SOUTHSIDE BANCSHARES INC Q3 FY2026 earnings call

• Financial Performance: The third quarter was described as excellent, with strong earnings per share ($0.93) and improved net interest margin (3.02%, up 12 bps linked quarter) driven by higher loan/security yields and flat funding costs.
• Loan Portfolio Dynamics: Total loans remained relatively flat at $4.96 billion due to new production (~$400 million) being offset by payoffs ($281 million). Payoffs were heavily weighted toward commercial real estate (CRE), specifically multifamily loans. The loan pipeline stands at $1.2 billion, with a shift toward term loans (44%) compared to the previous quarter.
• Asset Quality: Classified assets decreased by $15 million. Non-performing assets rose slightly to 0.18% of total assets, largely due to a single CRE loan that paid off shortly after quarter-end. No charge-offs were recorded.
• Strategic Shifts: Management is moderating 2026 loan growth guidance to low-to-mid single digits. There is a strategic focus on growing Commercial & Industrial (C&I) loans, which now represent 18% of the portfolio (up from 16%), aiming to drive stickier, cheaper deposits.
• Branch Expansion: Construction is underway for two new branches in Burleson and Celina/Prosper, Texas, expanding presence in the Fort Worth market.
• Capital Returns: No stock repurchases occurred during Q3, but 36,474 shares were bought post-quarter at an average price of $30.

The company does not report financial results by distinct product segments (e.g., Retail vs. Commercial) in absolute terms or revenue contribution percentages within the provided transcript. Financial performance is reported on a consolidated basis: Net income was $28 million (up 4.2% linked quarter), and diluted EPS was $0.93 (up 3.3% linked quarter). Non-interest income decreased by $271,000 (1.9%), while non-interest expense increased by $346,000 (0.9%). Trust fees grew 10.8% linked quarter, and brokerage services income grew 9.8% linked quarter.

• Loan Growth: 2026 full-year loan growth guidance is moderated to low-to-mid single digits, citing potential slowing in CRE originations and continued payoff activity.
• Net Interest Income: Management expects accretive impact from the September Fed rate increase, as ~55% of the loan book will reprice over the next 90 days. They anticipate loan yields to outpace deposit cost increases.
• Expenses: Budgeted average non-interest expense for Q4 is approximately $40.5 million.
• Tax Rate: The estimated annual effective tax rate for 2026 is 18%.
• Securities Portfolio: Management intends to maintain the securities balance at approximately $2.8 billion, reinvesting cash flows primarily into Agency MBS and potentially bank sub-debt.

• Interest Rate Risk: Rising rates may slow CRE originations and increase funding costs. While asset-sensitive, management notes competition in deposit pricing could pressure margins if loan repricing lags.
• Credit Concentration: Significant exposure to CRE and multifamily loans; however, risk ratings are conservative, and recent payoffs suggest healthy underlying assets despite classification spikes.
• Funding Costs: Increased competition for deposits and maturing CDs may require higher rates. Public fund deposits declined significantly due to rate unattractiveness.
• Unrealized Losses: AOCI net loss increased to $149.8 million due to unrealized losses in the AFS securities portfolio driven by longer-term rate increases, though partially offset by fair value hedges.

Q: Brett Robitin asked about the sustainability of securities yield and funding costs, noting noise in the link-quarter change. He also sought clarity on classified assets downgrading to 2.45% and asset quality in Austin multifamily projects.

A: Sunny Davis explained that the securities yield boost included one-time items (CMBS prepayment penalty and swap ineffectiveness reversal) that won't repeat, but core purchase yields should hold steady as prepays have slowed. Keith Donahoe emphasized that 55% of the loan book is floating rate and has repriced since the Fed hike, positioning them well for further rate hikes. Regarding classified assets, he noted they are conservative in rating, and the downgrade/spike was followed by full payoffs/refinancing of those specific multifamily loans without charge-offs, indicating a healthy portfolio rather than distress.

Q: Woody Lay asked why the net interest margin (NIM) outperformed expectations despite the late-Q3 rate hike, and requested details on core deposit trends and spot costs post-hike.

A: Keith Donahoe cited winning loan transactions with higher spreads and diligent funding cost management as key surprises. Sunny Davis added they utilized brokered markets and FHLB/discount window borrowing opportunistically, letting some public funds roll off to avoid high rates. Julie Shamburger reported cost of deposits at 1.89% for the quarter (down from 1.94%). Keith highlighted a strategic pivot to C&I lending to attract stickier, lower-cost non-interest-bearing deposits, which is a long-term initiative to combat deposit competition.

Q: Michael Rose asked how to model loan payoffs and growth for 2027, given the subdued 2026 outlook and pipeline drop. He also inquired about capital returns and M&A prospects.

A: Keith Donahoe stated 2027 growth shouldn't see drastic changes from the current low-to-mid single-digit expectation. New initiatives include launching a home equity line of credit and general consumer lending to reverse a decade-long decline in that portfolio. He also mentioned active engagement in talent acquisitions in metro markets, which will impact growth over 24-36 months. On capital, he confirmed stock buybacks are opportunistic when trading below intrinsic value, and while no deals are active, M&A remains a likely future opportunity, possibly emerging in 2027.

Q: Stephen Scouten asked if NIM pressure depends on balance sheet growth or if shrinking deposits insulated them, and requested quantification of NIM impact per 25bps rate hike. He also asked about securities duration strategy and reserve coverage for C&I loans.

A: Sunny Davis clarified that seasonal deposit roll-offs contributed to the reduction, but the primary driver was the faster repricing of their floating-rate loan book compared to deposit cost increases. Keith noted they haven't quantified the exact NIM impact per 25bps hike but will provide estimates later. Regarding securities, duration extension was a passive result of rising rates stretching existing holdings, not an intentional bet. On reserves, Keith stated he doesn't expect material reserve increases for C&I growth because their underwriting standards for C&I are tighter than for CRE; Julie Shamburger added pure commercial coverage is around 111%.