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) (“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

The ratings are anchored by SBSI’s solid and stable earnings performance, particularly on a risk weighted basis, with RoRWA largely tracking between 1.80%-2.00% in recent years, firmly above the average of rated peers. Earnings have been underpinned by a balanced asset mix, reinforced by a balance sheet strategy designed to moderate credit risks (securities historically represented 35%-40% of assets) and promote greater earnings predictability. Earnings consistency also reflects a stable, albeit less diverse, noninterest income contribution (18%-20% of total revenues) and disciplined operating expense management. Due, in part, to demonstrated effectiveness of the company’s hedging strategies and proactive balance sheet management, which have locked in lower funding costs on a meaningful portion of the balance sheet, and an asset sensitive loan book, we anticipate NIM trends to outperform many peers over the near term. With that said, SBSI reflects a more price sensitive funding profile with comparatively greater utilization of non-core deposits and wholesale borrowings, although we recognize it partly match-funds the comparatively large and longer-duration investment portfolio. Higher than peer regulatory capital protection also reinforces the ratings. Regulatory capital as measured by the CET1 ratio (12.3% at 2Q23) is solid for the risk profile, continuing to track above the peer average despite slight regression over the past year stemming from a combination of CRE-driven loan growth and comparatively high shareholder distributions. We also recognize a seasoned management team and a measured risk appetite, exhibited through conservative underwriting and capital management. Although partly benefiting from the benign credit environment, loss content has been well contained over time while the NPA ratio has outperformed peers in recent years. While we consider the Texas markets within SBSI’s operating footprint as stable, given the CRE-centric loan book, collateral values may become vulnerable to prolonged periods of economic disruptions or volatile oil prices. However, reasonable LTV coverage, geographic diversity across the state, and manageable sector concentrations provide adequate mitigants.

Rating Sensitivities

Substantially greater scale and diversity in fee income along with a meaningfully improved funding profile and less reliance on more price sensitive sources could lead to positive rating momentum over time. Better than peer credit and regulatory capital trends would also need to be demonstrated. Conversely, material asset quality deterioration in the form of persistently outsized credit losses, substantial contraction of the CET1 ratio, or an unexpected or aggressive shift in capital management could pressure ratings.

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