sbsi-20230930

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission file number: 000-12247

SOUTHSIDE BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Texas

75-1848732

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

1201 S. Beckham Avenue,

Tyler,

Texas

75701

(Address of Principal Executive Offices)

(Zip Code)

903-531-7111

(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $1.25 par value

SBSI

NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the issuer’s common stock, par value $1.25, outstanding as of October 24, 2023 was 30,196,614 shares.

TABLE OF CONTENTS


GLOSSARY OF ACRONYMS, ABBREVIATIONS AND TERMS			1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			40
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			62
ITEM 4. CONTROLS AND PROCEDURES			63
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			63
ITEM 1A. RISK FACTORS			63
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			64
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			64
ITEM 4. MINE SAFETY DISCLOSURES			64
ITEM 5. OTHER INFORMATION			64
ITEM 6. EXHIBITS			65
EXHIBIT INDEX			65
SIGNATURES			66

Table of Contents

SOUTHSIDE BANCSHARES, INC.

Glossary of Acronyms, Abbreviations and Terms

The acronyms, abbreviations and terms listed below are used in various sections of this Form 10-Q, including "Item 1. Financial Statements" and "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations."


Entities:
Southside Bancshares, Inc.						Bank holding company for Southside Bank
Southside Bank						Texas state bank and wholly owned subsidiary of Southside Bancshares, Inc.
Company						Combined entities of Southside Bancshares, Inc. and its subsidiaries, including Southside Bank
Bank						Southside Bank
Southside						Southside Bancshares, Inc.

Other Acronyms, Abbreviations and Terms:
2022 Form 10-K						Company’s Annual Report on Form 10-K for the year ended December 31, 2022
401(k) Plan						401(k) Defined Contribution Plan
Acquired Retirement Plan						OmniAmerican Bank defined benefit pension plan
AFS						Available for sale
ALCO						Asset/Liability Committee
AOCI						Accumulated other comprehensive income or loss
ASC						Accounting Standards Codification
ASU						Accounting Standards Update issued by the FASB
ATM						Automated teller machines
BTFP						The Federal Reserve’s Bank Term Funding Program
Basel Committee						Basel Committee on Banking Supervision
BOLI						Bank owned life insurance
CARES Act						Coronavirus Aid, Relief, and Economic Security Act
CDs						Certificates of deposit
CECL						ASC 326, Financial Instruments- Credit Losses, also known as Current Expected Credit Losses
CET1						Common Equity Tier 1
CMOs						Collateralized mortgage obligations
CRE						Commercial real estate
Dodd-Frank Act						Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
Economic Aid Act						Economic Aid to Hard-Hit Small Business, Nonprofits and Venues Act
ESOP						Employee Stock Ownership Plan
ETR						Effective tax rate
Exchange Act						Securities Exchange Act of 1934
FASB						Financial Accounting Standards Board
FDIC						Federal Deposit Insurance Corporation
Federal Reserve						The Board of Governors of the Federal Reserve System
FHLB						Federal Home Loan Bank
First Quarter Form 10-Q						Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023
FRBNY						Federal Reserve Bank of New York
FRDW						Federal Reserve Discount Window
FTE						Fully-taxable equivalents measurements
GAAP						United States generally accepted accounting principles

Southside Bancshares, Inc. |1

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GSEs						U.S. government-sponsored enterprises
Guidelines						Interagency Guidelines Prescribing Standards for Safety and Soundness adopted by federal banking agencies
HTM						Held to maturity
ITM						Interactive teller machines
LIBOR						London Interbank Offered Rate
MBS						Mortgage-backed securities
MVPE						Market value of portfolio equity
OREO						Other real estate owned
PCD						Purchased financial assets with credit deterioration under CECL
PCI						Financial assets purchased credit impaired under ASC 310-30 prior to CECL
Repurchase agreements						Securities sold under agreements to repurchase
Restoration Plan						Nonfunded supplemental retirement plan
Retirement Plan						Defined benefit pension plan
ROU						Right-of-use
SBA						Small Business Administration
SEC						Securities and Exchange Commission
Second Quarter Form 10-Q						Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023
SOFR						Secured Overnight Financing Rate provided by the Federal Reserve Bank of New York
TDR						Troubled debt restructurings prior to implementation of ASU 2022-02 “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures”
U.S.						United States

Southside Bancshares, Inc. |2

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
(in thousands, except share amounts)


	September 30, 2023		December 31, 2022

ASSETS
Cash and due from banks	$	105,601	$	106,143
Interest earning deposits	106,094		9,276
Federal funds sold	114,128		83,833
Total cash and cash equivalents	325,823		199,252
Securities:
Securities AFS, at estimated fair value (amortized cost of $1,472,520 and $1,387,874, respectively)	1,335,560		1,299,014
Securities HTM (estimated fair value of $1,052,430 and $1,149,156, respectively)	1,307,886		1,326,729
FHLB stock, at cost	12,778		9,190
Equity investments	9,454		11,181
Loans held for sale	1,382		667
Loans:
Loans	4,420,633		4,147,691
Less: Allowance for loan losses	(41,760)		(36,515)
Net loans	4,378,873		4,111,176
Premises and equipment, net	139,473		141,256
Operating lease ROU assets	14,948		15,314
Goodwill	201,116		201,116
Other intangible assets, net	3,295		4,622
Interest receivable	39,646		49,350
Deferred tax asset, net	41,221		34,695


BOLI	135,737		133,911
Other assets	25,276		21,163
Total assets	$	7,972,468	$	7,558,636

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest bearing	$	1,431,285	$	1,671,562
Interest bearing	4,918,286		4,526,457
Total deposits	6,349,571		6,198,019
Other borrowings	395,209		221,153
FHLB borrowings	212,829		153,358
Subordinated notes, net of unamortized debt issuance costs	93,838		98,674
Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,269		60,265

Unsettled trades to purchase securities	24,917		—
Operating lease liabilities	16,797		17,070
Other liabilities	90,443		64,100
Total liabilities	7,243,873		6,812,639

Off-balance-sheet arrangements, commitments and contingencies (Note 12)

Shareholders’ equity:
Common stock: ($1.25 par value, 80,000,000 shares authorized, 38,029,245 shares issued at September 30, 2023 and 38,000,822 shares issued at December 31, 2022)	47,537		47,501
Paid-in capital	788,190		784,545
Retained earnings	276,312		239,610
Treasury stock: (shares at cost, 7,691,151 at September 30, 2023 and 6,454,192 at December 31, 2022)	(228,467)		(188,203)
AOCI	(154,977)		(137,456)
Total shareholders’ equity	728,595		745,997
Total liabilities and shareholders’ equity	$	7,972,468	$	7,558,636

The accompanying notes are an integral part of these consolidated financial statements.

Southside Bancshares, Inc. |3

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(in thousands, except per share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest income:
Loans	$	64,110	$	45,257	$	177,570	$	118,489
Taxable investment securities	8,731		4,896		23,216		14,136
Tax-exempt investment securities	13,758		11,482		41,394		32,306
MBS	4,426		4,770		12,585		12,025
FHLB stock and equity investments	265		101		889		291
Other interest earning assets	1,788		374		5,148		606
Total interest income	93,078		66,880		260,802		177,853
Interest expense:
Deposits	30,951		7,887		72,536		15,388
FHLB borrowings	1,174		1,078		5,347		1,668
Subordinated notes	962		1,004		2,955		3,002
Trust preferred subordinated debentures	1,178		669		3,309		1,496
Other borrowings	5,540		727		16,113		800
Total interest expense	39,805		11,365		100,260		22,354
Net interest income	53,273		55,515		160,542		155,499
Provision for (reversal of) credit losses	6,987		1,494		6,873		1,155
Net interest income after provision for credit losses	46,286		54,021		153,669		154,344
Noninterest income:
Deposit services	6,479		6,241		19,192		19,365
Net gain (loss) on sale of securities AFS	11		(99)		(5,590)		(3,819)
Net gain on sale of equity securities	—		—		5,058		—
Gain on sale of loans	96		109		385		495
Trust fees	1,522		1,407		4,479		4,421
BOLI	790		720		3,221		2,131
Brokerage services	760		701		2,361		2,608
Other	1,178		1,190		4,227		4,890
Total noninterest income	10,836		10,269		33,333		30,091
Noninterest expense:
Salaries and employee benefits	21,241		21,368		64,473		61,666
Net occupancy	3,796		3,847		11,220		11,157

Advertising, travel & entertainment	1,062		789		2,966		2,242
ATM expense	358		317		1,033		954
Professional fees	1,472		1,412		4,036		3,486
Software and data processing	2,432		1,736		6,751		5,106
Communications	359		497		1,034		1,509
FDIC insurance	902		485		2,666		1,434
Amortization of intangibles	407		550		1,327		1,758

Other	3,524		2,463		9,889		7,453
Total noninterest expense	35,553		33,464		105,395		96,765
Income before income tax expense	21,569		30,826		81,607		87,670
Income tax expense	3,120		3,875		12,231		10,318
Net income	$	18,449	$	26,951	$	69,376	$	77,352

Earnings per common share – basic	$	0.60	$	0.84	$	2.25	$	2.40
Earnings per common share – diluted	$	0.60	$	0.84	$	2.24	$	2.39
Cash dividends paid per common share	$	0.35	$	0.34	$	1.05	$	1.02

The accompanying notes are an integral part of these consolidated financial statements.

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Net income	$	18,449	$	26,951	$	69,376	$	77,352
Other comprehensive income (loss):
Securities AFS and transferred securities:
Change in unrealized holding gain (loss) on AFS securities during the period	(52,882)		(61,354)		(33,032)		(256,778)

Change in net unrealized loss on securities transferred from AFS to HTM	—		(6,367)		—		(97,871)


Reclassification adjustment for amortization related to AFS and HTM debt securities	2,008		1,396		5,989		2,949

Reclassification adjustment for net (gain) loss on sale of AFS securities, included in net income	(11)		99		5,590		3,819

Derivatives:
Change in net unrealized gain (loss) on effective cash flow hedge interest rate swap derivatives	7,377		15,226		16,277		42,819

Reclassification adjustment of net (gain) loss related to derivatives designated as cash flow hedges	(6,408)		(1,572)		(17,570)		94

Pension plans:
Amortization of net actuarial loss, included in net periodic benefit cost	189		224		567		671


Other comprehensive income (loss), before tax	(49,727)		(52,348)		(22,179)		(304,297)
Income tax (expense) benefit related to items of other comprehensive income (loss)	10,443		10,993		4,658		63,902
Other comprehensive income (loss), net of tax	(39,284)		(41,355)		(17,521)		(240,395)
Comprehensive income (loss)	$	(20,835)	$	(14,404)	$	51,855	$	(163,043)

The accompanying notes are an integral part of these consolidated financial statements.

Southside Bancshares, Inc. |5

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share and per share data)


	Common Stock		Paid In Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at December 31, 2022	$	47,501	$	784,545	$	239,610	$	(188,203)	$	(137,456)	$	745,997


Net income	—		—		26,034		—		—		26,034
Other comprehensive income (loss)	—		—		—		—		4,144		4,144
Issuance of common stock for dividend reinvestment plan (8,026 shares)	10		292		—		—		—		302
Purchase of common stock (457,394 shares)	—		—		—		(15,945)		—		(15,945)
Stock compensation expense	—		914		—		—		—		914
Net issuance of common stock under employee stock plans (23,919 shares)	—		368		(91)		295		—		572
Cash dividends paid on common stock ($0.35 per share)	—		—		(10,988)		—		—		(10,988)



Balance at March 31, 2023	47,511		786,119		254,565		(203,853)		(133,312)		751,030
Net income	—		—		24,893		—		—		24,893
Other comprehensive income (loss)	—		—		—		—		17,619		17,619
Issuance of common stock for dividend reinvestment plan (10,390 shares)	13		286		—		—		—		299
Purchase of common stock (618,831 shares)	—		—		—		(18,725)		—		(18,725)
Stock compensation expense	—		924		—		—		—		924
Net issuance of common stock under employee stock plans (19,065 shares)	—		(302)		(95)		238		—		(159)
Cash dividends paid on common stock ($0.35 per share)	—		—		(10,720)		—		—		(10,720)



Balance at June 30, 2023	47,524		787,027		268,643		(222,340)		(115,693)		765,161
Net income	—		—		18,449		—		—		18,449
Other comprehensive income (loss)	—		—		—		—		(39,284)		(39,284)
Issuance of common stock for dividend reinvestment plan (10,007 shares)	13		294		—		—		—		307
Purchase of common stock (212,388 shares)	—		—		—		(6,237)		—		(6,237)
Stock compensation expense	—		875		—		—		—		875
Net issuance of common stock under employee stock plans (8,670 shares)	—		(6)		(93)		110		—		11
Cash dividends paid on common stock ($0.35 per share)	—		—		(10,687)		—		—		(10,687)
Balance at September 30, 2023	$	47,537	$	788,190	$	276,312	$	(228,467)	$	(154,977)	$	728,595

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)

(UNAUDITED)

(in thousands, except share and per share data)


	Common Stock		Paid In Capital		Retained Earnings		Treasury Stock		Accumulated Other Comprehensive Income (Loss)		Total Shareholders’ Equity
Balance at December 31, 2021	$	47,461	$	780,501	$	179,813	$	(155,308)	$	59,705	$	912,172


Net income	—		—		24,996		—		—		24,996
Other comprehensive income (loss)	—		—		—		—		(139,976)		(139,976)
Issuance of common stock for dividend reinvestment plan (7,671 shares)	10		312		—		—		—		322
Purchase of common stock (82,285 shares)	—		—		—		(3,358)		—		(3,358)
Stock compensation expense	—		819		—		—		—		819
Net issuance of common stock under employee stock plans (16,551 shares)	—		182		(67)		154		—		269
Cash dividends paid on common stock ($0.34 per share)	—		—		(11,003)		—		—		(11,003)


Balance at March 31, 2022	47,471		781,814		193,739		(158,512)		(80,271)		784,241
Net income	—		—		25,405		—		—		25,405
Other comprehensive income (loss)	—		—		—		—		(59,064)		(59,064)
Issuance of common stock for dividend reinvestment plan (7,717 shares)	10		303		—		—		—		313
Purchase of common stock (223,901 shares)	—		—		—		(8,842)		—		(8,842)
Stock compensation expense	—		847		—		—		—		847
Net issuance of common stock under employee stock plans (30,162 shares)	—		(453)		(67)		308		—		(212)
Cash dividends paid on common stock ($0.34 per share)	—		—		(10,906)		—		—		(10,906)


Balance at June 30, 2022	47,481		782,511		208,171		(167,046)		(139,335)		731,782
Net income	—		—		26,951		—		—		26,951
Other comprehensive income (loss)	—		—		—		—		(41,355)		(41,355)
Issuance of common stock for dividend reinvestment plan (7,372 shares)	9		269		—		—		—		278
Purchase of common stock (8,613 shares)	—		—		—		(309)		—		(309)
Stock compensation expense	—		760		—		—		—		760
Net issuance of common stock under employee stock plans (20,229 shares)	—		263		(61)		246		—		448
Cash dividends paid on common stock ($0.34 per share)	—		—		(10,919)		—		—		(10,919)
Balance at September 30, 2022	$	47,490	$	783,803	$	224,142	$	(167,109)	$	(180,690)	$	707,636

The accompanying notes are an integral part of these consolidated financial statements.

