Executive Summary / Key Takeaways

• Southside Bancshares, Inc. (SBSI) is strategically repositioning its balance sheet and expanding its lending capabilities to drive future net interest income growth and enhance shareholder value.
• A significant Q3 2025 available-for-sale (AFS) securities portfolio restructuring, involving the sale of $325 million in lower-yielding assets, is expected to boost future net interest income with an estimated payback period of less than four years.
• Despite recent volatility in loan payoffs, SBSI maintains a robust loan pipeline and is actively expanding its Commercial & Industrial (C&I) lending, particularly in the Houston metro market, to diversify its portfolio and achieve mid-single-digit loan growth in 2025.
• The company anticipates a slight increase in Net Interest Margin (NIM) in Q4 2025, with further expansion opportunities in 2026, driven by loan growth, the full impact of securities restructuring, and the repricing of maturing Certificates of Deposit (CDs).
• SBSI's strong community presence and diversified service offerings, including growing wealth management and trust segments, provide a competitive moat, though it faces intense competition from larger regional banks and agile debt funds.

Setting the Scene: A Texas Banking Mainstay Adapts for the Future

Southside Bancshares, Inc., headquartered in Tyler, Texas, has been a cornerstone of its communities since its founding in 1960. As the bank holding company for Southside Bank, it provides a comprehensive suite of financial services to individuals, businesses, municipal entities, and nonprofit organizations. This includes diverse deposit products, a broad range of consumer and commercial loans, and specialized wealth management and trust services. The company's 65-year history, marked by strategic integrations such as the OmniAmerican Bank defined benefit pension plan, has cultivated deep community ties and a diversified service model.

In the dynamic Texas banking landscape, SBSI operates amidst intense competition from both larger regional players and increasingly aggressive debt funds. Key direct competitors include Prosperity Bancshares, Inc. (PB), Independent Bank Group (IBTX), First Financial Bankshares, Inc. (FFIN), and Comerica Incorporated (CMA). While SBSI leverages its strong community presence and diversified loan portfolio, particularly in municipal and construction loans, it faces challenges from competitors' larger scale, aggressive acquisition strategies, and rapid innovation in digital services. For instance, some competitors, like IBTX, have pursued growth through mergers and acquisitions, while others, such as FFIN, emphasize conservative lending practices. SBSI's strategic response involves focusing on organic growth, deepening customer relationships, and expanding into new high-growth areas.

The broader industry is experiencing shifts towards digital banking and increased demand for commercial loans, partly driven by the growth of AI and data centers. SBSI addresses these trends through its offerings of telephone, internet, and mobile banking services, alongside interactive teller machines (ITMs) that enhance accessibility and convenience. While the company utilizes these standard banking technologies to support its operations and customer engagement, it does not appear to possess a proprietary, differentiated core technology with specific quantifiable performance metrics. Its software and data processing expenses reflect ongoing investment in its operational backbone.

Strategic Initiatives and Operational Momentum

SBSI's current strategy is characterized by a proactive approach to balance sheet management and targeted growth in key lending segments. A pivotal move in the third quarter of 2025 was the strategic repositioning of its available-for-sale (AFS) securities portfolio. The company sold approximately $325 million of lower-yielding, longer-duration municipal and mortgage-backed securities, incurring a net loss of $24.4 million. These divested securities had a combined taxable equivalent yield of approximately 3.28%. The net proceeds were reinvested into higher-yielding agency mortgage-backed pools with 5.5% to 6% coupons and Texas municipal securities with 5% to 5.75% coupons. This restructuring is estimated to have a payback period of less than four years and is designed to enhance future net interest income and provide additional balance sheet flexibility.

Loan growth remains a central pillar of SBSI's strategy. Despite higher-than-expected payoffs in the first half of 2025, particularly in the commercial real estate (CRE) portfolio, the company reported a robust loan pipeline exceeding $1.8 billion in Q3 2025. New loan production totaled approximately $500 million in Q3 2025, with $281 million funded during the quarter, including $81 million closing on the last day. The unfunded portion, largely construction-related, is expected to fund over the next six to nine quarters. SBSI is actively diversifying its loan portfolio by expanding its Commercial & Industrial (C&I) lending efforts. The Houston market, in particular, has seen the addition of four new relationship managers in the first six months of 2025, contributing to a C&I pipeline that now represents approximately 22% of the total, down from 30% last quarter due to a $20 million C&I relationship closing. Overall, Houston has seen positive loan growth in the 15% range this year.

The company's fee-based services are also a focus for growth. The wealth management and trust areas have experienced significant expansion due to strategic hires over the past 18 months. Management anticipates double-digit revenue growth in this segment for 2026 and is exploring expansion into other metro markets, with Fort Worth identified as a potential starting point for wealth management in 2026. This diversification of revenue streams is crucial for long-term stability and profitability.

