Thank you, Jade. Good morning, everyone, and welcome to Southside Bancshares 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 in other disclosures and presentations, I'll remind you that forward-looking statements are subject to risk and uncertainties.

Factors that could materially change our current forward-looking assumptions are described in our earnings release and our Form 10-K. Joining me today are our President and CEO, Keith Donahoe; CFO, Julie Shamburger; and Chief Treasury Officer, Suni Davis.

Keith will start us off with his comments on the quarter, then Julie will give an overview of our financial results, and Suni will end with comments on securities and funding. We will have a Q&A session following Suni's remarks.

I will now turn the call over to Keith.

Thank you, Lindsey, and welcome to today's call. Second quarter results are highlighted by earnings per share of 90 cents, a return on average assets of 1.23, and a return on average tangible common equity of 16.09.

A $3.6 million increase in linked-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 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. The higher funding costs, combined with a slight drop in yield on our earning assets, resulted in a lower net interest margin of 2.90.

Strong new loan production was offset by a return to elevated payoffs, resulting in a relatively flat loan balance during the quarter. However, we continue to target mid-single digits for 2026 loan 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. Of the second quarter new loan production, 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 totals $1.47 billion today, up slightly from first quarter levels of approximately $1.3. Our won but not closed category remains healthy at just over $287 million.

The 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, C&I 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.

We 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 quarter— second quarter items include a faster-than-expected buildout of our Fort Worth manage- wealth management team, which now includes three highly experienced and well-connected individuals.

Additionally, we started construction on a new branch in the Celina-Prosper area. 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.

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%. Diluted earnings per share were 90 cents for the second quarter, up 12 cents per share linked 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 quarter. Non-performing assets remained low on a linked-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 1 basis point to .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 at 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 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-quarter basis. This was primarily driven by a decrease in brokered 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 that 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 remained 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 2.26, a decrease of 12 basis points from 2.38.

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 costs. For the three months ended June 30th, we had a decrease in net interest income of $355,000 or .6% compared to the linked quarter.

Non-interest income increased $1.4 million or 11.2% for the linked 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 BOLI 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 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 ended June 30, 2025. 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 the loss on the redemption of sub debt recognized in the first quarter.

Salary and employee benefits decreased due to additional stock compensation and 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 Suni.

Thank you.

Thank you, Julie. The mortgage-backed security purchases in the second quarter have coupons ranging from 5% to 5.5%, a duration of 7 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.

Prepays 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 3.69 during the second quarter, a 10 basis point decrease from Q1.

CDs totaling $581.3 million with an average rate of 3.72 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 fund CDs.

Additionally, $941.4 million in CDs with an average rate of 3.71 will reprice 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 2.25 versus existing accounts averaging 1.57. However, excluding one large seasonal relationship, the rate on new deposits in June was 1.73.

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 brokered deposits into FHLB advances and Fed discount window borrowings, due primarily to rate, but also due to desired terms. We utilize a mix of wholesale funding sources and navigate 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 prepay ability. 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 4.63. After this maturity and some amortization related to past unwinds 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% have 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.

We are modeling a beta 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.

Hey, good morning, everybody. I wanted to start off on credit, and you lowered the classified assets linked quarter, and I know you've got some projects in Austin.

Can you maybe just walk through, seems 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.

Yes. Thank you for that question.

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 that portfolio.

Large amount of that are multifamily properties that were construction loans that have now moved into lease-up phase, and that story continues where their lease-up was happening. They're increasing occupancy, but at lower rental rates.

We've got customers that are actively selling or moving into refinance opportunities. There's still liquidity in the market for both of those right now, and so we do anticipate some additional payoffs in the third quarter that will continue to benefit our classified asset bucket.

I don't know if that helps, but I can dig in a little bit more if you need.

No, that's helpful, Keith. You gave the expense guide 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 adds in Fort Worth?

Any thoughts on the fees from here?

Sure. All right.

With respect to the ones I really called out, the trust fees, like I said, 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 dreamed of it happening.

It has resulted in some increased fees earlier in the year. I think if we continue the pace we're at, I think there's a strong chance that we will beat the budget that we've put in place, the $9 million for the year.

The budget for six months was $4,250,000. I didn't call that out specifically, and then it was weighted a little heavier in the back at $4,750,000.

Since we were over eight I think what did I say, 8.6%? I hate to promise, but we're optimistic that we will continue that trajectory for the rest of the year with the new team in place and what have you.

Then on the brokerage side, obviously that's very market-driven. We did budget, 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're 5.5% over that budget target at year-to-date, and so we think, provided the market cooperates, that we will continue to see some 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 of some refunds on some of our debit card expense. We do expect our debit card expense to be at more in line with that rate, and those are netted in our reporting, and that's GAAP accounting.

It's really hard to say on deposit services. It 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. 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. Hope that helps, Brett, on the fees.

Yeah. No, that's very helpful.

Thanks for all the color.

Sure.

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 quarters? Just trying to balance the production versus the payoffs as we think about the next couple quarters.

Good question, Michael. It may not be a peak.

Just looking forward, and we don't 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.

We have a fair amount of loans gearing up to pay off in the third quarter. I hesitate to say we saw peak.

On the flip side, loan production has been really strong. I tried to show that from 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. In addition, I do anticipate some of the construction loans, the newer construction loans that we put on the books in '25, that they're going to start funding up at some point.