Southside Bancshares, Inc. |7

SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


	Nine Months Ended
	September 30,
	2023		2022
OPERATING ACTIVITIES:
Net income	$	69,376	$	77,352
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and net amortization	7,972		8,332
Securities premium amortization (discount accretion), net	3,791		13,861
Loan (discount accretion) premium amortization, net	296		(267)
Provision for (reversal of) credit losses	6,873		1,155
Stock compensation expense	2,713		2,426
Deferred tax expense (benefit)	(1,868)		103

Net (gain) loss on sale of AFS securities	5,590		3,819
Net (gain) loss on sale of equity securities	(5,058)		—
Loss on impairment of investments	—		38
Net loss on premises and equipment	106		435
Gross proceeds from sales of loans held for sale	12,941		20,195
Gross originations of loans held for sale	(13,656)		(18,932)
Net (gain) loss on OREO	(53)		(12)

Gain on purchase of subordinated notes	(587)		—
Net change in:
Interest receivable	9,704		6,231
Other assets	(5,665)		76,432
Interest payable	10,545		925
Other liabilities	33,434		16,271
Net cash provided by (used in) operating activities	136,454		208,364

INVESTING ACTIVITIES:
Securities AFS:
Purchases	(1,137,694)		(697,393)
Sales	747,434		460,765
Maturities, calls and principal repayments	324,964		98,046
Securities HTM:
Purchases	—		(1,632)
Maturities, calls and principal repayments	21,010		11,020
Proceeds from sales of equity securities	6,679		—
Proceeds from redemption of FHLB stock and equity investments	30,767		26,623
Purchases of FHLB stock and equity investments	(34,249)		(24,346)
Net loan paydowns (originations)	(274,843)		(418,546)

Purchases of premises and equipment	(5,071)		(8,370)
Proceeds from BOLI	951		—
Proceeds from sales of premises and equipment	430		1,365
Net proceeds from sales of OREO	146		34
Proceeds from sales of repossessed assets	168		47
Net cash provided by (used in) investing activities	(319,308)		(552,387)

(continued)

Southside Bancshares, Inc. | 8








SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(in thousands)
	Nine Months Ended
	September 30,
	2023		2022
FINANCING ACTIVITIES:
Net change in deposits	151,446		430,321
Net change in other borrowings	174,056		51,502
Proceeds from FHLB borrowings	1,659,000		2,501,000
Repayment of FHLB borrowings	(1,599,529)		(2,601,507)

Purchase of subordinated notes	(4,365)		—
Proceeds from stock option exercises	705		912
Cash paid to tax authority related to tax withholding on share-based awards	(281)		(407)
Purchase of common stock	(40,120)		(12,509)
Proceeds from the issuance of common stock for dividend reinvestment plan	908		913

Cash dividends paid	(32,395)		(32,828)
Net cash provided by (used in) financing activities	309,425		337,397

Net increase (decrease) in cash and cash equivalents	126,571		(6,626)
Cash and cash equivalents at beginning of period	199,252		201,753
Cash and cash equivalents at end of period	$	325,823	$	195,127

SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:

Interest paid	$	89,715	$	21,428
Income taxes paid	$	12,250	$	8,200

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Loans transferred to other repossessed assets and real estate through foreclosure	$	127	$	266


Transfer of AFS to HTM securities	$	—	$	1,166,550


Unsettled trades to purchase securities	$	24,917	$	—

Unsettled trades to repurchase common stock	$	541	$	—
Unsettled issuances of brokered CDs	$	—	$	28,481

The accompanying notes are an integral part of these consolidated financial statements.

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SOUTHSIDE BANCSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Summary of Significant Accounting and Reporting Policies

Basis of Presentation

In this report, the words “the Company,” “we,” “us,” and “our” refer to the combined entities of Southside Bancshares, Inc. and its subsidiaries, including Southside Bank. The words “Southside” and “Southside Bancshares” refer to Southside Bancshares, Inc. The words “Southside Bank” and “the Bank” refer to Southside Bank.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, not all information required by GAAP for complete financial statements is included in these interim statements. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. The preparation of these consolidated financial statements in accordance with GAAP requires the use of management’s estimates. These estimates are subjective in nature and involve matters of judgment. Actual amounts could differ from these estimates.

Interim results are not necessarily indicative of results for a full year. These financial statements should be read in conjunction with the financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2022.

Accounting Changes and Reclassifications

Certain prior period amounts may be reclassified to conform to current year presentation.

Current Expected Credit Losses - Troubled Debt Restructurings and Vintage Disclosures

We adopted ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures” on January 1, 2023, the effective date of the guidance, on a prospective basis. ASU 2022-02 eliminated the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying the recognition and measurement guidance for TDRs, an entity must apply the loan refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, ASU 2022-02 requires an entity to disclose current-period gross write-offs by year of origination for financing receivables within the scope of Subtopic 326-20, “Financial Instruments—Credit Losses—Measured at Amortized Cost.” ASU 2022-02 did not have a material impact on our consolidated financial statements.

2. Earnings Per Share

Earnings per share on a basic and diluted basis are calculated as follows (in thousands, except per share amounts):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Basic and Diluted Earnings:
Net income	$	18,449	$	26,951	$	69,376	$	77,352
Basic weighted-average shares outstanding	30,502		32,112		30,862		32,195
Add: Stock awards	41		109		54		146
Diluted weighted-average shares outstanding	30,543		32,221		30,916		32,341
Basic earnings per share:
Net income	$	0.60	$	0.84	$	2.25	$	2.40
Diluted earnings per share:
Net income	$	0.60	$	0.84	$	2.24	$	2.39

For the three and nine months ended September 30, 2023, there were approximately 611,000 and 571,000 anti-dilutive shares, respectively. For the three months ended September 30, 2022, there were 22,000 anti-dilutive shares. For the nine months ended September 30, 2022 there were no anti-dilutive shares.

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3. Accumulated Other Comprehensive Income (Loss)

The changes in accumulated other comprehensive income (loss) by component are as follows (in thousands):


	Three Months Ended September 30, 2023

	Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives		Retirement Plans		Total
Beginning balance, net of tax	$	(125,929)	$	29,439	$	(19,203)	$	(115,693)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	(52,882)		7,377		—		(45,505)
Reclassification adjustments included in net income	1,997		(6,408)		189		(4,222)
Income tax (expense) benefit	10,686		(203)		(40)		10,443
Net current-period other comprehensive income (loss), net of tax	(40,199)		766		149		(39,284)
Ending balance, net of tax	$	(166,128)	$	30,205	$	(19,054)	$	(154,977)

	Nine Months Ended September 30, 2023

	Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives		Retirement Plans		Total
Beginning balance, net of tax	$	(149,181)	$	31,227	$	(19,502)	$	(137,456)
Other comprehensive income (loss):
Other comprehensive (loss) income before reclassifications	(33,032)		16,277		—		(16,755)
Reclassification adjustments included in net income	11,579		(17,570)		567		(5,424)

Income tax (expense) benefit	4,506		271		(119)		4,658
Net current-period other comprehensive income (loss), net of tax	(16,947)		(1,022)		448		(17,521)

Ending balance, net of tax	$	(166,128)	$	30,205	$	(19,054)	$	(154,977)

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	Three Months Ended September 30, 2022

	Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives		Retirement Plans		Total
Beginning balance, net of tax	$	(137,792)	$	21,857	$	(23,400)	$	(139,335)
Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	(67,721)		15,226		—		(52,495)
Reclassification adjustments included in net income	1,495		(1,572)		224		147
Income tax (expense) benefit	13,908		(2,868)		(47)		10,993
Net current-period other comprehensive income (loss), net of tax	(52,318)		10,786		177		(41,355)
Ending balance, net of tax	$	(190,110)	$	32,643	$	(23,223)	$	(180,690)

	Nine Months Ended September 30, 2022
	Unrealized Gains (Losses) on Securities		Unrealized Gains (Losses) on Derivatives		Retirement Plans		Total
Beginning balance, net of tax	$	84,716	$	(1,257)	$	(23,754)	$	59,705


Other comprehensive income (loss):
Other comprehensive income (loss) before reclassifications	(354,649)		42,819		—		(311,830)
Reclassification adjustments included in net income	6,768		94		671		7,533
Income tax (expense) benefit	73,055		(9,013)		(140)		63,902
Net current-period other comprehensive income (loss), net of tax	(274,826)		33,900		531		(240,395)
Ending balance, net of tax	$	(190,110)	$	32,643	$	(23,223)	$	(180,690)

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The reclassification adjustments out of accumulated other comprehensive income (loss) included in net income are presented below (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022






Unrealized gains and losses on securities transferred:
Amortization of unrealized gains and losses (1)	$	(2,008)	$	(1,396)	$	(5,989)	$	(2,949)
Tax benefit	422		293		1,258		619
Net of tax	(1,586)		(1,103)		(4,731)		(2,330)

Unrealized gains and losses on available for sale securities:
Realized net gain (loss) on sale of securities (2)	11		(99)		(5,590)		(3,819)


Tax (expense) benefit	(2)		21		1,174		802
Net of tax	9		(78)		(4,416)		(3,017)

Derivatives:
Realized net gain (loss) on interest rate swap derivatives (3)	6,408		1,572		17,570		(94)
Tax benefit	(1,346)		(330)		(3,690)		20
Net of tax	5,062		1,242		13,880		(74)





Amortization of pension plan:
Net actuarial loss (4)	(189)		(224)		(567)		(671)


Tax benefit	40		47		119		140
Net of tax	(149)		(177)		(448)		(531)
Total reclassifications for the period, net of tax	$	3,336	$	(116)	$	4,285	$	(5,952)

(1) Included in interest income on the consolidated statements of income.

(2) Listed as net gain (loss) on sale of securities AFS on the consolidated statements of income.

(3) Included in interest expense for FHLB borrowings, other borrowings and deposits on the consolidated statements of income.

(4) These AOCI components are included in the computation of net periodic pension cost (income) presented in “Note 8 – Employee Benefit Plans.”

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4. Securities

Debt securities

The amortized cost, gross unrealized gains and losses and estimated fair value of investment and mortgage-backed AFS and HTM securities as of September 30, 2023 and December 31, 2022 are reflected in the tables below (in thousands):


	September 30, 2023
	Amortized		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value
Investment securities:
U.S. Treasury	$	224,174	$	35	$	—	$	224,209

State and political subdivisions	822,753		14		114,224		708,543
Corporate bonds and other	14,550		19		1,173		13,396

MBS: (1)
Residential	399,943		305		20,861		379,387
Commercial	11,100		—		1,075		10,025
Total	$	1,472,520	$	373	$	137,333	$	1,335,560




HELD TO MATURITY
Investment securities:
State and political subdivisions	$	1,038,934	$	—	$	225,921	$	813,013
Corporate bonds and other	146,540		313		15,280		131,573
MBS: (1)
Residential	91,954		1		11,305		80,650
Commercial	30,458		—		3,264		27,194
Total	$	1,307,886	$	314	$	255,770	$	1,052,430


	December 31, 2022
	Amortized		Gross Unrealized		Gross Unrealized		Estimated
AVAILABLE FOR SALE	Cost		Gains		Losses		Fair Value
Investment securities:


State and political subdivisions	$	1,039,453	$	956	$	75,557	$	964,852
Corporate bonds and other	8,692		26		14		8,704

MBS: (1)
Residential	328,400		250		13,623		315,027
Commercial	11,329		50		948		10,431
Total	$	1,387,874	$	1,282	$	90,142	$	1,299,014





HELD TO MATURITY
Investment securities:
State and political subdivisions	$	1,037,556	$	3,969	$	163,283	$	878,242
Corporate bonds and other	152,552		575		7,993		145,134
MBS: (1)
Residential	93,796		21		8,343		85,474
Commercial	42,825		—		2,519		40,306
Total	$	1,326,729	$	4,565	$	182,138	$	1,149,156

(1) All MBS are issued and/or guaranteed by U.S. government agencies or U.S. GSEs.

From time to time, we transfer securities from AFS to HTM due to overall balance sheet strategies. We did not transfer any securities from AFS to HTM during the nine months ended September 30, 2023. We transferred securities from AFS to HTM with an estimated fair value of $1.25 billion during the year ended December 31, 2022. The remaining net unamortized, unrealized loss on the transferred securities included in AOCI in the accompanying balance sheets totaled $115.6 million ($91.3 million, net of tax) at September 30, 2023 and $121.5 million ($96.0 million, net of tax) at December 31, 2022. 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

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AOCI continue to be included in management’s assessment for impairment for each individual security. We transferred these securities due to overall balance sheet strategies, and our management has the current intent and ability to hold these securities until maturity.

Investment securities and MBS with carrying values of $2.48 billion and $1.82 billion were pledged as of September 30, 2023 and December 31, 2022, respectively, to collateralize FHLB borrowings, borrowings from the FRDW, including from the BTFP, repurchase agreements and public fund deposits, for potential liquidity needs or other purposes as required by law.

The following tables present the fair value and unrealized losses on AFS and HTM investment securities and MBS, if applicable, for which an allowance for credit losses has not been recorded as of September 30, 2023 and December 31, 2022, segregated by major security type and length of time in a continuous loss position (in thousands):


	September 30, 2023
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE
Investment securities:


State and political subdivisions	$	115,067	$	6,434	$	591,566	$	107,790	$	706,633	$	114,224
Corporate bonds and other	12,500		1,166		689		7		13,189		1,173

MBS:
Residential	157,854		2,226		191,521		18,635		349,375		20,861
Commercial	2,178		43		7,847		1,032		10,025		1,075
Total	$	287,599	$	9,869	$	791,623	$	127,464	$	1,079,222	$	137,333

HELD TO MATURITY
Investment securities:
State and political subdivisions	$	186,212	$	13,551	$	626,801	$	212,370	$	813,013	$	225,921
Corporate bonds and other	13,595		1,425		111,451		13,855		125,046		15,280
MBS:
Residential	523		2		80,024		11,303		80,547		11,305
Commercial	—		—		27,194		3,264		27,194		3,264
Total	$	200,330	$	14,978	$	845,470	$	240,792	$	1,045,800	$	255,770

	December 31, 2022
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
AVAILABLE FOR SALE
Investment securities:


State and political subdivisions	$	859,270	$	68,683	$	26,620	$	6,874	$	885,890	$	75,557
Corporate bonds and other	3,678		14		—		—		3,678		14

MBS:
Residential	306,294		13,623		—		—		306,294		13,623
Commercial	5,613		318		2,545		630		8,158		948
Total	$	1,174,855	$	82,638	$	29,165	$	7,504	$	1,204,020	$	90,142

HELD TO MATURITY
Investment securities:
State and political subdivisions	$	426,382	$	66,898	$	323,385	$	96,385	$	749,767	$	163,283
Corporate bonds and other	125,250		6,660		12,738		1,333		137,988		7,993
MBS:
Residential	80,801		7,799		3,932		544		84,733		8,343
Commercial	40,306		2,519		—		—		40,306		2,519
Total	$	672,739	$	83,876	$	340,055	$	98,262	$	1,012,794	$	182,138

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For those AFS debt securities in an unrealized loss position (i) where management has the intent to sell or (ii) where it will more-likely-than-not be required to sell the security before the recovery of its amortized cost basis, we recognize the loss in earnings. For those AFS debt securities in an unrealized loss position that do not meet either of these criteria, management assesses whether the decline in fair value has resulted from credit-related factors, using both qualitative and quantitative criteria. Determining the allowance under the credit loss method requires the use of a discounted cash flow method to assess the credit losses. Any credit-related impairment will be recognized in allowance for credit losses on the balance sheet with a corresponding adjustment to earnings. Noncredit-related temporary impairment, the portion of the impairment relating to factors other than credit (such as changes in market interest rates), is recognized in other comprehensive income, net of tax.

As of September 30, 2023 and December 31, 2022, we did not have an allowance for credit losses on our AFS securities, based on our consideration of the qualitative factors associated with each security type in our AFS portfolio. The unrealized losses on our investment and MBS are due to changes in interest rates and spreads and other market conditions. At September 30, 2023, we had 585 AFS debt securities in an unrealized loss position. Our state and political subdivisions are highly rated municipal securities with a long history of no credit losses. Our AFS MBS are highly rated securities which are either explicitly or implicitly backed by the U.S. Government through its agencies which are highly rated by major ratings agencies and also have a long history of no credit losses. Our corporate bonds and other investment securities consist of investment grade bonds and private placement bonds.

We assess the likelihood of default and the potential amount of default when assessing our HTM securities for credit losses. We utilize term structures and, due to no prior loss exposure on our state and political subdivision securities or our corporate securities, we currently apply a third-party average loss given default rate to model these securities. We elected to use the specific identification method to model our HTM securities which aligns with our third-party fair value measurement process. The model determined any expected credit loss over the life of these securities to be insignificant. Management further evaluated the remote expectation of loss, along with the qualitative factors associated with these securities and concluded that, due to the securities being highly rated municipals and investment grade corporates and private placement bonds with a long history of no credit losses, no credit loss should be recognized for these securities for the three and nine months ended September 30, 2023 or 2022.

The accrued interest receivable on our debt securities is excluded from the credit loss estimate and is included in interest receivable on our consolidated balance sheets. As of September 30, 2023, accrued interest receivable on AFS and HTM debt securities totaled $10.8 million and $8.5 million, respectively. As of December 31, 2022, accrued interest receivable on AFS and HTM debt securities totaled $16.9 million and $13.6 million, respectively. No HTM debt securities were past-due or on nonaccrual status as of September 30, 2023 or December 31, 2022.

