Southside Bancshares - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered steady profitability: net income $21.8M and diluted EPS $0.72, with ROA 1.07% and ROATCE 14.38%. Linked-quarter NIM (FTE) rose 9 bps to 2.95% on lower funding costs and a late-quarter loan surge.
• Results were above S&P Global consensus on EPS and revenue: EPS $0.72 vs $0.6825*, and “total revenue” $68.8M vs $68.0M*; definitions differ for revenue (company “Total revenue” is non-GAAP).
• Guidance/tone: management lowered 2025 loan growth to 3–4% (from “mid-single-digit”), sees NIM tailwinds in 2H driven by CD repricing (-10 bps on ~$430M maturities) and June loan production; expects ~$39M quarterly noninterest expense and ~18% ETR for 2025.
• Potential stock catalysts: rising NIM, disciplined expense run-rate, active buybacks (424,435 shares in Q2 at $28.13), and improving C&I pipeline despite payoff volatility.

What Went Well and What Went Wrong

What Went Well

• NIM expansion and funding cost relief: “linked quarter, our net interest margin increased nine basis points to 2.95%, and net interest income increased $414,000” (CEO).
• Late-quarter loan production and pipeline: June net loan growth of $104M, Q2 production ~$293M with $228M funded; pipeline rose to ~$2.1B (30% C&I) (President).
• Deposit growth and mix: deposits up $41.1M q/q; cost of interest-bearing deposits fell to 2.82% and total deposit cost held at 2.26%; uninsured deposits estimated 38.5% but only 21.1% excluding affiliates/public funds.

What Went Wrong

• Elevated noninterest expense from one-time branch demolition write-off ($1.2M), pushing Q2 noninterest expense to $39.3M (+5.8% q/q) (CFO).
• Credit costs ticked up: provision for loan losses $0.7M vs reversal in prior year; net charge-offs $0.9M (vs $0.3M both Q1 2025 and Q2 2024).
• NPAs stayed elevated vs 2024 on a restructured CRE loan: 0.39% of assets ($32.9M), flat q/q but up sharply vs 0.04% in Q4 2024; allowance at 0.97% of loans.

Transcript

Speaker 3

Thank you for standing by and welcome to Southside Bancshares Inc.'s second quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press *11 on your telephone. To remove yourself from the queue, you may press *11 again. I would now like to hand the call over to Lindsey Bailes, Vice President of Investor Relations. Please go ahead.

Speaker 6

Thank you, Latif. Good morning, everyone, and welcome to Southside Bancshares Inc.'s second 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 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 and our Form 10-K. Joining me today are CEO Lee Gibson, President Keith Donahoe, and CFO Julie Schamberger. 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.

Speaker 3

Thank you, Lindsey, and welcome to today's call. We had an excellent quarter with net income of $21.8 million, resulting in diluted earnings per share of $0.72, an annualized return on average assets of 1.07%, and an annualized return on average tangible common equity of 14.38%. I want to thank our dedicated team members for their hard work and contributions that were instrumental in producing these results. Linked quarter, our net interest margin increased nine basis points to 2.95%, and net interest income increased $414,000 to $54.3 million. The yield on our earning assets increased two basis points, and the cost of our interest-bearing liabilities decreased by five basis points. Linked quarter, total loans increased $35 million, while average total loans during the quarter decreased $106 million, primarily due to heavy payoffs during the first two months of the quarter.

Linked quarter, total loan growth resulted from the strong net loan growth of $104 million during June, a large portion of which occurred during the last two weeks. We anticipate this late quarter loan growth bodes well for potential further NIM expansion during the third quarter. Our loan pipeline is solid, and shortly, Keith will provide additional details related to the second quarter loan activity and our current loan pipeline. Our deposits net of public funds and broker deposits increased $90.1 million linked quarter. Based on discussions with our customers related to the uncertainties in the market surrounding tariff announcements and the ongoing related negotiations, overall, we remain optimistic. While it's too early to discern the likely outcome of these tariff announcements and negotiations, the current economic conditions and overall growth prospects for our markets continue to reflect a positive outlook.

