FNB BANCORP CALIF FNBG
February 15, 2016 - 1:35pm EST by
broncos727
2016 2017
Price: 30.00 EPS 1.80 0
Shares Out. (in M): 4 P/E 16 0
Market Cap (in $M): 129 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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  • Small Cap

Description

I’m recommending the shares of FNB Bancorp, the holding company of First National Bank of Northern
California (“FNBG”). With approximately 1.1 billion in assets FNBG has a solid footprint in South San
Francisco and services the counties of San Mateo, San Francisco and Santa Clara.
 
Let’s take a quick snap shot of the valuation metrics. 1.1 billion in assets trading at a valuation of 135%
price to tangible book value. With an efficiency ratio in the low 70s, this bank trades at approximately
16 times earnings per share. FNBG maintains a 4% NIM. Bank pays a small dividend which generates a
1.7% dividend yield.
 
At this point you might be thinking.. “So….ok…uh…what exactly is the attraction?” The answer is, I think
it is a takeover candidate. I have been buying shares of FNBG, and other banks with similar
characteristics, because I think that it is probable that the bank will be sold in the next 5 years, and
possibly sooner. I’d like to emphasize that this is a small holding for me, and part of a basket of banks
with similar takeover characteristics. I think a very important consideration is the age of the CEO, and
average age of the board. The next consideration I look at is how much the CEO and board collectively
own. If you have a bank board in their late 60s that collectively own at least 20% of the outstanding
shares I think it gives the investor a tail wind on the odds that they sell. I think that putting together a
basket of banks with such characteristics and pricing metrics should perform satisfactorily over the next
5 years.
 
Let’s take a look at the proxy.
 
PRINCIPAL SHAREHOLDERS.
 
Thomas G Atwood D.D.S owns or controls 627,780 shares, or 14.72%. Dr. Atwood is 69 and was on the
board from 1977 to 1996. He rejoined the board in 2010. Of note, he seems to have increased his
ownership from 10% to 15% between proxy filings in 2009 and 1010 at very attractive prices. A savvy
stock picking 69 year old dentist that owns 15%, sounds good to me.
 
The Ricco Lagomarsino Trust owns 9.76%. Ricco Lagomarsino was at one time the Chairman of FNBG.
Now a trustee of the Trust, Lisa Angelot serves as Chairwoman of FNBG. Lisa is the granddaughter of
Ricco Latomarsino and is 57.
 
Wellington owns 8.75%.
 
Banc Funds owns 5.46%.
 
Thomas McGraw is the CEO and a Director and owns 237,785 shares. Mr. McGraw is 63 and is also
covered by a generous Salary Continuation Agreement that kicks in at age 65.
 
So clearly we have some concentrated ownership with a vested interest in FNBG. Noticeably absent are
any significant Form 4s reporting stock sales by any director over the last few years.
 
I think the age of the CEO and Board are very important factors for deciding when or if a bank
might sell. The euphemism to describe this in banking circles is “social issues.”
 
Recently the American Banker wrote an article (December 9, 2015) titled “Is the Banking Industry on the
Verge of a Talent Crisis?” They stated:
 
“Among 312 banks publicly traded banks I track, Pulaski Bank represents a pattern of banks
announcing their sale this year. Although the most common age of CEOs who sell banks
appears to be between 62 and 64, the data shows 63 to be the sweet spot. More than half
the banks in my database with CEOs of this age have been sold during this year alone.
 
Who cares how old the CEO is when banks are sold?
 
Obviously investors care. But so should regulators, public policymakers and bank directors.
 
The pace of bank sales is now faster than at any time in 20 years and the trend is on a
decidedly upward trajectory. The third quarter of 2015 saw a 4.84% annual reduction in banks,
up from 4.26% in 2014 and 1.4% during the halcyon days of 2006. Expect to see the annual
consolidation rate climb north of 5% perhaps as soon as the first quarter of 2016, a level not
seen since the merger frenzy days of 1995.”
 
(End quote)
 
 
What peaked my interest (inside joke aimed at Shooter McGavin) lately was an October 2014
San Francisco Business Times article where McGraw was quoted as saying:
 
"Consolidation within the industry is a reality and I see no signs of that abating. To loosely
paraphrase 'The Godfather, 'if somebody makes us an offer we can’t refuse, that would
generously reward our shareholders, then yeah, we would give that kind of offer very serious
consideration."
 
The article was in the context of trying to guess at possible targets for Bank of Marin and
Mechanics Bank of Richmond. Which leads me to my next question who would a likely buyer
of FNBG be? To me Mechanics Bank would be an obvious fit. Mechanics is about 110 years
old, but late in 2014 Ford Financial purchased a controlling interest. Ford Financial is controlled
by Texas billionaire Gerald Ford and led ably by Carl Webb. Ford and Webb have been
successful in California acquisitions in the past. In 2002, after making six acquisitions in nine
years, they sold Cal Fed to Citigroup. They did a quick flip on Santa Barbara Bank & Trust
when they sold that to Union Bank in 2012. In an October 10th interview Carl Webb stated that
Mechanics had the infrastructure to make acquisitions and will be looking at banks with
$1billion to $5 billion in assets who are willing sellers.
 
From a footprint perspective this would work well for Mechanics and help them circle the Bay
Area. There frankly isn’t that many billion plus community banks around in the Bay Area that
would move the needle for Mechanics. Another obvious target for Mechanics would be Heritage 
Commerce Corp (“HTBK”), in San Jose. Castle Creek and Patriot Financial Partners both have
stakes in HTBK and I wouldn’t rule out a sale at HTBK. But even with the recent pullback, I
just can’t get comfortable with the lofty valuation at HTBK. Of course I think there are multiple
possible buyers if and when FNBG decides to sell. I just think Gerald Ford came to the Bay
Area for the sole purpose of pursuing a roll up strategy with Mechanics, and FNBG is surely on
his radar.
 
I’d summarize by reiterating that I am just "reading the tea leaves" here. This kind of idea
probably only makes sense in the context of building a basket of bank stocks that you think will
be a seller sooner rather than later. See dman’s write up of RVSB for a similar thesis, and
something I think is worthy of being in the same basket. The high water mark for the Bay Area
that I am familiar with is Bridge Bank which approached 2 times book value. It is not unreasonable
to think that FNBG could achieve something similar.
 
 
 
 
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Possible Acquisition Target.  Absent an acquisition, steady growth in book value.

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