Southside Bancshares, Inc. Aktie

Hello, everyone. Thank you for joining us and welcome to Southside Bancshares, Inc. Second Quarter Earnings Call. [Operator Instructions] I'll now hand the conference over to Lindsey Bailes, SVP Investor Relations. Lindsey, please go ahead.

Thank you, Jade. Good morning, everyone, and welcome to Southside Bancshares Second Quarter 2026 Earnings Call. A transcript of today's call will be posted on southside.com under Investor Relations.

During today's call and other disclosures and presentations, I'll remind you that forward-looking statements are subject to risk and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release in our form 10-K.

Joining me today are President and CEO Keith Donahoe, 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 and Suni will end with comments on securities and funding. We will have a Q&A session following Suni's remarks.

I'll now turn the call over to Keith.

Thank you, Lindsey, and welcome to today's call. Second quarter results are highlighted by earnings per share of $0.90, a return on average assets of 1.23%, and a return on average tangible common equity of 16.09%. A $3.6 million increase in linked quarter net income was primarily driven by increased non-interest income and a decrease in non-interest expenses.

Second quarter funding costs benefited from reduced subordinated debt expense and a slight increase in non-interest-bearing deposits, but overall our funding costs increased due to a change in our funding mix and the maturity of $245 million in cash flow hedges during the first quarter. The combined effect contributed to a $355,000 decrease in net interest income during the second quarter. Higher funding costs combined with a slight drop in yield on our earning assets resulted in a lower net interest margin of 2.90%.

Strong new loan production was offset by return to elevated payoffs resulting in a relatively flat loan balance during the quarter. However, we continue to target mid-single digits for 2026 loan growth. Second quarter new loan production totaled $487 million compared to $431 million in the first quarter and $327 million in the fourth quarter of '25.

In the second quarter, new loan production of approximately $300 million funded during the quarter, with the unfunded portion expected to fund over the next six to nine quarters. Excluding regular amortization and line of credit activity, second quarter payoffs totaled $297 million compared to $113 million during the first quarter. Payoffs during the second quarter were heavily weighted towards CRE to include five multifamily loans accounting for just under half of our total payoffs. Our loan pipeline total is $1.47 billion today, up slightly from first quarter levels of approximately $1.3 billion.

Our won but not closed category remains healthy at just over $287 million. Pipeline remains well balanced with approximately 52% term loans and 48% construction or commercial lines of credit. This represents a change from first quarter pipeline, which reflected 44% term and 56% construction or commercial lines of credit. Since year-end '25, C&I loans, including owner-occupied real estate loans, increased 8.5% and now represents approximately 17% of our total loan portfolio. This is up from 16% at year-end 2025.

In addition, C&I opportunities represent approximately 22% of today's total pipeline, and that's down slightly from a 24% mix at the end of the first quarter. Classified assets declined $31 million, largely related to the previously mentioned CRE payoffs. We anticipate additional reductions in classified assets in the third quarter as several property owners are moving forward with open market sales and or refinance opportunities.

Other notable quarter -- second quarter items include a faster than expected build out of our Fort Worth wealth management team, which now includes three highly experienced and well-connected individuals. Additionally, we started construction on a new branch in the Southlake-Prosper area, and for those non-Texans on the call, that's in the DFW market. We expect completion of that project in the second quarter of 2027. Overall, we had an excellent quarter, and the Texas markets we serve remain healthy and are anticipated to grow at a faster pace than the overall US economy for the foreseeable future.

With that, I'll turn the call over to Julie.

Thank you, Keith. Good morning, everyone, and welcome to our second quarter earnings call. For the second quarter, we reported net income of $26.8 million, a linked quarter increase of $3.6 million, or 15.4%. Diluted earnings per share were $0.90 for the second quarter, up $0.12 per share linked quarter, also a 15.4% increase. Loans were flat compared to first quarter at $4.95 billion as of June 30th due to elevated payoffs in the second quarter compared to last quarter, as Keith mentioned.

