Southside Bancshares, Inc. Aktie

Hello, everyone. Thank you for joining us, and welcome to Southside Bancshares, Inc. First Quarter 2026 Earnings Call. After today's prepared remarks, we will host a question-and-answer session. [Operator Instructions]

I will now hand the conference over to Lindsey Bailes, Senior Vice President, Investor Relations. Lindsay, please go ahead.

Thank you, Rebecca, and good morning, everyone, and welcome to Southside Bancshares First Quarter 2026 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 will remind you forward-looking statements are subject to risks 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 President and CEO, Keith Donahoe; CFO, Julie Shamburger, and Chief Treasury Officer, Suni Davis. Keith will start us off with his comments on the quarter, then Julie will give an overview of our financial results and Sunit comments on securities and funding. We will have a Q&A session following Sunny's remarks.

I will now turn the call over to Keith.

Thank you, Lindsay, and welcome to today's call. We are pleased to report solid financial results for the first quarter of Highlights include strong linked quarter loan growth of 2.7%, increased earnings per share of $0.78, improved annualized return on average assets of $110 and an annualized return on average tangible common equity of $14.39.

Lower funding costs resulted in a $441,000 linked quarter increase in net interest income and an improved NIM of 301. Our funding costs benefited from the February 15 redemption of approximately $93 million of subordinated debt, which had an interest rate of 7.51%.

Second quarter funding cost will also benefit from this redemption. First quarter loan growth was driven by strong new loan production combined with lower-than-expected payoffs. Although we experienced strong first quarter loan growth, we continue to target mid-single digits for 2026 loan growth due to an expected return to elevated payoffs for the remainder of the year.

New loan production of approximately $431 million compared to $327 million in the prior quarter. Of the new loan production, approximately $240 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, first quarter payoffs totaled approximately $113 million and represents the lowest payoff amount during the past 4 quarters. The single largest payoff during the quarter was the $27.5 million multifamily loan previously included in our nonperforming asset category.

In mid-February, the borrower successfully refinanced the loan balance with a life insurance company. Additional payoffs during the quarter included an office building, several small retail centers and industrial warehouse, a skilled nursing facility and several commercial land loans. Our loan pipeline today totals approximately $1.3 billion, down from a mid-quarter peak of about $2 billion.

Despite the reduction, our 1 but not closed category remains healthy at just over $331 million. The pipeline remains well balanced with approximately 44% term loans and 56% construction and/or commercial lines of credit. This is relatively unchanged from the fourth quarter mix.

C&I-related opportunities represent approximately 24% of today's total pipeline. This is up slightly from year-end total of 20%.

During the quarter, we migrated 4 multifamily loans and 1 office loan to substandard. The 2 multifamily loans originated as construction loans and are currently experiencing slower lease-up and lower rents than originally underwritten. The remaining 2 multifamily projects originated as term loans and have experienced a decline in occupancy and reduced rental rates.

All 4 credits are supported by experienced real estate borrowers, including equity partners providing financial support. Over the next 6 to 12 months, we expect successful resolutions either through open market sales or refinances.

Despite the substandard increase, credit quality remained strong. During the first quarter, nonperforming assets totaled $9.7 million, a decrease of $28.5 million from December 25. The reduction was primarily related to the previously mentioned $27.5 million multifamily loan, which paid off in February.

As a percentage of total assets, nonperforming assets remained low at 0.11%.

Other first quarter activities included replacing our Woodlands loan production office with a full-service branch and a new branch in our fast-growing home market of Tyler. Additionally, we are particularly excited to report the hiring of a 30-year wealth management veteran charged with building out our wealth management team and expanding our platform throughout the Dallas Worth market.

When considering our net income, earnings per share, expanded footprint and a key hire in our Wealth Management group, we had an excellent quarter. Overall, the markets we serve remain healthy, and the Texas economy is anticipated to grow faster -- 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 first quarter earnings call. We are pleased to report a solid start to 2026. For the first quarter, we reported net income of $23.3 million, an increase of $2.3 million or 10.8%. Diluted earnings per share were $0.78 for the first quarter, an increase of $0.08 per share linked quarter or 11.4%.

As of March 31, loans were $4.95 billion, a linked quarter increase of $128.2 million or 2.7%. The linked quarter increase was driven by increases of $93.2 million in construction loans, $40.6 million in commercial real estate loans and $12.2 million in the commercial portfolio, partially offset by decreases of $9.6 million in municipal loans and $7.1 million in Winder for family residential loans.

The average rate of loans funded during the first quarter was approximately 6.3%. As of March 31, our loans with oil and gas industry -- the over $72.1 million or 1.5% of total loans, a slight increase compared to $71 million linked quarter.

Nonperforming assets decreased to 0.11% in total assets at quarter end, a result of the payoff of the $27.5 million commercial real estate loan restructured in the first quarter of 2025 and to a lesser extent, a decrease in our nonaccrual loans.

Our allowance for credit losses increased to $49.6 million for the linked quarter from $48.3 million on December 31. The Linked quarter, our allowance for loan losses as a percentage of total loans decreased 1 basis point to 0.93 at March 31.

The securities portfolio increased $164.3 million or 6.1% to $2.87 billion on March 31 when compared to $2.7 billion at year-end. The increase was driven by purchases of $313.5 million in mortgage-backed securities during the first quarter.

As of March 31, we had a net unrealized loss in the AFS securities portfolio of $16.3 million. an increase of $15.5 million compared to $767,000 last quarter. There were no transfers of AFS securities during the first quarter.

On March 31, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $1.95 million compared to $788,000 linked quarter. As of March 31, the duration of the total securities portfolio was 7.4 years compared to 7.6 at December 31, and the duration on the AFS portfolio was 4.7% compared to 4.8 years on December 31.

