8-K: Southside Bancshares Q3 Net Income Plunges 76% on Securities Sale

Southside Bancshares, Inc. reported a significant 76.1% decrease in third-quarter 2025 net income, primarily due to a $24.4 million loss from restructuring its available-for-sale securities portfolio.

Summary

• Net income for the three months ended September 30, 2025, was $4.9 million, a decrease of $15.6 million or 76.1% compared to $20.5 million for the same period in 2024.
• Earnings per diluted common share were $0.16 for Q3 2025, down $0.52 or 76.5% from $0.68 in Q3 2024.
• The primary driver for the decrease in net income was a $24.4 million net loss on the sale of available-for-sale (AFS) securities, compared to a $1.9 million net loss in Q3 2024.
• The company restructured approximately $325 million of primarily lower-yielding long-duration municipal and mortgage-backed securities with a combined taxable equivalent yield of approximately 3.28% to enhance future earnings.
• Proceeds from the securities sales funded a portion of loan growth and were reinvested in US Agency MBS pools and Texas municipal securities.
• Total loans increased $163.4 million, or 3.5%, linked quarter to $4.77 billion at September 30, 2025, with significant growth in commercial real estate, commercial, and construction loans.
• Deposits increased $329.6 million, or 5.0%, linked quarter to $6.96 billion at September 30, 2025.
• Net interest income for Q3 2025 was $55.7 million, an increase of $0.3 million (0.5%) compared to Q3 2024, and a $1.5 million (2.7%) increase linked quarter.
• Net interest margin (FTE) decreased one basis point linked quarter to 2.94% for Q3 2025.
• Nonperforming assets increased to $35.6 million (0.42% of total assets) at September 30, 2025, from $7.7 million (0.09%) at September 30, 2024, primarily due to a $27.5 million increase in restructured loans.
• The company issued $150.0 million of subordinated debt at 7.00% fixed-to-floating rate notes during August 2025.
• The Board increased its authorization under the Stock Repurchase Plan by 1.0 million shares on October 16, 2025, for a total authorization to repurchase up to 2.0 million shares.
• During Q3 2025, 26,692 shares of common stock were repurchased at an average price of $30.24 per share.

Sentiment

Score: 3

Explanation: The substantial 76.1% decline in net income and diluted EPS for Q3 2025, primarily driven by a $24.4 million loss on the sale of AFS securities, indicates a challenging quarter. While management states this was a strategic move to enhance future earnings, the immediate impact on profitability and returns on assets/equity is significantly negative. The increase in nonperforming assets also raises concerns about asset quality, despite healthy loan and deposit growth.

Positives

• Net interest income increased $1.45 million linked quarter and $0.3 million year-over-year to $55.7 million.
• Total loans increased $163.4 million (3.5%) linked quarter to $4.77 billion, driven by growth in commercial real estate ($82.6 million), commercial ($49.3 million), and construction loans ($49.1 million).
• Deposits increased $329.6 million (5.0%) linked quarter to $6.96 billion, demonstrating strong deposit gathering capabilities.
• Noninterest income, excluding net losses on AFS securities, increased $2.3 million (22.8%) year-over-year to $12.4 million, primarily due to increases in other noninterest income and trust fees.
• The cost of total deposits decreased one basis point linked quarter to 2.25%.
• Capital ratios and contingent liquidity sources remain solid, with $2.77 billion in total available contingent liquidity at September 30, 2025.
• The Board increased the stock repurchase authorization by 1.0 million shares, signaling confidence and potential for shareholder value enhancement.

Negatives

• Net income for Q3 2025 decreased $15.6 million (76.1%) to $4.9 million compared to Q3 2024.
• Earnings per diluted common share decreased $0.52 (76.5%) to $0.16 compared to Q3 2024.
• A significant $24.4 million net loss on the sale of AFS securities was recorded in Q3 2025.
• Annualized returns on average assets and average shareholders' equity for Q3 2025 were significantly lower at 0.23% and 2.40%, respectively, compared to 0.98% and 10.13% in Q3 2024.
• Net interest margin (FTE) decreased one basis point linked quarter to 2.94% and was down from 2.95% in Q3 2024.
• Nonperforming assets increased $28.0 million (365.1%) year-over-year to $35.6 million, primarily due to a $27.5 million increase in restructured loans.
• The allowance for loan losses as a percentage of total loans decreased to 0.95% at September 30, 2025, from 0.97% at September 30, 2024.
• Net charge-offs increased to $0.8 million for Q3 2025 from $0.4 million for Q3 2024.

