Southside Bancshares (SBSI) Q2 2026 Earnings Call Transcript

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DATE

Friday, July 24, 2026 at 12:00 p.m. ET

CALL PARTICIPANTS

• Senior Vice President Investor Relations - Lindsey Bailes
• President and Chief Executive Officer - Keith Donahoe
• Chief Financial Officer - Julie Schamburger
• Chief Treasury Officer - Sunny Davis

TAKEAWAYS

• Net Income -- $26.8 million, a linked-quarter increase of 15.4% driven by higher non-interest income and a reduction in non-interest expenses.
• Diluted EPS -- $0.90, representing a $0.12 per share increase compared to the first quarter of 2026.
• Return on Average Assets (ROAA) -- 1.23%, up from 1.07% in the previous quarter.
• Return on Average Tangible Common Equity (ROATCE) -- 16.09%, reflecting improved profitability for the second quarter.
• Net Interest Margin (NIM) -- 2.90%, an 11-basis-point decline linked quarter due to higher funding costs and a slight reduction in earning asset yields.
• Net Interest Spread -- 2.26%, down 12 basis points from 2.38% in the first quarter.
• New Loan Production -- $487 million, an increase from $431 million in the first quarter, though total loan balances remained flat at $4.95 billion due to elevated payoffs.
• Loan Payoffs -- $297 million, heavily weighted toward commercial real estate, including five multifamily loans that accounted for nearly half of the total.
• Loan Pipeline -- $1.47 billion, which remains well balanced with 52% in term loans and 48% in construction or commercial lines of credit.
• C&I Loans -- Growth of 8.5% since year-end 2025, with the segment now representing approximately 17% of the total loan portfolio.
• Classified Assets -- $31 million decrease during the quarter, largely attributed to payoffs in the commercial real estate portfolio.
• Securities Portfolio -- $2.78 billion, a 3% decrease from $2.87 billion on March 31, 2026, driven by fewer purchases during the quarter.
• Duration of Securities -- 7.2 years for the total portfolio and 4.3 years for the available-for-sale (AFS) portfolio.
• Total Deposits -- Decreased by $705.1 million or 10.3% linked quarter, primarily due to a $777.9 million reduction in brokered deposits.
• Retail Deposits -- Increased $93.5 million, supported by a large commercial account that typically funds during the second quarter.
• Non-interest Income -- $1.4 million increase linked quarter, reflecting higher trust fees, deposit services income, and non-recurring bank-owned life insurance (BOLI) death benefits.
• Trust Fees -- Exceeded the year-to-date budget by 8.4% and rose 26.4% compared to the first six months of 2025 following the expansion of the Fort Worth wealth management team.
• Brokerage Fees -- Increased 18.3% compared to the same six-month period in 2025, exceeding the year-to-date budget by 5.6%.
• Non-interest Expense -- $38.7 million, a 4.7% decrease from the previous quarter, largely due to lower salary and employee benefits following one-time expenses in the first quarter.
• Efficiency Ratio -- 52.96%, an improvement from 54.98% in the first quarter of 2026.
• Effective Tax Rate -- 17.6% for the second quarter, with an annual estimate of 17.7% for 2026.
• Liquidity Resources -- $2 billion in available liquidity lines as of June 30, 2026.
• Fixed-Rate Loan Repricing -- $336.6 million in loans will reprice or mature in the next 12 months, with management estimating a yield increase of approximately 200 basis points for these assets.
• Asset Sensitivity -- 62% of the loan portfolio consists of floating-rate loans, with 82% of those containing interest rate floors.
• Funding Mix -- Management shifted wholesale funding sources from brokered deposits into Federal Home Loan Bank (FHLB) advances and Federal Reserve discount window borrowings to optimize rates and terms.

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RISKS

• Davis stated, "believe there could be a near term need to increase the rates due to competition, especially on public funds CDs," suggesting potential upward pressure on interest expense for certificates of deposit.
• Donahoe noted that for high-quality term loans, "spreads have dropped significantly," mentioning the company has lost deals at spreads as narrow as 185 basis points over SOFR.

