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Date
July 25, 2025, 4 p.m. ET
Call participants
President & Chief Executive Officer — Lee Gibson
Senior Executive Vice President & Chief Lending Officer — Keith Donahoe
Senior Executive Vice President & Chief Financial Officer — Julie Shamburger
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Takeaways
Net Income-- $21.8 million in net income for Q2 2025, a $306,000, or 1.4%, increase over the prior quarter.
Diluted Earnings Per Share-- $0.72 GAAP diluted earnings per share, up $0.01 sequentially from Q1.
Return on Average Assets-- 1.07% annualized return on average assets.
Return on Average Tangible Common Equity-- 14.38% annualized return on average tangible common equity.
Net Interest Margin-- Increased by nine basis points to a 2.95% tax-equivalent net interest margin on a linked quarter basis.
Net Interest Income-- $54.3 million, up $414,000, or 0.8%, over the prior quarter.
Loan Production-- $293 million in new loans originated, with $228 million funded, and the remainder to be funded over the next six to nine quarters.
Total Loans-- $4.6 billion in loans as of June 30, 2025, a $34.7 million, or 0.8%, increase over the prior quarter, driven by growth in commercial real estate and construction loans.
Commercial Real Estate Payoffs-- Second-quarter payoffs totaled approximately $150 million, mainly due to open market property sales.
Oil and Gas Loan Payoff-- A $50 million unexpected payoff reduced oil and gas exposure to $53.8 million, or 1.2% of total loans as of Q2 2025.
Loan Growth Guidance-- Loan growth guidance reduced to 3%-4% year-over-year, reflecting moderated expectations for the remainder of 2025.
Loan Pipeline-- Pipeline exceeded $2.1 billion, a slight increase over the first quarter's ending pipeline of $1.9 billion, with approximately 43% term loans, and 57% construction/commercial lines of credit.
Commercial & Industrial (C&I) Initiative-- C&I loans represent approximately 30% of the loan pipeline, up from 25% at the end of Q1, supported by new hires in Houston.
Nonperforming Assets-- Unchanged at 0.39% of total assets; remains concentrated in a single large construction loan with positive leasing activity.
Classified Loans-- Decreased to $55.4 million from $67 million at the end of Q1, with a $17.9 million payoff, and $6 million in new classified migration.
Allowance for Credit Losses-- Decreased to $48.3 million from $48.5 million on March 31, with allowance as a percentage of total loans at 0.97% compared to 0.98% at March 31.
Securities Portfolio-- $2.73 billion at June 30, a decrease of $6.2 million, or 0.2%, from $2.74 billion last quarter, with AFS net unrealized loss of $6.4 million as of June 30, an increase of $9.2 million compared to $51.2 million last quarter.
Portfolio Duration-- Total securities portfolio duration was 8.4 years, and AFS portfolio duration was 6.2 years as of June 30, 2025, both down from 9 years and 7 years, respectively, as of March 31, 2025.
Deposits-- Increased $41.1 million over the prior quarter, attributable to $61 million in broker deposits, and $90.1 million in commercial and retail deposits, offset by a $109.9 million decrease in public fund deposits.
Deposit Mix Movement-- A commercial account contributed to the deposit increase and is expected to exit in Q3 2025.
Liquidity-- $2.33 billion in available liquidity lines as of June 30, 2025.
Share Repurchases-- 424,435 shares repurchased at an average price of $28.13 during Q2 2025; an additional 2,443 shares repurchased post-quarter at $30.29, with 156,000 shares remaining in the current authorization.
Noninterest Income-- Up $1.4 million, or 12.7%, over the prior quarter, primarily from swap fee and services income.
Noninterest Expense-- $39.3 million, up $2.2 million, or 5.8%, impacted mainly by a $1.2 million write-off from branch demolition.
Efficiency Ratio-- Improved to 53.7% as of June 30, from 55.04% as of March 31, primarily due to increased total revenue.
Effective Tax Rate-- Effective tax rate was 17.8% for the second quarter, down from 18% last quarter, with full-year 2025 guidance at 18%.
