Southside Bancshares Inc.
04/30/2026 | Press release | Distributed by Public on 04/30/2026 12:52
Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our consolidated financial condition, changes in our financial condition and results of our operations, and should be read and reviewed in conjunction with the financial statements, and the notes thereto, in this Quarterly Report on Form 10-Q, and in our 2025 Form 10-K. Certain risks, uncertainties and other factors, including those set forth under "Risk Factors" in Part I, Item 1A. of the 2025 Form 10-K and elsewhere in this Quarterly Report on Form 10-Q, may cause actual results to differ materially from the results discussed in the forward-looking statements appearing in this discussion and analysis.
Forward-Looking Statements
Certain statements of other than historical fact that are contained in this report may be considered to be "forward-looking statements" within the meaning of and subject to the safe harbor protections of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance, nor should they be relied upon as representing management's views as of any subsequent date. These statements may include words such as "expect," "estimate," "project," "anticipate," "appear," "believe," "could," "should," "may," "might," "will," "would," "seek," "intend," "probability," "risk," "goal," "target," "objective," "plans," "potential," and similar expressions. Forward-looking statements are statements with respect to our beliefs, plans, expectations, objectives, goals, anticipations, assumptions, estimates, intentions and future performance and are subject to significant known and unknown risks and uncertainties, which could cause our actual results to differ materially from the results discussed in the forward-looking statements. For example, trends in asset quality, capital, liquidity, our ability to sell nonperforming assets, expense reductions, planned operational efficiencies and earnings from growth and certain market risk disclosures, including the impact of interest rates and our expectations regarding rate changes, tax reform, inflation, the impacts related to or resulting from other economic factors are based upon information presently available to management and are dependent on choices about key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and could be materially different from what actually occurs in the future. Accordingly, our results could materially differ from those that have been estimated. The most significant factors that could cause future results to differ materially from those anticipated by our forward-looking statements include general economic conditions in our markets, including higher energy and gas prices, the impact of changes in interest rates on our financial projections, models and guidance, as well as the effects of declines in the real estate market, tariffs or trade wars (including reduced consumer spending, lower economic growth or recession, reduced demand for U.S. exports, disruptions to supply chains and decreased demand for other banking products and services), high unemployment and increasing insurance costs, as well as the financial stress to borrowers as a result of the foregoing, all of which could impact economic growth and could cause a reduction in financial transactions and business activities, including decreased deposits and reduced loan originations and our ability to manage liquidity in a rapidly changing and unpredictable market. Other factors that could cause actual results to differ materially from those indicated by forward-looking statements include, but are not limited to, the following:
•general (i) political conditions, including, without limitation, governmental action and uncertainty resulting from U.S. and global political trends and (ii) economic conditions, either globally, nationally, in the State of Texas, or in the specific markets in which we operate, including, without limitation, the deterioration of the commercial real estate, residential real estate, construction and development, energy, oil and gas, credit or liquidity markets, which could cause an adverse change in our net interest margin, or a decline in the value of our assets, which could result in realized losses, as well as the risks of an economic slowdown or recession and the effects of inflationary pressures, changes in interest rates, tariffs or trade wars (including reduced consumer spending, supply chain issues and adverse impacts to credit quality) and the related financial stress on borrowers and changes to customer behavior and credit risk as a result of the foregoing;
•changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed Funds rate and changes in international trade policies, tariffs and treaties affecting imports and exports, and their related impacts on macroeconomic conditions, customer behavior, funding costs and loan and securities portfolios;
•inflation and fluctuations in interest rates that reduce our margins and yields, the fair value of financial instruments, the level of loan originations or prepayments on loans we have made and make, and the cost we pay to retain and attract deposits and secure other types of funding;
•current or future legislation, regulatory changes or changes in monetary or fiscal policy that adversely affect the businesses in which we or our customers or our borrowers are engaged, including the Federal Reserve's actions to manage interest rates, tariffs, trade policies, supply chain disruptions, immigration policies and/or disputes and other regulatory responses to economic conditions;
•the impact of interest rate fluctuations on our financial projections, models and guidance;
•legislative, tax and regulatory changes, including those that impact the money supply, trade, immigration and inflation;
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•acts of terrorism, war or other conflicts, natural disasters, such as hurricanes, freezes, flooding and other man-made disasters, such as oil spills or power outages, health emergencies, epidemics or pandemics, climate change or other catastrophic events that may affect general economic conditions or cause other disruptions and/or increase costs, including, but not limited to, property and casualty and other insurance costs;
•potential impacts of the adverse developments in the banking industry highlighted by high-profile bank failures, including impacts on customer confidence, deposit outflows, liquidity and the regulatory response thereto (including increases in the cost of our deposit insurance assessments);
•technological changes, including potential cyber-security incidents and other disruptions, developments in AI, or innovations to the financial services industry, including as a result of the increased telework environment;
•our ability to identify and address cyber-security risks such as data security breaches, malware, "denial of service" attacks, "hacking" and identity theft, which may be exacerbated by developments in generative AI and which could disrupt our business and result in the disclosure of and/or misuse or misappropriation of confidential or proprietary information, disruption or damage of our systems, increased costs, significant losses, or adverse effects to our reputation;
•changes in the interest rate yield curve such as flat, inverted or steep yield curves, or changes in the interest rate environment that impact net interest margins and may impact prepayments on our MBS portfolio;
•the risk that our enterprise risk management framework, compliance program or our corporate governance and supervisory oversight functions may not identify or address risks adequately, which may result in unexpected losses;
•the effect of compliance with legislation or regulatory changes;
•the implementation under the presidential administration of a regulatory reform agenda that is different than that of the prior administration, impacting the rulemaking, supervision, examination and enforcement priorities of the federal banking agencies;
•credit risks of borrowers, including any increase in those risks due to changing economic conditions, including inflation, tariffs and immigration policies;
•increases in our nonperforming assets;
•risks related to environmental liability as a result of certain lending activity;
•our ability to maintain adequate liquidity to fund operations and growth;
•our ability to control interest rate risk;
•any applicable regulatory limits or other restrictions on the Bank and its ability to pay dividends to us;
•the failure of our assumptions underlying our allowance for credit losses and other estimates;
•the failure to maintain an effective system of controls and procedures, including internal control over financial reporting;
•the effectiveness of our derivative financial instruments and hedging activities to manage risk;
•unexpected outcomes of, and the costs associated with, existing or new litigation involving us;
•potential claims, damages, penalties, fines and reputational damage resulting from pending or future litigation, regulatory proceedings and enforcement actions;
•changes impacting our balance sheet strategy;
•risks related to actual mortgage prepayments diverging from projections;
•risks related to fluctuations in the price per barrel of crude oil, including as a result of recent conflict in the Middle East;
•significant increases in competition in the banking and financial services industry;
•changes in consumer spending, borrowing and saving habits, including as a result of inflation, tariffs, supply chain disruptions, fluctuating interest rates and recessionary concerns;
•execution of future acquisitions, reorganization or disposition transactions, including the risk that the anticipated benefits of such transactions are not realized;
•our ability to increase market share and control expenses;
•our ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by our customers;
•the effect of changes in accounting policies and practices;
•adverse changes in the status or financial condition of the GSEs which impact the GSEs' guarantees or ability to pay or issue debt;
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•adverse changes in the credit portfolios of other U.S. financial institutions relative to the performance of certain of our investment securities;
•risks related to actual U.S. agency MBS prepayments exceeding projected prepayment levels;
•risks related to U.S. agency MBS prepayments increasing due to U.S. government programs designed to assist homeowners to refinance their mortgage that might not otherwise have qualified;
•risks related to loans secured by real estate, including the risk that the value and marketability of collateral could decline;
•risks associated with our common stock and our other securities, including fluctuations in our stock price and general volatility in the stock market; and
•other risks and uncertainties discussed in "Part I - Item 1A. Risk Factors" in the 2025 Form 10-K.
All written or oral forward-looking statements made by us or attributable to us are expressly qualified by this cautionary notice. We disclaim any obligation to update any factors or to announce publicly the result of revisions to any of the forward-looking statements included herein to reflect future events or developments, unless otherwise required by law.
Critical Accounting Estimates
Our accounting and reporting estimates conform with U.S. GAAP and general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We consider accounting estimates that can (1) be replaced by other reasonable estimates and/or (2) changes to an estimate from period to period that have a material impact on the presentation of our financial condition, changes in financial condition or results of operations as well as (3) those estimates that require significant and complex assumptions about matters that are highly uncertain to be critical accounting estimates. We consider our critical accounting estimates to include allowance for credit losses on loans and off-balance-sheet credit exposure.
