SOUTHSIDE BANCSHARES INC SBSI

New loan production was strong at $487 million in Q2, with $300 million funded, but elevated payoffs of $297 million, heavily weighted towards CRE and multifamily, resulted in flat loan balances. The loan pipeline remains healthy at $1.47 billion, with C&I loans increasing to 17% of the total portfolio and representing 22% of the pipeline. Management noted that new loan origination spreads have tightened significantly, with competitive deals closing as low as 190-195 bps over SOFR.

Total deposits decreased by $705.1 million, primarily due to a $777.9 million reduction in brokered deposits, partially offset by a $93.5 million increase in retail deposits. The company repositioned wholesale funding from brokered deposits to FHLB advances and Fed discount window borrowings due to rate and desired terms, leading to a significant shift in funding sources. Deposit competition is intense, particularly for public fund CDs, which may require rate increases in the near term.

Non-interest income saw an 11.2% linked-quarter increase, driven by higher BOLI income (including non-recurring^📎 death benefits), deposit services income, and strong performance in trust and wealth management fees, which were 26.4% higher year-over-year. Brokerage fees also increased 18.3% year-to-date. The faster-than-anticipated build-out of the Fort Worth wealth management team contributed to these gains, with trust fees expected to exceed the annual budget.

Non-interest expense decreased 4.7% linked quarter due to lower salaries and employee benefits and the absence of a sub-debt redemption loss from Q1. This, combined with increased non-interest income, improved the efficiency ratio to 52.96% from 54.98% linked quarter. The company's budget indicates an average non-interest expense of approximately $40.5 million for the remaining quarters of 2026.

Classified assets declined $31 million, largely due to CRE payoffs, and further reductions are anticipated in Q3 as property owners pursue sales or refinancing. Non-performing assets remain low at 0.11% of total assets. Management expressed confidence in the CRE book, particularly multifamily construction loans moving into lease-up, and expects no losses within that portfolio.

The company maintains strong capital ratios and has over 700,000 shares authorized for repurchase. While buybacks are part of the plan, the company is actively seeking acquisition opportunities. They target banks around $1 billion or in the $3-4 billion range to exceed the $10 billion mark, focusing on in-market or in-state Texas geographies, acknowledging that potential sellers still desire high valuations.