Description

Overview

BankFirst Capital Corporation (BFCC) is a well-run, growing bank based in Columbus, MS approaching almost $3B in total assets that received $150M in ECIP funds last year. BankFirst has already put most of that capital to work acquiring 3 smaller banks in its region over the last 16 months.  I believe BankFirst will earn at least $6 in EPS for 2023, and perhaps much more if they can make another acquisition with the excess capital from their latest acquisition (more on that later).  This would value shares at just 6x forward earnings and a roughly 20% discount to adjusted TBV.  This valuation is far too cheap for a bank that has nearly doubled EPS over the last 4 years, proven to be adept at M&A, and has excess capital for further acquisitions.

ECIP Funds

BankFirst received $150M of Preferred Equity through the Emergency Capital Investment Program (ECIP) from the US Treasury.  You’ve likely read about this program from Twitter (@dirtcheapstocks published an excellent write-up), raf698’s CBOBA write-up on VIC from Dec 2022, or somewhere else but just in case you haven’t, I’ll give a short overview.  

Qualifying community banks across the country received large sums of non-cumulative, perpetual preferred stock with only a 2% annual dividend rate after the 2nd year.  Many banks received amounts equal to 10 or 15% of total assets, with some receiving as much as 20% of total assets.  Given the leveraged nature of a bank’s balance sheet, these were massive injections of capital with very little economic cost, especially given the current interest rate environment.  I believe the preferred stock is conservatively only worth roughly 20% of par value, meaning 80% or more of the ECIP funds’ value accrues to common shareholders.  Interestingly, ECIP recipients are allowed to acquire other ECIP recipients which could lead to faster realization of this value mismatch and spur M&A activity within this group of CDFIs and MDIs.

BankFirst’s most recent acquisition of Mechanics Bank was an excellent move and a first of its kind.  While we still don’t know how much they paid for Mechanics, we do know Mechanics also received $43.6M of ECIP funds.  Mechanics’ TBV prior to receiving ECIP funds was about $30M and they were on pace to earn about $3-4M for 2022.  Many of BankFirst’s prior acquisitions were done right around 1.5x TBV. In this case, anything below $80M looks like a decent deal and if they got it for as low as $60M it looks excellent.  The key in this case is they receive $43.6M of excess cash on day 1 by migrating the preferred over.  I believe this excess capital combined with BankFirst’s existing cash balance gives them the ability to do another $70-80M acquisition if they can find the right candidate.

Financials

BankFirst has solid operating metrics with NIM of 4.09%, ROA of 1-1.2%, ROE around 10%, and a ~65% efficiency ratio.  They’ve been a serial acquirer over the years with good results for shareholders although that has led to some dilution in the past.  Fortunately, the ECIP funds have allowed them to continue with attractive acquisitions without dilution to shareholders the last couple of years.  They also have a strong deposit base and an attractive average cost of deposits of .2-.3%.

In Q4, BankFirst earned $7M, or $1.31/sh.  Annualizing this amount gives us $5.24 in EPS.  There were likely some material merger related costs in Q4 and the Mechanics acquisition didn’t close until Jan. 1 2023.  Mechanics was earning about $4M run-rate prior to the BankFirst acquisition.  I believe $6+ EPS for 2023 is easily achievable given their run-rate earnings in Q4, the Mechanics acquisition, and some conservative adjustments for merger-related expenses.

I also believe management may consider uplisting from the OTCQX to NASDAQ given the operational track record, proven M&A abilities, $3B asset base, and relative undervaluation.  This could provide an additional catalyst to cause shares to re-rate.

Management

BankFirst’s management team appears savvy and intelligent.  They were one of the first management teams to realize the ramifications of ECIP funds and were the first to act in acquiring another ECIP recipient.  Management owns 31.8% of the company and has treated shareholders well historically.

Summary

BankFirst is a growing, well-run bank that has made three material acquisitions over the past 16 months at no cost to shareholders thanks to ECIP funds. Going forward with the benefit of these acquisitions, I believe BankFirst is in a good position to earn $6+ in EPS for 2023 and could surpass that figure further if they’re able to find another acquisition candidate.  At $41, shares trade at only 6x forward earnings, despite being an operationally strong, growing bank.  There is also the possibility of an uplisting which would likely lead to a more appropriate valuation. Upside to simply trade at adjusted TBV is 20%, and 50%+ if they were to trade at a more appropriate 10x P/E or higher.

Risks

• Banks are inherently leveraged and therefore riskier in a bad economic environment

• A recession could lead to material loan losses

• This is a small/micro-cap security with limited liquidity and is likely only suitable for individuals or small funds

Catalyst

-Improved financials going forward including recent acquisitions

-Uplisting

-Continued market realization of value of ECIP funds