At quarter end, our mix of loans and securities were 63% and 37%, respectively, a slight shift compared to 64% and 36%, respectively, at year-end. Deposits increased slightly by $9.3 million or 0.1% on a linked-quarter basis.

Broker deposits increased $110.7 million, however, partially offset by a decrease of $82 million in retail deposits and $19.4 million in public fund deposits. We redeemed our $93 million of subordinated notes due in 2030 during February.

And at the time of the redemption, the notes had an interest rate of $7.51 and we recorded a loss of $791,000 on the redemption of the notes. We expect to see further savings in our funding cost during the second quarter as a result of the redemption.

Our capital ratios remained strong with all capital ratios well above the threshold for well capitalized. Liquidity resources remained solid with $2.68 billion in liquidity lines available as of March 31.

We did not repurchase any common stock during the first quarter, and we have approximately 762,000 shares remaining that are authorized for repurchase. Our tax equivalent net interest margin was $3.01, an increase of 3 basis points on a linked-quarter basis, up from 28% for the fourth quarter of 2025.

Our tax equivalent net interest spread for the same period was $2.38, an increase of 7 basis points from 231. The increase in the net interest margin and net interest spread is primarily due to lower funding costs. And for the 3 months ended March 31, we had an increase in net interest income of $441,000 or 0.8% compared to the linked quarter.

Noninterest income, excluding the net loss on sale of AFS securities, decreased $303,000 or 2.3% for the linked quarter due to a decrease in deposit services income and a decrease in BOLI income, partially offset by an increase in other noninterest income.

Other noninterest income increased primarily due to an increase in swap fee income. Noninterest expense was $40.6 million for the first quarter, an increase of $3.1 million or 8.3% compared to the linked quarter. The increase was largely driven by an increase in salaries and employee benefits, loss on the redemption of sub debt, software and data processing and other noninterest expense.

Salary and employee benefits increased due to normal salary and employment tax increases at the beginning of the new year, additional stock compensation and a onetime retirement expense related to a new split dollar agreement of approximately $420,000.

Other noninterest expense increased primarily due to an increase in nonservice cost of retirement expense. in a nonrecurring credit received in the fourth quarter. I mentioned during the last call that our budget indicated an increase of approximately 7%.

Absent the loss on redemption and the onetime retirement expense of 420, the linked quarter increase would have been a little over 5%. Our fully taxable equivalent efficiency ratio increased 4.98% as of March 31 from 52.28% as of December 31, and primarily due to the increase in noninterest expense.

For the second quarter of 2026, we anticipate noninterest expense of approximately $40.5 million for the remaining quarters. We recorded income tax expense of $5 million compared to $3.8 million in the prior quarter, an increase of $1.25 million. Our effective tax rate was 17.8% for the first quarter an increase compared to 15.3% last quarter. And we are currently estimating an annual effective tax rate of 17.8% for 2026.

At this time, I will turn the call over to Sunny.

Thank you, Julie. The MBS purchases in the first quarter have coupons ranging from 4.5% to 5.5%. a duration of 7 years and yield 5.24%. Approximately 1/3 of the purchases occurred late in the quarter and were essentially prepurchases of April and May cash flows due to an opportunity in the market.

These were purchased at discounts, which will act as a hedge to the earlier purchases should prepay speeds increase. This 1/3 or approximately $106.6 million at a rate of 5.44 was not reflected in the yield of the securities portfolio in the first quarter.

We expect to reinvest future cash flows from the securities portfolio into AFS MBS and maintain the balance of securities at approximately $2.7 billion to $2.8 billion. If presented with an opportunity similar to the 1 in March, we may repurchase again.

The principal cash flows we received during the quarter were $127 million or an average of $42.3 million per month which includes $20 million from the maturity of 2 MBS balloons held in HTM. I anticipate a pickup in prepays in the second quarter due to a higher MBS balance, lower mortgage rates through early March and lower spreads.

The spot rate on our CDs was 3.74% at quarter end compared to the average rate of 3.79% for the first quarter. CDs totaling $568 million with an average rate of 3.83% will reprice this quarter. We expect to retain most of these deposits and estimate and interest savings of roughly 10 basis points.

Additionally, $1.06 billion with an average rate of $3.79 will reprice by year-end.

As Julie mentioned in her comments, our public funds decreased. There was some seasonality to this decrease. In Texas, various public fund entities collect at the taxes in the fourth quarter through January of the following year then disperse some of those funds prior to the end of the first quarter.

There were also construction draws from bond funds we hold for a couple of public fund entities as well as February debt service payments. I expect public funds in the second quarter to increase from the March 31 balance. Many of our public fund nonmaturity accounts have floating rates that adjust as frequently as weekly.

We have certain nonmaturity deposit accounts with exception pricing and the last adjustment made to the exception priced accounts was December 11 of '25 following the FOMC's 25 basis point Fed funds reduction on December 10. The beta was 69% on the exception priced accounts and the beta on all noninterest-bearing nonmaturity deposit accounts net of brokered and public funds was approximately 25%.

I estimate using the same beta if there is a short-term rate cut in 2026. We have seen a higher cost on recently acquired deposit accounts versus existing account balances. In the first quarter, new deposit accounts, excluding brokered and public funds, had an average rate of 2.37% versus account -- versus existing accounts averaging 1.58%.

However, the rate on the new accounts in March showed a downward trend to 2.06%. Receclical deposits were $363 million at quarter end, a decrease of $13.9 million linked quarter, primarily due to a reduction in 1 relationship.

Many of these accounts are included in the exception pricing. 84% of reciprocal deposits are commercial and 16% are consumer. Our wholesale funding increased $370.5 million linked quarter to $1.4 billion due primarily to fund the $128.2 million increase in loans and the $164.3 million increase in securities.