Deposit Pricing Outlook-- Management anticipates relief from CD maturities in the next ninety days, expecting to lower average rates by at least ten basis points on those CDs.
Summary
Southside Bancshares(SBSI 0.80%) reported increased profitability and net interest margin growth for Q2 2025, while lowering loan growth expectations due to continued elevated payoffs in core portfolios. Management highlighted an expanded loan pipeline and renewed momentum in commercial and industrial lending, supported by targeted hiring in Houston. Competitive pressures from debt funds are impacting credit spreads and structure, especially in commercial real estate. Deposit growth was partially attributable to a seasonal commercial account and increased broker deposits, with management signaling anticipated outflows in Q3 2025. Securities portfolio durations were actively reduced, contributing to risk management efforts. Nonperforming assets remained steady at 0.39% of total assets and highly concentrated, as classified loans decreased from $67 million to $55.4 million through significant paydowns.
Management commented, "Our excellent second quarter results only reinforce our optimistic outlook for 2025," emphasizing confidence in forward performance.
Quarterly loan production more than doubled the prior quarter, but actual loan growth was muted by exceptionally high payoffs, with commercial real estate payoffs led by open market sales, and notable competitive refinancing from non-bank lenders.
Chief Lending Officer Donahoe noted, "It's the payoffs that'll be the difference," spotlighting the unpredictable payoff environment as a key determinant of net interest margin outcomes.
Management sees limited upward pressure on deposit costs compared to some Texas peers, expecting further relief primarily from CD repricing, rather than market-driven competition.
Industry glossary
AFS Securities: Available-for-sale securities, debt or equity investments that may be sold in response to liquidity needs or interest rate changes, with unrealized gains or losses recorded in other comprehensive income.
Classified Loans: Loans internally categorized as presenting elevated risk characteristics, requiring additional oversight and potential loss reserves.
C&I Loans: Commercial and industrial loans, typically funding business operations, working capital, or equipment purchases for non-real estate commercial clients.
Full Conference Call Transcript
Lee Gibson: Thank you, Lindsey, and welcome to today's call. We had an excellent quarter with net income of $21.8 million resulting in diluted earnings per share of $0.72 and an annualized return on average assets of 1.07% and an annualized return on average tangible common equity of 14.38%. I want to thank our dedicated team members for their hard work and contributions. They were instrumental in producing these results. Linked quarter, our net interest margin increased nine basis points to 2.95%, and net interest income increased $414,000 to $54.3 million. The yield on our earning assets increased two basis points, and the cost of our interest-bearing liabilities decreased by five basis points.
Linked quarter total loans increased $35 million, while average total loans during the quarter decreased by $106 million, primarily due to heavy payoffs during the first two months of the quarter. Linked quarter total loan growth resulted from the strong net loan growth of $104 million during June, a large portion of which occurred during the last two weeks. We anticipate this late quarter loan growth bodes well for potential further NIM expansion during the third quarter. Our loan pipeline is solid, and shortly, Keith will provide additional details related to the second quarter loan activity and our current loan pipeline. Our deposits, net of public funds and broker deposits, increased $90.1 million linked quarter.
Based on discussions with our customers related to the uncertainties in the market surrounding tariff announcements and the ongoing related negotiation, overall, we remain optimistic. While it's too early to discern the likely outcome of these tariff announcements and negotiations, the current economic conditions and overall growth prospects for our markets continue to reflect a positive outlook. Overall, the Texas markets we serve remain healthy and continue to report both job and population growth. I look forward to answering your questions, and we'll now turn the call over to Keith Donahoe.
Keith Donahoe: Thank you, Lee. The second quarter new loan production totaled approximately $293 million compared to the first quarter production of $142 million. Of the new loan production, $228 million funded during the quarter, with the remaining portion expected to fund over the next six to nine quarters. Despite strong new loan production, we continue to experience meaningful payoffs resulting in muted loan growth during the second quarter. Excluding regular amortization and line of credit activity, second quarter payoffs totaled $200 million. Consistent with the first quarter, commercial real estate loans continue to be the largest source of payoff.
