BNCC - BNCCorp

[Kraven]

I thought this might be an interesting idea for the board.  BNCCorp (BNCC) is a small bank that trades on the pink sheets.  Current market cap is around $21.5 mil, but the stock has tripled recently.  So why is it still interesting?  This is one where the numbers one can pull up don't fully reflect the situation.

 

BNCC is a community bank with 15 branches mainly in North Dakota, but also in Arizona and Minnesota.  They also have an active mortgage banking business conducted from various locations.  The bank has around $700 mil in assets.  BNCC has had its issues like many banks coming out of the financial crisis, but BNCC had them perhaps more than many.  They got killed with bad loans, etc, but their saving grace is that they are located in the very strong North Dakota market.  Many view it as kind of a related play on drilling there.  I don't pay much attention to that, but it's a good fact.

 

In addition to the bad loans, there was a fraud committed on them by an outside mortgage servicer in 2010.  The bank had to take charges of around $25 mil and promptly filed under their insurance which was a $15 mil policy.  The insurers rejected the claims and BNCC filed suit.

Between the charges resulting from the fraud and the bad loans, the bank was in a precarious situation.  Capital levels were low, very low.  In order to raise capital the company agreed to dilute the hell out of the thing.  It was kind of a strange move in a way.  Not because they didn't need the capital - they did - but because of the price.  After getting hammered, the price had moved from around $1 and change to $6 and change.  The agreement to sell the equity was for $1.85/share and would result in an additional 9 mil + shares being issued on top of the existing 3.3 mil.  The stock plummeted of course.

 

Meanwhile, the banking activites had started to improve.  Bad loans were being sold, operations were improving, etc.  At present time, reserves are over 2x NPLs (and slightly under NPAs).  Texas Ratio is down in the 24 range.  Etc, etc.  The metrics all look good now.  They do have TARP outstanding and will need to take care of that.

 

Going back to the equity sale, one thing that was intriguing was how long it was taking to close.  No details were announced other than to say that they were waiting for regulators to approve it.  But with very low tangible capital levels why not approve it?  It was a bit of a mystery.  Some interesting things started happening in the last month.  On Aug 31, a law firm announced that they were hired by a large investor and wanted to investigate the equity sale.  Later that same day, the bank announced they terminated the sale!  Kind of strange.  The stock moved up on that news as the bank was much stronger than when they initially did the deal and the thought was a new deal could be done on more favorable terms or perhaps some debt or what have you.

 

Then, on Sept 14 the bank announced that they were reversing $8.8 mil of their DTAs.  Their DTAs (around $15 mil) had been virtually completely off balance sheet due to a full valuation allowance.  So $8.8 mil would come back on balance sheet.  On Sept 20 they announced they settled their fraud claim for $7.5 mil (about $5 mil after expenses).

 

The financials don't currently reflect these latest additions.  Afterwards, TBV should be around $12 (it's about $7.85 prior to these changes).  TCE/TA is out of the danger zone and should be in the mid 5% range.  Earning power is strong.  As I said, the stock has had a nice run, but at $6.50 it would seem as if there still could be upside.  I don't see why it isn't worth TBV.

 

If anyone else follows this one, I'd be interested in hearing thoughts.

[vpagano]

Here's the link to some discussion we've had on the IHub board:

 

http://investorshub.advfn.com/BNC-National-Bank-BNCC-25049/

 

I've been kicking myself for not being able to get any around $2 as I was looking for plays on the Bakken boom.

[MrB]

Kraven,

Considering the relative valuation, why would you prefer it above BofA?

[Kraven]

Here's the link to some discussion we've had on the IHub board:

 

http://investorshub.advfn.com/BNC-National-Bank-BNCC-25049/

 

I've been kicking myself for not being able to get any around $2 as I was looking for plays on the Bakken boom.

 

Thanks for posting.  Yes, I had seen that discussion before.  Not many places where this one is discussed.

[Kraven]

Kraven,

Considering the relative valuation, why would you prefer it above BofA?