The increase in wholesale funding includes increases in FHLB advances of $104.8 million, $110.7 million in broker deposits and $155 million in Fed discount window borrowings. We utilize a mix of wholesale funding sources and navigate between them based on rate and term offered and the current ALCO strategy.

We have increased our collateral at the discount window, and we'll continue to utilize this source of short-term funding due to rate and prepay ability.

During the first quarter, $245 million of cash flow swaps at a rate of 2.7% matured. It was, however, necessary to retain the funding and the rate on the new borrowings is approximately 3.75%. We have another $25 million in cash flow swaps maturing in November at a current rate of 4.62%.

After this maturity and some amortization related to past unwind is fully expensed in October the rate on our cash flow swaps will drop to approximately 3.53%, assuming SOFR is unchanged. We unwound $155 million in municipal loan swaps during the quarter, creating a small gain that will be accreted over the loss of the previously hedged items.

This slightly improves our interest rate risk position in rates down scenarios. We no longer have any municipal loan swaps. We have a notional of $258.1 million in fair value hedges on municipal and MBS securities. Approximately 38% of our loans have fixed rates and 62% on at a floating rate and approximately 81% of the floating rate loans have floors.

We have $344.2 million in fixed rate loans that mature or reprice in the next 12 months. Approximately $209 million of these loans have rates at or below 4%. Approximately $44 million of the loans with the rates at or below 4% reprice or mature in the second quarter. We estimate a lift in the NIM as these loans repriced throughout '26 and during the first quarter of '27.

Our budget included 2 short-term rate cuts of 25 basis points 1 in June and another in September. Should rates remain at quarter end levels through year-end, we expect a positive impact on the NIM versus budget as we are asset sensitive.

Thank you for joining us today. This concludes our comments, and we will now open the line for your questions.

We will now begin the question-and-answer session. [Operator Instructions].

Your first question comes from Brett Rabatin from StoneX Group.

Wanted to -- wanted to start on just the loan growth outlook in the mid-single-digit guide and solid production in the quarter, lower payoffs, aided the first quarter, I think I heard the number of $113 million for payoff, but that number is expected to go higher.

Can you maybe give us some color around what you're expecting for payoffs in 2Q or 3Q? And then just the production pace, if you expect that to continue at the current level or what it was during 1Q?

Yes. I'll start with the production side. I do anticipate us to continue to produce new loans at a similar rate. We've talked about it internally. -- we're seeing good activity. The pipeline is down a little bit, but I think that has way more to do with -- the loan officers were hunkered down closing new transactions in the first quarter, and so they're coming up for air and they're going to rebuild that pipeline.

We were fortunate we didn't see as many payoffs in the first quarter, but we do know we've got a number of real estate assets that are individually rather large that are going through the normal cycle, we were predominantly a construction lender for a long time. And so those have technically a finite life that they build and lease up and then move into either a sale or open market reenhance with other lenders on a permanent basis.

So -- we know we've got some of that coming and so I'm hedging our bet a little bit that it's too early to call a change in our loan growth at this point because we do know we have a number of projects that are teeing up to get refinanced or sold.

Okay. That's helpful. And then maybe, Julie, on the funding costs, the money market decreases have kind of slowed. The CD portfolio might still be a an opportunity, but I think you mentioned that $237 for new accounts in the quarter. I don't know if that includes CDs, but just any thoughts on the ability to further lower funding costs from here if rates don't move. And then I heard you mention the margin will be up. There's a lot of moving parts in that. I was just hoping if you could give us a little more color on the magnitude that you're expecting for 2 or 3 Q.

This is Sunny. So yes, the 237 did include CDs and we do feel like we can save some interest expense on the CDs, maybe 10 basis points. And that may be conservative. During Q1, we had some local competition pretty heavily. for CD, short-term CDs, paying well over 4%, and that has ended. So we did see some exit of deposits related to that, but it's over.

And so yes, at least 10 basis points maybe more. We picked up, what, 20 or 21 linked quarter. So -- and we've also looked at some exception pricing. We've made a few adjustments there, even though Fed has held rates steady, but I mean those are minor.

Your next question comes from Stephen Scouten with Piper Sandler.

Appreciate it. I guess maybe sticking on that NIM conversation. Can you quantify what the expected benefit is in the second quarter on a basis point level from the sub debt. And then kind of what you think you could see from just asset repricing and the CD benefits?

So let's see, on the sub debt for the 3-month quarter, it was $741 million -- so expect to see -- I mean, obviously, the balance is going to be much smaller for the -- well, it's going to be about $147 million for the average in the second quarter, and it will be just over 7% with the amortization and the discount.

So I haven't calculated what I expect that to be, but that 731 that you see for the first quarter is going to come down to the low 7s on about roughly $147 million balance.

Okay. That's really helpful. And then just maybe on the expense front, I think you said the $40.5 million kind of per quarter which probably have done the math yet still keeps you in that 7% range, I imagine. Would you expect that, that would allow you to deliver year-over-year operating leverage at this point in time? And is that kind of I guess, the minimum goal for you all as you think about the progress for the year?

Yes. I mean I believe that we're going to be at the 7%, hopefully, under, but I don't expect us to go over that 7%. It was just a couple of these larger items were kind of front-loaded into the first quarter. by the nature of the timing of the events. So the $40.5 million may be a little heavy for second quarter. But I think on average, that's probably where we're going to end up.

And I'm still at this point, expecting the 7% annually. Does that help?

Yes. And I guess like from an operating leverage perspective, just as we think about maybe the efficiency ratio and how that all comes together, I mean would you expect that on a year-over-year basis, decline for the full year 2016?

