Is This Tiny Bank A Buy At 41% Of Book And A 20% Earnings Yield?

We wrote about Southern Community Bancshares, Inc. (OTC: SCBS), the holding company of First Community Bank of Cullman, in our post last year Small Companies (like Small Banks) As "Jobs Programs". We thought we'd update since the 2019 results are out, and the loan growth, earnings growth, and share repurchases were surprising.

Last year we noted a market capitalization of $4.3 million with stockholders' equity of $10 million, for a price-to-book ratio of 0.43x. The caveat was that the bank's property, plant and equipment were $5 million of the equity, making SCBS a strong contender for the Bank of Utica Small-Town Bank Headquarters Hall of Fame. Having half of the bank's equity tied up in premises made the 57% discount to book value feel much less generous.

This year we notice that assets have grown from $115 million to $127 million, with more than 100% of the increase coming from loan growth. Deposits grew by only $4.5 million; most of the asset growth was funded by FHLB borrowings. The loan portfolio is 92% real estate mortgage loans.

Shareholders' equity grew from $10 million to $10.7 million, while at the same time the bank shrank its share count from 505,592 to 488,296. (A 3.4% reduction.) Book value per share is now $21.90, so the price to book is now 41% instead of 43%.

For 2019 the bank had $883,000 of comprehensive income. Interest and fees on loans were $5.65 million on a portfolio that started the year at $90 million. Interest on deposits were $1.2 million on interest bearing deposits of $86 million.

With the 59% discount to book value and resultant $4.4 million market cap, the 8% return on equity now translates to a 20% ttm earnings yield!

It is somewhat amazing that with $10.7 million in equity, or $5.6 million if you exclude the value of premises and equipment, they have levered up to own $127 million of assets. (Or if you exclude the premises and the investment securities, $117 million of assets.) Only with a government guarantee would a 21x leverage scheme like this be possible.

Also interesting is that SCBS does not lack for competition. Their competitors just in Cullman, Alabama (town of 15,000) are Family Security Credit Union, Traditions Bank, Premier Bank of the South, Regions Bank, Merchants Bank of Alabama, Citizens Bank & Trust, Cullman Savings Bank, Peoples Bank of Alabama, Wells Fargo Bank, BBVA Bank, EvaBank, and Woodforest Bank. That is about one bank per thousand people.

A question for a bank sleuth - how did SCBS grow its loans from $58 million to $103 million in two years? Is this level of interest and fees on the loan portfolio size sustainable?

SCBS 2019 Annual Report by Nate Tobik on Scribd