Southside Bancshares (SBSI) Earnings Transcript

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DATE

Thursday, January 29, 2026 at 12 p.m. ET

CALL PARTICIPANTS

• President and Chief Executive Officer — Keith Donahoe
• Senior Executive Vice President and Chief Financial Officer — Julie Shamburger

TAKEAWAYS

• Net Income -- $21 million for the period, up $16.1 million or 327.2% from prior quarter, driven by the absence of the previous quarter’s restructuring loss.
• Diluted Earnings Per Share -- $0.70, an increase of $0.54 per share compared to last quarter.
• Full-Year Net Income -- $69.2 million, a decrease of $19.3 million or 21.8%, attributed to security portfolio restructuring.
• Net Interest Margin -- 2.98%, a 4 basis point linked-quarter increase, with further expansion expected due to forthcoming $93 million subordinated debt redemption in mid-February.
• Net Interest Income -- $1.5 million or 2.7% increase over previous quarter, primarily from lower funding costs and moderate loan growth.
• Fourth-Quarter Loan Production -- $327 million, down from $500 million in the third quarter, with only $25 million funded and the remainder to be funded over six to nine subsequent quarters.
• Total Loans Outstanding -- $4.82 billion at period end, a linked-quarter increase of $52.7 million or 1.1%, led by $29 million in construction loans, $24.1 million in commercial real estate loans, and $14.8 million in commercial loans, partially offset by a $6 million decrease in municipal loans and a $5.7 million decrease in 1-4 family residential loans.
• Loan Pipeline -- Rebounded to just over $2 billion from $1.5 billion mid-quarter, with 42% term loans and 58% construction/commercial lines of credit.
• Nonperforming Assets -- Increased by $2.6 million, mainly due to a $2.4 million residential condo loan, but remained low at 0.45% of total assets and concentrated in a previously disclosed $27.5 million multifamily loan.
• Allowance for Credit Losses -- Decreased slightly to $48.3 million, with allowance for loan losses down 1 basis point to 0.94% of total loans.
• Securities Portfolio -- Increased $147.9 million or 5.8% to $2.70 billion, based on $373 million in mainly MBS purchases, offsetting $82 million in municipal securities sales plus maturities/payments; duration reduced to 7.6 years (total securities) and 4.8 years (AFS portfolio).
• AFS Securities Net Unrealized Loss -- Decreased to $767,000 from $15.4 million prior quarter, primarily from portfolio restructuring and market improvement.
• Deposits -- Declined by $96.4 million or 1.4% quarter over quarter, with a $233.5 million reduction in brokered deposits, offset by increases of $40.8 million in retail deposits and $86.3 million in public fund deposits.
• Efficiency Ratio -- Improved to 52.28% from 52.99%, due to higher total revenue.
• Noninterest Expense -- Stable at $37.5 million, with a projected 7% year-over-year increase in 2026 (including ~$2.3 million-$2.4 million higher software/data spending and a one-time $800,000 charge for the subordinated note redemption).
• Income Tax Expense -- $3.8 million, up $3.6 million compared to the previous quarter, reflecting normalization after prior restructuring-related loss.
• Share Repurchases -- 369,804 shares repurchased averaging $28.94 per share; 762,000 shares remain authorized for future buybacks.
• Liquidity -- $2.78 billion in available liquidity lines reported as of period end.
• Capital Ratios -- All reported above regulatory "well capitalized" thresholds.
• Strategic Focus -- Core system moving off-premise and data platform development highlighted as key 2026 tech expenses intended to drive future efficiencies, M&A readiness, and improved data utilization.
• M&A Positioning -- Management stated openness to acquisitions in "target areas" such as Dallas, Houston, and Austin, with a focus on strategic expansion rather than size for its own sake.
• 2026 Fee Income Outlook -- Budgeted $1.5 million increase in trust income, supported by team expansion and geographic extension into North Texas markets; additional growth expected in treasury fees and brokerage services.