Overall, the Texas markets we serve remain healthy and continue to report both job and population growth. I look forward to answering your questions and will now turn the call over to Keith Donahoe.

Speaker 4

Thank you, Lee. The second quarter new loan production totaled approximately $293 million compared to the first quarter production of $142 million. Of the new loan production, $228 million funded during the quarter, with the remaining portion expected to fund over the next six to nine quarters. Despite strong new loan production, we continue to experience meaningful payoffs, resulting in muted loan growth during the second quarter. Excluding regular amortization and line of credit activity, second quarter payoffs totaled $200 million. Consistent with the first quarter, commercial real estate loans continue to be the largest source of payoff. Second quarter's commercial real estate payoffs totaled approximately $150 million, including 13 loans secured by a variety of property types: retail, medical, office, multifamily, industrial, and commercial land. Commercial real estate payoffs were largely the result of open market property sales.

However, two multifamily properties were refinanced with other lenders to include a life insurance company and a private debt fund. Both offered more aggressive loan-to-value limits and limited, if any, ongoing covenants. In addition to the commercial real estate payoffs, we experienced an unexpected $50 million payoff in our oil and gas portfolio. This resulted from a private equity firm's acquisition of a Southside customer. For the remaining half of 2025, we anticipate moderated payoffs and new loan production consistent with the first half of 2025. However, we are slightly lowering our loan growth guidance to 3% to 4% year over year. Currently, our loan pipeline exceeds $2.1 billion, representing a slight increase over first quarter's ending pipeline of $1.9 billion. The pipeline is well balanced with approximately 43% term loans and 57% construction and/or commercial lines of credit. Historically, we close between 25% and 30% of our pipeline.

Additionally, we are making progress with our C&I initiative, which now represents approximately 30% of our total pipeline, up from 25% at the end of first quarter. Expansion of the Houston C&I team continued with two new relationship managers. One individual started in late June, and the other individual started in early July. Both have contributed to the expanded C&I pipeline. New C&I hires in the Houston market now stand at four individuals during the first six months of 2025. Overall, credit quality remains strong. During the second quarter, non-performing assets increased slightly and remained concentrated in one large construction loan we moved into a non-performing category during the first quarter. The loan is secured by a newly built multifamily project with positive leasing activity and a sponsor that has demonstrated a willingness and financial capacity to support. As a percentage of total assets, non-performing assets remain unchanged at 0.39%.

During the quarter, a $17.9 million payoff of a classified loan was partially offset by the migration to classified of a $6 million loan. Overall, classified loans decreased from $67 million at the end of the first quarter to $55.4 million at the end of the second quarter. With that, I look forward to answering questions and will now turn the call over to Julie.

Speaker 6

Thank you, Keith. Good morning, everyone, and welcome to our second quarter call. For the second quarter, we reported net income of $21.8 million, an increase of $306,000 or 1.4% compared to the first quarter, and diluted earnings per share of $0.72 for the second quarter, an increase of $0.01 per share linked quarter. As of June 30, loans were $4.60 billion, a linked quarter increase of $34.7 million or 0.8%. The linked quarter increase was primarily driven by an increase of $28.8 million in commercial real estate loans, $12.3 million in construction loans, and $9 million in commercial loans, partially offset by a decrease of $7.5 million in municipal loans and $5.3 million in one-to-four family residential loans. The average rate of loans funded during the second quarter was approximately 6.9%.

As of June 30, our loans with oil and gas industry exposure were $53.8 million or 1.2% of total loans compared to $111 million or 2.4% linked quarter. The decrease occurred primarily due to the payoff of a large loan relationship of approximately $50 million. Non-performing assets remain low at 0.39% of total assets as of June 30. Our allowance for credit losses decreased to $48.3 million for the linked quarter from $48.5 million on March 31, and our allowance for loan losses as a percentage of total loans decreased slightly to 0.97% compared to 0.98% at March 31. Our securities portfolio was $2.73 billion at June 30, a decrease of $6.2 million or 0.02% from $2.74 billion last quarter. The decrease was driven primarily by maturities and principal payments.

