Southside Bancshares (NASDAQ:SBSI) (Southside) is a retail and commercial bank in Texas. While off the radar of many investors, Southside has been in business more than fifty years and today is one of the ten largest banks based in Texas with nearly $5 billion of assets and a remarkable track record. Within the last year Southside acquired and has been integrating another bank in Texas named OmniAmerican (Omni) which we believe will be transformative for the company.
We believe the acquisition will significantly increase Southside’s growth profile. Since its founding in 1960, Southside has been predominantly focused on East Texas and has grown to command a dominant position within the market. Based in Fort Worth, Omni now gives Southside a platform with which to expand within the fast-growing Dallas-Fort Worth metroplex. Moreover, Southside has been able to dramatically reduce expenses at Omni and sees significant opportunities for adding offerings to the bank outside of lending. Simultaneously, Southside has begun an aggressive organic expansion into the Austin market which has become the fastest-growing city in the country. With Southside’s over-capitalized balance sheet, particularly after the Omni acquisition, it has more than sufficient capital with which to expand in these new markets.
In addition to Southside’s outlook for growth, we would highlight the bank’s extraordinary track record and strong management team. In an industry rife with subpar capital allocation, Southside has proven itself to be a very conservative lender, always maintaining a strong balance sheet and credit culture and very high credit quality. This has resulted in exceptional compounding of the company’s book value at over 11.5% for the past ten years and over 16.5% when adding back dividends paid.
We believe investor neglect and misunderstanding gave us the opportunity to purchase Southside, as the markets indiscriminately sold banks fearing energy loan exposures. Conversely, Southside’s direct energy exposure is de minimis at less than 1.5% of its loan portfolio and indirect energy exposure even less. Intentionally, Southside also has no presence in the Texas geographies most exposed to the energy sector such as Houston and West Texas. We believe that at the undemanding valuation of 13-14x earnings this was a very attractive opportunity for the Fund, allowing us to buy a strong compounder at a reasonable 30% discount to our NAV estimate.
We would also note that Southside’s success over the years and strong prospects aren’t lost on other banks in the market and that Southside could become an acquisition target itself in time.
From Third Avenue Management (Trades, Portfolio)'s Small-Cap Value Fund fourth quarter 2015 portfolio manager commentary.
