Community Capital Corporation, a small Southern bank, is a compelling value here following a capital raise and the fencing in of some bad assets. It trades at 72% of tangible book value and around 3X my projected 2012 EBIT.
Tangible book value is at $5.39/share. They earned $0.16/sh in net income in the first quarter, or $0.64/sh run-rate. That translates into about $9.2 million of EBIT. The implied P/E rate is a little over 6X.
The banking operations are conducted through Capital Bank, which has 18 branches in upstate South Carolina. The bank began in 1988 and originally developed a unique, hometown bank name for each town it entered. The idea was to tap into depositors fed up with big bank mergers that had swept through the Carolinas in the 1980's. Several branches were also acquired from Carolina First in 1997 & 1998. They eventually decided to adopt a single identity in 2000 in order to reduce expenses due to the tough economic times.
Most of the branches are located in the Greenwood area. The area is a mix of agriculture and mill towns, which suffered in the 1990's when the textile industry collapsed. Consequently, the local real estate never participated in the real estate boom that began five years ago. It is hard to have a real estate bubble when unemployment was running around 9-10% at the time. As a result, the bank kept to the traditional loan underwriting standards.
The one exception involved their branch in Greenville, which benefited from being situated on the I-85 corridor and from several large firms moving to the area. Greenville enjoyed an economic boom that extended into new home building. With loan production flat in the Greenwood area, management decided to get involved in development lending, which involves just the purchase of building lots by home builders. It offered loan growth and higher net interest margins, the siren's call for bankers. A loan officer was hired from a larger bank to manage this product. While it turned out to a bone-headed move, the one redeeming factor was that they only lent to builders acquiring building lots and not the actual construction.
This a good point to start talking about the impaired loans, which have dropped from 141 loans worth $102.0 million as of 9/30/2009 to 123 loans worth $66.4 million as of 3/31/2010. From those numbers you can see that they are tackling the larger loans first. The building lot loans account for between 30-40% of the impaired loans with the remainder primarily made up of residential mortgages. South Carolina foreclosure laws prevent lenders from seizing property for 12 months. This has slowed down the process of dealing with impaired loans. On the real estate owned (REO), they are able to clear residential homes under $350K fairly quickly but less so with the other properties, which you can confirm by visiting their web site and checking out the properties for sale.
The impaired loan amount is still significant when measured against their gross loan portfolio of $549.0 million and $55.1 million of equity as of 3/31/2009. However, it appears that they have fenced in the bad loans and should be able to manage them from here. According to the CFO, Wess Brewer, they have written down the impaired loans on the lots to fair value, which currently, on average, is slightly under half of the loan value. Having spent time talking to management, they come across as knowledgeable and honest. When they recapitalized last fall, management and the board of directors were buyers. These are people of modest means who are putting it on the line.
I have to believe that things have bottomed here because of the following:
I probably sound like a cheerleader for the Greenville Chamber of Commerce, but I think it is important to provide some ground level granularity. This is the value-added intel that you are not going to find elsewhere. Banks are inherently black boxes when it comes to their loan book and yet they are very much tied to whatever economy in which they operate. Given the dozens of other banks in a similar situation with significant impaired loans, a lot depends on the economic health of the bank's territory. CPBK is kind of a macro bet on upstate South Carolina. According to the Bureau of Labor Statistics, the April 2010 unemployment rate for Greenville-Mauldin-Easley area is 9.2% and that is better than the statewide average of 11.5% and the 9.5% national average. I believe these numbers will improve as the above news items become reality.
Deposits remain good. 59% of deposits are core and brokered deposits only represent 4% of deposits. They have $95.4 million in FHLB advances with a blended rate at 3.0%, although some of that will reset soon. The capital ratio for the subsidiary bank is a very comfortable 11.38% and tangible equity to tangible assets sits at 7.8%.
The earnings power is depressed right now because they are maintaining high cash balances for liquidity (cash & equivalents were $70 million as of 3/31/2010) and they have $30 million of loans in non-accrual. If they are able to stabilize the balance sheet and earnings, I believe they can redeploy $50 million of assets that are earning close to 0% into bonds or loans yielding more. Assuming a 5% yield on $50 million, that would add $2.5 million to EBIT, bringing it to about $11.7 million. Another option would be to delever by reducing higher cost debt or deposits. The drag right now is that with low bond rates and low loan demand, cash will continue to accumulate on the balance sheet with few alternatives for generating income. That should change as the local economy stabilizes.
Earnings estimates will have a high degree of variability. The most recent quarter had a lot of noise. They benefited from a law suit settlement and securities gains, offset by higher loan loss provisions, FDIC assessments and REO admin costs. In a couple of years, they should be able to earn $0.70-$0.75/share and book value should eventually get to about $6.50-$7.00/sh. I think a P/E of 10 and a slight premium to 2012 book is possible.
Disclaimer: We own shares of CPBK and may buy or sell the shares at any time and without notice. Do not rely on this information as your sole basis for investing and perform your own due diligence and verification.