Southside Bancshares, Inc. Q2 FY2026 earnings call

Financial Results & Balance Sheet Composition

• Net income and EPS grew 15.4% quarter-over-quarter, driven by higher non-interest income and lower non-interest expenses.
• Net interest income and net interest margin declined, pressured by higher funding costs after the Q1 2026 maturity of $245 million in cash flow hedges and a shift to higher-cost wholesale funding, plus a slight drop in earning asset yields.
• Classified assets declined by $31 million quarter-over-quarter, primarily due to elevated CRE payoffs, with additional reductions expected in Q3.
• Capital ratios remain strong, with over 700,000 common shares remaining authorized for repurchase, and no buybacks executed in Q2.

Loan Originations & Pipeline

• Q2 new loan production totaled $487 million, up from $431 million in Q1 2026 and $327 million in Q4 2025, with approximately $300 million funded in Q2 and the remainder expected to fund over the next 6-9 quarters.
• Elevated payoffs ($297 million excluding amortization/line activity, up from $113 million in Q1) offset strong production, leaving total loans flat; nearly half of Q2 payoffs came from five multifamily CRE loans.
• Total loan pipeline is $1.47 billion, up slightly from Q1, with 52% term loans (up from 44% in Q1) and 48% construction/commercial lines of credit.
• C&I loans (including owner-occupied real estate) grew 8.5% year-to-date 2026, now representing 17% of total loans (up from 16% at year-end 2025).
• 62% of total loans are floating-rate, 82% of which have rate floors; approximately $105.3 million of fixed-rate loans at or below 4% will reprice/mature by the end of 2026, with an expected ~200 basis point increase in yield upon repricing.

Business Expansion & Market Context

• The Fort Worth wealth management team was built out faster than expected, now fully staffed with three experienced professionals.
• Construction began on a new branch in the Salina Prosper area of the DFW market, expected to open in Q2 2027.
• Texas markets served by the bank remain healthy and are projected to grow faster than the overall U.S. economy for the foreseeable future.

Securities & Funding

• The bank expects to maintain total securities balances between $2.7 billion and $2.8 billion, reinvesting principal cash flows primarily into AFS MBS and secondarily into investment-grade bank sub-debt.
• Wholesale funding was rebalanced in Q2, shifting from higher-cost brokered deposits to lower-cost FHLB advances and Federal Reserve discount window borrowings; the bank maintains increased collateral at the discount window for ongoing short-term funding use.

Southside Bancshares is a single-segment community bank, with the following overall Q2 2026 financial performance: Net income was $26.8 million, a 15.4% ($3.6 million) linked quarter increase. Diluted earnings per share was 90 cents, up 15.4% (12 cents) linked quarter. Net interest income decreased $355,000 (0.6%) linked quarter, with a tax-equivalent net interest margin of 2.90% (down 11 basis points linked quarter). Non-interest income increased $1.4 million (11.2%) linked quarter, driven by BOLI non-recurring death benefits, higher deposit services income, and trust fees. Non-interest expense was $38.7 million, a $1.9 million (4.7%) decrease linked quarter, driven by lower salaries/benefits and no first-quarter-style sub-debt redemption losses. The fully taxable equivalent efficiency ratio improved to 52.96% from 54.98% linked quarter. Total loans were flat at $4.95 billion as of June 30, 2026. The securities portfolio was $2.78 billion (down 3% linked quarter, representing 36% of total loans + securities). Total deposits decreased 10.3% ($705.1 million) linked quarter, driven by a $777.9 million reduction in broker deposits. Allowance for credit losses was $49.3 million, with allowance for loan losses equal to 0.92% of total loans (down 1 basis point linked quarter). Non-performing assets equaled 0.11% of total assets. Oil and gas exposure was $76.1 million, 1.5% of total loans.

• Management reaffirmed its target of mid-single-digit full year 2026 loan growth, with strong production expected to offset continued near-term elevated payoffs and meet the full-year target.
• Trust fees are currently 8.4% over year-to-date budget, and management is optimistic that full-year 2026 trust fees will beat the original $9 million full-year budget, following the earlier-than-planned buildout of the Fort Worth wealth team.
• Average non-interest expense is projected to be approximately $40.5 million per quarter for the remaining half of 2026.
• The 2026 annual effective tax rate is estimated to be 17.7%.
• Management expects continued margin pressure for the remainder of 2026 in the absence of Federal Reserve rate hikes; if rates remain flat or increase, net interest income will see a positive impact as the bank is asset-sensitive.
• Management projects a small net interest income increase for the second half of 2026 despite ongoing funding cost pressure.

• Intense deposit competition, particularly for public fund CDs, is expected to require moderate rate increases on repricing CDs, keeping funding costs elevated.
• Elevated CRE loan payoffs are expected to continue into Q3, keeping overall loan growth near-term flat despite strong new production.
• High competition for high-quality term loans has compressed loan spreads, creating downward pressure on overall loan yields; management is selectively pursuing only higher-quality loans with thinner spreads to avoid unnecessary credit risk.
• Bid-ask spreads persist in M&A negotiations, as many potential sellers still hold out for above-market valuations, which could delay or prevent acquisition activity.
• Uncertainty around future Federal Reserve rate movements could impact net interest income and margin trajectories.

Q: Can you provide an update on your classified CRE credits, particularly Austin projects, and confirm if you expect them to resolve without losses? / A: Management reports they are actively monitoring the CRE book and see positive momentum, with no expected losses on the portfolio. Most classified CRE exposures are multifamily construction loans in lease-up, with occupancy growing even with slightly lower rental rates. Borrowers are actively pursuing sales or refinancing, and market liquidity for these transactions remains strong, with additional payoffs expected in Q3 that will further reduce classified assets.

Q: After elevated Q2 payoffs, should we expect payoffs to peak this quarter and trend lower, and how will this impact loan growth? / A: Management notes it cannot rule out continued elevated payoffs in Q3, as it already sees a number of scheduled payoffs for the quarter. However, strong new loan production has grown sequentially since late 2025 and is expected to continue for the rest of the year. Drawdowns on 2025-originated construction loans (which carry higher spreads) are also expected to start soon, which will offset some payoff pressure and help the bank hit its full-year mid-single-digit loan growth target.

Q: What is your appetite for share buybacks and M&A in the second half, and what is your M&A strategy? / A: Share buybacks remain part of the long-term capital plan, but management has held off on buybacks in Q2 after a recent run-up in the bank's stock price, and is holding higher capital to pursue acquisition opportunities. The bank prefers in-market acquisitions within Texas, targeting $1 billion in assets (with room to stretch) or $3-4 billion to cross the $10 billion asset threshold. There are more available opportunities for smaller targets, which aligns with the bank's current capacity.

Q: Why maintain a stable securities portfolio balance rather than letting it run down to fund loan growth amid elevated funding costs? / A: Elevated loan payoffs mean the bank currently has sufficient liquidity without needing to shrink the securities portfolio, and maintaining the portfolio preserves steady interest income during this period of high loan payoffs. High-quality current MBS yields are comparable to the compressed spreads on today's high-quality loans, so the bank is willing to hold these low-risk securities rather than pursue higher-yield, higher-risk loans to grow the loan book faster.