ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides a comparison of our results of operations for the years ended December 31, 2025 and 2024 and financial condition as of December 31, 2025 and 2024. This discussion should be read in conjunction with the financial statements and related notes included elsewhere in this report. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2024 Form 10-K for a discussion and analysis of the more significant factors that affected periods prior to 2024.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements of other than historical fact that are contained in this report may be considered to be “forward-looking statements” within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. These statements may include words such as “expect,” “estimate,” “project,” “anticipate,” “appear,” “believe,” “could,” “should,” “may,” “might,” “will,” “would,” “seek,” “intend,” “probability,” “risk,” “goal,” “target,” “objective,” “plans,” “potential,” and similar expressions. Forward-looking statements are statements with respect to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance and are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from the results discussed in the forward-looking statements. For example, trends in asset quality, capital, liquidity, our ability to sell nonperforming assets, expense reductions, planned operational efficiencies and earnings from growth and certain market risk disclosures, including the impact of interest rates and our expectations regarding rate changes, tax reform, inflation, the impacts related to or resulting from other economic factors are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. Accordingly, our results could materially differ from those that have been estimated. The most significant factors that could cause future results to differ materially from those anticipated by our forward-looking statements include general economic conditions in our markets, including the impact of changes in interest rates on our financial projections, models and guidance, as well as the effects of declines in the real estate market, tariffs or trade wars (including reduced consumer spending, lower economic growth or recession, reduced demand for U.S. exports, disruptions to supply chains and decreased demand for other banking products and services), high unemployment and increasing insurance costs, as well as the financial stress to borrowers as a result of the foregoing, all of which could impact economic growth and could cause a reduction in financial transactions and business activities, including decreased deposits and reduced loan originations and our ability to manage liquidity in a rapidly changing and unpredictable market. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:
• general (i) political conditions, including, without limitation, governmental action and uncertainty resulting from U.S. and global political trends and (ii) economic conditions, either globally, nationally, in the State of Texas, or in the specific markets in which we operate, including, without limitation, the deterioration of the commercial real estate, residential real estate, construction and development, energy, oil and gas, credit or liquidity markets, which could cause an adverse change in our net interest margin, or a decline in the value of our assets, which could result in realized losses, as well as the risks of an economic slowdown or recession and the effects of inflationary pressures, changes in interest rates, tariffs or trade wars (including reduced consumer spending, supply chain issues and adverse impacts to credit quality) and the related financial stress on borrowers and changes to customer behavior and credit risk as a result of the foregoing;
• changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed Funds rate and changes in international trade policies, tariffs and treaties affecting imports and exports, and their related impacts on macroeconomic conditions, customer behavior, funding costs and loan and securities portfolios;
• inflation and fluctuations in interest rates that reduce our margins and yields, the fair value of financial instruments, the level of loan originations or prepayments on loans we have made and make, and the cost we pay to retain and attract deposits and secure other types of funding;
• current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the Federal Reserve’s actions to manage interest rates, tariffs, trade policies, supply chain disruptions, immigration policies and/or disputes and other regulatory responses to economic conditions;
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• the impact of interest rate fluctuations on our financial projections, models and guidance;
• legislative, tax and regulatory changes, including those that impact the money supply, trade, immigration and inflation;
• acts of terrorism, war or other conflicts, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate change or other catastrophic events that may affect general economic conditions or cause other disruptions and/or increase costs, including, but not limited to, property and casualty and other insurance costs;
• potential impacts of the adverse developments in the banking industry highlighted by high-profile bank failures, including impacts on customer confidence, deposit outflows, liquidity and the regulatory response thereto (including increases in the cost of our deposit insurance assessments);
• technological changes, including potential cyber-security incidents and other disruptions, developments in AI, or innovations to the financial services industry, including as a result of the increased telework environment;
• our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, which may be exacerbated by developments in generative artificial intelligence and which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, or adverse effects to our reputation;
• 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 impact prepayments on our MBS portfolio;
• the risk that our enterprise risk management framework, compliance program or our corporate governance and supervisory oversight functions may not identify or address risks adequately, which may result in unexpected losses;
• the effect of compliance with legislation or regulatory changes;
• the implementation under the presidential administration of a regulatory reform agenda that is different than that of the prior administration, impacting the rulemaking, supervision, examination and enforcement priorities of the federal banking agencies;
• credit risks of borrowers, including any increase in those risks due to changing economic conditions, including inflation, tariffs and immigration policies;
• increases in our nonperforming assets;
• risks related to environmental liability as a result of certain lending activity;
• our ability to maintain adequate liquidity to fund operations and growth;
• our ability to control interest rate risk;
• any applicable regulatory limits or other restrictions on the Bank and its ability to pay dividends to us;
• the failure of our assumptions underlying our allowance for credit losses and other estimates;
• the failure to maintain an effective system of controls and procedures, including internal control over financial reporting;
• the effectiveness of our derivative financial instruments and hedging activities to manage risk;
• unexpected outcomes of, and the costs associated with, existing or new litigation involving us;
• potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions;
• changes impacting our balance sheet strategy;
• risks related to actual mortgage prepayments diverging from projections;
• risks related to fluctuations in the price per barrel of crude oil;
• significant increases in competition in the banking and financial services industry;
• changes in consumer spending, borrowing and saving habits, including as a result of inflation, tariffs, supply chain disruptions, fluctuating interest rates and recessionary concerns;
• execution of future acquisitions, reorganization or disposition transactions, including the risk that the anticipated benefits of such transactions are not realized;
• our ability to increase market share and control expenses;
• our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers;
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• the effect of changes in accounting policies and practices;
• adverse changes in the status or financial condition of the GSEs which impact the GSEs’ guarantees or ability to pay or issue debt;
• adverse changes in the credit portfolios of other U.S. financial institutions relative to the performance of certain of our investment securities;
• risks related to actual U.S. agency MBS prepayments exceeding projected prepayment levels;
• risks related to U.S. agency MBS prepayments increasing due to U.S. government programs designed to assist homeowners to refinance their mortgage that might not otherwise have qualified;
• risks related to loans secured by real estate, including the risk that the value and marketability of collateral could decline;
• risks associated with our common stock and our other securities, including fluctuations in our stock price and general volatility in the stock market; and
• the risks identified in “Part I - Item 1A. Risk Factors – Risks Related to Our Business” in this report.
All written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary notice. We disclaim any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments, unless otherwise required by law.
CRITICAL ACCOUNTING ESTIMATES
Our accounting and reporting estimates conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. We consider our critical accounting estimates to include the following:
Allowance for Credit Losses . The allowance for credit losses includes credit losses on loans as well as the off-balance-sheet credit exposure, which is reported as a component of other liabilities on our consolidated balance sheets. The allowance for credit losses on loans is estimated and recognized upon origination of the loan based on expected credit losses. The off-balance-sheet credit exposure is evaluated using the expected credit losses using usage given defaults and credit conversion factors depending on the type of commitment and based upon historical usage rates. The CECL model uses historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about future events. Management selects models through which historical reserve factor estimates are calibrated to economic forecasts over the reasonable and supportable forecast period based on the projected performance of specific economic variables that statistically correlate with the probability of default and loss given default pools. estimates revert to the long-term trend of each economic variable beyond the forecast period. Management selects economic variables it believes to be most relevant based on the composition of the loan portfolio and customer base, including forecasted levels of employment, gross domestic product, corporate bond and treasury spreads, industrial production levels, consumer and commercial real estate price indices as well as housing statistics. The allowance for credit is highly sensitive to the economic forecasts used to develop the estimate. Due to the high level of uncertainty regarding significant assumptions, we evaluate a range of economic scenarios, including a more economic forecast scenario, with varying speeds of recovery. Selecting a different forecast could result in a significantly different estimated allowance for credit . To the extent actual outcomes differ from management estimates, additional provision for credit may be required that would impact earnings in future periods.
Refer to “Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Credit Losses - Loans and Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures,” “Note 1 – Summary of Significant Accounting and Reporting Policies,” “Note 5 – Loans and Allowance for Loan Losses” and “Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies” to our consolidated financial statements included in this report for a detailed description of our estimation process and methodology related to the allowance for loan losses.
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NON-GAAP FINANCIAL MEASURES
Certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the following fully taxable-equivalent measures: net interest income (FTE), net interest margin (FTE) and net interest spread (FTE), which include the effects of taxable-equivalent adjustments using a federal income tax rate of 21% to increase tax-exempt interest income to a tax-equivalent basis. Interest income earned on certain assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments.
Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE). Net interest income (FTE) is a non-GAAP measure that adjusts for the tax-favored status of net interest income from certain loans and investments and is not permitted under GAAP in the consolidated statements of income. We believe that this measure is the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread (FTE) is the difference in the average yield on average earning assets on a tax-equivalent basis and the average rate paid on average interest bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread.
These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently. Whenever we present a non-GAAP financial measure in an SEC filing, we are also required to present the most directly comparable financial measure calculated and presented in accordance with GAAP and reconcile the differences between the non-GAAP financial measure and such comparable GAAP measure.
In the following table we present the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis assuming a 21% marginal tax rate for interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of net interest margin (FTE) and net interest spread (FTE).
