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 of Investor Relations. Please go ahead.

Thank you, Alexandria. Good morning, everyone, and welcome to Southside Bankshare'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 materially 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 Schamburger. 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 linked 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 as four-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 dollars 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 CNI 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, and that's down slightly from third quarter's 22%. Credit quality remains strong. During the fourth quarter, non-performing assets increased 2.6 million dollars primarily related to a 2.4 million dollar loan secured by a small residential condo project but remain concentrated in the previously disclosed 27 and a half million multi-family 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 percent 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%. Deluded 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, the 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 percent. As of December 31st, our loans with oil and gas industry exposure were 71 million or one and a half percent of total loans compared to 70.6 million or one and a half percent linked quarter. Non-performing assets remained low at 0.45 percent 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. Wink's 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, occur 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 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 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 was 64 and 36 percent respectively. The slight shift compared to 65 percent and 35 respectively last quarter. Deposits decreased 96.4 million or 1.4 percent on a length 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 percent 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 percent the increase in the net interest margin in that interest spread is primarily due to lower funding costs for the three months ended December 31st, we had an increase in net interest income of 1.5 million or 2.7 percent compared to the linked quarter. Non-interest income, excluding the net loss on the sale of AFS securities, increased 494,000 or 4 percent for the linked quarter, primarily due to an increase in deposit services, BOLI income, and brokerage services income, partially offset by 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 31 from 52.99 as of September 30, primarily due to an increase in total revenue. We have budgeted a 7% increase in non-interest expense in 2026 over 2025 actual, 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% 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. 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 uh seven percent expense growth is is what you're budgeting in 2026 uh was just hoping to um get a little more detail and and exactly how much of the incremental expense build is related to these software projects and could you also talk about uh the hiring strategy and and how that's um

built into the budget thanks yeah i'll hit it high level and julie can provide some details so um i don't have the breakdown in front of me on the it's bent between uh software and ftes but what what's going on what's really happening is uh on the software front we are looking at moving our core uh to uh to outlink and so we're we're currently hosted 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 you know expanded growth mode and and or you know if we make an acquisition it's going to make that um a more efficient prospect for us so that's part of it um 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 two biggest components of the software spin from an fte standpoint some of this is uh is we hope will make us more efficient in in the long run as well because we are changing some of our processes within the loan origination uh group and uh we 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 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 22%. 25 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 the in our all of our filings in the 10q and

10ks and earnings got it that's that's really helpful color I appreciate I appreciate that

maybe a follow-up you mentioned already one sorry I was just going to say I was just going to say You know, the $39.5 million that I've 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 core 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 you all are thinking about M&A for Southside in this current environment.

yeah it's still part of the strategy um 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 um if it's filling out a geography for us um and or picking up um you know we've got for 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 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 um but it's it's those target areas and even in austin with only two locations um if the right opportunity comes around we are 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 Wade 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 uh taking my questions um maybe we can just start on the margin um obviously the the balance sheet restructure the securities restructuring was smaller this quarter than than last but you are going to redeem the the sub debt as you mentioned um just uh with those puts and takes and loan pricing competition things like that um can you just give us um some expectations on on maybe what the first quarter margin could look like thanks yeah um it is it's

It's going to be positive, although it'll 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, but directionally it's going to be positive and pick up towards the end of the year.

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 dollars 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 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 you know some of the production and pay down activity i know pay downs are really difficult to 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 um should we think about a higher level of production it seems like the environment's pretty uh conducive for for loan growth here just just wanted to get a sense for um how we should you know kind of think about at least uh 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 um but we do have a large number of payoffs that are in our forecast some of which are these construction projects that 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 a billion five in the middle of the fourth quarter. But we have rebounded strongly and we're back up over two 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 and but we we do have a significant number in the closing process right now so i i 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 to make that call but we are very active across all of the markets and and i do anticipate um it being a good year for us on the loan 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 will have decent capital accretion as we kind of move through the year. Stock is still, you know, relatively attractive on a tangible basis. Just want to get your thoughts, updated thoughts on

on the buyback. Thanks. Yeah, 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, you know, those are probably, 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, but, 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 Robiton with Hold. Your line is now open. Please

go ahead hey good morning Keith and Julie wanted to start off on just the fee income outlook from here and it seems like brokerages have 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 any

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 a million five for an increase. That's what we're budgeting. And a lot of it does come, most of that does come and 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 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 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 two areas over the last year. and that's where most of the increases is coming from okay that's helpful julie and then

wanted to um just go back to the securities portfolio and just you know are all the actions that you guys have anticipated uh 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 it for us we're going to continue to be opportunistic with it and we sitting here today rates aren't in the right position for us to continue to make moves um if they do and we're watching it's a daily process for us and so if if we're seeing the right signs we we will make those moves but right now we're we're in a holding pattern if you will okay and and then maybe lastly

just you've talked a little bit about it on you know hirings um you know there's there's there's been quite a bit of mna activity in texas um was just curious keith any you know any any thoughts on that disruption if 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 is there anything that you're specifically

targeting related to disruption yeah we're seeing opportunity both from a people on the people side as well as customer side um we're we've been working on a couple of cni opportunities in the metroplex that you know are sort of being you know disrupted because of the acquisitions we're seeing um 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 to tell that we we have our antenna up and we are looking and uh we'll be looking for both customer displacement as well as an employee displacement so yeah we're we're active in that and we'll continue to be so okay uh great great

job teller thank you your next question comes from the line of jordan ghent with stevens

your line is now open please go ahead good morning thanks for taking my question um 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 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're we will look at that as well but as you know in the state of texas when you start getting into the three to five billion dollar range those are fewer um so there's more opportunities in in the lower than two billion dollar market that and we're 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 it's a little bit of a you know puzzle to put together but we are we are looking at opportunities and and continue down the same strategy that we've had the last couple of years on that topic okay thank you and then maybe just

one follow-up question um for julie on the operating expense for that 1q 26 number the $39,500. 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 questions.

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. Goodbye.