Critical accounting estimates include a high degree of uncertainty in the underlying assumptions. Management bases its estimates on historical experience, current information and other factors deemed relevant. The development, selection and disclosure of our critical accounting estimates are reviewed with the Audit Committee of the Company's Board of Directors. Actual results could differ from these estimates. For additional information regarding critical accounting policies, refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates," "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Allowance for Credit Losses - Loans and Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures," "Note 1 - Summary of Significant Accounting and Reporting Policies," "Note 5 - Loans and Allowance for Loan Losses" and "Note 17 - Off-Balance-Sheet Arrangements, Commitments and Contingencies" in the 2025 Form 10-K. As of March 31, 2026, there have been no significant changes to our critical accounting estimates.
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Non-GAAP Financial Measures
Certain non-GAAP measures are used by management to supplement the evaluation of our performance. These include the following fully taxable-equivalent measures: net interest income (FTE), net interest margin (FTE) and net interest spread (FTE), which include the effects of taxable-equivalent adjustments using a federal income tax rate of 21% to increase tax-exempt interest income to a tax-equivalent basis. Interest income earned on certain assets is completely or partially exempt from federal income tax. As such, these tax-exempt instruments typically yield lower returns than taxable investments.
Net interest income (FTE), net interest margin (FTE) and net interest spread (FTE). Net interest income (FTE) is a non-GAAP measure that adjusts for the tax-favored status of net interest income from certain loans and investments and is not permitted under GAAP in the consolidated statements of income. We believe that this measure is the preferred industry measurement of net interest income, and that it enhances comparability of net interest income arising from taxable and tax-exempt sources. The most directly comparable financial measure calculated in accordance with GAAP is our net interest income. Net interest margin (FTE) is the ratio of net interest income (FTE) to average earning assets. The most directly comparable financial measure calculated in accordance with GAAP is our net interest margin. Net interest spread (FTE) is the difference in the average yield on average earning assets on a tax-equivalent basis and the average rate paid on average interest bearing liabilities. The most directly comparable financial measure calculated in accordance with GAAP is our net interest spread.
These non-GAAP financial measures should not be considered alternatives to GAAP-basis financial statements and other bank holding companies may define or calculate these non-GAAP measures or similar measures differently. Whenever we present a non-GAAP financial measure in an SEC filing, we are also required to present the most directly comparable financial measure calculated and presented in accordance with GAAP and reconcile the differences between the non-GAAP financial measure and such comparable GAAP measure.
In the following table we present the reconciliation of net interest income to net interest income adjusted to a fully taxable-equivalent basis assuming a 21% marginal tax rate for interest earned on tax-exempt assets such as municipal loans and investment securities (dollars in thousands), along with the calculation of net interest margin (FTE) and net interest spread (FTE).
| Non-GAAP Reconciliations | ||||||||||||||
|
Three Months Ended March 31, |
||||||||||||||
| 2026 | 2025 | |||||||||||||
| Net interest income (GAAP) | $ | 57,689 | $ | 53,852 | ||||||||||
| Tax-equivalent adjustments: | ||||||||||||||
| Loans | 538 | 581 | ||||||||||||
| Tax-exempt investment securities | 1,328 | 1,772 | ||||||||||||
|
Net interest income (FTE) (1)
|
$ | 59,555 | $ | 56,205 | ||||||||||
| Average earning assets | $ | 8,031,446 | $ | 7,958,424 | ||||||||||
| Net interest margin | 2.91 | % | 2.74 | % | ||||||||||
|
Net interest margin (FTE) (1)
|
3.01 | % | 2.86 | % | ||||||||||
| Net interest spread | 2.28 | % | 2.08 | % | ||||||||||
|
Net interest spread (FTE) (1)
|
2.38 | % | 2.20 | % | ||||||||||
(1)These amounts are presented on a fully taxable-equivalent basis and are non-GAAP measures.
Management believes adjusting net interest income, net interest margin and net interest spread to a fully taxable-equivalent basis is a standard practice in the banking industry as these measures provide useful information to make peer comparisons. Tax-equivalent adjustments are reported in the respective earning asset categories as listed in the "Average Balances with Average Yields and Rates" tables under Results of Operations.
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OVERVIEW
ECONOMIC CONDITIONS
Ongoing tariff negotiations and conflict in the Middle East have caused some uncertainty related to inflation levels, energy and gas prices, and their impact on interest rates and the overall economy. While it is too early to discern the likely outcome of these tariff negotiations and military conflicts, the current economic conditions and growth prospects for our markets continue to reflect a solid and overall positive outlook. Higher inflation levels, including higher energy and gas prices, and interest rate fluctuations could have a negative impact on both our consumer and commercial borrowers in the future. Overall, however, the Texas markets we serve remain healthy.
DEPOSITS
Our deposits were $6.87 billion at March 31, 2026, a slight increase of $9.3 million, or 0.1%, from December 31, 2025. At March 31, 2026, we had 178,823 total deposit accounts with an average balance of $34,000. Our estimated uninsured deposits were 38.4% of total deposits as of March 31, 2026. When excluding affiliate deposits (Southside-owned deposits) and public fund deposits (all collateralized), our total estimated deposits without insurance or collateral was 21.9% of total deposits as of March 31, 2026.
Our noninterest bearing deposits represent approximately 20.0% of total deposits. During the three months ended March 31, 2026, our cost of interest bearing deposits decreased 18 basis points to 2.65% from 2.83% for the three months ended March 31, 2025. Our cost of total deposits for the first quarter of 2026 decreased 13 basis points to 2.13% from 2.26% for the three months ended March 31, 2025.
CAPITAL RESOURCES AND LIQUIDITY
Our capital ratios and contingent liquidity sources remain solid. The table below shows our total lines of credit, borrowings, total amounts available for future liquidity, and swapped value as of March 31, 2026 (in thousands):
| March 31, 2026 | ||||||||||||||||||||||||||||||||
| Line of Credit | Borrowings | Total Available for Future Liquidity | Swapped | |||||||||||||||||||||||||||||
| FHLB advances | $ | 2,534,622 | $ | 315,943 | $ | 2,218,679 | $ | - | ||||||||||||||||||||||||
| Federal Reserve discount window | 649,350 | 265,000 | 384,350 | 230,000 | ||||||||||||||||||||||||||||
| Correspondent bank lines of credit | 80,000 | - | 80,000 | - | ||||||||||||||||||||||||||||
| Total liquidity lines | $ | 3,263,972 | $ | 580,943 | $ | 2,683,029 | $ | 230,000 | ||||||||||||||||||||||||
Operating Results
Net income was $23.3 million for the three months ended March 31, 2026, compared to $21.5 million for the same period in 2025, an increase of $1.8 million, or 8.1%. The increase in net income was due to a $3.8 million increase in net interest income, and a $2.4 million increase in noninterest income, partially offset by a $3.5 million increase in noninterest expense, a $652,000 increase in provision for credit losses and a $319,000 increase in income tax expense. Earnings per diluted common share were $0.78 for the three months ended March 31, 2026, compared to $0.71 for the same period in 2025, an increase of $0.07, or 9.9%.
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Financial Condition
Our total assets increased $287.6 million, or 3.4%, to $8.80 billion at March 31, 2026 from $8.51 billion at December 31, 2025. Our securities portfolio increased by $164.3 million, or 6.1%, to $2.87 billion at March 31, 2026, compared to $2.70 billion at December 31, 2025. The increase in the securities portfolio was primarily due to an increase in MBS during the three months ended March 31, 2026. Our FHLB stock increased $2.3 million, or 16.4%, to $16.4 million from $14.1 million at December 31, 2025, due to the increase in our FHLB borrowings during the three months ended March 31, 2026.
Loans at March 31, 2026 were $4.95 billion, an increase of $128.2 million, or 2.7%, compared to $4.82 billion at December 31, 2025, due to increases of $93.2 million in construction loans, $40.6 million in commercial real estate loans and $12.2 million in commercial loans. These increases were partially offset by decreases of $9.6 million in municipal loans, $7.1 million in 1-4 family residential loans and $1.2 million in loans to individuals. Loans held for sale increased $146,000, or 11.0%, to $1.5 million at March 31, 2026 from $1.3 million at December 31, 2025.
