Investing in Undervalued Banks: BNCCorp and Bank of Birmingham

I have spent so much time speculating that I have been neglecting the more long-term investment side of my portfolio. Here are two purchases that I made today to rectify that situation.

BNCCorp (

Since I wrote about, a lot has changed with the company: the stock price has nearly quintupled, the assets and equity have both skyrocketed, and the company has been increasing earnings at unfathomable rates (year-over-year earnings growth was 505%). (Read the article for the whole story on this investment idea.)

BNCCorp still remains undervalued. The Price/Book ratio sits at just under .58. For such a fast growing area as North Dakota, I would expect most banks to be trading above their book values, not significantly below it. Therefore, it is probably a safe investment until it reaches .80 or so. At that point, it will begin to look significantly less attractive.

I am regretting selling out 80% of my position when the stock went up by 150%. I thought the move was largely over, and was eager to invest in other areas, but I neglected to check the real value of the company’s earnings potential and equity in relation to the market capitalization.

I am glad however, that I decided to let 20% of the position run. I have since purchased more shares, though it is always painful to buy back a stock you sold at a lower value.

The bank has increased its equity-to-assets ratio to 8.9%. Thus it is no longer a “cigar butt”, but instead is a well-capitalized bank in the fastest growing area of the nation. (For reference, Peter Lynch recommends an Equity-to-Assets ratio of more than 7.5% to qualify as a well-capitalized bank.)

North Dakota has exploded in population, and as these people settle into more permanent arrangements, the need for home loans and commercial loans will continue to be enormous. The Bakken Shale will remain attractive as an oil play at WTI prices above $80, and now that the European crisis fears are on the decline, oil prices have stabilized in the $90 range. They will likely remain high until the next financial crisis threatens global demand.

Though most of the explosion in the Bakken region is already played out, and though a large portion of the oil workers in the region have already found permanent housing situations, I expect the growth in the Price/Book multiple coupled with steady earnings (if not growing earnings) to secure the safety of this investment for the near future.

Bank of Birmingham (BBBI)

In addition, I have begun a new investment in the Bank of Birmingham (BBBI). The company has been sitting at a price/book ratio just under 1 for a few weeks, but a recent pre-announcement by the company suggests that the current Price/Book is closer to .58, suggesting the company is undervalued.

The Equity/Assets ratio is 11.1%, indicating that the bank is significantly under-leveraged.  This is a good thing: a less leveraged balance sheet makes a less risky investment. In addition, the extra equity means that the bank has significant room to expand its loan portfolio and increase earnings in the future.

With these low amounts of leverage, the bank was able to increase earnings 54% over the course of 2012 (excluding a deferred-tax asset recognition in 2011). This rapid earnings growth rate is a testament to the earnings power of this bank.

So why has this bank been growing so quickly? The answer is simple: the rebound of the car industry.

The Bank of Birmingham is located in Birmingham, Michigan, on the outskirts of Detroit, so it is dependent upon the comeback of the auto industry. As Birmingham is a wealthy suburb, it is less-exposed to pullbacks in the U.S. automotive market than urban Detroit. As long as the auto industry comeback is not derailed by a significant U.S. recession, we should expect more suburban migration and an expanding population in Birmingham, leading to more deposits, loans, and mortgages issued.

Disclosure: I am long and BBBI.


3 thoughts on “Investing in Undervalued Banks: BNCCorp and Bank of Birmingham

  1. prabin (@ps470007)

    I’ve lived in Detroit area and it is really not news tells about Detroit. There are some hood areas and there are some nice areas. In the nice area that I happened to live for 2 years..there was not a single crime. There was never a scary feeling of being in Detroit unlike the media has only bad things about the area. Crime’s there but in specific zip codes. Anyway, Birmingham more or less like Plano Texas 75024 Zip code (Around Pepsico area).

    Have you checked the changing Detroit story? Its not hot yet, just getting warmer.

    1. This is good news – it means I am not too late on the trend.

      I have been trying to purchase much more of the stock. At these prices, Bank of Birmingham really is a steal, with a very limited downside.

      1. prabin (@ps470007)

        Good luck and I hope this does great. While I was there Governor Snyder was talked talked heavily by locals who supported or rejected the idea of building the bridge to Canada. Here’s a piece…from this blog..

        Editorial: State must continue fight for bridge
        Posted on April 18, 2013 by Admin
        Detroit-Windsor crossing vital to economy

        Now that Michigan has received a needed federal permit to proceed with the New International Trade Crossing, one point cannot be more clear: Those who care about the state’s economic future must fight valiantly to assure this project is successfully completed.

        The NITC is the name for the proposed new bridge between Detroit and Windsor — a new bridge that many analysts consider essential to the state’s future prosperity.

        Gov. Rick Snyder has worked tirelessly on advancing the new bridge, carving a deal with Canadian authorities that will allow the much-needed project to proceed despite objections from Manuel Moroun, owner of the Detroit International Bridge Co. which operates the existing Ambassador Bridge.

        So, this news should give BBBA more weight and hence more margin of safety. What do you think? More construction work would give the bank an extra edge?

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