SUMMARY

Management reported that **Southside Bancshares, Inc.** (NYSE:SBSI) achieved net income growth of 15.4% linked quarter despite margin compression and flat loan balances. The company successfully executed a strategic shift in its wholesale funding mix, replacing higher-cost brokered deposits with more favorable FHLB advances and Federal Reserve discount window borrowings. While commercial real estate payoffs offset strong new loan production of $487 million, the C&I portfolio grew 8.5% year to date, and classified assets were reduced by $31 million. Executives highlighted the accelerated build-out of the Fort Worth wealth management team as a primary driver of fee growth and indicated an ongoing appetite for in-market acquisitions to reach $10 billion in total assets.

• The company continues to target mid-single-digit loan growth for 2026, with CEO Donahoe noting that newer construction loans are expected to begin funding in the third quarter.
• Management is actively pursuing acquisition opportunities, with Donahoe stating, "Size-wise, a billion dollars is comfortable for us... if it's not a billion dollar asset, then it's going to be something of more size in the three to $4 billion range."
• Construction of a new branch in the Salina-Prosper area of the DFW market is underway, with an expected completion date in the second quarter of 2027.
• CEO Donahoe attributed the efficiency ratio improvement to a decline in non-interest expenses, which CFO Schamburger expects to average approximately $40.5 million per quarter for the remainder of the year.
• The company remains asset sensitive, with Sunny Davis noting, "Should rates remain flat or increase by year end, we could expect a positive impact on net interest income since we are asset sensitive."
• Management utilized 100% of the $100 million in MBS fair value swaps added during the quarter to manage interest rate risk in the securities portfolio.
• Wealth management growth in Fort Worth occurred ahead of schedule, with CFO Schamburger noting, "Our trust fees were over our year-to-date budget by 8.4%... It happened before we could have even dreamt of it happening."

INDUSTRY GLOSSARY

• ALCO: Asset/Liability Committee, a management group that coordinates a bank's assets and liabilities to maximize profit and manage interest rate risk.
• BOLI: Bank-Owned Life Insurance, a form of life insurance purchased by banks where the bank is the beneficiary, often used to fund employee benefits.
• C&I: Commercial and Industrial loans, typically made to businesses for working capital or capital expenditures.
• CRE: Commercial Real Estate, referring to loans secured by income-producing properties such as offices, retail spaces, or multifamily housing.
• FHLB: Federal Home Loan Bank, a system of regional banks that provides liquidity and funding to member financial institutions.
• MBS: Mortgage-Backed Securities, investment securities representing an interest in a pool of mortgage loans.
• NIM: Net Interest Margin, the difference between the interest income generated by a bank and the amount of interest paid out to its lenders, relative to the amount of its interest-earning assets.
• ROATCE: Return on Average Tangible Common Equity, a financial ratio measuring the performance of a company based on its tangible common equity.
• SOFR: Secured Overnight Financing Rate, a benchmark interest rate for dollar-denominated derivatives and loans that replaced LIBOR.
• Wholesale Funding: Funding acquired from sources other than retail deposits, such as brokered deposits, FHLB advances, or other financial institutions.

Full Conference Call Transcript

Operator: Thank you. Hello, everyone. Thank you for joining us and welcome to Southside Bank Shares, Inc. Second Quarter Earnings Call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star 1 again. now hand the conference over to Lindsay Bells, SVP Investor Relations. Lindsay, please go ahead.

Lindsey Bailes: Thank you, Jade. Good morning, everyone, and welcome to Southside Bank Share's second quarter 2026 earnings call. A transcript of today's call will be posted on Southside.com under investor relations. During today's call and other disclosures and presentations, I'll remind you that forward-looking risk and uncertainties. Factors that could materially change our current forward-looking assumptions are described in our earnings release in our form 10-K. Joining me today are President and CEO Keith Donahoe, CFO Julie Schamburger, and Chief Treasury Officer Sunny Davis. Keith will start us off with his comments on the quarter, then Julie will give an overview of our financial and Sunny will end with comments on securities and funding.

We will have a Q&A session following Sunny's remarks. I'll now turn the call over to Keith.

