10-Q: Southside Bancshares Q3 Net Income Plunges 76% on Securities Loss

Southside Bancshares, Inc. reported a sharp 76.1% decline in third-quarter net income, primarily due to a $24.4 million net loss from the sale of available-for-sale securities.

Summary

• Net income for the three months ended September 30, 2025, decreased by 76.1% to $4.9 million, from $20.5 million in the same period of 2024.
• Diluted earnings per common share fell 76.5% to $0.16 for the three months ended September 30, 2025, from $0.68 in the same period of 2024.
• The decline was largely driven by a $24.4 million net loss on the sale of available-for-sale (AFS) securities in Q3 2025, compared to a $1.9 million net loss in Q3 2024.
• For the nine months ended September 30, 2025, net income decreased 27.7% to $48.2 million, with diluted EPS at $1.59, down from $2.20.
• Total assets decreased by 1.6% to $8.38 billion at September 30, 2025, from $8.52 billion at December 31, 2024.
• Loans increased by 2.2% to $4.77 billion, driven by commercial real estate and commercial loans.
• Nonperforming assets surged 892.1% to $35.6 million, primarily due to a $27.5 million restructured commercial real estate loan.
• Total deposits increased 4.6% to $6.96 billion, with growth in brokered and retail deposits.
• The company issued $150.0 million in 7.00% fixed-to-floating rate subordinated notes due August 15, 2035, in Q3 2025.

Sentiment

Score: 3

Explanation: The substantial decline in net income and EPS, primarily due to a large loss on securities sales, and the significant increase in nonperforming assets, indicate a challenging quarter. While deposits grew and liquidity remains strong, these negative factors outweigh the positives for the period.

Positives

• Net interest income increased by 0.5% for the three months ended September 30, 2025, to $55.7 million, and by 0.9% for the nine months ended September 30, 2025, to $163.8 million, compared to the prior year periods.
• Total deposits increased by $307.3 million, or 4.6%, to $6.96 billion at September 30, 2025, from December 31, 2024.
• Retail deposits increased by $319.1 million, or 6.8%, and noninterest bearing deposits represent 20.3% of total deposits.
• The cost of interest bearing deposits decreased by 19 basis points to 2.82% for the three months ended September 30, 2025, and by 16 basis points to 2.83% for the nine months ended September 30, 2025.
• Total shareholders' equity increased by 2.8%, or $22.9 million, to $834.9 million at September 30, 2025.
• Maintained strong liquidity with approximately $2.77 billion available from FHLB and the Federal Reserve discount window.
• The company remains 'well capitalized' under Basel III Capital Rules.
• Provision for credit losses decreased by 54.3% for the three months ended September 30, 2025, to $1.092 million.

Negatives

• Net income decreased by 76.1% for the three months ended September 30, 2025, and by 27.7% for the nine months ended September 30, 2025.
• Diluted earnings per common share decreased by 76.5% for the three months ended September 30, 2025, and by 27.7% for the nine months ended September 30, 2025.
• A significant net loss of $24.4 million on the sale of available-for-sale (AFS) securities was recorded in the third quarter of 2025, contributing to a total net loss of $24.9 million for the nine months ended September 30, 2025.
• Nonperforming assets surged by 892.1% to $35.6 million at September 30, 2025, from $3.6 million at December 31, 2024.
• Restructured loans increased substantially to $27.5 million at September 30, 2025, from $2,000 at December 31, 2024, due to the extension of a commercial real estate loan.
• Nonaccrual loans increased by 149.8% to $8.0 million at September 30, 2025.
• Total noninterest income decreased by $20.2 million for the three months ended September 30, 2025, and by $19.1 million for the nine months ended September 30, 2025.
• Total noninterest expense increased by 3.3% for the three months ended September 30, 2025, and by 4.5% for the nine months ended September 30, 2025.