Years Ended December 31,
Net interest income (GAAP)
Tax-equivalent adjustments:
Loans
Tax-exempt investment securities
Net interest income (FTE) (1)
Average earning assets
Net interest margin
Net interest margin (FTE) (1)
Net interest spread
Net interest spread (FTE) (1)
(1) These amounts are presented on a fully taxable-equivalent basis and are non-GAAP measures.
Management believes adjusting net interest income, net interest margin and net interest spread to a fully taxable-equivalent basis is a standard practice in the banking industry as these measures provide useful information to make peer comparisons. Tax-equivalent adjustments are reported in the respective earning asset categories as listed in the “Average Balances with Average Yields and Rates” tables under Results of Operations.
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OVERVIEW
ECONOMIC CONDITIONS
Continued tariff announcements and ongoing tariff negotiations have caused some uncertainty related to inflation levels and its impact on interest rates and the overall economy. While it is too early to discern the likely outcome of these tariff announcements and negotiations, the current economic conditions and growth prospects for our markets continue to reflect a solid and positive outlook. Higher inflation levels and interest rate fluctuations could have a negative impact on both our consumer and commercial borrowers in the future. Overall, however, the Texas markets we serve remain healthy.
DEPOSITS
Our deposits were $6.87 billion at December 31, 2025, an increase of $210.9 million, or 3.2%, from December 31, 2024. At December 31, 2025, we had 178,757 total deposit accounts with an average balance of $35,000. Our estimated uninsured deposits were 39.7% of total deposits as of December 31, 2025. When excluding affiliate deposits (Southside-owned deposits) and public fund deposits (all collateralized), our total estimated deposits without insurance or collateral was 23.0% of total deposits as of December 31, 2025.
Our noninterest bearing deposits represent approximately 20.9% of total deposits. Our cost of interest bearing deposits decreased 18 basis points, from 2.98% for the year ended December 31, 2024, to 2.80% for the year ended December 31, 2025. Our cost of total deposits decreased 13 basis points, from 2.36% for the year ended December 31, 2024, to 2.23% for the year ended December 31, 2025.
CAPITAL RESOURCES AND LIQUIDITY
Our capital ratios and contingent liquidity sources remain solid. The table below shows our total lines of credit, borrowings, total amounts available for future liquidity, and swapped value as of December 31, 2025 (in thousands):
December 31, 2025
Line of Credit
Borrowings
Total Available for Future Liquidity
Swapped
FHLB advances
Federal Reserve discount window
Correspondent bank lines of credit
Total liquidity lines
OPERATING RESULTS
During the year ended December 31, 2025, our net income decreased $19.3 million, or 21.8%, to $69.2 million from $88.5 million for the same period in 2024. The decrease in net income was largely driven by a $25.8 million decrease in noninterest income and to a lesser extent, a $4.2 million increase in noninterest expense, partially offset by a $5.5 million decrease in income tax expense, a $5.0 million increase in net interest income and a $293,000 decrease in provision for credit losses. Net loss on sale of AFS securities, included in noninterest income, was $32.3 million for the year ended December 31, 2025, compared to a net loss of $2.5 million for the same period in 2024. Earnings per diluted common share decreased $0.62, or 21.3%, to $2.29 for the year ended December 31, 2025, compared to $2.91 for the same period in 2024.
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The following table sets forth selected financial data regarding our results of operations and financial position for, and as of the end of, each of the fiscal years in the three-year period ended December 31, 2025. This information should be read in conjunction with “Item 8. Financial Statements and Supplementary Data,” as set forth in this report (in thousands, except per share data):
As of and for the Years Ended December 31,
Summary Balance Sheet Data
Securities AFS, at estimated fair value
Securities HTM, at carrying value
Loans
Total assets
Noninterest bearing deposits
Interest bearing deposits
Total deposits
FHLB borrowings
Subordinated notes, net of unamortized debt issuance costs
Trust preferred subordinated debentures, net of unamortized debt issuance costs
Shareholders’ equity
Summary Income Statement Data
Interest income
Interest expense
Provision for (reversal of) credit losses
Deposit services
Net gain (loss) on sale of securities AFS
Noninterest income
Noninterest expense
Net income
Per Common Share Data
Earnings-basic
Earnings-diluted
Cash dividends declared and paid
Book value
Asset Quality
Allowance for loan losses
Allowance for loan losses to total loans
Net loan charge-offs
Net loan charge-offs to average loans
Nonperforming assets
Nonperforming assets to:
Total loans
Total assets
Consolidated Capital Ratios
Common equity tier 1 capital
Tier 1 risk-based capital
Total risk-based capital
Tier 1 leverage capital
Average shareholders’ equity to average total assets
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FINANCIAL CONDITION
Our total assets decreased $2.9 million to $8.51 billion at December 31, 2025 from $8.52 billion at December 31, 2024. Our securities portfolio decreased by $109.4 million, or 3.9%, to $2.70 billion, compared to $2.81 billion at December 31, 2024. The decrease in the securities portfolio was primarily due to decreases in municipal securities and U.S. Treasury securities, partially offset by an increase in MBS during the year ended December 31, 2025. Our FHLB stock decreased $19.8 million, or 58.4%, to $14.1 million from $33.8 million at December 31, 2024, due to the decrease in our FHLB borrowings during the year ended December 31, 2025.
Loans at December 31, 2025 were $4.82 billion, an increase of $156.4 million, or 3.4%, compared to $4.66 billion at December 31, 2024, due to increases of $133.1 million in commercial real estate loans, $81.6 million in commercial loans and $10.7 million in construction loans. These increases were partially offset by decreases of $44.2 million in municipal loans, $16.0 million in 1-4 family residential loans and $8.7 million in loans to individuals. Loans held for sale decreased $0.6 million, or 31.6%, to $1.3 million at December 31, 2025 from $1.9 million at December 31, 2024.
Our nonperforming assets at December 31, 2025 increased $34.7 million, or 965.6%, to $38.2 million and represented 0.45% of total assets, compared to $3.6 million, or 0.04% of total assets, at December 31, 2024, due primarily to an increase of $27.5 million in restructured loans. The increase in restructured loans was due to the extension of maturity of a $27.5 million commercial real estate loan to allow for an extended lease up period during the first quarter of 2025. Nonaccruing loans increased $7.3 million, or 229.2%, to $10.5 million, and the ratio of nonaccruing loans to total loans was 0.22% and 0.07% for December 31, 2025 and December 31, 2024, respectively. The increase in nonaccrual loans compared to December 31, 2024 was primarily due to increases of $3.2 million in 1-4 family residential loans, $3.0 million in commercial loans and $1.0 million in commercial real estate loans. There were no repossessed assets at December 31, 2025, compared to $14,000 at December 31, 2024. There was $248,000 of OREO at December 31, 2025 and $388,000 at December 31, 2024.
Our deposits increased $210.9 million, or 3.2%, to $6.87 billion at December 31, 2025 from $6.65 billion at December 31, 2024, due to an increase in retail deposits of $359.9 million, or 7.7%, partially offset by a decrease in public fund deposits of $78.4 million, or 6.4%, and a decrease in brokered deposits of $70.7 million, or 9.5%. The increase in retail deposits of $359.9 million consists of $280.7 million of interest bearing deposits and $79.2 million of noninterest bearing deposits.
Total FHLB borrowings decreased $520.8 million, or 71.2%, to $211.1 million at December 31, 2025, from $731.9 million at December 31, 2024.
Other borrowings increased $132.2 million, or 173.0%, to $208.7 million at December 31, 2025, from $76.4 million at December 31, 2024.
Our subordinated notes, net of unamortized debt issuance costs, increased $147.6 million, or 160.4%, to $239.7 million at December 31, 2025 from $92.0 million at December 31, 2024, a result of the issuance of $150.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes during the third quarter of 2025.
Our total shareholders’ equity at December 31, 2025 increased 4.4%, or $35.7 million, to $847.6 million, or 10.0% of total assets, compared to $811.9 million, or 9.5% of total assets, at December 31, 2024. The increase in shareholders’ equity was the result of net income of $69.2 million, other comprehensive income of $29.3 million, stock compensation expense of $3.0 million and common stock issued under our dividend reinvestment plan of $1.0 million, partially offset by cash dividends paid of $43.4 million, repurchases of $23.4 million of our common stock pursuant to our Stock Repurchase Plan and net issuance of common stock under employee stock plans of $91,000.
Key financial indicators management follows include, but are not limited to: numerous interest rate sensitivity and interest rate risk indicators; credit risk, operations risk; liquidity risk; capital risk; regulatory risk; inflation risk; competition risk; yield curve risk; U.S. agency MBS prepayment risk; and economic risk indicators.
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BALANCE SHEET STRATEGY
Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. Our balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding and funding sources. Changing interest rate environments and economic conditions require that we monitor the interest rate sensitivity of the assets, the funding driving our growth and closely align ALCO objectives accordingly.
