Southside Bancshares, Inc.

Thank you for standing by. At this time, I would like to welcome everyone to the Southside Bank Shares Inc. Third Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Lindsay Bales, Investor Relations Officer. You may begin.

Thank you, Jeannie. Good morning, everyone, and welcome to Southside Bank Share's third quarter 2025 earnings call. A transcript of today's call will be posted on southside.com under Investor Relations. During today's call and in other disclosures and presentations, I'll 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 in our Form 10 case. Joining me today are Lee Gibson, CEO, Keith Donahoe, President, and CFO, Julie Shanberger. First, Lee will start us off with his comments on the quarter, then Keith will discuss loans and credit, and then Julie will give an overview of our financial results. I will now turn the call over to Lee.

Thank you, Lindsay, and welcome to today's call. I'm going to start by discussing the repositioning of our available for sale securities portfolio. During the quarter, as market conditions allowed, we took the opportunity to sell approximately $325 million of lower-yielding, long-duration municipal securities, and to a lesser extent, mortgage-backed securities, and booked a net loss of $24.4 million. These securities had a combined taxable equivalent yield of approximately 3.28%. Most of these sales occurred in September. The net proceeds from these sales partially funded loan growth during the quarter, with the balance reinvested in agency mortgage-backed pools that had primarily 5.5% and 6% coupons, and to a lesser extent, Texas municipal securities with coupons ranging from 5% to 575. The sale of these securities will not only enhance future net interest income, but it also provides for additional balance sheet flexibility as we grow. We estimate the payback of this loss to be less than four years. As previously disclosed, we issued $150 million of subordinated debt at 7% fixed to floating rate notes in mid-August. Linked quarter, our net interest income increased 1.45 million, and our net interest margin decreased one basis point due to the issuance of the subordinated debt during the quarter. When considering our net income, earnings per share, and other financial results, excluding the one-time loss on the sale of securities, we had an excellent quarter. Non-interest income continued to perform well and loans increased 163 million with 81 million of that growth occurring on September 30th. Keith will provide additional commentary about our loan portfolio and third quarter loan growth. The repositioning of the securities portfolio combined with the late third quarter loan growth sets up an optimistic outlook for net interest income. If the current favorable swap markets remain, we will look for additional opportunities to enter into swaps. Overall, the markets we serve remain healthy and the Texas economy continues to be anticipated to grow at a faster pace than the overall U.S. growth rate. I look forward to answering your questions and will now turn the call over to Keith Donhoe.

Thank you, Lee. Third quarter new loan production totaled approximately $500 million compared to the second quarter production of $290 million. of the moon lung production 281 million approximately funded during the third quarter including the 81 million lee reference which closed on the last day of the quarter we expect the unfunded portion of this quarter's production to fund over the next six to nine quarters likely weighted towards the back end of those quarters given the construction nature of those opportunities Excluding regular amortization and line of credit activity, third quarter payoffs totaled approximately $116 million, a significant improvement from second quarter payoffs totaling approximately $200 million. Third quarter commercial real estate payoffs included approximately 15 loans secured by retail, healthy family, industrial, skilled nursing facilities, and some commercial land. Commercial real estate payoffs continue to be largely driven by open market property sales. However, two retail properties were refinanced with other bank lenders offering fixed rates using spreads below our target. After back-to-back strong production quarters, our loan pipeline dipped to approximately $1.5 billion mid-quarter, but has rebounded to $1.8 billion today. While lower than the prior two quarters, it remains elevated compared to the same period in 2024. The pipeline is well balanced with approximately 42% term loans and 58% construction and or commercial lines of credit. C&I related opportunities represent approximately 22% of today's total pipeline compared to approximately 30% last quarter. This reduction is largely due to closing a new $20 million CMI relationship, which originated in our East Texas market. As credit quality remains strong, during the third quarter, non-performing assets increased approximately 2.7 million that remained concentrated in the previously disclosed $27.5 million multifamily loan that was moved into the non-performing category during the first quarter. Keith Mines, They continue to expect this to be this long to be refinanced or right size before the end of the year. Keith Mines, And overall, as a percentage of federal assets nonperforming assets is at 0.42%. Keith Mines, We'll turn the meeting over to Julie.