The following table reflects interest income recognized on securities for the periods presented (in thousands):



	Three Months Ended September 30,
	2023		2022
U.S. Treasury	$	3,784	$	44

State and political subdivisions	16,940		14,666

Corporate bonds and other	1,765		1,668
MBS	4,426		4,770
Total interest income on securities	$	26,915	$	21,148



	Nine Months Ended September 30,
	2023		2022
U.S. Treasury	$	8,307	$	271

State and political subdivisions	50,940		41,786
Corporate bonds and other	5,363		4,385
MBS	12,585		12,025
Total interest income on securities	$	77,195	$	58,467

There was a $5.6 million net realized loss as a result of sales from the AFS securities portfolio for the nine months ended September 30, 2023, which consisted of $7.0 million in realized losses and $1.4 million in realized gains. There was a $3.8 million net realized loss as a result of sales from the AFS securities portfolio for the nine months ended September 30, 2022, which consisted of $4.4 million in realized losses and $584,000 in realized gains. There were no sales from the HTM portfolio

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during the three and nine months ended September 30, 2023 or 2022. We calculate realized gains and losses on sales of securities under the specific identification method.

Expected maturities on our securities may differ from contractual maturities because issuers may have the right to call or prepay obligations. MBS are presented in total by category since MBS are typically issued with stated principal amounts and are backed by pools of mortgages that have loans with varying maturities. The characteristics of the underlying pool of mortgages, such as fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the security holder. The term of a mortgage-backed pass-through security thus approximates the term of the underlying mortgages and can vary significantly due to prepayments.

The amortized cost and estimated fair value of AFS and HTM securities at September 30, 2023, are presented below by contractual maturity (in thousands):


	September 30, 2023
	Amortized Cost		Fair Value
AVAILABLE FOR SALE
Investment securities:
Due in one year or less	$	224,385	$	224,420
Due after one year through five years	4,266		4,193
Due after five years through ten years	33,991		32,127
Due after ten years	798,835		685,408
	1,061,477		946,148
MBS:	411,043		389,412
Total	$	1,472,520	$	1,335,560


	September 30, 2023
	Amortized Cost		Fair Value
HELD TO MATURITY
Investment securities:
Due in one year or less	$	15,962	$	15,281
Due after one year through five years	4,861		4,684
Due after five years through ten years	140,605		125,451
Due after ten years	1,024,046		799,170
	1,185,474		944,586
MBS:	122,412		107,844
Total	$	1,307,886	$	1,052,430

Equity Investments

Equity investments on our consolidated balance sheets include Community Reinvestment Act funds with a readily determinable fair value as well as equity investments without readily determinable fair values. At September 30, 2023 and December 31, 2022, we had equity investments recorded in our consolidated balance sheets of $9.5 million and $11.2 million, respectively.

Any realized and unrealized gains and losses on equity investments are reported in income. Equity investments without readily determinable fair values are recorded at cost less impairment, if any. For the three months ended September 30, 2023, there was no gain or loss on the sale of equity securities. For the nine months ended September 30, 2023, there was a net gain on the sale of equity securities of $5.1 million.

The following is a summary of unrealized and realized gains and losses on equity investments recognized in other noninterest income in the consolidated statements of income during the periods presented (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net gains (losses) recognized during the period on equity investments	$	(163)	$	(230)	$	4,895	$	(696)
Less: Net gains recognized during the period on equity investments sold during the period	—		—		5,058		—
Unrealized gains (losses) recognized during the reporting period on equity investments held at the reporting date	$	(163)	$	(230)	$	(163)	$	(696)

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Equity investments are assessed quarterly for other-than-temporary impairment. Based upon that evaluation, management does not consider any of our equity investments to be other-than-temporarily impaired at September 30, 2023.

FHLB Stock

Our FHLB stock, which has limited marketability, is carried at cost and is assessed quarterly for other-than-temporary impairment. Based upon evaluation by management at September 30, 2023, our FHLB stock was not impaired and thus was not considered to be other-than-temporarily impaired.

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5. Loans and Allowance for Loan Losses

Loans in the accompanying consolidated balance sheets are classified as follows (in thousands):


	September 30, 2023		December 31, 2022
Real estate loans:
Construction	$	720,515	$	559,681
1-4 family residential	689,492		663,519
Commercial	2,117,306		1,987,707
Commercial loans	385,816		412,064
Municipal loans	441,512		450,067
Loans to individuals	65,992		74,653
Total loans	4,420,633		4,147,691
Less: Allowance for loan losses	41,760		36,515
Net loans	$	4,378,873	$	4,111,176

Construction Real Estate Loans

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. 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 are subject to underwriting standards similar to that of the commercial 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 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.

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.

Commercial Real Estate Loans

Commercial real estate loans as of September 30, 2023 consisted of $1.75 billion of owner and non-owner occupied real estate, $339.4 million of loans secured by multi-family properties and $29.4 million of loans secured by farmland. 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. 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.

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. 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.

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

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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. Lending money directly to these municipalities allows us to earn a higher yield than we could if we purchased municipal securities for similar durations.

Loans to Individuals

Substantially all originations of our loans to individuals are made to consumers in our market areas. The majority of loans to individuals are collateralized by titled equipment, which are primarily automobiles. 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, 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.

Credit Quality Indicators

We categorize loans into risk categories on an ongoing basis based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. We use the following definitions for risk ratings:

•Pass (Rating 1 – 4) – This rating is assigned to all satisfactory loans. This category, by definition, consists of acceptable credit. Credit and collateral exceptions should not be present, although their presence would not necessarily prohibit a loan from being rated Pass, if deficiencies are in the process of correction. These loans are not included in the Watch List.

•Pass Watch (Rating 5) – These loans require some degree of special treatment, but not due to credit quality. This category does not include loans specially mentioned or adversely classified; however, particular attention is warranted to characteristics such as:

▪A lack of, or abnormally extended payment program;

▪A heavy degree of concentration of collateral without sufficient margin;

▪A vulnerability to competition through lesser or extensive financial leverage; and

▪A dependence on a single or few customers or sources of supply and materials without suitable substitutes or alternatives.

•Special Mention (Rating 6) – A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in our credit position at some future date. Special Mention loans are not adversely classified and do not expose us to sufficient risk to warrant adverse classification.

•Substandard (Rating 7) – Substandard loans are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

•Doubtful (Rating 8) – Loans classified as Doubtful have all the weaknesses inherent in those classified Substandard with the added characteristic that the weaknesses make collection or liquidation, in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

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The following tables set forth the amortized cost basis by class of financing receivable and credit quality indicator for the periods presented (in thousands):


September 30, 2023	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2023		2022		2021		2020		2019		Prior
Construction real estate:
Pass	$	109,018	$	225,290	$	191,843	$	33,111	$	3,009	$	6,753	$	128,083	$	697,107
Pass watch	—		—		—		—		—		—		9,544		9,544
Special mention	171		13,303		188		—		8		—		—		13,670
Substandard	—		73		—		—		—		80		—		153
Doubtful	—		—		41		—		—		—		—		41
Total construction real estate	$	109,189	$	238,666	$	192,072	$	33,111	$	3,017	$	6,833	$	137,627	$	720,515
Current period gross charge-offs	$	—	$	63	$	—	$	—	$	—	$	—	$	—	$	63

1-4 family residential real estate:
Pass	$	36,549	$	114,435	$	143,340	$	119,327	$	64,791	$	202,168	$	1,858	$	682,468
Pass watch	—		—		—		34		—		—		—		34
Special mention	—		—		—		1,090		—		1,348		—		2,438
Substandard	155		—		76		378		53		3,479		57		4,198
Doubtful	—		—		—		—		—		354		—		354
Total 1-4 family residential real estate	$	36,704	$	114,435	$	143,416	$	120,829	$	64,844	$	207,349	$	1,915	$	689,492
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	71	$	—	$	71

Commercial real estate:
Pass	$	338,060	$	708,281	$	501,231	$	148,979	$	92,448	$	203,242	$	15,583	$	2,007,824
Pass watch	39,704		9,530		1,846		632		338		148		—		52,198
Special mention	2,015		871		—		—		7,761		25,347		—		35,994
Substandard	—		—		281		269		14,206		6,377		—		21,133
Doubtful	—		—		—		—		70		87		—		157
Total commercial real estate	$	379,779	$	718,682	$	503,358	$	149,880	$	114,823	$	235,201	$	15,583	$	2,117,306
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial loans:
Pass	$	54,023	$	78,551	$	58,150	$	12,486	$	5,107	$	4,038	$	170,437	$	382,792
Pass watch	26		40		125		—		—		20		—		211
Special mention	—		176		—		20		—		177		780		1,153
Substandard	205		443		89		—		92		6		—		835
Doubtful	—		395		106		—		102		120		102		825
Total commercial loans	$	54,254	$	79,605	$	58,470	$	12,506	$	5,301	$	4,361	$	171,319	$	385,816
Current period gross charge-offs	$	575	$	439	$	44	$	26	$	23	$	6	$	—	$	1,113

Municipal loans:
Pass	$	30,063	$	62,250	$	70,471	$	50,793	$	42,340	$	185,595	$	—	$	441,512
Pass watch	—		—		—		—		—		—		—		—
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total municipal loans	$	30,063	$	62,250	$	70,471	$	50,793	$	42,340	$	185,595	$	—	$	441,512
Current period gross charge-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Loans to individuals:
Pass	$	20,845	$	17,948	$	13,536	$	7,550	$	2,698	$	1,169	$	2,207	$	65,953
Pass watch	—		—		—		—		—		—		—		—
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		14		—		—		14
Doubtful	—		—		5		—		—		11		9		25
Total loans to individuals	$	20,845	$	17,948	$	13,541	$	7,550	$	2,712	$	1,180	$	2,216	$	65,992
Current period gross charge-offs (1)	$	1,218	$	34	$	39	$	12	$	3	$	79	$	—	$	1,385

Total loans	$	630,834	$	1,231,586	$	981,328	$	374,669	$	233,037	$	640,519	$	328,660	$	4,420,633
Total current period gross charge-offs (1)	$	1,793	$	536	$	83	$	38	$	26	$	156	$	—	$	2,632

(1) Includes $1.2 million in charged off demand deposit overdrafts reported as 2023 originations.

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December 31, 2022	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized Cost Basis		Total
	2022		2021		2020		2019		2018		Prior
Construction real estate:
Pass	$	169,652	$	184,501	$	34,537	$	7,091	$	1,844	$	6,434	$	152,530	$	556,589
Pass watch	299		—		—		—		—		—		—		299
Special mention	1,858		290		—		—		—		—		—		2,148
Substandard	—		—		—		10		42		194		—		246
Doubtful	—		44		—		355		—		—		—		399
Total construction real estate	$	171,809	$	184,835	$	34,537	$	7,456	$	1,886	$	6,628	$	152,530	$	559,681

1-4 family residential real estate:
Pass	$	82,847	$	144,424	$	128,666	$	70,142	$	36,710	$	194,490	$	2,160	$	659,439
Pass watch	—		—		—		—		—		—		—		—
Special mention	—		—		79		—		1,397		—		—		1,476
Substandard	3		—		217		54		32		1,942		43		2,291
Doubtful	—		—		—		—		173		140		—		313
Total 1-4 family residential real estate	$	82,850	$	144,424	$	128,962	$	70,196	$	38,312	$	196,572	$	2,203	$	663,519

Commercial real estate:
Pass	$	798,653	$	546,938	$	168,607	$	136,440	$	55,480	$	233,509	$	12,315	$	1,951,942
Pass watch	—		9,219		—		—		—		—		—		9,219
Special mention	—		—		1,832		330		115		1,849		—		4,126
Substandard	—		—		281		14,603		260		6,992		—		22,136
Doubtful	—		—		—		76		—		208		—		284
Total commercial real estate	$	798,653	$	556,157	$	170,720	$	151,449	$	55,855	$	242,558	$	12,315	$	1,987,707

Commercial loans:
Pass	$	113,678	$	68,509	$	17,852	$	8,249	$	4,820	$	3,313	$	178,951	$	395,372
Pass watch	208		13		56		—		—		—		—		277
Special mention	—		5,109		31		—		288		—		9,986		15,414
Substandard	220		116		70		110		12		9		—		537
Doubtful	68		100		—		86		210		—		—		464
Total commercial loans	$	114,174	$	73,847	$	18,009	$	8,445	$	5,330	$	3,322	$	188,937	$	412,064

Municipal loans:
Pass	$	65,258	$	74,617	$	57,147	$	47,636	$	24,576	$	173,919	$	—	$	443,153
Pass watch	—		—		—		508		403		6,003		—		6,914
Special mention	—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—
Total municipal loans	$	65,258	$	74,617	$	57,147	$	48,144	$	24,979	$	179,922	$	—	$	450,067

Loans to individuals:
Pass	$	29,579	$	21,480	$	12,651	$	5,261	$	1,665	$	1,005	$	2,935	$	74,576
Pass watch	—		—		—		—		—		—		—		—
Special mention	—		—		—		—		—		—		—		—
Substandard	—		1		—		6		—		2		—		9
Doubtful	7		—		—		18		40		3		—		68
Total loans to individuals	$	29,586	$	21,481	$	12,651	$	5,285	$	1,705	$	1,010	$	2,935	$	74,653
Total loans	$	1,262,330	$	1,055,361	$	422,026	$	290,975	$	128,067	$	630,012	$	358,920	$	4,147,691

Watch List loans reported as 2023 originations as of September 30, 2023 and Watch List loans reported as 2022 originations as of December 31, 2022 were, for the majority, first originated in various years prior to 2023 and 2022, respectively, but were renewed in the respective year.

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The following tables present the aging of the amortized cost basis in past due loans by class of loans (in thousands):


	September 30, 2023
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
Real estate loans:
Construction	$	175	$	—	$	—	$	175	$	720,340	$	720,515
1-4 family residential	748		685		1,963		3,396		686,096		689,492
Commercial	2,331		41		36		2,408		2,114,898		2,117,306
Commercial loans	494		162		525		1,181		384,635		385,816
Municipal loans	—		—		—		—		441,512		441,512
Loans to individuals	140		11		—		151		65,841		65,992
Total	$	3,888	$	899	$	2,524	$	7,311	$	4,413,322	$	4,420,633


	December 31, 2022
	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Current		Total
Real estate loans:
Construction	$	43	$	21	$	—	$	64	$	559,617	$	559,681
1-4 family residential	3,529		368		214		4,111		659,408		663,519
Commercial	105		153		415		673		1,987,034		1,987,707
Commercial loans	515		277		247		1,039		411,025		412,064
Municipal loans	—		—		—		—		450,067		450,067
Loans to individuals	203		3		40		246		74,407		74,653
Total	$	4,395	$	822	$	916	$	6,133	$	4,141,558	$	4,147,691

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The following table sets forth the amortized cost basis of nonperforming assets for the periods presented (in thousands):


	September 30, 2023		December 31, 2022
Nonaccrual loans:
Real estate loans:
Construction	$	41	$	405
1-4 family residential	2,365		848
Commercial	527		762
Commercial loans	1,358		757

Loans to individuals	25		74
Total nonaccrual loans (1)	4,316		2,846

Accruing loans past due more than 90 days	—		—
Restructured loans (2)	15		7,849
OREO	50		93
Repossessed assets	—		74
Total nonperforming assets	$	4,381	$	10,862

(1) Includes $343,000 and $897,000 of restructured loans as of September 30, 2023 and December 31, 2022, respectively.

(2) Pursuant to our adoption of ASU 2022-02, effective January 1, 2023, we prospectively discontinued the recognition and measurement guidance previously required on troubled debt restructures. As a result, “restructured” loans as of September 30, 2023 exclude any loan modifications that are performing but would have previously required disclosure as troubled debt restructures.

We reversed $13,000 and $78,000 of interest income on nonaccrual loans during the three and nine months ended September 30, 2023, respectively, and $10,000 and $33,000 for the three and nine months ended September 30, 2022, respectively. We had $1.0 million and $1.6 million of loans on nonaccrual for which there was no related allowance for credit losses as of September 30, 2023 and December 31, 2022, respectively.

Collateral-dependent loans are loans that we expect the repayment to be provided substantially through the operation or sale of the collateral of the loan and we have determined that the borrower is experiencing financial difficulty. In such cases, expected credit losses are based on the fair value of the collateral at the measurement date, adjusted for selling costs. As of September 30, 2023 and December 31, 2022, we had $7.7 million and $8.1 million, respectively, of collateral-dependent loans, secured mainly by real estate and equipment. There have been no significant changes to the collateral that secures the collateral-dependent assets. Foreclosed assets include OREO and repossessed assets. For 1-4 family residential real estate properties, a loan is recognized as a foreclosed property once legal title to the real estate property has been received upon completion of foreclosure or the borrower has conveyed all interest in the residential property through a deed in lieu of foreclosure. There were $63,000 loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of September 30, 2023. There were no loans secured by 1-4 family residential properties for which formal foreclosure proceedings were in process as of December 31, 2022.

