Southside Bancshares: An Undervalued Regional Bank To Buy (NASDAQ:SBSI)

In the quest for yield or dividend growth, it is easy to overlook small companies. One company that I think most small investors should look at it is Southside Bancshares (SBSI). The bank is a Dividend Champion and is currently sporting a yield of approximately 4.5%. This is well above the current average yield of the S&P 500 at roughly 1.8%. Granted, most regional banks are being impacted by COVID-19, especially those with commercial real estate loans. But Southside is conservatively run and has solid asset quality. The stock is trading at a reasonable earnings valuation, and the stock price is still down about 25% year to date. It is trading at the same price as in mid-2016. I view the stock as a long-term buy.

Southside Bancshares

Source: Southside Bancshares

Overview of Southside Bancshares

Southside Bancshares is a community bank that was founded in 1960. The bank operates 59 branches and 80 ATMs in Texas. Fifteen of the branches are grocery store branches. The branches are clustered around the towns of Tyler, Dallas, Ft. Worth, Longview, and Lufkin as seen in the graphic below. The bank offers personal, commercial, and mortgage banking services. It also has a presence in wealth management and brokerage services. The bank has about 40% deposit share in Smith County and 29% in Angelina County. Southside Bancshares completed the acquisition of Diboll State Bancshares, Inc. for roughly $220 million in cash and stock at end of 2017 adding about $1 billion in assets. Currently, Southside has approximately $7,330 million in total assets, $3,853 million in total loans, and $5,071 million in total deposits.

Southside Bancshares Branches

Southside Bancshares Branch Network

Source: Southside Bancshares Investor Presentation July 2020

Southside Bancshares is Growing Rapidly

Southside Bancshares is growing rapidly, driven by organic growth, expansion, and M&A. Texas is a high population growth state that is growing faster than the national average. The state has high birth rates and net inflow of migration. In turn, this leads to high organic growth in Southside’s markets. Southside also expands its branch network. Last year, it added a branch in Kingwood, which is a Houston suburb. Next, Southside conducts M&A adding to its branch network, and thus, its assets, deposits, and loans. The most recent acquisitions were OmniAmerican Bancorp in 2014 and Diboll State Bancshares in 2017. The combined effect has been double-digit CAGR for total assets, total deposits, and total loans as seen in the chart below.

Importantly, this growth has not come with higher expenses. Southside’s efficiency ratio (lower is better) has ranged between 48.3% and 53.9% over the past year. In general, this means that revenue has increased faster than expenses.

Southside Balance Sheet GrowthSource: Southside Bancshares Investor Presentation July 2020

That growth is also profitable. Southside Bancshares’ business is relatively simple since it is a retail bank. It makes money off the net interest spread and fees. The bank gathers deposits at lower rates or takes on debt at lower rates and then either makes loans at higher rates or invests in higher interest rate securities. If the bank does not have too many charge-offs or nonperforming loans, it should make money. Net interest margin is trending down now for most banks as the federal funds rate has trended down. Granted, the cost of funds is also decreasing but seemingly not as fast as loan rates. The current net interest margin for Southside is 3.02%. This is very near the average net interest margin for all U.S. banks of 3.06%.

Southside Bancshares Net Interest Margin

Source: Southside Bancshares Investor Presentation July 2020

Southside Has Solid Asset Quality

When banks perform poorly, it is often because they do not have enough capital or they have high losses due to poor credit quality during times of economic distress. Currently, COVID-19 and the resulting economic fallout have impacted the broader economy and, thus, many banks. Southside’s capital ratios are trending down but still above the levels considered to be well capitalized as seen in the chart below. This provides some confidence that Southside will get through the current downturn in decent shape.

Southside Bancshares Capital Ratios

Source: Southside Bancshares Investor Presentation July 2020

From an asset quality perspective, Southside is still in excellent shape despite the pandemic. This is due at least in part to conservative lending practices. Further, the bank has only about 3.08% of the total loan portfolio in the troubled energy sector. The company is increasing reserves, and the allowance for loan losses is rising. But that is the case for almost all banks in response to the challenges of COVID-19. In addition, adaptation of CECL increased loan loss provisions. That said, nonperforming assets and net charge-offs are still very low as seen in the table below.

Southside Bancshares Asset Quality

Source: Southside Bancshares Q2 2020 Earnings Release

Southside Bancshares Valuation

Southside Bancshares stock price is still down year to date even as some stocks and indices set record highs. The main reason is that the earnings estimates for 2020 are now lower than in 2019. Consensus 2020 earnings are $1.72 per share. The bank had diluted earnings per share of $2.20 in 2019 and $2.11 per share in 2018. Earnings were last below $1.80 per share in 2015.

For the P/E ratio, I use 15.0, which is slightly lower than the company’s average 10-year valuation multiple of 15.4. I discount slightly for the impact of COVID-19.

Applying a sensitivity analysis using P/E ratios between 14.0 and 16.0, I obtain a fair value range from $24.08 to $27.52. The current stock price is ~101% to ~115% of my estimated of fair value. The current stock price is ~$27.68, suggesting that the stock is overvalued at the moment based on earnings. However, you must keep in mind that earnings are depressed in 2020 and even possibly 2021. If earnings were normalized, then the stock is arguably undervalued.

Estimated Current Valuation Based On P/E Ratio

P/E Ratio




Estimated Value




% of Estimated Value at Current Stock Price




Source: Calculations

Let’s check other valuation models. Morningstar is known to use a fairly conservative discounted cash flow model and provides a fair value of $29.24. The Gordon Growth Model gives a fair value of $31, assuming a desired return of 8% and a dividend growth rate of 4%. An average of these three models is ~$28.68, suggesting that Southside is undervalued at the current stock price.

Southside is a reasonably safe stock. The stock is less volatile than average with a trailing 5-year beta of ~0.85. Morningstar gives the stock a no economic moat. Value Line gives the stock a safety score of ‘3’, financial strength rating of ‘B+’, a stock price stability of 90, and an earnings predictability of 50. Southside has a ‘BBB+’ credit rating from Standard & Poor’s, which is investment grade. These are all OK scores and ratings.

Final Thoughts on Southside Bancshares

Regional banks are the linchpin of many communities. They provide essential banking services where larger banks often have little presence. Southside Bancshares is conservatively run in a rapidly growing state. There are three reasons why that I think Southside makes a good investment at this juncture. First, it is undervalued relative to broader market and trailing valuation in the past decade based on normalized earnings and dividend growth rates. Second, Texas, the bank’s home market is rapidly growing. It is likely that this growth will continue in the foreseeable future. Third, the bank has a solid capital position, although the ratios are decreasing, and credit losses are low, although reserves are increasing. Some large banks are struggling and need to preserve capital. Even a large bank like Wells Fargo (NYSE:WFC) had to cut its dividend recently. Southside is not immune to the pandemic but should do well over the long term. Southside’s combination of dividend yield, solid asset quality, dividend growth, and low valuation should interest most investors.

If you would like notifications as to when my new articles are published, please click the orange button at the top of the page to “Follow” me.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source Article