One good thing about those fundings is those tend to be our higher spread loans. I'm looking forward to seeing some of that hit the books.

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

It does. Very helpful, Keith.

Maybe just as a follow-up separate topic, just as it relates to the margin pressure this quarter, how much of that was really driven by some of the funding mix changes versus some of the more structural pressure on earning asset yields? Then just separately, I think you mentioned $105 or so million of fixed rate loans that are going to 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.

The funding pressure was a large contributor to the narrowed NIM and margin. I'm looking forward to some of those loans repricing, we can hopefully take some of that pressure off the funding side.

Also in the first quarter, we did have a couple of loan revenue non-recurring items. One was a purchase accretion on one particular loan that kind of elevated, if you will.

We also had an exit fee on a loan that was paid off in the first quarter that

had been in restructured. I think we alluded to that fee last quarter.

That was a little bit of it. It was both on the revenue side as well as the funding side that kind of pushed together.

Now, I will tell you, just to give you some color on new loan origination, we are focused on both term loans that are 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.

We've lost deals at 185 over SOFR and below. We won't play in that game.

We have been competitive and winning somewhere as low as 190, 195. That's where the market is today, and we are being selective when we go that skinny.

There is some downward pressure. I think we saw a little bit of decline in the loan yields in the second quarter.

Some of that is because we did close a fair amount in the first six months of the year on some thinner margins.

That's very helpful color, Keith, and Julie. I'll step back.

Thanks.

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 some 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 remainder of the year?

Of course, deposit competition is pretty intense, and we're seeing it really heavily on our public fund CDs for sure. 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 swaps mature in Q1, so that funding had to be replaced, and the funding had to be kept in place, and so that repriced up by 105 or so basis points.

We also saw the spreads 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. The floating rate paid to us based on SOFR compared to our borrowing, the spread between the two of those has tripled since year-end.

That was a driver on some of our wholesale expense, but also just we moved out of brokered and into FHLB and discount window because those sources became cheaper. Brokered was cheaper than both, and now brokered is more expensive than both.

I don't see that changing, cuz that's been in place for a few months now. Then 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.

We have a couple of ideas in the works to help generate some deposits.

I know your question was on the funding side, but one thing to highlight, and I think Suni mentioned this, but 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. If there is an upward movement by the Fed, that will be beneficial to us in that event.

We'll reprice those loans faster than what we've done in the past, so.

Got it. Then, I guess just taking that together, it kind of sounds like there's going to be some continued margin pressure going forward, just 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.

Perfect. Then just one other question, switching to capital.

You guys haven't been active with buybacks in the first half of the year, and capital levels have been building. What's your appetite for repurchases in the back half of the year?

Then maybe could you talk more about kind of your preferences for capital deployment? Thanks.

In the big picture, yes, share buybacks are still part of the plan. We're also in the market looking for acquisitions.

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.

Got it. 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?

I'm assuming if it would be kind of in-market or out-of-market for you guys?

We're still moving along the same strategy. Size-wise, $1 billion is comfortable for us.

We could stretch a little bit on $1 billion, and we've got an ability to shrink our balance sheet to some extent. If it's not a $1 billion asset, then it's going to be something of more size in the $3 to $4 billion range.

That would be something that would be of interest, too, because that gets us over the $10 billion mark with a little bit of scale. We're in an awkward space, but there's more opportunities for $1 billion to $1.3 billion banks than there are for $3 to $4, I'm actively spending time and open to discussions.

Got it. Thanks for taking my questions.

Yep. Thank you.

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 potential seller appetite, pricing?

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?

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. When you actually get into the discussions, people are still wanting the price that they want.

That's, 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 a private aspect, it's hard sometimes for them to get their head around exactly what the value of that organization really is. When you get into those discussions, that's when you start to realize that there's still some hesitancy on meeting the bid-ask in those negotiations, so.

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.

If we're filling in a geography, that is something of interest to me and to us. We've got plenty of room to grow in Dallas, and Houston, and Austin.

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.

Got it. Okay.

That's helpful. I guess from a balance sheet perspective, one, I'm curious why I think you said securities should stay kind of flat-ish in the $2.7, $2.8 billion range.

I'm curious, given the pressure on funding costs and sounds like even incremental CD costs and repricing, why you wouldn't think more about letting that book 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?

I think the elevated loan payoffs has a lot to do with it right now. When that slows down, cuz 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.

Right now, it is something we talked 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 the high payoffs on the loan side.

What we're looking at is right now, 6% coupon MBS that are yielding in the 5.75 range, for the asset quality, it's a nice yield. Yeah.

Not that different from loan yields, so, yeah.

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.

The loans we're pricing in the narrow spread are high quality, and everybody's in the market trying to get them. So.

Yeah. No, that makes sense.

Then just I guess lastly for me, and apologies if I missed this, but how are you thinking about just overall NII? It was, I guess, down slightly on an FTE basis quarter-over-quarter.

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, still hit that mid-single digits.

How do you think about NII growth versus kind of all those dynamics?

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's a move by the Fed.

It's our intention to continue to grow that, but we are under some pressure from the funding side.

Got it. Okay.

Thanks so much for the time and the answers. Appreciate it.

Thank you.

Thank you everyone for joining us today. We appreciate your interest in Southside Bancshares and in the opportunity to answer your questions.

We are optimistic about 2026, and I look forward to our third quarter earnings call sometime in October. Thank you.