Restructured Loans

Pursuant to our adoption of ASU 2022-02 effective January 1, 2023, we prospectively discontinued the recognition and measurement of TDRs. This guidance eliminated TDR accounting for loans in which the borrower was experiencing financial difficulty and the creditor granted a concession. See “Note 1 - Summary of Significant Accounting and Reporting Policies” to our consolidated financial statements included in this report.

A loan is now considered restructured if the borrower is experiencing financial difficulties and the loan has been modified. Modifications may include interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. We may provide a combination of modifications which may include an extension of the amortization period, interest rate reduction and/or converting the loan to interest-only for a limited period of time. In most instances, interest will continue to be charged on principal balances outstanding during the extended term. Therefore, the financial effects of the recorded investment of loans restructured during the nine months ended September 30, 2023 were not significant.

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The following tables set forth the recorded balance of restructured loans and type of modification by class of loans during the periods presented (dollars in thousands):



	Three Months Ended September 30, 2023
	Amortization Period Extension		Interest Rate Reduction		Combination		Total Modifications		Number of Loans	Percent of Total Class




Commercial loans	$	15	$	—	$	65	$	80	2	0.02	%


Total	$	15	$	—	$	65	$	80	2



	Nine Months Ended September 30, 2023
	Amortization Period Extension		Interest Rate Reduction		Combination		Total Modifications		Number of Loans	Percent of Total Class




Commercial loans	$	293	$	—	$	65	$	358	4	0.09	%


Total	$	293	$	—	$	65	$	358	4

There were three restructured loans totaling $343,000 included in our nonaccrual loans in nonperforming assets as of September 30, 2023.

On an ongoing basis, the performance of the restructured loans is monitored for subsequent payment default. Payment default is recognized when the borrower is 90 days or more past due. As of September 30, 2023, there were no restructured loans in default. Payment defaults for restructured loans did not significantly impact the determination of the allowance for loan losses in the periods presented. At September 30, 2023, there were no commitments to lend additional funds to borrowers whose loans had been restructured.

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by portfolio segment for the periods presented (in thousands):



	Three Months Ended September 30, 2023
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	$	3,395	$	2,660	$	28,012	$	2,017	$	37	$	182	$	36,303
Loans charged-off	—		—		—		(744)		—		(518)		(1,262)
Recoveries of loans charged-off	—		62		—		65		—		251		378
Net loans (charged-off) recovered	—		62		—		(679)		—		(267)		(884)
Provision for (reversal of) loan losses	1,019		17		4,327		731		(17)		264		6,341
Balance at end of period	$	4,414	$	2,739	$	32,339	$	2,069	$	20	$	179	$	41,760

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	Nine Months Ended September 30, 2023
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	$	3,164	$	2,173	$	28,701	$	2,235	$	45	$	197	$	36,515
Loans charged-off	(63)		(71)		—		(1,113)		—		(1,385)		(2,632)
Recoveries of loans charged-off	1		108		1		268		—		792		1,170
Net loans (charged-off) recovered	(62)		37		1		(845)		—		(593)		(1,462)
Provision for (reversal of) loan losses	1,312		529		3,637		679		(25)		575		6,707
Balance at end of period	$	4,414	$	2,739	$	32,339	$	2,069	$	20	$	179	$	41,760



	Three Months Ended September 30, 2022
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	$	3,399	$	2,024	$	27,221	$	2,558	$	46	$	201	$	35,449


Loans charged-off	—		(66)		—		(192)		—		(428)		(686)
Recoveries of loans charged-off	—		4		—		139		—		306		449
Net loans (charged-off) recovered	—		(62)		—		(53)		—		(122)		(237)
Provision for (reversal of) loan losses	136		44		1,273		(272)		(2)		115		1,294
Balance at end of period	$	3,535	$	2,006	$	28,494	$	2,233	$	44	$	194	$	36,506



	Nine Months Ended September 30, 2022
	Real Estate
	Construction		1-4 Family Residential		Commercial		Commercial Loans		Municipal Loans		Loans to Individuals		Total
Balance at beginning of period	$	3,787	$	1,866	$	26,980	$	2,397	$	47	$	196	$	35,273


Loans charged-off	—		(66)		—		(369)		—		(1,285)		(1,720)
Recoveries of loans charged-off	1		96		81		469		—		858		1,505
Net loans (charged-off) recovered	1		30		81		100		—		(427)		(215)
Provision for (reversal of) loan losses	(253)		110		1,433		(264)		(3)		425		1,448
Balance at end of period	$	3,535	$	2,006	$	28,494	$	2,233	$	44	$	194	$	36,506

The accrued interest receivable on our loan receivables is excluded from the allowance for credit loss estimate and is included in interest receivable on our consolidated balance sheets. As of September 30, 2023 and December 31, 2022, the accrued interest on our loan portfolio was $20.3 million and $18.8 million, respectively.

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6. Borrowing Arrangements

Information related to borrowings is provided in the table below (dollars in thousands):


	September 30, 2023			December 31, 2022
Other borrowings:
Balance at end of period	$	395,209		$	221,153
Average amount outstanding during the period (1)	451,966			77,845
Maximum amount outstanding during the period (2)	1,030,421			316,563
Weighted average interest rate during the period (3)	4.8		%	2.4		%
Interest rate at end of period (4)	4.4		%	4.1		%

FHLB borrowings:
Balance at end of period	$	212,829		$	153,358
Average amount outstanding during the period (1)	281,260			135,926
Maximum amount outstanding during the period (2)	533,242			423,645
Weighted average interest rate during the period (3)	2.5		%	2.4		%
Interest rate at end of period (5)	1.4		%	0.7		%

(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 (annualized for interim periods) by the average amount 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.

Maturities of the obligations associated with our borrowing arrangements based on scheduled repayments at September 30, 2023 are as follows (in thousands):


	Payments Due by Period
	Less than 1 Year		1-2 Years		2-3 Years		3-4 Years		4-5 Years		Thereafter		Total
Other borrowings	$	388,888	$	6,321	$	—	$	—	$	—	$	—	$	395,209
FHLB borrowings	210,733		764		582		401		349		—		212,829
Total obligations	$	599,621	$	7,085	$	582	$	401	$	349	$	—	$	608,038

Other borrowings may include federal funds purchased, repurchase agreements and borrowings from the Federal Reserve through the FRDW and BTFP. Southside Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, TIB – The Independent Bankers Bank and Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at September 30, 2023 or December 31, 2022. 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, 2023, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $636.9 million. There were no borrowings from the FRDW at September 30, 2023, and $188.0 million at December 31, 2022. To provide more stability and to assure banks have the ability to meet the needs of all of their depositors, the Federal Reserve created the BTFP in the first quarter of 2023. At September 30, 2023, the amount of additional funding the Bank could obtain from the BTFP, collateralized by securities, was approximately $6,000. There were $291.3 million in borrowings from the BTFP at September 30, 2023. Southside Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at September 30, 2023, the line had one outstanding letter of credit for $155,000. Southside Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits.

Southside Bank enters into sales of securities under repurchase agreements. These repurchase agreements totaled $103.9 million at September 30, 2023 and $33.2 million at December 31, 2022, and had maturities of less than 2.0 years. Repurchase

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agreements are secured by investment and MBS securities and are stated at the amount of cash received in connection with the transaction.

FHLB borrowings represent borrowings with fixed interest rates ranging from 0.74% to 4.80% and with remaining maturities of 20 days to 4.8 years at September 30, 2023. FHLB borrowings may be collateralized by FHLB stock, nonspecified loans and/or securities. At September 30, 2023, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $1.71 billion, net of FHLB stock purchases required.

7. Long-term Debt

Information related to our long-term debt is summarized as follows for the periods presented (in thousands):


	September 30, 2023		December 31, 2022

Subordinated notes: (1)
3.875% Subordinated notes, net of unamortized debt issuance costs (2)	$	93,838	$	98,674

Total Subordinated notes	93,838		98,674
Trust preferred subordinated debentures: (3)
Southside Statutory Trust III, net of unamortized debt issuance costs (4)	20,577		20,573
Southside Statutory Trust IV	23,196		23,196
Southside Statutory Trust V	12,887		12,887
Magnolia Trust Company I	3,609		3,609
Total Trust preferred subordinated debentures	60,269		60,265




Total Long-term debt	$	154,107	$	158,939

(1)This debt consists of subordinated notes with a remaining maturity greater than one year that qualify under the risk-based capital guidelines as Tier 2 capital, subject to certain limitations.

(2)The unamortized discount and debt issuance costs reflected in the carrying amount of the subordinated notes totaled approximately $1.2 million at September 30, 2023 and $1.3 million at December 31, 2022.

(3)This debt consists of trust preferred securities that qualify under the risk-based capital guidelines as Tier 1 capital, subject to certain limitations.

(4)The unamortized debt issuance costs reflected in the carrying amount of the Southside Statutory Trust III junior subordinated debentures totaled $42,000 at September 30, 2023 and $46,000 at December 31, 2022.

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As of September 30, 2023, the details of the subordinated notes and the trust preferred subordinated debentures are summarized below (dollars in thousands):

Date Issued

Amount Issued

Fixed or Floating Rate

Interest Rate

Maturity Date

3.875% Subordinated Notes (1)

November 6, 2020

100,000

Fixed-to-Floating

3.875%

November 15, 2030

Southside Statutory Trust III (2)

September 4, 2003

20,619

Floating

3 month SOFR + 3.20%

September 4, 2033

Southside Statutory Trust IV (2)

August 8, 2007

23,196

Floating

3 month SOFR + 1.56%

October 30, 2037

Southside Statutory Trust V (2)

August 10, 2007

12,887

Floating

3 month SOFR + 2.51%

September 15, 2037

Magnolia Trust Company I (2) (3)

May 20, 2005

3,609

Floating

3 month SOFR + 2.06%

November 23, 2035

(1)On June 14, 2023, the Company repurchased $5.0 million of the $100 million fixed-to-floating rate subordinated notes that mature on November 15, 2030.

(2)Effective July 1, 2023, the Company began utilizing SOFR to reset rates on our floating rate trust preferred subordinated debentures, due to the fact that LIBOR ceased to be published as of June 30, 2023.

(3)On October 10, 2007, as part of an acquisition we assumed $3.6 million of floating rate junior subordinated debentures issued in 2005 to Magnolia Trust Company I.

On November 6, 2020, the Company issued $100.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes that mature on November 15, 2030. This debt initially bears interest at a fixed rate of 3.875% per year through November 14, 2025 and thereafter, adjusts quarterly at a floating rate equal to the then current three-month term SOFR, as published by the FRBNY, plus 366 basis points. The proceeds from the sale of the subordinated notes were used for general corporate purposes.

8. Employee Benefit Plans

The components of net periodic benefit cost (income) related to our employee benefit plans are as follows (in thousands):



	Three Months Ended September 30,
	Retirement Plan				Acquired Retirement Plan				Restoration Plan
	2023		2022		2023		2022		2023		2022

Interest cost	$	942	$	685	$	31	$	25	$	208	$	144
Expected return on assets	(1,143)		(1,461)		(47)		(58)		—		—
Net loss amortization	182		160		—		—		7		64


Net periodic benefit cost (income)	$	(19)	$	(616)	$	(16)	$	(33)	$	215	$	208



	Nine Months Ended September 30,
	Retirement Plan				Acquired Retirement Plan				Restoration Plan
	2023		2022		2023		2022		2023		2022

Interest cost	$	2,828	$	2,056	$	94	$	76	$	623	$	433
Expected return on assets	(3,430)		(4,384)		(140)		(174)		—		—
Net loss amortization	545		480		—		—		22		191


Net periodic benefit cost (income)	$	(57)	$	(1,848)	$	(46)	$	(98)	$	645	$	624

The noncash adjustment to the employee benefit plan liabilities, consisting of changes in net loss, was $567,000 and $671,000 for the nine months ended September 30, 2023 and 2022, respectively.

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9. Derivative Financial Instruments and Hedging Activities

Our hedging policy allows the use of interest rate derivative instruments to manage our exposure to interest rate risk or hedge specified assets and liabilities. These instruments may include interest rate swaps and interest rate caps and floors. All derivative instruments are carried on the balance sheet at their estimated fair value and are recorded in other assets or other liabilities, as appropriate.

Derivative instruments may be designated as cash flow hedges of variable rate assets or liabilities, cash flow hedges of forecasted transactions, fair value hedges of a recognized asset or liability or as non-hedging instruments. Gains and losses on derivative instruments designated as cash flow hedges are recorded in AOCI to the extent they are effective. If the hedge is effective, the amount recorded in other comprehensive income is reclassified to earnings in the same periods that the hedged cash flows impact earnings. The ineffective portion of changes in fair value is reported in current earnings. Gains and losses on derivative instruments designated as fair value hedges, as well as the change in fair value on the hedged item, are recorded in interest income in the consolidated statements of income. Gains and losses due to changes in fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the hedged item. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.

We have entered into certain interest rate swap contracts on specific variable rate agreements and fixed rate short-term pay agreements with third-parties. These interest rate swap contracts were designated as hedging instruments in cash flow hedges under ASC Topic 815. The objective of the interest rate swap contracts is to manage the expected future cash flows on $760.0 million of Bank liabilities. The cash flows from the swap contracts are expected to be effective in hedging the variability in future cash flows attributable to fluctuations in the underlying SOFR rate.

In accordance with ASC Topic 815, if a hedging item is terminated prior to maturity for a cash settlement, the existing gain or loss within AOCI will continue to be reclassified into earnings during the period or periods in which the hedged forecasted transaction affects earnings unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period. These transactions are reevaluated on a monthly basis to determine if the hedged forecasted transactions are still probable of occurring. If at a subsequent evaluation, it is determined that the transactions will not occur, any related gains or losses recorded in AOCI are immediately recognized in earnings. During the second quarter of 2023, we terminated one interest rate swap contract designated as a cash flow hedge. At the time of termination, we determined the underlying hedged forecasted transactions were still probable of occurring. The existing loss in AOCI will be reclassified into earnings in the same periods the hedged forecasted transaction affects earnings.

During 2022, we entered into partial term fair value hedges, as allowed under ASU 2017-12, for certain of our fixed rate callable AFS municipal securities. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to 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, 2023, hedged securities with a carrying amount of $609.1 million are included in our AFS securities portfolio in our consolidated balance sheets. 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. The change in the fair value of these hedging instruments is recorded in AOCI and is subsequently reclassified into earnings in the period that the hedged transactions affect earnings. During the second quarter of 2023, we terminated some of our fair value hedging relationships and sold the hedged items. As a result of the sale, the cumulative adjustments to the carrying amount was a fair value gain recognized in earnings and recorded in noninterest income.

From time to time, we may enter into certain interest rate swaps, cap and floor contracts that are not designated as hedging instruments. These interest rate derivative contracts relate to transactions in which we enter into an interest rate swap, cap or floor with a customer while concurrently entering into an offsetting interest rate swap, cap or floor with a third-party financial institution. We agree to pay interest to the customer on a notional amount at a variable rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, we agree to pay a third-party financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount. These interest rate derivative contracts allow our customers to effectively convert a variable rate loan to a fixed rate loan. The changes in the fair value of the underlying derivative contracts primarily offset each other and do not significantly impact our results of operations. We recognized swap fee income associated with these derivative contracts immediately based upon the difference in the bid/ask spread of the underlying transactions with the customer and the third-party financial institution. The swap fee income is included in other noninterest income in our consolidated statements of income.

At September 30, 2023 and December 31, 2022, net derivative assets included $109.5 million and $82.1 million, respectively, of cash collateral received from counterparties under master netting agreements.

The notional amounts of the derivative instruments represent the contractual cash flows pertaining to the underlying agreements. These amounts are not exchanged and are not reflected in the consolidated balance sheets. The fair value of the interest rate swaps are presented at net in other assets and other liabilities and in the net change in each of these financial

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statement line items in the accompanying consolidated statements of cash flows when a right of offset exists, based on transactions with a single counterparty that are subject to a legally enforceable master netting agreement.