I expect some improvement in the efficiency ratio in the second quarter, for sure. The $791 million was excluded in the calculation and the efficiency ratio as we've always excluded like onetime loss on redemption, the like, for example, the $420 million that I mentioned was not excluded, appropriately not. And so like that will not occur again in the second, third and fourth quarter.

And so I expect an improvement in the efficiency ratio for the second quarter.

Your next question comes from Michael Rose with Raymond James.

Just going to the capital standpoint, ratio is still really good. I noticed you guys didn't buy back any stock in the quarter. I assume some of that was related to maybe just the redemption of the sub debt and some of the other actions in terms of buying securities, things like that. But any sort of outlook for what we might want to expect for repurchases as we move forward?

We'll continue to be opportunistic in that regard. Our stock is doing pretty well right now. So historically, when we've gone in and repurchase shares, it's usually and we're seeing a little bit of some downward pressure. But from a capital deployment standpoint, we are -- there's kind of a close first and second opportunity.

M&A is definitely part of our strategy. Stock buyback is there as a close second. But we're also organically growing. And so we're being judicious and we'll continue to deploy capital where we think we're going to get the fair return.

All right. Helpful. Maybe just switching gears to fees. -- nice step-up this quarter, still some good momentum in the trust business, which I know you guys have invested in -- just wanted to see if there's any kind of updated expectations from kind of last quarter? And then if there was anything in the other expense line because that was up both year-over-year and sequentially.

Yes. On the trust fees, I'm really excited. I think we all are very excited that we were able to pick up an individual in the Fort Worth market that has a tremendous amount of experience in a network that I think we will benefit from. I can't guarantee you we're going to see that lift this year, but it wouldn't surprise me to get a little bit of a lift throughout the rest of the year.

She's just getting their feet underneath her. but I'm really excited about it and look forward to strong growth in the forth market. I think we also picked up some fees from swap income.

Yes. I mean our trust fees and our brokerage services were both slightly from fourth quarter, but significantly over the first quarter of 2025, you mentioned year-over-year. So those were both. We saw a really nice increase year-over-year in those 2 categories. as well as the swap fee income, as I mentioned earlier, was a figure bit.

That's something that we -- that's intentional. We really made it an intentional approach to continue to generate swap income granted that is somewhat market-driven. So -- but we -- every relationship manager is with the appropriate customer, they are talking to them about swaps. We are -- mentioned, I think 38% is what our loan book is that's fixed on our balance sheet. That's a significant decline over the last 2 years. and that was intentional because we wanted to get to a point that we could manage our NIM a little bit better.

You're going to have 2 sides of the equation working at the same time from a funding cost and from a lending perspective, but we're becoming more disciplined in that.

Your next question comes from Woody Lay with KBW.

Wanted to start on credit. And it was great to see NPAs improved quarter-over-quarter with that restructured loan. paying off. You did mention there were a couple of downgrades in multi-family book. So just given some of the moving pieces, I was just curious on yours perspective on sort of the local multifamily market and -- how it's performing? And is it certain markets that are showing weakness? Is it individual projects? Would just love your thoughts there.

Yes. So it is -- to give you a little bit of color on that. So the 4 multifamily projects that we move down or downgraded 2 are in the Houston market, 1 is in the Dallas-Fort Worth market and 1 is in the Austin market. So I don't think we are -- I know we're not. We're not unique. Any Texas-based lender that's been doing multifamily construction and term loans have seen a weakness.

I'm not concerned about these and to give you a little bit of color, they average about $33 million each. -- they -- we've gotten new appraisals on 3 of the 4 assets, and we are sub 60% loan-to-value on those.

The real issue is that there's -- across the state in the metropolitan markets, there's been a ton of supply. I know that's nothing new to everybody listening, but -- we continue to see concessions offered from a rental rate standpoint. And the good news is in several of the markets, we do believe that the occupancy -- or really the vacancy has peaked -- and so it's a matter of time for these assets to stabilize.

We do expect -- 1 of these we expect will get refinanced by debt fund sometime before the end of the second quarter. And that's the plan. They actually have a written term sheet. We also anticipate 1 of our borrowers is posting -- it was running an option right not an auction, but they're running a process right now to sell the asset.

They also have started early enough that in the event they don't get a number they like, which we think they will. But if they don't, they'll still have the ability to go refinance it before the maturity. So I mean it's a combination of things, but predominantly it's just a supply issue. Demand is still there. Each project continues to lease up quarter-to- -- month-to-month, they're positive on lease-up.

It's just concessions are still in place at 3 of these projects, if you just let the concessions burn off, they are in a more traditional over 110, 115 to 120 DSCR. So -- hopefully, I'll provide some color. Again, not overly concerned about these, especially given the borrowers and their equity partners. These are folks that have been around the real estate world for a long time, and we've got long-term relationships with them.

Yes. No, that's really helpful. I appreciate you going into that. And I guess, as you mentioned, notice the oversupply isn't necessarily a new issue. How has that impacted the loan pipeline and new multifamily projects? Is there less these days or is underwriting shifted? Just curious on your thoughts.

Yes. We have modified our underwriting standards, but what that has done is it's made it more difficult to originate new multifamily projects. I do anticipate that to change some maybe towards the end of the year. But right now, the vast majority of the new opportunities we're seeing are coming in either the retail segment, the industrial warehouse segment. Those tend to be -- there's a lot of opportunity there.

And those underwrite easier in today's market. And in particular, the retail across the state of Texas is incredibly strong. and that goes to a continued population and migration of people and historically a relatively limited new retail development throughout the state.

The next question comes from Matt Olney with Stephens.

