Bank of South Carolina: Book Value Rammed From Securities Portfolio (NASDAQ:BKSC)
It’s been almost two years since I spoke about the Bank of South Carolina (NASDAQ: BKSC) here on Seeking Alpha. In June 2021 I still found the company too expensive and so far I was right. The total return is down 15% (including all dividends), underperforming, say, the S&P 500, which fell less than 9% over the same period. And according to charting tool Seeking Alpha, BKSC also significantly underperformed bank ETF Financial Select Sector SPDR ETF (XLF). This could be a good moment to take another look under the hood, as the financial sector has been rocked by the fallout from the Silicon Valley Bank collapse, while higher interest rates are likely to translate into higher interest rate margins in the future.
2022 was a decent year for the Bank – but the book value collapsed
Operating in the Charleston area of South Carolina, the Bank of South Carolina is a relatively small bank: total assets on its balance sheet are just $653 million and the bank’s market capitalization is just under $90 million.
In 2022, the bank reported total interest and fee income of $19.2 million, an increase of approximately 10% over 2021, while total interest expense increased by nearly $130,000. While interest expense nearly doubled, the overall increase is very manageable in absolute terms, and net interest income increased nearly 10% to $18.9 million.
The Bank of South Carolina also reported approximately $2.1 million in noninterest income and $12.4 million in noninterest expense, resulting in pretax and provisioning income of approximately $8.55 million. Surprisingly, BKSC was actually able to reverse some historical loan loss provisions, and the income statement clearly shows that about $75,000 of previously recognized provisions were released, giving a nice little boost to earnings, which ended on April 8 Up $.63 million before tax and approximately $6.66 million after-tax. And with approximately 5.55 million shares outstanding, earnings per share were $1.20. That sounds great, but it’s still a little lower than the $1.22 in EPS achieved in 2021, largely due to the fact that mortgage banking earnings fell off a cliff after falling into the had generated approximately $2.3 million per year for the previous two years. This fell to just $0.7M and I don’t expect things to get much better this year given the state of the economy.
The Bank of South Carolina saw a significant increase in net interest income but reported slightly lower net income.
However, what the income statement doesn’t show is the loss on the securities for sale. As the whole world now knows, these securities have to be valued at the market price, which sometimes leads to very serious destruction of value. In the case of the Bank of South Carolina, the unrealized loss on these securities during the year was approximately $23.1 million. And that also explains why the book value has fallen from $54 million to $38.8 million by the end of 2022.
And as you can see in the image above, BKSC has been withdrawing cash from interest-bearing deposits with the Federal Reserve throughout the year to buy even more securities. That’s not necessarily a bad thing if you think rates will peak at this level. But it sure is an interesting element to keep an eye on. And it’s worth noting that the bank actually reported an unrealized gain on its portfolio of securities held for sale in the fourth quarter. In late September, it reported an unrealized loss of $25.5 million, which was reduced to just $23.1 million at year-end, giving the company about $2.4 million of those losses for the entire fourth quarter recouped and its book value of $36 increased M at the end of September.
That doesn’t mean the Bank of South Carolina is out of the woods just yet. At the end of December, the bank still had over $270 million worth of securities classified as “available for sale,” accounting for over 40% of its total asset base. That’s a lot, and additional rate hikes will cause additional pain. Only $42.7 million of these securities will mature in 2023, and while the money will come in when it matures, the problem is that it’s less than 1/6th of securities will be redeemed this year, which is not much.
Should the $43 million be reallocated at an average interest rate of 4.5%, the Bank of South Carolina will see its interest income rise quite sharply, but at this point it’s more about avoiding further losses than about overcoming it Low-yield securities to look forward to unwinding. Luckily, the loan book is pretty strong, with just over $0.6 million (of $330 million) in interest-free loans and less than $2.8 million in bad loans.
Despite what happened with Silicon Valley Bank, I like regional banks because they usually have a better understanding of the needs of their local customers. In the case of the Bank of South Carolina, I remain very marginal. The bank trades at about 13 times its 2022 earnings, and I don’t expect 2023 results to be much better. I like the conservative loan portfolio, but limiting the damage from the portfolio of securities for sale should be the number one priority. There was an encouraging uptrend in the fourth quarter of last year, but the BKSC still has a long way to go.
And even assuming the situation doesn’t get worse, book value (and tangible book value) per share at the end of 2022 was just $6.99, making BKSC relatively unattractive from both an earnings and book value perspective. I’m on the sidelines I like the bank and its loan book, but personally I would like a stronger balance sheet.
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