SOUTHSIDE BANCSHARES INC Q2 FY2025 earnings call

• Lee noted an excellent quarter with strong net income, NIM increase, and positive loan pipeline. Linked quarter net interest margin up 9 basis points, net interest income up $414,000. - Keith discussed second quarter new loan production of ~$293 million, with $228 million funding during the quarter and remaining to fund over 6-9 quarters. Muted loan growth due to payoffs, with commercial real estate being the largest source of payoffs. Lowered loan growth guidance to 3%-4% YOY, loan pipeline over $2.1 billion, C&I now ~30% of pipeline. Credit quality strong, nonperforming assets slightly increased but remained concentrated in one large construction loan. - Julie provided financial results: net income up $306,000 QOQ, diluted EPS up $0.01 QOQ. Deposits increased $41.1 million linked quarter. Share repurchases of 424,435 shares at avg price $28.13 in Q2, ~156,000 shares remaining in authorization. Tax equivalent net interest margin up 9 basis points, noninterest income up $1.4 million QOQ.

Net income for the second quarter was $21.8 million, resulting in diluted earnings per share of $0.72. The net interest margin increased 9 basis points to 2.95% and net interest income rose to $54.3 million. Linked quarter total loans increased $35 million, while average total loans decreased $106 million primarily due to payoffs. Deposits net of public funds and broker deposits increased $90.1 million linked quarter. The securities portfolio was $2.73 billion at June 30. Capital ratios remained strong, and liquidity resources were solid. Tax equivalent net interest margin increased 9 basis points to 2.95%, and tax equivalent net interest spread rose 7 basis points to 2.27%. Loans as of June 30 were $4.60 billion, with commercial real estate loans, construction loans, and commercial loans contributing to the linked quarter increase, partially offset by decreases in municipal and 1-4 family residential loans. Nonperforming assets remained at 0.39% of total assets.

• Lowered loan growth guidance to 3%-4% year-over-year. - Loan pipeline exceeds $2.1 billion, well balanced with ~43% term loans and 57% construction/commercial lines of credit. - C&I initiative now represents ~30% of total pipeline, up from 25% at end of first quarter. - Anticipate moderated payoffs and new loan production consistent with first half of 2025 for remaining half of 2025.

• Uncertainty around payoffs, including unexpected $50 million payoff in oil and gas portfolio. - Competition from debt funds pricing deals aggressively, which may affect loan growth and margins. - Market uncertainties surrounding tariff announcements and negotiations could impact business conditions.

Q: Maybe we could just start big picture. We've seen a couple of deals here announced in Texas and more broadly, one bigger one last night. Just wanted to get a sense for what you see as potentially the dislocation opportunities from a hiring and client acquisition front. And then just given where you guys are on an asset side, just any updated thoughts around potential M&A for you all?

A: Yes. Thank you. I do agree that there's some potential that we could pick up some people from some of these acquisitions, especially the out-of-state ones. And that's a real possibility and certainly on our radar screen. It's good to see the activity finally begin to happen in Texas, and we think that's going to lead to additional sellers coming out of the woodwork, and we would like to be a part of that at some point in time if it strategically makes sense.

Q: Okay. Perfect. And then maybe just on the credit front. Just any update on the multifamily credit that was added to restructure last year. Just wanted to see if that's progressing as expected.

A: Michael, this is Keith. Yes, the loan continues to perform, still haven't had any missed payments, but the leasing activity on the asset continues to be positive. We do anticipate at the end of the year when the maturity hits that, that loan will move out of the bank. And we don't see any reason why it wouldn't be able to do so at this point, but we are continuing to monitor the lease-up activity.

Q: I want to ask about the net interest margin, and we saw some improvement this quarter. Any more color on just the puts and takes on the direction of that margin from here in the back half of the year? And then specifically, can you add some color on how dependent that margin outlook is on the loan growth? It sounds like the loan growth could be volatile based on the paydowns. I'm just curious how much of a driver that is for the margin.

A: We're up 12 basis points for the year. And looking at the average balance sheet, average loans have been down for the year. So far, it hadn't been dependent on loans. The encouraging thing is all that loan growth that we had occurred in the -- really the last 2 to 3 weeks of June. So in terms of our average loans, they're at the highest point they've really been at this entire year. So if we can continue to produce the loans, as Keith is discussing, and we have a pretty good insight into what's going to happen in the next couple of months. It's the payoffs that will be the difference. But if we can have net loan growth going forward, I think it's going to do nothing but really accrue to our benefit when it comes to the outlook for the NIM for the last half of the year.

Q: Okay. So it sounds like the margin has some tailwinds with or without the loan growth. Maybe just some commentary on deposit competition. Some of your peers in Texas are pointing towards increased competition that's perhaps going to put up -- push up deposit pricing in the back half of the year in the absence of any kind of Fed cut. So just curious kind of what you're seeing.

A: We're really not seeing that. We have focused previously in prior quarters on putting on CDs. A lot of those CDs are -- we had a lot that matured during the second quarter. We have another, I think, in the next 90 days. We have a little over $430 million that will mature, we're not going to be able to save as much money as we did in the first and the second quarter on the maturities. But we anticipate we'll be able to lower the average rate on those CDs at least 10 basis points, if not just a little bit more. So that's really where the relief is going to come. And who knows whether the Fed is going to lower rates or what they're going to do, but we believe that we will continue to see a little -- some relief in terms of pressure on deposit pricing over the last half of the year.