Keith Donahoe: Thank you, Lindsay, and welcome to today's call. Second quarter results are highlighted by earnings per share of 90 cents, a return on average assets of 123 and a return on average tangible common equity of 1609. A $3.6 million increase in length quarter net income was primarily driven by increased non-interest income and a decrease in non-interest expenses. Second quarter funding costs benefited from reduced subordinated debt expense and a sliver a slight increase in non-interest-bearing deposits, but overall our funding costs increased due to a change in our funding mix and the maturity of $245 million in cash flow hedges during the first quarter.

The combined effect contributed to a $355,000 decrease in net interest income during the second quarter. Higher funding costs combined with a slight drop in yield on our earning assets resulted in a lower net interest margin of $290. Strong new loan production was offset by return to elevated payoffs resulting in a relatively flat loan balance during the quarter. However, we continue to target mid single digits for 2026 phone growth. Second quarter new loan production totaled $487 million compared to $431 million in the first quarter and $327 million in the fourth quarter of 25.

In the second quarter, new loan production of approximately 300 million funded during the quarter, with the unfunded portion expected to fund over the next six to nine quarters. Excluding regular amortization and line of credit activity, second quarter payoffs totaled $297 million compared to $113 million during the first quarter. Payoffs during the second quarter were heavily weighted towards CRE to include five multifamily loans accounting for just under half of our total payoffs. Our loan pipeline total is $1.47 billion today, up slightly from first quarter levels of approximately $1.3. The run but not closed category remains healthy at just over $287 million.

Pipeline remains well balanced with approximately 52% term loans and 48% construction or commercial lines of credit. This represents a change from first quarter pipeline, which reflected 44% term and 56% construction or commercial lines of credit. Since year end 25, C&I loans, including owner-occupied real estate loans, increased 8.5% and now represents approximately 17% of our total loan portfolio. This is up from 16% at year end 2025. In addition, CNI opportunities represent approximately 22% of today's total pipeline, and that's down slightly from a 24% mix at the end of the first quarter.

Classified assets declined $31 million, largely related to the previously mentioned CRE payoffs. anticipate additional reductions in classified assets in the third quarter as several property owners are moving forward with open market sales and or refinance opportunities. Other notable second quarter items include a faster than expected build out of our Fort Worth wealth management team, which now includes three highly experienced and well connected individuals. Additionally, we started construction on a new branch in the Salina Prosper area, and for those non-Texans on the call, that's in the DFW market. We expect completion of that project in the second quarter of 2027.

Overall, we had an excellent quarter, and the Texas markets we serve remain healthy and are anticipated to grow at a faster pace than the overall US economy for the foreseeable future. With that, I'll turn the call over to Julie.

Julie Shamburger: Thank you, Keith. Good morning, everyone, and welcome to our second quarter earnings call. For the second quarter, we reported net income of $26.8 million, a linked quarter increase of $3.6 million, or 15.4%. Deleted earnings per share were $0.90 for the second quarter, up $0.12 per share linked quarter. quarter, also a 15.4% increase. Loans were flat compared to first quarter at $4.95 billion as of June 30th due to elevated payoffs in the second quarter compared to last quarter as Keith mentioned. The average rate of loans funded during the second quarter was approximately 6.1% compared to 6.3% during the first quarter.

As of June 30th, our loans with oil and gas industry exposure were 76.1 million or 1.5% of total loans, an increase compared to $72.1 million linked to quarter. Non-performing assets remain low on a linked to quarter basis at .11% of total assets at quarter end. Our allowance for credit losses decreased slightly to $49.3 million from $49.6 million on March 31st. Linked quarter, our allowance for loan losses as a percentage of total loans decreased one basis point to 0.92% at June 30th. The securities portfolio decreased 86.3 million or 3% to 2.78 billion on June 30th when compared to 2.87 billion on March 31st.

The decrease was driven by a decrease in purchases compared to the first quarter. As of June 30th, we had a net unrealized loss in the AFS securities portfolio of $9.8 million, a decrease of $6.5 million compared to $16.3 million last quarter. On June 30th, the unrealized gain on the fair value hedges on municipal and mortgage backed securities was approximately 3.1 million compared to 2 million linked quarter. As of June 30th, the duration of the securities portfolio, the total securities portfolio was 7.2 years compared to 7.4 years at March 31st. And the duration of the AFS portfolio was 4.3 compared to 4.7 years on March 31st.

