Southside Bancshares, Inc.

Hello, everyone. Thank you for joining us and welcome to the Southside Bank Shares Inc. Fourth Quarter and Year-End 2025 Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, please press star 1 again. I will now hand the call over to Lindsay Bale, SVP.

Thank you, Alexandria. Good morning, everyone, and welcome to Southside Bank Share's fourth quarter and year-end 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 maturely change our current forward-looking assumptions are described in our earnings release in our Form 10-K. Joining me today are President and CEO Keith Donahoe and CFO Julie Shanberger. First, Keith will start us off with his comments on the quarter, and then Julie will give an overview of our financial results. I will now turn the call over to Keith.

Thank you, Lindsay, and welcome to today's call. Early in the fourth quarter, market conditions allowed us to continue the partial restructuring of our available for sale securities by selling approximately 82 million of lower yielding long duration municipal securities with a combined taxable equivalent yield of 2.6% and generating a $7.3 million net loss. All sales were completed at the end of October with net proceeds together with additional portfolio cash flows and a $49.7 million sale of a T-bill, reinvested in various low premium, primarily 5.5% coupon agency MBS with an average yield of 536. Similar to the third quarter security sales, we believe the fourth quarter sales enhances future net interest income while providing additional balance sheet flexibility as we grow. We estimate the payback on the third quarter security sales to be less than three and a half years. Overall, we experienced a $1.5 million length quarter increase in net interest income, resulting primarily from lower funding costs and moderate loan growth. Our net interest margin expanded to 298. And we expect additional net interest margin expansion resulting from the redemption of approximately $93 million of score-dated debt on February 15, 2026. Fourth quarter new loan production totaled approximately $327 million, compared to third quarter production of approximately $500 million. Of the new loan production, $215 million funded during the quarter, with the unfunded portion of this quarter's production expected to fund over the next six to nine quarters. Excluding regular amortization and line of credit activity, fourth quarter payoffs totaled approximately $164 million. While higher than the third quarter payoffs of $117 million, it was the second lowest quarter for payoffs during 2025. Third quarter CRE payoffs included 28 loans secured by industrial, retail, multifamily, medical office, general office, and commercial land. Most of these were concentrated in five industrial properties and eight retail properties. Outside of CRE payoffs, we did exit a C&I participation during the quarter due to pricing well below our comfort zone. Our loan pipeline dipped to $1.5 billion mid-quarter, but rebounded after the first of the year to just over $2 billion today. The pipeline is well balanced with approximately 42% term loans and 58% construction or commercial lines of credit. This mix is unchanged from the third quarter. CNI-related opportunities represent approximately 20% of today's total pipeline, That's down slightly from third quarter's 22%. Credit quality remains strong. During the fourth quarter, non-performing assets increased $2.6 million, primarily related to a $2.4 million loan secured by a small residential condo project, but remained concentrated in the previously disclosed 27.5 million multifamily loan we moved into the non-performing category during the first quarter of 25. Despite this loan not paying off in the fourth quarter, we remain optimistic that the borrower will finalize their refinance within the next two weeks. As a percentage of total assets, non-performing assets remain low at 0.45%. 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. Overall, the markets we serve remain healthy, and the Texas economy is anticipated to grow at a faster pace than the overall projected U.S. growth rate. With that, I'll turn the call over to Julie.

