Southside Q3 2025 Earnings Call Transcript

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DATE

Friday, October 24, 2025 at 12:00 p.m. ET

CALL PARTICIPANTS

President and Chief Executive Officer — Lee Gibson

Executive Vice President and Chief Lending Officer — Keith Donahoe

Senior Executive Vice President and Chief Financial Officer — Julie N. Schamberger

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RISKS

Net Loss on Securities Sale — The company recorded a realized net loss of $24.4 million from selling lower-yielding, long-duration available-for-sale municipal and mortgage-backed securities in Q3 2025.

Decreased Net Income — Net income dropped to $4.9 million, a decline of $16.9 million or 77.5% in Q3 2025.

Non-Performing Assets — Non-performing assets rose to $2.7 million in Q3 2025, remaining concentrated in a single $27.5 million multifamily loan that was moved to non-performing status earlier in 2025.

TAKEAWAYS

Securities Portfolio Repositioning -- Sold $325 million of lower-yielding securities, booked a net loss of $24.4 million, and reinvested proceeds into higher coupon mortgage-backed and municipal securities in Q3 2025.

Loan Growth -- Loans increased by $163.4 million, reaching $4.77 billion, with $81 million of growth booked on September 30, Q3 2025.

New Loan Production -- New loan production totaled $500 million, up from $290 million last quarter; $281 million of new loans were funded in Q3 2025.

Net Interest Income -- Net interest income rose $1.45 million, a 2.7% increase compared to the linked quarter.

Net Interest Margin -- Tax-equivalent net interest margin was 2.94% in Q3 2025, down one basis point from last quarter; management expects a slight increase in Q4 2025.

Allowance for Credit Losses -- Allowance increased to $48.5 million, but the ratio to total loans fell to 0.95% from 0.97% last quarter in Q3 2025.

Deposits -- Deposits rose $329.6 million, or 5% on a linked quarter basis, driven by an increase in brokered deposits of $288.6 million and a $137.1 million rise in commercial and retail deposits, offset by a $96.1 million decline in public fund deposits.

Subordinated Notes Issuance -- $150 million of 7% fixed-to-floating subordinated notes were issued in Q3 2025, with expected full quarter impact in Q4 2025, and $92.1 million of existing notes set to reprice to floating in mid-November 2025.

Loan Pipeline -- The pipeline rebounded to $1.8 billion after a mid-quarter dip, with a typical pull-through rate of 25%-30% as of Q3 2025.

Securities Portfolio Metrics -- The portfolio fell to $2.56 billion, down $174.2 million or 6.4% in Q3 2025, reflecting restructuring and sales.

Duration Shift -- Total securities portfolio duration increased to 8.7 years from 8.4 years, while AFS duration rose to 6.5 years from 6.2 years in Q3 2025.

Efficiency Ratio Improvement -- The fully taxable equivalent efficiency ratio improved to 52.99%, down from 53.70% last quarter due to revenue gains in Q3 2025.

Buyback Authorization -- Repurchased 26,692 shares in Q3 2025 at an average price of $30.24. Authorization was increased to 1.1 million shares for future repurchase activity as of October 16, 2025.

Effective Tax Rate -- The effective tax rate was reduced to 3.7% in Q3 2025 compared to 17.8% in Q2 2025, driven by the securities sale loss.

SUMMARY

Southside Bancshares (NYSE:SBSI) completed a major restructuring of its available-for-sale securities portfolio in Q3 2025, recording a substantial net loss but positioning itself for higher net interest income through future reinvestment. Deposit and loan growth were both significant in Q3 2025, with the loan pipeline rebounding to $1.8 billion and new loan funding totaling $281 million. The issuance of new subordinated debt will further impact net interest margin in Q4 2025, along with the anticipated repricing of outstanding notes. The composition of non-interest income improved in Q3 2025, driven by increased trust fees and management's forecast of double-digit revenue growth in that segment for the next year. Management is monitoring balance sheet flexibility for further restructuring opportunities and confirmed continued discipline amid intense loan pricing competition. Leadership transition was formally noted, with the CEO set to retire year-end, elevating Keith Donahoe to chief executive and highlighting a stable executive team.