The average rate of loans funded during the second quarter was approximately 6.1% compared to 6.3% during the first quarter. As of June 30th, our loans with oil and gas industry exposure were $76.1 million or 1.5% of total loans, an increase compared to $72.1 million linked quarter.

Non-performing assets remain low on a linked quarter basis at 0.11% of total assets at quarter end. Our allowance for credit losses decreased slightly to $49.3 million from $49.6 million on March 31st. Linked quarter, our allowance for loan losses as a percentage of total loans decreased one basis point to 0.92% at June 30th.

The securities portfolio decreased $86.3 million or 3% to $2.78 billion on June 30th when compared to $2.87 billion on March 31st. The decrease was driven by a decrease in purchases compared to the first quarter. As of June 30th, we had a net unrealized loss in the AFS securities portfolio of $9.8 million, a decrease of $6.5 million compared to $16.3 million last quarter. On June 30th, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $3.1 million compared to $2 million linked quarter.

As of June 30th, the duration of the securities portfolio -- the total securities portfolio was 7.2 years compared to 7.4 years at March 31st. And the duration of the AFS portfolio was 4.3 compared to 4.7 years on March 31st. At quarter end, our mix of loans and securities was 64% and 36% respectively, a very slight shift from 63% and 37% at March 31st.

Deposits decreased by $705.1 million, or 10.3% on a linked quarter basis. This was primarily driven by a decrease in broker deposits of $777.9 million, a decrease of public fund deposits of $20.7 million, partially offset by an increase in retail deposits of $93.5 million, which was driven by one commercial account that typically funds starting in second quarter and rolls out of the bank in the third quarter each year.

We remain well capitalized with strong capital ratios. Liquidity resources remain solid with $2 billion in liquidity lines available as of June 30th. We did not repurchase any common stock during the second quarter. However, we have over 700,000 remaining shares authorized for repurchase.

Our tax equivalent net interest margin was 2.90%, a decrease of 11 basis points on a linked quarter basis from 3.01% for the first quarter. Our tax equivalent net interest spread for the same period was 2.26%, a decrease of 12 basis points from 2.38%. The decrease in the net interest margin and the interest spread is primarily due to a lower overall yield on the earning assets and increased wholesale borrowings and the related higher funding cost.

For the three months ended June 30th, we had a decrease in net interest income of $355,000, or 0.6% compared to the linked quarter. Non-interest income increased $1.4 million or 11.2% for the linked quarter due to increases in BOLI income, deposit services income, trust fees, and to a lesser extent, income from swap fees and letter of credit fees included in other non-interest income. The increase in BOLI income was related to non-recurring death benefits recognized in the second quarter.

We continue to see positive activity in our trust and wealth management and brokerage groups. As Keith mentioned, we were fortunate to get our North Texas team in place earlier in the year than first anticipated. As a result, our trust fees were over our year-to-date budget by 8.4% and over year-to-date actual from the same time last year by $962,000, or 26.4%. We budgeted $9 million in trust fees for 2026, weighted slightly heavier in the back half of the year. We have also experienced higher year-to-date brokerage fees of $427,000 or 18.3% compared to the six months ended June 30, 2025. And brokerage fees, too, were over our year-to-date budget by 5.6%.

Non-interest expense was $38.7 million for the second quarter, a decrease of $1.9 million or 4.7% compared to the linked quarter. The decrease was largely driven by a decrease in salaries and employee benefits and a loss on the redemption of sub-debt recognized in the first quarter. Salary and employee benefits decreased due to additional stock compensation and a one-time retirement expense related to a new split dollar agreement both recorded in the first quarter.

Our fully taxable equivalent efficiency ratio decreased to 52.96% as of June 30th from 54.98% as of March 31st due to both the increase in non-interest income and the decrease in non-interest expense. Our budget indicates average non-interest expense of approximately $40.5 million for the remaining quarters. We recorded income tax expense of $5.7 million compared to $5 million in the prior quarter, an increase of $702,000. Our effective tax rate was 17.6% for the second quarter compared to 17.8% last quarter. And our current estimate for the 2026 annual effective tax rate is 17.7%.

