Southside Bancshares Inc: Form 10-Q for the period ended Sep 30, 2025

The following is a discussion of our consolidated financial condition, changes in our financial condition and results of our operations, and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this Quarterly Report on Form 10-Q, and in our 2024 Form 10-K. Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A. of the 2024 Form 10-K and elsewhere in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.

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 ongoing impact of higher inflation levels, interest rate fluctuations, 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;
• 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;
• the impact of interest rate fluctuations on our financial projections, models and guidance;
• legislative, tax and regulatory changes including overdraft and late fee caps (if implemented), including those that impact the money supply 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, 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;
• 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;
• 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
• other risks and uncertainties discussed in “Part I – Item 1A. Risk Factors” in the 2024 Form 10-K.

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. We consider accounting estimates that can (1) be replaced by other reasonable estimates and/or (2) changes to an estimate from period to period that have a material impact on the presentation of our financial condition, changes in financial condition or results of operations as well as (3) those estimates that require significant and complex assumptions about matters that are highly uncertain to be critical accounting estimates. We consider our critical accounting estimates to include allowance for credit losses on loans and off-balance-sheet credit exposure.

Critical accounting estimates include a high degree of uncertainty in the underlying assumptions. Management bases its estimates on historical experience, current information and other factors deemed relevant. The development, selection and disclosure of our critical accounting estimates are reviewed with the Audit Committee of the Company’s Board of Directors. Actual results could differ from these estimates. For additional information regarding critical accounting policies, refer to “Part II – Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates,” “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” in the 2024 Form 10-K. As of September 30, 2025, there have been no significant changes to our critical accounting estimates.

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).

(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.

OVERVIEW

ECONOMIC CONDITIONS

Continued tariff announcements and ongoing tariff negotiations have caused some uncertainty related to inflation levels and its impact on 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. Overall, the Texas markets we serve remain healthy and continue to report both job and population growth.

DEPOSITS

Our deposits were $6.96 billion at September 30, 2025, an increase of $307.3 million, or 4.6%, from December 31, 2024. At September 30, 2025, we had 179,097 total deposit accounts with an average balance of $34,000. Our estimated uninsured deposits were 36.9% of total deposits as of September 30, 2025. When excluding affiliate deposits (Southside-owned deposits) and public fund deposits (all collateralized), our total estimated deposits without insurance or collateral was 21.7% of total deposits as of September 30, 2025.

Our noninterest bearing deposits represent approximately 20.3% of total deposits. During the three months ended September 30, 2025, our cost of interest bearing deposits decreased 19 basis points to 2.82% from 3.01% for the three months ended September 30, 2024. Our cost of total deposits for the third quarter of 2025 decreased 13 basis points to 2.25% from 2.38% for the three months ended September 30, 2024.

Our cost of interest bearing deposits decreased 16 basis points, from 2.99% for the nine months ended September 30, 2024 to 2.83% for the nine months ended September 30, 2025. Our cost of total deposits decreased 11 basis points, from 2.37% for the nine months ended September 30, 2024 to 2.26% for the nine months ended September 30, 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 September 30, 2025 (in thousands):

Operating Results

Net income was $4.9 million for the three months ended September 30, 2025, compared to $20.5 million for the same period in 2024, a decrease of $15.6 million, or 76.1%. The decrease in net income was largely driven by a $20.2 million decrease in noninterest income and, to a lesser extent, a $1.2 million increase in noninterest expense, partially offset by a $4.2 million decrease in income tax expense, a $1.3 million decrease in provision for credit losses and a $254,000 increase in net interest income. Net loss on sale of AFS securities, included in noninterest income, was $24.4 million for the three months ended September 30, 2025, compared to a net loss of $1.9 million for the same period in 2024. Earnings per diluted common share were $0.16 for the three months ended September 30, 2025, compared to $0.68 for the same period in 2024, a decrease of $0.52, or 76.5%.

