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 firstname.lastname@example.org.