At quarter end, our mix of loans and securities was 64% and 36% respectively, a very slight shift from 63% and 37% at March 31st. Deposits decreased by 705.1 million or 10.3% on a linked order basis. This was primarily driven by a decrease in broker deposits of 777.9 million, a decrease of public fund deposits of 20.7 million, partially offset by an increase in retail deposits of 93.5 million, which was driven by one commercial account typically funds starting in second quarter and rolls out of the bank in the third quarter each year. We remain well capitalized with strong capital ratios. Liquidity resources remain solid with $2 billion in liquidity lines available as of June 30th.

We did not repurchase any common stock during the second quarter. However, we have over 700,000 remaining shares authorized for repurchase. Our tax equivalent net interest margin was 2.90%, a decrease of 11 basis points on a linked quarter basis from 3.01 for the first quarter. Our tax equivalent net interest spread for the same period was 226, a decrease of 12 basis points from 238. The decrease in the net interest margin and the interest spread is primarily due to a lower overall yield on the earning assets. and increased wholesale borrowings and the related higher funding cost.

For the three months into June 30th, we had a decrease in net interest income of $355,000, or 0.6%, compared to the linked quarter. Non-interest income increased $1.4 million or 11.2% for the length quarter due to increases in BOLI income, deposit services income, trust fees, and to a lesser extent, income from swap fees and letter of credit fees included in other non-interest income. The increase in bully income was related to non-recurring death benefits recognized in the second quarter. We continue to see positive activity in our trust and wealth management and brokerage groups. As Keith mentioned, we were fortunate to get our North Texas team in place earlier in the year than first anticipated.

As a result, our trust fees were over our year-to-date budget by 8.4% and over year-to-date year-to-date actual from the same time last year by 962,000, or 26.4%. We budgeted $9 million in trust fees for 2026, weighted slightly heavier in the back half of the year. We have also experienced higher year-to-date brokerage fees of $427,000 or 18.3% compared to the six months in June 30, 2025. And brokerage fees too were over our year-to-date budget by 5.6%. Non-interest expense was $38.7 million for the second quarter, a decrease of $1.9 million or 4.7% compared to the linked quarter.

The decrease was largely driven by a decrease in salaries and employee benefits and a loss on the redemption of sub-debt recognized in the first quarter. Salary and employee benefits decrease due to additional stock compensation in a one-time retirement expense related to a new split dollar agreement both recorded in the first quarter. Our fully taxable equivalent efficiency ratio decreased to 52.96% as of June 30th from 54.98% as of March 31st due to both the increase in non-interest income and the decrease in non-interest expense. Our budget indicates average non-interest expense of approximately $40.5 million for the remaining quarters.

We recorded income tax expense of $5.7 million compared to $5 million in the prior quarter, an increase of $702,000. Our effective tax rate was 17.6 for the second quarter compared to 17.8% last quarter. And our current estimate for the 2026 annual effective tax rate is 17.7. At this time, I will turn the call over to Sunny.

Suni Davis: Thank you. Thank you, Julie. The mortgage-backed security purchases in the second quarter have coupons ranging from five to five and a half percent, a duration of seven years and yield 5.4. These were purchased at slight premiums. The corporate bonds or bank sub debt purchased in Q2 were new issues of investment grade credits, yielding 6.25%. We expect to reinvest future cash flows from the securities portfolio into AFS, MBS, and potentially to a lesser extent into bank, sub-debt while maintaining the balance of securities at approximately $2.7 to $2.8 billion. The principal cash flows we received during the quarter were $109.5 million, a decrease of $17.4 million linked quarter.

Pays declined through the quarter, starting at a record high in April and falling over 60% by June. Securities amortization expense had a slight increase of $17,000 linked quarter. The spot rate on our CDs was 3.67% at quarter end, a decrease of 7 basis points linked quarter. The average rate was 369 during the second quarter, a 10 basis point decrease from Q1. These totaling 581.3 million with an average rate of 372 will reprice in the third quarter. We expect to retain the majority of these deposits, but believe there could be a near term need to increase the rates due to competition, especially on public funds. CDs.