As of June 30, we had a net unrealized loss in the available-for-sale (AFS) portfolio of $60.4 million, an increase of $9.2 million compared to $51.2 million last quarter. There were no transfers of AFS securities during the second quarter. On June 30, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $5.2 million compared to $8.6 million linked quarter. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio. As of June 30, the duration of the total securities portfolio was 8.4 years, and the duration of the AFS portfolio was 6.2 years, a decrease from nine and seven years, respectively, as of March 31. At quarter end, our mix of loans and securities was 63% and 37%, respectively, consistent with last quarter.

Deposits increased $41.1 million or 0.6% on a linked quarter basis due to an increase in broker deposits of $61 million and a $90.1 million increase in commercial and retail deposits, partially offset by a decrease in public fund deposits of $109.9 million. The increase in commercial deposits was due to an account that increases for a short period at this time each year and is expected to exit the bank in the third quarter. Our capital ratios remain strong, with all capital ratios well above the threshold for capital adequacy and well capitalized. Liquidity resources remain solid, with $2.33 billion in liquidity lines available as of June 30th. We repurchased 424,435 shares of our common stock at an average price of $28.13 during the second quarter. Since quarter end and through July 23rd, we have repurchased 2,443 shares at an average price of $30.29 per share.

We have approximately 156,000 shares remaining in the current repurchase authorization. Our tax equivalent net interest margin increased nine basis points on a linked quarter basis to 2.95% from 2.86%. The tax equivalent net interest spread increased for the same period by seven basis points to 2.27%, up from 2.20%. For the three months ended June 30th, we had an increase in net interest income of $414,000 or 0.8% compared to the linked quarter. Non-interest income, excluding net loss on the sales of available-for-sale (AFS) securities, increased $1.4 million, a 12.7% for the linked quarter, primarily due to an increase in swap fee income and deposit services income. Non-interest expense was $39.3 million for the second quarter, an increase of $2.2 million or 5.8% on a linked quarter basis, primarily driven by the $1.2 million write-off and demolition of an existing branch that was replaced with a new building.

As certain items in our budget continue to materialize, we expect to be in the $39 million range for the remaining quarters this year. Our fully taxable equivalent efficiency ratio decreased to 53.7% as of June 30th from 55.04% as of March 31st, primarily due to an increase in total revenue. We recorded income tax expense of $4.7 million, consistent with the prior quarter. Our effective tax rate was 17.8% for the second quarter, a decrease compared to 18% last quarter. We are currently estimating an annual effective tax rate of 18% for 2025. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.

Speaker 3

Thank you. As a reminder, to ask a question, you will need to press *11 on your telephone. To remove yourself from the queue, you may press *11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Michael Rose of Raymond James. Please go ahead, Michael.

Speaker 0

Good afternoon. Thanks for taking my questions. Maybe I could just start, big picture. We've seen a couple deals announced in Texas and more broadly, one bigger one last night. I wanted to get a sense for what you see as potentially the dislocation opportunities from a hiring and client acquisition front. Just given where you guys are on an asset side, any updated thoughts around potential M&A for you all. Thanks.

Speaker 2

Thank you. I do agree that there's some potential that we could pick up some people from some of these acquisitions, especially the out-of-state ones. That's a real possibility and certainly on our radar screen. It's good to see the activity finally begin to happen in Texas, and we think that's going to lead to additional sellers coming out of the woodwork. We would like to be a part of that at some point in time if it strategically makes sense.

Speaker 0

Okay, perfect. Maybe just on the credit front, any update on the multifamily credit that was added to restructure last year? Just wanted to see if that's progressing as expected.

Speaker 4

Michael, this is Keith. Yeah, the loan continues to perform. Still haven't had any missed payments. The leasing activity on the asset continues to be positive. We do anticipate at the end of the year, when the maturity hits, that that loan will move out of the bank. We don't see any reason why it wouldn't be able to do so at this point, but we are continuing to monitor the lease-up activity.