Second quarter's commercial real estate payoffs totaled approximately $150 million, including 13 loans secured by a variety of property types: retail, medical, office, multifamily, industrial, and commercial land. Commercial real estate payoffs were largely the result of open market property sales. However, two multifamily properties were refinanced with other lenders to include a life insurance company and a private debt fund. Both offered more aggressive loan-to-value limits and limited, if any, ongoing covenants. In addition to the commercial real estate payoffs, we experienced an unexpected $50 million payoff in our oil and gas portfolio. This resulted from a private equity firm's acquisition of the Southside customer.
For the remaining half of 2025, we anticipate moderated payoffs in new loan production consistent with the first half of 2025. However, we are slightly lowering our loan growth guidance to 3% to 4% year over year. Currently, our loan pipeline exceeds $2.1 billion, representing a slight increase over the first quarter's ending pipeline of $1.9 billion. The pipeline is well balanced with approximately 43% term loans and 57% construction and/or commercial lines of credit. Historically, we closed between 25-30% of our pipeline. Additionally, we are making progress with our C&I initiative, which now represents approximately 30% of our total pipeline, up from 25% at the end of the first quarter.
Expansion of the Houston C&I team continued with two new managers. One individual started in late June, and the other individual started in early July. Both have contributed to the expanded C&I pipeline. New C&I hires in the Houston market now stand at four individuals during the first six months of 2025. Overall, credit quality remains strong. During the second quarter, nonperforming assets increased slightly and remain concentrated in one large construction loan we moved into a nonperforming category during the first quarter. The loan is secured by a newly built multifamily project with positive leasing activity and a sponsor that has demonstrated a willingness and financial capacity to support.
As a percentage of total assets, nonperforming assets remain unchanged at 0.39%. During the quarter, a $17.9 million payoff of a classified loan was partially offset by the migration to classified of a $6 million loan. Overall, classified loans decreased from $67 million at the end of the first quarter to $55.4 million at the end of the second quarter. With that, I look forward to answering questions, and we'll now turn the call over to Julie Shamburger.
Julie Shamburger: Good morning, everyone, and welcome to our second quarter call. For the second quarter, we reported net income of $21.8 million, an increase of $306,000 or 1.4% compared to the first quarter, and diluted earnings per share of $0.72 for the second quarter, an increase of $0.01 per share linked quarter. As of June 30, loans were $4.6 billion, a linked quarter increase of $34.7 million or 0.8%. The linked quarter increase was primarily driven by an increase of $28.8 million in commercial real estate loans, $12.3 million in construction loans, and $9 million in commercial loans, partially offset by a decrease of $7.5 million in loans and $5.3 million in one to four family residential loans.
The average rate of loans funded during the second quarter was approximately 6.9%. As of June 30, our loans with oil and gas industry exposure were $53.8 million or 1.2% of total loans, compared to $111 million or 2.4% linked quarter. The decrease occurred primarily due to the payoff of a large loan relationship of approximately $50 million. Nonperforming assets remain low at 0.39% of total assets as of June 30. Our allowance for credit losses decreased to $48.3 million for the linked quarter from $48.5 million on March 31, and our allowance for loan losses as a percentage of total loans decreased slightly to 0.97% compared to 0.98% at March 31.
Our securities portfolio was $2.73 billion at June 30, a decrease of $6.2 million or 0.2% from $2.74 billion last quarter. The decrease was driven primarily by maturities and principal payments. As of June 30, we had a net unrealized loss in the AFS securities portfolio of $6.4 million, an increase of $9.2 million compared to $51.2 million last quarter. There were no transfers of AFS securities during the second quarter. On June 30, the unrealized gain on the fair value hedges on municipal and mortgage-backed securities was approximately $5.2 million compared to $8.6 million linked quarter. This unrealized gain partially offset the unrealized losses in the AFS securities portfolio.
