Bank Of South Carolina: High Quality Franchise, Full Price (NASDAQ: BKSC)

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Overview

Bank of South Carolina Corporation (BKSC) is a South Carolina-based less than $1.0 billion commercial bank. The bank operates in Charleston, North Charleston, Summerville, Mt. Pleasant and the West Ashley community and has been in continuous business since 1987. Insiders own 20% of the bank.

The bank is a commercial and real estate lender from a loan portfolio perspective. The bank has always maintained strong credit quality, but in fiscal 2020, the NPL percentage reached 61 basis points as the bank’s portfolio was tested by the COVID 19 pandemic. In terms of loan mix, real estate accounts for ¾ of the total loan portfolio, while C&I and consumer loans round out the rest of the loan portfolio. Historically, the bank has maintained strong credit quality due to its conservative underwriting standard. In addition, the significant insider participation also provides shareholders with assurance that loan officers will be cautious when underwriting credit.

In terms of funding mix, the bank has reduced its reliance on term deposit funding over time. Since 2016, the bank has had a solid funding base since term deposits only represent 15%. As of FY21, CD represented 4.48% of total funding, which is a great sign that Bank of South Carolina has a high-quality deposit franchise. Typically, when a bank reduces the CD as part of the funding mix, the cost of funding goes down and depositors are less likely to “shop for the rate”, creating a more stable deposit base. A bank is a return-generating investment vehicle that arbitrates return on the asset and liability side, so if the liability side is not actively chasing rates for whatever reason, the bank will benefit.

Transaction Review

Bank of South Carolina Corporation (BKSC) reported net income of $1.5 million in the fourth quarter for fiscal 2021, compared to $1.7 million for the prior year period. Earnings per share were $0.28 versus $0.30 for the prior year period.

The bank has consistently achieved a return on investment greater than 1% over the past six years from a profitability perspective. As mentioned earlier, the credit quality of the bank is top notch. The cost of financing is cheap. The bank runs a relatively efficient operation. The bank secured 3.5% NIM from 2021, which is a testament to the bank’s ability to access a cheap funding base.

Historical balance sheet growth has been tepid. The current management team has been in place for a long time. The CEO and the Chairman have been with the bank since 2005 and the management team has consistently deployed a strategy based on organic growth. Over the past six years, total assets, net income and EPS have increased by 5.9%, 5.8% and 5.3%, respectively. The bank announced expansion to North Charleston and James Island in 2019 and 2021.

Operation matrix

Corporate documents, 10K

Evaluation

The stock is priced at 16.5x P/E and 2.1x P/TBV. Bank of South Carolina’s growth profile is not as exciting on a stand-alone basis. However, when looking at the bank from an acquisition perspective, the bank’s deposit base is very valuable to any potential acquirer.

Evaluation

Business Deposits, CapIQ

Risk/Reward

From a risk point of view, the bank is fully valued, which mainly reflects the high quality of the bank – cheap funding cost, high quality loan portfolio. However, the bank’s growth prospects were limited as Bank of South Carolina did not engage in mergers and acquisitions to create value.

From a reward perspective, due to the COVID pandemic, more and more people are interested in cities like Charleston, where the bank has a presence. Growing the local economy can generate shareholder value. Additionally, business expansion in James Island may lead to further growth in deposit and loan products. Finally, the bank is well placed to take advantage of an environment of rising interest rates. From an asset rate sensitivity perspective, approximately ~50% of assets are rate sensitive. Although the rate hike is a net positive from an earnings perspective, Bank of South Carolina is not as rate sensitive as some of its peers.

Conclusion

In our view, the bank is fully valued for its size. Given its cheap funding base and high-quality loan book, it can be seen as an acquisition target. An acquirer can reduce operating costs and improve pro-forma transaction metrics. Looking at the bank on a stand-alone basis, the bank’s growth prospects will likely hinge on organic growth opportunities in cities such as Charleston, where there is an influx of people. Looking at the bank from a dividend perspective, the bank has consistently increased its dividends over time. We want to see banks show consistent loan book growth, and we like banking opportunities that have strong growth prospects, and for that reason, we’re sitting on the sidelines for Bank of South Carolina.

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