate are our largest category of loans, and they consist of construction, 1-4 family residential loans and commercial real estate loans. This group represents 76% of our loan portfolio. For the first quarter of 2020, we were pleased to report an increase in our commercial real estate portfolio of $100.6 million, some of which moved from the construction category, which decreased $41 million during the first quarter. Municipal loans represent 10% of total loans, and these loans are primarily made in the state of Texas to municipalities and school districts with tax or revenue pledges. As I mentioned earlier in my presentation, we experienced meaningful loan growth of $255.4 million or 7.7% during 2019. This loan growth was a result of significant efforts and results in all of our markets. Our asset quality continues to be strong, and we're really proud of our metrics for 2019. We were extremely pleased to report a decrease in nonperforming assets during 2019. Our nonperforming assets were $17.4 million as of 03/31/20, a very slight decrease from year-end. However, due to the increase in our balance sheet at March 31, our nonperforming assets to total assets ratio decreased further to 0.24%. All of the asset quality ratios presented here improved in the first quarter of 2020, and the increase in the allowance for loan losses stated as a percentage of our nonperforming loans increased to 321.8%, which we believe enhances our ability to navigate the potential challenges related to the pandemic. As in years past, we will continue to apply our unwavering high underwriting standards to maintain strong asset quality. Next, I'll move on to our securities portfolio. Our securities portfolio provides the bank earnings and liquidity. Our combined securities portfolio at March 31, 2020, totaled $2.95 billion, an increase from year-end of $454.1 million. The securities portfolio consists of both agency commercial and residential mortgage-backed securities as well as municipal securities. The mortgage-backed securities are issued and/or guaranteed by U.S. government and government-sponsored agencies. The municipal securities consist primarily of high-quality Texas municipal securities. During March, as volatility in equity markets persisted, U.S. agency mortgage-backed securities and highly rated municipal bonds also began to experience volatility primarily due to illiquidity. When this occurred, given our reduced expectations for loan growth, we increased our securities portfolio by purchasing $490 million of largely AAA-rated municipal bonds. Due to the timing of these transactions, the full impact on interest income will be reflected in future quarters. During the first quarter, we did sell certain lower-yielding available-for-sale securities and more than offset these sales with purchases of municipal securities with higher yields. The securities resulted in a net gain on the sale of AFS securities of $5.5 million. Our Board of Directors closely monitors the performance of our securities portfolio and the investment team to enhance profitability, manage interest rate and liquidity risk and to meet overall balance sheet strategies and objectives. Our capital levels are presented here for 2018, '19 and the first quarter of 2020. The line across the bar represents the regulatory standards we must maintain to be considered well capitalized. As you can see, we were well capitalized in all of the regulatory capital categories for all of the periods presented. Our strong capital position provides flexibility as we navigate through the pandemic. Our shareholder returns are presented on this slide, and they represent the performance on a per-share basis of our stock in both of the tables. Since 2015, we have experienced upward trends in the returns to our shareholders. For 2019, we reported tangible book value per share of $17.45 and earnings per share of $2.20. For the first quarter of 2020, our tangible book value increased to $17.64. The earnings per share of $0.12 per share reflects the increase in provision due to COVID-19-related economic forecast, as mentioned earlier. We are pleased with our start for 2020 and believe we are well positioned to navigate the challenges ahead associated with the COVID-19 pandemic. Thank you for your attendance today, and I will turn the meeting over to Lee.

Thank you, Julie. This next slide covers our cash dividend history. Going back to 2001, the upward sloping graph clearly shows our record of cash dividend increases over this period. 2020 marks the 51st year in a row that Southside has paid a cash dividend, dating all the way back to 1970. This slide shows the total return performance for the 5-year period ended December 31, 2019, for Southside's common stock, SBSI. It's compared to the performance of the Russell 2000 Index and a peer group of Texas publicly traded banks. As the chart shows, Southside outperformed both over this 5-year period. As Julie pointed out, 2019 was an excellent year. When we began 2020, our goals were aligned with our plan to continue growing and expanding our Texas franchise in some of the best growth markets in the country against the backdrop of a strong Texas economy and a growing employment base with record-low unemployment. However, just like everyone joining us today, when COVID-19 became a reality in the United States, it quickly changed daily routines, commerce, methods of conducting business and the economic forecast. We feel very fortunate that we entered this crisis from a position of strength with strong asset quality, capital, liquidity, a low level of nonperforming assets, combined with a deep experienced management team adept at navigating challenges. On this slide, we present our goals for 2020. As our history reflects, strong asset quality has always been one of Southside's cornerstones. So it should come as no surprise that maintaining asset quality is top of mind for our 2020 goals, especially considering the current economic forecast. When we design our delivery channels, processes and methods of doing business, we do it with one goal in mind: providing exceptional customer service. I am proud to say, our Southside team equally adapted to changes in operational methods and delivery channels as a result of the pandemic and never missed a beat delivering the exceptional customer service our customers expect and deserve. During the last 2 months, we have seen a huge increase in the number of customers embracing our digital technologies, which has reinforced the importance of this goal. Like most businesses across the country, we had to adjust operational strategies to deal with the many changes caused by the pandemic. For the foreseeable future, a more frequent review of operational strategies will be necessary as pandemic conditions continue to change. Some of the changes we made to accommodate the pandemic have worked exceptionally well, giving us a new perspective on future operations. Capitalizing on operational process efficiency and focusing on growing non-maturity deposits are reoccurring goals each year that are necessary for the continued success of Southside. With interest rates at or near record lows, carefully monitoring interest rate risks is especially important this year. For many years, we've devoted a great deal of time to business continuity planning. One risk scenario we talk through in-depth each year has been the outbreak of a pandemic. When COVID-19 hit the West Coast, we began implementing our pandemic plan. Listed here are some of the changes that have taken place. I cannot praise all of the Southside team members enough for their outstanding attitudes and continued dedication to Southside during this challenging time. Not only did they eagerly adapt to changes in operational methods and delivery channels, but when the Paycheck Protection Program was announced, our lending and credit teams, together with assistance from team members from several additional departments in the bank, began working day and night to process over 2,000 PPP loans, providing over $300 million in much needed funding to small businesses. This year, Southside will celebrate its 60th anniversary. Over the last 60 years, we have seen growth, not only in our balance sheet and capital position, but also in the relationships we have formed in the communities we serve. We still believe the underpinnings of the Texas markets we serve are sound and will recover once the economic downturn caused by COVID-19 subsides. As a result, given Southside's experienced management team, sound asset quality, strong capital and liquidity and low level of nonperforming assets, we believe we are well positioned to continue helping our customers achieve their financial goals, while navigating through the pandemic-related challenges. This ends the presentation, and we'll go to the Q&A session. At this point, we do not show that there are any questions that have been submitted to be answered. Seeing no questions, that concludes our annual meeting. Thank you for joining us today and for your continued support.

Goodbye.

Thank you for joining us. You may now disconnect.