Southside Bancshares Faces A Margin Test As CD Repricing Meets Record Loan Production

Southside Bancshares heads into its third-quarter report with a question that fee income alone cannot answer: has the squeeze on its net interest margin run its course, or was last quarter only the first leg down? After three straight quarters of expanding margins, the Tyler, Texas lender saw its margin slip 11 basis points to 2.90% in the second quarter, and net interest income fell for the first time in a year. The October 29 release, due before the open, is the first real chance to see whether that turn was a one-time funding hiccup or the start of a trend.

The Street is bracing for a step back. Consensus calls for earnings of $0.79 per share, down from $0.90 last quarter and essentially flat against the $0.80 earned a year ago. That sequential drop makes sense. Second-quarter results got help from non-recurring bank-owned life insurance death benefits and from expenses that fell 4.7% to $38.7 million, well below the roughly $40.5 million per quarter management has said to expect. A return toward that run rate, minus the insurance windfall, accounts for much of the gap on its own. The revenue consensus of $72.6 million implies a 36.5% year-over-year decline, but that figure appears to be measured on a different basis than the $114.3 million reported a year ago. It is better read as a measurement quirk than a sign the business is collapsing.

The heart of the quarter is funding. Management flagged $581.3 million of certificates of deposit repricing in the third quarter, along with stiffer competition for public fund CDs that may force the bank to pay up. That lands on top of $245 million in cash flow hedges that rolled from about 2.7% to roughly 3.75%, and swap funding spreads that have tripled since year-end. Deposits also fell 10.3% last quarter as brokered balances ran off, leaving the bank leaning on about $1.4 billion of wholesale funding. A margin that holds near 2.90% would suggest the worst of the repricing is absorbed. Another double-digit decline would challenge management's constructive tone, especially now that it models no Fed cuts for the rest of 2026.

There are real offsets. About 62% of loans float, and $336.6 million of fixed-rate loans reprice within a year, roughly $160 million of it at or below 4%, with an estimated 200 basis point lift. Loan production climbed from $327 million to $431 million to a record $487 million, and the pipeline swelled to $1.47 billion. The catch is that payoffs jumped to $297 million, leaving loans flat at $4.95 billion, while new-loan yields slid to about 6.1%. For the mid-single-digit loan growth target to stay credible, balances need to actually grow this quarter. On the fee side, trust and wealth revenue was running 8.4% ahead of its $9 million annual budget, helped by a Fort Worth team assembled ahead of schedule. Continued momentum there would show the wealth push is more than a single good quarter.

The market has not given management the benefit of the doubt. Shares are down 10.4% since the last report while the S&P 500 gained 4.1%, and at $30.92 the stock sits below its 200-day moving average of $32.37 and only modestly above its post-earnings low of $29.59. The entire trading range has shifted lower from the prior quarter's $31.45 to $36.20 band. Sentiment, meanwhile, has improved from deeply bearish to only mildly so, suggesting the selling may have already priced in much of the margin worry.

That sets up a fairly clear test. If Southside can show the margin stabilizing despite the CD wave, convert its pipeline into net loan growth, and keep expenses near guidance, the case that last quarter marked a funding blip rather than a structural turn gains weight. If the margin slides again and payoffs keep swallowing production, fee strength will look like a cushion rather than a growth story.

This earnings preview was originally published on Earnings Whispers.

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