Southside Bancshares (NYSE:SBSI) reported third-quarter net income of $28 million, up 4.2% from the prior quarter, as higher loan and securities yields and flat funding costs supported an expansion in net interest margin.
Diluted earnings per share rose to $0.93, up $0.03 from the second quarter. The company reported a 1.27% return on average assets, a 16.31% return on average tangible common equity and a tax-equivalent net interest margin of 3.02%, compared with 2.90% in the preceding quarter.
President and CEO Keith Donahoe said the margin benefited from improved yields on loans and securities, while funding costs remained stable. He said approximately 55% of the loan portfolio is expected to reprice over the following 90 days, positioning the company to benefit from the September Federal Reserve rate increase in the fourth quarter.
Loan Growth Outlook Moderated
Loans were nearly unchanged during the quarter at $4.96 billion as new production was largely offset by payoffs. Southside generated approximately $400 million of new loan production during the period, including $276 million funded in the quarter. Excluding normal amortization and line-of-credit activity, payoffs totaled $281 million, down from $297 million in the second quarter.
Payoffs were concentrated in commercial real estate, including four multifamily loans that represented more than half of the total. Donahoe said those transactions contributed to a $15 million reduction in classified assets during the quarter.
Given expectations for continued payoffs and potentially slower commercial real estate originations following rate increases, Southside reduced its 2026 loan-growth outlook to low- to mid-single digits. Donahoe said he did not expect a major change in that outlook for 2027, though the company is pursuing growth in consumer lending, home equity lines of credit and potential lending-team hires.
The loan pipeline stood at $1.2 billion, down from $1.4 billion in the second quarter. Of the current pipeline, commercial construction loans and commercial lines of credit accounted for about 56%, while full-funding term loans represented about 44%.
C&I loans, including owner-occupied real estate, increased about 5% during the quarter and represented 18% of the loan portfolio, compared with 16% at the end of 2025. C&I opportunities represented roughly 24% of the pipeline.
Credit Metrics Remain Low Despite Nonperforming Asset Increase
Nonperforming assets increased $6 million from the prior quarter to 0.18% of total assets. CFO Julie Shamburger said the increase was largely attributable to a $5.2 million commercial real estate loan that was subsequently repaid in full on Oct. 1.
The allowance for credit losses increased to $50.4 million from $49.3 million in the second quarter. The allowance for loan losses rose two basis points to 0.94% of total loans.
During the question-and-answer session, Donahoe said the company remains conservative in its risk ratings and does not currently see material losses from its larger real estate credits. He said two of the four multifamily loans that paid off during the quarter were refinanced by life insurance companies, one was refinanced by a debt fund and one was sold in the open market.
Oil and gas exposure fell to $54.6 million, or 1.1% of total loans, from $76.1 million at the end of the second quarter, primarily due to payoffs tied to one relationship.
Securities Purchases Lift Income as Unrealized Losses Rise
The securities portfolio increased $49.3 million during the quarter to $2.83 billion, primarily reflecting purchases of mortgage-backed securities and, to a lesser extent, corporate bonds. Chief Treasury Officer Suni Davis said the company purchased $172.2 million of mortgage-backed securities with coupons ranging from 5% to 6%, a 6.9-year duration and a 5.75% yield. It also bought $19.5 million of investment-grade bank subordinated debt yielding an average 6.63%.
Davis said lower amortization expense, reinvestment yields that were about 35 basis points higher than second-quarter purchases, swap income and certain bank subordinated debt repricing from fixed to floating rates contributed to higher securities income.
Southside plans to reinvest future securities cash flows primarily into available-for-sale mortgage-backed securities and, potentially to a lesser extent, bank subordinated debt, while maintaining securities near $2.8 billion.
Rising longer-term interest rates increased the net unrealized loss in the available-for-sale securities portfolio to $93.3 million at Sept. 30, from $9.8 million in the prior quarter. Accumulated other comprehensive income reflected a net loss of $149.8 million, compared with a $92.1 million loss at June 30.
Deposit Competition and Funding Mix Remain Key Focus
Deposits declined $155.6 million, or 2.5%, from the prior quarter. Public-fund deposits fell $200.2 million, partly because Southside chose not to match renewal rates on approximately $141 million of maturing public-fund certificates of deposit. The overall decline was partly offset by a $49.4 million increase in brokered deposits.
Davis said certificates of deposit totaling $517 million, with an average rate of 3.63%, are scheduled to reprice in the fourth quarter. Southside expects to retain most of those deposits but anticipates needing to raise offered rates because of competition.
Wholesale funding increased $334.3 million to $1.7 billion, driven mainly by lower public-fund deposits and an increase in the book value of securities. The company had $1.9 billion of available liquidity lines at quarter-end.
Southside did not repurchase stock during the third quarter but bought 36,474 shares after quarter-end at an average price of $30 per share. Donahoe said the company would remain opportunistic with repurchases and continues to view acquisitions as a potential future opportunity, though no transaction is currently active.
The company also began construction on a branch in Burleson, Texas, south of Fort Worth, while its Celina Prosper construction project remains on track for expected completion in the second quarter of 2027.
About Southside Bancshares (NYSE:SBSI)
Southside Bancshares, Inc is a Texas-based financial holding company and the parent company of Southside Bank. Founded in 1960 and headquartered in Tyler, Texas, the company provides banking and financial services to individuals, businesses, and institutions.
Southside Bank offers a range of deposit products, including checking, savings, money market, and certificate of deposit accounts. Its lending activities include residential and commercial real estate loans, construction financing, commercial and industrial loans, consumer loans, and other forms of business credit.
The bank also provides treasury management, online and mobile banking, wealth management, trust and fiduciary services, and other financial solutions.
