First Citizen Bancorp of South Carolina FCBN
September 20, 2010 - 9:57am EST by
david101
2010 2011
Price: 525.00 EPS $0.00 $0.00
Shares Out. (in M): 1 P/E 0.0x 0.0x
Market Cap (in $M): 445 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0.0x 0.0x

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  • Regional Bank

Description

Where do you find an $8.8 billion asset bank that trades on the pink sheets and yet is healthy and growing? Let me introduce you to First Citizen Bancorp of South Carolina. This is a well-run but thinly traded (~$40K/day) bank that offers decent value at 97% of tangible book value (TBV) and a P/E of 5.9.  The majority of shares are owned by the Holding family, which may be a familiar name to those who read Chuck307's write-up on FCNCA. FCBN is the southern cousin of FCNCA.

 

History: You can read the basic history of the bank, essentially a snowball rolling downhill, here:

 

http://www.firstcitizensonline.com/about/history.html

 

One thing to note is that while the Holdings are involved directly in managing FCNCA, they have been more hands off with FCBN, with the current CEO, Jim B. Apple, having served since 1998. However, they have instilled a long-term focus. They pay their executives well and have never issued stock options. The bank went dark in January 2006 but they regularly disclose their financials on their web site:

 

http://www.firstcitizensonline.com/about/financial/index.html

 

Over the past 17 years, the bank has earned a median ROE of 12.07%, a median ROA of 0.90% and a median return on tangible equity (ROTE) of 15.43%.

 

FDIC Deals: While FCBN has not done as many deals as its northern cousin, it has done two. I am going to spend some time on discussing these deals. FCBN did a small deal this quarter:

 

http://www.fdic.gov/news/news/press/2010/pr10165.html

 

...and the details will be available in the next quarterly report. I will ignore it for now and rather concentrate on analyzing the Georgian Bank failure from 2009:

 

http://www.fdic.gov/news/news/press/2009/pr09177.html

 

This allowed them to continue their expansion into neighboring Georgia. While FCBN did not disclose the terms of the deal, the Statement of Cash Flows from the 2009 Annual Report (AR) shows that they received $74.5 million in acquisitions. Yes, the FDIC paid them to acquire Georgian Bank (this corresponds to an after-tax amount for the $107.9 million gain booked on the acquisition). But it gets better, as noted in the 2009 annual report, which states (note figures in 000's):

 

Under the terms of the loss sharing agreements, there is no reimbursement by the FDIC until net losses reach $326,991. The FDIC will reimburse First Citizens for 80 percent of net losses incurred between $326,991 and $853,000, and 95 percent of net losses exceeding $853,000. The term for loss sharing on residential real estate loans is ten years, while the term for loss sharing on non-residential real estate loans is five years with respect to losses and eight years with respect to the recoveries. As a result of the loss sharing agreements with the FDIC, First Citizens recorded a receivable of $279,310 at the time of acquisition. First Citizens identified $61,032 in net losses to submit to the FDIC under such loss sharing agreements during the period from the acquisition date through December 31, 2009.

 

Per a recent FDIC publication, the loss sharing arrangements (LSA) are based on the failed institutions valuation of the loans and not the fair values at acquisition:

 

"Importantly, the FDIC's reimbursement for losses on assets covered by an LSA is measured in relation to the asset's book value on the books of the failed institution on the date of the failure, not in relation to acquisition-date fair value at which the covered asset must be booked by the acquiring bank."

 

http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum10/SI_sum10.pdf

 

Let's examine this a little bit more, using some algebra. Georgian Bank (GB) had $1,781.3 million in loans and leases, net, as of the FDIC take-over on 9/25/09 (as reported in the AR). Subtract $327.0 million in first losses and that equals $1,454.3 million. The first layer of the LSA is for $526.0 million ($853.0 million - $327.0 million) and 80% is covered by the FDIC or $420.8 million. FCBN booked an FDIC receivable of $279.3 million as of 12/31/09, so the losses are still in the first layer. Dividing $279.3 million by 80% gives us an implied loss of $349.1 million. Subtract that from $1,454.3 million after first loss, and FCBN values the loans at $1,105.2 for the FDIC. The implied recovery rate on the entire loan book is estimated by FCBN to be 62%. This now allows us to compare how the loans were valued on a GAAP basis.

 

From the table below that is in the 2009 Annual Report, you will see that FCBN took an aggressive mark to GB's loans, some of it justified because of the amount of residential development loans:

 

Loans covered by loss sharing agreements in (000's)

Impaired

Non-Impaired

Total

Contractual principal payments receivable

986,243

782,880

1,769,123

Less: Estimate of contractual principal not expected to be collected (non-accretable difference).

531,976

126,244

658,220

Liquidity discount (accretable yield)

68,700

71,753

140,453

Fair value of loans acquired

385,567

584,883

970,450

 

It appears that the main difference between the FDIC and GAAP is the liquidity discount. The GAAP numbers imply a loan recovery rate of 55%. From my perspective, there is a $123 million cushion on the FDIC side that the loans would have to deteriorate before they reached the GAAP level.