We ended 2025 with approximately $241.8 million in available liquidity from the FRDW, in addition to the approximately $2.45 billion available from the credit line with FHLB due primarily to the blanket lien on our loan portfolio and to a lesser extent, securities available as collateral. At December 31, 2025, the estimated deposits without insurance or collateral to total deposits, excluding affiliate deposits (Southside-owned deposits), was 23.0%, or $1.58 billion.
At December 31, 2025, brokered deposits of $650 million and FHLB advances of $210 million were hedged with $860 million of cash flow swaps. In connection with this $860.0 million of funding at December 31, 2025, the Bank also entered into various interest rate swap contracts that are treated as cash flow hedges under ASC Topic 815, “Derivatives and Hedging” that are expected to be effective in hedging the variability in future cash flows at 3.42% with a remaining average weighted maturity of 1.3 years at December 31, 2025. During the year ended December 31, 2025, we entered into an additional $250 million in cash flow hedge interest rate swap contracts, while $180 million in cash flow hedge interest rate swap contracts matured. As of December 31, 2025, a pre-tax unrealized loss of $663,000 was recognized in other comprehensive income, and there was no ineffective portion of these hedges. At December 31, 2024, the outstanding balance of cash flow hedges was $790.0 million. Refer to “Note 11 – Derivative Financial Instruments and Hedging Activities” in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments.
We continue to evaluate the lowest cost wholesale funding sources and will utilize either brokered deposits, FHLB advances or FRDW borrowings, or a combination of the three funding sources in addition to utilizing cash flow hedges to mitigate the impacts of interest rate movements. Wholesale funding and securities are utilized to enhance overall profitability, to determine the appropriate leverage of our capital and to determine acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. Wholesale funds are invested primarily in U.S. agency MBS and long-term municipal securities and to a lesser extent, corporate securities. Although the securities often carry lower yields than loans, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government and the guarantees of the municipalities, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations.
Risks associated with this asset structure include a potentially lower net interest rate spread and margin when compared to our peers, changes in the slope of the yield curve, increased interest rate risk, the length of interest rate cycles, changes in volatility or spreads associated with the MBS, municipal and corporate securities, the unpredictable nature of MBS prepayments and credit risks associated with the municipal and corporate securities. See “Part I - Item 1A. Risk Factors – Risks Related to Our Business” in this report for a discussion of risks related to interest rates. An additional risk is significant increases in interest rates, especially long-term interest rates, which could adversely impact the fair value of the AFS securities portfolio and could also impact our equity capital. Due to the unpredictable nature of MBS prepayments, the length of interest rate cycles and the slope of the interest rate yield curve, net interest income could fluctuate more than simulated under the scenarios modeled by our ALCO and described under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in this report.
Our securities portfolio decreased 3.9% from $2.81 billion at December 31, 2024 to $2.70 billion at December 31, 2025, with decreases in municipal securities, U.S. Treasury Bills and corporate bonds, partially offset by an increase in U.S. Agency MBS. The decrease in the securities portfolio was due to sales of securities, maturities and principal payments during the year ended December 31, 2025, which more than offset securities purchased.
During the second half of 2025, we restructured a portion of the AFS securities portfolio to enhance future earnings by selling primarily lower yielding long duration municipal securities and, to a lesser extent, MBS. During the year ended December 31, 2025, we sold $299.4 million of municipal securities, $225.9 million of MBS and $49.7 million in U.S. Treasury Bills, which resulted in a net realized loss of $32.3 million. During the year ended December 31, 2025, we purchased $739.1 million in lower premium, 5.50% to 6.50% coupon MBS, $41.8 million in 5.00% to 5.75% coupon municipal securities, $4.8 million in corporate bonds and $182.0 million in short-term U.S. Treasury Bills for collateral purposes.
At December 31, 2025, securities as a percentage of assets totaled 31.8%, compared to 33.0% at December 31, 2024, due to a $109.4 million, or 3.9%, decrease in securities. Cash and cash equivalents decreased to 4.6% of total assets at December 31, 2025, compared to 5.0% at December 31, 2024. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant.
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Our FHLB borrowings decreased 71.2%, or $520.8 million, to $211.1 million at December 31, 2025 from $731.9 million at December 31, 2024. As of December 31, 2025, we had $110.0 million in borrowings from the FRDW. There were no borrowings from the FRDW at December 31, 2024.
As of December 31, 2025, our total wholesale funding as a percentage of deposits, not including brokered deposits, decreased to 16.0% from 24.9% at December 31, 2024.
Our brokered deposits may consist of CDs and non-maturity deposits which may be raised quickly with terms tailored to our funding needs. We had $19.8 million in brokered CDs at December 31, 2025, a decrease from $115.7 million at December 31, 2024. At December 31, 2025, our brokered CDs had a weighted average cost of 406 basis points and matured on January 8, 2026. Our brokered non-maturity deposits increased to $652.4 million at December 31, 2025, of which $650.0 million are related to our cash flow hedges, from $627.1 million at December 31, 2024, with a weighted average cost of 359 and 321 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.05 billion, or 12% of total assets. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.
At December 31, 2025, the majority of the securities portfolio was funded by non-maturity deposits, some of which are included in wholesale funding that accounts for approximately 37% of the funding source, of which approximately 87% is swapped at a fixed rate, providing protection from rising interest rates.
We have partial term fair value hedges for certain of our fixed rate callable AFS municipal securities and partial term fair value hedges of fixed rate AFS MBS and fixed rate municipal loans using the portfolio layer method. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to partially offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. As of December 31, 2025, $24.1 million in hedging instruments were used to hedge municipal securities with a carrying amount of $21.3 million included in our AFS securities portfolio in our consolidated balance sheets, representing approximately 12.0% of the AFS municipal portfolio. As of December 31, 2025, $301.0 million in hedging instruments were used to hedge a layer of the closed portfolio of AFS MBS with a carrying value of $1.08 billion, or 85.8% of the AFS MBS portfolio, and $155.0 million in hedging instruments were used to hedge a layer of the closed portfolio of municipal loans. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.
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RESULTS OF OPERATIONS
Our results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on assets (loans and investments) and interest expense due on our funding sources (deposits and borrowings) during a particular period. Results of operations are also affected by our noninterest income, provision for credit losses, noninterest expenses and income tax expense. General economic and competitive conditions, particularly changes in interest rates, changes in interest rate yield curves, prepayment rates of MBS and loans, repricing of loan relationships, government policies and actions of regulatory authorities also significantly affect our results of operations. Future changes in applicable law, regulations or government policies may also have a material impact on us. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our 2024 Form 10-K for a discussion and analysis of the periods prior to 2024.
The following table presents net interest income for the periods presented (in thousands):
Years Ended December 31,
Interest income:
Loans
Taxable investment securities
Tax-exempt investment securities
MBS
FHLB stock and equity investments
Other interest earning assets
Total interest income
Interest expense:
Deposits
FHLB borrowings
Subordinated notes
Trust preferred subordinated debentures
Repurchase agreements
Other borrowings
Total interest expense
Net interest income
NET INTEREST INCOME
Net interest income is one of the principal sources of a financial institution’s earnings stream and represents the difference or spread between interest and fee income generated from interest earning assets and the interest expense paid on interest bearing liabilities. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income. During the last four months of 2024, the Federal Reserve reduced target federal funds rate by 100 basis points to 4.25% to 4.50%. During the last four months of 2025, the Federal Reserve reduced target federal funds rate by 75 basis points to 3.50% to 3.75%. If the federal funds rate remains elevated, it may negatively impact our net interest income. See “Part I - Item 1A. Risk Factors – Risks Related to Our Business” in this report for a discussion of risks related to interest rates.
Net interest income was $221.1 million for the year ended December 31, 2025, compared to $216.1 million for the same period in 2024, an increase of $5.0 million, or 2.3%. The increase in net interest income for the year ended December 31, 2025 was due to decreases in the average rate paid on our interest bearing liabilities and a change in the mix of our interest earning assets and interest bearing liabilities, partially offset by the decrease in the average yield of interest earning assets. Total interest income decreased $11.3 million, or 2.7%, to $403.1 million for the year ended December 31, 2025, compared to $414.3 million for the same period in 2024. Total interest expense decreased $16.2 million, or 8.2%, to $182.0 million for the year ended December 31, 2025, compared to $198.2 million for the same period in 2024. Our net interest margin and net interest margin (FTE), a non-GAAP measure, increased to 2.81% and 2.93%, respectively, for the year ended December 31, 2025, compared to 2.74% and 2.88%, respectively, for the same period in 2024, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, increased to 2.14% and 2.26%, respectively, compared to 2.02% and 2.16%, respectively, for the same period in 2024. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.
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ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
The following table presents on a fully taxable-equivalent basis, a non-GAAP measure, the net change in net interest income and sets forth the dollar amount of increase (decrease) in the average volume of interest earning assets and interest bearing liabilities and from changes in yields/rates. Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes (in thousands). The comparison between the years includes an additional change factor that shows the effect of the difference in the number of days in each period for assets and liabilities that accrue interest based upon the actual number of days in the period.