The following tables present the notional and estimated fair value amount of derivative positions outstanding (in thousands):


	September 30, 2023						December 31, 2022
			Estimated Fair Value						Estimated Fair Value
	Notional Amount (1)		Asset Derivative		Liability Derivative		Notional Amount (1)		Asset Derivative		Liability Derivative
Derivatives designated as hedging instruments
Interest rate contracts:
Swaps-Cash Flow Hedge-Financial institution counterparties	$	760,000	$	39,409	$	—	$	575,000	$	39,527	$	—
Swaps-Fair Value Hedge-Financial institution counterparties	654,870		42,229		—		742,675		21,733		171
Derivatives designated as non-hedging instruments
Interest rate contracts:
Swaps-Financial institution counterparties	216,777		27,876		—		223,124		21,046		—
Swaps-Customer counterparties	216,777		—		27,876		223,124		—		21,046
Gross derivatives			109,514		27,876				82,306		21,217
Offsetting derivative assets/liabilities			—		—				(171)		(171)
Cash collateral received/posted			(109,514)		—				(82,135)		—
Net derivatives included in the consolidated balance sheets (2)			$	—	$	27,876			$	—	$	21,046

(1) Notional amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement. These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the consolidated balance sheets.

(2) Net derivative assets are included in other assets and net derivative liabilities are included in other liabilities on the consolidated balance sheets. Included in the fair value of net derivative assets and net derivative liabilities are credit valuation adjustments reflecting counterparty credit risk and our credit risk. We had no credit exposure related to interest rate swaps with financial institutions and none related to interest rate swaps with customers at September 30, 2023 or December 31, 2022. The credit risk associated with customer transactions is partially mitigated as these are generally secured by the non-cash collateral securing the underlying transaction being hedged.

The summarized expected weighted average remaining maturity of the notional amount of interest rate swaps and the weighted average interest rates associated with the amounts expected to be received or paid on interest rate swap agreements are presented below (dollars in thousands). Variable rates received on fixed pay swaps are based on one-month or three-month LIBOR or overnight SOFR rates in effect at September 30, 2023 and December 31, 2022:


	September 30, 2023							December 31, 2022
			Weighted Average							Weighted Average
	Notional Amount		Remaining Maturity (in years)	Receive Rate		Pay Rate		Notional Amount		Remaining Maturity (in years)	Receive Rate		Pay Rate
Swaps-Cash Flow hedge
Financial institution counterparties	$	760,000	2.4	5.42	%	2.02	%	$	575,000	2.3	4.44	%	1.13	%
Swaps-Fair Value hedge
Financial institution counterparties	654,870		5.6	5.30	%	3.19	%	742,675		6.3	3.42	%	3.21	%
Swaps-Non-hedging
Financial institution counterparties	216,777		8.3	5.91	%	2.66	%	223,124		9.0	4.83	%	2.69	%
Customer counterparties	216,777		8.3	2.66	%	5.91	%	223,124		9.0	2.69	%	4.83	%

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10. Fair Value Measurement

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants. A fair value measurement assumes the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

Valuation techniques including the market approach, the income approach and/or the cost approach are utilized to determine fair value. Inputs to valuation techniques refer to the assumptions market participants would use in pricing the asset or liability. Valuation policies and procedures are determined by our investment department and reported to our ALCO for review. An entity must consider all aspects of nonperforming risk, including the entity’s own credit standing, when measuring fair value of a liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. A fair value hierarchy for valuation inputs gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1 Inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

Certain financial assets are measured at fair value in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of fair value accounting or write-downs of individual assets. A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities AFS and Equity Investments with readily determinable fair values – U.S. Treasury securities and equity investments with readily determinable fair values are reported at fair value utilizing Level 1 inputs. Other securities classified as AFS are reported at fair value utilizing Level 2 inputs. For most of these securities, we obtain fair value measurements from independent pricing services and obtain an understanding of the pricing methodologies used by these independent pricing services. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things, as stated in the pricing methodologies of the independent pricing services.

We review and validate the prices supplied by the independent pricing services for reasonableness by comparison to prices obtained from, in some cases, two additional third-party sources. For securities where prices are outside a reasonable range, we further review those securities, based on internal ALCO approved procedures, to determine what a reasonable fair value measurement is for those securities, given available data.

Derivatives – Derivatives are reported at fair value utilizing Level 2 inputs. We obtain fair value measurements from two sources including an independent pricing service and the counterparty to the derivatives designated as hedges. The fair value measurements consider observable data that may include dealer quotes, market spreads, the U.S. Treasury yield curve, live trading levels, trade execution data, credit information and the derivatives’ terms and conditions, among other things. We review the prices supplied by the sources for reasonableness. In addition, we obtain a basic understanding of their underlying pricing methodology. We validate prices supplied by the sources by comparison to one another.

Certain nonfinancial assets and nonfinancial liabilities measured at fair value on a recurring basis include reporting units measured at fair value and tested for goodwill impairment.

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Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis, which means that the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets and financial liabilities measured at fair value on a nonrecurring basis included foreclosed assets and collateral-dependent loans at September 30, 2023 and December 31, 2022.

Foreclosed Assets – Foreclosed assets are initially recorded at fair value less costs to sell. The fair value measurements of foreclosed assets can include Level 2 measurement inputs such as real estate appraisals and comparable real estate sales information, in conjunction with Level 3 measurement inputs such as cash flow projections, qualitative adjustments and sales cost estimates. As a result, the categorization of foreclosed assets is Level 3 of the fair value hierarchy. In connection with the measurement and initial recognition of certain foreclosed assets, we may recognize charge-offs through the allowance for credit losses.

Collateral-Dependent Loans – Certain loans may be reported at the fair value of the underlying collateral if repayment is expected substantially from the operation or sale of the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria or appraisals. At September 30, 2023 and December 31, 2022, the impact of the fair value of collateral-dependent loans was reflected in our allowance for loan losses.

The fair value estimate of financial instruments for which quoted market prices are unavailable is dependent upon the assumptions used. Consequently, those estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented in the fair value tables do not necessarily represent their underlying value.

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The following tables summarize assets measured at fair value on a recurring and nonrecurring basis segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):



			Fair Value Measurements at the End of the Reporting Period Using
September 30, 2023	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements
Investment securities:
U.S. Treasury	$	224,209	$	224,209	$	—	$	—

State and political subdivisions	708,543		—		708,543		—
Corporate bonds and other	13,396		—		13,396		—
MBS: (1)
Residential	379,387		—		379,387		—
Commercial	10,025		—		10,025		—
Equity investments:
Equity investments	5,072		5,072		—		—
Derivative assets:
Interest rate swaps	109,514		—		109,514		—
Total asset recurring fair value measurements	$	1,450,146	$	229,281	$	1,220,865	$	—

Derivative liabilities:
Interest rate swaps	$	27,876	$	—	$	27,876	$	—
Total liability recurring fair value measurements	$	27,876	$	—	$	27,876	$	—

Nonrecurring fair value measurements
Foreclosed assets	$	50	$	—	$	—	$	50
Collateral-dependent loans (2)	7,137		—		—		7,137
Total asset nonrecurring fair value measurements	$	7,187	$	—	$	—	$	7,187

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			Fair Value Measurements at the End of the Reporting Period Using
December 31, 2022	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Recurring fair value measurements
Investment securities:


State and political subdivisions	$	964,852	$	—	$	964,852	$	—
Corporate bonds and other	8,704		—		8,704		—
MBS: (1)
Residential	315,027		—		315,027		—
Commercial	10,431		—		10,431		—
Equity investments:
Equity investments	5,235		5,235		—		—
Derivative assets:
Interest rate swaps	82,306		—		82,306		—
Total asset recurring fair value measurements	$	1,386,555	$	5,235	$	1,381,320	$	—

Derivative liabilities:
Interest rate swaps	$	21,217	$	—	$	21,217	$	—
Total liability recurring fair value measurements	$	21,217	$	—	$	21,217	$	—

Nonrecurring fair value measurements
Foreclosed assets	$	167	$	—	$	—	$	167
Collateral-dependent loans (2)	7,815		—		—		7,815

Total asset nonrecurring fair value measurements	$	7,982	$	—	$	—	$	7,982

(1)All MBS are issued and/or guaranteed by U.S. government agencies or U.S. GSEs.

(2)Consists of individually evaluated loans. Loans for which the fair value of the collateral and commercial real estate fair value of the properties is less than cost basis are presented net of allowance. Losses on these loans represent charge-offs which are netted against the allowance for loan losses.

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Disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, is required when it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other estimation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Such techniques and assumptions, as they apply to individual categories of our financial instruments, are as follows:

Cash and cash equivalents – The carrying amount for cash and cash equivalents is a reasonable estimate of those assets’ fair value.

Investment and MBS HTM – Fair values for these securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices for similar securities or estimates from independent pricing services.

FHLB stock – The carrying amount of FHLB stock is a reasonable estimate of the fair value of those assets.

Equity investments – The carrying value of equity investments without readily determinable fair values are measured at cost less impairment, if any, adjusted for observable price changes for an identical or similar investment of the same issuer. This carrying value is a reasonable estimate of the fair value of those assets.

Loans receivable – We estimate the fair value of our loan portfolio to an exit price notion with adjustments for liquidity, credit and prepayment factors. Nonperforming loans continue to be estimated using discounted cash flow analyses or the underlying value of the collateral where applicable.

Loans held for sale – The fair value of loans held for sale is determined based on expected proceeds, which are based on sales contracts and commitments.

Deposit liabilities – The fair value of demand deposits, savings accounts and certain money market deposits is the amount on demand at the reporting date, which is the carrying value. Fair values for fixed rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities.

Other borrowings – Federal funds purchased generally have original terms to maturity of one day and repurchase agreements generally have terms of less than one year, and therefore both are considered short-term borrowings. Consequently, their carrying value is a reasonable estimate of fair value. Borrowings from the Federal Reserve through the FRDW and BTFP have original maturities of one year or less, and the fair value is estimated by discounting the future cash flows using rates at which borrowings would be made to borrowers with similar credit ratings and for the same remaining maturities.

FHLB borrowings – The fair value of these borrowings is estimated by discounting the future cash flows using rates at which borrowings would be made to borrowers with similar credit ratings and for the same remaining maturities.

Subordinated notes – The fair value of the subordinated notes is estimated by discounting future cash flows using estimated rates at which long-term debt would be made to borrowers with similar credit ratings and for the remaining maturities.

Trust preferred subordinated debentures – The fair value of the long-term debt is estimated by discounting future cash flows using estimated rates at which long-term debt would be made to borrowers with similar credit ratings and for the remaining maturities.

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The following tables present our financial assets and financial liabilities measured on a nonrecurring basis at both their respective carrying amounts and estimated fair value (in thousands):


			Estimated Fair Value
September 30, 2023	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	325,823	$	325,823	$	325,823	$	—	$	—
Investment securities:
HTM, at carrying value	1,185,474		944,586		—		944,586		—
MBS:
HTM, at carrying value	122,412		107,844		—		107,844		—
FHLB stock, at cost	12,778		12,778		—		12,778		—
Equity investments	4,382		4,382		—		4,382		—
Loans, net of allowance for loan losses	4,378,873		3,962,889		—		—		3,962,889
Loans held for sale	1,382		1,382		—		1,382		—
Financial liabilities:
Deposits	$	6,349,571	$	6,315,058	$	—	$	6,315,058	$	—
Other borrowings	395,209		393,551		—		393,551		—
FHLB borrowings	212,829		198,457		—		198,457		—
Subordinated notes, net of unamortized debt issuance costs	93,838		84,992		—		84,992		—
Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,269		52,568		—		52,568		—


			Estimated Fair Value
December 31, 2022	Carrying Amount		Total		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	199,252	$	199,252	$	199,252	$	—	$	—
Investment securities:
HTM, at carrying value	1,190,108		1,023,376		—		1,023,376		—
Mortgage-backed securities:
HTM, at carrying value	136,621		125,780		—		125,780		—
FHLB stock, at cost	9,190		9,190		—		9,190		—
Equity investments	5,946		5,946		—		5,946		—
Loans, net of allowance for loan losses	4,111,176		3,880,664		—		—		3,880,664
Loans held for sale	667		667		—		667		—
Financial liabilities:
Deposits	$	6,198,019	$	6,158,517	$	—	$	6,158,517	$	—
Other borrowings	221,153		221,153		—		221,153		—
FHLB borrowings	153,358		140,976		—		140,976		—
Subordinated notes, net of unamortized debt issuance costs	98,674		91,357		—		91,357		—
Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,265		60,594		—		60,594		—

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11. Income Taxes

The income tax expense included in the accompanying consolidated statements of income consists of the following (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Current income tax expense	$	4,672	$	4,415	$	14,099	$	10,215
Deferred income tax expense (benefit)	(1,552)		(540)		(1,868)		103
Income tax expense	$	3,120	$	3,875	$	12,231	$	10,318

The net deferred tax asset totaled $41.2 million at September 30, 2023 as compared to $34.7 million at December 31, 2022. The increase in the net deferred tax asset is primarily the result of an increase in unrealized losses in the AFS securities portfolio. No valuation allowance was recorded at September 30, 2023 or December 31, 2022, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years. Unrecognized tax benefits were not material at September 30, 2023 or December 31, 2022.

We recognized income tax expense of $3.1 million and $12.2 million for an ETR of 14.5% and 15.0% for the three and nine months ended September 30, 2023, respectively, compared to income tax expense of $3.9 million and $10.3 million, for an ETR of 12.6% and 11.8%, respectively, for the three and nine months ended September 30, 2022. The higher ETR for the three and nine months ended September 30, 2023 was primarily due to a decrease in net tax-exempt income as a percentage of pre-tax income as compared to the same period in 2022. The ETR differs from the statutory rate of 21% for the three and nine months ended September 30, 2023 and 2022 primarily due to the effect of tax-exempt income from municipal loans and securities, as well as BOLI. We file income tax returns in the U.S. federal jurisdictions and in certain states. We are no longer subject to U.S. federal income tax examinations by tax authorities for years before 2020 or Texas state tax examinations by tax authorities for years before 2019.

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12. Off-Balance-Sheet Arrangements, Commitments and Contingencies

Financial Instruments with Off-Balance-Sheet Risk. In the normal course of business, we are a party to certain financial instruments with off-balance-sheet risk to meet the financing needs of our customers. These off-balance-sheet instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the financial statements. The contract or notional amounts of these instruments reflect the extent of involvement and exposure to credit loss that we have in these particular classes of financial instruments. The allowance for credit losses on these off-balance-sheet credit exposures is calculated using the same methodology as loans including a conversion or usage factor to anticipate ultimate exposure and expected losses and is included in other liabilities on our consolidated balance sheets.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

Balance at beginning of period	$	3,207	$	1,891	$	3,687	$	2,384

Provision for (reversal of) off-balance-sheet credit exposures	646		200		166		(293)
Balance at end of period	$	3,853	$	2,091	$	3,853	$	2,091

Contractual commitments to extend credit are agreements to lend to a customer provided the terms established in the contract are met. Commitments to extend credit generally have fixed expiration dates and may require the payment of fees. Since some commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in commitments to extend credit and similarly do not necessarily represent future cash obligations.

Financial instruments with off-balance-sheet risk were as follows (in thousands):


	September 30, 2023		December 31, 2022

Commitments to extend credit	$	1,160,638	$	1,296,773
Standby letters of credit	16,651		26,844
Total	$	1,177,289	$	1,323,617

We apply the same credit policies in making commitments to extend credit and standby letters of credit as we do for on-balance-sheet instruments. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral held varies but may include cash or cash equivalents, negotiable instruments, real estate, accounts receivable, inventory, oil, gas and mineral interests, property, plant and equipment.

Leases. There were no operating lease ROU assets obtained in exchange for new operating lease liabilities during the three months ended September 30, 2023, and there were $603,000 operating lease ROU assets obtained in exchange for new operating lease liabilities during the nine months ended September 30, 2023. During both the three and nine months ended September 30, 2022, there were $1.5 million operating lease ROU assets obtained in exchange for new operating lease liabilities.

Securities. In the normal course of business we buy and sell securities. At September 30, 2023, there were $24.9 million unsettled trades to purchase securities and no unsettled trades to sell securities. At December 31, 2022, there were no unsettled trades to purchase securities and no unsettled trades to sell securities.

Deposits. There were no unsettled issuances of brokered CDs at September 30, 2023 or December 31, 2022.