Financial Performance and Outlook

SBSI's financial performance in the third quarter of 2025 reflected both strategic adjustments and market dynamics. Net income for the three months ended September 30, 2025, was $4.9 million, a significant decrease of 76.1% from $20.5 million in the same period of 2024. For the nine months ended September 30, 2025, net income decreased 27.7% to $48.2 million from $66.7 million in 2024.

Despite the impact of the securities sale, net interest income for Q3 2025 increased by $254,000 (0.5%) compared to Q3 2024, reaching $55.7 million. This was primarily due to a decrease in the average rate paid on interest-bearing liabilities, which fell by 19 basis points to 2.82% for interest-bearing deposits, and an increase in the average balance of interest-earning assets, partially offset by a decrease in the average yield of interest-earning assets. The fully taxable equivalent efficiency ratio improved to 52.99% as of September 30, 2025, from 53.70% in June 2025, indicating increased operational efficiency relative to revenue. The effective tax rate for Q3 2025 was 3.7%, significantly lower than 17.8% in the prior quarter, due to the impact of the AFS securities loss. The estimated annual effective tax rate for 2025 is 16.6%.

Looking ahead, management anticipates a slight increase in the Net Interest Margin (NIM) for the fourth quarter of 2025, with net interest income expected to improve nicely. This outlook is supported by the full impact of the $325 million securities restructuring, the expected increase in average loans by $125 million even without new loan growth, and the repricing of over $600 million of CDs at an anticipated average savings of around 34 basis points. A potential headwind is the full impact of the 7% subordinated debt issued in Q3 2025, and the repricing of $92 million in subordinated notes in mid-November 2025, which will adjust from 3.875% to an estimated 7.52% based on current SOFR rates. Management projects noninterest expense to be in the $38 million range for Q4 2025.

Liquidity, Capital, and Risk Assessment

SBSI maintains a strong liquidity and capital position. Total deposits increased by $307.3 million (4.6%) to $6.96 billion at September 30, 2025, from December 31, 2024. This growth was driven by a 20.6% increase in brokered deposits and a 6.8% increase in retail deposits, partially offset by a 13.4% decrease in public fund deposits. Estimated uninsured deposits stood at 36.9% of total deposits, or 21.7% when excluding affiliate and public fund deposits. The company has substantial liquidity lines available, totaling $2.77 billion as of September 30, 2025, including $2.30 billion from FHLB advances and $382.24 million from the Federal Reserve discount window.

Capital ratios remain robust, with all metrics well above the "well capitalized" thresholds. Total shareholders' equity increased by $22.9 million (2.8%) to $834.9 million at September 30, 2025. This was supported by net income, other comprehensive income, and stock compensation, partially offset by cash dividends and common stock repurchases. The company issued $150 million in fixed-to-floating rate subordinated notes in Q3 2025, increasing subordinated notes to $239.6 million, net of unamortized debt issuance costs. This issuance strengthens the capital base and provides additional funding flexibility.

Credit quality remains a key focus. Nonperforming assets increased by $32 million (892.1%) to $35.6 million at September 30, 2025, representing 0.42% of total assets. This increase was primarily due to a $27.5 million commercial real estate loan that was restructured with an extended maturity in Q1 2025 to allow for an extended lease-up period. This multifamily loan, located in Austin, Texas, continues to perform without missed payments, and management expects it to be refinanced or rightsized by year-end. Nonaccruing loans also increased to $8 million, primarily from commercial and commercial real estate loans. The allowance for loan losses stood at $45.3 million, or 0.95% of total loans, at September 30, 2025, which management deems sufficient to cover expected losses.

Key risks include general economic conditions, interest rate fluctuations, and real estate market declines, which could impact loan demand and asset values. The unpredictable nature of mortgage-backed securities prepayments and credit risks associated with municipal and corporate securities also pose challenges. The company's balance sheet management strategy is dynamic, continually evaluated as market conditions warrant, and utilizes hedging instruments to mitigate interest rate risk.

Conclusion

Southside Bancshares is demonstrating a clear strategic direction, actively reshaping its balance sheet and expanding its lending footprint to capitalize on opportunities in the robust Texas economy. The decisive restructuring of its securities portfolio, coupled with a strong loan pipeline and a focused C&I expansion, positions SBSI for enhanced net interest income and margin expansion in the coming quarters. While the company faces a competitive environment and manages specific credit exposures, its solid capital base, ample liquidity, and disciplined approach to risk management provide a resilient foundation.

The leadership transition, with Keith Donahoe succeeding Lee Gibson as CEO at year-end 2025, signals continuity in strategy, particularly in leveraging community ties and pursuing growth in wealth management and C&I lending. Investors should monitor SBSI's ability to execute its loan growth targets, manage funding costs amidst potential Fed rate cuts, and effectively integrate its strategic initiatives to drive sustained profitability and shareholder value in a dynamic market.