Year Ended December 31, 2025 Compared to 2024
Year Ended December 31, 2024 Compared to 2023
Change Attributable to
Total Change
Change Attributable to
Total Change
Fully Taxable-Equivalent Basis:
Average Volume
Average Yield/Rate
Number of Days
Average Volume
Average Yield/Rate
Number of Days
Interest income on:
Loans (1)
Loans held for sale
Taxable investment securities
Tax-exempt investment securities (1)
Mortgage-backed and related securities
FHLB stock, at cost, and equity investments
Interest earning deposits
Federal funds sold
Total earning assets
Interest expense on:
Savings accounts
CDs
Interest bearing demand accounts
FHLB borrowings
Subordinated notes, net of unamortized debt issuance costs
Trust preferred subordinated debentures, net of unamortized debt issuance costs
Repurchase agreements
Other borrowings
Total interest bearing liabilities
Net change
(1) Interest yields on loans and securities that are nontaxable for federal income tax purposes are presented on a fully taxable-equivalent basis. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.
The decrease in total interest income for the year ended December 31, 2025 was attributable to the decrease in the average yield on earning assets to 5.25% for the year ended December 31, 2025 from 5.40% for the same period in 2024, partially offset by a change in the mix of our interest earning assets when compared to the year ended December 31, 2024.
The decrease in total interest expense for the year ended December 31, 2025 was attributable to the decrease in the average rate paid on our interest bearing liabilities to 2.99% from 3.24% for the year ended December 31, 2024 and a change in the average balance and mix of our interest bearing liabilities.
Interest bearing demand, savings and noninterest bearing demand deposits are considered the lowest cost deposits and decreased to 79.2% of total average deposits for the year ended December 31, 2025, from 83.7% for the year ended December 31, 2024.
At December 31, 2025, brokered CDs were 0.3% of deposits, compared to 1.7% of deposits at December 31, 2024. Our brokered non-maturity deposits increased to 9.5% of deposits at December 31, 2025, compared to 9.4% of deposits at December 31, 2024. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.05 billion, or 12% of total assets. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.
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AVERAGE BALANCES WITH AVERAGE YIELDS AND RATES
The following table presents average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities for the years ended December 31, 2025, 2024 and 2023. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP. The information should be reviewed in conjunction with the consolidated financial statements for the same years then ended (dollars in thousands):
Average Balances with Average Yields and Rates
Year ended
December 31, 2025
December 31, 2024
December 31, 2023
Average Balance
Interest
Avg Yield/Rate (3)
Average Balance
Interest
Avg Yield/Rate (3)
Average Balance
Interest
Avg Yield/Rate (3)
ASSETS
Loans (1)
Loans held for sale
Securities:
Taxable investment securities (2)
Tax-exempt investment securities (2)
Mortgage-backed and related securities (2)
Total securities
FHLB stock, at cost, and equity investments
Interest earning deposits
Federal funds sold
Total earning assets
Cash and due from banks
Accrued interest and other assets
Less: Allowance for loan losses
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Savings accounts
CDs
Interest bearing demand accounts
Total interest bearing deposits
FHLB borrowings
Subordinated notes, net of unamortized debt issuance costs
Trust preferred subordinated debentures, net of unamortized debt issuance costs
Repurchase agreements
Other borrowings
Total interest bearing liabilities
Noninterest bearing deposits
Accrued expenses and other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income (FTE)
Net interest margin (FTE)
Net interest spread (FTE)
(1) Interest on loans includes net fees on loans that are not material in amount.
(2) For the purpose of calculating the average yield, the average balance of securities do not include unrealized gains and losses on AFS securities.
(3) Yield/rate includes the impact of applicable derivatives.
Note: As of December 31, 2025, 2024 and 2023, loans totaling $10.5 million, $3.2 million and $3.9 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.
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PROVISION FOR CREDIT LOSSES
For the year ended December 31, 2025, there was a provision for credit losses of $3.1 million, compared to $3.3 million for the year ended December 31, 2024. The decrease in provision expense for the year ended December 31, 2025, compared to 2024, was primarily due to improvements in the overall economic forecast in the CECL model.
As of December 31, 2025, and 2024, our reviews of the loan portfolio indicated that loan loss allowances of $45.1 million and $44.9 million, respectively, were appropriate to cover expected credit losses in the portfolio. See the section captioned “Allowance for Credit Losses - Loans” elsewhere in this discussion for further analysis of the provision for credit losses for loans.
The balance of the allowance for off-balance-sheet credit exposures at December 31, 2025 and 2024, was $3.2 million and $3.1 million, respectively, and is included in other liabilities. See the section captioned “Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures” elsewhere in this discussion for further analysis of the provision for credit losses for off-balance-sheet credit exposures.
The balance of the allowance for credit losses on securities held to maturity at December 31, 2025 was $25,000. There was no allowance for credit losses on securities held to maturity at December 31, 2024.
The following table details the provision for (reversal of) loan losses, provision for (reversal of) off-balance-sheet credit exposures and provision for (reversal of) securities held to maturity for the years ended December 31, 2025, 2024 and 2023 (dollars in thousands):
Increase
(Decrease)
Increase
(Decrease)
Provision for (reversal of) loan losses
Provision for (reversal of) off-balance-sheet credit exposures
Provision for (reversal of) securities held to maturity
Total provision for credit losses
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NONINTEREST INCOME
Noninterest income consists of revenue generated from a broad range of financial services and activities and other fee generating services that we either provide or in which we participate.
The following table details the categories included in noninterest income for the years ended December 31, 2025, 2024 and 2023 (dollars in thousands):
Increase
(Decrease)
Increase
(Decrease)
Deposit services
Net gain (loss) on sale of securities AFS
Net gain on sale of equity securities
Gain (loss) on sale of loans
Trust fees
BOLI
Brokerage services
Other noninterest income
Total noninterest income
The 61.8% decrease in noninterest income for the year ended December 31, 2025, when compared to the same period in 2024, was due to an increase in net loss on sale of securities AFS and a decrease in BOLI income, partially offset by increases in other noninterest income, trust fees, brokerage services income and gain on sale of loans.
During the year ended December 31, 2025, we sold municipal securities, MBS and U.S. Treasury securities that resulted in a net loss on sale of AFS securities of $32.3 million. During the year ended December 31, 2024, we sold municipal securities that resulted in a net loss on sale of AFS securities of $2.5 million.
The increase in gain on sale of loans for the year ended December 31, 2025, was primarily due to the $412,000 net loss on the sale of a commercial real estate loan relationship during the first quarter of 2024.
Trust fees increased for the year ended December 31, 2025, when compared to the same period in 2024, due to an increase in accounts under management and fee repricing.
The decrease in BOLI income for the year ended December 31, 2025, when compared to the same period in 2024, was due to a death benefit of $962,000 realized in the second quarter of 2024 for a former covered officer, partially offset by a death benefit of $255,000 realized during the fourth quarter of 2025 for a former covered officer.
Brokerage services income increased for the year ended December 31, 2025, when compared to the same period in 2024, due to an increase in assets under management.
Other noninterest income increased for the year ended December 31, 2025, when compared to the same period in 2024, partially due to an impairment loss in the third quarter of 2024 of $868,000 for AFS securities. Additionally, the increase for the year ended December 31, 2025 was also due to increases in swap fee income, equity investment income, deluxe income and merchant services income, partially offset by the gain recognized on the repurchase of our subordinated notes at a discount during the second quarter of 2024.
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NONINTEREST EXPENSE
We incur certain types of noninterest expenses associated with the operation of our various business activities. The following table details the categories included in noninterest expense for the years ended December 31, 2025, 2024 and 2023 (dollars in thousands):
Increase
(Decrease)
Increase
(Decrease)
Salaries and employee benefits
Net occupancy
Advertising, travel & entertainment
ATM expense
Professional fees
Software and data processing
Communications
FDIC insurance
Amortization of intangibles
Other noninterest expense
Total noninterest expense
The increase in noninterest expense for the year ended December 31, 2025, when compared to the same period in 2024, was primarily due to increases in other noninterest expense, professional fees and advertising, travel and entertainment expense, partially offset by decreases in amortization of intangibles and communications expense.
Salaries and employee benefits expense remained relatively unchanged during the year ended December 31, 2025 compared to the same period in 2024, consisting of a decrease in health insurance expense, partially offset by increases in direct salary expense and retirement expense.
Direct salary expense increased $248,000, or 0.3%, for the year ended December 31, 2025, compared to the same period in 2024, primarily due to normal salary increases effective in the first quarter of 2025.
Health and life insurance expense, included in salaries and employee benefits, decreased $272,000, or 3.0%, for the year ended December 31, 2025, compared to the same period in 2024, due to decreases in health claims expense and plan administration cost. We have a self-insured health plan which is supplemented with a stop loss policy.
Retirement expense, included in salaries and employee benefits, increased $7,000, or 0.2%, for the year ended December 31, 2025, compared to the same period in 2024.
Advertising, travel and entertainment expense increased during the year ended December 31, 2025, compared to the same period in 2024, due to increases in media advertising, meals and entertainment and travel related expenses and donations.
Professional fees increased for the year ended December 31, 2025, when compared to the same period in 2024, due to increases in managed services, audit, consulting and legal fees.
Communications expense decreased for the year ended December 31, 2025, when compared to the same period in 2024, resulting from improved network management efficiency.
