Southside Bancshares (NYSE:SBSI) reported what management described as a “solid” start to 2026, driven by linked-quarter loan growth, improved profitability metrics, and lower funding costs following the redemption of higher-rate subordinated debt.
Quarterly results and margin trends
President and CEO Keith Donahoe said the company delivered “solid financial results” in the first quarter, highlighting linked-quarter loan growth of 2.7%, earnings per share of $0.78, an annualized return on average assets of 1.10%, and an annualized return on average tangible common equity of 14.39%.
Net interest income increased $441,000, or 0.8%, linked quarter, which Donahoe attributed in part to lower funding costs tied to the company’s Feb. 15 redemption of roughly $93 million of subordinated debt that carried a 7.51% rate. Shamburger said the company recorded a $791,000 loss on the redemption, and expects “further savings” in funding costs in the second quarter.
Loan growth, production, and pipeline
Shamburger said period-end loans were $4.95 billion as of March 31, increasing $128.2 million, or 2.7%, from Dec. 31. The linked-quarter increase was driven by growth in construction loans (+$93.2 million), commercial real estate loans (+$40.6 million), and the commercial portfolio (+$12.2 million), partially offset by declines in municipal loans (-$9.6 million) and 1-4 family residential loans (-$7.1 million). She said the average rate on loans funded during the quarter was about 6.3%.
Donahoe said first-quarter loan growth reflected strong new production and lower-than-expected payoffs. New loan production totaled about $431 million, up from $327 million in the prior quarter, with about $240 million funding during the quarter. Management expects the unfunded portion to fund over the “next six-nine quarters,” Donahoe said.
Despite the strong first quarter, Donahoe said the company continues to target mid-single-digit loan growth for 2026, citing expectations that payoffs will return to elevated levels as projects reach the end of their lifecycle. Excluding regular amortization and line activity, first-quarter payoffs were about $113 million, the lowest in the past four quarters, he said. The largest payoff was a $27.5 million multifamily credit that had been included in non-performing assets; Donahoe said the borrower refinanced with a life insurance company in mid-February.
The company’s loan pipeline totaled about $1.3 billion, down from a mid-quarter peak of roughly $2.0 billion. Donahoe said the “won but not closed” category was “healthy” at just over $331 million, with a pipeline mix of about 44% term loans and 56% construction and/or commercial lines of credit. C&I-related opportunities represented approximately 24% of the pipeline, up from 20% at year-end.
Asked about production and expected payoffs, Donahoe told analysts he anticipates producing new loans “at a similar rate,” adding that the pipeline decline was partly due to lenders focusing on closing transactions during the quarter and then “rebuild[ing] that pipeline.” On payoffs, he said the bank expects a number of larger real estate assets to be refinanced or sold as they move through normal cycles.
Credit quality and multifamily exposure
Management said credit quality remained strong, even as the company downgraded several loans. Donahoe said Southside migrated four multifamily loans and one office loan to substandard during the quarter. Two of the multifamily loans were originally construction loans experiencing slower lease-up and lower rents than underwritten, while the other two were term loans with lower occupancy and reduced rental rates. Donahoe said the borrowers and equity partners are providing support and the bank expects “successful resolutions either through open market sales or refinances” over the next six to 12 months.
Non-performing assets totaled $9.7 million at quarter-end, down $28.5 million from Dec. 31, according to Donahoe, primarily reflecting the payoff of the $27.5 million multifamily credit. Shamburger said non-performing assets were 0.11% of total assets at March 31, and that the decrease was also helped by a reduction in non-accrual loans.
The allowance for credit losses increased to $49.6 million from $48.3 million linked quarter, while allowance for loan losses as a percentage of total loans declined 1 basis point to 0.93%, Shamburger said. She also noted oil and gas-related loans totaled $72.1 million, or 1.5% of total loans, slightly higher than $71.0 million the prior quarter.
On multifamily conditions, Donahoe told analysts the four downgraded projects were located across major Texas markets—two in Houston, one in Dallas-Fort Worth, and one in Austin—and that the primary issue is supply-driven weakness and the use of concessions. He said the loans average about $33 million each and that new appraisals on three of the four put the bank “sub 60% loan to value.” Donahoe added that one credit is expected to refinance with a debt fund before the end of the second quarter and another borrower is running a sale process with a refinancing back-up plan if pricing is not attractive.