Most of my questions have been addressed. I want to go back to deposit growth. I think you mentioned some seasonal headwinds for deposit growth in the first quarter. What about the remainder of the year? Do you expect the deposit growth to match the loan growth in that mid-single-digit number? Just any more color there?

I do expect a little bit of deposit growth -- but I believe we are going to be funding at least half of the loan growth with wholesale.

And is that come like a full year comment? Or is it kind of in the near term? What was the timing of that comment?

Okay. So we're over budget right now with wholesale because of loan growth as has exceeded. So I would -- I expect deposits to pick up in Q2. We're going to have some more seasonality in Q2 with 1 particular customer and then we are targeting to still meet our budgeted deposit growth, and we're putting in some, I would say, some -- looking closer at our strategy to ensure that, that happens.

We are spending a lot of time talking about deposit strategy growth. So it's key to what we do, obviously, and we're getting everybody focused on it.

Okay. Appreciate that. And then on the net interest margin this past quarter, the loan yields look exceptionally strong. I know you have some nice longer pricing tailwinds that you highlighted, anything else unusual on that loan yield number this quarter that you reported this morning?

No, we're still seeing fierce competition on quality real estate assets in particular. I do think what helped us in the first quarter were a number of the closings were in areas that we tend to see a little bit higher spread. Some of that is in our homebuilding book. Some of that is in our lot development.

Both of those categories tend to get a little bit higher spread. I can't tell you that will continue throughout the rest of the year. But we do have 1 of the specialties that we have is homebuilding activity, and it's been good for us. I think we bank some of the top premier builders throughout the state, and we'll continue to do that.

But generally speaking, you get a little bit better pricing on that. Lot development activity is similar, although we're being very selective on adding new lot developer projects because it's very, very submarket-specific today, especially in the Dallas-Fort Worth market.

There are still pockets that are really -- they're pretty strong, but there are also -- you go 5 miles down the road and you don't want to touch a project. So -- it's very, very submarket specific. And again, these are developers that have deep equity pockets and long a lot of experience.

And then just lastly, on the credit front, I think Keith, you addressed some of the questions on multifamily, but we also got that pay down of that $27 million restructured credit from the previous quarters that we've discussed on these calls. Just any more color on the resolution of that credit?

Yes. The only thing that I'd call out is, especially given that we've moved -- we migrated 4 other multifamily projects -- that 1 was in the nonperforming asset category, but we felt pretty good about it given the individual project dynamics and the fact that it got refinanced by a life company, -- and they actually added an additional $1 million in loan proceeds.

It's an earn-out for them, but that gives you some indication of the type of projects that we typically finance even though that 1 was in the NPA bucket, it really -- we were never overly concerned about it. We obviously watch them and pay attention to them. But that is -- I think you'll be able to expect the same type of results coming out of these other 4 that we have been where we've downgraded, but we're not overly concerned with, hopefully, that helps.

The next question comes from Brett Rabatin with Stonex Group.

Just a follow-up on the Texas markets, and there's been a couple of deals in the market here in the past few quarters. And just wanted to see if you're being able to take advantage of the disruption from some of those transactions or how you viewed disruption in the Texas markets?

And then if M&A might be a strategy from here if you guys are out actively or aggressively looking for other partners? Or just any thoughts on your growth plans and the Texas markets?

Yes. In general, there has been disruption in the market, and it's both from a customer standpoint as well as an employee base. We are -- we've been having conversations with folks from an employment standpoint that could be beneficial to us, some of which are from larger banks than we are, that would be helpful for us as we cross the $10 billion mark. So we're going to be very opportunistic with that.

And in addition, I didn't highlight this, that 1 of the C&I customers we picked up in the first quarter really came out of a displacement with another acquisition by an out-of-state organization. The customer had a strong desire to bank with a Texas-based bank. We have been calling on them.

And so it made for a a fairly easy transition for them. So yes, we're seeing it both from an employee standpoint and also customer opportunities.

Okay. And then just any thoughts on M&A, your appetite if what you were seeing out there?

Yes. So we're continuing to talk and we are open to acquisitions in -- that has always been our strategy. I do think that today, there is a higher probability of something occurring because just the market dynamics that are out there. So that will continue to be part of our strategy.

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

All right. Thank you, everyone, for joining us today. We appreciate your interest in South side, and we are optimistic about 2026 and look forward to reporting the second quarter earnings during our next call in July. Thank you.

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

Hello, everyone. Thank you for joining us, and welcome to the Southside Bancshares, Inc. Fourth Quarter and Year-End 2025 Earnings Call. [Operator Instructions] I will now hand the call over to Lindsey Bailes, SVP [Technical Difficulty].

Thank you, Alexandria. Good morning, everyone, and welcome to Southside Bancshares 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 risks 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 President and CEO, Keith Donahoe; and CFO, Julie Shamburger. 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, 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 5.36%.

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 $1.5 million linked quarter increase in net interest income, resulting primarily from lower funding cost 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 subordinated 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 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, multifamily, medical office, general office and commercial land. Most of these were concentrated in five 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 '25.

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.

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%. 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 $6.6 million in municipal loans and $5.7 million in 1-4 family residential loans. The average rate of loans funded 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. 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, a 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 fund deposits. On February 15, 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 remained solid with $2.78 billion in liquidity lines available as of December 31, 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 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 2.94% 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 $494,000 or 4% for the linked quarter, primarily due to an increase in deposit services, BOLI 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 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 Instructions] Your first question comes from the line of Woody Lay with KBW.

I believe you just called out 7% 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?

Yes. I'll hit it at a high level, and Julie can provide some details. So I don't have the breakdown in front of me on the expense between software and FTEs. But what's going -- what's really happening is on the software front, we are looking at moving our core to outlink. And so we're currently hosting 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, it's going to make that a 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 two 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 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 the 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 '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 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, Woody, on 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.