Amortization of intangibles decreased for the year ended December 31, 2025, compared to the same period in 2024, due primarily to a decrease in core deposit intangible amortization which is recognized on an accelerated method resulting in a decline in expense over the amortization period.
Other noninterest expense increased for the year ended December 31, 2025, when compared to the same period in 2024, primarily due to an increase in non-service cost of the Retirement Plan as a result of the amortization method change from average life expectancy to average future service in the first quarter of 2025 and a one-time charge of $1.2 million on the demolition of an old branch facility following completion of the new branch during the second quarter of 2025. Additional increases included an increase in bank analysis fees and online banking expense.
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INCOME TAXES
Pre-tax income for the year ended December 31, 2025 was $82.6 million, compared to $107.4 million for the year ended December 31, 2024.
Income tax expense was $13.4 million for the year ended December 31, 2025 and represented a decrease of $5.5 million, or 29.0%, from $18.9 million for the year ended December 31, 2024. The ETR as a percentage of pre-tax income was 16.2% in 2025 and 17.6% in 2024. The decrease in the ETR for the year ended December 31, 2025, compared to the same period in 2024, was primarily a result of an increase in net tax-exempt income as a percentage of pre-tax income. The decrease in income tax expense is due to the lower ETR and lower pre-tax income for the year ended December 31, 2025 compared to the same period in 2024.
The ETR differs from the statutory rate of 21% primarily due to the effect of tax-exempt income from municipal loans and securities, as well as BOLI. The net deferred tax asset totaled $27.1 million at December 31, 2025, as compared to $34.5 million in 2024. The decrease in the net deferred tax asset is primarily the result of a decrease in unrealized losses in the AFS securities portfolio. See “Note 15 – Income Taxes” to our consolidated financial statements included in this report. No valuation allowance was recorded at December 31, 2025 or December 31, 2024, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years.
LENDING ACTIVITIES
One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the market areas in which we operate. The majority of our loan originations are made to borrowers who live in and/or conduct business in the market areas of Texas in which we operate or adjoin.
Total loans as of December 31, 2025 increased $156.4 million, or 3.4%, and the average loan balance outstanding for the year increased $50.8 million, or 1.1%, compared to 2024.
From December 31, 2024 to December 31, 2025, commercial real estate loans increased $133.1 million, commercial loans increased $81.6 million and construction loans increased $10.7 million. The increases were partially offset by decreases of $44.2 million in municipal loans, $16.0 million in 1-4 family residential loans and $8.7 million in loans to individuals. Loans held for sale decreased $614,000, or 31.6%, to $1.3 million at December 31, 2025 from $1.9 million at December 31, 2024.
Our greatest concentration of loans is in our real estate portfolio. Management does not consider there to be a concentration of risk in any one industry type. See “Item 1. Business – Market Area.”
The aggregate amount of loans that we are permitted to make under applicable bank regulations to any one borrower, including non-affiliate related entities is 25% of Tier 1 capital. Our legal lending limit at December 31, 2025, was approximately $240.7 million. Our largest loan relationship at December 31, 2025 was approximately $133.1 million.
The average yield on loans for the year ended December 31, 2025 decreased to 5.98%, compared to 6.13% for the year ended December 31, 2024.
LOAN PORTFOLIO COMPOSITION AND ASSOCIATED RISK
For purposes of this discussion, our loans are divided into real estate loans, commercial loans, municipal loans and loans to individuals.
REAL ESTATE LOANS
Our real estate loan portfolio consists of construction, 1-4 family residential and commercial real estate loans, and represents our greatest concentration of loans. We attempt to mitigate the amount of risk associated with this group of loans through the type of loans originated and geographic distribution. At December 31, 2025, the majority of our real estate loans were collateralized by properties located in our market areas. Of the $3.99 billion in real estate loans, $724.4 million, or 18.2%, represent loans collateralized by residential dwellings that are primarily owner occupied. Historically, the amount of losses realized on this type of loan has been significantly less than those on other properties. Prior to funding any real estate loan, our loan policy requires an appraisal or evaluation of the property and also outlines the requirements for appraisals on renewals based on the size and complexity of the transaction.
We pursue an aggressive policy of reappraisal on any real estate loan that is in the process of foreclosure and potential exposures are recognized and reserved for or charged off as soon as they are identified. Our ability to liquidate certain types of properties that may be obtained through foreclosure could adversely affect the volume of our nonperforming real estate loans.
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Construction Real Estate Loans
Our construction loans are collateralized by property located primarily in or near the market areas we serve. Some of our construction loans will be owner occupied upon completion. Construction loans for non-owner occupied projects are financed, but these typically have cash flows from leases with tenants, secondary sources of repayment, and in some cases, additional collateral. Our construction loans have both adjustable and fixed interest rates during the construction period. Construction loans to individuals are typically priced and made with the intention of granting the permanent loan on the completed property. Commercial construction loans typically have adjustable interest rates and are subject to underwriting standards similar to that of the commercial real estate loan portfolio. Owner occupied 1-4 family residential construction loans are subject to the underwriting standards of the permanent loan.
1-4 Family Residential Real Estate Loans
Residential loan originations are generated by our mortgage loan officers, in-house origination staff, marketing efforts, present customers, walk-in customers and referrals from real estate agents and builders. We focus our lending efforts primarily on the origination of loans secured by first mortgages on owner occupied 1-4 family residences. Substantially all of our 1-4 family residential originations are secured by properties located in or near our market areas. Historically, we have originated a portion of our residential loans for sale into the secondary market. These loans are reflected on the balance sheet as loans held for sale. Secondary market investors, other than Fannie Mae, typically pay us a service release premium in addition to a predetermined price based on the interest rate of the loan originated. We retain liabilities related to early prepayments, defaults, failure to adhere to origination and processing guidelines and other issues. We have internal controls in place to mitigate many of these liabilities and historically our realized liability has been extremely low. In addition, many of the retained liabilities expire one year from the date a loan is sold. We warehouse these loans until they are transferred to the secondary market investor, which usually occurs within 45 days.
Our 1-4 family residential loans generally have maturities ranging from 15 to 30 years. These loans are typically fully amortizing with monthly payments sufficient to repay the total amount of the loan. Our 1-4 family residential loans are made at both fixed and adjustable interest rates.
Underwriting for 1-4 family residential loans includes debt-to-income analysis, credit history analysis, appraised value and down payment considerations. Changes in the market value of real estate can affect the potential losses in the residential portfolio.
We also make home equity loans, which are included as part of the 1-4 family residential loans, and at December 31, 2025, these loans totaled $97.2 million. Under Texas law, these loans, when combined with all other mortgage indebtedness for the property, are capped at 80% of appraised value.
Commercial Real Estate Loans
Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. Management does not consider there to be a concentration of risk in any one industry type. In determining whether to originate commercial real estate loans, we generally consider such factors as the financial condition of the borrower and the debt service coverage of the property. Commercial real estate loans are made at both fixed and adjustable interest rates for terms generally up to 20 years. Most of our fixed rate commercial real estate loans adjust at least every five years. At December 31, 2025, commercial real estate loans consisted of $1.94 billion of owner and non-owner occupied real estate loans, $742.7 million of loans secured by multi-family properties and $32.7 million of loans secured by farmland.
COMMERCIAL LOANS
Our commercial loans are diversified loan types including short-term working capital loans for inventory and accounts receivable and short- and medium-term loans for equipment or other business capital expansion. Management does not consider there to be a concentration of risk in any one industry type. In our commercial loan underwriting, we assess the creditworthiness, ability to repay and the value and liquidity of the collateral being offered. Terms of commercial loans are generally commensurate with the useful life of the collateral offered. Commercial loans increased $81.6 million, or 22.5%, to $444.7 million as of December 31, 2025, when compared to 2024.
MUNICIPAL LOANS
We make loans to municipalities and school districts primarily throughout the state of Texas, with a small percentage originating outside of the state. The majority of the loans to municipalities and school districts have tax or revenue pledges and in some cases are additionally supported by collateral. Municipal loans made without a direct pledge of taxes or revenues are usually made based on some type of collateral that represents an essential service. These loans allow us to earn a higher yield
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than we could if we purchased municipal securities for similar durations. Loans to municipalities and school districts decreased $44.2 million, or 11.3%, to $346.7 million as of December 31, 2025, when compared to 2024.
LOANS TO INDIVIDUALS
Substantially all originations of our loans to individuals are made to consumers in our market areas. At December 31, 2025, loans collateralized by titled equipment, which are primarily automobiles, accounted for approximately $19.3 million, or 47.3%, of total loans to individuals.
Home equity loans, which are included in 1-4 family residential loans, have replaced some of the traditional loans to individuals. In addition, we make loans for a full range of other consumer purposes, which may be secured or unsecured depending on the credit quality and purpose of the loan.
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. The underwriting standards we employ for consumer loans include an application and a determination of the applicant’s payment history on other debts, with the greatest weight being given to payment history with us and an assessment of the borrower’s ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, in relation to the proposed loan amount. Most of our loans to individuals are collateralized, which management believes assists in limiting our exposure.