Thank you, Keith. Good morning, everyone, and welcome to our fourth quarter and year-end call. For the fourth quarter, we were pleased to report net income of $21 million, an increase of $16.1 million at 327.2%. Diluted earnings per share were $0.70 for the fourth quarter, an increase of $0.54 per share-linked quarter. We reported net income of $69.2 million for 2025, a decrease of $19.3 million, or 21.8%, and diluted earnings per share of $229 compared to $291 for 2024. The decrease was driven by the restructuring of the AFS securities portfolio. As of December 31st, loans were $4.82 billion, a linked quarter increase of $52.7 million, or 1.1%. The linked quarter increase was driven by an increase of $29 million in construction loans, $24.1 million in commercial real estate loans, and $14.8 million in commercial loans. partially offset by decreases of 6.6 million in municipal loans and 5.7 million in one to four family residential loans. The average rate of loans funded during the fourth quarter was approximately 6.6%. As of December 31st, our loans with oil and gas industry exposure were 71 million or 1.5% of total loans compared to $70.6 million or 1.5% linked quarter. Non-performing assets remain below at 0.45% of total assets as of year end. Our allowance for credit losses decreased to $48.3 million for the linked quarter from $48.5 million on September 30th. Linked quarter, our allowance for loan losses as a percentage of total loans decreased one basis point to 0.94% at December 31st. During the fourth quarter, we continued restructuring a portion of our AFS securities portfolio that included sales of approximately $82 million of lower yielding, longer duration municipal securities. Purchases of $373 million, primarily mortgage-backed securities, occurred during the fourth quarter to replace securities sold during the restructuring of the AFS portfolio during the third and fourth quarters. The purchases more than offset sales, maturity, and principal payments, resulting in an increase in the securities portfolio of $147.9 million, or 5.8%, to $2.70 billion at December 31st, when compared to $2.56 billion on September 30th. The increase for the linked quarter brought the total securities portfolio to a level consistent with the first and second quarters of 2025. As of December 31st, we had a net unrealized loss in the AFS securities portfolio of $767,000, a decrease of 14.7 million compared to 15.4 million last quarter. The improvement occurred primarily due to the restructuring of the AFS portfolio and an improvement in the remaining AFS portfolio. There were no transfers of AFS securities during the fourth quarter. On December 31st, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $788,000 compared to $905,000 linked quarter. This unrealized gain more than offset the unrealized losses in the AFS securities portfolio. As of December 31st, the duration of the total securities portfolio was 7.6 years compared with 8.7 years at September 30th, and the duration of the AFS portfolio was 4.8 years compared to six and a half years on September 30th. At quarter end, our mix of loans and securities the slight shift compared to 65% and 35%, respectively, last quarter. Deposits decreased 96.4 million, or 1.4% on a linked quarter basis, due to a decrease in broker deposits of 233.5 million, partially offset by an increase of 40.8 million in retail deposits and an increase of 86.3 million in public loan deposits. On February 15th, we will redeem our $93 million of subordinated notes due in 2030. The rate on the notes adjusted during the fourth quarter to a floating rate of 7.51%. Our capital ratios remain strong with all capital ratios well above the threshold for well-capitalized. Liquidity resources remain solid with $2.78 billion in liquidity lines available as of December 31st. And we purchased 369,804 shares of our common stock at an average price of $28.84 during the fourth quarter. There have been no purchases of our common stock since December 31st. And we have approximately 762,000 shares remaining authorized for repurchase. Our tax equivalent net interest margin was 2.98%, an increase of four basis points on a linked quarter basis up from 294 at the end of the quarter. Our tax equivalent net interest spread for the same period was 2.31%, an increase of five basis points from 2.26%. The increase in the net interest margin and net interest spread is primarily due to lower funding costs. For the three months into December 31st, we had an increase in net interest income of $1.5 million or 2.7% compared to the linked quarter. Non-interest income, excluding the net loss on the sale of AFS securities, increased 494,000 or 4% for the linked quarter. primarily due to an increase in deposit services, bully income, and brokerage services income, partially offset by a decrease in other non-interest income. Other non-interest income decreased primarily due to a decrease in swap fee income. Non-interest expense was $37.5 million for the fourth quarter, consistent with the last quarter with a slight decrease of $57,000. Our fully taxable equivalent efficiency ratio decreased to 52.28% as of December 31st from 52.99 as of September 30th, primarily due to an increase in total revenue. We have budgeted a 7% increase in non-investment. primarily related to salary and employment benefits, software expense, professional fees, retirement expense, and a one-time charge of approximately $800,000 in connection with the redemption of the subordinated notes on February 15th. During 2025, we budgeted for several software initiatives that did not materialize, and we have allocated those into the 2026 budget. For the first quarter of 2026, we anticipate non-interest expense of approximately $39.5 million. We recorded income tax expense of $3.8 million compared to $189,000 in the prior quarter, an increase of $3.6 million driven by the loss on sales of AFS securities in the third quarter. Our effective tax rate was 15.3%. to 3.7% last quarter, and we are currently estimating an annual effective tax rate of 17.4 for 2026. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.

We will now begin the question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. To withdraw your question, press star 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Woody Lay with KBW. Your line is open. Please go ahead.

I believe you just called out 7% expense growth is what you're budgeting in 2026. I was just hoping to get a little more detail and exactly how much of the incremental expense bill is related to these software projects. And could you also talk about the hiring strategy and how that's built into the budget? Thanks.

Yeah, I'll hit it high level and Julie can provide some details. So I don't have the breakdown in front of me on the budget, It's bents between software and FTEs. But what's really happening is on the software front, we are looking at moving our core to Outlink. And so we're currently hosting it on-premise, and we're going to take it off-premise. In the long run, we anticipate that to create some efficiencies for us. as we move into the expanded growth mode and or, you know, if we make an acquisition, it's going to make that a more efficient prospect for us. So that's part of it. We're also starting an initiative to build out a data platform, which we do believe will give us over time much more insight into the raw data that we have in multiple systems right now. Those are the two biggest components of the software spin from an FTE standpoint. Some of this is we hope will make us more efficient in the long run as well because we are changing some of our processes within the loan origination group, and we are kind of wearing everybody thin right now. We're pumping high volume of loan growth through a system that probably wasn't ready for it yet. So we are making some personnel changes and shifting people around, which means also adding some staff in certain situations. So that's a bulk of what we're doing. Julie, if you've got any additional detail.