Our nonperforming assets at March 31, 2026 decreased $28.5 million, or 74.6%, to $9.7 million and represented 0.11% of total assets, compared to $38.2 million, or 0.45% of total assets, at December 31, 2025, primarily due to a decrease of $27.5 million in restructured loans. The decrease in restructured loans was due to the payoff of a $27.5 million restructured commercial real estate loan in the first quarter that was originally restructured with an extension of maturity in the first quarter of 2025 to allow for an extended lease up period. Nonaccruing loans decreased $927,000, or 8.8%, to $9.6 million, and the ratio of nonaccruing loans to total loans was 0.19% and 0.22% for March 31, 2026 and December 31, 2025, respectively. Repossessed assets were $7,000 at March 31, 2026, compared to no repossessed assets at December 31, 2025. There was $128,000 of OREO at March 31, 2026 and $248,000 at December 31, 2025.
Our deposits increased $9.3 million, or 0.1%, and remained relatively unchanged from $6.87 billion at December 31, 2025. Brokered deposits increased $110.7 million, or 16.5%, partially offset by decreases in retail deposits of $82.0 million, or 1.6%, and public fund deposits of $19.4 million, or 1.7%. The decrease in retail deposits of $82.0 million consists of $53.1 million of noninterest bearing deposits and $28.9 million of interest bearing deposits.
Total FHLB borrowings increased $104.8 million, or 49.6%, to $315.9 million at March 31, 2026 from $211.1 million at December 31, 2025.
Other borrowings increased $146.9 million, or 70.4%, to $355.5 million at March 31, 2026, from $208.7 million at December 31, 2025, due to a $155.0 million increase in FRDW borrowings.
Our subordinated notes, net of unamortized debt issuance costs, decreased $92.1 million, or 38.4%, to $147.5 million at March 31, 2026 from $239.7 million at December 31, 2025, as a result of the full redemption of $100.0 million in aggregate principal amount of 3.875% fixed-to-floating rate subordinated notes during the first quarter of 2026. Refer to "Note 7 - Long-term Debt" in our consolidated financial statements included in this report for a detailed description of the terms of the redemption of the subordinated notes.
Our total shareholders' equity at March 31, 2026 increased 0.9%, or $7.2 million, to $854.9 million, or 9.7% of total assets, compared to $847.6 million, or 10.0% of total assets, at December 31, 2025. The increase in shareholders' equity was the result of net income of $23.3 million, stock compensation expense of $1.6 million and common stock issued under our dividend reinvestment plan of $233,000, partially offset by cash dividends paid of $10.7 million, other comprehensive loss of $7.0 million and net issuance of common stock under employee stock plans of $172,000.
Key financial indicators management follows include, but are not limited to, numerous interest rate sensitivity and interest rate risk indicators, credit risk, operations risk, liquidity risk, capital risk, regulatory risk, inflation risk, competition risk, yield curve risk, U.S. agency MBS prepayment risk and economic risk indicators.
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Balance Sheet Strategy
Determining the appropriate size of the balance sheet is one of the critical decisions any bank makes. Our balance sheet is not merely the result of a series of micro-decisions, but rather the size is controlled based on the economics of assets compared to the economics of funding and funding sources. Changing interest rate environments and economic conditions require that we monitor the interest rate sensitivity of our assets, the funding driving our growth and closely align ALCO objectives accordingly.
We ended the first quarter of 2026 with approximately $384.4 million in available liquidity from the FRDW, in addition to the approximately $2.22 billion available from the credit line with FHLB due primarily to the blanket lien on our loan portfolio and to a lesser extent, securities available as collateral. At March 31, 2026, the estimated deposits, without insurance or collateral, to total deposits, excluding affiliate deposits (Southside-owned deposits) was 21.9%, or $1.51 billion.
From time to time, we may enter into certain interest rate swap contracts with third parties using specific variable rate, as well as short-term (generally three months or less) fixed rate borrowings designated as cash flow hedges under ASC Topic 815. At March 31, 2026, we had swap contracts covering $385 million in brokered deposits and $230 million in FRDW borrowings for a total of $615 million of cash flow hedges. We expect the cash flows from swap contracts to be highly effective in hedging the variability in future cash flows attributable to fluctuations in the underlying SOFR rate. At March 31, 2026, these contracts reflected a weighted average of 3.78% with a remaining average weighted maturity of 1.5 years. During the three months ended March 31, 2026, $245 million cash flow hedge interest rate swap contracts matured. As of March 31, 2026, a pre-tax unrealized gain of $1.7 million was recognized in other comprehensive income, and there was no ineffective portion of these hedges. At December 31, 2025, the outstanding balance of cash flow hedges was $860 million. Refer to "Note 9 - Derivative Financial Instruments and Hedging Activities" in our consolidated financial statements included in this report for a detailed description of our hedging policy and methodology related to derivative instruments.
We continue to evaluate the lowest cost wholesale funding sources and will utilize either brokered deposits, FHLB advances, FRDW borrowings, or any combination of the three funding sources to minimize interest expense while also utilizing cash flow hedges to mitigate the impacts of interest rate movements. Wholesale funding and securities are utilized to enhance overall profitability, to determine the appropriate leverage of our capital and to determine acceptable levels of credit, interest rate and liquidity risk consistent with prudent capital management. Wholesale funds are invested primarily in U.S. agency MBS and long-term municipal securities and to a lesser extent, corporate securities. Although the securities often carry lower yields than loans, these securities generally (i) increase the overall quality of our assets because of either the implicit or explicit guarantees of the U.S. Government and the guarantees of the municipalities, (ii) are more liquid than individual loans and (iii) may be used to collateralize our borrowings or other obligations.
Risks associated with this asset structure include a potentially lower net interest rate spread and margin when compared to our peers, changes in the slope of the yield curve, increased interest rate risk, the length of interest rate cycles, changes in volatility or spreads associated with the MBS, municipal and corporate securities, the unpredictable nature of MBS prepayments and credit risks associated with the municipal and corporate securities. See "Part I - Item 1A. Risk Factors - Risks Related to Our Business" in the 2025 Form 10-K for a discussion of risks related to interest rates. An additional risk is significant increases in interest rates, especially long-term interest rates, which could adversely impact the fair value of the AFS securities portfolio and could also impact our equity capital. Due to the unpredictable nature of MBS prepayments, the length of interest rate cycles and the slope of the interest rate yield curve, net interest income could fluctuate more than simulated under the scenarios modeled by our ALCO and described under "Item 7A. Quantitative and Qualitative Disclosures about Market Risk" in this report.
Our securities portfolio increased $164.3 million, or 6.1%, from $2.70 billion at December 31, 2025 to $2.87 billion at March 31, 2026, with an increase in U.S. Agency MBS, partially offset by decreases in corporate bonds and municipal securities. As a result, securities totaled 32.6% of assets at March 31, 2026, compared to 31.8% at December 31, 2025. The increase in the U.S. Agency MBS was due to the purchase of $313.5 million of low premium and discounted MBS with coupons ranging from 4.50% to 5.50%. The net increase in the total securities portfolio was due to securities purchased during the three months ended March 31, 2026, which more than offset maturities, principal payments, net amortization and the decrease in the fair value of the portfolio.
Cash and cash equivalents decreased to 4.4% of total assets at March 31, 2026, compared to 4.6% at December 31, 2025.
Our FHLB borrowings increased $104.8 million, or 49.6%, to $315.9 million at March 31, 2026 from $211.1 million at December 31, 2025. As of March 31, 2026 and December 31, 2025, we had $265.0 million and $110.0 million, respectively, in borrowings from the FRDW.
As of March 31, 2026, our total wholesale funding as a percentage of deposits, not including brokered deposits, increased to 22.4% from 16.0% at December 31, 2025.
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Our brokered deposits may consist of CDs and non-maturity deposits which may be raised quickly with terms tailored to our funding needs. We had $24.1 million in brokered CDs at March 31, 2026, of which $10.0 million are related to our cash flow hedges, an increase from $19.8 million at December 31, 2025. At March 31, 2026, our brokered CDs had a weighted average cost of 368 basis points and remaining maturities of less than a month. Our brokered non-maturity deposits increased to $758.8 million at March 31, 2026, of which $375.0 million are related to our cash flow hedges, from $652.4 million at December 31, 2025, with a weighted average cost of 376 and 359 basis points, respectively. Our wholesale funding policy currently allows for maximum brokered deposits of the lesser of $1.05 billion, or 12% of total assets. Potential higher interest expense and lack of customer loyalty are risks associated with the use of brokered deposits.
At March 31, 2026, the majority of the securities portfolio was funded by non-maturity deposits, some of which are included in wholesale funding that accounts for approximately 47% of the funding source, of which approximately 45% is swapped at a fixed rate, providing protection from rising interest rates.