LOAN MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST RATES
The following tables represent loan maturities and sensitivity to changes in interest rates for our loans (dollars in thousands). The amounts of these loans outstanding at December 31, 2025, which, based on maturity, are due in (1) one year or less, (2) after one but within five years, (3) after five years but within 15 years, and (4) after 15 years, are shown in the following table. The amounts due after one year are classified according to the sensitivity to changes in interest rates:
Due in One
Year or Less
After One but
Within Five Years
After Five
Years Within 15 Years
After 15 Years
Total
Real estate loans:
Construction
1-4 family residential
Commercial
Commercial loans
Municipal loans
Loans to individuals
Total loans
Loans with maturities after one year for which:
Interest Rates are Fixed or Predetermined
Interest Rates are Floating or Adjustable
Real estate loans:
Construction
1-4 family residential
Commercial
Commercial loans
Municipal loans
Loans to individuals
Total loans
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LOANS TO AFFILIATED PARTIES
In the normal course of business, we make loans to our own executive officers and directors and their related interests. These loans totaled $9.8 million and $12.1 million and represented 1.2% and 1.5% of shareholders’ equity as of December 31, 2025 and 2024, respectively.
NONPERFORMING ASSETS
Nonperforming assets consist of delinquent loans 90 days or more past due, nonaccrual loans, OREO, repossessed assets and restructured loans. Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not expected. Additionally, some loans that are not delinquent or that are delinquent less than 90 days may be placed on nonaccrual status if it is probable that we will not receive contractual principal and interest payments in accordance with the terms of the respective loan agreements. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes. OREO represents real estate taken in full or partial satisfaction of debts previously contracted. The dollar amount of OREO is based on a current evaluation of the OREO at the time it is recorded on our books, net of estimated selling costs. Updated valuations are obtained as needed and any additional impairments are recognized. loans represent loans that have been modified due to the borrower experiencing financial by providing interest rate reductions or below market interest rates, amortization schedules and other actions intended to minimize potential . Categorization of a loan as is not in itself a reliable indicator of potential loan . Other factors, such as the value of collateral securing the loan and the financial condition of the borrower, are considered in judgments as to potential loan .
Our nonperforming assets at December 31, 2025 increased $34.7 million, or 965.6%, to $38.2 million and represented 0.45% of total assets, compared to $3.6 million, or 0.04% of total assets, at December 31, 2024, due primarily to an increase of $27.5 million in restructured loans. The increase in restructured loans was due to the extension of maturity of a $27.5 million commercial real estate loan to allow for an extended lease up period during the first quarter of 2025. Nonaccruing loans increased $7.3 million, or 229.2%, to $10.5 million, and the ratio of nonaccruing loans to total loans was 0.22% and 0.07% for December 31, 2025 and December 31, 2024, respectively. The increase in nonaccrual loans compared to December 31, 2024 was primarily due to increases of $3.2 million in 1-4 family residential loans, $3.0 million in commercial loans and $1.0 million in commercial real estate loans. There were no repossessed assets at December 31, 2025, compared to $14,000 at December 31, 2024. There was $248,000 of OREO at December 31, 2025 and $388,000 at December 31, 2024.
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The following table sets forth nonperforming assets and selected asset quality ratios for the periods presented (dollars in thousands):
December 31,
Change (%)
Nonaccrual loans (1)
Accruing loans past due more than 90 days
Restructured loans
OREO
Repossessed assets
Total nonperforming assets
Total loans
Allowance for loan losses at end of period
Ratio of nonaccruing loans to:
Total loans
Ratio of nonperforming assets to:
Total assets
Total loans
Total loans and OREO
Ratio of allowance for loan losses to:
Nonaccruing loans
Nonperforming assets
Total loans
(1) Includes $2.0 million and $63,000 of restructured loans as of December 31, 2025 and December 31, 2024, respectively.
Nonperforming assets hinder our ability to earn interest income. Decreases in earnings can result from both the loss of interest income and the costs associated with maintaining the OREO, for taxes, insurance and other operating expenses. We actively market all OREO properties and do not hold them for investment purposes.
We reversed $83,000 of interest income on nonaccrual loans during the year ended December 31, 2025. We had $2.7 million of loans on nonaccrual for which there was no related allowance for credit losses as of December 31, 2025.
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ALLOWANCE FOR CREDIT LOSSES – LOANS
The following table presents information regarding changes in the allowance for loan losses for the periods presented (in thousands):
Years Ended December 31,
Balance of allowance for loan losses at beginning of period
Total loan charge-offs
Total recovery of loans previously charged-off
Net loan charge-offs
Provision for (reversal of) loan losses
Allowance for loan losses at end of period
Our allowance for loan losses was $45.1 million at December 31, 2025, or 0.94% of loans, an increase of $216,000, or 0.5%, compared to $44.9 million at December 31, 2024.
In accordance with ASC 326, the allowance for credit losses on loans is estimated and recognized upon origination of the loan based on expected credit losses. The CECL model uses historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about future events. The impact of varying economic conditions and portfolio stress factors are a component of the credit loss models applied to each portfolio. Reserve factors are specific to the loan segments that share similar risk characteristics based on the probability of default assumptions and loss given default assumptions, over the contractual term. The forecasted periods gradually mean-revert the economic inputs to their long-run historical trends. Management evaluates the economic data points used in the Moody’s forecasting scenarios on a quarterly basis to determine the most appropriate impact to the various portfolio characteristics based on management’s view and applies weighting to various forecasting scenarios as deemed appropriate based on known and expected economic activities. Management also considers and may apply relevant qualitative factors, not previously considered, to determine the appropriate allowance level. The use of the CECL model includes significant judgment by management and may differ from those of our peers due to different historical patterns, economic forecasts, and the length of time of the reasonable and supportable forecast period and reversion period.
We utilize Moody’s Analytics economic forecast scenarios and assign probability weighting to those scenarios which best reflect management’s views on the economic forecast. The probability weighting and scenarios utilized for the estimate of the allowance were generally reflective of the economic forecast in our CECL model as of December 31, 2025.
When determining the appropriate allowance for credit losses on our loan portfolio, our commercial construction and real estate loans, commercial loans and municipal loans utilize the probability of default/loss given default discounted cash flow approach. Reserves on these loans are based upon risk factors including the loan type and structure, collateral type, leverage ratio, refinancing risk and origination quality, among others. Our consumer construction real estate loans, 1-4 family residential loans and our loans to individuals use a loss rate based upon risk factors including loan types, origination year and credit scores.
Loans evaluated collectively in a pool are monitored to ensure they continue to exhibit similar risk characteristics with other loans in the pool. If a loan does not share similar risk characteristics with other loans, expected credit losses for that loan are evaluated individually.
Our lenders have the primary responsibility for identifying problem loans based on customer financial stress and underlying collateral. These recommendations are reviewed by a senior credit officer, the special assets department and the loan review department on a monthly basis. The loan review department independently reviews the portfolio on an annual basis in compliance with the board-approved annual loan review scope. The loan review scope encompasses a number of considerations including the size of the loan, the type of credit extended, the seasoning of the loan and the performance of the loan. The loan review scope, as it relates to size, focuses more on larger dollar loan relationships, typically aggregate debt of $500,000 or greater.
At each review, a subjective analysis methodology is used to grade the respective loan. Categories of grading vary in severity from loans that do not appear to have a significant probability of loss at the time of review to loans that indicate a probability that the entire balance of the loan will be uncollectible. If at the time of the review we determine it is probable we will not collect the principal and interest cash flows contractually due on the loan, estimates of future expected cash flows or appraisals of the collateral securing the debt are used to determine the necessary allowance. The internal loan review department maintains a list of all loans or loan relationships that are graded as having more than the normal degree of risk associated with them. In addition, a list of specifically reserved loans or loan relationships of $150,000 or more is updated on a
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quarterly basis in order to properly determine necessary allowances and keep management informed on the status of attempts to correct the deficiencies noted with respect to the loans.
As of December 31, 2025, our review of the loan portfolio indicated that an allowance for loan losses of $45.1 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model, may require future adjustments to the allowance for loan losses.
Industry and our own experience indicate that a portion of our loans will become delinquent and a portion of our loans will require partial or full charge-off. Regardless of the underwriting criteria utilized, losses may occur as a result of various factors beyond our control, including, among other things, changes in market conditions affecting the value of properties used as collateral for loans and problems affecting the credit worthiness of the borrower and the ability of the borrower to make payments on the loan. Our determination of the appropriateness of the allowance for loan losses is based on various considerations, including an analysis of the risk characteristics of various classifications of loans, previous loan loss experience, specific loans which have loan loss potential, delinquency trends, estimated fair value of the underlying collateral, current economic conditions and geographic and industry loan concentration.
