Is Southside Bancshares Stock a Buy?

While far less exciting than high-growth tech stocks, bank stocks are among the most historically stable and lucrative investments.

Large banks like JP Morgan Chase and Bank of America draw much of the investor attention in this area, but there are also values to be found among smaller regional banking institutions. One such smaller bank is Southside Bancshares (NASDAQ:SBSI).

Southside Bancshares is a holding company that controls Southside Bank, a Texan banking institution with 55 branches throughout the state. The company offers financial services to both individual and commercial customers. This includes the extension of commercial real estate loans, which have driven much of the bank’s recent growth.

Southside Bancshares Net Income Rising

In Q4, Southside Bancshares saw its net income increase to $27.7 million, up $717,000 from the same quarter in 2021. This translated to earnings of $0.87 per share. Net interest margin also increased to 3.19 percent.

During 2022, Southside considerably expanded its loan portfolio. Total loans excluding PPP loans rose 14.8 percent last year. Much of this increase was driven by commercial real estate loans, which added $389.5 million to the bank’s loan portfolio in 2022.

Southside has also managed to keep its profitability quite high. The company’s return on equity is a reasonably high 14.3 percent, while its net margin stands at over 35 percent.

The company does, however, perform fairly poorly with regard to its return on assets. This number is currently just 1.4 percent, a potentially worrying factor for investors.

Although Southside has done well over the past 12 months, analysts believe that the bank’s growth could be much slower in 2023. Over the next year, earnings are expected to grow just 1.2 percent. This slowdown will likely continue for some time, as the 5-year projected growth rate for the company is only 2 percent. If Southside cannot beat these projections, it’s difficult to see the stock generating much in the way of returns.

Ultimately, it appears that Southside Bancshares may be a company that is about to plateau. Despite decent growth last year, the company’s forward prospects are somewhat uninspiring. While this doesn’t rule the stock out as an investment, it does largely undermine a growth argument for the company.

SBSI Valuation Metrics Mostly Positive

Southside Bancshares is expected to remain more or less flat over the coming year. Analysts have pegged fair value at $39.50, only 2.3 percent above the most recent price of $38.60. 

It is worth noting, however, that Southside’s total return could be more than double its projected upside, thanks to its high dividend. The stock currently pays $1.40 per share annually and yields over 3.6 percent. And it has raised its dividend for 29 consecutive years, including a 2.9 percent increase announced earlier this month.

The bank trades at a roughly fair valuation with its P/E ratio of 11.92 closely in line with its industry, as is the price-to-book ratio of 1.67.

One concerning metric for Southside is its price-to-cash-flow ratio, which is a good bit higher than average at 11.43. Overall, though, Southside appears to be neither substantially overvalued or undervalued.

What Could Go Wrong?

Despite being more or less fairly valued, Southside Bancshares does carry a fair amount of debt relative to its industry. The company’s debt-to-equity ratio is currently 0.72, nearly 3x that of other Southwesten bank stocks. This higher debt load isn’t necessarily a problem, but investors should be aware of it when evaluating the stock.

Slow growth is also a significant risk for investors. While Southside has done well with commercial real estate financing as Texas has attracted new businesses, the Southwestern boom may not continue at its current pace in the coming years. Without this key growth driver, Southside could struggle to raise its earnings and generate value for its investors.

Finally, Southside Bancshares could be negatively affected by the Federal Reserve’s efforts to cool the real estate market. With so much of its loan growth generated by commercial and residential real estate, Southside is tightly tied to the property market in Texas. While the state’s rapid growth climate will likely keep properties in demand, higher interest rates could suppress the buyer market over time.

Is Southside Bancshares a Buy?

SBSI has several appealing factors. As a commercial real estate lender operating in the Southwest, the company is in an excellent position to benefit from business relocations from other markets. Southside is also currently enjoying tailwinds from higher interest rates, allowing it to thrive in what many other companies find to be difficult economic conditions.

The bank is widely favored by institutional investors, who currently own over 50 percent of the stock. In the last 12 months, inflows from institutional investors have nearly doubled outflows. This indicates a reasonably high degree of confidence from Wall Street funds.

Even with all of these positives, however, Southside Bancshares looks more like a hold than a buy today. The limited potential for upside and lackluster growth projections both suggest that this stock could underperform in the near future.

Combined with somewhat high debt load and heavy exposure to real estate, these factors suggest that Southside Bancshares is not a buy for most investment strategies at this time.

One group of investors, however, may find Southside Bancshares more attractive. For income investors focused more on dividends than share prices, the stock could be a reasonably good fit.

At well over 3 percent, Southside Bancshares offers a high dividend yield without excessive risk. Given that the company has kept its payout ratio under 40 percent and maintained a dividend growth streak for nearly 30 years, it’s likely that the distribution will continue rising.

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