Julie P. Good morning everyone and welcome to our third quarter call. For the third quarter, we reported net income of $4.9 million, a decrease of $16.9 million, or 77.5%. Deleted earnings per share were 16 cents for the third quarter, a decrease of 56 cents per share linked quarter. As of September 30th, loans were 4.77 billion, a linked quarter increase of 163.4 million, dollars or three and a half percent the leans quarter increase was driven by an increase of 82.6 million in commercial real estate loans 49.3 million in commercial loans and 49.1 million in construction loans partially offset by a decrease of 10.4 million in municipal loans and 6 million in one to four family residential loans the average rate of loans Funded during the third quarter was approximately 6.7%. As of September 30th, our loans with oil and gas industry exposure were 70.6 million, or 1.5% of total loans, compared to 53.8 million, or 1.2% linked quarter. Non-performing assets remained low at 0.42% of total assets as of September 30th. Our allowance for credit losses increased to $48.5 million for the linked quarter from $48.3 million on June 30th, and our allowance for loan losses as a percentage of total loans decreased to .95% compared to .97% at June 30th. Our securities portfolio was $2.56 billion at September 30th, 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 restructuring included sales of $325 million of lower yielding, longer duration securities. The sales, along with maturities and principal payments, more than offset the purchases of $288 million. As of September 30th, we had a net unrealized loss in the AFS securities portfolio of 15.4 million, a decrease of 45 million compared to 60.4 million last quarter. The improvement occurred primarily due to the restructuring of the AFS portfolio and to a lesser extent, an improvement in the remaining AFS portfolio. There were no transfers of AFS securities during the third quarter. On September 30th, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $905,000 compared to 5.2 million linked quarter. The decrease is primarily driven by the unwinding of fair value hedges associated with the restructuring of the AFS portfolio. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio. As of September 30th, the duration of the total securities portfolio was 8.7 years compared with 8.4 years at June 30th. And the duration of the AFS portfolio was six and a half years compared to 6.2 years at June 30th. At quarter end, our mix of loans and securities was 65% and 35% respectively. compared to 63% and 37%, respectively, last quarter. Deposits increased 329.6 million, or 5%, on a linked quarter basis due to an increase in broker deposits of 288.6 million and a $137.1 million increase in commercial and retail deposits. partially offset by a decrease in public fund deposits of $96.1 million. On August 14th, we issued 150 million of 7% subordinated notes. Our 3.875% subordinated notes issued in 2020 with an outstanding amount of $92.1 million will begin to adjust quarterly at a floating rate equal to the then current three-month term SOFR plus 366 basis points in mid-November of 2025. Our capital ratios remain strong with all capital ratios well above the threshold for well capitalized. liquidity resources remain solid with $2.87 billion in liquidity bonds available as of September 30th. We repurchased 26,692 shares of our common stock at an average price of $30.24 during the third quarter. On October 16, 2025, our board approved the additional 1 million shares authorization under the current repurchase plan, bringing the shares available for repurchase to approximately 1.1 million. There have been no purchases of our common stock since September 30th. Our tax equivalent net interest margin was 2.94%, a decrease of one basis point on a linked quarter basis down from 295. And our tax equivalent net interest spread for the same period was 2.26%, Also a decrease of one basis point from 227. For the three months ending September 30th, we had an increase in net interest income of 1.45 million or 2.7% compared to the linked quarter. Non-interest income excluding the net loss on the sales of AFS securities increased $260,000 or 2.1% for the linked quarter. primarily due to an increase in trust fees. Non-interest expense was $37.5 million for the third quarter, a decrease of $1.7 million, or 4.4%, on a linked quarter basis, primarily driven by a $1.2 million write-off on the demolition of an existing branch recorded last quarter, and a decrease in software and data processing expense. Our fully taxable equivalent efficiency ratio decreased to 52.99% as of September 30th from 53.70 as of June 30th, primarily due to an increase in total revenue. At this time, we expect non-interest expense to be in the $38 million range for the fourth quarter. We recorded income tax expense of $189,000 compared to $4.7 million in the prior quarter, a decrease of 4.5 million driven by the loss on sales on AFS securities. Our effective tax rate was 3.7% for the third quarter, a decrease compared to 17.8% last quarter. We are currently estimating an annual effective tax rate of 16.6% for 2025. Thank you for joining us today. This concludes our comments and we will open the line for your questions.