The following table presents the allocation of allowance for loan losses for the years presented (dollars in thousands):
December 31,
Amount
Percent
of Loans
To Total
Loans
Amount
Percent
of Loans
To Total
Loans
Real estate loans:
Construction
1-4 family residential
Commercial
Commercial loans
Municipal loans
Loans to individuals
Ending balance
The following table presents information regarding the net charge-offs to average amount of loans outstanding by portfolio segment (dollars in thousands):
Years Ended
December 31, 2025
December 31, 2024
December 31, 2023
Net Loans (Charged-off) Recovered
Average Loans Outstanding
Net (Charge-offs) Recoveries to Average Loans Outstanding
Net Loans (Charged-off) Recovered
Average Loans Outstanding
Net (Charge-offs) Recoveries to Average Loans Outstanding
Net Loans (Charged-off) Recovered
Average Loans Outstanding
Net (Charge-offs) Recoveries to Average Loans Outstanding
Real estate loans:
Construction
1-4 family residential
Commercial
Commercial loans
Municipal loans
Loans to individuals
Total
For the year ended December 31, 2025, net loan charge-offs increased $860,000, or 44.6%, to $2.8 million, compared to $1.9 million for the same period in 2024.
See “Note 5 – Loans and Allowance for Loan Losses” in our consolidated financial statements included in this report.
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ALLOWANCE FOR CREDIT LOSSES – OFF-BALANCE-SHEET CREDIT EXPOSURES
Allowance for off-balance-sheet credit exposures were as follows (in thousands):
Years Ended December 31,
Balance at beginning of period
Provision for (reversal of) off-balance-sheet credit exposures
Balance at end of period
Our off-balance-sheet credit exposures include contractual commitments to extend credit and standby letters of credit. For these credit exposures we evaluate the expected credit losses using usage given defaults and credit conversion factors depending on the type of commitment and based upon historical usage rates. These assumptions are reevaluated on an annual basis and adjusted if necessary. For the year ended December 31, 2025, we recorded a provision for credit losses for off-balance-sheet exposures of $25,000, compared to a reversal of provision for credit losses on off-balance-sheet exposures of $791,000 for the year ended December 31, 2024. For additional information regarding our methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures, see “Note 17 – Off-Balance-Sheet Arrangements, Commitments and Contingencies” to our consolidated financial statements included in this report.
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SECURITIES ACTIVITY
Our securities portfolio plays a primary role in the management of our interest rate sensitivity and liquidity and, therefore, is managed in the context of the overall balance sheet. The securities portfolio generates a substantial percentage of our interest income and serves as a necessary source of liquidity.
Refer to “Note 1 – Summary of Significant Accounting and Reporting Policies” and “Note 4 – Securities” to our consolidated financial statements included in this report for a detailed description of our accounting related to our debt and equity securities.
Management attempts to deploy investable funds into instruments that are expected to provide a reasonable overall return on the portfolio given the current assessment of economic and financial conditions, while maintaining acceptable levels of capital, interest rate and liquidity risk. At December 31, 2025, the combined investment securities, MBS, FHLB stock and other investments as a percentage of total assets was 32.0%, compared to loans, which were 56.6% of total assets. For a discussion of our strategy in relation to the securities portfolio, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Balance Sheet Strategy.”
Our MBS are all insured or guaranteed by U.S. government agencies and corporations. Our MBS include pools and CMOs. CMOs were developed in response to investor concerns regarding the uncertainty of cash flows associated with the prepayment option of the underlying mortgages. MBS generally may be prepaid at any time without penalty and can result in significantly increased price and yield volatility. Several of our MBS were purchased at a premium and should they prepay at a faster rate, our yield on these securities will decrease. Conversely, as prepayments slow, the yield on these MBS will increase. The total net unamortized premium for our MBS increased to $9.3 million at December 31, 2025, compared to $5.9 million at December 31, 2024.
Our investment securities consist primarily of state and political subdivision (municipal bonds) and to a lesser extent, corporate bonds. Most of our municipal bonds were issued by the State of Texas or political subdivisions or agencies within the State of Texas and are highly rated. Our corporate bonds consist of investment grade bonds, private placement bonds and one bond rated below investment grade in the amount of $4.0 million.
During 2025, we sold AFS municipal securities, mortgage related securities and U.S. Treasury Bills that resulted in an overall net loss of $32.3 million, which included a net loss of $1.2 million recorded on the unwind of fair value municipal securities and MBS hedges in the AFS securities portfolio. During 2024, the sale of AFS municipal securities resulted in an overall net loss of $2.5 million, which included a net gain of $3.5 million recorded on the unwind of fair value municipal security hedges in the AFS securities portfolio.
The combined investment securities, MBS, FHLB stock and other investments decreased to $2.73 billion at December 31, 2025, compared to $2.86 billion at December 31, 2024, a decrease of $129.1 million, or 4.5%. The decrease is a result of a decrease in our investment securities portfolio of $431.6 million, or 24.4%, and a decrease in FHLB stock of $19.8 million, or 58.4%, partially offset by an increase in our MBS of $322.1 million, or 30.8%, when compared to December 31, 2024.
The combined fair value of the AFS and HTM securities portfolio at December 31, 2025 was $2.56 billion, which represented a net unrealized loss as of that date of $145.0 million. The net unrealized loss was comprised of $165.1 million of unrealized losses and $20.1 million in unrealized gains. The fair value of the AFS securities portfolio at December 31, 2025 was $1.46 billion, which included a net unrealized loss of $767,000. The net unrealized loss was comprised of $17.9 million of unrealized losses and $17.1 million of unrealized gains. The majority of the $17.9 million of unrealized losses is reflected in our state and political subdivisions. Net unrealized gains and losses on AFS securities, which is also a component of shareholders’ equity on the consolidated balance sheet, can fluctuate significantly as a result of changes in interest rates and is monitored through the use of shock tests on the AFS securities portfolio using an array of interest rate assumptions.
From time to time, we transfer securities from AFS to HTM due to overall balance sheet strategies. Any net unrealized gain or loss on the transferred securities included in AOCI at the time of transfer will be amortized over the remaining life of the underlying security as an adjustment to the yield on those securities. Securities transferred with losses included in AOCI continue to be included in management’s assessment for impairment for each individual security. During the years ended December 31, 2025 and 2024, we did not transfer any securities from AFS to HTM. There were no sales from the HTM portfolio during the years ended December 31, 2025 or 2024. There were $1.25 billion and $1.28 billion of securities classified as HTM at December 31, 2025 and 2024, respectively.
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The maturities of AFS and HTM investment securities and MBS portfolio and the weighted yields are presented below (dollars in thousands) as of December 31, 2025. Tax-exempt obligations are shown on a taxable-equivalent basis, which is a non-GAAP measure. See “Non-GAAP Financial Measures” for more information and a reconciliation to GAAP. MBS are included in maturity categories based on their stated maturity date. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations.
MATURING
Within 1 Year
After 1 But
Within 5 Years
After 5 But
Within 10 Years
After 10 Years
Available for Sale:
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Investment securities:
State and political subdivisions
Corporate bonds and other
MBS:
Residential
Commercial
Total
MATURING
After 1 But
After 5 But
Within 1 Year
Within 5 Years
Within 10 Years
After 10 Years
Held to Maturity:
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Investment securities:
State and political subdivisions
Corporate bonds and other
MBS:
Residential
Commercial
Total
At December 31, 2025, there were no holdings of any one issuer, other than the U.S. government, its agencies and its GSEs, in an amount greater than 10% of our shareholders’ equity.
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DEPOSITS AND BORROWED FUNDS
We utilize deposits and primarily borrowings from FHLB, FRDW and BTFP to assist with our funding needs. Deposits provide us with our primary source of funds. The following table sets forth average deposits and rates paid by category (dollars in thousands) for the years ended December 31, 2025, 2024 and 2023:
Years Ended December 31,
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Average
Balance
Average
Rate
Interest bearing demand accounts (1)
Savings accounts
CDs
Total interest bearing deposits
Noninterest bearing demand deposits
Total deposits
(1) The average rate on interest bearing demand accounts includes the effect of interest rate swaps.
The table below sets forth the maturity distribution of CDs greater than $250,000 (in thousands):
December 31, 2025
December 31, 2024
Time deposits otherwise uninsured with a maturity of:
Three months or less
Over three to six months
Over six to twelve months
Over twelve months
Total CDs greater than $250,000
Estimated amount of uninsured deposits, including related accrued interest, were $2.73 billion and $2.53 billion at December 31, 2025 and 2024, respectively.
Brokered deposits may consist of CDs and non-maturity deposits. At December 31, 2025, we had $19.8 million in brokered CDs. Brokered non-maturity deposits were $652.4 million at December 31, 2025 with a weighted average cost of 359 basis points. As of December 31, 2024, we had $115.7 million in brokered CDs and $627.1 million in brokered non-maturity deposits. Our current policy allows for maximum brokered deposits of the lesser of $1.05 billion, or 12% of total assets. The potential higher interest costs and lack of customer loyalty are risks associated with the use of brokered deposits.
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Borrowing arrangements, consisting of FHLB borrowings, repurchase agreements and borrowings from the FRDW and BTFP, decreased $388.6 million, or 48.1%, during 2025 compared to 2024, due to a $520.8 million decrease in FHLB borrowings, partially offset by a $110.0 million increase in borrowings from the FRDW and a $22.2 million increase in repurchase agreements.
