Southern BancShares is my favorite type of company. The firm is secretive, allergic to self-promotion, strongly profitable, and loves to return capital to shareholders. Just as important, the company is dedicated to making prudent investments and sensible acquisitions and expansion.
Southern BancShares was founded in 1910 as the Bank of Mount Olive in Mount Olive, North Carolina. The bank has expanded throughout eastern and coastal North Carolina and into Virginia’s Hampton Roads metro. Over the last 20 years, the company grew its tangible book value per share at an 11% annual rate and repurchased 32% of its shares outstanding along the way.
Somewhere along the way, Southern BancShares picked up a meaningful stake in a related bank: First Citizens BancShares. It’s no coincidence. A look at the board of directors and top holders of each company reveals many of the same names. These companies are closely-related and have been since their founding. By any measure, First Citizens BancShares is a successful mid-sized bank. Over the last 20 years, the company grew its book value per share fivefold while building its balance sheet from $9 billion to $35 billion. First Citizens has long been a voracious acquirer of small banks, and benefited from its locations in high-growth areas with good demographics. The company now operates bank subsidiaries in 19 states and is in the midst of acquiring Capital Commerce Bancorp. Because of its growth efforts, First Citizens has come to dwarf Southern BancShares. First Citizens is NASDAQ-listed.
At year-end, Southern held 204,463 First Citizens Class A shares and 22,619 First Citizens Class B shares. Together, these shares are worth $106 million. Not shabby! With just 81,223 shares of Southern BancShares stock outstanding, each share of Southern BancShares represents ownership of 2.52 First Citizens Class A shares and 0.28 First Citizens Class B shares. That’s total value of $1,300 per Southern BancShares share.
Southern BancShares stock is illiquid and the bid/ask spread is often wide. But at a recent price of $3,600, the look-through value of the First Citizens stock that Southern owns makes up 36% of its market capitalization.
The remaining $2,300 of the share price that isn’t covered by First Citizens stock works out to $187 million in equity market value. Adjusted for the tax-effected value of its First Citizens stock, Southern BancShares’ tangible common equity is $172 million. So in essence, an investment in Southern BancShares stock at the current share prices values standalone Southern BancShares at 1.1x tangible book value and a current P/E of ~7.5x.
That’s one way of seeing things. The other way is to estimate a fair value for Southern BancShares’ operations, then to see what we’re paying for First Citizens. I think 1.7x tangible book value is a very conservative value to apply to Southern. This works out to only 11.6x current earnings. At this valuation, Southern’s own operations would be worth….$3,600. That’s the entire current market capitalization, meaning investors get First Citizens for free!
Just as a check, we can look at the valuation on a look through basis. First, earnings. Southern BancShares’ own operations should produce about $310 per share in earnings this year. First Citizens should earn about $31 per share in 2018. That would add $87 per share to Southern’s earnings if First Citizens were treated as an equity investment. This totals to $397 per share, giving us an estimated current P/E of 9.1x. On a tangible book value basis, remember that Southern’s banking operations have tangible equity of $172 million. On a look-through basis, the owned First Citizens shares add $65 million. That totals $237 million. Southern BancShares’ market capitalization of $292 million yield a price-to-tangible book ratio of 1.2x.
I’m not big on relative valuations, but they do provide helpful insight into market expectations. Right now, US banks with balance sheets from $10-50 billion trade at a median price-to-tangible book ratio of 2.2x and a median current P/E of 17.5x. Banks with $1-10 billion balance sheets trade at 1.8x tangible equity and with a P/E of 17.0x. No matter how you categorize it, Southern BancShares looks cheap.
The usual stipulations apply. Southern BancShares stock is extremely illiquid and the company is closely-held. What insiders want, they will get. The company’s bank operations are also fairly geographically concentrated (though First Citizens is national in scope) and a downturn in the North Carolina economy would sting. Investors in Southern BancShares should not expect short-term fireworks and must be prepared to hold on the very long term.
Alluvial Capital Management, LLC holds shares of Southern BancShares, Inc. for clients. Alluvial Capital Management, LLC does not hold shares of First Citizens BancShares, Inc. for clients. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.
hi I have been looking at it. It doesn’t seem to grow much in a growth market and its loan to deposit is low. I wonder if
they have not so good talents. do you know if management will want to sell the bank one day?
other than this and the bid ask spread, I dont have much worry about it.
This is a conservatively-run bank. They’re cautious lenders and they don’t pursue growth aggressively. Despite the good demographics, this bank is cautious and even a bit stodgy. They tend to focus on capital return over reinvestment, hence the steady decrease in shares outstanding over time. However, Southern will make moves when the time is right. They have acquired failed banks with FDIC support and make occasional strategic purchases.
It’s interesting to compare it to First Citizens, which has been an aggressive grower and acquirer. Southern actually boasts a better long-term track record of book value growth.
Thank you！ I just bought a share today.
I was reading its financials, and the bank seems to be selling its stake in First Citizens in the past two years(not sure about earlier). I was wondering if there is any tax-efficient way for monetizing it.
Definitely interesting to compare it with First Citizens, especially when there is First Citizens VP on Southern Bancshare’s board. I was thinking with two significant shareholders related to First Citizens, would it possibly affect its strategic direction? (for example, I see the bank doesn’t have a branch in Raleigh, the headquarter of First Citizens)
Lastly, have you spoken to its management, by any chance? I was curious what are your impressions if you have talked with them.
Thank you!
Ironic that you post this just days before North Carolina gets hit by a hurricane, perhaps the worst in 60 years. I’ll postpone doing my due diligence until I can see what’s left of its customer base in a week’s time.
Strange timing indeed! Good luck to the folks in the hurricane’s path. Despite any damage, I have little doubt that North Carolina will continue to be a growth market for a long time to come.
Traditionally hurricanes have assisted banks via insurance proceeds and working capital loans to the construction and building materials sectors.
Do you tax affect the fcnca stake? Sad the Holdings insist on dual class. Not sure why the banks arent combined but perhaps the tax issue would be moot in that event.
Would you expect the imminent hurricane to put share prices at risk?
Where did you find the ownership of the First Citizens shares disclosed? I have not been able to find it.
Christian – It is disclosed in the notes to the financial statements, which can be found on their website.
My experience with First Citizens BancShares (FCNCA) started when I purchased shares in FCBN. FCBN was largely held by the Holding family, who also control FCNCA. I always felt FCNCA would end up buying FCBN, which they did. I received 4 shares of FCNCA for each share of FCBN, plus $50 cash. SBNC seems like a bargain way to get exposure to FCNCA. FCNCA is a very acquisitive bank, and it would not surprise me at all if FCNCA bought SBNC in the future. I wonder what the tax implications would be for the shares held by SBNC in this scenario?
Also, you can currently purchase the B class shares of First Citizens at a fairly meaningful discount to the A shares. The current spread is over 10%. If liquidity is not an issue for you, and you want to hold FCNCA, you could instead buy FCNCB for a bit less, and pick up the additional voting rights. I would still prefer buying SBNC though. The discount seems even greater there. Great find, and thank you for posting!
With the recent downturn, I know they had dropped a lot at one point (to 2500/share), just like a lot of illiquid companies on the OTC (CAOX, LAACZ, etc). However, their annual report hit my mailbox yesterday, and they earned something like $660 a share, still have all of their First Citizen stake (from 2018, which also was a substantial amount of the 2019 NI) and have BV around $4451/share.