 

Can't you eat chocolate and vanilla?  Why does it have to be one over the other?  I do own some BAC.  It isn't an apples to apples comparison, it's more like apples to tomatoes or something.  BAC is a global, money center bank with operations in virtually every country in the world.  BNCC is a tiny community bank primarily located in North Dakota.  Every bank is not comparable to every other bank.  Just like you wouldn't compare your local coffee and donut shop to Dunkin' Donuts.

 

People never want to hear this, but I firmly believe that BAC is impossible to understand at the level that people believe they understand it.  And I own it.  I think in another thread about Pabrai someone was puzzled why he doesn't run all kinds of fancy projections and I believe said his decisions come down to a few numbers or metrics.  So true.  Why is BAC a good buy?  Because of earning power and the fact that it's cheap based on that basis and the fact that it's trading at such a low p/tbv.  That's it.  If you believe, as I do, that the future for BAC will look something like the past, that's your analysis (I am oversimplifying). 

 

If you believe that you can read the 10-K for BAC and understand what is going on, I think you are misguided.  Sorry to offend some people, but even Buffett doesn't understand it fully.  It would be impossible for him to do so.  The numbers for things like derivatives, structured products, etc. are all truly estimates.  Trying to figure out the value for one CDO would take days or weeks to even attempt to do properly.  Where do the numbers come from?  Some 21 year old kid on the desk working 100 hours a week.

 

But that's the thing.  Buffett knows you don't need to know it.  All you need to know is that the odds are tremendously in your favor no matter where the wind blows.

 

Now look at BNCC.  It's a tiny community bank.  They make mortgage loans.  That's it.  No funky securities or anything.  They had issues, major issues, in the past.  But they were easy to think about and analyze and handicap if you want to call it that.  Everything fell into place pretty well, but even if it didn't it was still cheap. 

 

But I digress.  I own both and am happy to do that.  I own plenty of other banks as well.  So I will have some strawberry, rocky road, and chunky monkey along with my chocolate and vanilla.  Banks ARE a black box.  While I hope that the folks that have huge BAC positions do well (as I said, I own it too), I would never do that.  Just my preference.  I wish I had the foresight and stones to do so.  Alas, as much as I want to be Gordon Gekko I realize that I will always just be Bud Fox.

[MrB]

Kraven,

Considering the relative valuation, why would you prefer it above BofA?

 

Can't you eat chocolate and vanilla?  Why does it have to be one over the other?  I do own some BAC.  It isn't an apples to apples comparison, it's more like apples to tomatoes or something.  BAC is a global, money center bank with operations in virtually every country in the world.  BNCC is a tiny community bank primarily located in North Dakota.  Every bank is not comparable to every other bank.  Just like you wouldn't compare your local coffee and donut shop to Dunkin' Donuts.

 

People never want to hear this, but I firmly believe that BAC is impossible to understand at the level that people believe they understand it.  And I own it.  I think in another thread about Pabrai someone was puzzled why he doesn't run all kinds of fancy projections and I believe said his decisions come down to a few numbers or metrics.  So true.  Why is BAC a good buy?  Because of earning power and the fact that it's cheap based on that basis and the fact that it's trading at such a low p/tbv.  That's it.  If you believe, as I do, that the future for BAC will look something like the past, that's your analysis (I am oversimplifying). 

 

If you believe that you can read the 10-K for BAC and understand what is going on, I think you are misguided.  Sorry to offend some people, but even Buffett doesn't understand it fully.  It would be impossible for him to do so.  The numbers for things like derivatives, structured products, etc. are all truly estimates.  Trying to figure out the value for one CDO would take days or weeks to even attempt to do properly.  Where do the numbers come from?  Some 21 year old kid on the desk working 100 hours a week.

 

But that's the thing.  Buffett knows you don't need to know it.  All you need to know is that the odds are tremendously in your favor no matter where the wind blows.

 

Now look at BNCC.  It's a tiny community bank.  They make mortgage loans.  That's it.  No funky securities or anything.  They had issues, major issues, in the past.  But they were easy to think about and analyze and handicap if you want to call it that.  Everything fell into place pretty well, but even if it didn't it was still cheap. 

 

But I digress.  I own both and am happy to do that.  I own plenty of other banks as well.  So I will have some strawberry, rocky road, and chunky monkey along with my chocolate and vanilla.  Banks ARE a black box.  While I hope that the folks that have huge BAC positions do well (as I said, I own it too), I would never do that.  Just my preference.  I wish I had the foresight and stones to do so.  Alas, as much as I want to be Gordon Gekko I realize that I will always just be Bud Fox.

