SBSI - Southside Bancshares: Solid Earnings But A Massive Premium To Book Value

Summary

• Southside Bancshares, Inc. reported a decent set of results in the fourth quarter.
• The tangible book value per share increased again, and that's encouraging.
• I like the quality of the loan book and the earnings multiple, but Southside Bancshares' stock is trading at in excess of 2x Tangible Book.

Introduction

In my last article on Southside Bancshares, Inc. ( SBSI ), a Texas-focused bank, I discussed how the higher interest rate caused the bank's book value and tangible book value per share to drop. This was caused by the requirement to record the value of the securities available for sale on a mark-to-market basis. Higher interest rates meant the value of those securities went down, and the comprehensive income statement of the bank recorded substantial (unrealized) losses in that portfolio of securities available for sale.

As the bank has recently reported on its fourth quarter and its full-year results, I wanted to check if the worst is now behind us.

A small EPS increase thanks to a reduced share count

Most banks are counting on the interest rate increases to boost their net interest income and thus their earnings. Keep in mind this won't happen overnight, as it takes some time for a portion of the loan book to see its interest rates being reset. We clearly see this in the quarterly results. Although the net interest income increased by approximately $1.3M , the interest expenses increased by more than 50% while the interest income increased by less than 15%.

As you can see in the image above, this caused a rather subdued reaction in the net interest income. While we see a continuous and gradual increase, it takes some time for the bank to take full advantage of the increasing interest rates.

The total non-interest income and non-interest expenses remained relatively stable on a QoQ basis, and despite recording a $2.1M loan loss provision (which is higher than the $1.5M recorded in the third quarter of the year), the pre-tax income increased by $1.1M or just under 4% to $32M. After deducting the $4.3M in taxes, the net income was $27.7M. Based on the average share count of 31.9M shares throughout the quarter, the EPS came in at $0.87. Keep in mind, Southside accelerated its share buyback pace as it ended December with just over 31.5M shares outstanding. That's approximately 1% lower than the average share count and approximately 2% lower than the share count at the end of 2021.

It sounds counter-intuitive, but buying back shares is actually not supporting the book value at all. The stock is currently trading in the mid-$30 range, which means Southside is buying back the shares at a premium of approximately 50% to the book value per share, and about 100% to the tangible book value per share.

So while the share buyback program definitely boosts the EPS, it doesn't help too much on the BVPS and TVBS front. At the end of 2022, Southside's book value per share was $23.65 while its tangible book value per share was $17.13. Despite the negative impact of the share buyback, that's actually good news, as the TBVPS increased by $1.52 in the final quarter of the year after showing a decrease in the first three quarters of the year. While we are still way off from the $21.77 tangible book value per share at the end of 2021, it is encouraging to see the uptick from $15.61 at the end of Q3.

I now anticipate Southside's tangible book value to continue to increase. Its quarterly EPS should continue to hover around $0.85-0.90, and considering the bank is currently paying a quarterly dividend of $0.35 , it basically retains $0.50 per share in earnings on a quarterly basis. During the final quarter of the year, Southside also paid a special dividend of 4 cents per share, but I am not counting on additional special dividends in the future. On a normalized basis, the four quarterly dividends add up to $1.40 per year, for a yield of approximately 3.6%.

Southside does have a history of special dividends. The image below (taken from a Q3 presentation , so before the $0.04 special dividend was announced) clearly shows Southside's history of paying special dividends. It's reasonable to expect special dividends, but the size of those dividends remains uncertain.

Investment thesis

The dividend is safe, and seeing how Southside is trading at approximately 11 times its normalized earnings, the Texas-focused bank is not outrageously expensive. However, I am still not prepared to pay a premium in excess of 100% on the tangible book value per share. And even if the bank is able to retain $2/share in earnings on an annual basis, even by the end of 2025 the current share price would still represent a premium of approximately 50%.

I do have to acknowledge Southside's loan portfolio remains robust, and on a QoQ basis, the total amount of non-performing assets actually decreased. It is very important for the bank to maintain a strong loan book, as that will ultimately drive the earnings and the restoration of the book value. I also like the management's focus on avoiding office-related loans unless the building has respectable tenants and if the borrower has a " fair amount of equity " as skin in the game.

Southside Bancshares, Inc. is a well-led bank, but the triple-digit premium to the tangible book value per share puts me off, and I'm on the sidelines.

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