We have partial term fair value hedges for certain of our fixed rate callable AFS municipal securities and partial term fair value hedges of fixed rate AFS MBS using the portfolio layer method. The instruments are designated as fair value hedges as the changes in the fair value of the interest rate swap are expected to partially offset changes in the fair value of the hedged item attributable to changes in the SOFR swap rate, the designated benchmark interest rate. As of March 31, 2026, $24.1 million in hedging instruments were used to hedge municipal securities with a carrying amount of $20.7 million included in our AFS securities portfolio in our consolidated balance sheets, representing approximately 12.0% of the AFS municipal portfolio. As of March 31, 2026, $234.0 million in hedging instruments were used to hedge a layer of the closed portfolio of AFS MBS with a carrying value of $980.8 million, or 67.3% of the AFS MBS portfolio. These derivative contracts involve the receipt of floating rate interest from a counterparty in exchange for us making fixed-rate payments over the life of the agreement, without the exchange of the underlying notional value.
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Results of Operations
Our results of operations are dependent primarily on net interest income, which is the difference between the interest income earned on assets (loans and investments) and interest expense due on our funding sources (deposits and borrowings) during a particular period. Results of operations are also affected by our noninterest income, provision for credit losses, noninterest expenses and income tax expense. General economic and competitive conditions, particularly changes in interest rates, inflation, changes in interest rate yield curves, prepayment rates of MBS and loans, repricing of loan relationships, government policies and actions of regulatory authorities also significantly affect our results of operations. Future changes in applicable laws, regulations or government policies may also have a material impact on our results of operations. See "Part I - Item 1A. Risk Factors - Risks Related to Our Business" in the 2025 Form 10-K for further discussion of these risks.
The following table presents net interest income for the periods presented (in thousands):
| Three Months Ended | ||||||||||||||
| March 31, | ||||||||||||||
| 2026 | 2025 | |||||||||||||
| Interest income: | ||||||||||||||
| Loans | $ | 70,988 | $ | 67,590 | ||||||||||
| Taxable investment securities | 4,649 | 6,363 | ||||||||||||
| Tax-exempt investment securities | 6,156 | 8,481 | ||||||||||||
| MBS | 17,908 | 13,523 | ||||||||||||
| FHLB stock and equity investments | 249 | 483 | ||||||||||||
| Other interest earning assets | 2,306 | 3,848 | ||||||||||||
| Total interest income | 102,256 | 100,288 | ||||||||||||
| Interest expense: | ||||||||||||||
| Deposits | 36,563 | 37,247 | ||||||||||||
| FHLB borrowings | 975 | 5,837 | ||||||||||||
| Subordinated notes | 3,577 | 932 | ||||||||||||
| Trust preferred subordinated debentures | 915 | 1,014 | ||||||||||||
| Repurchase agreements | 784 | 666 | ||||||||||||
| Other borrowings | 1,753 | 740 | ||||||||||||
| Total interest expense | 44,567 | 46,436 | ||||||||||||
| Net interest income | $ | 57,689 | $ | 53,852 | ||||||||||
Net Interest Income
Net interest income is one of the principal sources of a financial institution's earnings stream and represents the difference or spread between interest and fee income generated from interest earning assets and the interest expense paid on interest bearing liabilities. Fluctuations in interest rates or interest rate yield curves, as well as repricing characteristics and volume and changes in the mix of interest earning assets and interest bearing liabilities, materially impact net interest income. During the last four months of 2025, the Federal Reserve reduced the target federal funds rate by 75 basis points to 3.50% to 3.75%. During the three months ended March 31, 2026, the Federal Reserve held the target federal funds rate steady. If the federal funds rate remains elevated or is not further reduced, it may negatively impact our net interest income.
Net interest income for the three months ended March 31, 2026 increased $3.8 million, or 7.1%, compared to the same period in 2025. The increase in net interest income was primarily due to a decrease in the average rate paid on our interest bearing liabilities and an increase in the volume and change in the mix of our interest earning assets, partially offset by an increase in the average balance of our interest bearing liabilities. Total interest income increased $2.0 million, or 2.0%, to $102.3 million for the three months ended March 31, 2026, compared to $100.3 million during the same period in 2025. Total interest expense decreased $1.9 million, or 4.0%, to $44.6 million for the three months ended March 31, 2026, compared to $46.4 million for the same period in 2025. Our net interest margin and our net interest margin (FTE), a non-GAAP measure, both increased to 2.91% and 3.01%, respectively, for the three months ended March 31, 2026, compared to 2.74% and 2.86%, respectively, for the same period in 2025. Our net interest spread and net interest spread (FTE), also a non-GAAP measure, increased to 2.28% and 2.38%, respectively, for the three months ended March 31, 2026, compared to 2.08% and 2.20%, respectively, for the same period in 2025. See "Non-GAAP Financial Measures" for more information and a reconciliation to GAAP.
Southside Bancshares, Inc. |47
Quarterly Analysis of Changes in Interest Income and Interest Expense
The following table presents on a fully taxable-equivalent basis, a non-GAAP measure, the net change in net interest income and sets forth the dollar amount of increase (decrease) in the average volume of interest earning assets and interest bearing liabilities and changes in yields/rates. Volume/Yield/Rate variances (change in volume times change in yield/rate) have been allocated to amounts attributable to changes in volumes and to changes in yields/rates in proportion to the amounts directly attributable to those changes (in thousands). The comparison between the quarters includes an additional change factor that shows the effect of the difference in the number of days in each period for assets and liabilities that accrue interest based upon the actual number of days in the period.
| Three Months Ended March 31, 2026 Compared to 2025 | |||||||||||||||||
| Change Attributable to | Total | ||||||||||||||||
| Fully Taxable-Equivalent Basis: | Average Volume | Average Yield/Rate | Change | ||||||||||||||
| Interest income on: | |||||||||||||||||
|
Loans (1)
|
$ | 3,724 | $ | (369) | $ | 3,355 | |||||||||||
| Loans held for sale | 1 | (1) | - | ||||||||||||||
| Taxable investment securities | (1,387) | (327) | (1,714) | ||||||||||||||
|
Tax-exempt investment securities (1)
|
(2,345) | (424) | (2,769) | ||||||||||||||
| Mortgage-backed and related securities | 4,775 | (390) | 4,385 | ||||||||||||||
| FHLB stock, at cost, and equity investments | (247) | 13 | (234) | ||||||||||||||
| Interest earning deposits | (583) | (552) | (1,135) | ||||||||||||||
| Federal funds sold | (332) | (75) | (407) | ||||||||||||||
| Total earning assets | 3,606 | (2,125) | 1,481 | ||||||||||||||
| Interest expense on: | |||||||||||||||||
| Savings accounts | 239 | 702 | 941 | ||||||||||||||
| CDs | (91) | (1,913) | (2,004) | ||||||||||||||
| Interest bearing demand accounts | 1,123 | (744) | 379 | ||||||||||||||
| FHLB borrowings | (3,537) | (1,325) | (4,862) | ||||||||||||||
| Subordinated notes, net of unamortized debt issuance costs | 1,541 | 1,104 | 2,645 | ||||||||||||||
| Trust preferred subordinated debentures, net of unamortized debt issuance costs | - | (99) | (99) | ||||||||||||||
| Repurchase agreements | 148 | (30) | 118 | ||||||||||||||
| Other borrowings | 1,674 | (661) | 1,013 | ||||||||||||||
| Total interest bearing liabilities | 1,097 | (2,966) | (1,869) | ||||||||||||||
| Net change | $ | 2,509 | $ | 841 | $ | 3,350 | |||||||||||
(1)Interest yields on loans and securities that are nontaxable for federal income tax purposes are presented on a fully taxable-equivalent basis. See "Non-GAAP Financial Measures" for more information and for a reconciliation to GAAP.
The increase in total interest income for the three months ended March 31, 2026, was attributable to an increase in the average balance of and a change in the mix of our interest earning assets when compared to the same period in 2025. The decrease in total interest expense for the three months ended March 31, 2026, was primarily attributable to the decrease in interest rates on our interest bearing liabilities to 2.88% for the three months ended March 31, 2026 from 3.03% for the same period in 2025, partially offset by an increase in the average balance of our interest bearing liabilities of $69.8 million, or 1.1%, for the three months ended March 31, 2026, compared to the same period in 2025.