Litigation. We are involved with various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, our First Quarter and Second Quarter Reports on Form 10-Q and in our 2022 Form 10-K. Certain risks, uncertainties and other factors, including those set forth under “Risk Factors” in Part I, Item 1A. of the 2022 Form 10-K, “Risk Factors” in Part II, Item 1A. of the First Quarter Form 10-Q 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, discussions of the effect of our expansion, benefits of the Share Repurchase Plan, 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, 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 factor that could cause future results to differ materially from those anticipated by our forward-looking statements include the ongoing impact of higher inflation levels, higher interest rates and general economic and recessionary concerns, 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, our ability to manage liquidity in a rapidly changing and unpredictable market, supply chain disruptions, labor shortages and additional interest rate increases by the Federal Reserve. 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 risk of an economic slowdown or recession;

•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 impact of the Dodd-Frank Act, the Federal Reserve’s actions to increase interest rates, the capital requirements promulgated by the Basel Committee, the CARES Act, the Economic Aid Act and other regulatory responses to economic conditions;

•economic or other disruptions caused by acts of terrorism, war or other conflicts, including the Russia-Ukraine conflict, 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 changes or other catastrophic events;

•potential impacts of the recent 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;

•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;

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•our ability to identify and address cyber-security risks such as data security breaches, malware, “denial of service” attacks, “hacking” and identity theft, 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;

•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 monitor 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 and leverage 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 rising inflation 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 federal or state tax laws;

•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 2022 Form 10-K and “Part II -Item 1A. Risk Factors” in the First Quarter Form 10-Q.

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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 policies 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 2022 Form 10-K. As of September 30, 2023, there have been no significant changes to our critical accounting estimates.

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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 this measure to be 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).


Non-GAAP Reconciliations
	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022
Net interest income (GAAP)	$	53,273		$	55,515		$	160,542		$	155,499
Tax equivalent adjustments:
Loans	674			742			2,044			2,249
Tax-exempt investment securities	2,474			2,973			7,486			8,431
Net interest income (FTE) (1)	$	56,421		$	59,230		$	170,072		$	166,179

Average earning assets	$	7,418,157		$	6,999,525		$	7,269,326		$	6,742,985

Net interest margin	2.85		%	3.15		%	2.95		%	3.08		%
Net interest margin (FTE) (1)	3.02		%	3.36		%	3.13		%	3.29		%

Net interest spread	2.14		%	2.87		%	2.31		%	2.90		%
Net interest spread (FTE) (1)	2.31		%	3.08		%	2.48		%	3.11		%

(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

The economic conditions and growth prospects for our markets, even against the headwinds of inflation and potential recessionary concerns, continue to reflect a solid and positive overall outlook. Worker shortages, supply chain disruptions, higher interest rates and inflationary conditions have had some impact on the level of economic growth in our market areas. Ongoing higher inflation and interest rates could have a negative impact on both our consumer and commercial borrowers. Currently, the Texas markets we serve continue to remain healthy due to both job and population growth.

DEPOSITS

Our deposits increased $151.6 million, or 2.4%, to $6.35 billion at September 30, 2023 from $6.20 billion at December 31, 2022. At September 30, 2023, we had 181,094 total deposit accounts with an average balance of $31,000. Our estimated uninsured deposits was 36.2% as of September 30, 2023. When excluding affiliate deposits (Southside-owned deposits) and public fund deposits (all collateralized), our total estimated deposits without insurance or collateral was 19.4% as of September 30, 2023.

We continued to increase interest rates paid on deposits during the quarter in order to retain deposits. Our noninterest bearing deposits represent approximately 23% of total deposits. During the three months ended September 30, 2023, our cost of interest bearing deposits increased 188 basis points from 0.70% for the three months ended September 30, 2022 to 2.58%. Our cost of total deposits for the third quarter of 2023 increased 147 basis points from 0.51% for the three months ended September 30, 2022 to 1.98%.

Our cost of interest bearing deposits increased 169 basis points, from 0.47% for the nine months ended September 30, 2022, to 2.16% for the nine months ended September 30, 2023. Our cost of total deposits increased 128 basis points, from 0.34% for the nine months ended September 30, 2022, to 1.62% for the nine months ended September 30, 2023.

CAPITAL RESOURCES AND LIQUIDITY

Our capital ratios and contingent liquidity sources remain solid. We utilized the Federal Reserve’s Bank Term Funding Program to reduce our overall funding costs and to enhance our interest rate risk position. As of September 30, 2023, our BTFP borrowings of $291.3 million were at a cost of 4.46%.

The table below shows our total lines of credit, current borrowings as of September 30, 2023, total amounts available for future borrowings, and swapped value (in thousands):


	September 30, 2023
	Line of Credit		Borrowings		Total Available for Future Liquidity		Swapped

FHLB advances	$	1,924,617	$	212,829	$	1,711,788	$	210,000
Federal Reserve discount window	636,863		—		636,863		—
Correspondent bank lines of credit	62,500		—		62,500		—
Federal Reserve Bank Term Funding Program	291,273		291,267		6		—
Total liquidity lines	$	2,915,253	$	504,096	$	2,411,157	$	210,000

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Operating Results

Net income decreased $8.5 million, or 31.5%, for the three months ended September 30, 2023, to $18.4 million compared to the same period in 2022. The decrease in net income was primarily a result of the $5.5 million increase in the provision for credit losses, the $2.2 million decrease in net interest income and the $2.1 million increase in noninterest expense, partially offset by the $755,000 decrease in income tax expense and the $567,000 increase in noninterest income. Earnings per diluted common share decreased $0.24, or 28.6%, to $0.60 for the three months ended September 30, 2023, compared to $0.84 for the three months ended September 30, 2022.

During the nine months ended September 30, 2023, our net income decreased $8.0 million, or 10.3%, to $69.4 million compared to $77.4 million for the same period in 2022. The decrease in net income was primarily a result of the $8.6 million increase in noninterest expense, the $5.7 million increase in the provision for credit losses and the $1.9 million increase in income tax expense, partially offset by the $5.0 million increase in net interest income and the $3.2 million increase in noninterest income. Earnings per diluted common share decreased $0.15, or 6.3%, to $2.24 for the nine months ended September 30, 2023, compared to $2.39 for the same period in 2022.

Financial Condition

Our total assets increased $413.8 million, or 5.5%, to $7.97 billion at September 30, 2023 from $7.56 billion at December 31, 2022. Our securities portfolio increased by $17.7 million, or 0.7%, to $2.64 billion, compared to $2.63 billion at December 31, 2022. The increase in the securities portfolio was due to purchases of three-month U.S. Treasury Bills and to a lesser extent, MBS, partially offset by a decrease in municipal bonds during the nine months ended September 30, 2023. Our FHLB stock increased $3.6 million, or 39.0%, to $12.8 million from $9.2 million at December 31, 2022, due to the increase in our FHLB borrowings during the nine months ended September 30, 2023, increasing the amount of FHLB stock we are required to hold.

Loans at September 30, 2023 were $4.42 billion, an increase of $272.9 million, or 6.6%, compared December 31, 2022, due to increases of $160.8 million in construction loans, $129.6 million in commercial real estate loans and $26.0 million in 1-4 family residential loans. The increases were partially offset by decreases of $26.2 million in commercial loans, $8.7 million in loans to individuals and $8.6 million in municipal loans. Loans held for sale increased $0.7 million, or 107.2%, to $1.4 million at September 30, 2023 from $667,000 at December 31, 2022.

Our nonperforming assets at September 30, 2023 decreased $6.5 million, or 59.7%, to $4.4 million and represented 0.05% of total assets, compared to $10.9 million, or 0.14% of total assets, at December 31, 2022. Nonaccruing loans increased $1.5 million, or 51.7%, to $4.3 million, and the ratio of nonaccruing loans to total loans was 0.10% and 0.07% for September 30, 2023 and December 31, 2022, respectively. There was a $15,000 restructured loan at September 30, 2023, compared to $7.8 million at December 31, 2022. The decrease in restructured loans was due to the adoption of ASU 2022-22 on January 1, 2023, which allowed for the prospective exclusion of loan modifications that are performing, but would have previously required disclosure as troubled debt restructures in nonperforming assets. There were no repossessed assets at September 30, 2023 and $74,000 at December 31, 2022. There was $50,000 and $93,000 of OREO at September 30, 2023 and December 31, 2022, respectively.

Our deposits increased $151.6 million, or 2.4%, to $6.35 billion at September 30, 2023 from $6.20 billion at December 31, 2022, which consisted of an increase of $391.8 million in interest bearing deposits, partially offset by a decrease of $240.3 million in noninterest bearing deposits. The increase in interest bearing deposits included an increase in our brokered deposits of $130.4 million, or 19.8%, as the funding of our cash flow hedge swaps partially transitioned from FHLB advances to brokered deposits to obtain lower cost funding. Additionally, our public fund deposits increased $160.3 million, or 17.7%, to $1.07 billion at September 30, 2023 from $907.7 million at December 31, 2022.

Total FHLB borrowings increased $59.5 million, or 38.8%, to $212.8 million at September 30, 2023 from $153.4 million at December 31, 2022.

Our total shareholders’ equity at September 30, 2023 decreased 2.3%, or $17.4 million, to $728.6 million, or 9.1% of total assets, compared to $746.0 million, or 9.9% of total assets, at December 31, 2022. The decrease in shareholders’ equity was the result of the repurchase of $40.9 million of our common stock, cash dividends paid of $32.4 million and other comprehensive loss of $17.5 million, partially offset by net income of $69.4 million, stock compensation expense of $2.7 million, common stock issued under our dividend reinvestment plan of $908,000 and net issuance of common stock under employee stock plans of $424,000.

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.

Due to disruptions in the banking industry during the first quarter of 2023, we increased the balance of securities pledged as collateral at the FRDW in preparation for potential liquidity needs and utilized the BTFP as a source of wholesale funding to reduce interest cost and interest rate risk. We ended the third quarter of 2023 with approximately $636.9 million in available liquidity between the FRDW and the BTFP in addition to the approximately $1.71 billion credit line available from FHLB due primarily to the blanket lien on our loan portfolio and to a lesser extent, securities available as collateral. At September 30, 2023, the estimated deposits, without insurance or collateral, to total deposits, excluding affiliate deposits (Southside-owned deposits) was 19.4%, or $1.23 billion.

During the nine months ended September 30, 2023, we entered into $350 million of additional cash flow hedge swaps, $100 million of which were terminated in the second quarter. We also replaced $60 million of brokered deposits with FHLB advances as the funding source for cash flow hedge swaps, bringing this funding source to $210 million. At September 30, 2023, brokered deposits funded $550 million of our $760 million remaining cash flow hedge swaps. As of September 30, 2023, a pre-tax unrealized gain of $39.4 million was recognized in other comprehensive income, and there was no ineffective portion of these hedges. We continue to evaluate the lowest cost funding sources for our cash flow swaps and will utilize either brokered deposits, FHLB advances or FRDW borrowings, or a combination of the three funding sources. At September 30, 2023, the majority of the securities portfolio was funded by non-maturity deposits with wholesale funding accounting for approximately 47% of the funding source, of which approximately 59% is swapped at a fixed rate, providing protection from rising interest rates.

We utilize wholesale funding and securities to enhance overall profitability to determine the appropriate leverage of our capital, determining acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. This balance sheet strategy currently consists of borrowing funds from the brokered market, FHLB and the Federal Reserve through the FRDW and BTFP. These 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 U.S. agency MBS often carry lower yields than loans we make, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government, (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 2022 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 3. Quantitative and Qualitative Disclosures about Market Risk” in this Quarterly Report on Form 10-Q.

Our securities portfolio increased slightly from $2.63 billion at December 31, 2022 to $2.64 billion at September 30, 2023. The increase in the securities portfolio was due to securities purchased during the nine months ended September 30, 2023, which more than offset sales of securities and principal payments.

During the nine months ended September 30, 2023, the composition of the securities portfolio continued to change as U.S. Treasury Bills and MBS increased while the remaining categories in the portfolio decreased. The increase in MBS was attributable to purchases of U.S. Agency MBS, partially offset by MBS sales and principal payments. During the nine months ended September 30, 2023, we purchased $888.5 million in short-term U.S. Treasury Bills, $268.3 million in MBS and $5.8 million in investment grade subordinated corporate debt. Sales during the nine months ended September 30, 2023, included $372.7 million in U.S. Treasury Bills, $205.7 million in municipal securities and $174.7 million in MBS to align the investment portfolio with the current balance sheet strategy. Sales of AFS securities for the three and nine months ended September 30, 2023, resulted in a net realized gain of $11,000 and a net realized loss of $5.6 million, respectively, which was partially offset by the sale of equity securities that resulted in a net gain of $5.1 million for the nine months ended September 30, 2023.

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At September 30, 2023, securities as a percentage of assets totaled 33.2%, compared to 34.7% at December 31, 2022, due primarily to a $413.8 million, or 5.5%, increase in the total assets. Our balance sheet management strategy is dynamic and is continually evaluated as market conditions warrant.

During the year ended 2022, we entered into partial term fair value hedges for certain of our fixed rate callable AFS municipal securities. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to 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, 2023, hedged securities with a carrying amount of $609.1 million are included in our AFS securities portfolio in our consolidated balance sheets representing approximately 46% and 86% of the AFS securities portfolio and the AFS municipal portfolio, respectively. 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. As of September 30, 2023, a pre-tax unrealized gain of $42.2 million was recognized in other comprehensive income, and there was no ineffective portion of these hedges.

With respect to funding sources, we primarily utilize deposits and to a lesser extent wholesale funding to achieve our strategy of minimizing cost while achieving overall interest rate risk objectives as well as the liability management objectives of the ALCO. Our primary wholesale funding sources are brokered deposits, FHLB and borrowings from the Federal Reserve through the FRDW and BTFP. Our FHLB borrowings increased 38.8%, or $59.5 million, to $212.8 million at September 30, 2023 from $153.4 million at December 31, 2022.

As of September 30, 2023, our total wholesale funding as a percentage of deposits, not including brokered deposits, increased to 23.3%, from 18.1% at December 31, 2022, and 19.2% at September 30, 2022.

Our brokered deposits consist of CDs and non-maturity deposits. Our brokered CDs decreased $109.3 million, or 49.5%, from $220.9 million at December 31, 2022 to $111.5 million at September 30, 2023. At September 30, 2023, our brokered CDs had a weighted average cost of 525 basis points and remaining maturities of approximately 3 months or less. Our brokered non-maturity deposits increased to $678.1 million at September 30, 2023, of which $550.0 million are related to our cash flow hedges, from $438.4 million at December 31, 2022, with a weighted average cost of 301 basis points and 126 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of $1.41 billion, with an additional $100 million of flexibility for deposits maturing within 30 days. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.

In connection with $760.0 million of our wholesale funds, the Bank has entered into various variable rate agreements and fixed or variable rate short-term pay agreements with an interest rate tied to overnight SOFR. In connection with $760.0 million and $575.0 million of the agreements outstanding at September 30, 2023 and December 31, 2022, 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 attributable to fluctuations in the underlying SOFR interest rate. The interest rate swap contracts had an average interest rate of 2.13% with a remaining average weighted maturity of 2.4 years at September 30, 2023. 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.

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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.

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Interest income:
Loans	$	64,110	$	45,257	$	177,570	$	118,489
Taxable investment securities	8,731		4,896		23,216		14,136
Tax-exempt investment securities	13,758		11,482		41,394		32,306
MBS	4,426		4,770		12,585		12,025
FHLB stock and equity investments	265		101		889		291
Other interest earning assets	1,788		374		5,148		606
Total interest income	93,078		66,880		260,802		177,853
Interest expense:
Deposits	30,951		7,887		72,536		15,388
FHLB borrowings	1,174		1,078		5,347		1,668
Subordinated notes	962		1,004		2,955		3,002
Trust preferred subordinated debentures	1,178		669		3,309		1,496
Repurchase agreements	1,048		54		2,423		82
Other borrowings	4,492		673		13,690		718
Total interest expense	39,805		11,365		100,260		22,354
Net interest income	$	53,273	$	55,515	$	160,542	$	155,499

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 nine months ended September 30, 2023, the Federal Reserve increased the target federal funds rate by 100 basis points to 550 basis points and has indicated it anticipates interest rates will remain higher for longer. The increase in the federal funds rate has increased our net interest income. However, as the federal funds rate increases further and the yield curve remains inverted, it may be less beneficial to our net interest income.

Net interest income for the three months ended September 30, 2023 decreased $2.2 million, or 4.0%, compared to the same period in 2022. The decrease in net interest income for the three months ended September 30, 2023 was due to the increase in interest expense on our interest bearing liabilities exceeding the increase in interest income on our interest earning assets. The increase in interest expense was due to higher interest rates and an increase in the average balance of our interest bearing liabilities, partially offset by the increase in interest income, a result of the increase in the average yield and the average balance of interest earning assets. Total interest income increased $26.2 million, or 39.2%, to $93.1 million for the three months ended September 30, 2023, compared to $66.9 million during the same period in 2022. Total interest expense increased $28.4 million, or 250.2%, to $39.8 million for the three months ended September 30, 2023, compared to $11.4 million for the same period in 2022. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.85% and 3.02%, respectively, for the three months ended September 30, 2023, compared to 3.15% and 3.36%, respectively, for the same period in 2022, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.14% and 2.31%, respectively, compared to 2.87% and 3.08%, respectively, for the same period in 2022.

