The Payoff Wave Meets the Discount Window

SBSI's Q2: credit begins to resolve, a funding mix shift sets up NIM recovery, and the Fort Worth wealth build-out turns fee income into a growth engine.

SBSI · Earnings Call · 2026-07-24

Production vs. payoffs: the loop tightens, then loosens

For three quarters running, Southside Bancshares has played out the same loop: strong loan production, then a wall of payoffs as its construction-heavy CRE book matures to lease-up and sale. Q2 was the loudest instance yet — $487M of new production (vs. $431M in Q1 and $327M in Q4'25) against $297M of payoffs, "heavily weighted towards CRE to include five multifamily loans accounting for just under half of our total payoffs." Loans finished flat at $4.95B, but the pipeline grew to $1.47B and — more important — the credit book finally began to resolve. Classified assets fell $31M, largely pulled down by those same CRE payoffs. “We don't anticipate any losses inside of that inside of that portfolio.” — Keith Donahoe, President and CEO · 2026-07-24 Donahoe said of the multifamily credits he downgraded in Q1 (two Houston, one DFW, one Austin), and he expects "additional reductions in classified assets in the third quarter as several property owners are moving forward with open market sales and/or refinance opportunities." That calm had been telegraphed back in April, when management first framed these as the natural sequel to a long construction franchise: “We were predominantly a construction lender for a long time, and those have a finite life — they build, lease up, and then move into either a sale in the open market or refinance with other lenders on a permanent basis. We know we have some of that coming.” — Keith Donahoe, President and CEO · 2026-04-30 And about the four downgraded credits specifically, Donahoe added: “We are not unique — any Texas-based lender doing multifamily construction and term loans has seen weakness. I am not concerned about these.” — Keith Donahoe, President and CEO · 2026-04-30

Even though it was in the NPA bucket, we were never overly concerned. We obviously watched it closely. I think you can expect similar results from the other four we downgraded — we are not overly concerned with them either.
Keith Donahoe, President and CEO · 2026-04-30

The payoff wave hasn't crested — “we have a fair amount of loans gearing up to pay off in the third quarter” — Keith Donahoe, President and CEO · 2026-07-24 — but the direction of travel is constructive, and the next leg looks to come from higher-spread construction fundings beginning to cycle.

The funding re-jig: broker out, discount window in

The newsworthy move was on the liability side. The bank cut broker deposits by $778M and pivoted toward FHLB advances and, notably, Fed discount window borrowings — a source SBSI had not previously leaned on. The logic: the swap funding spread widened sharply as a $245M cash-flow hedge matured, flipping relative costs. CFO Suni Davis explained:

We also saw the spread on our swap funding increase. And so we pay a fixed rate to our counterparty and then they pay us floating and we have the rate on our borrowing... the spread between the two of those has tripled since year end.
Suni Davis, Chief Financial Officer · 2026-07-24

The 11-bp NIM decline to 2.90% was substantially this funding re-set. But the asset side sets up a recovery: 62% of loans float (82% with floors), ~$160M of fixed-rate loans at or below 4% reprice over the next 12 months with an estimated +200 bps uplift, and $581M of CDs reprice through Q3 with the spot rate down to 3.67%. Management is modeling flat Fed funds and expects “some of those loans repricing so we can hopefully take some of the pressure off the funding side.” — Keith Donahoe, President and CEO · 2026-07-24 Net interest income still rose 7% YoY, so the dollar story remains intact even as the margin compresses.

The fee engine: Fort Worth arrives early

The quarter's most company-unique signal was the early landing of the Fort Worth wealth team — three experienced advisors who arrived ahead of plan and pushed trust fees to run 8.4% over budget and 26.4% above last year. Brokerage fees climbed 18.3% YTD. CFO Julie Shamburger, on beating the $9M trust budget: “It happened before we could have even dreamt of it happening... I think there's a strong chance that we will beat the budget that we've put in place.” — Julie Shamburger, Chief Accounting Officer · 2026-07-24 With noninterest income up 23% YoY and the FTE efficiency ratio improving to 52.96% from 54.98% in March, the fee tailwind is broadening the revenue base at exactly the moment loan growth is flat.

Capital: M&A sets the pace

Capital stayed high and buybacks were absent after a strong stock run, with management preferring to keep powder dry for acquisitions. “Size-wise, a billion dollars is comfortable for us. We could stretch a little bit on a billion dollars... or something of more size in the three to $4 billion range that gets us over the $10 billion mark.” — Keith Donahoe, President and CEO · 2026-07-24 The wholesale funding mix, meanwhile, gives added flexibility — the discount window is prepayable, which aligns with the ALCO strategy. The recent tape is flat-to-down (-2.8% over 90 days) after peaking at $35.74 on July 16, so the market hasn't yet handed the quarter a premium. The NII trajectory, the credit-resolution tailwind, and the fee inflection make a solid case that the trough is behind — but the funding re-jig needs to show through in a stabilizing NIM before the full story lands.