Restructuring Mortgage-Backed Securities Will Reduce Volatility In 2025

Key Takeaways

• Restructuring the mortgage-backed securities portfolio and favorable interest rate conditions may boost net interest margins and income in 2025.
  
• Loan growth and strategic hires in wealth management are expected to enhance revenue, earnings, and profitability.
  
• Decreased net interest margin, increased credit loss allowance, and rising noninterest expenses pressure net margins and future revenue growth amidst loan payoffs and unrealized losses.

Catalysts

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

• The restructuring of Southside Bancshares' mortgage-backed securities portfolio is expected to increase the overall average yield and reduce amortization volatility, positively impacting net interest margins in 2025.
  
• The bank anticipates mid-single-digit loan growth in 2025 due to a healthy loan pipeline and the strengthening Texas economy, which is likely to enhance revenue and earnings.
  
• Positive net interest margin expectations in 2025 are supported by recent loan growth and a return to a positively sloped yield curve, potentially boosting net interest income.
  
• Growth in Southside Bancshares' wealth management and trust areas, driven by strategic hires, is expected to result in at least a 16% increase in revenue for 2025, improving overall earnings.
  
• The anticipated decrease in deposit betas due to potential Federal Reserve rate cuts and the repricing of existing CDs could lower deposit costs, potentially enhancing net interest margins and overall profitability.

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 34.8% 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 February 2028, up from $88.5 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 14.8x on those 2028 earnings, up from 10.7x today. This future PE is greater than the current PE for the US Banks industry at 12.0x.
• 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 7.53%, 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, which could continue to be impacted by interest rate volatility, affecting net interest income.
  
• The allowance for credit losses slightly increased, indicating potential concerns about future loan performance, which could impact net earnings if losses materialize.
  
• There was an increase in net unrealized losses in the available-for-sale securities portfolio, which could impact the company's comprehensive income and shareholder equity.
  
• Anticipated increases in noninterest expenses, particularly related to salaries, benefits, and software expenses, could pressure net margins if revenue growth does not offset these costs.
  
• The early loan payoffs leading to decreased average loan balances might indicate a trend that could dampen future revenue growth if not compensated by new loan originations.

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 14.8x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $31.3, the analyst price target of $36.5 is 14.2% 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.