 

The punch line here is that if the GB loans all go to zero with no recovery, FCBN is on the hook for an additional $81.2 million based on the FDIC agreement and 12/31/09 figures. Since they have already booked a gain from acquiring GB, the absolute worst that FCBN can do is break-even on the acquired loan book. So let's take a look at the GB loans.

 

GB Loans: On the surface, being paid to take over a bank sounds great but Georgian Bank had its warts. It began as a de novo bank in 2001 and grew to $2.2 billion assets in nine years using just five branches. In banking circles, that only happens by being very aggressive. Looking at their last report filed with the government for 6/30/09, slightly more than half the GB loans were construction and land development and 23% were commercial and industrial loans. I do not have any insight as to the loans but foreclosure law in Georgia is fairly quick, especially on the commercial side. The Georgian loans are running off quickly, down from $979 million as of 9/25/09 to $616 million as of 6/30/10. Part of that was other real estate owned (OREO) going from $32 million to $150 million but the other $245 million had to be sales & amortization. Not surprisingly, cash & equivalents are over $1.1 billion on the balance sheet and the FDIC receivable is now $382 million as of 6/30/10. Since the maximum receivable from the 80/20 loss tranche is $420.8 million, they are not far from activating the 95/5 loss tranche, if they have not already done so.

 

GB Deposits: GB also attracted a lot of "hot" money on the deposit side. As of last June, 36% of their deposits were brokered and 54% were time deposits; total deposits were $1,960.1 million. Contrast that to the $1,286.3 million in deposits assumed by FCBN on 9/25/09. Sources indicate that their largest depositor, Reliance Trust, pulled over $200 million in client deposits from GB:

 

http://atlanta.bizjournals.com/atlanta/stories/2010/04/12/daily49.html

 

It was a classic run on the bank, like the one portrayed in "It's a Wonderful Life," minus the unruly mobs. FCBN does not track the GB deposits separately, but total deposits have grown from $7.0 billion as of 9/30/09 to $7.4 billion as of 6/30/10. See "Deposits" for additional information.

 

Loans: The loan book prior to the GB acquisition was fairly well diversified, with the exception of having almost 10% in construction & land development and 15% in HELOC's. Despite those two categories, loan performance has been good, suggesting that they are reasonably conservative in their underwriting. Net charge offs (NCO) for 2nd Qtr 2010 were 1.56% on an annualized basis. Nonperforming assets (NPA) were 3.03% of assets and the allowance ratio was 1.69%. Please note that the NPA excludes OREO under the LSA. Excluding the LSA will distort the reality, as its NPA would be 8% and its Texas ratio 105%. The fact that they participated in another FDIC deal in July indicates their strength.

 

Loans (000's Omitted)

 As of 6/30/2010

Pct

 As of 9/30/2009

 As of 6/30/2009

Loans Secured by Real Estate

 

 

 

 

 

1 - 4 Family Residential Construction

171,799

3.4%

219,152

139,912

 

Other Construction Loans

414,710

8.1%

625,871

321,989

 

Farmland

28,776

0.6%

32,335

26,531

 

Revolving 1 - 4 Family Residential Loans

685,763

13.5%

723,607

706,243

 

Closed-End 1 - 4 Family 1st Liens

1,315,089

25.8%

1,358,187

1,372,844

 

Closed-End 1 - 4 Family 2nd Liens

37,123

0.7%

39,852

35,698

 

Multifamily Residential

54,258

1.1%

44,440

30,190

 

Owner-Occupied Non-Res. Property

887,905

17.4%

882,857

763,034

 

Other Non-Residential Property

229,005

4.5%

263,830

192,862

Loans to Depository Institutions, Com'l Banks

9

0.0%

12

13

Loans for Agriculture/Farmers

12,797

0.3%

10,580

9,854

Loans for Commercial & Industrial

448,872

8.8%

541,629

301,038

Consumer Loans

       

 

Credit Cards

54,158

1.1%

53,417

52,988

 

Revolving Credit

19,517

0.4%

21,881

15,108

 

Other Installment

454,038

8.9%

489,826

476,193

Other Loans & Leasing

       

 

States and Political Divisions

74,052

1.5%

61,290

58,775

 

Other

137,808

2.7%

140,279

135,008

 

Lease Financing Receivables

63,918

1.3%

74,406

65,563

Total

 

5,089,597

 

5,583,451

4,703,843

 

What I like about the above table is that you can see the loans before the GB acquisition, where the GB loans hit, and how they have attacked the GB construction and C&I loans (see shaded areas above).

 

Deposits: FCBN has a decent deposit base. CD's make up 34% of deposits which is good for a bank this size. Only knock, and is not a big one at that, is that jumbo CD's make up 12.7% of deposits.