Additionally, 941.4 million in CDs with an average rate of 371 will be priced by year end. Our public fund deposits decreased in the second quarter. There was movement between the 120 plus public entities we hold deposits for, but primarily the decrease was due to construction draws from bond funds. We have certain non-maturity deposit accounts with exception pricing. There were no interest rate adjustments to these accounts in Q2 other than on an individual basis. We have seen a higher cost on recently acquired deposit accounts versus existing account balances. In the second quarter, new deposit accounts, excluding brokered and public funds, had an average rate of 225 versus existing accounts averaging 157.

However, excluding one large seasonal relationship, the rate on new deposits in June was 173. Reciprocal deposits were 360.1 million at quarter end, a decrease of 3.9 million linked quarter. Many of these accounts are included in the exception pricing. Approximately 81% of reciprocal deposits are commercial and 19% are consumer. Linked quarter, our wholesale funding remained at $1.4 billion, a slight decrease of $8 million. There was a significant shift in the sources of wholesale funding utilized during the second quarter as we repositioned broker deposits into FHLB advances and Fed discount window borrowings due primarily to rate but also due to desired terms.

We utilized a mix of wholesale funding sources and now between them based on rate and term offered and the current ALCO strategy. We have increased our collateral at the discount window and will continue to utilize this source of short-term funding due to rate and prepayability. Our cash flow hedge notional remains at $615 million with no maturities or additions in Q2. The next maturity is a $25 million notional maturing in November, currently at a rate of $463. After this maturity and some amortization related to past unwind, is fully expensed in October, the rate on our cash flow hedges will drop to approximately 3.57% assuming current spreads.

We have a notional of $358.1 million in fair value swaps on municipal and MBS securities, including $100 million of MBS fair value swaps added in Q2. Approximately 38% of our loans have fixed rates and 62% of a floating rate with approximately 82% of our floating rate loans having floors. We have $336.6 million in fixed rate loans that mature or reprice in the next 12 months. Approximately 160 million of these loans have rates at or below 4%. Of the loans at or below 4%, approximately 105.3 million reprice or mature by year end and approximately 22.7 reprice or mature in the third quarter. Should these loans reprice, we estimate their yield increasing approximately 200 basis points.

We are currently modeling Fed funds to be flat for the remainder of 2026 as forecasted in Moody's base case scenario. Should rates remain flat or increase by year end, we could expect a positive impact on net interest income since we are asset sensitive. modeling a data of 35 on non-maturity interest-bearing deposits in rates up. Thank you for joining us today. This concludes our comments and we will now open the line for your questions.

Operator: Thank you. We will now begin the question and answer session. Your first question comes from the line of Brett Rabaton from Stone X Group. Your line is open. Please go ahead.

Brett Rabaton: Hey, good morning, everybody. I wanted to start off on credit, and you've lowered the classified assets link order, and I know you've got some projects in Austin. Can you maybe just walk through things like you're being able to have good success with those four or five credits. Just wanted to hear an update on them and if you still think those all work out and anything else you're seeing on the credit side.

Keith Donahoe: Yes, thank you for that question. So we, you know, we have spent a lot of time monitoring our CRE book and we feel really confident that we've got things moving in the right direction. We don't anticipate any losses inside of those inside of that portfolio. A large amount of that or multiple. family property properties that were construction loans that have now moved into lease up phase. And you know that story continues where their lease up was happening. You know they're they're increasing occupancy but at lower rental rates. Many of those properties that we have are in the process of, we've got customers that are actively selling or moving into refinanced opportunities.

There's still liquidity in the market for both of those right now. We do anticipate some additional payoffs in third quarter that will continue to benefit our classified asset bucket. So I don't know if that helps, but I can dig in a little bit more if you need.

Brett Rabaton: No, that's helpful, Keith. And then wanted just to... You gave the expense guy for the back half of the year. It's nice to see the strength in fees kind of across the board. Is that level what we should expect from here or does it grow further with the wealth management ads in Fort Worth? Any thoughts on the fees?.

