SOUTHSIDE BANCSHARES INC Q3 FY2025 earnings call

• Lee Gibson discussed repositioning of the available-for-sale securities portfolio, selling $325 million of lower-yielding long-duration municipal and mortgage-backed securities, booking a net loss of $24.4 million, with proceeds funding loan growth and reinvested in higher-yielding securities. Linked quarter net interest income increased $1.45 million, but net interest margin decreased 1 basis point due to subordinated debt issuance. Excluding the one-time loss on securities sale, the quarter was excellent. - Keith Donahoe noted third quarter new loan production totaled ~$500 million, with $281 million funded during the quarter, unfunded portion to fund over 6-9 quarters. Third quarter payoffs improved vs second quarter. Loan pipeline rebounded to $1.8 billion, well balanced with term loans and construction/commercial lines of credit. Credit quality remained strong with nonperforming assets at 0.42% of total assets. - Julie Shamburger reported net income of $4.9 million, a decrease of $16.9 million or 77.5% for the third quarter. Diluted earnings per share were $0.16. Deposits increased $329.6 million linked quarter. Capital ratios remained strong, liquidity resources solid. Tax equivalent net interest margin was 2.94%, a decrease of 1 basis point linked quarter. Noninterest expense decreased $1.7 million or 4.4% linked quarter.

Loans: As of September 30, loans were $4.77 billion, a linked quarter increase of $163.4 million or 3.5%. The average rate of loans funded during the third quarter was approximately 6.7%. Loans with oil and gas industry exposure were $70.6 million or 1.5% of total loans. Nonperforming assets were 0.42% of total assets as of September 30. Securities: The securities portfolio was $2.56 billion at September 30, a decrease of $174.2 million or 6.4% from $2.73 billion last quarter due to the partial restructuring of the AFS portfolio. The net unrealized loss in the AFS securities portfolio was $15.4 million, a decrease of $45 million from last quarter. Deposits: Deposits increased $329.6 million or 5% on a linked quarter basis due to an increase in broker deposits and commercial/retail deposits, partially offset by a decrease in public fund deposits.

• Lee Gibson expected NIM to be up slightly in the fourth quarter, with average loans increasing $125 million during the quarter, full impact of securities restructuring and CD repricing, offsetting the full impact of the 7% subordinated debt. Net interest income expected to improve nicely. - Keith Donahoe mentioned feeling good about pull-through from the loan pipeline, with a success rate of 25%-30% typically. - Julie Shamburger expected noninterest expense to be in the $38 million range for the fourth quarter and estimated an annual effective tax rate of 16.6% for 2025.

• Competition in pricing, both in CRE and C&I, is intense. - Potential unknown payoffs near year-end could impact results. - Impact of Fed rate changes, with Lee Gibson anticipating possible rate cuts next year depending on inflation and employment.

Q: Michael Rose asked about normalizing the fourth quarter margin considering loan growth, sub debt costs, and securities restructuring.

A: Lee Gibson said NIM expected to be up slightly, with average loans increasing $125 million, full impact of securities restructuring and CD repricing, and full impact of 7% sub debt, but NIM expected to be up slightly.

Q: Wood Lay asked about loan pipeline entering the fourth quarter, segments of strength, and pricing competition.

A: Lee Gibson said pipeline bounced back to $1.8 billion, strong, with 25%-30% pull-through rate. Julie Shamburger said there's a lot of competition, being disciplined in pricing, with pricing not changing much since Q2.

Q: Jordan Ghent asked about buyback activity and fee income.

A: Julie Shamburger said they'll approach buybacks opportunistically, watching the market. Lee Gibson said trust fees expected to have double-digit revenue growth next year, with plans to expand wealth management into metro markets like Fortworth.

Q: Unknown Analyst asked about DDA growth and loan pipeline growth from new lenders.

A: Julie Shamburger said DDA growth from Erafile business will moderate in Q4. On new lenders, 4 hires in Houston market, seeing positive loan growth in Houston, with C&I mix increasing slightly from 15% to 16%.