BNCCORP (OTCQX:BNCC) - If an investor is playing the bank M&A game the best banks to buy are ones where shareholders have grown frustrated with the state of affairs and have started to fire warnings shots that things will be changing soon. This is the case with BNCCORP, a bank located in North Dakota.
The bank was left for dead after the financial crisis before it was discovered and deemed a market darling for their North Dakota oil market exposure. The stock took a hit again when oil crashed, but the company itself has held up well.
BNCCORP has $942m in assets of which $413m are loans. The bank has a sizable amount of long dated investment securities. Of their $409m portfolio of investment securities $375m are invested with maturities greater than 10 years.
The bank is unsurprisingly overcapitalized with a 16.9% Tier 1 ratio and total risk based capital of 18.16%. Even with being overcapitalized they've been able generate respectable returns on their assets (0.97%) and returns on their equity (9.55%).
Rangeley Capital, a Connecticut-based hedge fund, owns 6% of the company and published a letter at the end of October stating that the bank should consider strategic alternatives and needs a shareholder representative on the Board.
At first glance the bank might appear to be overvalued as they trade for 1.11x book value. But this metric doesn't capture two very important variables of the bank. The first is the sizable securities portfolio mentioned above. If the bank were to put half of this portfolio to work in loans interest income from lending could increase by 50%. The second is while the bank has acceptable returns on assets and equity they are also an inefficient operator with an efficiency ratio of 75%. An acquiring bank could metaphorically turn on the earnings spigot by cutting costs (without reducing services) and allocating capital better by selling off some of their securities and using the proceeds to make additional loans.
The bank trades with a market cap of $86.52m at current prices, while my estimate for acquisition value is $158m. This acquisition value assumes an acquirer could reduce non-interest expenses by 35%, but doesn't include projected future earnings from putting the securities portfolio to work. It's possible an acquirer that's overcapitalized could put almost all of BNCCORP's securities to work and almost double earnings. If that were the case the company could be worth north of $225m.
This is a perfect bank investment setup with a sizable valuation gap and a large shareholder pushing management to make changes. I invested in another Rangeley Capital bank activist situation, Ocean Shore Holding, and it worked out very well for shareholders. I expect a similar outcome this time as well.
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Disclosure: I am/we are long BNCC.