SBSI Dividend at Risk: Rising NPA and Loan Growth Challenges Signal Caution

Southside Bancshares (SBSI) has long been a reliable dividend-paying bank, but recent financial trends raise red flags. A surge in nonperforming assets, weakening loan growth, and macroeconomic uncertainties are creating significant risks to its dividend sustainability. Here’s why investors should proceed with caution.

Key Risks to the Dividend

1. Surging Nonperforming Assets (NPAs)
   SBSI’s NPAs jumped 303% year-over-year to $32.2 million in Q1 2025, representing 0.39% of total assets. This spike stems largely from a $27.5 million commercial real estate loan restructuring. While management attributes this to strategic adjustments, such a sharp increase in credit issues signals potential vulnerabilities. A deterioration in economic conditions could strain reserves and force dividend cuts if defaults rise further.

2. Loan Growth Delays
   Total loans fell 2% quarter-over-quarter to $4.57 billion due to unexpected payoffs, despite management’s mid-single-digit growth guidance for 2025. Over 80% of anticipated growth is expected in the latter half of the year—a timeline that leaves little room for error. If loan origination lags, net interest income will suffer, directly impacting dividend affordability.

3. Deposit Volatility
   Deposits dipped 1% sequentially to $6.59 billion, with 20.8% of deposits uninsured and lacking collateral. While funding costs have stabilized, prolonged deposit outflows or a sudden demand for liquidity could pressure margins or force costly asset sales.

Economic and Operational Challenges

• Earnings Pressure: Net income remained flat at $21.5 million in Q1 2025, with the net interest margin (NIM) holding at 2.74%—a historically low level. NIM compression, driven by lower asset yields and rising deposit costs, remains a concern.
• Efficiency Strains: The efficiency ratio improved slightly to 57%, but it remains elevated, indicating ongoing cost pressures.
• Macro Risks: Tariff disputes, Middle East oil production increases, and recession fears weigh on the broader economy. A slowdown could reduce loan demand or increase default rates, further straining SBSI’s balance sheet.

Why the Dividend Is Vulnerable

SBSI’s dividend payout ratio of 49% appears manageable, but the risks outlined above could quickly erode this buffer:
- If NPAs rise further, provisions for loan losses may consume earnings, reducing cash flow available for dividends.
- A delay in loan growth could shrink interest income, squeezing margins and forcing a payout cut.
- Deposit volatility or a rise in uninsured deposits could lead to liquidity strains, diverting funds from dividends.

Conclusion

Southside Bancshares faces significant headwinds in 2025. While its dividend history is strong, the sudden surge in NPAs, delayed loan growth, and macroeconomic uncertainties create a high-risk environment. Investors should closely monitor Q2 loan performance, NPA trends, and deposit stability. Until these risks are resolved, the dividend—currently yielding 4.5%—is far from secure. With a payout ratio poised to rise if earnings slip, caution is warranted.

In short, SBSI’s dividend is at a critical crossroads. Without clear progress on loan growth and credit quality, this once-stable payout could become the next casualty of banking sector turbulence.

Data as of Q1 2025. Risks include but are not limited to: economic downturns, loan defaults, and regulatory changes.