Borrowing arrangements are summarized as follows (dollars in thousands):
Years Ended December 31,
Other borrowings:
Balance at end of period
Average amount outstanding during the period (1)
Maximum amount outstanding during the period (2)
Weighted average interest rate during the period (3)
Interest rate at end of period (4)
FHLB borrowings:
Balance at end of period
Average amount outstanding during the period (1)
Maximum amount outstanding during the period (2)
Weighted average interest rate during the period (3)
Interest rate at end of period (5)
(1) The average amount outstanding during the period was computed by dividing the total daily outstanding principal balances by the number of days in the period.
(2) The maximum amount outstanding at any month-end during the period.
(3) The weighted average interest rate during the period was computed by dividing the actual interest expense by the average balance outstanding during the period. The weighted average interest rate on other borrowings and FHLB borrowings includes the effect of interest rate swaps.
(4) Stated rate.
(5) The interest rate on FHLB borrowings includes the effect of interest rate swaps.
Other borrowings may include federal funds purchased, repurchase agreements and borrowings from the Federal Reserve through the FRDW. Southside Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, Amegy Bank and TIB – The Independent Bankers Bank for $40.0 million, $25.0 million and $15.0 million, respectively. There were no federal funds purchased at December 31, 2025 or 2024. To provide more liquidity in response to economic conditions in recent years, the Federal Reserve has encouraged broader use of the discount window. At December 31, 2025, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $241.8 million. There were $110.0 million in borrowings from the FRDW at December 31, 2025. There were no borrowings from the FRDW at December 31, 2024. Southside Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at December 31, 2025, the line had oneoutstanding letter of credit for $155,000. Southside Bank currently has two outstanding letters of credit from FHLB held as collateral for loans totaling $6.2 million.
Southside Bank enters into sales of securities under repurchase agreements. These repurchase agreements totaled $98.7 million at December 31, 2025, and $76.4 million at December 31, 2024, and had maturities of less than one year. Repurchase agreements are secured by investment and MBS and are stated at the amount of cash received in connection with the transaction.
FHLB borrowings represent borrowings with fixed interest rates ranging from 1.26% to 4.80% (including the effect of interest rate swaps) and with remaining maturities of 5 days to 2.5 years at December 31, 2025. FHLB borrowings may be collateralized by FHLB stock, nonspecified loans and/or securities. At December 31, 2025, the amount of additional funding Southside Bank could obtain from FHLB was approximately $2.45 billion, net of FHLB stock purchases required.
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CAPITAL RESOURCES AND LIQUIDITY
Our total shareholders’ equity at December 31, 2025 increased 4.4%, or $35.7 million, to $847.6 million, or 10.0% of total assets, compared to $811.9 million, or 9.5% of total assets, at December 31, 2024. The increase in shareholders’ equity was the result of net income of $69.2 million, other comprehensive income of $29.3 million, stock compensation expense of $3.0 million, and common stock issued under our dividend reinvestment plan of $1.0 million, partially offset by cash dividends paid of $43.4 million, repurchases of $23.4 million of our common stock pursuant to our Stock Repurchase Plan and the net issuance of common stock under employee stock plans of $91,000.
The Company’s Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. The Bank’s Common Equity Tier 1 capital includes common stock and related paid-in capital, and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1. Common Equity Tier 1 for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.
Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. For the Company, additional Tier 1 capital at December 31, 2025 included $58.5 million of trust preferred securities. For bank holding companies that had assets of less than $15 billion as of December 31, 2009, trust preferred securities issued prior to May 19, 2010 can be treated as Tier 1 capital to the extent that they do not exceed 25% of Tier 1 capital after the application of capital deductions and adjustments. The Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at December 31, 2025.
Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes a permissible portion of the allowance for credit losses on loans, off-balance sheet exposures and HTM securities. Tier 2 capital for the Company also includes $221.2 million of qualified subordinated debt as of December 31, 2025. The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes.
In April 2020, the FDIC, Federal Reserve, and the Office of the Comptroller of the Currency issued supplemental instructions allowing banking organizations that implement CECL before the end of 2020, the option to delay for two years an estimate of the CECL methodologies’ effect on regulatory capital, relative to the incurred loss methodologies effect on capital, followed by a three-year transition period. We elected to adopt the five-year transition option, and as of December 31, 2024, the CECL impact on regulatory capital was fully phased in and there is no longer a transitional amount.
The FDIA requires bank regulatory agencies to take “prompt corrective action” with respect to FDIC-insured depository institutions that do not meet minimum capital requirements. A depository institution’s treatment for purposes of the prompt corrective action provisions will depend on how its capital levels compare to various capital measures and certain other factors, as established by regulation. Prompt corrective action and other discretionary actions could have a direct material effect on our financial statements.
Management believes that, as of December 31, 2025, we met all capital adequacy requirements to which we were subject. It is management’s intention to maintain our capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either us or the Bank not exceed earnings for that year. Accordingly, shareholders should not anticipate a continuation of the cash dividend payments simply because of the existence of a dividend reinvestment program. The payment of dividends will depend upon future earnings, our financial condition and other related factors including the discretion of the Board.
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To be categorized as well capitalized we must maintain minimum Common Equity Tier 1 risk-based, Tier 1 risk-based, Total capital risk-based and Tier 1 leverage ratios as set forth in the following table (dollars in thousands):
Actual
For Capital
Adequacy Purposes
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2025
Common Equity Tier 1 (to Risk Weighted Assets)
Consolidated
Bank Only
Tier 1 Capital (to Risk Weighted Assets)
Consolidated
Bank Only
Total Capital (to Risk Weighted Assets)
Consolidated
Bank Only
Tier 1 Capital (to Average Assets) (1)
Consolidated
Bank Only
December 31, 2024
Common Equity Tier 1 (to Risk Weighted Assets)
Consolidated
Bank Only
Tier 1 Capital (to Risk Weighted Assets)
Consolidated
Bank Only
Total Capital (to Risk Weighted Assets)
Consolidated
Bank Only
Tier 1 Capital (to Average Assets) (1)
Consolidated
Bank Only
(1) Refers to quarterly average assets as calculated in accordance with policies established by bank regulatory agencies.
As of December 31, 2025, Southside Bancshares and Southside Bank met all capital adequacy requirements under the Basel III Capital Rules that became fully phased-in as of January 1, 2019. See the section captioned “Supervision and Regulation” in “Item 1. Business” included in this report.
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The table below summarizes our key equity ratios:
Years Ended December 31,
Return on average assets
Return on average shareholders’ equity
Dividend payout ratio – Basic
Dividend payout ratio – Diluted
Average shareholders’ equity to average total assets
EFFECTS OF INFLATION
Our consolidated financial statements and their related notes have been prepared in accordance with GAAP, which requires the measurement of financial position and operating results in terms of historical dollars, without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike many industrial companies, nearly all of our assets and liabilities are monetary. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Inflation can affect the amount of money customers have for deposits, as well as their ability to repay loans.
MANAGEMENT OF LIQUIDITY
Liquidity management involves our ability to convert assets to cash with minimum risk of loss while enabling us to meet our current and future obligations to our customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and other fund providers; (2) the funding requirements of lines and letters of credit; and (3) the short-term credit needs of customers. Liquidity is provided by cash, interest earning deposits and short-term investments that can be readily liquidated with a minimum risk of loss. At December 31, 2025, these investments were 8.1% of total assets, as compared with 8.6% for December 31, 2024. The decrease to 8.1% at December 31, 2025 as compared to December 31, 2024, is largely driven by a decrease in the short-term investment portfolio and cash and due from banks, partially offset by an increase in interest earning deposits. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, Amegy Bank and TIB – The Independent Bankers Bank for $40.0 million, $25.0 million and $15.0 million, respectively. There were no federal funds purchased at December 31, 2025 or 2024. To provide more liquidity in response to economic conditions in recent years, the Federal Reserve has broader use of the discount window. At December 31, 2025, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $241.8 million. There were $110.0 million in borrowings from the FRDW at December 31, 2025. There were no borrowings from the FRDW at December 31, 2024. At December 31, 2025, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by FHLB stock, nonspecified loans and/or securities, was approximately $2.45 billion, net of FHLB stock purchases required. The Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at December 31, 2025, the line had oneoutstanding letter of credit for $155,000. The Bank currently has two outstanding letters of credit from FHLB held as collateral for loans totaling $6.2 million.
Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios and interest rate spreads and margins. The ALCO utilizes a simulation model to perform interest rate simulation tests that apply various interest rate scenarios including immediate shocks and MVPE to assist in determining our overall interest rate risk and the adequacy of our liquidity position. In addition, the ALCO utilizes this simulation model to determine the impact on net interest income of various interest rate scenarios. By utilizing this methodology, we can determine potential changes to make to the asset and liability mix to minimize the change in net interest income under these various interest rate scenarios.
In the ordinary course of business we have entered into contractual obligations and have made certain other commitments to make future cash payments. Please refer to the accompanying notes to these consolidated financial statements for the expected timing of such cash payments as of December 31, 2025. These include payments related to (i) borrowings presented in “Note 8 - Borrowing Arrangements” and “Note 9 – Long-Term Debt,” (ii) operating leases presented in “Note 16 - Leases,” (iii) time deposits with stated maturity dates presented in “Note 7 – Deposits” and (iv) commitments to extend credit and standby letters of credit as presented in “Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies.”
Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs.
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