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Net interest income was $160.5 million for the nine months ended September 30, 2023, compared to $155.5 million for the same period in 2022, an increase of $5.0 million, or 3.2%. The increase in net interest income for the nine months ended September 30, 2023 was due to the increase in the average yield as well as the average balance of interest earning assets, partially offset by the increase in interest expense on our interest bearing liabilities due to the increase in interest rates and an increase in the average balance of our interest bearing liabilities. Total interest income increased $82.9 million, or 46.6%, to $260.8 million for the nine months ended September 30, 2023, compared to $177.9 million for the same period in 2022. Total interest expense increased $77.9 million, or 348.5%, to $100.3 million for the nine months ended September 30, 2023, compared to $22.4 million for the same period in 2022. Our net interest margin and net interest margin (FTE), a non-GAAP measure, decreased to 2.95% and 3.13%, respectively, for the nine months ended September 30, 2023, compared to 3.08% and 3.29%, respectively, for the same period in 2022, and our net interest spread and net interest spread (FTE), also a non-GAAP measure, decreased to 2.31% and 2.48%, respectively, compared to 2.90% and 3.11%, respectively, for the same period in 2022. 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 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):


	Three Months Ended September 30, 2023 Compared to 2022
	Change Attributable to				Total
Fully Taxable-Equivalent Basis:	Average Volume		Average Yield/Rate		Change
Interest income on:
Loans (1)	$	4,712	$	14,054	$	18,766
Loans held for sale	15		4		19
Taxable investment securities	2,578		1,257		3,835
Tax-exempt investment securities (1)	(2,177)		3,954		1,777
Mortgage-backed and related securities	(751)		407		(344)
FHLB stock, at cost, and equity investments	(7)		171		164
Interest earning deposits	174		256		430
Federal funds sold	444		540		984
Total earning assets	4,988		20,643		25,631
Interest expense on:
Savings accounts	(49)		1,026		977
CDs	1,349		6,642		7,991
Interest bearing demand accounts	46		14,050		14,096
FHLB borrowings	309		(213)		96
Subordinated notes, net of unamortized debt issuance costs	(49)		7		(42)
Trust preferred subordinated debentures, net of unamortized debt issuance costs	—		509		509
Repurchase agreements	337		657		994
Other borrowings	2,591		1,228		3,819
Total interest bearing liabilities	4,534		23,906		28,440
Net change	$	454	$	(3,263)	$	(2,809)

(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 increase in total interest income was primarily attributable to an increase in the average yield on interest earning assets to 5.15% from 4.00% for the same period in 2022, as well as an increase in the average balance of interest earning assets of $418.6 million, or 6.0%, for the three months ended September 30, 2023, compared to the same period in 2022. The increase in total interest expense for the three months ended September 30, 2023, was primarily attributable to the increase in interest rates on our interest bearing liabilities to 2.84% from 0.92% for the same period in 2022, and an increase in the average balance of our interest bearing liabilities of $666.9 million, or 13.6%, for the three months ended September 30, 2023, compared to the same period in 2022.

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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, 2023 and 2022. 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.


	Average Balances with Average Yields and Rates (Annualized)
	(unaudited)
	Three Months Ended
	September 30, 2023						September 30, 2022
	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Loans (1)	$	4,396,184	$	64,758	5.84	%	$	4,012,547	$	45,992	4.55	%
Loans held for sale	1,537		26		6.71	%	606		7		4.58	%
Securities:
Taxable investment securities (2)	912,789		8,731		3.79	%	626,136		4,896		3.10	%
Tax-exempt investment securities (2)	1,510,044		16,232		4.26	%	1,750,952		14,455		3.28	%
Mortgage-backed and related securities (2)	442,908		4,426		3.96	%	520,501		4,770		3.64	%
Total securities	2,865,741		29,389		4.07	%	2,897,589		24,121		3.30	%
FHLB stock, at cost, and equity investments	22,363		265		4.70	%	24,013		101		1.67	%
Interest earning deposits	37,891		535		5.60	%	18,664		105		2.23	%
Federal funds sold	94,441		1,253		5.26	%	46,106		269		2.31	%
Total earning assets	7,418,157		96,226		5.15	%	6,999,525		70,595		4.00	%
Cash and due from banks	106,348						102,840
Accrued interest and other assets	400,850						433,532
Less: Allowance for loan losses	(36,493)						(35,706)
Total assets	$	7,888,862					$	7,500,191
LIABILITIES AND SHAREHOLDERS’ EQUITY
Savings accounts	$	622,246	1,458		0.93	%	$	685,947	481		0.28	%
CDs	949,894		9,443		3.94	%	588,212		1,452		0.98	%
Interest bearing demand accounts	3,189,048		20,050		2.49	%	3,164,961		5,954		0.75	%
Total interest bearing deposits	4,761,188		30,951		2.58	%	4,439,120		7,887		0.70	%
FHLB borrowings	230,184		1,174		2.02	%	173,838		1,078		2.46	%
Subordinated notes, net of unamortized debt issuance costs	93,817		962		4.07	%	98,621		1,004		4.04	%
Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,268		1,178		7.75	%	60,263		669		4.40	%
Repurchase agreements	104,070		1,048		4.00	%	30,530		54		0.70	%
Other borrowings	317,913		4,492		5.61	%	98,174		673		2.72	%
Total interest bearing liabilities	5,567,440		39,805		2.84	%	4,900,546		11,365		0.92	%
Noninterest bearing deposits	1,441,738						1,746,245
Accrued expenses and other liabilities	109,490						101,881
Total liabilities	7,118,668						6,748,672
Shareholders’ equity	770,194						751,519
Total liabilities and shareholders’ equity	$	7,888,862					$	7,500,191
Net interest income (FTE)			$	56,421					$	59,230
Net interest margin (FTE)					3.02	%					3.36	%
Net interest spread (FTE)					2.31	%					3.08	%

(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, 2023 and 2022, loans totaling $4.3 million and $3.0 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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Year-to-Date Analysis of Changes in Interest Income and Interest Expense


	Nine Months Ended September 30, 2023 Compared to 2022
	Change Attributable to				Total
Fully Taxable-Equivalent Basis:	Average Volume		Average Yield/Rate		Change
Interest income on:
Loans (1)	$	13,019	$	45,821	$	58,840
Loans held for sale	19		17		36
Taxable investment securities	5,469		3,611		9,080
Tax-exempt investment securities (1)	(1,758)		9,901		8,143
Mortgage-backed and related securities	(1,766)		2,326		560
Federal Home Loan Bank stock, at cost, and equity investments	71		527		598
Interest earning deposits	94		1,962		2,056
Federal funds sold	962		1,524		2,486
Total earning assets	16,110		65,689		81,799
Interest expense on:
Savings accounts	(40)		3,161		3,121
CDs	1,994		16,597		18,591
Interest bearing demand accounts	(546)		35,982		35,436
FHLB borrowings	2,953		726		3,679
Subordinated notes, net of unamortized debt issuance costs	(56)		9		(47)
Trust preferred subordinated debentures, net of unamortized debt issuance costs	—		1,813		1,813
Repurchase agreements	512		1,829		2,341
Other borrowings	11,865		1,107		12,972
Total interest bearing liabilities	16,682		61,224		77,906
Net change	$	(572)	$	4,465	$	3,893

The increase in total interest income was attributable to the increase in the average yield on earning assets to 4.97% from 3.74% for the same period in 2022 as well as an increase in average earning assets of $526.3 million, or 7.8%, for the nine months ended September 30, 2023, compared to the same period in 2022. The increase in total interest expense for the nine months ended September 30, 2023 was primarily attributable to the increase in interest rates on our interest bearing liabilities to 2.49% from 0.63% for the same period in 2022 and an increase in the average balance of our interest bearing liabilities of $674.9 million, or 14.3%, when compared to the same period in 2022.

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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, 2023 and 2022. 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.


	Average Balances with Average Yields and Rates (Annualized)
	(unaudited)
	Nine Months Ended
	September 30, 2023						September 30, 2022
	Average Balance		Interest		Average Yield/Rate		Average Balance		Interest		Average Yield/Rate
ASSETS
Loans (1)	$	4,241,676	$	179,545	5.66	%	$	3,855,844	$	120,705	4.19	%
Loans held for sale	1,620		69		5.69	%	1,102		33		4.00	%
Securities:
Taxable investment securities (2)	843,846		23,216		3.68	%	629,413		14,136		3.00	%
Tax-exempt investment securities (2)	1,587,656		48,880		4.12	%	1,656,691		40,737		3.29	%
Mortgage-backed and related securities (2)	433,335		12,585		3.88	%	501,330		12,025		3.21	%
Total securities	2,864,837		84,681		3.95	%	2,787,434		66,898		3.21	%
FHLB stock, at cost, and equity investments	25,071		889		4.74	%	20,796		291		1.87	%
Interest earning deposits	60,623		2,310		5.09	%	46,972		254		0.72	%
Federal funds sold	75,499		2,838		5.03	%	30,837		352		1.53	%
Total earning assets	7,269,326		270,332		4.97	%	6,742,985		188,533		3.74	%
Cash and due from banks	105,885						103,390
Accrued interest and other assets	406,160						492,173
Less: Allowance for loan losses	(36,564)						(35,746)
Total assets	$	7,744,807					$	7,302,802
LIABILITIES AND SHAREHOLDERS’ EQUITY
Savings accounts	$	645,415	4,201		0.87	%	$	669,632	1,080		0.22	%
CDs	845,851		21,215		3.35	%	556,728		2,624		0.63	%
Interest bearing demand accounts	3,005,449		47,120		2.10	%	3,146,350		11,684		0.50	%
Total interest bearing deposits	4,496,715		72,536		2.16	%	4,372,710		15,388		0.47	%
FHLB borrowings	281,260		5,347		2.54	%	117,724		1,668		1.89	%
Subordinated notes, net of unamortized debt issuance costs	96,753		2,955		4.08	%	98,587		3,002		4.07	%
Trust preferred subordinated debentures, net of unamortized debt issuance costs	60,266		3,309		7.34	%	60,262		1,496		3.32	%
Repurchase agreements	89,282		2,423		3.63	%	27,393		82		0.40	%
Other borrowings	362,684		13,690		5.05	%	35,421		718		2.71	%
Total interest bearing liabilities	5,386,960		100,260		2.49	%	4,712,097		22,354		0.63	%
Noninterest bearing deposits	1,506,431						1,697,779
Accrued expenses and other liabilities	91,784						92,161
Total liabilities	6,985,175						6,502,037
Shareholders’ equity	759,632						800,765
Total liabilities and shareholders’ equity	$	7,744,807					$	7,302,802
Net interest income (FTE)			$	170,072					$	166,179
Net interest margin (FTE)					3.13	%					3.29	%
Net interest spread (FTE)					2.48	%					3.11	%

(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, 2023 and 2022, loans totaling $4.3 million and $3.0 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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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):


	Three Months Ended September 30,				2023
					Change From
	2023		2022		2022
Deposit services	$	6,479	$	6,241	$	238	3.8	%
Net gain (loss) on sale of securities AFS	11		(99)		110		111.1	%
Net gain on sale of equity securities	—		—		—		—
Gain on sale of loans	96		109		(13)		(11.9)	%
Trust fees	1,522		1,407		115		8.2	%
BOLI	790		720		70		9.7	%
Brokerage services	760		701		59		8.4	%
Other noninterest income	1,178		1,190		(12)		(1.0)	%
Total noninterest income	$	10,836	$	10,269	$	567	5.5	%



	Nine Months Ended September 30,			2023
			Change From
		2023		2022		2022
Deposit services				$	19,192	$	19,365	$	(173)	(0.9)	%
Net gain (loss) on sale of securities AFS				(5,590)		(3,819)		(1,771)		(46.4)	%
Net gain on sale of equity securities				5,058		—		5,058		100.0	%
Gain on sale of loans				385		495		(110)		(22.2)	%
Trust fees				4,479		4,421		58		1.3	%
BOLI				3,221		2,131		1,090		51.1	%
Brokerage services				2,361		2,608		(247)		(9.5)	%
Other noninterest income				4,227		4,890		(663)		(13.6)	%
Total noninterest income				$	33,333	$	30,091	$	3,242	10.8	%

The 5.5% increase in noninterest income for the three months ended September 30, 2023, when compared to the same period in 2022, was due to increases in deposit services income and trust fees and a net gain on sale of securities AFS. The 10.8% increase in noninterest income for the nine months ended September 30, 2023, when compared to the same period in 2022, was due to a net gain on sale of equity securities and an increase in BOLI income, partially offset by an increase in net loss on sale of securities AFS and a decrease in other noninterest income.

During the three and nine months ended September 30, 2023, we sold MBS and municipal securities that resulted in a net gain on sale of AFS securities of $11,000 and a net loss on sale of AFS securities of $5.6 million, respectively.

During the nine months ended September 30, 2023, we sold equity securities that resulted in a net gain of $5.1 million.

Gain on sale of loans decreased for the three and nine months ended September 30, 2023, when compared to the same periods in 2022, due to a decrease in the volume of loans sold and a decrease in margins on loan sales as interest rates continued to increase in 2023.

Trust fees increased for the three months ended September 30, 2023, when compared to the same period in 2022, due to an increase in accounts under management during the quarter.

The increase in BOLI income for the nine months ended September 30, 2023, when compared to the same period in 2022, was primarily due to a death benefit of $951,000 realized in the first quarter of 2023 for a former covered officer.

Other noninterest income decreased for the nine months ended September 30, 2023, when compared to the same period in 2022, primarily due to decreases in investment income and mortgage servicing fee income, partially offset by a gain recognized on the repurchase of $5.0 million of our subordinated notes and an increase in equity investment income.

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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 (dollars in thousands):


	Three Months Ended September 30,				2023
					Change From
	2023		2022		2022
Salaries and employee benefits	$	21,241	$	21,368	$	(127)	(0.6)	%
Net occupancy	3,796		3,847		(51)		(1.3)	%

Advertising, travel & entertainment	1,062		789		273		34.6	%
ATM expense	358		317		41		12.9	%
Professional fees	1,472		1,412		60		4.2	%
Software and data processing	2,432		1,736		696		40.1	%
Communications	359		497		(138)		(27.8)	%
FDIC insurance	902		485		417		86.0	%
Amortization of intangibles	407		550		(143)		(26.0)	%

Other noninterest expense	3,524		2,463		1,061		43.1	%
Total noninterest expense	$	35,553	$	33,464	$	2,089	6.2	%



	Nine Months Ended September 30,			2023
			Change From
		2023		2022		2022
Salaries and employee benefits				$	64,473	$	61,666	$	2,807	4.6	%
Net occupancy				11,220		11,157		63		0.6	%

Advertising, travel & entertainment				2,966		2,242		724		32.3	%
ATM expense				1,033		954		79		8.3	%
Professional fees				4,036		3,486		550		15.8	%
Software and data processing				6,751		5,106		1,645		32.2	%
Communications				1,034		1,509		(475)		(31.5)	%
FDIC insurance				2,666		1,434		1,232		85.9	%
Amortization of intangibles				1,327		1,758		(431)		(24.5)	%

Other noninterest expense				9,889		7,453		2,436		32.7	%
Total noninterest expense				$	105,395	$	96,765	$	8,630	8.9	%

The increase in noninterest expense for the three months ended September 30, 2023, when compared to the same period in 2022, was due to increases in other noninterest expense, software and data processing expense, FDIC insurance and advertising, travel and entertainment. The increase in noninterest expense for the nine months ended September 30, 2023, when compared to the same period in 2022, was due to increases in salaries and employee benefits, other noninterest expense, software and data processing expense, FDIC insurance, advertising, travel and entertainment, and professional fees.

Salaries and employee benefits increased for the nine months ended September 30, 2023, when compared to the same period in 2022, due to an increase in direct salary expense, partially offset by a decrease in retirement expense.

For the nine months ended September 30, 2023, direct salary expense increased $3.3 million, or 6.1%, when compared to the same period in 2022, primarily due to normal salary increases effective in the first quarter of 2023.

Retirement expense, included in salaries and employee benefits, decreased $448,000, or 17.9%, for the nine months ended September 30, 2023, when compared to the same period in 2022. This decrease was primarily due to decreases in our split dollar expense and deferred compensation expense.

Advertising, travel and entertainment expense increased for the three months ended September 30, 2023, when compared to the same period in 2022, primarily due to increases in media and other advertising expense, travel related expenses and conference registration fees, and increased for the nine months ended September 30, 2023, when compared to the same period in 2022, primarily due to increases in travel related expenses, media and other advertising expense, conference registrations fees and donations.