During the nine months ended September 30, 2025, our net income decreased $18.5 million, or 27.7%, to $48.2 million from $66.7 million for the same period in 2024. The decrease in net income was largely driven by a $19.1 million decrease in noninterest income and, to a lesser extent, a $4.9 million increase in noninterest expense and a $510,000 increase in provision for credit losses, partially offset by a $4.6 million decrease in income tax expense and a $1.4 million increase in net interest income. Net loss on sale of AFS securities, included in noninterest income, was $24.9 million for the nine months ended September 30, 2025, compared to a net loss of $2.5 million for the same period in 2024. Earnings per diluted common share decreased $0.61, or 27.7%, to $1.59 for the nine months ended September 30, 2025, compared to $2.20 for the same period in 2024.

Financial Condition

Our total assets decreased $134.3 million, or 1.6%, to $8.38 billion at September 30, 2025 from $8.52 billion at December 31, 2024. Our securities portfolio decreased by $257.3 million, or 9.1%, to $2.56 billion at September 30, 2025, 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 during the nine months ended September 30, 2025. Our FHLB stock decreased $24.5 million, or 72.3%, to $9.4 million from $33.8 million at December 31, 2024, due to the decrease in our FHLB borrowings during the nine months ended September 30, 2025.

Loans at September 30, 2025 were $4.77 billion, an increase of $103.7 million, or 2.2%, compared to $4.66 billion at December 31, 2024, due to increases of $109.0 million in commercial real estate loans and $66.8 million in commercial loans. These increases were partially offset by decreases of $37.6 million in municipal loans, $18.3 million in construction loans, $10.3 million in 1-4 family residential loans and $5.8 million in loans to individuals. Loans held for sale decreased $1.4 million, or 74.5%, to $497,000 at September 30, 2025 from $1.9 million at December 31, 2024.

Our nonperforming assets at September 30, 2025 increased $32.0 million, or 892.1%, to $35.6 million and represented 0.42% 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 $4.8 million, or 149.8%, to $8.0 million, and the ratio of nonaccruing loans to total loans was 0.17% and 0.07% for September 30, 2025 and December 31, 2024, respectively. The increase in nonaccrual loans compared to December 31, 2024 was primarily due to a $3.7 million increase in commercial loans and a $1.1 million increase in commercial real estate loans. Repossessed assets were $24,000 at September 30, 2025, compared to $14,000 at December 31, 2024. There was $128,000 of OREO at September 30, 2025 and $388,000 at December 31, 2024.

Our deposits increased $307.3 million, or 4.6%, to $6.96 billion at September 30, 2025 from $6.65 billion at December 31, 2024, primarily due to an increase in brokered deposits of $152.9 million, or 20.6%, and retail deposits of $319.1 million, or 6.8%, partially offset by a decrease in public fund deposits of $164.7 million, or 13.4%. The increase in retail deposits of $319.1 million consist of $56.6 million of noninterest bearing deposits and $262.5 million of interest bearing deposits.

Total FHLB borrowings decreased $630.6 million, or 86.2%, to $101.3 million at September 30, 2025 from $731.9 million at December 31, 2024.

Other borrowings increased $22.9 million, or 30.0%, to $99.4 million at September 30, 2025, from $76.4 million at December 31, 2024.

Our subordinated notes, net of unamortized debt issuance costs, increased $147.6 million, or 160.3%, to $239.6 million at September 30, 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 September 30, 2025 increased 2.8%, or $22.9 million, to $834.9 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 $48.2 million, other comprehensive income of $16.8 million, stock compensation expense of $2.4 million, common stock issued under our dividend reinvestment plan of $739,000 and net issuance of common stock under employee stock plans of $111,000, partially offset by cash dividends paid of $32.7 million and repurchases of $12.7 million of our common stock pursuant to our Stock Repurchase Plan.

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.

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 the third quarter of 2025 with approximately $382.2 million in available liquidity from the FRDW, in addition to the approximately $2.30 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 September 30, 2025, the estimated deposits, without insurance or collateral, to total deposits, excluding affiliate deposits (Southside-owned deposits) was 21.7%, or $1.51 billion.

