Every Penny Counts, And With This Bank Merger You Get A 5.90% Annualized Return

| About: Birmingham Bloomfield (BBBI)

Summary

Bank of Ann Arbor is buying Birmingham Bloomfield Bank.

The merger is mutually agreed on and will provide benefits for both the acquiring and acquired company.

The merger is expected to be complete by year-end.

Have you ever had one of those moments where you should have done something but you didn't? I know I have. I should have studied for that test weeks in advance, before cramming the night before. I should have went to bed early, instead of staying up to the wee hours of the night. Or I should have bought Birmingham Bloomfield Bancshares (OTCPK:BBBI) before the merger announcement on 7/20/16 and the subsequently ~75% pop.

I know I am not the only one kicking myself about the BBBI merger I missed. In fact, I am sure there are a few bank investors out there who wanted to buy BBBI, but just didn't get around to it. Despite the fact that we just missed a ~75% pop, there is still a decent spread that M&A guys may find interesting.

Summary

On 7/20/16, Bank of Ann Arbor's Holding company and Birmingham Bloomfield Bancshares entered into a merger agreement where Ann Arbor will acquire Birmingham Bloomfield Bancshares for an all-cash transaction valued at $33.3 million.

Shareholders of BBBI will receive $16.50/share for each share of BBBI they hold. Based on the closing price on 7/20/2016, $16.08/share, this represents a 2.61% spread M&A guys can take advantage of. The deal is expected to close by year-end, giving investors an annualized gain of 5.902%.

Birmingham Bloomfield Bancshares Overview

BBBI is a one bank branch located in Birmingham, Michigan. The bank has $273,610,000 in assets, $224,117,000 in loans and $250,325,000 in deposits.

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Source: Investor Relations

In the most recent quarter, BBBI had net income of $313,000 or $0.17/share, which was a 10.7% increase YOY. Total assets increased 31% YOY and the book value was $9.46/share. Net interest income compressed to 3.85% from 4.10% YOY due to competitive market conditions and additional funding costs which were used to retire the SBLF preferred investment. In addition, portfolio loans increased 19.8% YOY and non-performing loans remained flat in the mrq, totaling 0.92%.

Bank of Ann Arbor Overview

Bank of Ann Arbor is a seven branch bank located in the Mid-Michigan area(s). The bank has $1,214,100,000 in assets, $853,326,000 in loans and $1,025,757,000 in deposits.

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Source: CompleteBankData Bank of Ann Arbor

In the most recent quarter, the bank had net interest income of $10,686,000, an increase of 13.39% YOY, and net income of $3,903,000, an increase of 16.51% YOY. In addition total assets, equity capital and total loans have grew YOY at a 10.21%, 15.75% and 17.61% rate(s). Finally, the noncurrent loans to loans are 0.32%.

Combined Entity

Post-merger, the company is expected to have $2.5 billion in assets and 225 employees in eight locations in the Washtenaw, western Wayne and Oakland counties. The Bank of Ann Arbor expects a 15% rate accretive to earnings post-merger.

Bank of Ann Arbor has been on the acquiring side of the rapid consolidation in the community banking space. For an example, in 2010, the bank acquired Liberty Bank in Plymouth, Michigan. Furthermore, the bank acquired UniFi Equipment Finance of Ann Arbor, Michigan back in 2013.

The combined entity will give the bank a greater market footprint, allow customers of BBBI access to different services (investment management) and there will be more lending opportunities the combined bank can act upon.

Based upon the mutually agreed transaction, I believe the merger has a high chance of transpiring. Furthermore, given the lack of liquidity in BBBI, there may be a good chance in the next 5-6 months to pick up BBI at a much cheaper price-locking in a juicier spread. Even if you can't get in at a cheaper price, a 5.902% annualize gain isn't too bad and could be a good place to park some money for a half of year or so. Sure it isn't a juicy 75% gain, but every nickel counts in this game. I know I am one to stop and pick up pennies on the street.

Conclusion: just one merger of many to come

Sure I was kind of upset that I missed out on this 75% pop. However, the community banking space is rapidly consolidating, with mergers announced, seemingly, every week. Furthermore, I believe there are a lot of positive 'things' happening in the banking space lately, which should provide bank investors with real potential for alpha generation. Additionally, I am willing to bet that an investor could buy a basket of community banking stocks and 'crush' the broad market over the next few years. Why? Pay attention, I might write about it in the next week or so…

- Nick Bodnar

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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