Southside Bancshares: A Solid Income Stock

Southside Bancshares Inc (SBSI) is a smaller regional bank that operates in Texas. Like many regional banks the bank’s stock price is depressed at the moment. The stock price is down over 22% year-to-date and down over 16% in the past six months. The stock price is also down over 13% in the past three years. Regional bank stock prices are being impacted by COVID-19 and low interest rates. The stock price is at levels last seen in late 2016. Southside Bancshares could be a bargain for those seeking a solid income stock with some dividend growth.

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Overview of Southside Bancshares

Southside Bancshares is a community bank that was founded in 1960 and is headquartered in Tyler, TX. The bank operates 60 branches and 82 ATMs in Texas. The branches are clustered around the towns of Tyler, Dallas, Ft. Worth, Longview, and Lufkin. The bank offers personal, commercial, and mortgage banking services. It also has a presence in wealth management and brokerage services. Southside Bancshares has about 40% market share in Smith County (East Texas) and 29% in Angelina County (Southeast Texas). Today, the bank has about $7.27 billion in assets.

Southside Bancshares’ Challenges

Regional Banks, like Southside Bancshares, are being affected by low interest rates and COVID-19. Low interest rates are expected to reduce the net interest margin for regional banks leading to lower profitability. Pressure on net interest margins is projected to occur since loans will reprice lower while banks will have difficulty lowering deposit rates. Additionally, the spread between deposit rates and short-term interest notes will decline. The combined effect is to reduce income for regional banks. COVID-19 is likely disrupting operations. It could lead to higher loan losses depending on how long business activity remains depressed due to restrictions and ‘social distancing’.

Southside Bancshares is Conservatively Run

With that said, Southside Bancshares is seemingly a conservatively run bank with decent asset quality. At the end of Q1 2020, non-performing assets were 0.24% of total assets. This was a decrease from 0.61% of total assets in the prior year. In response to COVID-19, the bank also increased its allowance for loan losses to 1.49% of total loans up from 0.69% in comparable periods. In its most recent earnings release, the bank also reported a good capital position with ratios above the level to be considered well capitalized.

Southside Bancshares Income Stock with Dividend Growth

For investors interested in a solid income stock with dividend growth Southside Bancshares pays an annual forward dividend of $1.24 and is yielding approximately 4.3% at the moment. This is higher than in the trailing 10-years. The yield was higher in mid-March right after the Fed’s rate cut. Still, the current yield is much higher than the ~1.9% offered by the S&P 500 index. It is also much higher than conventional higher yielding stocks such as utilities and telecoms. The bank also typically pays an annual special dividend adding to the attraction.

Southside Bancshares has raised the dividend for 25 consecutive years making it a Dividend Champion. This means that the bank was able to raise the dividend even during the financial crisis of the Great Recession. On a negative note that payout ratio is currently ~78% based on depressed consensus forward earnings for 2020. But in 2019 the payout ratio was approximately 56%, a solid value.

Southside Bancshares Valuation

Southside Bancshares is seemingly not undervalued based on the forward price-to-earnings ratio of ~18.2. The trailing 10-year earnings multiple is slightly over 15.0. However, this is due to depressed forward earnings in 2020.

The bank will likely have a challenging year in 2020. But Southside Bancshares should be of interest for those seeking an income stock with dividend growth. The current yield is attractive, and the bank has a long track record of raising the dividend. I view the stock as a long-term buy.

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