Houston Expansion Will Unlock Future Lending Opportunities

Key Takeaways

• Strategic expansion in C&I loans, especially in Houston, could drive earnings growth through diversified loan portfolios.
  
• Cost management improvements may enhance net margins and boost overall earnings efficiency despite occasional one-time charges.
  
• Credit risk issues, investment portfolio challenges, and noninterest income declines may hinder Southside Bancshares' revenue and impact net margins and earnings.

Catalysts

Operates as the bank holding company for Southside Bank that provides various financial services to individuals, businesses, municipal entities, and nonprofit organizations.

• Southside Bancshares anticipates mid-single-digit loan growth in 2025, which could drive future increases in revenue as loan balances expand.
  
• The company's loan pipeline has grown to $1.9 billion, the largest in 24 to 36 months, indicating potential significant revenue growth from converting these opportunities into funded loans.
  
• There is a strategic expansion in the commercial and industrial (C&I) loans, particularly in the Houston market with plans to increase the team, suggesting future growth in earnings through diversified loan portfolios.
  
• Recent restructuring and management of securities have led to a slight improvement in net interest margins, potentially enhancing net interest income as funding costs are expected to decrease.
  
• Cost management improvements, with lower-than-budgeted expenses in key areas like salaries and benefits, may positively impact net margins and overall earnings efficiency despite occasional one-time charges.

Southside Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southside Bancshares's revenue will grow by 8.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.7% today to 28.2% in 3 years time.
• Analysts expect earnings to reach $90.7 million (and earnings per share of $2.91) by about May 2028, up from $88.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from 9.9x today. This future PE is greater than the current PE for the US Banks industry at 11.0x.
• Analysts expect the number of shares outstanding to grow by 0.41% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.59%, as per the Simply Wall St company report.

Southside Bancshares Future Earnings Per Share Growth

Risks

• A $94.4 million or 2% reduction in loans due to payoff activity, primarily in the CRE portfolio, may hinder loan growth and negatively impact revenue projections.
  
• The restructuring of $120 million in securities and recorded net realized loss of $554,000 on sales of mortgage-backed securities indicate challenges in managing the investment portfolio, potentially affecting net income and margins.
  
• An increase in nonperforming assets and classified loans, specifically related to a large construction loan, suggests potential credit risk issues that could impact net margins and earnings.
  
• Decreases in noninterest income by $1.5 million or 12.2% due to a drop in swap fee and mortgage servicing fee income raise concerns about the ability to maintain or grow revenue.
  
• The increase in noninterest expense projections, with expectations of additional charges, suggests potential pressures on net margins and earnings.

Valuation

• The analysts have a consensus price target of $33.833 for Southside Bancshares based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $321.5 million, earnings will come to $90.7 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of $28.68, the analyst price target of $33.83 is 15.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.