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

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

Yes. I appreciate that. And maybe a follow-up. You mentioned the core switch might help with M&A down the road. And I 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 Southside in this current environment?

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, which should be opening in the next 60 days. But it's those target areas. And even in Austin with only two locations, if the right opportunity comes around, we are discussing those situations and are open to it. I hope that helps.

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

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

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.

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 one piece of funding. If that makes sense.

Okay. Yes. No, that's -- 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.

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. 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.

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 want to get your thoughts -- updated thoughts on the buyback.

Yes. 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, 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 one of them may impact the other one, but we'll see how that goes this year.

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

I 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 you were specifically thinking about for '26 in terms of fee revenues? And then just any thoughts on the outlook for '26?

Sure, Michael -- 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 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 increase is coming from.

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?

Yes. For us, we're going to continue to be opportunistic with it. 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. 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.

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. I 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?

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.

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

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?

Yes. I mean it still remains that we aren't going to buy something in the $2 billion category. We would be below $1 billion -- I mean, $1.5 billion 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 done that gets us close, then that helps us get to the point that we can spring over $10 billion with a second transaction. So we're -- it's a little bit of a puzzle to 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.

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

Yes, Jordan, it will include it.

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 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.

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

[Audio Gap] our current forward-looking assumptions are described in our earnings release in our Form 10-K. Joining me today are Lee Gibson, CEO; Keith Donahoe, President and CFO, Julie Shamburger. 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.

These securities had a combined taxable equivalent yield of approximately 3.28%. 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 5.5% and 6% coupons and, to a lesser extent, Texas municipal securities with coupons ranging from 5% to 5.75%.

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 4 years. As previously disclosed, we issued $150 million of subordinated debt at 7% fixed to floating rate notes in mid-August.

Linked quarter, our net interest income increased $1.45 million, and our net interest margin decreased 1 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 onetime loss on the sale of securities, we had an excellent quarter.

Linked-quarter noninterest income continued to perform well, and loans increased $163 million, with $81 million of that growth occurring on September 30. 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. 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 we 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 6 to 9 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 [indiscernible] family, industrial, skilled nursing facilities and some commercial land.

Commercial real estate payoffs continue to be largely driven by open market property sales. However, 2 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 that has rebounded to $1.8 billion today.

While lower than the prior 2 quarters, it remains elevated compared to the same period in 2024. The pipeline is well balanced with approximately 42% term loans and 58% construction and/or commercial loans 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, nonperforming assets increased approximately $2.7 million, but remain concentrated in the previously disclosed $27.5 million multifamily loan that was moved into the nonperforming category during the first quarter.

We continue to expect this to be -- this loan to be refinanced or rightsized before the end of the year. And overall, as a percentage of total assets, nonperforming assets is at 0.42%. 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, a decrease of $16.9 million or 77.5%. Diluted earnings per share were $0.16 for the third quarter, a decrease of $0.56 per share linked quarter.

As of September 30, 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 1 to 4 family residential loans.

The average rate of loans funded during the third quarter was approximately 6.7%. As of September 30, our loans with oil and gas industry exposure were $70.6 million or 1.5% of total loans compared to $53.8 million or 1.2% linked quarter. Nonperforming assets remained low at 0.42% of total assets as of September 30.

Our allowance for credit losses increased to $48.5 million for the linked quarter from $48.3 million on June 30. And our allowance for loan losses as a percentage of total loans decreased to 0.95% compared to 0.97% at June 30. Our securities portfolio was $2.56 billion at September 30, a decrease of $174.2 million or 6.4% from $2.73 billion last quarter due to a partial restructuring in 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 30, we had a net unrealized loss in the AFS securities portfolio of $15.4 million, a decrease of $45 million compared to $64 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 in the AFS portfolio. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio. As of September 30, the duration of the total securities portfolio was 8.7 years compared with 8.4 years at June 30. And the duration of the AFS portfolio was 6.5 years compared to 6.2 years at June 30.

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.

On August 14, we issued $150 million of 7% subordinated notes. Our 3.875% subordinated notes issued in 2020 with an outstanding amount of $92.1 million will begin to adjust quarterly at a floating rate equal to the then current 3-month term SOFR plus 366 basis points in mid-November of 2025. Our capital ratios remained strong with all capital ratios well above the threshold for well capitalized.

Liquidity resources remained solid with $2.87 billion in liquidity lines available as of September 30. We repurchased 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%, a decrease of 1 basis point on a linked-quarter basis, down from 2.95%. And our tax equivalent net interest spread for the same period was 2.26%, also a decrease of 1 basis point from $2.27.

For the 3 months ending September 30, we had an increase in net interest income of $1.45 million or 2.7% compared to the linked quarter. Noninterest 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. Noninterest 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 the decrease in software and data processing expense.

Our fully taxable equivalent efficiency ratio decreased to 52.99% as of September 30 from 53.70% as of June 30, primarily due to an increase in total revenue. At this time, we expect noninterest 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 effective 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.

[Operator Instructions] Your first question comes from Michael Rose with Raymond James.

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 kind of on the last day of the quarter, half of it, roughly, you did the restructuring. Just wanted to get kind of a level set of if I normalize all that, what's a good kind of starting margin that we should be contemplating 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?

The NIM in the fourth quarter, I expect to be up slightly. We have the sub debt costs in the third quarter that will have the full impact in the fourth quarter. But with -- if loans don't grow at all in the fourth quarter, which we're not anticipating, the average loans will increase $125 million during the quarter.

