Thursday, August 8, 2013

BNCCorp: Some Background

Some people would say that history is already priced into a stock and is, therefore, irrelevant. I think, though, that a thorough understanding of how the stock got here is needed in order to understand where the stock might be going in the future. For that reason, I’m going to start including some short background research articles for the stocks that I’m following, or considering following, beginning with BNCCorp (BNCC), a regional bank holding company headquartered in Bismarck, North Dakota.

BNCC Chart
BNCC data by YCharts

On January 14, 2008 BNCC announced plans to voluntarily deregister its common stock with the SEC and deregister with the Nasdaq global market. The company listed several reasons, including low trading volume of the stock, small number of individual investors, and cost of compliance with SEC regulations. The company does still maintain quarterly and annual reports that are substantially similar to those required by the SEC on its website (Source: Press Release). At the time of the announcement, the stock was trading much the same as it is today, closing at $12.65 on volume of 3,800 shares.

BNCC’s 2008 annual report showed net income of $2.22 million, or $0.67 per diluted share, with the company stating:

The key factors contributing to our earnings from continuing operations were an increase in net interest income due to the growth in our balance sheet, higher non-interest income from mortgage banking revenues, and reduced non-interest expenses. These improvements were partly offset by a $4 million increase in the provision for loan losses resulting from the difficult credit environment.

The 2009 annual report reflected much different results. BNCC showed a net loss of $20 million ($6.14 per share), largely due to a $27 million provision for loan losses. Also in 2009, the company “elected to participate in the U.S. Treasury Capital Purchase program because other forms of capital were generally not accessible by community banks.” This shows up on the balance sheet as approximately $21 million in preferred shares.

2010 turned-out to be an even rougher year than 2009. On January 26, 2010, the Office of the Comptroller of Currency (OCC) issued a Formal Agreement with BNC National Bank in Phoenix, because “The Comptroller has found unsafe and unsound banking practices relating to loan and investment portfolio management at the Bank.” Basically, the Formal Agreement required the bank to “develop, implement, and thereafter ensure Bank adherence to a written program to improve the Bank’s identification and monitoring of credit and underwriting exceptions to the loan policy.”

Later in 2010, the company discovered fraud on the part of one of its mortgage origination partners, AMS. While BNCC was carrying fidelity insurance, the insurance company balked at payment, with the result that BNCC’s 2010 annual report was even worse than 2009’s, showing a net loss of $22 million, or $7.13 per share. By this time, BNCC’s book value per share had fallen to $5.09.

Despite the dismal 2010 results, things started turning around for BNCC in that year. In November 2010, the company announced an agreement to sell some of its deposits and assets to Alerus Financial Group, a deal which was consummated in the first quarter of 2011. In November of 2011, the OCC terminated its formal agreement with BNCC, indicating the bank had successfully derisked its operations, at least to the satisfaction of the OCC. However, the previous couple of years had left the bank with little tangible common equity, and BNCC announced plans for an equity offering to raise capital. In the end, BNCC’s earnings in 2011-2012 proved sufficient to eliminate the need to raise additional equity financing, and the stock issuance was canceled in August 2012.

2011 results (EPS of $0.86) benefited largely from a reduction in the provision for credit losses, indicating higher credit quality of loans in the bank’s portfolio. 2012 proved to be a banner year for BNCC as the company earned $7.52 per diluted share, benefiting largely from mortgage banking results, a reversal of the valuation allowance on deferred tax assets, and a $7.5 million settlement on the previously mentioned insurance claim.

Which brings us to 2013. BNCC still has a bit of a hangover from its past difficulties, but the real questions are whether those problems, as well as future prospects for the company, are properly reflected in the current stock price ($12.50 at the time of this writing).

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