I just noticed its financial leverage was 50% more than BAC and its tiny v BAC being a TBTF and wanted to get a sense why you were willing to pay 25% more on a P/BV basis.

 

So was just interested how you compared it.

[Kraven]

I just noticed its financial leverage was 50% more than BAC and its tiny v BAC being a TBTF and wanted to get a sense why you were willing to pay 25% more on a P/BV basis.

 

So was just interested how you compared it.

 

Note that the spread on the leverage is closer than it seems as BNCC has just added approximately $13.8 mil in assets.  Same with it's p/b.  Once you add in the DTAs and settlement funds, TBV moves from around $7.84 to about $12.  And by TBV, I refer to TCBV.  BV will be around $18.28, so actually BNCC's p/b is less than BAC.

 

It's just not apples to apples though.  They can't be compared.  I don't view them as competing investments.  I am happy to own both.  It's not as if I didn't own one, those funds would be in the other.  BAC may be a TBTF, but that doesn't mean the equity can't be wiped out.  I actually have more faith that I can tell what will happen with BNCC than with BAC. 

[Shawn]

hmmm interesting find. I'm gonna look more into this one.

[Sunrider]

Hi

 

Very interesting find - thank you. I've had a quick look through some of the recent reports - my concern here/questions are twofold:

 

1. Yes it's at half BV or TCE. However, what - in your view - would be a catalyst for the market to wake up to this fact and revalue the company closer to BV? Especially in this case of a very small firm in the pink sheets?

 

2. I've not gone back very far but it seems to me the the bank can probably continue to operate somewhere around 1% ROA, which would imply a pretty decent RoE of >12%. Provisions are down this year but what is your view on sustainable earnings in the medium term?

 

Lastly (ok that makes three) ... what can kill this business and lead to even lower prices? The Bakken not continuing to boom? Any other ideas/theories?

 

Thank you very much!

[Kraven]

Hi

 

Very interesting find - thank you. I've had a quick look through some of the recent reports - my concern here/questions are twofold:

 

Thanks.  Good questions.  I will try to answer them.

 

1. Yes it's at half BV or TCE. However, what - in your view - would be a catalyst for the market to wake up to this fact and revalue the company closer to BV? Especially in this case of a very small firm in the pink sheets?

 

Once you add in the expected amounts from the partial release of the valuation allowance against the DTAs and the settlement from their insurer claim, BV should be around $18 and TCBV should be around $12.  The stock is currently $6.25.  I think it's worth at least its TCBV of around $12.  There is no specific catalyst to reach that level.  For a small community bank on the pink sheets it does seem to have some followers, but there isn't a specific catalyst. 

 

Here are a couple possiblities.  The M&A market for small and regional banks is just heating up and one would expect that trend to continue.  BNCC would make a nice bolt on acquisition for someone looking to expand in ND.  A negative fact is that while there have been a number of acquisitions, there is a trend to paying well under BV and sometimes even TBV.  See HCBK, CRBC and ECBE.  All were taken out at levels that would indicate the buyer got a good deal.  So while I think that BNCC is worth at least its TBV, it's always possible it could get taken out at a lesser amount, say 80% or around $9.60. 

 

Another catalyst is that there was a large shareholder who hired a law firm to "investigate" the equity sale that got terminated.  That holder stated they intend to keep on the bank and ensure value is realized, whatever that means.  So maybe something happens with that.

 

But as I said, there is nothing specific.  I don't invest with catalysts in mind anyway.  I believe value is its own catalyst and when something is good and cheap it will be recognized some day.  As Graham said, experience shows that over a few year period almost no stock doesn't reach it's intrinsic value at some point during that time.  Of course when it does intrinsic value may not be the same as it was when one made the initial investment, but that's a risk.

 

2. I've not gone back very far but it seems to me the the bank can probably continue to operate somewhere around 1% ROA, which would imply a pretty decent RoE of >12%. Provisions are down this year but what is your view on sustainable earnings in the medium term?