At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. Your first question comes from Michael Rose with Raymond James. Your line is open.

Hey, good morning, everyone. Thanks for taking my questions. Sorry if I missed this, but I wanted to go back to the restructuring. I know there's obviously going to be some moving parts here, just given that the loan growth happened, you know, kind of on the last day of the quarter, you know, half of it, roughly, you did the restructuring. Just wanted to get a kind of a level set of, you know, if I normalize all that, what's a good kind of starting margin that we should be contemplating for the fourth quarter, just given, again, the late quarter growth, the benefits of the securities restructuring as we go forward. Just looking for a little color there. And then what your rate expectations are. Thanks.

You know, the NEM in the fourth quarter, I expect to be up slightly. You know, we have We have the sub debt costs in the third quarter that will have the full impact in the fourth quarter. But with, you know, if loans don't grow at all in the fourth quarter, which we're not anticipating, the average loans will increase $125 million during the quarter. And then we'll have the full impact of the $325 million of security sales restructuring. that will take in effect along with repricing of over $600 million of CDs that we anticipate, you know, we'll have an average savings of around 34 basis points on. You know, the only headwind to the NEM in the fourth quarter is I mentioned the full impact of the 7% and then we also have the repricing of the 92 million that Julie mentioned uh which you know today would be a rate of the 752 compared to the current rate of of 3.875 so overall i expect them to be up slightly i expect managed income to improve nicely and um you know i think i think you know we're set up for a lot a lot of positive things in the future when it comes to managed income in the name I don't know if that gives you a flavor for what we're looking at.

Yeah, it's helpful. There's just obviously a good amount of moving parts here, so I appreciate the color. There's a bunch. Yep. Maybe just moving on, you know, we've seen some deal activity here in Texas over the past couple months. I know you guys have kind of previously stated, you know, wanting to potentially, you know, do a deal yourselves. Just wanted to see, you know, if there's any kind of update there in terms of what you may be looking for, and then maybe separately if there's some opportunities for hiring in light of those, you know, recent deals or maybe a market share gain from clients.

Thanks. You know, what we're looking at really hasn't changed. You know, there are a few institutions that we have some interest in that potentially might be for sale. in terms of hires that is that is something we're looking at and we've made a few hires but um yeah with some of the disruption that's occurring especially with some of the larger out-of-state banks buying you know some of the the uh the less than 10 billion dollar banks here in texas um you know there's there's definitely been some disruption and you know we hope to uh to

to you know jump on that that opportunity and and make some additional hires there uh okay great um i'll step back uh lee congratulations uh on uh on the announcement um and uh look forward to uh seeing you all soon thanks all right thank you your next question comes from the line of woody today with kbw your line is open

Hey, thanks for taking my questions. Wanted to start on loan growth. Obviously a really strong quarter and it sounds like a lot of that growth actually came on the final day of the quarter. So I was just curious on the pipeline entering the fourth quarter, how it's looking and if there was any pull through of the pipeline in this quarter.