Julie Shamburger: from here. You want to? Yes, sure. All right. With respect to the ones I really called out, the trust fees, you know, like I said, their budget, we budgeted $9 million. And obviously the budget was done early in the year before we knew the timeline of when this Fort Worth North Texas team would be built out. It happened before we could have even dreamt of it happening. So it has resulted in some increased fees earlier in the year. I think if we continue the pace we're at, I think we'll I think there's a strong chance that we will beat the budget that we've put in place, the nine million for the year.

The budget for six months was four million to I didn't call that out specifically. And then it was weighted a little heavier in the back at 4,750,000. But since we were over 8%, I think, what did I say, 8.6%, I think we can... I hate to promise, but we're optimistic that we will continue that trajectory for the rest of the year with a new team in place and what have you. And then on the brokerage side, obviously that's very market driven. We did budget, right? We're over budget there as well.

That budget's pretty much split evenly across the 12 months for us. which is not necessarily important to you, but we, you know, we're five and a half percent over that budget target at year to date. And so, you know, we think providing the market, you know, nice fees there. I think as far as deposit services go, those have some seasonality to them. This quarter, it was more driven by debit card income, and that was kind of made up of some increase in volume and some additional. We received about $150,000, $60,000 in the some refunds on some of our debit card expense.

We do expect our debit card expense to be more in line with that rate, and those are netted in our reporting. that's GAAP accounting. So it's really hard to say on deposit services, you know, there has the overdraft income and NSF and that has some seasonality to it. That part was up a little bit for the quarter, about $60,000. So that one's a little harder for me to predict for you. If you look at the five quarters in the earnings release, you can see they are a little bit more unpredictable. I hope that helps, Brett, on the fees. Yes. Yes. That's very helpful. Thanks for all the color. Sure.

Operator: Your next question comes from the line of Michael Rose from Raymond James. Your line is open. Please go ahead.

Michael Rose: Hey, good morning. Thanks for taking my questions. Maybe I'll just start on the loan side. I know you guys kind of reiterated the mid-single-digit growth guide. Just as it relates to the payoffs this quarter, is that kind of a peak? Or how should payoffs kind of trend over the next couple of quarters? just trying to balance the production versus the, the payoffs as we think about the next couple of quarters.

Keith Donahoe: Yes, good question, Michael. It may not be a peak. Just looking forward, you know, and we don't know, you know, when we get into our pipeline and part of our pipeline are projected payoffs, we're pretty good at about 60 days out, 90 days out it gets a little bit more fuzzy. but we have a fair amount of loans gearing up to pay off in the third quarter. So I hesitate to say we saw a peak.

On the flip side, loan production has been really strong and I tried to show that from, uh fourth quarter 25 first quarter 26 and this quarter we've been elevating that production level we still feel really good that we're going to be able to do that the rest of the year um In addition, I do anticipate some of the construction loans, the newer construction loans that we put on the books and you know, 25, that they're going to start funding up at some point. So, and one good thing about those fundings is those tend to be our higher spread loans. So I'm looking forward to seeing some of that the books.

Some of that could happen in the third quarter, which may alleviate some of the pressure. So hopefully that helps.

Michael Rose: Yes, it does. Very helpful, Keith. Maybe just as a follow-up separate topic, just as it relates to the margin pressure, the score, how much of that was really driven by some of the funding exchanges versus some of the more structural pressure on earning asset yields. And then just separately, yes, I know, I think you mentioned 105 or so million of fixed rate loans that are in reprice by year end. Can you just kind of talk about the interplay there and kind of margin dynamics as we move over the next couple quarters? Thanks.

Keith Donahoe: Yes, the funding pressure was a large contributor to the narrowed NIM and margin. We are looking forward to some of those loans repricing so we can hopefully take some of the pressure off the funding side. But we did also in the first quarter, we did have a couple of loan revenue non-recurring items.

One was some purchase accretion on one side. particular loan that kind of elevated if you will and we also had an exit fee on a loan that was paid off in the first quarter that contributed that had been in restructured and i think we alluded to that fee last quarter yes so that's that was a little bit of it so there was a it was both on the revenue side as well as the funding side that kind of push together now on I will tell you just to give you some color on new loan origination.