At this time, I will turn the call over to Suni. Thank you.

Thank you, Julie. The mortgage-backed security purchases in the second quarter have coupons ranging from 5% to 5.5%, a duration of seven years and yield 5.4%. These were purchased at slight premiums. The corporate bonds or bank sub-debt purchased in Q2 were new issues of investment grade credits, yielding 6.25%. We expect to reinvest future cash flows from the securities portfolio into AFS, MBS, and potentially to a lesser extent into bank sub-debt while maintaining the balance of securities at approximately $2.7 billion to $2.8 billion. The principal cash flows we received during the quarter were $109.5 million, a decrease of $17.4 million linked quarter. Prepays declined through the quarter, starting at a record high in April and falling over 60% by June.

Securities amortization expense had a slight increase of $17,000 linked quarter. The spot rate on our CDs was 3.67% at quarter end, a decrease of 7 basis points linked quarter. The average rate was 3.69% during the second quarter, a 10 basis point decrease from Q1. CDs totaling $581.3 million with an average rate of 3.72% will reprice in the third quarter. We expect to retain the majority of these deposits, but believe there could be a near term need to increase the rates due to competition, especially on public funds CD. Additionally, $941.4 million in CDs with an average rate of 3.71% will reprice by year end.

Our public fund deposits decreased in the second quarter. There was movement between the 120-plus public entities we hold deposits for, but primarily the decrease was due to construction draws from bond funds. We have certain non-maturity deposit accounts with exception pricing. There were no interest rate adjustments to these accounts in Q2 other than on an individual basis. We have seen a higher cost on recently acquired deposit accounts versus existing account balances.

In the second quarter, new deposit accounts, excluding brokered and public funds, had an average rate of 2.25% versus existing accounts averaging 1.57%. However, excluding one large seasonal relationship, the rate on new deposits in June was 1.73%. Reciprocal deposits were $360.1 million at quarter end, a decrease of $3.9 million linked quarter. Many of these accounts are included in the exception pricing. Approximately 81% of reciprocal deposits are commercial and 19% are consumer.

Linked quarter, our wholesale funding remained at $1.4 billion, a slight decrease of $8 million. There was a significant shift in the sources of wholesale funding utilized during the second quarter as we repositioned broker deposits into FHLB advances and Fed discount window borrowings due primarily to rate but also due to desired terms. We utilized a mix of wholesale funding sources and negative between them based on rate and term offered and the current ALCO strategy. We have increased our collateral at the discount window and will continue to utilize this source of short-term funding due to rate and prepayability.

Our cash flow hedge notional remains at $615 million with no maturities or additions in Q2. The next maturity is a $25 million notional maturing in November, currently at a rate of 4.63%. After this maturity and some amortization related to past unwinds, is fully expensed in October, the rate on our cash flow hedges will drop to approximately 3.57% assuming current spreads. We have a notional of $358.1 million in fair value swaps on municipal and MBS securities, including $100 million of MBS fair value swaps added in Q2. Approximately 38% of our loans have fixed rates and 62% of a floating rate with approximately 82% of our floating rate loans having floors.

We have $336.6 million in fixed rate loans that mature or reprice in the next 12 months. Approximately $160 million of these loans have rates at or below 4%. Of the loans at or below 4%, approximately $105.3 million reprice or mature by year-end and approximately $22.7 million reprice or mature in the third quarter. Should these loans reprice, we estimate their yield increasing approximately 200 basis points. We are currently modeling Fed funds to be flat for the remainder of 2026 as forecasted in Moody's base case scenario. Should rates remain flat or increase by year end, we could expect a positive impact on net interest income since we are asset sensitive. We're modeling a beta of 35% on non-maturity interest-bearing deposits in rates up.

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

[Operator Instructions] Your first question comes from the line of Brett Rabatin from StoneX Group.

I wanted to start off on credit, and you've lowered the classified assets linked quarter, and I know you've got some projects in Austin. Can you maybe just walk through things like you're being able to have good success with those four or five credits. Just wanted to hear an update on them and if you still think those all work out and anything else you're seeing on the credit side.

