Southern First Bancshares, Inc. (SFST), headquartered in Greenville, SC, is the holding company for Southern First Bank, the third-largest bank headquartered in South Carolina. Relative to the other companies highlighted on this blog, Southern First is a relative baby; it was founded in 1999 and now operates a 11-branch network in several attractive markets in the southeast (Greenville/Columbia/Charleston SC; Raleigh, NC; Atlanta, GA).
As of six months ago, there was one major reason I didn’t think Southern First would have any chance of showing up on my screens: valuation. In June 2018, shares of SFST were trading a ~220% TBV and ~22x TTM EPS. No matter how attractive a bank franchise may be, the math just never works if you are trying to justify a 200%+ TBV valuation is a good setup/entry for a long-term investment.
So, its only after a material selloff that SFST popped back up on the radar. Shares of SFST have declined ~33% from the June 2018 highs, cutting its P/E valuation in half to ~11x (lowest levels of the current expansionary cycle) and its TBV valuation down to ~145% (lowest since early 2016). One of the main reasons I’m hesitant to invest in young banks is the lack of an underwriting and performance track record through various credit cycles. If there is one sliver of a silver lining of the 2007-2010 era, it provides a very nice window into how a community bank performed through both a credit and liquidity shock. So I do get some comfort in seeing that while SFST is a young institution and focused on growth (an initiative that can get a lot of banks into trouble), SFST weathered through the financial crisis without printing a full-year net loss. SFST’s trough year for profitability occurred in 2010 when it printed a 0.18% and 1.90% ROA and ROE, respectively.
I naturally gravitate towards the older, traditional bank franchises that have been around for 100+ years, but I also have to recognize when the market is giving patient investors a nice opportunity to hop aboard a “growth” story (at least my definition of a growth bank) in the community bank space. So, in the spirit of mixing in a little growth with my typical value-based approach, I think it is time to start buying some SFST.
Post-crisis, SFST has been executing its growth strategy and expanding its presence in some quality southeastern markets. Management has entered Charleston, Raleigh, Greensboro, and Atlanta markets since 2012, and growth has been impressive. Since 2015, loans and deposits have grown 60%+ and equity has grown 75%+ (retained earnings and two equity raises). While the market has not been kind to SFST recently, it doesn’t appear to be impacting the business performance. SFST has printed quarterly EPS of ~$0.70 for Q1-Q3 2018, so ROA is ~1.25% and ROE is ~14% YTD thru Q3 2018. At these levels, SFST will double its capital base in 5 years time. There is a lot to like in the underlying business: earnings are top-notch, growth appears sustainable, valuation is manageable, and somebody is going to try and take over this franchise at some point.
Some concerns that could pressure earnings/profitability/growth to keep an eye on:
- Economic Cycle – Hard to forecast how close we are to a turn in the credit cycle, but all banks and shareholders, no matter the quality of management, bear the risk of a downturn in local and national economies.
- Index Inclusion – SFST is a Russell 2000 member. Russell ETF flows and rebalances can drive near-term price dislocations in smaller, less-liquid bank names.
- There is such a think as too much growth – high-flying growth pulls a lot of unforeseen risks into a bank’s orbit. Focus on growth can take attention away from credit risk and underwriting standards (we’ve seen issues pop during this cycle already, e.g. Opus Bank).
Bank Description & Geography
Nice pu pu platter of southeastern geographies
- Directors / Named Executives, as group – 10.9%
- T Rowe– 7.6%
- Manulife – 7.0%
- Banc Funds – 6.3%
- Wellington – 6.3%
- Vanguard – 5.8%
- Blackrock – 4.7%
- Mendon – 3.9%
- Elizabeth Park Capital – 2.8%
- Castine Capital – 2.5%
- Synovus ($43.4B Assets / SNV)
- First Horizon ($40.6B / FHN)
- First Citizens Bancshares ($36.4B / FCNCA)
- IBERIABANK ($30.1B / IBKC)
- Pinnacle Financial ($23.8B / PNFP)
- South State ($14.6B / SSB)
- United Community ($12.3B / UCBI)
- Carolina Financial ($3.7B / CARO)