Speaker 0

All right, very helpful. Maybe just one final one for me. It looks like you kind of effectively lowered your loan growth outlook, but I think that's more of a function of maybe a little bit softer growth this quarter. I just wanted to confirm that because you did say pipelines were solid. If you could just kind of size the pipeline opportunity and maybe how much of the pipeline is comprised of newer commercial and industrial (C&I) loans around the efforts there. Thanks.

Speaker 4

Sure. Yeah. You know, if you noticed, we've produced more than twice the loans that we produced in the first quarter. We've had a lot of momentum moving forward. We anticipate on the growth side that to continue. The thing that's been a little bit harder to judge for us has been the payoffs. We know we have some payoffs still to come. It's the ones that kind of surprise us that we're not 100% sure. We don't know about the $50 million oil and gas reduction, which was kind of out of the blue for us. We are really bullish on the fact that production is going to be there. We're just not 100% sure what the payoff situation is going to look like.

You add to it the fact that we did increase our pipeline total from $1.9 billion at the end of the first quarter to $2.1 billion. We're seeing a lot of opportunity, and we're doing our best to compete with not just banks, but we're starting to see a lot of competition from the debt funds. We've got some numbers on that that are a little bit surprising there. We're seeing debt funds that are now pricing deals that banks were getting, you know, from a spread standpoint, six months ago. Debt funds are really aggressive with their spreads at this point, and as you know, they typically come with higher leverage and fewer covenants. It's a tough competition, but we still feel pretty good about the second half of 2025 from a production standpoint. I hope that helps.

Speaker 0

Yeah, it's a great call. I really appreciate it. Thanks for taking my questions. I'll step back.

Speaker 3

Thank you. Once again, to ask a question, press *11 on your telephone. Our next question comes from the line of Matt Olney of Stephens. Please go ahead, Matt.

Speaker 1

Hey, thanks for taking the question, guys. I want to ask about the net interest margin, and we saw some improvement this quarter. Any more color on just the puts and takes on the direction of that margin from here in the back half of the year? Specifically, can you add some color on how dependent that margin outlook is on the loan growth? It sounds like the loan growth could be volatile based off the paydowns, and I'm just curious how much of a driver that is for the margin. Thanks.

Speaker 2

We're up 12 basis points for the year, and looking at the average balance sheet, average loans have been down for the year. So far, it hadn't been dependent on loans. The encouraging thing is all that loan growth that we had occurred in really the last two to three weeks of June. In terms of our average loans, they're at the highest point they've really been at this entire year. If we can continue to produce the loans, as Keith's discussing, and we have pretty good insight into what's going to happen in the next couple of months, it's the payoffs that will be the difference. If we can have net loan growth going forward, I think it's going to do nothing but really accrue to our benefit when it comes to the outlook for the NIM for the last half of the year.

Speaker 1

Okay. It sounds like the margin has some tailwinds with or without the loan growth. Maybe just some commentary on deposit competition. Some of your peers in Texas are pointing towards increased competition that's perhaps going to push up deposit pricing in the back half of the year in the absence of any kind of Fed cut. I'm just curious kind of what you're seeing.

Speaker 2

We're really not seeing that. We have focused previously in prior quarters on putting on CDs. A lot of those CDs are, we had a lot that matured during this second quarter. We have another, I think, in the next 90 days, we have a little over $430 million that will mature. We're not going to be able to save as much money as we did in the first and the second quarter on the maturities, but we anticipate we'll be able to lower the average rate on those CDs at least 10 basis points, if not just a little bit more. That's really where the relief is going to come.

Who knows whether the Fed's going to lower rates or what they're going to do, but we believe that we will continue to see a little, some relief in terms of pressure on deposit pricing over the last half of the year.

Speaker 1

Okay, thanks, guys.

Speaker 2

All right.

Speaker 3

Thank you. I would now like to turn the conference back to Lee Gibson for closing remarks, sir.

Speaker 5

Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares Inc., along with the opportunity to answer your questions. Our excellent second quarter results only reinforce our optimistic outlook for 2025. We look forward to reporting third quarter results to you during our next earnings call in October. This concludes the call. Thank you again.

Speaker 3

This concludes today's conference call. Thank you for participating. You may now disconnect.