During the nine months ended September 30, 2025, we entered into additional $250 million cash flow hedge interest rate swap contracts, while $180 million cash flow hedge interest rate swap contracts matured. At September 30, 2025, brokered deposits of $760 million and FHLB advances of $100 million were hedged with our $860 million of cash flow swaps. As of September 30, 2025, a pre-tax unrealized gain of $858,000 was recognized in other comprehensive income, and there was no ineffective portion of these hedges. In connection with $860.0 million and $790.0 million of the agreements outstanding at September 30, 2025 and December 31, 2024, respectively, 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 3.47% with a remaining average weighted maturity of 1.5 years at September 30, 2025. Refer to “Note 9 – 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, U.S. Treasury Bills and corporate securities. Although the securities purchased 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 the 2024 Form 10-K 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 9.1% from $2.81 billion at December 31, 2024 to $2.56 billion at September 30, 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 nine months ended September 30, 2025, which more than offset securities purchased.

During the three months ended September 30, 2025, we restructured a portion of the securities portfolio to enhance future earnings by selling primarily lower yielding long duration municipal securities and, to a lesser extent, MBS. During the third quarter, we sold $106.3 million of MBS and $217.8 million of municipal securities, which resulted in a net realized loss of $24.4 million. During the nine months ended September 30, 2025, we replaced $182 million of maturing short-term U.S. Treasury Bills to collateralize public fund deposits as needed and purchased $368 million in lower premium, 5.50% to 6.50% coupon MBS.

At September 30, 2025, securities as a percentage of assets totaled 30.5%, compared to 33.0% at December 31, 2024, due to a $257.3 million, or 9.1%, decrease in securities. Cash and cash equivalents increased to 5.6% of total assets at September 30, 2025, compared to 5.0% at December 31, 2024. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant.

Our FHLB borrowings decreased 86.2%, or $630.6 million, to $101.3 million at September 30, 2025 from $731.9 million at December 31, 2024. As of September 30, 2025 and December 31, 2024, we had no borrowings from the FRDW.

As of September 30, 2025, our total wholesale funding as a percentage of deposits, not including brokered deposits, decreased to 16.4% 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 $192.7 million in brokered CDs at September 30, 2025, of which $80.0 million are related to our cash flow hedges, an increase from $115.7 million at December 31, 2024. At September 30, 2025, our brokered CDs had a weighted average cost of 436 basis points and remaining maturities of less than 11 months. Our brokered non-maturity deposits increased to $703.0 million at September 30, 2025, of which $680.0 million are related to our cash flow hedges, from $627.1 million at December 31, 2024, with a weighted average cost of 364 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 September 30, 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 39% of the funding source, of which approximately 86% 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 September 30, 2025, $56.2 million in hedging instruments were used to hedge municipal securities with a carrying amount of $51.2 million are included in our AFS securities portfolio in our consolidated balance sheets, representing approximately 20.6% of the AFS municipal portfolio. As of September 30, 2025, $201.0 million in hedging instruments were used to hedge a layer of the closed portfolio of AFS MBS with a carrying value of $315.2 million, or 32.2% 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.

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 laws, regulations or government policies may also have a material impact on our results of operations. See “Part I - Item 1A. Risk Factors – Risks Related to Our Business” in the 2024 Form 10-K for further discussion of these risks.

The following table presents net interest income for the periods presented (in thousands):

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 third quarter of 2025, the Federal Reserve reduced the target federal funds rate by 25 basis points to 4.00% to 4.25%. If the federal funds rate remains elevated, it may negatively impact our net interest income.

Net interest income for the three months ended September 30, 2025 increased $254,000, or 0.5%, compared to the same period in 2024. The increase in net interest income was due to the decrease in the average rate paid on our interest bearing liabilities and the increase in the average balance of our interest earning assets, partially offset by the decrease in the average yield of our interest earning assets. Total interest income decreased $3.8 million, or 3.6%, to $101.9 million for the three months ended September 30, 2025, compared to $105.7 million during the same period in 2024. Total interest expense decreased $4.1 million, or 8.1%, to $46.2 million for the three months ended September 30, 2025, compared to $50.2 million for the same period in 2024. Our net interest margin and our net interest margin (FTE), a non-GAAP measure, both decreased by one basis point to 2.81% and 2.94%, respectively, for the three months ended September 30, 2025, compared to 2.82% and 2.95%, respectively, for the same period in 2024. Our net interest spread and net interest spread (FTE), also a non-GAAP measure, increased to 2.14% and 2.26%, respectively, for the three months ended September 30, 2025, compared to 2.10% and 2.23%, respectively, for the same period in 2024. See “Non-GAAP Financial Measures” for more information and a reconciliation to GAAP.