Southside Bancshares, Inc. |48
The following table presents average earning assets and interest bearing liabilities together with the average yield on the earning assets and the average rate of the interest bearing liabilities (dollars in thousands) for the three months ended March 31, 2026 and 2025. The interest and related yields presented are on a fully taxable-equivalent basis and are therefore non-GAAP measures. See "Non-GAAP Financial Measures" for more information and for a reconciliation to GAAP.
| Average Balances with Average Yields and Rates (Annualized) | |||||||||||||||||||||||||||||||||||
| (unaudited) | |||||||||||||||||||||||||||||||||||
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| March 31, 2026 | March 31, 2025 | ||||||||||||||||||||||||||||||||||
| Average Balance | Interest |
Average Yield/Rate (3)
|
Average Balance | Interest |
Average Yield/Rate (3)
|
||||||||||||||||||||||||||||||
| ASSETS | |||||||||||||||||||||||||||||||||||
|
Loans (1)
|
$ | 4,879,867 | $ | 71,515 | 5.94 | % | $ | 4,625,902 | $ | 68,160 | 5.98 | % | |||||||||||||||||||||||
| Loans held for sale | 792 | 11 | 5.63 | % | 752 | 11 | 5.93 | % | |||||||||||||||||||||||||||
| Securities: | |||||||||||||||||||||||||||||||||||
|
Taxable investment securities (2)
|
578,480 | 4,649 | 3.26 | % | 749,155 | 6,363 | 3.44 | % | |||||||||||||||||||||||||||
|
Tax-exempt investment securities (2)
|
865,279 | 7,484 | 3.51 | % | 1,134,590 | 10,253 | 3.66 | % | |||||||||||||||||||||||||||
|
Mortgage-backed and related securities (2)
|
1,418,491 | 17,908 | 5.12 | % | 1,041,038 | 13,523 | 5.27 | % | |||||||||||||||||||||||||||
| Total securities | 2,862,250 | 30,041 | 4.26 | % | 2,924,783 | 30,139 | 4.18 | % | |||||||||||||||||||||||||||
| FHLB stock, at cost, and equity investments | 21,693 | 249 | 4.66 | % | 43,285 | 483 | 4.53 | % | |||||||||||||||||||||||||||
| Interest earning deposits | 258,860 | 2,235 | 3.50 | % | 319,889 | 3,370 | 4.27 | % | |||||||||||||||||||||||||||
| Federal funds sold | 7,984 | 71 | 3.61 | % | 43,813 | 478 | 4.42 | % | |||||||||||||||||||||||||||
| Total earning assets | 8,031,446 | 104,122 | 5.26 | % | 7,958,424 | 102,641 | 5.23 | % | |||||||||||||||||||||||||||
| Cash and due from banks | 82,443 | 89,703 | |||||||||||||||||||||||||||||||||
| Accrued interest and other assets | 521,219 | 457,948 | |||||||||||||||||||||||||||||||||
| Less: Allowance for loan losses | (45,491) | (45,105) | |||||||||||||||||||||||||||||||||
| Total assets | $ | 8,589,617 | $ | 8,460,970 | |||||||||||||||||||||||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||||||||||||||||||||||||||
| Savings accounts | $ | 683,270 | 2,370 | 1.41 | % | $ | 593,953 | 1,429 | 0.98 | % | |||||||||||||||||||||||||
| CDs | 1,328,312 | 12,402 | 3.79 | % | 1,336,815 | 14,406 | 4.37 | % | |||||||||||||||||||||||||||
| Interest bearing demand accounts | 3,588,863 | 21,791 | 2.46 | % | 3,406,342 | 21,412 | 2.55 | % | |||||||||||||||||||||||||||
| Total interest bearing deposits | 5,600,445 | 36,563 | 2.65 | % | 5,337,110 | 37,247 | 2.83 | % | |||||||||||||||||||||||||||
| FHLB borrowings | 144,008 | 975 | 2.75 | % | 614,897 | 5,837 | 3.85 | % | |||||||||||||||||||||||||||
| Subordinated notes, net of unamortized debt issuance costs | 195,664 | 3,577 | 7.41 | % | 92,060 | 932 | 4.11 | % | |||||||||||||||||||||||||||
| Trust preferred subordinated debentures, net of unamortized debt issuance costs | 60,280 | 915 | 6.16 | % | 60,275 | 1,014 | 6.82 | % | |||||||||||||||||||||||||||
| Repurchase agreements | 92,622 | 784 | 3.43 | % | 75,291 | 666 | 3.59 | % | |||||||||||||||||||||||||||
| Other borrowings | 189,444 | 1,753 | 3.75 | % | 33,061 | 740 | 9.08 | % | |||||||||||||||||||||||||||
| Total interest bearing liabilities | 6,282,463 | 44,567 | 2.88 | % | 6,212,694 | 46,436 | 3.03 | % | |||||||||||||||||||||||||||
| Noninterest bearing deposits | 1,363,826 | 1,334,933 | |||||||||||||||||||||||||||||||||
| Accrued expenses and other liabilities | 82,948 | 88,450 | |||||||||||||||||||||||||||||||||
| Total liabilities | 7,729,237 | 7,636,077 | |||||||||||||||||||||||||||||||||
| Shareholders' equity | 860,380 | 824,893 | |||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 8,589,617 | $ | 8,460,970 | |||||||||||||||||||||||||||||||
| Net interest income (FTE) | $ | 59,555 | $ | 56,205 | |||||||||||||||||||||||||||||||
| Net interest margin (FTE) | 3.01 | % | 2.86 | % | |||||||||||||||||||||||||||||||
| Net interest spread (FTE) | 2.38 | % | 2.20 | % | |||||||||||||||||||||||||||||||
(1)Interest on loans includes net fees on loans that are not material in amount.
(2)For the purpose of calculating the average yield, the average balance of securities do not include unrealized gains and losses on AFS securities.
(3)Yield/rate includes the impact of applicable derivatives.
Note: As of March 31, 2026 and 2025, loans totaling $9.6 million and $4.3 million, respectively, were on nonaccrual status. Our policy is to reverse previously accrued but unpaid interest on nonaccrual loans; thereafter, interest income is recorded to the extent received when appropriate.
Southside Bancshares, Inc. |49
Noninterest Income
Noninterest income consists of revenue generated from a broad range of financial services and activities and other fee-generating services that we either provide or in which we participate.
The following table details the categories included in noninterest income (dollars in thousands):
|
Three Months Ended March 31, |
2026 | ||||||||||||||||||||||
| Change From | |||||||||||||||||||||||
| 2026 | 2025 | 2025 | |||||||||||||||||||||
| Deposit services | $ | 5,931 | $ | 5,829 | $ | 102 | 1.7 | % | |||||||||||||||
| Net gain (loss) on sale of securities AFS | - | (554) | 554 | 100.0 | % | ||||||||||||||||||
| Gain (loss) on sale of loans | 118 | 55 | 63 | 114.5 | % | ||||||||||||||||||
| Trust fees | 2,202 | 1,765 | 437 | 24.8 | % | ||||||||||||||||||
| BOLI | 986 | 799 | 187 | 23.4 | % | ||||||||||||||||||
| Brokerage services | 1,363 | 1,120 | 243 | 21.7 | % | ||||||||||||||||||
| Other noninterest income | 1,996 | 1,209 | 787 | 65.1 | % | ||||||||||||||||||
| Total noninterest income (loss) | $ | 12,596 | $ | 10,223 | $ | 2,373 | 23.2 | % | |||||||||||||||
The 23.2% increase in noninterest income for the three months ended March 31, 2026, when compared to the same period in 2025, was due to increases in all noninterest income categories, however, the primary increases occurred in other noninterest income, trust fees and a decrease in net loss on sale of AFS securities.
During the three months ended March 31, 2025, we sold MBS that resulted in a net loss on sale of AFS securities of $554,000.
Gain on sale of loans increased for the three months ended March 31, 2026, when compared to the same period in 2025, due to an increase in the volume of loans sold.
Trust fees increased for the three months ended March 31, 2026, when compared to the same periods in 2025, due to an increase in accounts under management and to a lesser extent, fee repricing.
The increase in BOLI income for the three months ended March 31, 2026, when compared to the same period in 2025, was primarily due to the purchase of a new policy for $5.5 million late in the fourth quarter of 2025 and to a lesser extent, a death benefit of $47,000 realized in the first quarter of 2026 for a former covered officer.
Brokerage services income increased for the three months ended March 31, 2026, when compared to the same period in 2025, due to an increase in assets under management.
Other noninterest income increased for the three months ended March 31, 2026, when compared to the same period in 2025, due to increases in swap fee income, mortgage servicing fee income, merchant services income and letter of credit fees, partially offset by a decrease in equity investment income.