Yeah, pipeline's strong. It did take a dip. That's somewhat to be expected, given the strong production quarters we've had. As we talk about internally, we have folks that are running hard to catch something. When they catch it, they run hard to get it closed. And during that period of time, they get in what we sometimes refer to as bunker mentality. So they're closing the transaction and not looking for the next one. But I was really excited to see that after we took a dip in the pipeline that it bounced back up to 1.8 billion, which I feel is a really strong number. If you go back 12 months ago, I think we were running about a billion dollars typically on a pipeline. So we're strong. We feel good about, you know, Purple generally speaking, we're still seeing 25 to 30% of the pipeline moving through to a success rate. You know, sometimes that gets a little bit skewed by time, because some of these have taken a while. They've been in the pipeline of also, but we feel good that the one thing that I was out there is is especially as you get towards a year in, there may be some unknown payoffs that that occur, but we still feel pretty good about our. or guidance number today.

Got it. That's helpful. And then based on the current pipeline, are there segments that you're seeing a particular strength in? And just what's the overall pricing competition dynamic like? I feel like most things this quarter are just talking about how intense competition is. So are you seeing that from y'all's perspective?

Yeah, there's a lot of competition out there, both from the CRE standpoint and C&I. So we're not immune to it. We are being disciplined in our pricing approach. And generally speaking, since the second quarter, pricing hasn't changed a lot. We're still looking at, you know, if it's a fully funded transaction, those are, and it's a high quality, You're getting down to a 2% spread over SOPA. We have seen some banks willing to go below two. We slightly dipped below two on one transaction, but we were also selling a swap as part of the deal that helped get us back to what we would consider kind of the floor for us. On the construction side, we're still seeing construction debt that is moving at somewhere between as low as 250, but generally speaking somewhere around 265 to 275.

Got it. And then lastly, as it pertains to the securities restructure, you know, part of those proceeds going to loan growth, to the extent that loan growth remains strong in the future, should we expect additional restructures to sort of help fund that growth?

Well, two things. You know, I spoke to the fact that this restructuring provided us even more flexibility as we have a lot of securities now that are at, you know, gains. And, you know, so we're in a position now that we can fund loan growth, increase spread, and actually sell, you know, sell securities near our book or, you know, above it. If the market allows and conditions are such that it makes sense to do some additional restructuring available for sales portfolio, we're certainly going to take a look at it. As Julie mentioned, you know, the market's improved quite a bit. Spreads have also tightened there quite a bit, especially in the muni market. So, you know, we're going to continue to look at that carefully. I would say most of the heavy lifting in the AFS portfolio has been done, but there is still some that we will take a look at and make decisions on as appropriate.

Got it. Well, thanks for taking my questions, and Lee, congrats on the upcoming retirement, and Keith, congrats on stepping into the role. Thank you. Thank you. Appreciate it.

Your next question comes from the line of Jordan Gent with Stevens. Please go ahead.

Hey, thanks for taking my question. I just had a question on the buyback. So, you recently increased the authorization and just kind of what should we expect with, you know, buyback activity going forward?

Yes. So, we did increase, as you mentioned, The last time we increased was back in July of 2030, and since that date we've purchased 868,000 shares, give or take a few. And so I think we're going to approach it the same way that we historically have. You know, when we see the price dip and it's opportunistic, you know, we will be out there actively purchasing shares. You know, we've historically purchased open market shares and then done several 10b51 plans, you know, at the quarter ends. So we did not do that this last quarter. But that's pretty much our strategy. We just try to, we want to have it in place when it's opportunistic to purchase. So no strategy just to be terribly active at any one point, but just to watch the market.

Okay, thanks. And then Um, just kind of going into the fee income. So it looks like trust fees have just had a steady climb over the last year. Kind of where you guys see that going, um, over, you know, maybe the next year or so, and as a, as a portion of the income.