Yes, thank you for that question. So we have spent a lot of time monitoring our CRE book and we feel really confident that we've got things moving in the right direction. We don't anticipate any losses inside of those inside of those -- inside of that portfolio. A large amount of that or multifamily properties that were construction loans that have now moved into lease-up phase. And you know that story continues where their lease up was happening. You know they're increasing occupancy but at lower rental rates. Many of those properties that we have are in the process of -- we've got customers that are actively selling or moving into refinanced opportunities. There's still liquidity in the market for both of those right now.

We do anticipate some additional payoffs in third quarter that will continue to benefit our classified asset bucket. So I don't know if that helps, but I can dig in a little bit more if you need.

No, that's helpful, Keith. And then wanted just to -- you gave the expense guide for the back half of the year. It's nice to see the strength in fees kind of across the board. Is that level what we should expect from here or does it grow further with the wealth management adds in Fort Worth? Any thoughts on the fees from here?

You want to?

Yes, sure. All right. With respect to the ones I really called out, the trust fees, you know, like I said, their budget -- we budgeted $9 million. And obviously the budget was done early in the year before we knew the timeline of when this Fort Worth North Texas team would be built out. It happened before we could have even dreamt of it happening. So it has resulted in some increased fees earlier in the year. I think if we continue the pace we're at, I think we'll -- I think there's a strong chance that we will beat the budget that we've put in place, the $9 million for the year. The budget for six months was $4.250 million, I didn't call that out specifically. And then it was weighted a little heavier in the back at $4,750,000. But since we were over 8%, I think, what did I say, 8.6%, I think we can. I hate to promise, but we're optimistic that we will continue that trajectory for the rest of the year with a new team in place and what have you.

And then on the brokerage side, obviously that's very market driven. We did budget, right? We're over budget there as well. That budget's pretty much split evenly across the 12 months for us, which is not necessarily important to you, but we're 5.5% over that budget target at year-to-date. And so we think providing the market cooperates that we will continue to see some nice fees there.

I think as far as deposit services go, those have some seasonality to them. This quarter, it was more driven by debit card income, and that was kind of made up of some increase in volume and some additional. We received about $160,000 of some refunds on some of our debit card expense. We do expect our debit card expense to be more in line with that rate, and those are netted in our reporting and that's GAAP accounting.

So it's really hard to say on deposit services, you know, there is the overdraft income and NSF and that has some seasonality to it. That part was up a little bit for the quarter, about $60,000. So that one's a little harder for me to predict for you. And if you look at the five quarters in the earnings release, you can see they are a little bit more unpredictable. I hope that helps, Brett, on the fees.

Yes. Yes. That's very helpful.

Your next question comes from the line of Michael Rose from Raymond James.

Maybe I'll just start on the loan side. I know you guys kind of reiterated the mid-single-digit growth guide. Just as it relates to the payoffs this quarter, is that kind of a peak? Or how should payoffs kind of trend over the next couple of quarters? Just trying to balance the production versus the, the payoffs as we think about the next couple of quarters.

Yes, good question, Michael. It may not be a peak. Just looking forward, and we don't know when we get into our pipeline and part of our pipeline are projected payoffs, we're pretty good at about 60 days out, 90 days out it gets a little bit more fuzzy, but we have a fair amount of loans gearing up to pay off in the third quarter. So I hesitate to say we saw a peak. On the flip side, loan production has been really strong and I tried to show that from fourth quarter '25, first quarter '26 and this quarter, we've been elevating that production level. We still feel really good that we're going to be able to do that the rest of the year.

In addition, I do anticipate some of the construction loans, the newer construction loans that we put on the books in '25, that they're going to start funding up at some point. So, and one good thing about those fundings is those tend to be our higher spread loans. So I'm looking forward to seeing some of that hit the books. Some of that could happen in the third quarter, which may alleviate some of the pressure.

So hopefully that helps.

