Southside Bancshares, Inc. 2026 Q3 Earnings Call

Good morning, everyone, and welcome to Southside Bancshares' Third Quarter 2026 Earnings Call. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call and in other presentations and disclosures, I will remind you, forward-looking statements are subject to risk and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release and our Form 10-K. Joining me today are President and CEO, Keith Donahoe, CFO, Julie Shamburger, and Chief Treasury Officer, Suni Davis. Keith will start us off with his comments on the quarter, then Julie will give an overview of our financial results, and Suni will end with comments on securities and funding. We will have a Q&A session following Suni's remarks. I will now turn the call over to Keith.

Thank you, Lindsey, and welcome to today's call. Our third quarter results are highlighted by $0.93 earnings per share, a 1.27% return on average asset, a 16.31% return on average tangible common equity, and a 3.02% tax equivalent net interest margin. Our tax equivalent net interest margin benefited from improved loan and security yields and flat funding costs during the quarter. We expect the September Fed rate increase to be accretive to fourth quarter loan yields as approximately 55% of our loan book will reprice over the next 90 days. Third quarter new loan production was strong, but largely offset by payoffs resulting in a relatively flat loan balance during the quarter. Recognizing that commercial real estate originations may slow with recent rate increases and our expectation of continued payoffs, we are moderating our loan growth guidance to low to mid-single digits for 2026.

Third quarter new loan production totaled approximately $400 million, of which $276 million funded during the quarter. Excluding regular amortization and line of credit activity, third quarter payoffs totaled $281 million. This was down slightly from second quarter payoffs totaling $297 million. Third quarter payoffs were heavily weighted towards CRE and include four multifamily loans accounting for just over half of our payoffs. On a positive note, these payoffs resulted in a $15 million decrease in classified assets for the quarter. Our loan pipeline totals $1.2 billion today, down from the second quarter levels of $1.4 billion. We have issued term sheets on approximately $222 million of this pipeline, with $99 million in the closing process.

Commercial construction loans and commercial lines of credit represent approximately 56% of the pipeline, while full funding term loans represent approximately 44%, a change from second quarter pipeline, when term loans made up approximately 52% of the total pipeline. C&I loans, including owner-occupied real estate loans, increased approximately 5% during the quarter and now represent 18% of our total loan portfolio, up from 16% at year-end 2025. In addition, C&I opportunities represent approximately 24% of today's total pipeline. Other notable third quarter items include a newly hired director of treasury management and the start of the second branch construction project. The new start is located south of Fort Worth in Burleson, Texas, and expands our commitment to the greater Fort Worth market. Additionally, the Celina Prosper construction project continues to move forward with completion expected in the second quarter of 2027.

When considering our net income, earnings per share, and other financial results, we had an excellent quarter. Overall, the markets we serve remain healthy, and the Texas economy is anticipated to grow at a faster pace than the overall U.S. growth rate. With that, I look forward to answering questions, and I'll turn the call over to Julie.

Thank you, Keith. Good morning, everyone, and welcome to our third quarter earnings call. For the third quarter, we are pleased to report net income of $28 million, a linked quarter increase of $1.1 million or 4.2%. Diluted earnings per share were $0.93 for the third quarter, up $0.03 per share linked quarter, a 3.3% increase. Loans increased slightly compared to the second quarter to $4.96 billion as of September 30th, and the average rate of loans funded during the third quarter was approximately 6.1%, consistent with the second quarter and down from 6.3% in the first quarter.

As of September 30th, our loans with oil and gas exposure were $54.6 million or 1.1% of total loans, a decrease of $21.5 million compared to $76.1 million on June 30th, driven by payoffs associated with one relationship. Non-performing assets increased by $6 million, or 61.6% linked quarter, largely driven by a $5.2 million CRE loan that subsequently paid off in full on October 1st, 2026. Non-performing assets remain low on a linked quarter basis at 0.18% of total assets at quarter end. Our allowance for credit losses increased to $50.4 million from $49.3 million on June 30th. Linked quarter, our allowance for loan losses as a percentage of total loans increased two basis points to 0.94% at September 30th. The securities portfolio increased $49.3 million, or 1.8%, to $2.83 billion on September 30th when compared to $2.78 billion on June 30th.

