BNC Bancorp (BNCN)

[Enterprising Investor]

Small-Bank Snatchers at BNC, Atlantic Capital (4/16/18)

Integrating its many acquisitions should help BNC Bancorp achieve growth, while Atlantic Capital’s merger with First Security could lead to new business.

By David Englander

Last week’s big rally aside, bank stocks haven’t fared well in 2016. While concerns about the sector persist, consolidation among small banks continues to present opportunities.

One such bank whose shares look attractive is BNC Bancorp (ticker: BNCN). Since 2010, the High Point, N.C.–based company has been on an acquisition binge, rolling up 15 banks, including two deals that will close this year. When all of the recent deals close, BNC will have assets of $7.2 billion, making it the fifth-largest bank headquartered in North Carolina.

At a recent $21.90, the stock isn’t particularly cheap, based on last year’s earnings of $1.47 a share and year-end tangible book value of $10.77 a share. But over the next few years, as BNC Bancorp drives synergies from its acquisitions, its earnings and tangible book value could move up substantially.

Analysts look for earnings growth of 12%, to $1.65 a share, this year and 13%, to $1.86, in 2017. That puts the stock at an inexpensive 11.8 times 2017 estimate. At a more reasonable 14 times, the shares would be worth 20% more.

BNC operates 62 branches in attractive metro markets in North Carolina, South Carolina, and Virginia. Led since 2003 by CEO Richard Callicutt, BNC began to ramp up its growth after receiving backing from private-equity firm Aquiline Capital Partners in 2010.

Notably, Aquiline’s representative on the BNC board is Kennedy Thompson, the former CEO of Wachovia. Aquiline owns about 4% of the bank’s stock and all of its preferred shares.

BNC underwrites real estate and commercial and consumer loans. Last year, commercial real estate and residential mortgages accounted for about 75% of the $4.2 billion loan book. Credit quality has been good.

In 2015, helped by acquisitions, the loan book grew 35%. Organic loan growth, too, has been solid, up 20% in the December quarter on an annualized basis, with commercial real estate showing particular strength.

In 2015, BNC closed on two deals, Virginia-based Valley Financial, and the acquisition of seven branches of CertusHoldings in South Carolina, which altogether brought in more then $1 billion in assets. This year, deals for Southcoast Financial and High Point Bank, in South Carolina and North Carolina, respectively, are expected to close. Those add another $1.3 billion in assets.

Integrating the acquisitions should deliver synergies. Stephens analyst Tyler Stafford estimates that the bank’s efficiency ratio could drop to 50% by 2017 from 59% last year. He expects tangible book value to grow to $13.30 a share. On that metric, the stock trades for an undemanding 1.6 times tangible book, especially considering the bank’s earnings potential.

The discount probably reflects some investor skepticism over whether BNC can deliver on profitability growth. In a December report, Stafford points out that management has a “history of quickly realizing targeted cost saves” in past acquisitions. That bodes well for the bank, which is due to report first-quarter earnings in about a week.

He also notes that the BNC franchise has a “scarcity value,” as there aren’t many banks its size that have a comparable footprint in the Southeast. That could, one day, make BNC an attractive target itself for a larger bank.

ANOTHER SMALL BANK poised to benefit from an acquisition is Atlanta-based Atlantic Capital Bancshares. Last fall, Atlantic Capital completed a $160 million merger with Chattanooga, Tenn.–based First Security Group.

The deal transformed Atlantic Capital (ACBI) from a single-branch privately held commercial bank into a 26-branch operation located throughout northern Georgia and eastern Tennessee. Notably, the bank has a presence in the metro markets of Atlanta, Chattanooga, and Knoxville.

The shares began trading in November. At a recent $14—or at 1.3 times tangible book value—they look inexpensive. They could rise by 15% or more in the next year.

WITH $2.6 BILLION IN ASSETS , Atlantic could have a long runway for growth. Legacy Atlantic and FSG had two distinct business lines. The old Atlantic provided niche services for small businesses, including corporate banking and franchise lending. FSG, on the other hand, was a community bank focused on small-business lending and mortgage banking.

Integrating the offerings across the new footprint could lead to new business and market-share gains. Atlantic is also hiring new loan-production bankers and may expand into new metro markets in the Southeast. Management has targeted growth of $5 billion to $10 billion in assets over the next four years.

From the merger, Atlantic will be able to wring out cost savings as well as keep a significant chunk of FSG’s net operating losses, a deferred tax asset worth about $50 million.

Commercial real estate and business loans represent over 60% of Atlantic’s loan business. The bank, which will report earnings in two weeks, also underwrites residential real estate and consumer loans.

Sandler O’Neill & Partners analyst Stephen Scouten estimates earnings of 67 cents a share this year, growing to $1.09 a share in 2017. He values the shares at $16, based on 1.4 times this year’s estimated tangible book.

The stock is apt to be much higher in a couple of years if management can make progress on its strategy.

http://www.barrons.com/articles/small-bank-growth-bnc-atlantic-capital-1460781743