Net interest income was $163.8 million for the nine months ended September 30, 2025, compared to $162.4 million for the same period in 2024, an increase of $1.4 million, or 0.9%. The increase in net interest income for the nine months ended September 30, 2025 was due to decreases in the average rate paid on and average balance of our interest bearing liabilities and a change in the mix of our interest earning assets, partially offset by the decrease in the average yield of interest earning assets. Total interest income decreased $11.9 million, or 3.8%, to $300.7 million for the nine months ended September 30, 2025, compared to $312.6 million for the same period in 2024. Total interest expense decreased $13.3 million, or 8.9%, to $136.9 million for the nine months ended September 30, 2025, compared to $150.2 million for the same period in 2024. Our net interest margin and net interest margin (FTE), a non-GAAP measure, increased to 2.79% and 2.92%, respectively, for the nine months ended September 30, 2025, compared to 2.76% and 2.90%, respectively, for the same period in 2024, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, increased to 2.12% and 2.24%, respectively, compared to 2.04% and 2.18%, respectively, for the same period in 2024. See “Non-GAAP Financial Measures” for more information and for a reconciliation to GAAP.

Quarterly 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 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 quarters 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.

(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 three months ended September 30, 2025, was attributable to a decrease in the average yield on interest earning assets to 5.27% for the three months ended September 30, 2025, compared to 5.51% for the same period in 2024, partially offset by a $31.5 million, or 0.4%, increase in the average balance of interest earning assets when compared to the same period in 2024. The decrease in total interest expense for the three months ended September 30, 2025, was primarily attributable to the decrease in interest rates on our interest bearing liabilities to 3.01% for the three months ended September 30, 2025 from 3.28% for the same period in 2024.

The “Average Balances with Average Yields and Rates” table that follows shows 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 (dollars in thousands) for the three months ended September 30, 2025 and 2024. 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.

(unaudited)

(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 September 30, 2025 and 2024, loans totaling $8.0 million and $7.3 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.

Year-to-Date 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 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):

(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 was attributable to the decrease in the average yield on earning assets to 5.25% for the nine months ended September 30, 2025 from 5.45% for the same period in 2024, partially offset by a change in the mix of our interest earning assets when compared to the same period in 2024. The decrease in total interest expense for the nine months ended September 30, 2025 was attributable to the decrease in interest rates on our interest bearing liabilities to 3.01% from 3.27% for the same period in 2024 and a decrease in the average balance of our interest bearing liabilities of $44.0 million, or 0.7%, when compared to the same period in 2024.

The “Average Balances with Average Yields and Rates” table that follows shows 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 (dollars in thousands) for the nine months ended September 30, 2025 and 2024. 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.

(unaudited)

(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 is presented at historical cost.

Note: As of September 30, 2025 and 2024, loans totaling $8.0 million and $7.3 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.

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 (dollars in thousands):

The 246.7% decrease in noninterest income for the three months ended September 30, 2025, when compared to the same period in 2024, was due to an increase in net loss on sale of securities AFS, partially offset by increases in other noninterest income, gain on sale of loans and trust fees. The 64.8% decrease in noninterest income for the nine months ended September 30, 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, gain on sale of loans and trust fees.

During the three and nine months ended September 30, 2025, we sold MBS and municipal securities that resulted in a net loss on sale of AFS securities of $24.4 million and $24.9 million, respectively. During the three and nine months ended September 30, 2024, we sold municipal securities that resulted in a net loss on sale of AFS securities of $1.9 million and $2.5 million, respectively.

Gain on sale of loans increased for the three months ended September 30, 2025, when compared to the same period in 2024, due to an increase in the volume of loans sold. The increase in gain on sale of loans for the nine months ended September 30, 2025, when compared to the same period in 2024, was 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 three and nine months ended September 30, 2025, when compared to the same periods in 2024, due to an increase in accounts under management and fee repricing.