Lee Gibson said, "Net interest margin in the fourth quarter, I expect to be up slightly." and referenced the full effect of the recent restructuring and funding mix changes.

The company closed funding on $81 million in loans on the last day of Q3 2025, indicating that much of the reported loan growth is not yet fully reflected in average balances.

Non-performing assets remain concentrated in a $27.5 million multifamily loan, and management continues to expect resolution before the end of the year.

Keith Donahoe reported that new lender hires in the Houston market are "gathering deposits, as well as loan growth," with the C&I segment rising from 15% to 16% of the loan book since the start of 2025, and some of that growth coming from the existing East Texas market.

Management plans to remain opportunistic in executing share repurchases, with no fixed schedule announced and purchases contingent on "opportunistic" market conditions.

Strategic M&A remains on the agenda, with "a few institutions" according to Lee Gibson identified as potential acquisition targets, and management expects disruption from other bank deals to provide hiring and market share opportunities.

INDUSTRY GLOSSARY

Available-for-Sale (AFS) Securities: Debt or equity securities that a bank may sell in response to changes in interest rates, liquidity needs, or other factors, valued at fair market prices on the balance sheet.

SOFR: Secured Overnight Financing Rate, a benchmark interest rate for dollar-denominated derivatives and loans, replacing LIBOR for variable and floating-rate instruments.

C&I (Commercial and Industrial): Loans made to businesses for purposes other than real estate purchase, typically used for working capital or equipment financing.

Full Conference Call Transcript

Lee Gibson: Thank you, Lindsey, and welcome to today's call. I'm going to start by discussing the repositioning of our available-for-sale (AFS) 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 6.0% coupons and, to a lesser extent, Texas municipal securities with coupons ranging from 5% to 5.75%.

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 notes 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 notes 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. Linked quarter, non-interest income continued to perform well, and loans increased to $163 million, with $81 million of that growth occurring on September 30.

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 Donahoe.

Keith Donahoe: Thank you. Third quarter new loan production totaled approximately $500 million compared to the second quarter production of $290 million. Of the new loan production, $281 million approximately funded during the third quarter, including the $81 million Lee referenced, 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, multifamily, 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 C&I relationship, which originated in our East Texas market. Credit quality remains strong.

During the third quarter, non-performing assets increased to approximately $2.7 million, but remained concentrated in the previously disclosed $27.5 million multifamily loan that was moved into the non-performing category during the first quarter.

We continue to expect this loan to be refinanced or right-sized before the end of the year. Overall, as a percentage of total assets, non-performing assets is at 0.42%. With that, I will turn the meeting over to Julie.

Julie N. Schamberger: Thank you, Keith. 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%. Diluted earnings per share were $0.16 for the third quarter, a decrease of $0.56 per share linked quarter. As of September 30, loans were $4.77 billion, a linked quarter increase of $163.4 million or 3.5%. The linked 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 30, 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 30. Our allowance for credit losses increased to $48.5 million for the linked quarter from $48.3 million on June 30. Our allowance for loan losses as a percentage of total loans decreased to 0.95% compared to 0.97% at June 30. Our securities portfolio was $2.56 billion at September 30, a decrease of $174.2 million or 6.4% from $2.73 billion last quarter due to the partial restructuring of the available-for-sale (AFS) securities 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 30, 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 30, 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 30, the duration of the total securities portfolio was 8.7 years compared with 8.4 years at June 30.