I was just going to point out on the FTEs, since December of 23, our FTEs have been down about 6% actual number of FTEs. So that speaks somewhat to Keith's comments, you know, about adding some staff. Also, as far as numbers in the software and data processing, we've got about 2.3, 2.4 million additional in the budget over 2025 spend. So I don't know if that answers your question, Woody, on the software and data processing, which is where combined how it's reported in all of our filings in the 10Q and 10Ks and earnings.

Got it. That's a really helpful color. I appreciate that. Maybe a follow-up.

You mentioned – I was just going to say, you know, the $39.5 million that I forecasted, if you will, for the first quarter, you know, doesn't reflect a full 7% as, you know, these are not all day one increases. You know, we expect them to come in, you know, over the course of the year. So, just wanted to add that color as well.

Yeah. Appreciate that. It may be a follow-up. You mentioned, you know, the course switch might help with M&A down the road. And just wanted to get your thoughts on, you know, just given the deal activity we've seen recently in Texas, how how you all are thinking about M&A for Southside in this current environment.

Yeah, it's still part of the strategy. We are open to discussions. Again, as I've told a lot of folks, we're not going to acquire just to acquire. We're going to be strategic. If it's filling out a geography for us and or picking up You know, we've got, as an example, we've got only a loan production office in Dallas. If we can find the right target in Dallas, that would be a good expansion for us because it would help us fill out the Metroplex. Same thing in Houston. We've got effectively a loan production office. We are opening a new retail location in the woodlands. which should be opening in the next 60 days. But it's those target areas, and even in Austin with only two locations, if the right opportunity comes around, we are discussing those situations and are open to it. I hope that helps.

Yep, that definitely does. All right, that's all for me. Thanks for taking my questions.

Thank you.

Thanks, Woody.

Your next question comes from the line of Michael Rose with RJ. Your line is now open. Please go ahead.

Hey, good morning, everyone. Thanks for taking my questions. Maybe we can just start on the margin. Obviously, the balance sheet restructure, the securities restructuring was smaller this quarter than last, but you are going to redeem the sub debt, as you mentioned. just with those puts and takes and loan pricing competition, things like that, can you just give us some expectations on maybe what the first quarter margin could look like? Thanks.

Yeah, it is going to be positive, although it will be muted. I think we'll see a bigger pickup as we move through the rest of the year. We do have a one-time charge coming in the first quarter for the redemption.

To that, Nick.

But directionally, it's going to be positive and pick out towards the end of the year.

From the standpoint of the sub-debt, you know, it repriced in the middle of the fourth quarter, and it's going to go away in the middle of the first quarter. So, strictly with respect to the $93 million, it's going to have about the same impact in the first quarter as it did in the fourth. those sources of funding are replaced in the second quarter we'll certainly see you know we expect for sure to see some improvement just with respect to that one piece of funding if that makes sense okay yep no that's uh thanks for the clarification julie i appreciate it um and then maybe as we just think about loan growth um you know appreciate the comments at the beginning of the call just around

some of the production and pay down activity. I know pay downs are really difficult to forecast, but just given some of the investments that you've made in people and opening up new locations over the past few years, should we think about a higher level of production? It seems like the environment's pretty conducive for loan growth here. Just wanted to get a sense for how we should kind of think about at least on the production side as we move through the year. Thanks.

Yeah, you know, from a production standpoint, I anticipate us to probably exceed 25. But we do have a large number of payoffs that are in our forecast, some of which are these construction projects that have stayed on our books longer than what they normally would as these projects are finished and stabilized occupancy comes around. And so we've got a high number of those maturities happening this year. So We anticipate some of those moving out into the permanent market and or sales. So, those are some of the headwinds that we're still facing. I'm excited because I was a little concerned that the pipeline dropped to $1.5 billion in the middle of the fourth quarter. But we have rebounded strongly, and we're back up over $2 billion now. Over half of that pipeline is in the very early stages, which means it hasn't run through our credit screening process, but they are starting to move through. But we do have a significant number in the closing process right now. So I would love to tell you I'm super optimistic that we may beat our numbers, but right now it's too early in the year to make that call. But we are very active. across all of the markets. And I do anticipate it being a good year for us on the long growth side.

