First Northern Community Bancorp (FNRN), headquartered in Dixon, California (Solano County, near Sacramento) is the single-bank holding company for First Northern Bank. First Northern Bank was established in 1910 and currently has a 10 branch network in and around Sacramento.
The market weakness in bank stocks has not hit FNRN as hard as most of its peers as shares are down ~10% since the 2018 highs. The current valuation on shares of FNRN (14x P/E and 135% P/TBV) provides a good entry point to start accumulating a position in an attractive banking franchise.
Like most CA-based banks, FNRN had to work through some credit and income challenges during the financial crisis (albeit small, FNRN reported full year net losses in 2008-2009). Going into the crisis, the bank was positioned with a heavy allocation to Construction and Land Development loans (~22% of total loans) and Residential Loans (~18%). It seems hard to believe given the size of its land/construction book, but FNRN had returned to what I would describe a normalized operating/profitability profile by 2012. The credit turnaround and recent strength in performance metrics coincides with the appointment of Louise Walker as President and CEO (assumed role in 2011). Since the crisis, management has better allocated its loan composition (current mix detail in financial overview section).
The current management team has done a nice job of growing the bank’s balance sheet (all organic growth – no M&A activity) and the current funding structure provides a wonderful foundation to drive shareholder returns. In its Q3 2018 earnings report, FNRN reported YTD ROA and ROE of 1.02% and 11.9%, respectively, along with an expanding net interest margin (currently 3.77%). I’ll touch on the deposit book in a bit, but expect continued NIM expansion from FNRN going forward.
Primary drivers setting up FNRN shareholders for continued investment performance over the near- and longer-term:
- Compounding Earnings: Under the current regulatory environment, ROE should continue to compound at a 10%+ rate and provide attractive growth and investment returns to shareholders. First Northern has done a wonderful job establishing and strengthening its franchise and the bank is well positioned to continue to deliver healthy returns to its shareholders.
- Dividend Income: FNRN does not pay a dividend. Management prefers to retain earnings to fund organic growth and bolster its capital position.
- Potential M&A Upside (lower probability scenario): from an acquirer’s perspective, FNRN checks all the boxes and, I don’t say this lightly, FNRN has one of the best deposit franchises in the United States.
- Market Geography: nestled in and around Sacramento, potential buyers abound.
- Deposit Funding: impressive, all around
- 36% of FNRN’s deposits are noninterest-bearing
- The cost of the interest-bearing deposits is 0.17%
- The total cost of funds on FNRN’s $1.1 Billion deposit book is 0.11%
- FNRN only has $775 Million loans on its balance sheet, meaning acquiring banks are looking at $350 Million of “excess” (and cheap) funding available to them.
- Capital Positions: FNRN has a healthy capital position and its income run-rate continues to flow directly to its capital base.
- Asset Quality: Louise Walker and her team have done a nice job cleaning up the credit book and repositioning its loan assets to a more diversified allocation. Current NPLs total 0.88% the bank has loan loss reserve account totaling ~1.8x its current NPL position.
Some concerns that could pressure earnings/profitability/growth to keep an eye on:
- CRE Mix – while below the arbitrarily-set industry threshold of 300% of Capital, nearly 50% of FNRN’s loan book is classified as CRE. I won’t waste the ink here given the amount of coverage CRE lending has received in the business press, but that concentration is worth monitoring.
- Economic Cycle
- Hard to forecast where we are here, but all banks and shareholders, no matter the quality of management, bear the risk of a downturn in the local and national economy.
Bank Description & Geography
First Northern Bank was established in 1910 and currently has a 10 branch network in and around Sacramento.
- Directors / Named Executives, as group – 9.7%
- Banc Funds – 3.4%
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