KBRA Affirms Ratings for Southside Bancshares, Inc.

KBRA affirms the senior unsecured debt rating of BBB+, the subordinated debt rating of BBB, and the short-term debt rating of K2 for Tyler, Texas-based Southside Bancshares, Inc. (NASDAQ: SBSI) ("Southside" or “the company”). KBRA also affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for the bank subsidiary, Southside Bank. The Outlook for all long-term ratings is Stable.

Key Credit Considerations

SBSI’s ratings are supported by a balance sheet composition that is more conservative than peers’ in our opinion. Most importantly, we believe a low loan-to-earning asset ratio of 59% suggests that absolute credit loss content at the company is comparatively lower than peer, which should serve SBSI well in the event of an economic slowdown should one occur. Additionally, a lower proportion of loans on the balance sheet contributes to a RWA density which is recognizably lower than the peer group, and, as a result, allows for rather strong risk-weighted core capital ratios. Southside’s core deposit base is also considered a relative ratings strength with noninterest bearing deposits representing >20% of total deposits, while core deposits to total funding has averaged 75% over a five-year period.

SBSI’s asset quality has been pristine, including very low charge-offs and non-performing assets over the last few years - a function of the company's sound underwriting and relatively conducive credit conditions - and KBRA believes SBSI management’ team has a conservative credit risk appetite. While management noted the possibility of oversupply of multi-family developments in their Austin market, the company’s proven sound underwriting policies offsets the concentrations in office and multifamily (8% and 18% of total loans, respectively) in our view.

SBSI continues to improve capital levels as TCE increased to 7.3% and CET1 increased to 12.7% as of 2Q24. The strong credit discipline and moderately diverse lines of revenue continue to be the drivers of core earnings and capital accretion. The capital levels and the additional loss absorption should be sufficient to cushion a potential credit cycle, and we expect the company to continue to modestly build capital.

The higher for longer interest rate environment has negatively impacted SBSI’s NIM as liquidity has been strategically invested in the investment portfolio (32% of assets) though NIM appears to have troughed in 2Q24 (quarterly margin expansion of 1 bp).

Rating Sensitivities

A rating upgrade in the near-to-medium term is unlikely. Maintenance of strong asset quality ratios despite higher than peer concentrations in CRE and construction along with a continued solid liquidity profile could precipitate positive rating momentum over the longer term. Deterioration in asset quality that is greater than peer, a meaningful change to the company’s earning asset composition, or a decline in capital metrics could pressure the ratings.

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