Yes, it does. Very helpful, Keith. Maybe just as a follow-up separate topic, just as it relates to the margin pressure this quarter, how much of that was really driven by some of the funding exchanges versus some of the more structural pressure on earning asset yields. And then just separately, I know, I think you mentioned $105 million or so of fixed rate loans that are going to reprice by year end. Can you just kind of talk about the interplay there and kind of margin dynamics as we move over the next couple quarters?

Yes, the funding pressure was a large contributor to the narrowed NIM and margin. We are -- I'm looking forward to some of those loans repricing so we can hopefully take some of the pressure off the funding side. But we did -- also in the first quarter, we did have a couple of loan revenue non-recurring items. One was some purchase accretion on one particular loan that kind of elevated, if you will, and we also had an exit fee on a loan that was paid off in the first quarter that contributed.

Only one that had been restructured. And I think we alluded to that fee last quarter. Yes.

So that's that was a little bit of it so there was -- a it was both on the revenue side as well as the funding side that kind of pushed together. Now on -- I will tell you just to give you some color on new loan origination. So we are focused on both term loans that we're going to be fully funded at closing, as well as construction loans. Term loan when you're getting into the market to the high quality loans that we're looking for, those spreads have dropped significantly. We're seeing -- we've lost deals at 185 over SOFR and below. We won't play in that game. But we have been competitive and winning somewhere as low as 190, 195. But that's where the market is today. And we are being selective when we go that skinny.

So there is some downward pressure. We saw a little bit of decline in the loan yields in the second quarter. And some of that is because we did close a lot, a fair amount in the first six months of the year of this term debt on some thinner margins.

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

Thanks for all the color you provided. It's been really helpful. I just wanted to follow up on the margin and more particularly the cost of funds. given with all the funding mix, where do you guys see cost of funds going for the remainder of the year?

Well, of course, deposit competition is pretty intense, and we're seeing it really heavily on our public fund CDs for sure. So I feel like our CDs, some of those are going to reprice up a little. In fact, we may be adjusting our rates. We've been internally talking about that. We had some pressure related to our swap funding. As Keith mentioned in his comments, we had the swap mature in Q1. So that funding had to be replaced and it, I mean, sorry, the funding had to be kept in place. And so that repriced up by 105 or so basis points. We also saw the spread on our swap funding increase. And so we pay a fixed rate to our counterparty and then they pay us floating and we have the rate on our borrowing. Well, floating rate paid to us based on SOFR compared to our borrowing, the spread between the two of those has tripled since year end. So that was a driver on some of our wholesale expense, but also just moving, we moved out of brokered and into FHLB and discount window because those sources became cheaper.

So brokered was cheaper than both and now brokered is more expensive than both. So we -- I don't see that changing because that's been in place for a few months now. And then really, I mean, we've got some initiatives to try to grow some commercial deposits, and we're looking at our online platform for ease and efficiency to our customers there. So I mean we have a couple of ideas in the works to help generate some deposits.

I know your question was on the funding side, but one thing to highlight, and I know, I think Suni mentioned this, but we've made a strategic change in our loan portfolio. And right now we've got about 62% of our loans are on a floating rate. So if there is an increase, upward movement by the Fed, that will be beneficial to us. And in that event, we'll reprice those loans faster than what we've done in the past.

Got it. And then, so I guess just taking that together. It kind of sounds like there's going to be some continued margin pressure going forward, just given absent of any rate hikes. Is that kind of how we should understand it?

That's a fair way to look at it right now.

Okay, perfect. And then just one other question going -- switching to capital. So you guys haven't been active with buybacks in the first half of the year and capital levels have been building. What's your appetite for repurchases in the back half of the year and then maybe can you talk more about kind of your preferences for capital deployment?

Yes, in the big picture, yes, share buybacks are still part of the plan. We're also in the market looking for acquisitions. So to some extent, historically on our share buybacks, we've kind of dipped into that market when we see a decline in the stock that we don't think is reasonable. That's one reason why we haven't been actively engaged in that in the second quarter is because we had a nice run on the stock value or price. That doesn't mean that we won't step into that market, but we are anticipating having some opportunities in the acquisition space. So that's another reason why our capital levels remain high.