The duration of the available-for-sale (AFS) securities portfolio was 6.5 years compared to 6.2 years at June 30. 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 brokered 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 14, 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 lines available as of September 30. 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 30. Our tax equivalent net interest margin was 2.94%, a decrease of one basis point on a linked quarter basis, down from 2.95%. Our tax equivalent net interest spread for the same period was 2.26%, also a decrease of one basis point from 2.27%.

For the three months ending September 30, 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 available-for-sale (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 30 from 53.70% as of June 30, 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 available-for-sale (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.

Operator: 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.

Michael Edward Rose: 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 kind of on the last day of the quarter, 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.

What your rate expectations are. Thanks. You know.

Lee Gibson: Net interest margin in the fourth quarter, I expect to be up slightly. We have the subordinated notes costs in the third quarter that will have the full impact in the fourth quarter. 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. We'll have the full impact of the $325 million of security sales restructuring that will take effect, along with a repricing of over $600 million of certificates of deposit that we anticipate will have an average savings of around 34 basis points.

The only headwind to the net interest margin in the fourth quarter is, as I mentioned, the full impact of the 7%. We also have the repricing of the $92 million that Julie Schamberger mentioned, which today would be a rate of $7.52 compared to the current rate of $3.875.

Overall, I expect the net interest margin to be up slightly. I expect net interest income to improve nicely. I think we're set up for a lot of positive things in the future when it comes to net interest income and the net interest margin. I don't know if that gives you a flavor for what we're looking at.

Michael Edward Rose: Yeah, it's helpful. There's just some, obviously, a good amount of moving parts here. I appreciate the.

Lee Gibson: There's a bunch.

Michael Edward Rose: Appreciate the color.

Lee Gibson: Yep.

Michael Edward Rose: Maybe just moving on. We've seen some deal activity here in Texas over the past couple of months. I know you guys have kind of previously stated wanting to potentially do a deal yourselves. Just wanted to see if there's any kind of update there in terms of what you may be looking for. Maybe separately, if there's some opportunities for hiring in light of those recent deals or maybe a market share gain from clients. Thanks.

Lee Gibson: What we're looking at really hadn't changed. There are a few institutions that we have some interest in that potentially might be for sale. In terms of hires, that is something we're looking at, and we've made a few hires. With some of the disruption that's occurring, especially with some of the larger out-of-state banks buying some of the less than $10 billion banks here in Texas, there's definitely been some disruption. We hope to jump on that opportunity and make some additional hires there.

Michael Edward Rose: Okay, great. I'll step back. Lee, congratulations on the announcement.

Lee Gibson: Well, thanks.

Michael Edward Rose: I look forward to seeing you all soon. Thanks.

Lee Gibson: All right. Thank you.

Operator: Your next question comes from the line of Wood Lay with KBW. Your line is open.

Wood Lay: 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. 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.

Keith Donahoe: Yeah, you know, the 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. During that period of time, they get in what we sometimes refer to as bunker mentality. They're closing the transaction and not looking for the next one. I was really excited to see that after we took a dip in the pipeline, 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 $1 billion typically on a pipeline. Looks strong. We feel good about, you know, pull-through.

Generally speaking, we're still seeing 25% to 30% of the pipeline moving through to a success rate. Sometimes that gets a little bit skewed by time because some of these have taken a while. They've been in the pipeline a while. We feel good. The one thing that's always out there is, especially as you get towards year-end, there may be some unknown payoffs that occur, but we still feel pretty good about our guidance number today.

Wood Lay: Got it. That's helpful. Based on the current pipeline, are there segments that you're seeing a particular strength in? What's the overall pricing competition dynamic like? I feel like most banks this quarter are just talking about how intense competition is. Are you seeing that, from y'all's perspective?

Keith Donahoe: Yeah, there's a lot of competition out there, both from the commercial real estate standpoint and C&I. We're not immune to it. We are being disciplined in our pricing approach. 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 know, you're getting down to a, you know, 2% spread over SOFR. We have seen some banks willing to go below 2%. We slightly dipped below 2% 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, you know, as low as $250, but generally speaking, somewhere around $265 to $275.