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RISKS

• Net Loss from Securities Sales -- Fourth-quarter restructuring of available-for-sale securities resulted in a $7.3 million net loss, explicitly reported by management.
• Loan Growth Payoffs Headwind -- Management flagged a "high number of those maturities" from construction projects, with loans potentially moving off the balance sheet as projects stabilize, presenting a loan growth challenge in 2026.
• Noninterest Expense Increase -- A 7% rise is budgeted for 2026, driven by higher compensation costs, technology investments, and a one-time $800,000 charge, which may pressure future efficiency ratios.
• Nonperforming Loan Concentration -- Nonperforming assets remain "concentrated in the previously disclosed $27.5 million multifamily loan," with resolution contingent on borrower refinancing.

SUMMARY

Management reported a quarter-on-quarter rebound in profitability, underpinned by lower funding costs and moderate loan growth, after taking a significant loss from the restructuring of available-for-sale securities in the prior period. The net interest margin improved and is forecast to benefit further with the imminent redemption of $93 million in subordinated debt. Credit quality stayed stable, with a modest increase in nonperforming assets but continued concentration in a single large multifamily loan. Management is executing technology investments that are expected to drive cost efficiency and support M&A readiness, while deposit balances shifted away from brokered sources toward retail and public funds. The company is actively pursuing strategic acquisitions in selected Texas markets and anticipates a material increase in trust and fee income, bolstered by recent talent additions and market expansion.

• President and CEO Donahoe said, "we are open to discussions" on M&A in Dallas, Houston, and Austin and remain focused on opportunities that fill geographic gaps rather than growth for its own sake.
• Chief Financial Officer Shamburger stated that software and data processing expenses will rise $2.3 million-$2.4 million due to the migration of the core system off-premise and the launch of a data platform initiative.
• Bank will redeem $93 million in subordinated notes on February 15, which management expects will "enhances future net interest income while providing additional balance sheet flexibility."
• Repurchase activity increased in the latest quarter, with no buybacks since year-end and 762,000 shares remaining under current authorization.

INDUSTRY GLOSSARY

• AFS (Available-For-Sale) Securities: Debt or equity securities that are not classified as held-to-maturity or trading, and whose unrealized gains and losses are reported in other comprehensive income until realized.
• Subordinated Debt: Debt that ranks below other loans and securities with respect to claims on assets or earnings, typically used for regulatory capital purposes in banks.
• MBS (Mortgage-Backed Securities): Financial instruments secured by pools of mortgages, providing investors with periodic payments derived from the underlying loan payments.
• CRE (Commercial Real Estate): Loans secured by income-producing commercial properties, such as office buildings, industrial complexes, retail properties, and multifamily residences.
• C&I (Commercial and Industrial) Loans: Loans made to businesses, not secured by real estate, generally used for working capital, equipment purchase, or business expansion.
• Nonperforming Assets: Loans or assets that are not generating expected returns, commonly due to delinquency or default; includes loans past due or in nonaccrual status.

Full Conference Call Transcript

Keith Donahoe: Thank you, Lindsey, 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 3.5 years. Overall, we experienced a million linked quarter increase in net interest income, resulting primarily from lower funding costs and moderate loan growth. Our net interest margin expanded to 2.98% and we expect additional net interest margin expansion resulting from the redemption of approximately $93 million of supported debt on February 15, 2026 . The fourth quarter new loan production totaled approximately $327 million compared to third quarter production of approximately $500 million. Of the new loan production $25 million funded during the quarter with the unfunded portion of this quarter's production expected to fund over the next 6 to 9 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 and multifamily, medical office, general office and commercial land. Most of these were concentrated in 5 industrial properties and 8 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. C&I-related opportunities represent approximately 20% of today's total pipeline, and that's down slightly from third quarter's 22%. Credit quality remains strong during the fourth quarter, nonperforming assets increased $2.6 million, primarily related to a $2.4 million loan secured by a small residential condo project. but remain concentrated in the previously disclosed $27.5 million multifamily loan we moved into the nonperforming category during the first quarter of despite this loan not paying off in the fourth quarter, we remain optimistic that the borrower will finalize their refinance within the next 2 weeks.