So we are, you know, we are focused on both term loans that we're going to be fully funded at closing, as well as construction loans. Term loan when you're getting into the market to the high quality loans that we're looking for those spreads. have dropped significantly. Um, we're seeing, we've lost deals at, you know, 185 over, so far and below. We won't play in that game. Um, But we have been competitive and winning somewhere as low as 190, 195. But that's where the market is today. And we are being selective when we go that skinny. So. So there is some downward pressure.

We saw a little bit of decline in the loan yields in the second quarter. And some of that is because we did close a lot, a fair amount in the first six months of the year of this term debt on some thinner margins.

Michael Rose: That's very helpful, Caller Keith and Julie. I'll step back. Thanks.

Operator: Your next question comes from the line of Jordan Ghent from Stevens. Please go ahead.

Jordan Ghent: Hey, good morning. Thanks for taking my question and thanks for all the color you provided. It's been really helpful. I just wanted to follow up on the margin and more particularly the cost of funds. given with all the funding mix, where do you guys see cost of funds going for the rest. remainder of the year?

Suni Davis: Well, of course, deposit competition is pretty intense, and we're seeing it really heavily on our public fund CDs for sure. So I feel like our CDs, some of those are going to reprice up a little. In fact, we may be adjusting our rates. We've been internally talking about that. We had some pressure related to our SWAP funding. As Keith mentioned in his comments, we had the SWAP mature in Q1. So that funding had to be replaced and it, I mean, sorry, the funding had to be kept in place. And so that repriced up by, you know, and five or so basis points. We also saw the spread on our swap funding increase.

And so we pay a fixed rate to our counterparty and then they pay us floating and we have the rate on our borrowing. floating rate paid to us based on SOFR compared to our borrowing, the spread between the two of those has tripled since year end. So that was a driver on some of our COSEL expense, but also just moving, we moved out of brokered and into SHLB and discount window because those sources became cheaper. So brokered was cheaper than both and now brokered is more expensive than both. I don't see that changing because that's been in place for a few months now.

And then really, I mean, we've got some initiatives to try to grow some commercial deposits, and we're looking at our online platform for ease and efficiency to our customers there. so i mean we have a couple of ideas in the works to help generate some deposits i know.

Keith Donahoe: I know your question was on the funding side, but one thing to highlight, and I know I think We've made a strategic change in our loan portfolio. And right now we've got about 62% of our, loans are on a floating rate. So if there is an increase, upward movement by the Fed, that will be beneficial to us. And in that event, we'll reprice those loans faster than what we've done in the past. So.

Jordan Ghent: Got it. And then, so I guess just taking that together. It kind of sounds like there's going to be some continued margin pressure going forward, you know, absent of any rate hikes. Is that kind of how we should understand it? that's a fair way to look at it right now. Okay, perfect. And then just one other question. switching to capital. So you guys haven't been active with buybacks in the first half of the year. capital levels have been building. What's your appetite for... repurchases in the back half of the year and then maybe can you talk more about um kind of your preferences for capital deployment thanks.

Keith Donahoe: Yes, in the big picture, yes, share buybacks are still part of the plan. We're also in the market looking for acquisitions. So to some extent, historically on our share buybacks, we've kind of dipped into that market when we see a decline in the stock that we don't think is reasonable. That's one reason why we haven't been actively engaged in that in the second quarter is because we had a nice run on the stock value or price. That doesn't mean that we won't step into that market, but we are anticipating having some opportunities in the acquisition space. So that's another reason why our capital levels remain high.

Jordan Ghent: Got it. And then could you maybe just remind us kind of asset size and kind of as far as a target for M&A that you guys would be looking for? And I'm assuming if it would be kind of like in market or out of market for you guys.

Keith Donahoe: Yes, we're still moving along the same strategy. Size-wise, a billion dollars is comfortable for us. We could stretch a little bit on a billion dollars. And we've got an ability to shrink our balance sheet to some extent. If it's not a billion dollar asset, then it's going to be something of more size in the three to $4 billion range. That would be something that would be of interest to, because that gets us over the $10 billion mark with some little bit of scale. So we're in an awkward space, but there are plenty, There's more opportunities for billion to billion three banks than there are for three to four.

I'm actively spending time and open to discussions.