Wood Lay: Got it. Lastly, as it pertains to the securities restructure, you know, a 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?

Lee Gibson: Two things. I spoke to the fact that this restructuring provided us even more flexibility, as we have a lot of securities now that are at gains. We're in a position now that we can fund loan growth, increase spreads, and actually sell securities near our book or above it. If the market allows and conditions are such that it makes sense to do some additional restructuring in the available-for-sale (AFS) securities portfolio, we're certainly going to take a look at it. As Julie Schamberger mentioned, the market's improved quite a bit. Spreads have also tightened there quite a bit, especially in the muni market. 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.

Wood Lay: Got it. Thanks for taking my questions. Lee, congrats on the upcoming retirement. Keith, congrats on stepping into the role.

Keith Donahoe: Thank you.

Lee Gibson: Thank you. Appreciate it.

Operator: Your next question comes from the line of Jordan Gent with Stephens. Please go ahead.

Jordan Ghent: Hey, thanks for taking my question. I just had a question on the buyback. You recently increased the authorization. What should we expect, with, you know, buyback activity going forward?

Julie N. Schamberger: Yes. We did increase, as you mentioned. The last time we increased was back in July of 2023. Since that date, we've purchased 868,000 shares, give or take a few. I think we're going to approach it the same way that we historically have. When we see the price dip and it's opportunistic, we will be out there actively purchasing shares. We've historically purchased open market shares and then done several 10(b)(5)(1) plans at the quarter ends. We did not do that this last quarter. That's pretty much our strategy. We just try to, we want to have it in place when it's opportunistic to purchase.

No strategy just to be terribly active at any one point, but just to watch the market.

Jordan Ghent: Okay. Thanks. Just kind of going into the fee income, it looks like trust fees have just had a steady climb over the last year. Kind of where do you guys see that going, over, you know, maybe the next year or so and as a portion of the income?

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

Keith Donahoe: Yeah. To add to that, Lee, you know, one of the missing things for us right now is to really go into the metro markets with the wealth management. 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 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. I'm really excited about that in the future.

Jordan Ghent: Perfect. Maybe just one more question. How many rate cuts are you guys assuming through year-end and maybe even into 2026?

Lee Gibson: I'm pretty certain that next week we'll see movement. There's 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. Of course, we're going to have new leadership mid-next year. 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. It could be more than two cuts next year. A lot of it's probably going to depend on inflation and on the employment. The inflation numbers came in nice this morning, lower than expectation, but it's still above their 2% target.

Now, whether they change that with new Fed leadership, that's up in the air.

Jordan Ghent: Okay, thank you.

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

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

Keith Donahoe: Sorry. Yeah, I guess the answer is it's not necessarily seasonal. We were just talking internally. Through some enterprise business, we have picked up some large depositors through that process. 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. We do think that'll moderate, some, through the end of the fourth quarter.

Anya Pelshaw: Thank you. You've talked about the loan pipeline. I was hoping you could expand on the growth so far from the new lenders.

Keith Donahoe: Out of the Houston market, is that what you're referring to?

Operator: Yeah.

Anya Pelshaw: Yeah.

Keith Donahoe: Yeah. We are seeing good positive traction. One thing that just to keep clear, we've had four new hires in that market that are specific kind of to C&I business. One of them came in, I think, December 30 of this past year. We had another one add in the first quarter, right towards the end of the first quarter. We've had one added at the end of the second quarter. We had another one added right in the end of July, early August. 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, 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. 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.

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

Keith Donahoe: Yeah, some of that's coming on the back of commercial real estate lending.

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

Lee Gibson: 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. I wanted to take this opportunity to thank the analysts that 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. 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 Bancshares Inc. along with the opportunity to answer your questions.

We look forward to reporting fourth quarter results to you during our next earnings call in January. This concludes the call. Thank you.

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

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