As a percentage of total assets, nonperforming assets remained low at 0.45% when considering our net income, earnings per share and other financial results, excluding the onetime 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.

Julie Shamburger: 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 or 327.2 and 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 $2.29 compared to $2.91 for 2024. The decrease was driven by the restructuring of the AFS securities portfolio. As of December 31, 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 $6.2 $6 million in municipal loans and $5.7 million in 1 to 4 family residential loans. The average rate of loans spend during the fourth quarter was approximately 6.6%. As of December 31, 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. Nonperforming assets remained low 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 30. And Linked quarter, our allowance for loan losses as a percentage of total loans decreased 1 basis point to 0.94% at December 31. 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 31 when compared to $2.56 billion on September 30. 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 31, 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 31, 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 31, the duration of the total securities portfolio was 7.6 years compared with 8.7 years at September 30 and the duration of the AFS portfolio was 4.8 years compared to 6.5 years on September 30. At quarter end, our mix of loans and securities was 64% and 36%, respectively. 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 some deposits. On February 15, we will redeem our $93 million of subordinated notes due in 2030. The rate on the note adjusted during the fourth quarter to a floating rate of 7.1%, our capital ratios remained strong with all capital ratios well above the threshold for well capitalized. Liquidity resources remained solid with $2.78 billion in liquidity lines available as of December 31.

And repurchased 369,804 shares of our common stock at an average price of $28.94 during the fourth quarter. There have been no purchases of our common stock since December 31, and we have approximately 762,000 shares remaining authorized for repurchase. Our tax equivalent net interest margin was 2.98%, an increase of 4 basis points on a linked-quarter basis, up from 2.4% at the end of the quarter. Our tax equivalent net interest spread for the same period was 2.31%, an increase of 5 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 3 months ended December 31, we had an increase in net interest income of $1.5 million or 2.7% compared to the linked quarter. Noninterest income, excluding the net loss on the sale of AFS securities increased 4, or 4% for the linked quarter, primarily due to an increase in deposit services, billing income and brokerage services income partially offset by a decrease in other noninterest income. Other noninterest income decreased primarily due to a decrease in swap fee income. Noninterest 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 31 from $52.99 as of September 30, primarily due to an increase in total revenue. We have budgeted a 7% increase in noninterest expense in 2026 over 2025 actual primarily related to salary and employment benefits, software expense, professional fees, retirement expense and a onetime charge of approximately $800,000 and in connection with the redemption of the subordinated notes on February 15. 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 noninterest 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% for the fourth quarter, an increase compared 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.

Operator: [Operator Instructions] Your first question comes from the line of Woody Lay with KBW.

Wood Lay: Then I believe you just called out 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 build is related to these software projects? And could you also talk about the hiring strategy and how that's built into the budget?

Keith Donahoe: Yes. I'll hit at a high level and Julie can provide some details. So I don't have the breakdown in front of me on the bench between software and FTEs. But what's going -- what's really happening is on the software front, we are looking at moving our core out link. 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 expanded growth mode and/or if we make an acquisition that's going to make that 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. So those are the 2 biggest components of the software spend 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 where everybody is in right now. We're pumping high volume of loan grocer 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 bulk of what we're doing, Julie, if you've got any additional detail?

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

Wood Lay: Got it. That's really helpful color. I appreciate that. Maybe a follow-up. You mentioned working.

Julie Shamburger: I was just going to say that the $39.5 million that I forecasted, if you will, for the first quarter doesn't reflect the full 7% as these are not all day 1 increases. We expect them to come in over the course of the year. So I just wanted to add that color as well.

Wood Lay: Yes. Appreciate that. And maybe a follow-up, you mentioned the core switch might help with M&A down the road. And just wanted to get your thoughts on just given the deal activity we've seen recently in Texas, how you are thinking about M&A for sell side in the current environment?

Keith Donahoe: Yes. 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. 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 and which should be opening in the next 60 days.