As of June 30, the duration of the total securities portfolio was 8.4 years, and the duration of the AFS portfolio was 6.2 years, a decrease from 9 and 7 years, respectively, as of March 31. At quarter end, our mix of loans and securities was 63% and 37%, respectively, consistent with last quarter. Deposits increased $41.1 million or 0.6% on a linked quarter basis due to an increase in broker deposits of $61 million and a $90.1 million increase in commercial and retail deposits, partially offset by a decrease in public fund deposits of $109.9 million.
The increase in commercial deposits was due to an account that increases for a short period at this time each year and is expected to exit the bank in the third quarter. Our capital ratios remain strong with all capital ratios well above the threshold for capital adequacy and well-capitalized. Liquidity resources remain solid with $2.33 billion in liquidity lines available as of June 30. We repurchased 424,435 shares of our common stock at an average price of $28.13 during the second quarter. Since quarter end and through July 23, we have repurchased 2,443 shares at an average price of $30.29 per share. We have approximately 156,000 shares remaining in the current repurchase authorization.
Our tax-equivalent net interest margin increased nine basis points on a linked quarter basis to 2.95% from 2.86%. The tax-equivalent net interest spread increased for the same period by seven basis points to 2.27% from 2.20%. For the three months ended June 30, we had an increase in net interest income of $414,000 or 0.8% compared to the linked quarter. Noninterest income, excluding net loss on the sales of AFS Securities, increased $1.4 million or 12.7% for the linked quarter, primarily due to an increase in swap fee income and services income.
Noninterest expense was $39.3 million for the second quarter, an increase of $2.2 million or 5.8% on a linked quarter basis, primarily driven by the $1.2 million write-off in demolition at an existing branch that was replaced with a new building. As certain items in our budget continue to materialize, we expect to be in the $39 million range for the remaining quarters this year. Our fully taxable equivalent efficiency ratio decreased to 53.7% as of June 30, from 55.04% as of March 31, primarily due to an increase in total revenue. We recorded income tax expense of $4.7 million, consistent with the prior quarter.
Our effective tax rate was 17.8% for the second quarter, a decrease compared to 18% last quarter. We are currently estimating an annual effective tax rate of 18% for 2025. Thank you for joining us today. This concludes our comments, and we will open the line for your questions.
Operator: Thank you. As a reminder, to ask a question, you will need to press 11 on your telephone. To remove yourself from the queue, you may press 11 again. Our first question comes from the line of Michael Rose of Raymond James. Please go ahead, Michael.
Michael Rose: Hey. I guess good afternoon. Thanks for taking my questions. Maybe we could just start, you know, big picture. We've seen a couple deals here announced in Texas, and more broadly, one bigger one last night. Just wanted to get a sense for, you know, what you see as potentially the dislocation opportunities from a hiring and client acquisition front. And then, you know, just given where you guys are on an asset side, just any updated thoughts around potential M&A for you all? Thanks.
Lee Gibson: Yeah. Thank you. I do agree that there's some potential that we could pick up some people from some of these acquisitions, especially the out-of-state ones. And you know, that's a real possibility and certainly on our radar screen. It's good to see the activity finally begin to happen in Texas, and we think that's gonna lead to additional sellers coming out of the woodwork. And, you know, we would like to be a part of that at some point in time if it strategically makes sense.
Michael Rose: Okay. Perfect. And then maybe just on the credit front, just any update on the multifamily credit that was added to, restructured last year. Just wanted to see if that's progressing as expected.
Keith Donahoe: Michael, this is Keith. I think, yeah, the loan continues to perform. Still haven't had any missed payments, but the leasing activity on the asset continues to be positive. We do anticipate at the end of the year when the maturity hits that loan will move out of the bank, and we don't see any reason why we wouldn't be able to do so at this point, but we are continuing to monitor the lease-up activity.
Michael Rose: Alright. Very helpful. And then maybe just one final one for me. You know, it looks like, you know, you kind of effectively lowered your loan growth outlook, but I think that's more of a function of maybe a little bit softer growth this quarter. So just wanted to confirm that because you did say pipelines were solid. And then if you could just kind of size the pipeline opportunity, maybe how much of the pipeline is comprised of, you know, newer C&I loans around, you know, the efforts there?