And then we'll have the full impact of the $325 million of security sales restructuring that will take in effect, along with repricing of over $600 million of CDs that we anticipate will have an average savings of around 34 basis points on. 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 today would be a rate of 7.52% compared to the current rate of 3.875%. So overall, I expect the NIM to be up slightly. I expect net interest income to improve nicely. And I think we're set up for a lot of positive things in the future when it comes to net interest income and the NIM. I don't know if that gives you a flavor for what we're looking at.

Yes, it's helpful. There's just some -- obviously, a good amount of moving parts here. So I appreciate the -- appreciate the color -- yes. Maybe just moving on, we've seen some deal activity here in Texas over the past couple of months. I know you guys have kind of previously stated wanting to potentially do a deal yourselves.

Just wanted to see 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 recent deals or maybe a market share gain from clients.

What we're looking at really hasn't changed. There are a few institutions that we have some interest in that potentially might be for sale. And in terms of hires, that is something we're looking at, and we've made a few hires. But yes, with some of the disruption that's occurring, especially with some of the larger out-of-state banks buying, some of the less than $10 billion banks here in Texas.

There's definitely been some disruption, and we hope to jump on that opportunity and make some additional hires there.

Okay. Great. I'll step back. Lee, congratulations on the announcement.

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

Wanted to start on loan growth, obviously, a really strong quarter, and it sounds like a lot of that growth actually came on the final day of the quarter. So I was just curious on the pipeline entering the fourth quarter, how it's looking and if there was any pull-through of the pipeline in this quarter.

Yes. The pipeline is strong. It did take a bit. That's somewhat to be expected, given the strong production quarters we've had. 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 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. 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 $1 billion typically on a pipeline. So looks strong.

We feel good about pull through. Generally speaking, we're still seeing 25% to 30% of the pipeline moving through to a success rate. 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 loan sentiment that's always out there is, especially as you get towards the year-end, there may be some unknown payoffs that occur, but we still feel pretty good about our guidance number today.

Got it. That's helpful. And then 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 those things this quarter, just talk about how intense competition is. So are you seeing that from you all's perspective?

Yes. There's a lot of competition out there, both from the CRE standpoint and C&I so we're not immune to it. We are being disciplined in our pricing approach. And generally speaking, since the second quarter pricing hasn't changed a lot.

We're still looking at -- if it's a fully funded transaction, those are and it's a high-quality, you're getting down to a 2% spread over SOFR. We have seen some banks willing to go below to. We slightly dip below 2% on loan transaction, but we are also selling a swap as part of the deal that helped get us Mac to what we would consider kind of the floor for us.

On the construction side, we're still seeing construction that is going or moving -- running that somewhere between as low as 2.50%, but generally speaking, somewhere around 2.65% to 2.75%.

Got it. And then lastly, as it pertains to the securities restructure, 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, 2 things. I spoke to the fact that this restructuring provided us even more flexibility as we have a lot of securities now that are at gains. And so we're in a position now that we can fund loan growth, increase spread and actually self securities near our book are above it.

If the market allows and conditions are such that it makes sense to do some additional restructuring and the available for sale portfolio, we're certainly going to take a look at it. As Julie mentioned, the market's improved quite a bit. Spreads have also tightened there quite a bit, especially in the muni market. So we're going to continue to look at that carefully. But I would say most of the heavy lifting in the AFS portfolio has been done, but there is still some that we will take a look at and make decisions on as appropriate.

And Lee, congrats on the upcoming retirement. And Keith, congrats on stepping into the role.

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

Just had a question on the buyback. So you recently increased the authorization. And just kind of what should we expect with buyback activity going forward?

Yes. So we did increase, as you mentioned, the last time we increase was back in July 2030. And since that day, we purchased 868,000 shares give or take, if you -- and so I think we're going to approach it the same way that we historically have.

When we see the price debt and it's opportunistic, we will be out there actively purchasing shares. We've historically purchased open market shares and then done several 10b5-1 plans at the quarter end. 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. 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 do you guys see that going over maybe the next year or so and as a portion of the income?

We have a really good team in place that we've put in place over the last 2 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 have -- we were expecting continued success. They're extremely busy.

And they're taking on new clients all the time. So that's an area of noninterest income that we're really encouraged about and excited about.

And to add to that, Lee, we are -- one of the missing things for us right now is to really go into the metro markets with the wealth management. So we are exploring that, and we think we're going to make some good headway in 2026 on that. We may not attack each metro market with the same vigor, but we've got a pretty good footprint in footwear that I think could be a good support and starting point for wealth 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 many rate cuts are you guys assuming through year-end and maybe even into '26?

I'm pretty certain that next week, we'll see movement potential that there's another move the last the last Fed meeting this year. Next year, I'm anticipating probably at least 2 cuts. It really just depends the -- what the fab 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 it could be more than 2 next year.

A lot of it's probably going to depend on inflation and on the -- and the employment. And the inflation numbers came in nice this morning, lower than expectations, but it's still above their 2% target. Whether they change that with new Fed leadership, that's up in the air.

[Operator Instructions] Your next question comes from the line of Ania Palca with Hubbed Group.

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 yes, I guess the answer is it's not necessarily seasonal what we were just talking internally. So through some intra file business, we have picked up some large depositors through that process. So we're -- 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. And you've talked about the loan pipeline, but I guess I was talking -- I was hoping you could expand on the growth so far from the new lenders. .

So out of the Houston market, is that what you're referring to?

Yes.

Yes.

6 So we're seeing good positive traction. One thing that just to keep clear, we've had 4 new hires in that market that are specific kind of to C&I business. And one of them came in, I think, December 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 added at the end of the second quarter, and then you have no one added right into July, early August.

So we haven't been able to see truly a full year of production yet, but it's been positive. They are gathering deposits as well as loan growth right now. The C&I uptick -- one thing we've talked about is really pushing our mix on C&I. Right now, we are -- at the beginning of the year, we were about 15% of our book is C&I. We have seen a slight uptick of about 16% today.