But it's those target areas. And even in Austin with only 2 locations. If the right opportunity comes around, we are discussing those situations and are open to it. I hope that helps.

Wood Lay: Yes, that definitely does. All right. That's all for me.

Operator: Your next question comes from the line of Michael Rose with RJ.

Michael Rose: Maybe we can just start on the margin. Obviously, the balance sheet restructuring on the securities restructuring was smaller this quarter than last, but you are going to redeem the sub debt that you mentioned. Just with those puts and takes in the loan pricing competition, things like that, can you just give us some expectations on maybe what the first quarter margin could look like?

Keith Donahoe: Yes. It's 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 onetime charge coming in the first quarter for the redemption. But directionally, it's going to be positive, but -- and pick up towards the end of the year.

Julie Shamburger: From the standpoint of the sub debt, 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. But when those sources of funding are replaced in the second quarter, we'll certainly see we expect for sure to see some improvement just with respect to that 1 piece of funding, if that makes sense.

Michael Rose: Okay. Yes. Thanks for the clarification, Julie. I appreciate it. And then maybe as we just think about loan growth, I appreciate the comments at the beginning of the call just around some of the production and paydown activity. I know paydowns 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 is 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.

Keith Donahoe: Yes. 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're 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 that 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 loan growth side.

Michael Rose: I appreciate it, Keith. And maybe just one final one for me. 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 guys will have decent capital accretion 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.

Keith Donahoe: Yes. I think from a -- 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 -- when you look at capital strategy, those are -- first, we've got the sub debt retirement is obviously the #1 capital strategy. close behind that is stock buyback and then M&A. So we're -- all of that's going to work together, but -- and 1 of them may impact the other one, but we'll see how that goes this year.

Michael Rose: All right. I'll step back.

Operator: Your next question comes from the line of Brett Rabatin with Hovde.

Brett Rabatin: Julie wanted to start off on just the fee income outlook from here. And it seems like brokerage has had some pretty good trends. I was just curious if there were any drivers that you were specifically thinking about the '26 in terms of fee revenues? And then just any thoughts on the outlook for 2026?

Julie Shamburger: Sure, Michael -- Brad, 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 fees. We've -- I think we told you on the last couple of quarters that we have picked up some additional talent in that area, and we've built up a really strong team that we're excited about. And 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 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 some nice pickup in those 2 areas over the last year. And that's where most of the increase is coming from.

Brett Rabatin: Okay. That's helpful, Julie. And then I wanted to just go back to the securities portfolio and just -- 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?

Keith Donahoe: Yes. For us, we're going to continue to be opportunistic with it. And we're 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.

Brett Rabatin: Okay. And then maybe lastly, just -- you've talked a little bit about it on hirings. There's been quite a bit of M&A activity in Texas was just curious, Keith, any thoughts on that disruption, if that's an opportunity for you maybe in the Dallas market, Fort Worth market, with either people or clients? Is there anything that you're specifically targeting related to disruption?

Keith Donahoe: Yes. We're seeing opportunity both from a people -- on the people side as well as customer side. We've been working on a couple of C&I opportunities in the Metroplex that 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 yes, we're active in that and we'll continue to be so.

Brett Rabatin: Okay. Great, for the color.

Operator: Your next question comes from the line of Jordan Ghent with Stephens.

Jordan Ghent: 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?

Keith Donahoe: Yes. I mean it still remains that we aren't going to buy something in the $2 billion category. We would be below 1 -- I mean, 1.5 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 billion 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 down that gets us close, and that helps us get to the point that we can spring over 10 with the second transaction.

So we're -- it's a little bit of puzzle will put together, but we are looking at opportunities and continue down the same strategy that we've had in the last couple of years on that topic.

Jordan Ghent: Okay. And then maybe just one follow-up question for Julie on the operating expense for that 1Q 26 number, the 39.5%, does that include that onetime charge? Or is that excluding that onetime charge of $800,000.

Julie Shamburger: Yes, Jordan, it will include it.

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

Keith Donahoe: Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares 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.

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

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