The decrease in BOLI income for the nine months ended September 30, 2025, when compared to the same period in 2024, was primarily due to a death benefit of $962,000 realized in the second quarter of 2024 for a former covered officer.

Brokerage services income increased for the three and nine months ended September 30, 2025, when compared to the same periods in 2024, due to an increase in assets under management.

Other noninterest income increased for the three and nine months ended September 30, 2025, when compared to the same periods 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 three months ended September 30, 2025 was also due to increases in swap fee income, mortgage servicing fee income and deluxe income, partially offset by a decrease in equity investment income. The additional increase for the nine months ended September 30, 2025 was also due to increases in swap fee 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.

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 (dollars in thousands):

The increase in noninterest expense for the three and nine months ended September 30, 2025, when compared to the same periods in 2024, was primarily due to increases in advertising, travel and entertainment, professional fees, other noninterest expense, and to a lesser extent, salaries and employee benefits expense, partially offset by decreases in communications expense and amortization of intangibles.

Salaries and employee benefits expense increased during the three and nine months ended September 30, 2025, compared to the same periods in 2024, due to increases in direct salary expense and health insurance expense, partially offset by a decrease in retirement expense.

For the three and nine months ended September 30, 2025, direct salary expense increased $399,000, or 2.1%, and $48,000, or 0.1%, respectively, when compared to the same periods in 2024, primarily due to normal salary increases effective in the first quarter of 2025.

Retirement expense, included in salaries and employee benefits, decreased $24,000, or 2.6%, and $94,000, or 3.4%, for the three and nine months ended September 30, 2025, respectively, when compared to the same periods in 2024. This decrease was due to decreases in our split dollar expense, post-retirement benefits expense and deferred compensation expense, partially offset by an increase in 401(k) matching expense.

Health and life insurance expense, included in salaries and employee benefits, increased $196,000, or 8.7%, and $173,000, or 2.7%, for the three and nine months ended September 30, 2025, respectively, when compared to the same periods in 2024, due to increases in health claims expense and plan administration cost. We have a self-insured health plan which is supplemented with a stop loss policy.

Advertising, travel and entertainment expense increased during the three and nine months ended September 30, 2025, compared to the same periods in 2024, due to increases in media advertising, meals and entertainment and travel related expenses and donations.

ATM expense increased for the nine months ended September 30, 2025, when compared to the same period in 2024, due to an increase in ATM maintenance costs.

Professional fees increased for the three and nine months ended September 30, 2025, when compared to the same periods in 2024, due to increases in managed services, audit, consulting and legal fees.

Communications expense decreased for the three and nine months ended September 30, 2025, when compared to the same periods in 2024, resulting from improved network management efficiency.

Amortization of intangibles decreased for the three and nine months ended September 30, 2025, when compared to the same periods 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 three and nine months ended September 30, 2025, when compared to the same periods 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, partially offset by a decrease in repossessed asset expense.

Income Taxes

Pre-tax income for the three and nine months ended September 30, 2025 was $5.1 million and $57.9 million, respectively, a decrease of 79.5% and 28.5%, compared to $24.9 million and $80.9 million for the three and nine months ended September 30, 2024. We recorded income tax expense of $189,000 and $9.6 million for the three and nine months ended September 30, 2025, respectively, compared to income tax expense of $4.4 million and $14.2 million for the same periods in 2024. The ETR as a percentage of pre-tax income was 3.7% and 16.6% for the three and nine months ended September 30, 2025, respectively, compared to an ETR as a percentage of pre-tax income of 17.6% for both the three and nine months ended September 30, 2024. The decrease in the ETR for the three and nine months ended September 30, 2025 was primarily due to the impact of the net loss on the sale of AFS securities of $24.4 million recorded during the third quarter of 2025 on our tax-exempt income as a percentage of pre-tax income as well as a decrease in state income tax expense compared to the same periods 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, BOLI and state income tax. The net deferred tax asset totaled $30.6 million at September 30, 2025, compared to $34.5 million at December 31, 2024. The decrease in the net deferred tax asset is primarily the result of a decrease in the unrealized loss in the AFS securities portfolio partially offset by an increase in the estimated fair value of the effective hedging derivatives.