Keith Donahoe: Sure. Yeah. You know, if you noticed, we produced more than twice the loans that we produced in the first quarter. So we've had a lot of momentum moving forward. We anticipate on the growth side that to continue. The thing that's been a little bit harder to judge for us has been the payoffs. We know we have some payoffs still to come. It's the ones that kinda surprise us that we're not 100% sure about. The $50 million oil and gas reduction was kinda out of the blue for us. But so we're really bullish on the fact that production is gonna be there. We're just not 100% sure what the payoff situation is gonna look like.
You add to it the fact that we did increase our pipeline total from $1.9 billion at the end of the first quarter to $2.1 billion. So we're seeing a lot of opportunity. We're doing our best to compete with not just banks, but we're starting to see a lot of competition from the debt funds. We got some numbers on that. It's a little bit surprising. They're seeing debt funds that are now pricing deals that banks were getting, you know, from a spread standpoint, you know, six months ago. And so debt funds are really aggressive with their spreads at this point. And as you know, they typically come with, you know, higher leverage and fewer covenants.
So it's a tough competition, but we still feel pretty good about 2025 from a production standpoint. I hope that helps.
Michael Rose: Yeah. It's great color. I really appreciate it. Thanks for taking my questions. I'll step back.
Operator: Thank you. Star one on your telephone. Our next question comes from the line of Matt Olney of Stephens. Please go ahead, Matt.
Matt Olney: Hey. Thanks for taking the question, guys. I wanna ask about the net interest margin, and we saw some improvement this quarter. Any more color on just the puts and takes on the direction of that margin from here in the back half of the year? And then specifically, can you add some color on how dependent that margin outlook is on the loan growth? It sounds like the loan growth could be volatile based off the paydowns, and I'm curious how much of a driver that is for the margin. Thanks.
Lee Gibson: We're up 12 basis points for the year. And looking at the average balance sheet, average loans have been down for the year. So far, it hasn't been dependent on loans. The encouraging thing is all that loan growth that we had occurred in the, really, the last two to three weeks of June. So in terms of our average loans, you know, they're at the highest point they've really been at this entire year. So if we can continue to produce the loans as Keith discussed, and we have pretty good insight into what's gonna happen in the next couple of months. It's the payoffs that'll be the difference.
But if we can have net loan growth going forward, I think it's gonna do nothing but really accrue to our benefit when it comes to the outlook for the NIM for the last half of the year.
Matt Olney: Okay. So it sounds like the margin has some tailwinds with or without the loan growth. Maybe just some commentary on deposit competition since some of your peers in Texas are pointing towards increased competition that's perhaps gonna push up deposit pricing in the back half of the year in the absence of any kind of Fed cut. So I'm just curious kinda what you're seeing.
Lee Gibson: We're really not seeing that. You know, we have focused previously and, you know, prior quarters on putting on CDs. A lot of those CDs are, you know, we had a lot mature during this second quarter. We have another, I think, in the next ninety days. We have a little over $430 million that will mature. We're not gonna be able to save as much money as we did in the first and the second quarter on the maturities. We anticipate we'll be able to lower the average rate on those CDs at least 10 basis points, if not just a little bit more.
So, you know, that's really where the relief is gonna come, and, you know, who knows whether the Fed's lower rates or what they're gonna do. But, you know, we believe that we will continue to see a little bit of relief in terms of pressure on deposit pricing over the last half of the year.
Matt Olney: Okay. Thanks, guys.
Lee Gibson: Alright. Thank you. I would now like to turn the conference back to Lee Gibson for closing remarks.
Lee Gibson: Thank you, everyone, for joining us today. We appreciate your interest in Southside Bancshares along with the opportunity to answer your questions. Our excellent second quarter results only reinforce our optimistic outlook for 2025. We look forward to reporting third quarter results to you during our next earnings call in October. This concludes the call. Thank you again.
Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Goodbye.