The increase was mainly driven by purchases of mortgage-backed securities and, to a lesser extent, corporate bonds during the third quarter. As of September 30th, we had a net unrealized loss in the AFS securities portfolio of $93.3 million, an increase of $83.5 million compared to $9.8 million last quarter, which was driven by the increase in longer-term rates. on September 30th, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $7.6 million, compared to $3.1 million linked quarter. This unrealized gain partially offsets the unrealized losses in the AFS portfolio. Our AOCI on September 30th, 2026, had a net loss of $149.8 million compared to a net loss of $92.1 million on June 30th, 2026. The net loss was comprised of net losses on our securities and swap derivatives of $133.9 million and $15.9 million related to our retirement plans.

As of September 30th, the duration of the total securities portfolio was 7.8 years, compared to 7.2 years at June 30th, and the duration of the AFS portfolio was 5.9 years, compared to 4.3 years on June 30th. At quarter end, our mix of loans and securities was 64% and 36%, respectively, consistent with the second quarter. Deposits decreased by $155.6 million, or 2.5%, on a linked quarter basis. This was primarily driven by a decrease in public fund deposits of $200.2 million and an overall decrease in commercial and retail deposits of $4.8 million, partially offset by an increase in brokered deposits of $49.4 million. The net decrease in commercial and retail deposits resulted from the seasonal $99.1 million commercial escrow account that funded during the second quarter and rolled off in July. We remain well-capitalized with strong capital ratios.

Liquidity resources remain solid with $1.9 billion in liquidity lines available as of September 30th. We did not repurchase any common stock during the third quarter. However, since quarter end, we purchased 36,474 shares at an average price of $30 per share. Our tax equivalent net interest margin was 3.02%, an increase of 12 basis points on a linked quarter basis from 2.90% for the second quarter. Our tax equivalent net interest spread for the same period was 2.36%, an increase of 10 basis points from 2.26%. The increase in the net interest margin and the net interest spread is primarily due to the higher yield on securities and loans and flat funding costs in the third quarter. Sunny will provide details on the higher yield in the securities portfolio during her remarks.

For the three months ending September 30th, we had an increase in net interest income of $3 million, or 5.2%, compared to the linked quarter. Non-interest income decreased $271,000, or 1.9%, for the linked quarter due to decreases in BOLI income and swap fees and equity fair value adjustments included in other non-interest income. Our trust and brokerage services continued to perform well this quarter. Trust fees increased $259,000, or 10.8%, linked quarter and increased $1.5 million, or 27%, for the nine months ending September 30th, 2026, when compared to the same period last year. Wealth management and trust assets under management increased to $1.8 billion on September 30th, compared to $1.5 billion on September 30th, 2025. Additionally, brokerage services income increased $137,000, or 9.8%, linked quarter and $795,000, or 22.6%, year to date compared to the same period in 2025.

Non-interest expense was $39 million for the third quarter, an increase of $346,000, or 0.9%, compared to the linked quarter. The increase was largely driven by an increase in salaries and health expense. Our fully taxable-equivalent efficiency ratio decreased to 51.55 as of September 30th from 52.96 last quarter, due to the increase in net interest income, partially offset by the increase in non-interest expense. Our budget indicates average non-interest expense of approximately $40.5 million for the fourth quarter. We recorded income tax expense of $6.3 million compared to $5.7 million in the prior quarter, an increase of $542,000 or 9.4%. Our effective tax rate was 18.3% for the third quarter compared to 17.6% last quarter. Our current estimate for the 2026 annual effective tax rate is 18%. At this time, I will turn the call over to Sunny.

Thank you. Thank you, Julie.