I appreciate it, Keith. And maybe just one final one for me. You know, obviously, the buyback stepped up a little bit this quarter. The restructuring is also a little bit smaller than the third quarter as well. But how should we think about kind of the pace of buybacks from here? You know, you guys all have decent... Capital appreciation as we kind of move through the year. Stock is still relatively attractive on a tangible basis. Just wanted to get your thoughts, updated thoughts on the buyback. Thanks.

I think from just a strategic standpoint, we're going to continue to be opportunistic with it. What may impact that is if there is an acquisition in the future. But at the same time, those are probably opportunities When you look at capital strategy, those are, you know, first we've got the sub-debt retirement is obviously the number one capital strategy. Close behind that is stock buyback and then M&A. So we're, you know, all of that's going to work together, and one of them may impact the other one, but we'll see how that goes this year.

All right. I'll step back. Thanks for taking my questions.

Your next question comes from the line of Brett Rabaton with Hold. Your line is now open. Please go ahead.

Hey, good morning, Keith and Julie. Wanted to start off on just a fee income outlook from here. And it seems like brokerages had some pretty good trends. Was just curious if there were Any drivers you were specifically thinking about for 26 in terms of fee revenues? And then just any thoughts on the outlook for 26?

Sure, Mike. I'm sorry. I'll take that one. We are expecting an increase in a pretty nice increase in our fee income. We've put in our budget about $1.5 million for an increase. That's what we're budgeting. And a lot of it does come, most of that does come in the trust income of fees. We've, you know, I think we told you on the last couple of quarters that we have picked up, you know, some additional talent in that area. And we've built up a really strong team that we're excited about and are even looking to increase that team into the Fort Worth, North Texas area. Right now it's pretty much, well, it is completely in East Texas and Southeast Texas areas. areas of our market areas but we are looking to increase it in the North Texas area so we have budgeted additional fees there and looking for some additional increase in just treasury fees And as well in the brokerage services because we have seen, you know, some nice pickup in those two areas over the last year. And that's where most of the increase is coming from.

Okay. That's helpful, Julie. And then wanted to just go back to the securities portfolio and just, you know, are all the actions that you guys have anticipated played out from here? Is there anything else that you might want to do? Or is basically anything from here would be more opportunistic relative to rates changing?

Yeah. For us, we're going to continue to be opportunistic with it. Sitting here today, rates aren't in the right position for us to continue to make moves. If they do and we're watching, it's a daily process for us. And so, if we're seeing the right signs, we will make those moves. But right now, we're in a holding pattern, if you will.

Okay. And then maybe lastly, just you've talked a little bit about it on, you know, hirings. You know, there's been quite a bit of M&A activity in Texas. Was just curious, Keith, any, you know, any thoughts on that disruption?

that's an opportunity for you you know maybe in the dallas market fort worth market um with either you know people or clients is there anything that you're specifically targeting related to disruption yeah we're seeing opportunity both from the people on the people side as well as customer side um we've been working on a couple of cni opportunities in the metroplex that you know are sort of being disrupted because of the acquisitions we're seeing. Obviously, the transaction that was announced yesterday in Houston, I think we could see some activity out of that, but it's too early to tell that we have our antenna up and we are looking, and we'll be looking for both customer displacement as well as employee displacement. So, yeah, we're active in that, and we'll continue to be so.

Okay, great. Thank you.

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

Good morning. Thanks for taking my question. I just wanted to ask a question on M&A, kind of going back to that. How do you guys think about that as far as the target asset size and especially, in relation to crossing $10 billion?

Yeah, I mean, it still remains that we aren't going to buy something in the $2 billion category. We would be below, you know, one, I mean, one and a half, roughly. But if there's an opportunity that can spring us over that in a significant way, we will look at that as well. But as you know, in the state of Texas, when you start getting into the $3 to $5 billion range, those are fewer. So there's more opportunities in the lower than $2 billion market. And we're looking, and if we can get one done that gets us close, then that helps us get to the point that we can spring over 10 with a second transaction. So we're, you know, it's a little bit of a puzzle to put together, but we are We're looking at opportunities and continue down the same strategy that we've had in the last couple of years on that topic.

Okay, thank you. And then maybe just one follow-up question for Julie on the operating expense for that 1Q26 number, the 39 and a half, does that include that one-time charge or is that excluding that one-time charge of $800,000?

Yes, Jordan, it will include it.

Okay. Thanks for taking my question.

Thank you.

There are no further questions at this time. I will now turn the call back to Keith Donahoe, President and CEO, for closing remarks.

Thank you, everyone, for joining us today. We appreciate your interest in Southside Bank shares and the opportunity to answer your questions. We're optimistic about 2026 and look forward to reporting first quarter results during our next earnings call in April. Thank you.

This concludes today's call. Thank you for attending. You may now disconnect.