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ATM expense increased for the three months ended September 30, 2023, when compared to the same period in 2022, due primarily to an increase in ATM maintenance expense.

Professional fees increased for the nine months ended September 30, 2023, when compared to the same period in 2022, due to an increase in legal and consulting fees.

Software and data processing expense increased for the three and nine months ended September 30, 2023, when compared to the same periods in 2022, due to new software contracts and increases in existing contract renewal costs.

Communications expense decreased for the three and nine months ended September 30, 2023, when compared to the same periods in 2022, driven by a decrease in phone and internet costs due to a change in vendors.

FDIC insurance increased for the three and nine months ended September 30, 2023, when compared to the same periods in 2022, due to an increase in the rate assessed by the FDIC and an increase in our assessment base resulting from an increase in our total assets.

Amortization of intangibles decreased for the three and nine months ended September 30, 2023, when compared to the same periods in 2022, 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.

The primary increase in other noninterest expense for the three and nine months ended September 30, 2023, when compared to the same periods in 2022, was in non-service cost retirement expense related to the Retirement Plan. Several additional expenses increased during the three and nine months ended September 30, 2023, including advantage check card losses, other losses and computer supplies expense.

Income Taxes

Pre-tax income for the three and nine months ended September 30, 2023 was $21.6 million and $81.6 million, respectively, a decrease of 30.0% and 6.9%, compared to $30.8 million and $87.7 million for the same periods in 2022. We recorded income tax expense of $3.1 million and $12.2 million, for the three and nine months ended September 30, 2023, respectively, compared to income tax expense of $3.9 million and $10.3 million for the same periods in 2022. The ETR as a percentage of pre-tax income was 14.5% and 15.0% for the three and nine months ended September 30, 2023, compared to an ETR as a percentage of pre-tax income of 12.6% and 11.8% for the same periods in 2022. The increase in the income tax expense for the nine months ended September 30, 2023 was primarily a result of a decrease in net tax-exempt income as a percentage of pre-tax income as compared to the same periods in 2022.

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 $41.2 million at September 30, 2023 as compared to $34.7 million at December 31, 2022. The increase in the net deferred tax asset is primarily the result of an increase in unrealized losses in the AFS securities portfolio.

See “Note 11 – Income Taxes” to our consolidated financial statements included in this report. No valuation allowance was recorded at September 30, 2023 or December 31, 2022, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years.

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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 2022 Form 10-K for a discussion of our primary market area and the geographic concentration of our loan portfolio as of December 31, 2022. There were no substantial changes in these concentrations during the nine months ended September 30, 2023. 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 are made primarily throughout the state of Texas. Municipal loans are 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):


							Compared to
							December 31, 2022		September 30, 2022
	September 30, 2023		December 31, 2022		September 30, 2022		Change (%)		Change (%)

Real estate loans:
Construction	$	720,515	$	559,681	$	554,345	28.7	%	30.0	%
1-4 family residential	689,492		663,519		646,692		3.9	%	6.6	%
Commercial	2,117,306		1,987,707		1,901,921		6.5	%	11.3	%
Commercial loans	385,816		412,064		433,538		(6.4)	%	(11.0)	%
Municipal loans	441,512		450,067		449,219		(1.9)	%	(1.7)	%
Loans to individuals	65,992		74,653		77,780		(11.6)	%	(15.2)	%
Total loans	$	4,420,633	$	4,147,691	$	4,063,495	6.6	%	8.8	%

Our total loan portfolio increased $272.9 million, or 6.6%, and $357.1 million, or 8.8%, at September 30, 2023 compared to December 31, 2022 and September 30, 2022, respectively, with increases in all the real estate loan categories, partially offset by decreases in commercial loans, municipal loans and loans to individuals.

At September 30, 2023, our real estate loans represented 79.8% of our loan portfolio and were comprised of commercial real estate loans of 60.0%, 1-4 family residential loans of 19.6% and construction loans of 20.4%. 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.

PCD Loans

We have purchased certain loans that as of the date of purchase have experienced more-than-insignificant deterioration in credit quality since origination. Management evaluates these loans against a probability threshold to determine if substantially all of the contractually required payments will be received. PCD loans are recorded at the purchase price plus an allowance for credit losses which becomes the PCD loan’s initial amortized cost. The non-credit related discount or premium, the difference between the initial amortized cost and the par value, will be amortized into interest income over the life of the loan. Any further changes to the allowance for credit losses are recorded through provision expense. In accordance with the adoption of ASU 2016-13, management did not reassess whether PCI assets met the criteria of PCD assets and elected to not maintain pools of loans as of the date of adoption. All PCD loans are evaluated based upon product type within the underlying segment.

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

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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):


							Compared to
							December 31, 2022		September 30, 2022
	September 30, 2023		December 31, 2022		September 30, 2022		Change (%)		Change (%)







Nonaccrual loans	$	4,316	$	2,846	$	3,039	51.7	%	42.0	%
Accruing loans past due more than 90 days	—		—		—		—		—
Restructured loans (1)	15		7,849		8,481		(99.8)	%	(99.8)	%
OREO	50		93		162		(46.2)	%	(69.1)	%
Repossessed assets	—		74		35		(100.0)	%	(100.0)	%
Total nonperforming assets	$	4,381	$	10,862	$	11,717	(59.7)	%	(62.6)	%

Total loans	$	4,420,633	$	4,147,691	$	4,063,495
Allowance for loan losses at end of period	41,760		36,515		36,506


Ratio of nonaccruing loans to:
Total loans	0.10	%	0.07	%	0.07	%
Ratio of nonperforming assets to:
Total assets	0.05	%	0.14	%	0.16	%
Total loans	0.10	%	0.26	%	0.29	%
Total loans and OREO	0.10	%	0.26	%	0.29	%
Ratio of allowance for loan losses to:
Nonaccruing loans	967.56	%	1,283.03	%	1,201.25	%
Nonperforming assets	953.21	%	336.17	%	311.56	%
Total loans	0.94	%	0.88	%	0.90	%
Net charge-offs to average loans outstanding	0.05	%	0.02	%	0.01	%

(1) Pursuant to our adoption of ASU 2022-02, effective January 1, 2023, we prospectively discontinued the recognition and measurement guidance previously required on troubled debt restructures. As a result, “restructured” loans as of September 30, 2023 exclude any loan modifications that are performing but would have previously required disclosure as troubled debt restructures.

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

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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 uncertainty related to prolonged inflation, higher interest rates and recessionary concerns, as based on known and knowable information as of September 30, 2023.

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, 2023, our review of the loan portfolio indicated that an allowance for loan losses of $41.8 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model, rising interest rates and heightened inflation, may require future adjustments to the allowance for loan losses.

During the nine months ended September 30, 2023, the allowance for loan losses increased $5.3 million, or 14.4%, to $41.8 million, or 0.94% of total loans, when compared to $36.5 million, or 0.88% of total loans at December 31, 2022.

For the three and nine months ended September 30, 2023, loan charge-offs were $1.3 million and $2.6 million, respectively, and recoveries were $378,000 and $1.2 million, respectively. For the three and nine months ended September 30, 2022, loan charge-offs were $686,000 and $1.7 million, respectively, and recoveries were $449,000 and $1.5 million, respectively. For the three and nine months ended September 30, 2023, we recorded a provision for credit losses for loans of $6.3 million and $6.7 million, respectively. For the three and nine months ended September 30, 2022, we recorded a provision for credit losses for loans of $1.3 million and $1.4 million, respectively.

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

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022

Balance at beginning of period	$	3,207	$	1,891	$	3,687	$	2,384

Provision for (reversal of) off-balance-sheet credit exposures	646		200		166		(293)
Balance at end of period	$	3,853	$	2,091	$	3,853	$	2,091

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.

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Capital Resources and Liquidity

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. We also elected, for a five-year transitional period, the effects of credit loss accounting under CECL from Common Equity Tier 1, as further discussed below. 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, 2023 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, 2023.

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 and off-balance sheet exposures. Tier 2 capital for the Company also includes $93.8 million of qualified subordinated debt as of September 30, 2023. 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. In accordance with CECL guidance, a CECL transitional amount totaling $4.1 million has been added back to CET1 as of September 30, 2023, representing 50% of the $8.2 million transitional amount at December 31, 2022.

Management believes that, as of September 30, 2023, 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 of directors.

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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 Actions Provisions
September 30, 2023	Amount		Ratio		Amount		Ratio		Amount		Amount
Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	686,806	12.27	%	$	251,949	4.50	%	N/A		N/A
Bank Only	$	825,559	14.75	%	$	251,932	4.50	%	$	363,901	6.50	%

Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	745,264	13.31	%	$	335,932	6.00	%	N/A		N/A
Bank Only	$	825,559	14.75	%	$	335,909	6.00	%	$	447,879	8.00	%

Total Capital (to Risk-Weighted Assets)
Consolidated	$	879,571	15.71	%	$	447,909	8.00	%	N/A		N/A
Bank Only	$	866,028	15.47	%	$	447,879	8.00	%	$	559,848	10.00	%

Tier 1 Capital (to Average Assets) (1)
Consolidated	$	745,264	9.61	%	$	310,319	4.00	%	N/A		N/A
Bank Only	$	825,559	10.64	%	$	310,227	4.00	%	$	387,784	5.00	%


	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Actions Provisions
December 31, 2022	Amount		Ratio		Amount		Ratio		Amount		Ratio










Common Equity Tier 1 (to Risk-Weighted Assets)
Consolidated	$	687,686	12.63	%	$	245,107	4.50	%	N/A		N/A
Bank Only	$	823,323	15.12	%	$	245,085	4.50	%	$	354,012	6.50	%

Tier 1 Capital (to Risk-Weighted Assets)
Consolidated	$	746,140	13.70	%	$	326,809	6.00	%	N/A		N/A
Bank Only	$	823,323	15.12	%	$	326,780	6.00	%	$	435,707	8.00	%

Total Capital (to Risk-Weighted Assets)
Consolidated	$	877,281	16.11	%	$	435,746	8.00	%	N/A		N/A
Bank Only	$	855,790	15.71	%	$	435,707	8.00	%	$	544,633	10.00	%

Tier 1 Capital (to Average Assets) (1)
Consolidated	$	746,140	9.96	%	$	299,511	4.00	%	N/A		N/A
Bank Only	$	823,323	11.00	%	$	299,410	4.00	%	$	374,263	5.00	%

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

As of September 30, 2023, 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 2022 Form 10-K for further discussion of our capital requirements.

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


	Three Months Ended September 30,
	2023		2022
Return on average assets	0.93	%	1.43	%
Return on average shareholders’ equity	9.50	%	14.23	%
Dividend payout ratio – Basic	58.33	%	40.48	%
Dividend payout ratio – Diluted	58.33	%	40.48	%
Average shareholders’ equity to average total assets	9.76	%	10.02	%
	Nine Months Ended September 30,
	2023		2022
Return on average assets	1.20	%	1.42	%
Return on average shareholders’ equity	12.21	%	12.92	%
Dividend payout ratio – Basic	46.67	%	42.50	%
Dividend payout ratio – Diluted	46.88	%	42.68	%
Average shareholders’ equity to average total assets	9.81	%	10.97	%

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, 2023, these investments were 6.3% of total assets, as compared with 2.4% for December 31, 2022 and 2.6% for September 30, 2022. The increase to 6.3% at September 30, 2023 as compared to December 31, 2022 and September 30, 2022, is reflective of increases in the short-term investment portfolio and interest earning deposits, partially offset by the increase in total assets. 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, TIB – The Independent Bankers Bank and Comerica Bank for $40.0 million, $15.0 million and $7.5 million, respectively. There were no federal funds purchased at September 30, 2023 or December 31, 2022. 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, 2023, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $636.9 million. There were no borrowings from the FRDW at September 30, 2023, and $188.0 million at December 31, 2022. To provide more stability and to assure that banks have the ability to meet the needs of all of their depositors, the Federal Reserve created the BTFP in the first quarter of 2023. At September 30, 2023, the amount of additional funding the Bank could obtain from the BTFP, collateralized by securities, was approximately $6,000. There were $291.3 million in borrowings from the BTFP at September 30, 2023. At September 30, 2023, the amount of additional funding the Bank could obtain from FHLB, collateralized by securities, FHLB stock and nonspecified loans and securities, was approximately $1.71 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, 2023, the line had one outstanding letter of credit for $155,000. The Bank currently has no outstanding letters of credit from FHLB held as collateral for its public fund deposits.

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.

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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.

Subsequent Events

Subsequent to September 30, 2023, and through October 24, 2023, we purchased 141,480 shares of common stock at an average price of $28.56 pursuant to the Stock Repurchase Plan.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 2022 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 additional rate increases during the remainder of 2023.

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.


	Anticipated impact over the next 12 months
	September 30,
Rate projections:	2023		2022
Increase:
100 basis points	3.14	%	4.26	%
200 basis points	6.53	%	7.19	%

Decrease:
50 basis points	(2.22)	%	(2.13)	%
100 basis points	(4.71)	%	(4.54)	%
200 basis points	(9.60)	%	(10.28)	%

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.

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Economic conditions and growth prospects are currently impacted by record inflation and potential recessionary concerns. Furthermore, worker shortages, supply chain disruptions and inflationary conditions, have had some impact on the level of economic growth in our market areas. Ongoing higher inflation levels and higher interest rates could have a negative impact on the financial condition of both our consumer and commercial borrowers.

The ALCO monitors various liquidity ratios to ensure a satisfactory liquidity position for us. 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 need to be made to the asset and liability mixes to mitigate the change in net interest income under these various interest rate scenarios.

ITEM 4. CONTROLS AND PROCEDURES

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, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are a party to various litigation in the normal course of business. Management, after consulting with our legal counsel, believes that any liability resulting from litigation will not have a material effect on our financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors previously disclosed in the First Quarter Form 10-Q and the 2022 Form 10-K.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On July 20, 2023, our board of directors approved a Stock Repurchase Plan authorizing the repurchase of up to 1.0 million shares of the Company’s outstanding common stock. Repurchases may be carried out in open market purchases, privately negotiated transactions or pursuant to any trading plan that might be adopted in accordance with Rule 10b5-1 of the Exchange Act, as amended. The Company has no obligation to repurchase any shares under the Stock Repurchase Plan and may modify, suspend or discontinue the plan at any time.

The following table provides information with respect to purchases made by or on behalf of any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act), of our common stock during the three months ended September 30, 2023:


Period	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan	Maximum Number of Shares That May Yet Be Purchased Under the Stock Repurchase Plan at the End of the Period
July 1, 2023 - July 31, 2023	—	$	—	—	1,000,000
August 1, 2023 - August 31, 2023	20,000	30.38		20,000	980,000
September 1, 2023 - September 30, 2023	192,388	29.29		192,388	787,612
Total	212,388	$	29.39	212,388

Subsequent to September 30, 2023, and through October 24, 2023, we purchased 141,480 shares of common stock at an average price of $28.56 pursuant to the Stock Repurchase Plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION

Pursuant to Item 408(a) of Regulation S-K, none of our directors or executive officers adopted, terminated or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2023.

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ITEM 6. EXHIBITS

Exhibit Index

Incorporated by Reference

Exhibit Number

Exhibit Description

Filed Herewith

Exhibit

Form

Filing Date

File No.

(3)

Articles of Incorporation and Bylaws

3.1

Restated Certificate of Formation of Southside Bancshares, Inc.

3.1

8-K

05/14/2018

0-12247

3.2

Amended and Restated Bylaws of Southside Bancshares, Inc.

3.1

8-K

02/22/2018

0-12247

(31)

Rule 13a-14(a)/15d-14(a) Certifications

31.1

Certification of Chief Executive Officer

31.2

Certification of Chief Financial Officer

(32)

Section 1350 Certification

†32

Certification of Executive Officer and Chief Financial Officer

(101)

Interactive Date File

101.INS

XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document.

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document.

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document.

104

Cover Page Interactive Data File (embedded within the Inline XBRL document).

† The certification attached as Exhibit 32 accompanies this Quarterly Report on Form 10-Q and is “furnished” to the Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by us for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		SOUTHSIDE BANCSHARES, INC.

DATE:	October 27, 2023	BY:	/s/ Lee R. Gibson
			Lee R. Gibson, CPA
			President and Chief Executive Officer
			(Principal Executive Officer)




DATE:	October 27, 2023	BY:	/s/ Julie N. Shamburger
			Julie N. Shamburger, CPA
			Chief Financial Officer
			(Principal Financial and Accounting Officer)

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