Southside Bancshares, Inc. |50
Noninterest Expense
We incur certain types of noninterest expenses associated with the operation of our various business activities. The following table details the categories included in noninterest expense (dollars in thousands):
|
Three Months Ended March 31, |
2026 | ||||||||||||||||||||||
| Change From | |||||||||||||||||||||||
| 2026 | 2025 | 2025 | |||||||||||||||||||||
| Salaries and employee benefits | $ | 24,332 | $ | 22,382 | $ | 1,950 | 8.7 | % | |||||||||||||||
| Net occupancy | 3,459 | 3,404 | 55 | 1.6 | % | ||||||||||||||||||
| Advertising, travel & entertainment | 1,043 | 924 | 119 | 12.9 | % | ||||||||||||||||||
| ATM expense | 430 | 378 | 52 | 13.8 | % | ||||||||||||||||||
| Professional fees | 1,485 | 1,520 | (35) | (2.3) | % | ||||||||||||||||||
| Software and data processing | 3,097 | 2,839 | 258 | 9.1 | % | ||||||||||||||||||
| Communications | 287 | 383 | (96) | (25.1) | % | ||||||||||||||||||
| FDIC insurance | 937 | 947 | (10) | (1.1) | % | ||||||||||||||||||
| Amortization of intangibles | 132 | 223 | (91) | (40.8) | % | ||||||||||||||||||
| Loss on redemption of subordinated notes | 791 | - | 791 | 100.0 | % | ||||||||||||||||||
| Other noninterest expense | 4,583 | 4,089 | 494 | 12.1 | % | ||||||||||||||||||
| Total noninterest expense | $ | 40,576 | $ | 37,089 | $ | 3,487 | 9.4 | % | |||||||||||||||
The increase in noninterest expense for the three months ended March 31, 2026, when compared to the same period in 2025, was primarily due to increases in salaries and employee benefits expense, loss on redemption of subordinated notes, other noninterest expense and software and data processing expense.
Salaries and employee benefits expense increased during the three months ended March 31, 2026, compared to the same period in 2025, due to increases in direct salary expense, retirement expense and health insurance expense.
For the three months ended March 31, 2026, direct salary expense increased $1.4 million, or 7.4%, when compared to the same period in 2025, primarily due to normal salary increases effective in the first quarter of 2026 and an increase in stock compensation expense.
Retirement expense, included in salaries and employee benefits, increased $440,000, or 52.7%, for the three months ended March 31, 2026, when compared to the same period in 2025. This increase was primarily due to an increase in our split dollar expense related to the execution of a new split dollar agreement with an executive officer.
Health and life insurance expense, included in salaries and employee benefits, increased $70,000, or 3.5%, for the three months ended March 31, 2026, when compared to the same period in 2025, primarily due to premiums for a new short-term disability policy. We have a self-insured health plan which is supplemented with a stop loss policy.
Advertising, travel and entertainment expense increased during the three months ended March 31, 2026, compared to the same period in 2025, due to increases in meals and entertainment expenses and donations.
ATM expense increased for the three months ended March 31, 2026, when compared to the same period in 2025, due to an increase in ATM maintenance costs.
Software and data processing expense increased for the three months ended March 31, 2026, when compared to the same period in 2025, due to new software contracts and increases in existing contract renewal costs.
Communications expense decreased for the three months ended March 31, 2026, when compared to the same period in 2025, resulting from improved network management efficiency.
Amortization of intangibles decreased for the three months ended March 31, 2026, when compared to the same period in 2025, due primarily to a decrease in core deposit intangible amortization which is recognized on an accelerated method resulting in a decline in expense over the amortization period.
Loss on redemption of subordinated notes consisted of the remaining unamortized discount of $601,000 and debt issuance costs of $190,000 associated with the notes at the time of redemption on February 15, 2026.
Southside Bancshares, Inc. |51
Other noninterest expense increased for the three months ended March 31, 2026, when compared to the same period in 2025, primarily due to increases in online banking expense, printing and supplies expense, losses on disposal of fixed assets, ATM losses, advantage check card losses and trust expense.
Income Taxes
Pre-tax income for the three months ended March 31, 2026 was $28.3 million, an increase of 7.9% compared to $26.2 million for the three months ended March 31, 2025. We recorded income tax expense of $5.0 million for the three months ended March 31, 2026, compared to income tax expense of $4.7 million for the same periods in 2025. The ETR as a percentage of pre-tax income was 17.8% for the three months ended March 31, 2026, compared to an ETR as a percentage of pre-tax income of 18.0% for the three months ended March 31, 2025. The marginally lower ETR for the three months ended March 31, 2026 was partially due to a decrease in state income tax expense as a percentage of pre-tax income.
The ETR differs from the statutory rate of 21% primarily due to the effect of tax-exempt income from municipal loans and securities, BOLI and state income tax. The net deferred tax asset totaled $29.2 million at March 31, 2026, compared to $27.1 million at December 31, 2025. The increase in the net deferred tax asset is primarily the result of an increase in the unrealized loss in the AFS securities portfolio.
See "Note 11 - Income Taxes" to our consolidated financial statements included in this report. No valuation allowance was recorded at March 31, 2026 or December 31, 2025, as management believes it is more likely than not that all of the deferred tax asset items will be realized in future years.
Southside Bancshares, Inc. |52
Composition of Loans
One of our main objectives is to seek attractive lending opportunities in Texas, primarily in the market areas in which we operate. Refer to "Part I - Item 1. Business - Market Area" in the 2025 Form 10-K for a discussion of our primary market area and the geographic concentration of our loan portfolio as of December 31, 2025. There were no substantial changes in these concentrations during the three months ended March 31, 2026. The majority of our loan originations are made to borrowers who live in and/or conduct business in the market areas of Texas in which we operate or adjoin, with the exception of municipal loans, which were made primarily throughout the state of Texas. Municipal loans are made to municipalities, counties, school districts and colleges.
The following table sets forth loan totals by class as of the dates presented (dollars in thousands):
| Compared to | |||||||||||||||||||||||||||||
| December 31, 2025 | March 31, 2025 | ||||||||||||||||||||||||||||
| March 31, 2026 | December 31, 2025 | March 31, 2025 | Change (%) | Change (%) | |||||||||||||||||||||||||
| Real estate loans: | |||||||||||||||||||||||||||||
| Construction | $ | 641,818 | $ | 548,570 | $ | 458,101 | 17.0 | % | 40.1 | % | |||||||||||||||||||
| 1-4 family residential | 717,298 | 724,354 | 741,432 | (1.0) | % | (3.3) | % | ||||||||||||||||||||||
| Commercial | 2,753,421 | 2,712,816 | 2,577,229 | 1.5 | % | 6.8 | % | ||||||||||||||||||||||
| Commercial loans | 456,896 | 444,720 | 371,643 | 2.7 | % | 22.9 | % | ||||||||||||||||||||||
| Municipal loans | 337,089 | 346,720 | 371,271 | (2.8) | % | (9.2) | % | ||||||||||||||||||||||
| Loans to individuals | 39,639 | 40,811 | 47,563 | (2.9) | % | (16.7) | % | ||||||||||||||||||||||
| Total loans | $ | 4,946,161 | $ | 4,817,991 | $ | 4,567,239 | 2.7 | % | 8.3 | % | |||||||||||||||||||
Our total loan portfolio increased $128.2 million, or 2.7%, compared to December 31, 2025 and increased $378.9 million, or 8.3%, compared to March 31, 2025 with increases in construction loans, commercial real estate loans and commercial loans when compared to December 31, 2025 and March 31, 2025, partially offset by decreases in the remaining loan categories.
At March 31, 2026, our real estate loans represented 83.1% of our loan portfolio and were comprised of commercial real estate loans of 67.0%, 1-4 family residential loans of 17.4% and construction loans of 15.6%. Commercial real estate loans primarily include loans collateralized by retail, commercial office buildings, multi-family residential buildings, medical facilities and offices, senior living, assisted living and skilled nursing facilities, warehouse facilities, hotels and churches. Our 1-4 family residential loans consist primarily of loans secured by first mortgages on owner occupied 1-4 family residences. Our construction loans are collateralized by property located primarily in or near the market areas we serve.