Funding, securities, expenses, and capital deployment
Deposits increased $9.3 million, or 0.1%, linked quarter, Shamburger said. She noted brokered deposits rose $110.7 million, offset by declines in retail deposits (-$82.0 million) and public funds (-$19.4 million). Chief Treasury Officer Suni Davis said the public fund decline reflected seasonality tied to Texas ad valorem tax collections and related disbursements, as well as bond fund construction draws and a February debt service payment; she said she expects public funds to increase in the second quarter.
Davis said reciprocal deposits ended the quarter at $363 million, down $13.9 million, primarily due to one relationship. She also said new deposit accounts (excluding brokered and public funds) carried a higher average rate than existing balances—2.37% versus 1.58%—though March new account rates trended down to 2.06%.
Southside’s wholesale funding increased $370.5 million to $1.4 billion, Davis said, used primarily to fund loan and securities growth. The increase included higher FHLB advances (+$104.8 million), brokered deposits (+$110.7 million), and Fed discount window borrowings (+$155 million). Davis said the company is using a mix of wholesale sources and has increased collateral at the discount window, which it expects to continue using for short-term funding due to rate and prepay flexibility.
The securities portfolio increased $164.3 million, or 6.1%, to $2.87 billion, driven by $313.5 million in mortgage-backed securities purchases, Shamburger said. Davis said the MBS purchases carried coupons ranging from 4.5% to 5.5%, duration of seven years, and a 5.24% yield. She added that about one-third of the purchases were made late in the quarter as “pre-purchases” of April and May cash flows, acquired at discounts, and were not reflected in first-quarter portfolio yields. Davis said management expects to reinvest future cash flows into AFS MBS and maintain the securities balance around $2.7 billion to $2.8 billion.
Shamburger also reported that net unrealized losses in the AFS portfolio increased to $16.3 million from $767,000 in the prior quarter. She said the unrealized gain on fair value hedges on municipal and mortgage-backed securities was about $1.95 million at March 31, compared with $788,000 linked quarter.
On expenses, Shamburger said non-interest expense was $40.6 million, up $3.1 million, or 8.3%, linked quarter, driven by higher salaries and benefits, the sub-debt redemption loss, software and data processing, and other items. She said salary and benefit increases included “normal” annual adjustments, additional stock compensation, and a one-time retirement expense tied to a new split dollar agreement of about $420,000. The fully taxable equivalent efficiency ratio increased to 54.98% from 52.28%, primarily due to the higher expense base. Looking ahead, Shamburger said the company anticipates non-interest expense of approximately $40.5 million “for the remaining quarters,” and expects improvement in the efficiency ratio in the second quarter as certain one-time items do not repeat.
Regarding deposit and CD pricing, Davis said CDs totaling $568 million with an average rate of 3.83% will reprice in the second quarter, and management expects to retain most of those balances with interest savings of roughly 10 basis points. She also said $1.06 billion of CDs with an average rate of 3.79% will reprice by year-end. In Q&A, Davis said local short-term CD competition “paying well over 4%” eased, and that management believes it can reduce CD costs by “at least 10 basis points, maybe more.”
Southside ended the quarter with $2.68 billion in liquidity lines available, Shamburger said, and capital ratios “well above” well-capitalized thresholds. The company did not repurchase any common stock in the first quarter and had about 762,000 shares remaining under authorization. Donahoe said management will remain “opportunistic” on buybacks, adding that M&A remains part of its capital deployment strategy and that repurchases are typically considered when the stock sees “downward pressure.”
Donahoe also pointed to strategic initiatives during the quarter, including replacing the Woodlands loan production office with a full-service branch, opening a new branch in Tyler, and hiring a “30-year wealth management veteran” to help expand the wealth management platform in the Dallas-Fort Worth market. He said the company has also seen customer and employee opportunities created by disruption from bank acquisitions in Texas, including one C&I relationship added in the first quarter following an out-of-state acquisition.
Management said it remains optimistic about 2026 and expects to report second-quarter results in July.
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.