 

I think you're being overly optimistic.  It's a good little bank, but other than the past year or so, they haven't reached levels like what you're talking about in a long long time.  They were lucky to hit about 0.55% ROA.  The past year has been skewed by a fantastic mortgage business that even the CEO in his last letter said one shouldn't expect will continue.  A 1% ROA would be a massive home run on this stock.  Call it around $2 a share in earnings.  That would be something.  I would hope for a steady 0.50-0.60% ROA.  That's over a buck a share in earnings and is more than enough to support at least TCBV especially in a strong area like ND with the Bakken.

 

Lastly (ok that makes three) ... what can kill this business and lead to even lower prices? The Bakken not continuing to boom? Any other ideas/theories?

 

What can kill this business or lead to lower prices?  I don't think the Bakken continuing to boom would hurt all that much.  It wouldn't help of course, but it's a solid little bank now that they've got their issues behind them (hopefully).  So what can kill it?  Just bad banking business.  Bad loans.  This is a bank that had more than their share of issues in the past.  They seem to have seen the light and really improved operations, but there's always a risk of more "bad acts".  That's really the only problem I see.  It's still cheap and so long as they continue on the straight and narrow, the stock has more room to move.  If NPAs spiked again, that would be a huge issue.  They do have TARP they need to pay off too.  If they don't have enough funds on hand and can't do any kind of debt or preferred offering for the difference, they will have to dilute some.  Hopefully though if they had to, dilution would be at a high level.

 

Hope this answers your questions.  If not, feel free to ask again.

 

[Sunrider]

Hi Kraven

 

Thank you - I can't find much on that 'large shareholder' and I guess my main concern here is simply the obscurity of the bank (of course that doesn't mean someone else won't go shopping it around and it ending up being taken out ... as you said).

 

Cheers - C.

[Kraven]

Hi Kraven

 

Thank you - I can't find much on that 'large shareholder' and I guess my main concern here is simply the obscurity of the bank (of course that doesn't mean someone else won't go shopping it around and it ending up being taken out ... as you said).

 

Cheers - C.

 

Sure, no problem.  Yeah, I couldn't find out much on that "large shareholder" either.  No clue.  In terms of possible catalysts (that's where I mentioned that holder), I don't mean to mislead you.  I was just throwing those out there as possibilities.  They are kind of the same possibilities for any small and cheap company at some level.  I don't know if that holder is going to do anything more than he has done and I don't know if the bank will be sold.

 

I am a big believer that valuation provides it's own catalyst.  If I see something that meets my parameters I don't worry about how it will get there.  I just know that it will because that's what experience tells us.  This is the Graham/Schloss method of investing.  One thing to keep in mind though is that the stock has almost tripled in the past few months.  In July it was in the low $2 range.  I don't say that to imply that it will keep going, only that this "obscure" bank moved up quickly once their performance improved and once certain potential uncertainties were resolved.  So someone is out there watching and keeping tabs.

 

 

[Kraven]

BNCC reported this morning.  Great quarter.  $4.41/share.  Note that this does include funds from their fraud settlement and reversal of their DTA valuation allowance.  I quickly tried to back those items out and normalize the elevated expenses incurred along with the fraud settlement funds.  I come to roughly $1.14/share.  This does not include taxes (they won't be paying them for a while) or any provision (NPLss are low and they are over reserved).  NPAs are down to 1.44% as well.  TCBV is up to about $13.49/share.  Tangible common equity is over 6%.  TARP is still outstanding and will need to be dealt with, but hopefully now from a position of strength.

[Sunrider]

Hi Kraven

 

Congratulations - I never ended up buying any. I'm wondering though if this one will now jump from announcement to announcement with little activity in between (a takeover notwithstanding, of course).

 

Cheers - C.

[Kraven]

Hi Kraven

 

Congratulations - I never ended up buying any. I'm wondering though if this one will now jump from announcement to announcement with little activity in between (a takeover notwithstanding, of course).

 

Cheers - C.

 

Thanks.  Maybe.  There's really nothing left to announce other than if there was a merger, payback of TARP, or some kind of capital raise.  The "goodies" are pretty much gone at this point.  Now it's just a bank that needs to chug along on it's own 2 feet.  Performance has been very good though.  So we'll see.