Nonperforming Assets
Nonperforming assets consist of delinquent loans 90 days or more past due, nonaccrual loans, OREO, repossessed assets and restructured loans. Nonaccrual loans are loans 90 days or more delinquent and collection in full of both the principal and interest is not expected. Additionally, some loans that are not delinquent or that are delinquent less than 90 days may be placed on nonaccrual status if it is probable that we will not receive contractual principal and interest payments in accordance with the terms of the respective loan agreements. When a loan is categorized as nonaccrual, the accrual of interest is discontinued and any accrued balance is reversed for financial statement purposes. OREO represents real estate taken in full or partial satisfaction of debts previously contracted. The dollar amount of OREO is based on a current evaluation of the OREO at the time it is recorded on our books, net of estimated selling costs. Updated valuations are obtained as needed and any additional impairments are recognized. Restructured loans represent loans that have been modified due to the borrower experiencing financial difficulty by providing interest rate reductions or below market interest rates, restructuring amortization schedules and other actions intended to minimize potential losses. Categorization of a loan as nonperforming is not in itself a reliable indicator of potential loan loss. Other factors, such as the value of collateral securing the loan and the financial condition of the borrower are considered in judgments as to potential loan loss.
Southside Bancshares, Inc. |53
The following table sets forth nonperforming assets for the periods presented (dollars in thousands):
| Compared to | |||||||||||||||||||||||||||||
| December 31, 2025 |
March 31, 2025 |
||||||||||||||||||||||||||||
|
March 31, 2026 |
December 31, 2025 |
March 31, 2025 |
Change (%) | Change (%) | |||||||||||||||||||||||||
| Nonaccrual loans | $ | 9,559 | $ | 10,486 | $ | 4,254 | (8.8) | % | 124.7 | % | |||||||||||||||||||
| Accruing loans past due more than 90 days | - | - | - | - | - | ||||||||||||||||||||||||
| Restructured loans | 34 | 27,509 | 27,505 | (99.9) | % | (99.9) | % | ||||||||||||||||||||||
| OREO | 128 | 248 | 388 | (48.4) | % | (67.0) | % | ||||||||||||||||||||||
| Repossessed assets | 7 | - | 46 | 100.0 | % | (84.8) | % | ||||||||||||||||||||||
| Total nonperforming assets | $ | 9,728 | $ | 38,243 | $ | 32,193 | (74.6) | % | (69.8) | % | |||||||||||||||||||
| Total loans | $ | 4,946,161 | $ | 4,817,991 | $ | 4,567,239 | |||||||||||||||||||||||
| Allowance for loan losses at end of period | 45,963 | 45,100 | 44,623 | ||||||||||||||||||||||||||
| Ratio of nonaccruing loans to: | |||||||||||||||||
| Total loans | 0.19 | % | 0.22 | % | 0.09 | % | |||||||||||
| Ratio of nonperforming assets to: | |||||||||||||||||
| Total assets | 0.11 | % | 0.45 | % | 0.39 | % | |||||||||||
| Total loans | 0.20 | % | 0.79 | % | 0.70 | % | |||||||||||
| Total loans and OREO | 0.20 | % | 0.79 | % | 0.70 | % | |||||||||||
| Ratio of allowance for loan losses to: | |||||||||||||||||
| Nonaccruing loans | 480.83 | % | 430.10 | % | 1,048.97 | % | |||||||||||
| Nonperforming assets | 472.48 | % | 117.93 | % | 138.61 | % | |||||||||||
| Total loans | 0.93 | % | 0.94 | % | 0.98 | % | |||||||||||
| Net charge-offs to average loans outstanding | 0.01 | % | 0.06 | % | 0.03 | % | |||||||||||
Nonperforming assets hinder our ability to earn interest income. Decreases in earnings can result from both the loss of interest income and the costs associated with maintaining the OREO, for taxes, insurance and other operating expenses. We actively market all OREO properties and do not hold them for investment purposes.
Allowance for Credit Losses - Loans
In accordance with ASC 326, the allowance for credit losses on loans is estimated and recognized upon origination of the loan based on expected credit losses. The CECL model uses historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about future events. The impact of varying economic conditions and portfolio stress factors are a component of the credit loss models applied to each portfolio. Reserve factors are specific to the loan segments that share similar risk characteristics based on the probability of default assumptions and loss given default assumptions, over the contractual term. The forecasted periods gradually mean-revert the economic inputs to their long-run historical trends. Management evaluates the economic data points used in the Moody's forecasting scenarios on a quarterly basis to determine the most appropriate impact to the various portfolio characteristics based on management's view and applies weighting to various forecasting scenarios as deemed appropriate based on known and expected economic activities. Management also considers and may apply relevant qualitative factors, not previously considered, to determine the appropriate allowance level. The use of the CECL model includes significant judgment by management and may differ from those of our peers due to different historical loss patterns, economic forecasts, and the length of time of the reasonable and supportable forecast period and reversion period.
We utilize Moody's Analytics economic forecast scenarios and assign probability weighting to those scenarios which best reflect management's views on the economic forecast. The probability weighting and scenarios utilized for the estimate of the allowance were generally reflective of the economic forecast in our CECL model as of March 31, 2026.
When determining the appropriate allowance for credit losses on our loan portfolio, our commercial construction and real estate loans, commercial loans and municipal loans utilize the probability of default/loss given default discounted cash flow approach. Reserves on these loans are based upon risk factors including the loan type and structure, collateral type, leverage ratio,
Southside Bancshares, Inc. |54
refinancing risk and origination quality, among others. Our consumer construction real estate loans, 1-4 family residential loans and our loans to individuals use a loss rate based upon risk factors including loan types, origination year and credit scores.
Loans evaluated collectively in a pool are monitored to ensure they continue to exhibit similar risk characteristics with other loans in the pool. If a loan does not share similar risk characteristics with other loans, expected credit losses for that loan are evaluated individually.
As of March 31, 2026, our review of the loan portfolio indicated that an allowance for loan losses of $46.0 million was appropriate to cover expected losses in the portfolio. Changes in economic and other conditions, including the application of the CECL model, may require future adjustments to the allowance for loan losses.
During the three months ended March 31, 2026, the allowance for loan losses increased $863,000, or 1.9%, to $46.0 million, or 0.93% of total loans, when compared to $45.1 million, or 0.94% of total loans at December 31, 2025.
For the three months ended March 31, 2026, loan charge-offs were $680,000 and recoveries were $529,000. For the three months ended March 31, 2025, loan charge-offs were $613,000 and recoveries were $310,000. We recorded a provision for credit losses for loans of $1.0 million and $42,000 for the three months ended March 31, 2026 and 2025, respectively.
Allowance for Credit Losses - Off-Balance-Sheet Credit Exposures
Allowance for off-balance-sheet credit exposures were as follows (in thousands):
|
Three Months Ended March 31, |
|||||||||||
| 2026 | 2025 | ||||||||||
| Balance at beginning of period | $ | 3,166 | $ | 3,141 | |||||||
| Provision for (reversal of) off-balance-sheet credit exposures | 396 | 652 | |||||||||
| Balance at end of period | $ | 3,562 | $ | 3,793 | |||||||
Our off-balance-sheet credit exposures include contractual commitments to extend credit and standby letters of credit. For these credit exposures we evaluate the expected credit losses using usage given defaults and credit conversion factors depending on the type of commitment and based upon historical usage rates. These assumptions are reevaluated on an annual basis and adjusted if necessary. For additional information regarding our methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures, see "Note 12 - Off-Balance-Sheet Arrangements, Commitments and Contingencies" to our consolidated financial statements included in this report.
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Capital Resources and Liquidity
Our total shareholders' equity at March 31, 2026 increased 0.9%, or $7.2 million, to $854.9 million, or 9.7% of total assets, compared to $847.6 million, or 10.0% of total assets, at December 31, 2025. The increase in shareholders' equity was the result of net income of $23.3 million, stock compensation expense of $1.6 million and common stock issued under our dividend reinvestment plan of $233,000, partially offset by cash dividends paid of $10.7 million, other comprehensive loss of $7.0 million and net issuance of common stock under employee stock plans of $172,000.
The Company's Common Equity Tier 1 capital includes common stock and related paid-in capital, net of treasury stock, and retained earnings. The Bank's Common Equity Tier 1 capital includes common stock and related paid-in capital and retained earnings. In connection with the adoption of the Basel III Capital Rules, we elected to opt-out of the requirement to include accumulated other comprehensive income in Common Equity Tier 1. Common Equity Tier 1 for both the Company and the Bank is reduced by goodwill and other intangible assets, net of associated deferred tax liabilities.
Tier 1 capital includes Common Equity Tier 1 capital and additional Tier 1 capital. For the Company, additional Tier 1 capital at March 31, 2026 included $58.5 million of trust preferred securities. For bank holding companies that had assets of less than $15 billion as of December 31, 2009, trust preferred securities issued prior to May 19, 2010 can be treated as Tier 1 capital to the extent that they do not exceed 25% of Tier 1 capital after the application of capital deductions and adjustments. The Bank did not have any additional Tier 1 capital beyond Common Equity Tier 1 at March 31, 2026.
Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital for both the Company and the Bank includes a permissible portion of the allowance for credit losses on loans, off-balance sheet exposures and HTM securities. Tier 2 capital for the Company also includes $147.5 million of qualified subordinated debt as of March 31, 2026. The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes.
Management believes that, as of March 31, 2026, we met all capital adequacy requirements to which we were subject. It is management's intention to maintain our capital at a level acceptable to all regulatory authorities and future dividend payments will be determined accordingly. Regulatory authorities require that any dividend payments made by either the Company or the Bank not exceed earnings for that year. Accordingly, shareholders should not anticipate a continuation of the cash dividend payments simply because of the existence of a dividend reinvestment program. The payment of dividends will depend upon future earnings, our financial condition and other related factors including the discretion of the Board.
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To be categorized as well capitalized we must maintain minimum Common Equity Tier 1 risk-based, Tier 1 risk-based, Total capital risk-based and Tier 1 leverage ratios as set forth in the following table (dollars in thousands):
| Actual |
For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Actions Provisions |
||||||||||||||||||||||||||||||||||||
| March 31, 2026 | Amount | Ratio | Amount | Ratio | Amount | Amount | ||||||||||||||||||||||||||||||||
| Common Equity Tier 1 (to Risk-Weighted Assets) | ||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 758,649 | 12.68 | % | $ | 269,219 | 4.50 | % | N/A | N/A | ||||||||||||||||||||||||||||
| Bank Only | $ | 957,913 | 16.01 | % | $ | 269,205 | 4.50 | % | $ | 388,852 | 6.50 | % | ||||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | ||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 817,118 | 13.66 | % | $ | 358,959 | 6.00 | % | N/A | N/A | ||||||||||||||||||||||||||||
| Bank Only | $ | 957,913 | 16.01 | % | $ | 358,940 | 6.00 | % | $ | 478,587 | 8.00 | % | ||||||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | ||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 1,014,200 | 16.95 | % | $ | 478,611 | 8.00 | % | N/A | N/A | ||||||||||||||||||||||||||||
| Bank Only | $ | 1,007,454 | 16.84 | % | $ | 478,587 | 8.00 | % | $ | 598,234 | 10.00 | % | ||||||||||||||||||||||||||
|
Tier 1 Capital (to Average Assets) (1)
|
||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 817,118 | 9.74 | % | $ | 335,688 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||
| Bank Only | $ | 957,913 | 11.42 | % | $ | 335,593 | 4.00 | % | $ | 419,491 | 5.00 | % | ||||||||||||||||||||||||||
| Actual |
For Capital Adequacy Purposes |
To Be Well Capitalized Under Prompt Corrective Actions Provisions |
||||||||||||||||||||||||||||||||||||
| December 31, 2025 | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||
| Common Equity Tier 1 (to Risk-Weighted Assets) | ||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 744,172 | 12.87 | % | $ | 260,186 | 4.50 | % | N/A | N/A | ||||||||||||||||||||||||||||
| Bank Only | $ | 962,990 | 16.66 | % | $ | 260,102 | 4.50 | % | $ | 375,703 | 6.50 | % | ||||||||||||||||||||||||||
| Tier 1 Capital (to Risk-Weighted Assets) | ||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 802,640 | 13.88 | % | $ | 346,915 | 6.00 | % | N/A | N/A | ||||||||||||||||||||||||||||
| Bank Only | $ | 962,990 | 16.66 | % | $ | 346,803 | 6.00 | % | $ | 462,403 | 8.00 | % | ||||||||||||||||||||||||||
| Total Capital (to Risk-Weighted Assets) | ||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 1,072,160 | 18.54 | % | $ | 462,553 | 8.00 | % | N/A | N/A | ||||||||||||||||||||||||||||
| Bank Only | $ | 1,011,270 | 17.50 | % | $ | 462,403 | 8.00 | % | $ | 578,004 | 10.00 | % | ||||||||||||||||||||||||||
|
Tier 1 Capital (to Average Assets) (1)
|
||||||||||||||||||||||||||||||||||||||
| Consolidated | $ | 802,640 | 9.72 | % | $ | 330,251 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||
| Bank Only | $ | 962,990 | 11.67 | % | $ | 329,998 | 4.00 | % | $ | 412,498 | 5.00 | % | ||||||||||||||||||||||||||
(1)Refers to quarterly average assets as calculated in accordance with policies established by bank regulatory agencies.
As of March 31, 2026, Southside Bancshares and Southside Bank met all capital adequacy requirements under the Basel III Capital Rules that became fully phased-in as of January 1, 2019. Refer to the Supervision and Regulation section in the 2025 Form 10-K for further discussion of our capital requirements.
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The table below summarizes our key equity ratios for the periods presented:
|
Three Months Ended March 31, |
|||||||||||
| 2026 | 2025 | ||||||||||
| Return on average assets | 1.10 | % | 1.03 | % | |||||||
| Return on average shareholders' equity | 10.96 | % | 10.57 | % | |||||||
| Dividend payout ratio - Basic | 46.15 | % | 50.70 | % | |||||||
| Dividend payout ratio - Diluted | 46.15 | % | 50.70 | % | |||||||
| Average shareholders' equity to average total assets | 10.02 | % | 9.75 | % | |||||||
Management of Liquidity
Liquidity management involves our ability to convert assets to cash with minimum risk of loss while enabling us to meet our current and future obligations to our customers at any time. This means addressing (1) the immediate cash withdrawal requirements of depositors and other fund providers; (2) the funding requirements of lines and letters of credit; and (3) the short-term credit needs of customers. Liquidity is provided by cash, interest earning deposits and short-term investments that can be readily liquidated with a minimum risk of loss. At March 31, 2026, these investments were 7.2% of total assets, as compared with 8.1% and 8.6% for December 31, 2025 and March 31, 2025, respectively. The decrease to 7.2% at March 31, 2026 as compared to December 31, 2025 and March 31, 2025, is largely driven by an increase in total assets and a decrease in the short-term investment portfolio and cash and due from banks. Liquidity is further provided through the matching, by time period, of rate sensitive interest earning assets with rate sensitive interest bearing liabilities. The Bank has three unsecured lines of credit for the purchase of overnight federal funds at prevailing rates with Frost Bank, Amegy Bank and TIB - The Independent Bankers Bank for $40.0 million, $25.0 million and $15.0 million, respectively. There were no federal funds purchased at March 31, 2026 or December 31, 2025. To provide more liquidity in response to economic conditions in recent years, the Federal Reserve has encouraged broader use of the discount window. At March 31, 2026, the amount of additional funding the Bank could obtain from the FRDW, collateralized by securities, was approximately $384.4 million. At March 31, 2026 and December 31, 2025, we had $265.0 million and $110.0 million, respectively, in borrowings from the FRDW. At March 31, 2026, the amount of additional funding Southside Bank could obtain from FHLB, collateralized by FHLB stock, nonspecified loans and/or securities, was approximately $2.22 billion, net of FHLB stock purchases required. The Bank has a $5.0 million line of credit with Frost Bank to be used to issue letters of credit, and at March 31, 2026, the line had one outstanding letter of credit for $155,000. The Bank currently has four outstanding letters of credit from FHLB held as collateral for loans totaling $19.3 million.
Interest rate sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The ALCO closely monitors various liquidity ratios and interest rate spreads and margins. The ALCO utilizes a simulation model to perform interest rate simulation tests that apply various interest rate scenarios including immediate shocks and MVPE to assist in determining our overall interest rate risk and the adequacy of our liquidity position. In addition, the ALCO utilizes this simulation model to determine the impact on net interest income of various interest rate scenarios. By utilizing this methodology, we can determine potential changes to make to the asset and liability mix to minimize the change in net interest income under these various interest rate scenarios.
Management continually evaluates our liquidity position and currently believes the Company has adequate funding to meet our financial needs.
Expansion
In March 2026, we opened traditional branch locations at Bellwood Park in Tyler, Texas, and in The Woodlands, Texas.
Recent Accounting Pronouncements
See "Note 1 - Summary of Significant Accounting and Reporting Policies" in our consolidated financial statements included in this Quarterly Report on Form 10-Q.
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Southside Bancshares Inc. published this content on April 30, 2026, and is solely responsible for the information contained herein. Distributed via EDGAR on April 30, 2026 at 18:52 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]