Undervalued Bank Buying Back Shares

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Raleigh, North Carolina-based First Citizens Bancshares Corporation (NASDAQ: FCNCA) is looking increasingly attractive as a short-term long play in the wake of a significant share buyback push. The company appears to be undervalued by as much as 10% and may see a major upward move in the coming weeks. With fairly strong fundamentals, healthy profit margins and strong secular growth prospects, First Citizens Bancshares appears to be well positioned for the future. Like other regional deposit and thrift banks that operate in the United States, it may also benefit from a slowly building investment boom and a rejuvenated housing market.

First Citizens Bancshares is a regional deposit and thrift institution that does business under the First Citizens Bank & Trust name. The company operates around 430 branches in over a dozen mid-Atlantic and Southeastern states, including North Carolina, Virginia and Maryland. It also operates several branches within Washington, D.C. First Citizens provides a full suite of deposit products, including savings accounts, checking accounts, and certificates of deposit. It also offers a range of loan and investment products, including retirement accounts, wealth management accounts, money market accounts, home mortgages and commercial loans. First Citizens earned $134.4 million on $961.1 million in gross 2012 revenues.

Current valuations

Market watchers like First Citizens Bancshares for a variety of reasons. One of the most powerful arguments for a long position in the stock is the company's valuation: First Citizens may be undervalued by as much as 10%. From its current trading range between $175 and $180 per share, First Citizens would need to appreciate by 8-10% in order to attain a price-to-book ratio close to its peers. By contrast, its share price has remained below $190 per share for the better part of two years. In fact, the company has not traded above $195 per share on a sustained basis since the second quarter of 2011. 

Share repurchase program

Of course, plenty of bank stocks are undervalued in the uncertain post-crisis economy. Skeptical investors who might not be sold on the idea of purchasing a regional bank simply because its shares are undervalued might instead take solace in the fact that First Citizens is mounting a sizable share buyback program. Ultimately, this program will remove more than 1% of the company's total shares from the market. Specifically, the buyback program authorizes the repurchase of up to 100,000 shares of First Citizens's Class A shares and 25,000 of its Class B shares. Collectively, these have a current value of more than $22.5 million. Pending an extension, the program is scheduled to last until June of 2013.

Although news of the share buyback broke in mid-June of 2012, First Citizens's investors did not begin to respond favorably until the very end of the year. This delayed response may have been spurred by a veteran director's decision to leave the company and sell back shares valued at about $92 million. The announcement of that decision sparked a three-month rally in the company's stock that has yet to crest. Given that the company remains significantly undervalued, investors who wonder whether they have missed the bulk of this rally may wish to give First Citizens a second look.


First Citizens operates in a crowded marketplace. The densely-populated mid-Atlantic region in which it does business is home to several similarly-sized banks, including First Niagara Bancorp (NASDAQ: FNFG), Hudson City Bancorp (NASDAQ: HCBK) and People's United Bank. In fact, there are literally dozens of other banks that operate current or planned branches in First Citizens's home markets. However, there is plenty of reason to believe that the company is well insulated from competitive threats.

All of the companies mentioned above have carved out niches for themselves. Some focus on deposit accounts, others focus on wealth management, and still others focus on making mortgage and business loans to established community members. With a steadily growing population and a stable economy, the region should be able to support plenty of conservative, growth-minded banks over the next several years.  Recently though, out of these banks, only First Niagara has been seeing much growth in revenue while the others, Hudson City, People's United, and First Citizens, have had flat or declining revenue numbers. First Niagara recently announced that they have a new interim CEO.  Investors appear to believe that things may change for this competitor since the stock increased 4% after the announcement.  

Hudson’s City has by far the highest operating margin, however, at 70%. The other three banks have operating margins around 25-40%.  When looking at valuations on an earnings multiple basis, First Niagara is the lowest valuation with a PE of 11 and Hudson City has the highest valuation with a PE of 21.  However, Hudson City doesn't have the highest return on assets and some hedge funds have been selling their investments of late.  People's United has a slightly higher return on assets at 0.85%.  This may be due to their emphasis on the more lucrative wealth management segment.

Long-term prospects and outlook

In sum, First Citizens Bancshares is an undervalued company that should be trading 8-10% higher than its current valuation. With the delayed effects of a robust share buyback program finally taking hold and the potential for further buybacks on the horizon, the company may finally be emerging from a long period of flat trading. While a sustained move above $210 per share might not be likely in the foreseeable future, it is not inconceivable that First Citizens could touch $200 per share by the end of the second quarter of 2013. As such, investors would do well to watch the company at these levels.

Mike Thiessen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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