Southside Bancshares (NYSE:SBSI) reported second-quarter 2026 net income of $26.8 million, up $3.6 million, or 15.4%, from the prior quarter, as higher non-interest income and lower expenses more than offset pressure on net interest income.
Diluted earnings per share rose to $0.90 from the preceding quarter. President and CEO Keith Donahoe said the company generated a return on average assets of 1.23% and a return on average tangible common equity of 16.09%.
Loan Production Rises, but Payoffs Keep Balances Flat
Total loans were essentially unchanged from the first quarter at $4.95 billion as elevated loan payoffs offset stronger originations. New loan production totaled $487 million during the second quarter, compared with $431 million in the first quarter and $327 million in the fourth quarter of 2025.
About $300 million of second-quarter production funded during the period, while the remaining portion is expected to fund over the next six to nine quarters. Excluding regular amortization and line-of-credit activity, loan payoffs were $297 million, up from $113 million in the first quarter.
Donahoe said the payoffs were heavily weighted toward commercial real estate, including five multifamily loans that represented just under half of total payoffs. He said some additional payoffs are anticipated in the third quarter, although management continued to target mid-single-digit loan growth for 2026.
The company’s loan pipeline stood at $1.47 billion, compared with approximately $1.3 billion in the first quarter. Loans that had been won but not yet closed totaled just over $287 million. The pipeline was composed of about 52% term loans and 48% construction loans or commercial lines of credit.
Commercial and industrial loans, including owner-occupied real estate loans, increased 8.5% since year-end 2025 and accounted for approximately 17% of total loans, up from 16% at the end of 2025. C&I opportunities represented about 22% of the current pipeline.
Credit Metrics Remain Low; Classified Assets Decline
Classified assets declined $31 million during the quarter, primarily due to the commercial real estate payoffs. Donahoe said the company expects further reductions in classified assets during the third quarter as certain property owners pursue open-market sales or refinancing.
Addressing questions on the commercial real estate portfolio, Donahoe said management does not anticipate losses within that portfolio. He said many classified multifamily properties were formerly construction loans that have entered lease-up phases, with occupancy increasing despite lower rental rates.
“There’s still liquidity in the market” for sales and refinancing, Donahoe said.
Nonperforming assets remained at 0.11% of total assets at June 30. The allowance for credit losses decreased slightly to $49.3 million from $49.6 million at March 31, while the allowance for loan losses represented 0.92% of total loans, down one basis point from the prior quarter.
Oil and gas exposure was $76.1 million, or 1.5% of total loans, compared with $72.1 million in the first quarter.
Funding Costs Pressure Margin
Tax-equivalent net interest margin fell 11 basis points from the first quarter to 2.90%, while tax-equivalent net interest spread declined 12 basis points to 2.26%. Net interest income decreased $355,000, or 0.6%, from the first quarter.
Management attributed the margin decline to a lower yield on earning assets and higher funding costs, including increased wholesale borrowings. Donahoe also cited the maturity of $245 million in cash-flow hedges during the first quarter and changes in the company’s funding mix.
During the second quarter, Southside shifted funding from brokered deposits into Federal Home Loan Bank advances and Federal Reserve discount-window borrowings, citing both rates and desired terms. Wholesale funding was $1.4 billion at quarter-end, essentially unchanged from the prior quarter.
Deposits fell $705.1 million, or 10.3%, from the first quarter, mainly because brokered deposits declined $777.9 million. Public-fund deposits declined $20.7 million, partly offset by a $93.5 million increase in retail deposits tied largely to a seasonal commercial relationship.
Chief Treasury Officer Suni Davis said certificates of deposit totaling $581.3 million, with an average rate of 3.72%, are scheduled to reprice in the third quarter. Another $941.4 million of CDs, averaging 3.71%, will reprice by year-end. The company expects to retain most of those deposits but may need to offer higher rates because of competition, particularly for public-fund CDs.
Management said it is modeling flat federal funds rates for the balance of 2026 under Moody’s base-case scenario. The bank considers itself asset-sensitive, with 62% of loans carrying floating rates and approximately 82% of those floating-rate loans having floors.
Fee Income and Lower Expenses Support Earnings
Non-interest income increased $1.4 million, or 11.2%, from the first quarter, driven by higher bank-owned life insurance income, deposit-service revenue, trust fees, swap fees and letter-of-credit fees. The increase in BOLI income included nonrecurring death benefits.
Trust fees exceeded Southside’s year-to-date budget by 8.4% and rose $962,000, or 26.4%, from the comparable period a year earlier. Management cited the faster-than-expected buildout of its Fort Worth and North Texas wealth-management team, which now includes three individuals.
Brokerage fees rose $427,000, or 18.3%, from the first six months of 2025 and were 5.6% above the company’s year-to-date budget.
Non-interest expense declined $1.9 million, or 4.7%, from the first quarter to $38.7 million. The decrease reflected lower salary and employee-benefit costs as well as a first-quarter loss on the redemption of subordinated debt that did not recur. Southside expects average non-interest expense of approximately $40.5 million in each remaining quarter of 2026.
The fully taxable-equivalent efficiency ratio improved to 52.96% from 54.98% in the first quarter.
Capital, Securities and Strategic Priorities
The securities portfolio declined 3% from the first quarter to $2.78 billion, largely due to lower purchases. Management expects to maintain securities at roughly $2.7 billion to $2.8 billion while reinvesting future cash flows primarily into available-for-sale mortgage-backed securities and, to a lesser degree, bank subordinated debt.
Southside had $2 billion in available liquidity lines at June 30 and did not repurchase stock during the quarter. More than 700,000 shares remained authorized for repurchase.
Donahoe said share buybacks remain part of the company’s capital plan, but Southside is also evaluating acquisition opportunities within Texas. He said deals involving banks with roughly $1 billion in assets would be manageable, while opportunities involving institutions with $3 billion to $4 billion in assets could provide sufficient scale to move the company above $10 billion in assets.
Management said it remains focused on growth in Dallas, Houston and Austin, while also considering opportunities in East and Southeast Texas.
About Southside Bancshares (NYSE:SBSI)
Southside Bancshares Inc is a bank holding company headquartered in Tyler, Texas. Through its subsidiary, Southside Bank, it provides a broad array of commercial and consumer banking services to individuals and businesses. The company’s offerings include deposit products, loan facilities and treasury management solutions tailored to the needs of its clientele. Established in 1974, Southside Bancshares has grown its footprint across East and North Texas while maintaining a community banking focus.
In the commercial banking segment, the company extends financing for real estate development, construction projects, equipment purchases and working capital needs.