Risks

• General economic conditions in our markets, including the ongoing impact of higher inflation levels.
• Interest rate fluctuations, including the impact of changes in interest rates on financial projections, models, and guidance.
• Effects of declines in the real estate market.
• 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.
• High unemployment and increasing insurance costs.
• Financial stress to borrowers as a result of economic factors, potentially impacting economic growth and causing a reduction in financial transactions and business activities, including decreased deposits and reduced loan originations.
• Ability to manage liquidity in a rapidly changing and unpredictable market.

Future Outlook

The company restructured a portion of its available-for-sale securities portfolio to enhance future earnings, indicating an expectation of improved profitability going forward. However, forward-looking statements highlight potential risks from general economic conditions, interest rate fluctuations, real estate market declines, and trade wars, which could materially impact financial projections and business activities, including deposits and loan originations.

Management Comments

• "During the third quarter, we restructured a portion of our available for sale (AFS) securities portfolio to enhance future earnings by selling approximately $325 million of primarily lower yielding long duration municipal securities and, to a lesser extent, mortgage-backed securities (MBS), with a combined taxable equivalent yield of approximately 3.28% at a loss of $24.4 million." Lee R. Gibson, Chief Executive Officer.
• "The majority of the sales occurred during September. The proceeds from the sale of these securities funded a portion of the loan growth during the quarter with the balance reinvested in US Agency MBS pools and Texas municipal securities." Lee R. Gibson, Chief Executive Officer.
• "As previously disclosed, we issued $150.0 million of our subordinated debt at 7.00% fixed to floating rate notes during August." Lee R. Gibson, Chief Executive Officer.
• "Linked quarter, net interest income increased $1.45 million and our net interest margin decreased one basis point to 2.94% due to the $150.0 million issuance of subordinated debt during the quarter." Lee R. Gibson, Chief Executive Officer.
• "Linked quarter, total loans increased $163.4 million, with $81.0 million of this growth occurring on September 30, 2025." Lee R. Gibson, Chief Executive Officer.

Industry Context

The banking industry is currently navigating a dynamic environment marked by evolving interest rate policies and economic uncertainties. Southside Bancshares' strategic decision to incur a significant one-time loss by restructuring its AFS securities portfolio reflects a proactive measure to optimize future earnings and adapt to potential shifts in the interest rate landscape. While the company demonstrated healthy loan and deposit growth, which is a positive indicator of market presence and customer relationships, the notable increase in nonperforming assets and restructured loans suggests that asset quality pressures are emerging, a trend that many regional banks are closely monitoring amidst broader economic slowdown concerns.

Comparison to Industry Standards

• NA

Corporate Governance

Stakeholder Impact

• Shareholders: Experienced a significant decrease in net income and EPS for the quarter, but the strategic AFS securities sale is intended to enhance future earnings. The increased stock repurchase authorization could provide some support for share value.
• Customers: Continued loan and deposit growth indicates ongoing demand for banking services and stable customer relationships.
• Employees: Salaries and employee benefits expense increased, suggesting stable or growing workforce and compensation.

Next Steps

• Southside's management team will host a conference call to discuss its third quarter ended September 30, 2025, financial results on Friday, October 24, 2025, at 11:00 a.m. CDT.

Key Dates

Recommendation

While the company's strategic decision to restructure its AFS securities portfolio aims to enhance future earnings, the immediate impact is a severe 76.1% decline in net income and diluted EPS for Q3 2025, driven by a $24.4 million loss. This significant underperformance, coupled with a notable increase in nonperforming assets (up 365.1% year-over-year), signals deteriorating asset quality and immediate profitability challenges. Despite healthy loan and deposit growth, the substantial short-term earnings hit and rising credit concerns warrant a cautious stance. A seasoned investor would likely view the immediate financial results as a strong negative, suggesting a 'sell' until the benefits of the AFS restructuring materialize and asset quality trends stabilize.

Keywords

Southside Bancshares, SBSI, Q3 2025 earnings, financial results, net income, EPS, net interest margin, loan growth, deposit growth, nonperforming assets, securities portfolio, stock repurchase, banking, regional bank, Texas