See “Note 11 – Income Taxes” to our consolidated financial statements included in this report. No valuation allowance was recorded at September 30, 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.

Composition of Loans

One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the market areas in which we operate. Refer to “Part I – Item 1. Business – Market Area” in the 2024 Form 10-K for a discussion of our primary market area and the geographic concentration of our loan portfolio as of December 31, 2024. There were no substantial changes in these concentrations during the nine months ended September 30, 2025. 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, with the exception of municipal loans, which were made primarily throughout the state of Texas. Municipal loans were made to municipalities, counties, school districts and colleges.

The following table sets forth loan totals by class as of the dates presented (dollars in thousands):

Our total loan portfolio increased $103.7 million, or 2.2%, compared to December 31, 2024 and increased $187.2 million, or 4.1%, compared September 30, 2024 with increases in commercial real estate loans and commercial loans when compared to December 31, 2024 and September 30, 2024, partially offset by decreases in the remaining loan categories.

At September 30, 2025, our real estate loans represented 82.6% of our loan portfolio and were comprised of commercial real estate loans of 68.3%, 1-4 family residential loans of 18.5% and construction loans of 13.2%. 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. Our 1-4 family residential loans consist primarily of loans secured by first mortgages on owner occupied 1-4 family residences. Our construction loans are collateralized by property located primarily in or near the market areas we serve. A number 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.

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. Restructured loans represent loans that have been modified due to the borrower experiencing financial difficulty to provide interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. 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 loss.

The following table sets forth nonperforming assets for the periods presented (dollars in thousands):

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.

Allowance for Credit Losses – Loans

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 loss 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 continued economic and repricing uncertainty forecasted in our CECL model as of September 30, 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.

As of September 30, 2025, our review of the loan portfolio indicated that an allowance for loan losses of $45.3 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.

During the nine months ended September 30, 2025, the allowance for loan losses increased $410,000, or 0.9%, to $45.3 million, or 0.95% of total loans, when compared to $44.9 million, or 0.96% of total loans at December 31, 2024.

For the three and nine months ended September 30, 2025, loan charge-offs were $1.3 million and $3.1 million, respectively, and recoveries were $491,000 and $1.1 million, respectively. For the three and nine months ended September 30, 2024, loan charge-offs were $773,000 and $2.1 million, respectively, and recoveries were $365,000 and $1.2 million, respectively. We recorded a provision for credit losses for loans of $1.7 million and $2.4 million for the three and nine months ended September 30, 2025, respectively. For the three and nine months ended September 30, 2024, we recorded a provision for credit losses for loans of $2.3 million and $2.6 million, respectively.

Allowance for Credit Losses – Off-Balance-Sheet Credit Exposures

Allowance for off-balance-sheet credit exposures were as follows (in thousands):

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 additional information regarding our methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures, see “Note 12 – Off-Balance-Sheet Arrangements, Commitments and Contingencies” to our consolidated financial statements included in this report.

Capital Resources and Liquidity

Our total shareholders’ equity at September 30, 2025 increased 2.8%, or $22.9 million, to $834.9 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 $48.2 million, other comprehensive income of $16.8 million, stock compensation expense of $2.4 million, common stock issued under our dividend reinvestment plan of $739,000 and net issuance of common stock under employee stock plans of $111,000, partially offset by cash dividends paid of $32.7 million and repurchases of $12.7 million of our common stock pursuant to our Stock Repurchase Plan.

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 September 30, 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 September 30, 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 $239.6 million of qualified subordinated debt as of September 30, 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 and there is no longer a transitional amount.

Management believes that, as of September 30, 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 the Company 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.

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):

(1) Refers to quarterly average assets as calculated in accordance with policies established by bank regulatory agencies.

As of September 30, 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. Refer to the Supervision and Regulation section in the 2024 Form 10-K for further discussion of our capital requirements.

The table below summarizes our key equity ratios for the periods presented:

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 September 30, 2025 and December 31, 2024, these investments were 8.8% and 8.6% of total assets, as compared with 10.8% for September 30, 2024. The decrease to 8.8% at September 30, 2025 as compared to September 30, 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 September 30, 2025 or December 31, 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 September 30, 2025, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $382.2 million. There were no borrowings from the FRDW at September 30, 2025 or December 31, 2024. At September 30, 2025, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $2.30 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 September 30, 2025, the line had one outstanding 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 technology, we can determine changes that need to be made to the asset and liability mix to minimize the change in net interest income under these various interest rate scenarios.

Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs.

Expansion

We expect to open a traditional branch location at Bellwood Park in Tyler, Texas in 2026.

Recent Accounting Pronouncements

See “Note 1 – Summary of Significant Accounting and Reporting Policies” in our consolidated financial statements included in this Quarterly Report on Form 10-Q.

The disclosures set forth in this item are qualified by the section captioned “Forward-Looking Statements” included in “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this report and other cautionary statements set forth elsewhere in this Quarterly Report on Form 10-Q.

Refer to the discussion of market risks included in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in the 2024 Form 10-K.

In the banking industry, a major risk exposure is changing interest rates. The primary objective of monitoring our interest rate sensitivity, or risk, is to provide management the tools necessary to manage the balance sheet to minimize adverse changes in net interest income as a result of changes in the direction and level of interest rates. Federal Reserve monetary control efforts, the effects of deregulation, economic uncertainty and legislative changes have been significant factors affecting the task of managing interest rate sensitivity positions in recent years.

In an attempt to manage our exposure to changes in interest rates, management closely monitors our exposure to interest rate risk through our ALCO. Our ALCO meets regularly and reviews our interest rate risk position and makes recommendations to our board for adjusting this position. In addition, our board regularly reviews our asset/liability position. We primarily use two methods for measuring and analyzing interest rate risk: net income simulation analysis and MVPE modeling. We utilize the net income simulation model as the primary quantitative tool in measuring the amount of interest rate risk associated with changing market rates. This model quantifies the effects of various interest rate scenarios on projected net interest income and net income over the next 12 months. The model is used to measure the impact on net interest income relative to a base case scenario of rates immediately increasing 100 and 200 basis points or decreasing 50, 100 and 200 basis points over the next 12 months. These simulations incorporate assumptions regarding balance sheet growth and mix, pricing and the repricing and maturity characteristics of the existing and projected balance sheet. The impact of interest rate-related risks such as prepayment, basis and option risk are also considered. The model has interest rate floors and no interest rates are assumed to go negative. We continue to monitor interest rates and anticipate rate changes during the remainder of 2025.

The following table reflects the noted increases and decreases in interest rates under the model simulations and the anticipated impact on net interest income relative to the base case over the next 12 months for the periods presented.

As part of the overall assumptions, certain assets and liabilities are given reasonable floors. This type of simulation analysis requires numerous assumptions including but not limited to changes in balance sheet mix, prepayment rates on mortgage-related assets and fixed rate loans, cash flows and repricing of all financial instruments, changes in volumes and pricing, future shapes of the yield curve, relationship of market interest rates to each other (basis risk), credit spread and deposit sensitivity. Assumptions are based on management’s best estimates but may not accurately reflect actual results under certain changes in interest rates.

Continued tariff announcements and ongoing tariff negotiations have caused some uncertainty related to inflation levels and its impact on 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 overall positive outlook.

The ALCO monitors various liquidity ratios to ensure a satisfactory liquidity position. Management continually evaluates the condition of the economy, the pattern of market interest rates and other economic data to determine the types of investments that should be made and at what maturities. Using this analysis, management from time to time assumes calculated interest sensitivity gap positions to maximize net interest income based upon anticipated movements in the general level of interest rates. Regulatory authorities also monitor our gap position along with other liquidity ratios. In addition, as described above, we utilize a simulation model to determine the impact of net interest income under several different interest rate scenarios. By utilizing this model, we can determine changes that could be made to the asset and liability mix to mitigate the change in net interest income under these various interest rate scenarios.

Evaluation of Disclosure Controls and Procedures

Management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), undertook an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report, and, based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report, in recording, processing, summarizing and reporting in a timely manner the information that the Company is required to disclose in its reports under the Exchange Act and in accumulating and communicating to the Company’s management, including the Company’s CEO and CFO, such information as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

No changes were made to our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended September 30, 2025 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.