Jordan Ghent: Got it. Thanks for taking my questions.

Operator: Yep. Thank you. Your next question comes from the line of Steven Scoudin from Piper. Please go ahead.

Stephen Scouten: Yes, thanks a lot, everyone. Just maybe kind of following up on that conversation around M&A, what do you feel like the dynamics are in terms of seller potential seller appetite pricing? Like, do you feel like that's reasonable? Has there been any sort of a push for people to think about needing to take advantage of this window of kind of accommodative regulatory environment, strong valuations, that sort of thing? Or do people still want the price they want no matter what?.

Keith Donahoe: I think it's a mixed bag, to be honest with you. The window of opportunity, everybody talks about it. I think there's a little bit of pressure, but when you actually get into the discussions, people are still wanting the price that they want. And that's a, you know, I guess when you build a bank and it's been in your family for a long time, or you've been a part of that bank for a long time on private aspect, it's hard sometimes for them to get their head around exactly what the value of that organization really is.

So when you get into those discussions, that's when you start to realize that there's still some hesitancy on meeting the bid asked in those negotiations. So. You know, somebody mentioned geography or kind of just to make sure I'm clear, we're not going to go necessarily outside of our market to make an acquisition. We're certainly not going to go outside of the state of Texas. But if we're filling in a geography, that is something of interest to me and to us. So we've got plenty of room to grow in Dallas and Houston and Austin.

But I'm also not forgetting that we have a very strong presence in East Texas and Southeast Texas, and there are some opportunities in those markets.

Stephen Scouten: Got it. Okay. Yes, that's helpful. I guess from a balance sheet perspective one, I'm curious why I think you said security should stay kind of flat-ish in the $272 billion, $8 billion range. I'm curious, given the pressure on funding costs, and it sounds like even incremental CD costs and repricing, why you wouldn't think more about letting that bug run down and taking those cash flows and trying to fund loan growth through those cash flows? Am I hearing that wrong? Or can you help me think about why that wouldn't be the case?.

Keith Donahoe: Well, I think the elevated loan payoffs has a lot to do with it right now. I mean, we are, if, when that slows down, because the payoffs will slow down, I think you will see us apply more of the cash flows from the securities book into the loan growth. But right now, when it is something we talked about, about that from a budgeting standpoint we're trying to keep that interest income up on the securities book as much as we can right now while we're experiencing such high payoffs on the loan side and what we're looking at is like right now six percent coupon mbs that are yielding in the 5.

Suni Davis: 75-75 range. So, you know, for the asset quality.

Keith Donahoe: And I'm not that different from loan yields. So yes. Right. Makes sense. That tells you how tight loan spreads have become. On quality deals, now we could, and we're not going to do this, but we could go find more yield in the loan book. in my opinion, you take on unnecessary risk at that point. So the loans we're pricing in the narrow spread are high quality and everybody's in the market trying to get them. So. Yes, yes, no, that makes sense. And then just, I guess, lastly for me and apologies if I miss this, but how are you.

Stephen Scouten: THINKING ABOUT JUST OVERALL NII IN SPITE OF, I MEAN, IT WAS, I GUESS, DOWN SLIGHTLY ON AN FTE BASIS, QUARTER OVER QUARTER. It sounds like we might face additional NIM pressures. I know you're thinking loan growth should pick up. It sounds like in the back half, hit that mid single digits but how do you think about ni growth versus kind of all those dynamics.

Keith Donahoe: Yes, I think we'll continue to see a little bit of net interest income growth between now and the end of the year. Some of that obviously will become a lot better if there is a move by the Fed, but I But yes, it's our intention to continue to grow that, but we are under some pressure from the funding side.

Stephen Scouten: Got it. Okay. Thanks so much for the time and the answers. Appreciate it.

Operator: Thank you. At this time, there are no further questions. I will now turn the call back to Keith Donahoe, President and CEO, for closing remarks.

Keith Donahoe: Thank you everyone for joining us today. We appreciate your interest in Southside Bank shares and the opportunity to answer your questions. We're optimistic about 2026 and look forward to our third quarter earnings call sometime in October.

Operator: Thank you. This concludes today's call. You may now disconnect.

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