Bank of Botetourt (BORT): cheap, much cheaper than you would think
The Bank of Botetourt is a community bank in Virginia, US. The stock trades on OTC Markets with symbol BORT. There are 1,960,879 common shares (63.7 million USD market cap) and 243,659 cumulative preferred shares. The prefs had a subscription price of 28 USD per share and pay out 7% per share (0.49 USD per quarter).
Using the most recent share price for the prefs, 32.47 USD per share (BORTP), the book value of the commons is 74.598 million USD or 38.04 USD per common share. That means the P/B is low: 0.85.
Not only the P/B is low but also P/E is low, at 8.5. I like the combination of low P/B and low P/E. Investing in a basket of such stocks is like investing in a basket of net-nets: very simple but still generating high average returns.
What caught my attention is that this bank had a strong and smooth momentum. Smooth momentum often suggests certain investors have found out something positive and are acting on this information by bidding the stock up. So I looked into the annual report over 2023.
In one of the notes there was an overview of the fair value of the assets and the liabilities. I always find such an overview interesting because often it tells me something about hidden profits and losses. For the Bank of Botetourt the fair value of the liabilities was indeed much lower than their book value. This was only partly offset by hidden fair value losses in the asset section.
The source of the fair value losses in the asset section could be losses on loans, from interest rate increases. It is also possible the source of the hidden fair value losses are related to non-performing loans. We don’t know, all we know is that the fair value of the loan assets is estimated using level 3 methods.
I suspect the bank has borrowed from clients using multi-year fixed-rate term deposits. The value of these liabilities decreases when interest rates increase. That might be the source of the hidden fair value profits in the liabilities section. What we know is that these fair value estimates have been made using level 2 methods.
I checked whether I could find something similar in the financial reports of other small community banks. For one bank I could not find a fair value overview at all. For the second bank the fair value overview showed that hidden losses more or less matched hidden profits. So, it is very well possible that hidden profits from fair value estimates have caused good momentum in the share price of the Bank of Botetourt.
I also like other things. For example, Total Assets/Total book value is about 10.5 but taking hidden fair value losses and profits into account this metric is much lower. Furthermore, the bank pays a small dividend (0.90 USD per year, quarterly).
Insiders do not own large stakes but have significant amounts of money in the stock. There is one substantial shareholder, Cutler Capital Management, owning about 5% but there is no controlling shareholder.
Not only momentum is smooth but also 3-year monthly share price volatility is very low. I have not found any governance issues, apart from that I could not find anything on management compensation, that the board has a 3-class structure and that the CFO is not a board member.
I bought some shares. A couple of weeks later I received the annual report over 2024 by post. I do not like receiving reports since it is not necessary, inefficient and expensive, and bad for the environment. But in this case it was still handy since it reminded me to check my previous observations for 2024 as well.
At the end of 2024 hidden fair value losses on the loan assets were 21 million USD. Hidden fair value profits on the deposits were 76 million USD. The difference is 55 million USD. 55 million USD of hidden book value on top of the official book value of 74.6 million USD is substantial. I expect this 55 million USD to be converted into real profits and stated book value in the next couple of years. That said, I cannot think of any event causing the share price to substantially increase.
I do not have an opinion on whether recent or future trade policies of the US government will have a substantial effect on this bank. However I have an opinion on the effect of rising US treasury yields on this bank. That will probably increase fair value losses on loan assets but also increase fair value profits on deposits. I think the net result will be positive for shareholders of the Bank of Botetourt: increased US treasury yields will increase net fair value profits.
Disclosure: long common shares of Bank of Botetourt.