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 moving to C&I in the East Texas and Southeast Texas markets, and we're seeing some good traction with that.

Overall, as we've seen really positive loan growth probably in the 15% range this year.

1

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 in 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 Southside's future as Keith Donahoe takes the helm assisted by CFO, Julie Shamburger and an extremely capable senior management team. Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares 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.

Thank you for standing by, and welcome to Southside Bancshares' Second Quarter 2025 Earnings Conference Call. [Operator Instructions]

I would now like to hand the call over to Lindsey Bailes, Vice President, Investor Relations.

Please go ahead.

Thank you, Latif. Good morning, everyone, and welcome to Southside Bancshares' 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 risks 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 Shamburger.

Firstly, 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.

We had an excellent quarter with net income of $21.8 million, resulting in diluted earnings per share of $0.72 and an annualized return on average assets of 1.07% and an annualized return on average tangible common equity of 14.8%. 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 9 basis points to $2.95 and net interest income increased [indiscernible] million. The yield on earning assets increased 2 basis points and the cost of our interest-bearing liabilities decreased by 5 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 2 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 2 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 we'll now turn the call over to Keith on.

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 6 to 9 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 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, 2 multifamily properties were refinanced with other lenders to include a life insurance company and a private debt side. 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 the Southside customer. For the remaining half of 2025, we anticipate moderated payoffs and new loan production consistent with the first half. 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 closed 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 CI team continued with 2 new relationship managers. One individual started in late June and the other individuals started in early July. Both have contributed to the expanded C&I pipeline. New C&I hires in the Houston market now stand at 4 individuals during the first 6 months of 2025.

Overall, credit quality remains strong. During the second quarter, nonperforming assets increased slightly and remain concentrated in 1 large construction loan we used into a nonperforming category during the first quarter. The loan is secured by a movie 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, nonperforming assets remained unchanged at 0.39%. During the quarter, a $17.9 million payoff of the classified loans was partially offset by the migration to classified of the $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.

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% and 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 1 to 4 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. Nonperforming assets remained 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 AFS securities 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.

The unrealized gain or 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 9 in 7 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 [ $9.1 ] 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 remained strong with all capital ratios well above the threshold for capital adequacy and well capitalized. Liquidity resources remained solid with $2.33 billion in liquidity lines available as of June 30. 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 23, 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 9 basis points on a linked-quarter basis to $2.95 from $286. The tax equivalent net interest spread increased for the same period by 7 basis points to $2.27 from $220 million.

For the 3 months ended June 30, we had an increase in net interest income of $414,000 or 0.8% compared to the linked quarter. Noninterest income, excluding net loss on the sales of AFS securities increased $1.4 million or 12.7% for the linked quarter. primarily due to an increase in swap fee income and deposit services income. Noninterest 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 in 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 30 from 55.04 as of March 31, 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.

[Operator Instructions] Our first question comes from the line of Michael Rose of Raymond James.

Please go ahead, Michael.

I guess on -- maybe I could just start big picture. We've seen a couple of deals here announced in Texas and more broadly, 1 bigger 1 last night. Just wanted to get a sense for what you see is potentially the dislocation opportunities from a hiring and client acquisition front? And then just given where you guys are on an asset side, just any updated thoughts around potential M&A for you all.

Yes. Thank you. I do agree that there's some potential that we could pick up some people from some of these acquisitions, especially in the out-of-state ones. And 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, and we would like to be a part of that at some point in time if it strategically makes sense. .

Okay. Perfect. And then maybe just on the credit front. Just any update on the multifamily credit that was added to restructured last year. Just wanted to see if that's progressing as expected. .

Michael, this is Keith. Yes, the loan continues to perform. -- still haven't had any missed payments, but 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. And we don't see any reason why we wouldn't be able to do so at this point, but we are continuing to monitor the lease-up activity.

All right. Very helpful. And then maybe just 1 final 1 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. So I just wanted to confirm that because you did say pipelines were solid. And then if you could just kind of size the pipeline opportunity and maybe how much of the pipeline is comprised of kind of newer C&I loans around the efforts there? .

Sure. Yes. if you noticed, we produced more than price the loans that we produced in the first quarter. So 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 surprised us that we're not 100% sure. We don't know about the $50 million oil and gas reduction was kind of out of the blue for us. But -- so we're 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.

So we're seeing a lot of opportunity. 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. It's a little bit surprising there -- we're seeing debt funds that are now pricing deals that banks were getting from a spread standpoint, 6 months ago. And so that funds are really aggressive with their spreads at this point. And as you know, they typically come with higher leverage and fewer covenants. So 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.

Yes, it's great color. I really appreciate it. I'll step back. .

[Operator Instructions] Our next question comes from the line of Matt Olney of Stephens.

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? And then 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 on the paydowns. And just curious how much of a driver that is for the margin.

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 the -- really the last 2 to 3 weeks of June. So in terms of our average loans, they're at the highest point they've really been at this entire year. So if we can continue to produce the loans, as Keith is 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. But 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.

Okay. So 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 put up -- push up deposit pricing in the back half of the year in the absence of any kind of Fed cut. So I'm just curious kind of what you're seeing.

We're really not seeing that. We have focused previously in prior quarters. I'm putting on CDs. A lot of those CDs are -- we had a lot that matured during the 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 -- in the second quarter on the maturity [indiscernible] 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.

So that's really where the relief is going to come and who knows whether the Fed's 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.

I would now like to turn the conference back to Lee Gibson for closing remarks. Sir?

Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares along with the opportunity to answer your questions. Our excellent second quarter results only reinforces 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. .

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