Got it. And then could you maybe just remind us kind of asset size and kind of as far as a target for M&A that you guys would be looking for? And I'm assuming if it would be kind of like in market or out of market for you guys.

Yes, we're still moving along the same strategy. Size-wise, $1 billion is comfortable for us. We could stretch a little bit on a billion dollars. And we've got an ability to shrink our balance sheet to some extent. If it's not a billion dollar asset, then it's going to be something of more size in the $3 billion to $4 billion range. That would be something that would be of interest to, because that gets us over the $10 billion mark with some little bit of scale. So we're in an awkward space, but there are plenty, there's more opportunities for $1 billion to $1.3 billion banks than there are for 3 to 4. So I'm actively spending time and open to discussions.

Your next question comes from the line of Stephen Scouten from Piper.

Just maybe kind of following up on that conversation around M&A, what do you feel like the dynamics are in terms of seller -- potential seller appetite, pricing? Like, do you feel like that's reasonable? Has there been any sort of a push for people to think about needing to take advantage of this window of kind of accommodative regulatory environment, strong valuations, that sort of thing? Or do people still want the price they want, no matter what?

I think it's a mixed bag, to be honest with you. The window of opportunity, everybody talks about it. I think there's a little bit of pressure but when you actually get into the discussions, people are still wanting the price that they want. And that's, I guess when you build a bank and it's been in your family for a long time, or you've been a part of that bank for a long time on private aspect, it's hard sometimes for them to get their head around exactly what the value of that organization really is. So when you get into those discussions, that's when you start to realize that there's still some hesitancy on meeting the bid-ask in those negotiations.

You know, somebody mentioned geography or kind of just to make sure I'm clear, we're not going to go necessarily outside of our market to make an acquisition. We're certainly not going to go outside of the state of Texas. But if we're filling in a geography, that is something of interest to me and to us. So we've got plenty of room to grow in Dallas and Houston and Austin. But I'm also not forgetting that we have a very strong presence in East Texas and Southeast Texas, and there are some opportunities in those markets.

Got it. Okay. Yes, that's helpful. I guess from a balance sheet perspective, one, I'm curious why -- I think you said security should stay kind of flat-ish in the $2.7 billion, $2.8 billion range. I'm curious, given the pressure on funding costs, and it sounds like even incremental CD costs and repricing, why you wouldn't think more about letting that book run down and taking those cash flows and trying to fund loan growth through those cash flows? Am I hearing that wrong? Or can you help me think about why that wouldn't be the case?

Well, I think the elevated loan payoffs has a lot to do with it right now. I mean, we are -- when that slows down, because the payoffs will slow down, I think you will see us apply more of the cash flows from the securities book into the loan growth. But right now, it is something we talked about that from a budgeting standpoint we're trying to keep that interest income up on the securities book as much as we can right now while we're experiencing such high payoffs on the loan side.

And what we're looking at is like right now 6% coupon MBS that are yielding in the 5.75% range. So for the asset quality...

Not that different from loan yields. So yes.

Right.

That tells you how tight loan spreads have become. On quality deals, now we could -- and we're not going to do this, but we could go find more yield in the loan book. In my opinion, you take on unnecessary risk at that point. So the loans we're pricing in the narrow spread are high quality and everybody's in the market trying to get them.

Yes. Yes. That makes sense. And then just, I guess, lastly for me and apologies if I miss this, but how are you thinking about just overall NII in spite of -- I mean, it was, I guess, down slightly on an FTE basis, quarter over quarter. It sounds like we might face additional NIM pressures. I know you're thinking loan growth should pick up. It sounds like in the back half, still hit that mid-single digits. But how do you think about NII growth versus kind of all those dynamics.

Yes, I think we'll continue to see a little bit of net interest income growth between now and the end of the year. Some of that obviously will become a lot better if there's a move by the Fed, but yes, it's our intention to continue to grow that, but we are under some pressure from the funding side.

At this time, there are no further questions. 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 our third quarter earnings call sometime in October. Thank you.

This concludes today's call. You may now disconnect.

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.