 

Deposits (000's)

6/30/2010

Pct

6/30/2009

Pct

Demand

1,241,524

16.9%

994,814

16.9%

NOW Accouts

1,630,900

22.2%

1,325,977

22.5%

MMA & Savings

1,967,167

26.7%

1,445,180

24.5%

Time <$100K

1,583,924

21.5%

1,536,972

26.0%

Time >$100K

931,215

12.7%

600,367

10.2%

Total

7,354,730

 

5,903,310

 

 

 

Capital Structure: Despite having only about 848K shares outstanding, the stock ownership is a bit complicated. It is currently difficult to ascertain the exact number of shares held by the Holding family and their related entities, but the family controlled about 64% of the shares when FCBN went dark. The Holding family does value the stock highly. They have never issued stock options, and they issued stock for an acquisition only once in 1999. Otherwise, the bank has been a buyer of shares, even after they went dark, with the share count going from 945K as of 12/31/93 to 848K as of 6/30/10. The debt is straight-forward as follows:

 

Description

Due Date

Debt (MM)

Use of Proceeds

FHLB weighted avg 3.73%

Various

              100.0

Repos

8.00% Fixed

4/1/2013

                  5.6

Acquire First Bank & Trust and Bank of Toccoa

6.80% Fixed

4/1/2015

                 74.5

Acquire People's Community and Summit Financial Corporation

8.00% Fixed

6/1/2018

                15.0

Acquire Community Resource and Merchants & Farmers Banks

8.25% Fixed TRUPS

3/15/2028

                51.5

Various branch purchases, new branches and acquisition of the Exchange Bank of Kingstree

3 Mo. LIBOR + 2.80% TRUPS

4/7/2034

                10.3

Part of the CBI acquisition

3 Mo. LIBOR + 2.25% TRUPS

6/15/2034

                51.5

Build new head quarters

Total

 

                308.4

 

 

An obvious question is why they don't pay off the high cost debt. The TRUPS are easy to explain because they count towards Tier 1 capital. It is cheaper to keep the TRUPS rather than trying to sell equity in the current market.

 

Earnings: The bank is on target to earn between $75-$80 million in 2010, representing a P/E of between 5.9 to 5.6. They have already earned $39 million in the first half of this year already. However, there are variables with regard to the earnings. The main ones are that the loan loss provisions and work out expenses are elevated right now but are offset by income from the LSA. I think the next two years will be below average but they should eventually achieve normal ROA's/ROE's.

 

Valuation: Fair value appraisal by Ryan Beck was set at $735/share five years ago when it went dark:

 

http://www.secinfo.com/d14D5a.z73tn.d.htm

 

Different world with different bank valuations, but in the years since, the bank has grown assets, deposits, and equity. When reading the appraisal for going dark, note that in the years prior to deal, insiders were strictly buyers at prices higher than today's prices.  The controlling shareholders rarely sell their shares and are net buyers.  Their percentage of ownership goes up every year because the bank is shrinking the share count while they hold.  Share count goes down slightly every year.  

 

I believe that they can earn $70 million next year and $80 million in a normal year. They should be able to grow book value and EPS at low-double digits for the next five years. Apply a P/E of 10 or a P/TBV of 1.2 - 1.3X in 2015 and we should have a nice story.

 

Management/Holding Family: There is not much information about the CoB & CEO Jim Apple, save for what can be gleaned from this 2006 article:

 

http://www.columbiachamber.com/PDF/June_2006_FP.pdf

 

The Holding family is also very well respected in the Carolinas but does not seek much media attention. The exception is an article published last year:

 

http://triangle.bizjournals.com/triangle/stories/2009/12/28/story1.html

 

 

Catalysts: The most obvious catalyst is that FCBN is merged with its cousin, FCNCA. Besides both banks sharing majority ownership by the Holdings, their operations are very integrated:

 

The Holding family's controlling ownership stake in other banks, including the 180-branch First Citizens Bancorporation of South Carolina: "It's evolved over a long period of time. They are separate institutions with separate shareholders and separate management. It's just different stories behind each one of them, I'm sure."

 

But Holding did identify one common thread behind the various banks: Their information technology and data processing needs are mostly handled by First Citizens' data center in Raleigh.

Source: http://www.newsobserver.com/2009/12/13/236915/ceo-is-well-aware-of-his-heritage.html (emphasis mine)

 

Total cost for these back-office services were $20.5 million in 2009. Additionally, FCBN owns $35 million in FCNCA shares and FCNCA owns $15 million of FCBN shares as of 12/31/09.

 

Frank B. Holding Jr. is 48 years-old and Jim Apple is 57. My guess is that the consolidation will occur when Apple retires. Both banks are digesting FDIC deals, so there is no rush to consolidate in the near future.

 

 

Information:

 

http://www.firstcitizensonline.com/about/financial/index.html

 

http://www.ffiec.gov/nicpubweb/NICDataCache/BHCPR/BHCPR_1075911_20100630.PDF

 

https://cdr.ffiec.gov/public/ManageFacsimiles.aspx (Georgian Bank)

 

Catalyst

- Continues compounding value
- Merged with its cousin
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