Restructured Mortgage-Backed Securities And Slower Fed Rate Changes Will Stabilize Earnings In 2025

Key Takeaways

• Strategic restructuring and growth initiatives are set to improve net interest margin and boost overall earnings in 2025.
  
• Expected Fed rate changes and strategic hires will stabilize income volatility and drive significant revenue growth.
  
• Decreased net interest margins and rising operating expenses pose risks to earnings, while restructuring and credit quality could affect future income and net margins.

Catalysts

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

• The restructuring of the mortgage-backed securities portfolio is expected to reduce amortization volatility and increase the overall average yield, positively impacting net interest margin in 2025.
  
• Southside Bancshares anticipates mid-single-digit loan growth in 2025, supported by a healthy loan pipeline. This is expected to drive revenue growth and increase net interest income.
  
• Strategic hires in the wealth management and trust areas are projected to result in at least a 16% revenue increase in 2025, positively impacting overall earnings.
  
• The expected moderation of hedge-related net interest income volatility due to the anticipated slower pace of Fed interest rate changes could stabilize and improve earnings.
  
• The anticipated reduction in deposit rates, tied to potential Federal Reserve rate cuts, is expected to contribute to net interest margin expansion, thus positively impacting earnings throughout 2025.

Southside Bancshares Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southside Bancshares's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 34.7% today to 29.6% in 3 years time.
• Analysts expect earnings to reach $91.9 million (and earnings per share of $2.99) by about April 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 14.6x on those 2028 earnings, up from 9.9x today. This future PE is greater than the current PE for the US Banks industry at 11.1x.
• Analysts expect the number of shares outstanding to grow by 0.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Southside Bancshares Future Earnings Per Share Growth

Risks

• The net interest margin decreased by 12 basis points due to faster prepayments on premium mortgage-backed securities and a decrease in average loan balances, which could pressure future net margins if these trends persist.
  
• There was a net unrealized loss in the AFS securities portfolio of $53.5 million, which increased compared to the previous quarter. This could impact overall earnings if market conditions do not improve.
  
• The company's strategy to restructure the mortgage-backed securities portfolio and anticipate slower Fed rate changes carries unknown execution risks that could affect future net interest income and margins.
  
• The allowance for credit losses is relatively stable, but any unexpected deterioration in loan quality metrics could necessitate additional provisions, impacting earnings.
  
• Operating expenses are expected to increase by 5.7% in 2025 due to various factors, including anticipated demolitions and branch closures, which could pressure net margins if not matched by equivalent revenue growth.

Valuation

• The analysts have a consensus price target of $36.5 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 $310.1 million, earnings will come to $91.9 million, and it would be trading on a PE ratio of 14.6x, assuming you use a discount rate of 7.1%.
• Given the current share price of $28.9, the analyst price target of $36.5 is 20.8% 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.