Southside Bancshares Inc (SBSI) Q3 2025 Earnings Call Transcript

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 Bankshare'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 that 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 10K. Joining me today are Lee Gibson, CEO, Keith Donahoe, President, and CFO, Julie Schamburger. 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. dollars these securities had a combined taxable equivalent yield of approximately 3.28 percent 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 five and a half and six percent 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 dollars of subordinated debt at seven percent fix the 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 linked 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 we'll now turn the call over to Keith Donahoe.

Thank you, Lee. The 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 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 15 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 percent term loans and 58 percent 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 it's increased approximately 2.7 million that remain concentrated in the previously disclosed 27 and a half million dollar multi-family loan that was moved into the non-performing category during the first quarter we continue to expect this to be this loan to be refinanced or right sized before the end of the year and overall as a percentage of total assets non-performing assets was at 0.42 percent. With that, I'll turn the meeting over to Julie.

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 dollars, a decrease of 16.9 million dollars, or 77.5 percent. 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, 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 30th, our loans with oil and gas industry exposure were $70.6 million, or one and a half percent of total loans compared to 53.8 million or 1.2 percent linked quarter. Non-performing assets remained low at 0.42 percent of total assets as of September 30th. Our allowance for credit losses increased to 48.5 million dollars 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 0.95% compared to 0.97% 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 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 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 6.5 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. dollars on august 14th we issued 150 million of seven percent subordinated notes our 3.875 percent subordinated notes issued in 2020 with an outstanding amount of 92.1 million dollars 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 30th. We only purchased 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 percent, 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 percent, 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 percent 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 affected 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, you know, margin that we should be contemplating, you know, 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 NIM in the fourth quarter, I expect to be up slightly. You know, we have the sub-debt costs in the in the third quarter that will have the full impact uh in the in the fourth quarter but with um you know if loans don't grow at all in the fourth quarter which we're not anticipating uh the average loans will increase 125 million dollars uh during the quarter and then we'll have the full impact of the 325 million dollars of security sales restructuring uh 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 NIM 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, which, you know, today would be a rate of the 752 compared to the current rate of 3.875. So overall, I expect the NEM to be up slightly. I expect net interest income to improve nicely. And, you know, I think, you know, we're set up for a lot of positive things in the future when it comes to net interest income in the NEM.

I don't know if that that gives you a flavor for for what we're looking at yeah it's helpful there's just uh some obviously you know good amount of moving parts here so um appreciate the there's a bunch appreciate the color yep um maybe just uh just just moving on um you know we've seen some deal activity here in Texas uh over the past couple months I know you guys have have kind of uh previously stated uh 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.

You know, what we're looking at really hadn't changed. You know, there are a few institutions that we have some interest in that potentially might be for sale. Well, in terms of hires, that is something we're looking at, and we've made a few hires. But, 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 less than $10 billion banks here in Texas, you know, there's definitely been some disruption. And, you know, we hope to, you know, jump on that opportunity and make some additional hires there.

Okay, great. I'll step back. Lee, congratulations on the announcement. Well, thanks. And look forward to seeing you all soon. All right.

Your next question comes from the line of Woody Lay with KBW.

Your line is open. hey uh thanks for taking my questions wanted to start on loan growth obviously a a really strong quarter and it sounds like you know a lot of that growth actually came on the the final day of the quarter um so it's just curious on the pipeline entering the fourth quarter how it's looking and if there was any pull through of the pipeline um in this quarter yeah um you know pipeline's strong it did take a bit um that's somewhat to be expected given the strong production quarters we've had you know as 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 um 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 on a pipeline so um work strong we feel good about you know pull through generally speaking we're still seeing 25 to 30 percent 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 a while so but we feel good the one thing that's always 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 our guidance number today got it that's that's helpful and then um 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 um most things this quarter just talking about how intense competition is so are you seeing that um from y'all's perspective yeah there's a lot of competition out there um both from the cre standpoint and cni um so we're we're not immune to it um we are being disciplined in our pricing approach and generally speaking since the second quarter pricing hasn't changed a lot um we're still looking at you know turn 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 two percent spread over so far we have seen some some banks willing to go below two um we we slightly get below two on one transaction but we are also selling a swap as part of the deal um that that helped get us back to what we would consider kind of the floor for us on the construction side we're We're still seeing construction debt that is going or moving at somewhere between as low as $250,000, but generally speaking somewhere around $265,000 to $275,000.

Got it. And then lastly, as it pertains to the securities restructuring, 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. But if the market allows and conditions are such that it makes sense to do some additional restructuring and 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. But, you know, I would say most of the heavy lifting in the AFS portfolio has been done. But there is, you know, 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. Appreciate it.

Your next question comes from the line of Jordan Ghent with Stevens. please go ahead hey thanks for taking my question um i just had a question on the buyback so you recently increased the authorization and just kind of what should we expect um with you know buyback activity going forward um yes so we did increase as you mentioned the last time we increased was back in july of 23 and since that day we've purchased 868 000 shares um 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 10B-5-1 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 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 over, you know, maybe the next year or so as a portion of fee income?

We have a really good team in place that we've put in place over the last two years. And they're having a lot of impact, especially here in East Texas. And so we anticipate seeing double-digit revenue growth in that area next year as well.

So we were expecting continued success. they're extremely busy and you know they're taking on new clients all the time so you know that that's an area of non-interest income that we're really encouraged about and excited about and to add to that lee you know we are one of the missing things for us right now is is to really go into the metro markets with the with the wealth management so we are exploring that um and we think we're going to make some good headway uh in 2026 on that and we may not attack each metro market um 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 rough management in the metro market so we're i'm really excited about that in the future perfect and then maybe just one more question how How many rate cuts are you guys assuming through year-end and maybe even into 26?

You know, I'm pretty certain that next week we'll see movement. Potential that there's, you know, another move the last Fed meeting this year. Next year, you know, I'm anticipating, you know, probably at least two cuts. It really just depends, you know, 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 the employment. And the inflation numbers came in nice this morning, you know, lower than expectation. 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.

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 Huvdi 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.

So, yeah, I guess the answer is it's not necessarily seasonal. We were just talking internally. So through some Intrify business, we have picked up some large depositors through that process. 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 will moderate some through the end of the fourth quarter. Okay, thank you. and you've talked about uh the loan pipeline but i guess i was talking i was hoping you could um expand on the growth so far from the new lenders so out of the houston market is that what you're referring to yeah uh yeah so we are uh 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 see in our 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 in added at the end of the second quarter and then we have another one added right in in the july early august so we haven't been able to see two or four year of production yet but it's been positive they are gathering deposits as well as uh loan growth right now the cni uptick one thing we've talked about is really pushing our mix on cni right now we are at the beginning of the year we were about 15 percent of our brick is cni we have seen a slight uptick we're about 16 today um and that 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 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, probably in the 15% range this year. And so that's coming on the back of CRE lending.

This completes our question and answer session.

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 that cover south side 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 south side's future as Keith Donahoe takes the helm, assisted by CFO Julie Schamburger, 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.