We, we, uh, you know, we have a really good team in place that, uh, we've put in place over the last two years and, um, they're having a lot of impact, uh, especially here in east Texas. And so we anticipate seeing double-digit revenue growth in that area next year as well. So, you know, we were expecting, you know, continued success. They're extremely busy and, you know, they're taking on new clients all the time. So, you know, that's an area of non-interest income that we're really encouraged about and excited about.

And to add to that, one of the missing things for us right now is to really go into the metro markets with the wealth management. So we are exploring that, and we think we're going to make some good headway in 2026 on that. We may not attack each metro market. And with the same vigor, but we've got a pretty good footprint and footwork that I think could be a good support and starting point for wealth management in the metro market. So I'm really excited about that in the future.

Perfect. And then maybe just one more question. How many rate cuts are you guys assuming through year end and maybe even into 26?

I'm pretty certain that next week we'll see movement, potential that there's another move, the last Fed meeting this year. Next year, I'm anticipating probably at least two cuts. It really just depends. what the Fed determines. And of course, we're going to have new leadership mid next year. And my guess is that the new leadership is going to be more on the side of cutting additionally based on what the executive branch is saying. So, you know, it could be more than two cuts next year. A lot of it's probably going to depend on inflation and on the and the employment and the inflation numbers came in came in nice this morning, you know, lower than expectations, but it's still above their 2% target. Now, whether they change that with new Fed leadership, you know, that's up in the air. Okay, thank you.

Again, if you would like to ask a question, press star 1 on your telephone keypad. Your next question comes from the line of Anya Pelshaw with Hubdy Group. Please go ahead.

Hey, I'm asking questions on behalf of Brett today. Was hoping you could talk about the growth in DDA if it was somewhat seasonal or if you think it was sticky.

That's right.

So yeah, I guess the answer is that it's not necessarily seasonal, what we were just talking internally. So through some enterprise business, we have picked up some large depositors through that process. And so we do think that's going to moderate probably in the fourth quarter. Some of that came in through one particular customer that is ramping up sales right now and getting deposits. So we do think that'll moderate some through the end of the fourth quarter.

Okay, thank you. And you've talked about the loan pipeline, but I guess I was hoping you could expand on the growth so far from the new lenders.

So out of the Houston market, is that what you're referring to?

Yeah.

so we are we're seeing good positive traction um one thing that just to keep clear we've had four new hires in that market that are specific kind of to cni business and um one of them came in i think december 30th of this past year and we had another one add in the First quarter right towards the end of the first quarter and then we've had one added at the end of the second quarter and then we have another one added right in the July early August. So we haven't been able to see truly a full year of production yet, but it's been positive. They are gathering deposits as well as loan growth right now. The C&I uptick, one thing we've talked about is really pushing our mix on C&I. Right now, we are, at the beginning of the year, we were about 15% of our book is C&I. We have seen a slight uptick. We're about 16% today. And some of that growth is actually coming out of our existing East Texas market. So we're excited about what's happening in Houston, but You know, we've long been doing C&I in the East Texas and Southeast Texas markets, and we're seeing some good traction with that.

Overall in Houston, we've seen really positive loan growth, you know, probably in the 15% range this year.

And so that's coming on the back of CRE lending.

This completes our question and answer sessions. I will now turn the call back to Lee Gibson, CEO, for closing remarks.

Thank you. As alluded to earlier, this is going to be my final earnings call as I'm going to be retiring at the end of the year. So I wanted to take this opportunity to thank the analysts at Cover Southside for your thoughtful questions, keen insight, and your overall excellent coverage. I also want to thank our shareholders for your continued support and encouragement. And I want to let you know how excited I am about Southside's future as Keith Donahoe takes the helm, assisted by CFO Julie Schamberger and an extremely capable senior management team. Thank you, everyone, for joining us today. We appreciate your interest in Southside Bank shares, along with the opportunity to answer your question. We look forward to reporting fourth quarter results to you during our next earnings call in January. This concludes the call. Thank you.

Ladies and gentlemen, thank you all for joining you may now disconnect.