Risks

• General economic conditions, including higher inflation levels, interest rate fluctuations, and potential declines in the real estate market.
• Impact of tariffs or trade wars, which could lead to reduced consumer spending, lower economic growth or recession, reduced demand for U.S. exports, disruptions to supply chains, and decreased demand for banking products and services.
• Financial stress to borrowers as a result of economic conditions, potentially impacting credit quality.
• Cyber-security incidents, data security breaches, malware, denial of service attacks, hacking, and identity theft, potentially exacerbated by developments in generative artificial intelligence.
• Changes in the interest rate yield curve, such as flat, inverted, or steep yield curves, or changes in the interest rate environment that impact net interest margins and may affect prepayments on the mortgage-backed securities portfolio.
• The risk that the enterprise risk management framework, compliance program, or corporate governance and supervisory oversight functions may not adequately identify or address risks, potentially resulting in unexpected losses.
• Potential impacts of adverse developments in the banking industry, including impacts on customer confidence, deposit outflows, liquidity, and increases in the cost of deposit insurance assessments.
• The unpredictable nature of mortgage-backed securities (MBS) prepayments and credit risks associated with municipal and corporate securities.

Future Outlook

The current economic conditions and growth prospects for our markets continue to reflect a solid and positive outlook, particularly in Texas with ongoing job and population growth. The Federal Reserve reduced the target federal funds rate by 25 basis points to 4.00% to 4.25% during the third quarter of 2025, and management continues to monitor interest rates and anticipate rate changes. The balance sheet management strategy is dynamic and continually evaluated as market conditions warrant, focusing on optimizing wholesale funding sources and utilizing cash flow hedges to mitigate interest rate movements. A new traditional branch location is expected to open at Bellwood Park in Tyler, Texas in 2026.

Management Comments

• "The current economic conditions and growth prospects for our markets continue to reflect a solid and positive outlook."
• "Overall, the Texas markets we serve remain healthy and continue to report both job and population growth."
• "Our capital ratios and contingent liquidity sources remain solid."
• "The balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant."
• "Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs."

Industry Context

The banking industry is navigating a dynamic interest rate environment, with the Federal Reserve having recently reduced the target federal funds rate, which could impact net interest margins and the cost of funding for banks. Southside Bancshares operates in healthy Texas markets experiencing job and population growth, generally supporting loan demand and deposit growth. However, the broader industry faces challenges related to customer confidence, deposit outflows, and liquidity management, as highlighted by recent high-profile bank failures. The company's strategy of restructuring its securities portfolio to enhance future earnings and utilizing wholesale funding with hedging reflects a proactive approach to managing these industry-wide pressures.

Corporate Governance

Legal Proceedings

• Involved in various litigation in the normal course of business.
• Management, after consulting with legal counsel, believes any liability from litigation will not have a material effect on financial position, results of operations, or liquidity.

Stakeholder Impact

• Shareholders experienced a significant decrease in earnings per share, but the company maintained its cash dividend of $0.36 per common share and expanded its stock repurchase plan, which could provide some support.
• Customers continue to have access to loan products and deposit services, with deposit growth indicating ongoing customer relationships.
• Employees saw an increase in salaries and employee benefits expense, suggesting stable employment conditions, though retirement expense decreased.
• Creditors benefit from the issuance of subordinated notes, indicating continued access to capital markets, and strong capital ratios provide assurance.

Next Steps

• Continue to evaluate the balance sheet management strategy dynamically as market conditions warrant.
• Monitor interest rates and anticipate rate changes for the remainder of 2025.
• Open a new traditional branch location at Bellwood Park in Tyler, Texas in 2026.
• Repurchase up to 1.1 million additional shares under the expanded Stock Repurchase Plan.

Key Dates

Recommendation

The significant drop in net income and EPS, primarily driven by a strategic but costly securities portfolio restructuring, is a major concern. The substantial increase in nonperforming assets, particularly the restructured commercial real estate loan, also warrants caution. However, the company maintains strong capital and liquidity, has seen deposit growth, and is actively managing its interest rate risk through hedging. The expansion of the stock repurchase plan could offer some support to the stock price. Given the mixed signals—poor quarterly performance due to a specific strategic action, but underlying balance sheet strength and proactive management—a 'hold' recommendation is appropriate for a seasoned investor to observe the impact of these strategic moves and the broader economic environment on future performance.

Keywords

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