Jay Unni, M.D.'s  Instablog

Jay Unni, M.D.
Send Message
I'm currently a resident Psychiatrist in Houston, Tx. I previously worked as an analyst in Dallas. I keep a value portfolio and speculative portfolio. In my value investing work, I use a valuation framework influenced by Joel Greenblatt, Peter Lynch, and Ben Graham. In my speculative portfolio,... More
My blog:
  • Investing In Undervalued Banks: BNCCorp And Bank Of Birmingham 3 comments
    Feb 15, 2013 5:35 PM | about stocks: BNCC, BBBI

    (as posted on my blog, Betterstockideas.com)

    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 (BNCC.pk)

    Since I wrote about BNCC.pk, 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 (OTCPK:BBBI)

    In addition, I have begun a new investment in the Bank of Birmingham (OTCPK: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 OTCQX:BNCC, OTCPK:BBBI.

    Stocks: BNCC, BBBI
Back To Jay Unni, M.D.'s Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (2)
Track new comments
  • whatdoIknow?
    , contributor
    Comments (94) | Send Message
    I agree with the majority of your BBBI analysis, but your last paragraph shows deductions that aren't based in reality. Birmingham is in fact wealthy, and it is dependent on the auto industry just like the rest of the metropolitan area, but there is little room for population expansion and the suburban migration currently occurring around Detroit is not helping the communities experiencing it.


    That said, Birmingham is seeing further commercial development of the downtown area which surely helps BBBI, and housing prices have been on the rise long enough to limit their exposure to mortgage losses.


    It is also worth noting that Bank of Birmingham de-listing resulted in significant savings per their filings, which is somewhat of a mixed bag, but should help the bottom line.
    18 Feb 2013, 03:15 AM Reply Like
  • Jay Unni, M.D.
    , contributor
    Comments (78) | Send Message
    Author’s reply » Thank you for the reply. You have pointed out a significant error in my analysis.


    In fact, 87% of BBBI's loan portfolio is made up of commercial loans, related to the commercial development you discussed. I generally regard commercial loans as a higher risk category than mortgage loans. In the current environment, coming off of a huge bust in commercial lending, these assets may be safer than they have been in the past, but still, this warrants consideration.


    The population growth and suburban migration will not directly help the commercial district of Birmingham unless those new citizens are willing to spend. The health of Birmingham's commercial district is difficult for me to assess from Texas, so I am left with a less bullish stance on BBBI.


    As for the de-listing, I am generally in favor of the move. It saves the bank money and keeps it off the radar while it is padding its books.
    19 Feb 2013, 06:57 PM Reply Like
  • ps677
    , contributor
    Comments (284) | Send Message
    "The health of Birmingham's commercial district is difficult for me to assess from Texas, so I am left with a less bullish stance on BBBI."


    It is not very difficult. All you need to do is "like" couple of "facebook pages" from Birmingham city and you get a lot of ideas about the city. I normally follow "city", "chamber of commerce" and "local newspaper" facebook page to know more about the city and its past and current mood. I've become more confident with BNCC. However, I've lived near Birmingham, MI. It's the best place to be at. You can also find more about the city by looking at "craigslist" differently. People feel proud to say that they have a nest in Birmingham, MI. I worked in the area so I know the place. The place is filled with rich people. It is small and traffic is bad but people love to be there. One of my co-worker was living in a 2000 a month condo over there and when another guy who was her director found out that she lived there, he wasn't taking it seriously (that's what she told me, her husband made tons more than her) ..now i'm out of the place but i think that place is valuable. They have everything "setup" where rich can hang out. Including movie theaters, restaurants and all other stuffs I don't know about. And as per Warren Buffett, Americans are becoming more rich.
    12 May 2013, 10:08 AM Reply Like
Full index of posts »
Latest Followers


More »

Latest Comments

Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.