<SPECIAL FEATURE>
June 15, 1999
First Citizens Bancorporation for Dad Trading at $300 as of June 14, 1999
Hi Dad. Next -- Immunex from TMFGump
* A Stock for Dad represents the opinion of one Fool and in no way should be taken as the opinion of either The Motley Fool, Inc., the company in question, or representative of anyone or anything else other than that specific Fool's thoughts.
by Dale Wettlaufer ([email protected])
Time for another barn-burning stock pick for Father's Day. Since this is your first year as an America Online customer, I won't have to send a hard copy to you, either, so you can act FAST! Just kidding. I just find it interesting that I can simply send you a hyperlink on this, the fourth time we've done this feature.
Let's get down to business. Last year's pick for you, First Citizens Bancorporation of South Carolina (OTC: FCBN), has suffered a bit of a quotational loss (down 20%) from last year, as the very thin float of this company's stock is a double-edged sword. On the one hand, its status as an over-the-counter traded equity keeps it illiquid and attractive in price. On the other, the trading is very ragged and the spreads are big. Therefore, over the short term, you can see these potholes in price.
I am again recommending this stock to you as a good long-term investment in the banking industry. FCBSC is a bank holding company with 132 branches in South Carolina (at year-end 1998). By deposits, the company is the sixth-largest commercial bank in the Palmetto State; by branch locations, it's the second-largest next to BankAmerica <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: BAC)") else Response.Write("(NYSE: BAC)") end if %>, as far as I can tell from the Fed's database. First Citizens is a very conservatively run commercial and retail bank with a strong presence across the state, especially in its major cities of Columbia, Charleston, Greenville, Anderson, and Spartanburg.
From fiscal 1994 through fiscal 1998, gross loans grew at an annual (compounded) rate of 13.8%; deposits, 10.1%; shareholders' equity, 15.5%; revenues, 11.8%; and noninterest expenses before intangibles amortization, 7.1%. Shares outstanding fell 1.9% over those four years and assets/equity leverage fell to 14.26x from 16.21x over that time. Measuring leverage on a risk-adjusted basis (which takes into account the nature of assets and collateral backing assets), total risk-based capital ratio has fallen (the higher the number, the less leverage) from 11.04% at year-end 1994 to 14.37% as of the end of Q1 1999.
This definitely isn't a fancy money center bank -- it's pretty much a solid regional with return on assets (ROA) of 1.15% and return on equity (ROE) of 16.25% (both before goodwill amortization and both my estimates) over the last 12 months. A taxable-equivalent net interest spread of 3.74% and cash efficiency ratio of 61.7% are both good for a bank of this size. Since I last wrote to you about the company, its valuation metrics have come down and the company trades at a very reasonable 9.87 times cash EPS of $30.40 (again, this is my estimate, because goodwill amortization isn't broken out in the 10-Qs. Amortization of goodwill is, by the way, the only amortization I add back to cash earnings). Here are some other valuation metrics:
Share Price.....$300
Market Cap.....$275.75 million
Price/Book.....1.55
Price/Tangible Book.....1.69
Book value per share.....$193.04
Tangible book per share.....$177.25
Price/Assets.....10.93%
Price/Net Loans.....17.57%
Price/Deposits.....13.52%
Price/Tangible Assets.....11.00%
Price/Revenues.....2.22
P/E.....12.23
Amortization-Adjusted P/E.....9.87
Credit quality and reserves are also very good ($ in millions):
Nonperforming Assets.....$2.8
Loan Loss Provision/Net Interest Income.....5.02%
Charge-Offs.....$3.75
Recoveries.....$1.51
Net Charge-Offs.....$2.23
Nonperforming Assets/Gross Loans.....0.18%
Reserves/Nonperforming Assets.....1022.03%
Months Net Charge-Offs in Reserves.....154.7
Months Charge-Offs in Reserves.....92.2
Loan Loss Provision/Net Charge Offs.....210.00%
Gross Loans.....$1,598.0
Loan Loss Reserves.....$28.76
Loan Loss Reserves %.....1.80%
About two-thirds of the lending portfolio is made up of residential and commercial mortgages and about 10% of the portfolio is made up of home equity loans. 21% of the portfolio is personal lines of credit and about 8.9% of the loan portfolio is commercial and industrial loans. For a full breakdown of loans, click here.
The company has some trust activities, issues VISAs and MasterCards, and has a full array of retail banking services. In commercial banking for large companies, its larger competitors look like they have some big product edges.
The thesis here is that South Carolina is a rapidly growing market. Late last year, I put together a spreadsheet with data I extracted from the Census Bureau website. Scoring each state by its projected population and state product growth rates (1995-2010), South Carolina ranked fourth. Overweighting state product growth rate, South Carolina ranked sixth. Click here for the Excel 5.0 spreadsheet.
The investment proposition is simple. South Carolina is a fast-growth state with balanced growth prospects coming from inflows of retirees and industry. Small business follows this sort of growth, and that's the sort of commercial lending a bank like this thrives on. It's not a flashy investment like Citigroup nor is it a mega-regional with a low-cost banking platform. It is a service-oriented, conservatively run company with great market share.
I don't think this is a barnburner, but it offers a margin of safety and the possibility of expanding earnings as new products and marketing initiatives take hold. In the short term, it's undervalued by at least one-third, in my opinion. Over the longer haul, the company's good internal capital generation capabilities will allow shareholder value to expand by about 10% per year, tax-deferred, off an intrinsic value of $400 per share. It's also an attractive acquisition candidate for a company such as Wachovia <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WB)") else Response.Write("(NYSE: WB)") end if %>, First Union <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FTU)") else Response.Write("(NYSE: FTU)") end if %>, Regions Financial <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RGBK)") else Response.Write("(Nasdaq: RGBK)") end if %>, or other large commercial banks. It's closely held, however, so if the family that controls it doesn't want to go that route, no takeover premium will get built in. That's only icing on the cake. In the meantime, this is a very solid regional banking investment.
First Citizens Bancorp Company Information:
Trades on the OTC under the symbol FCBN
Other Related Links:
Dale's Stock for Dad 1998 -- 6/17/98