Bancorp ETF: 3.16% yield with a payout ratio below 30% (NASDAQ:FNCB)


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Bancorp ETF (NASDAQ: FNCBlisten)) is the holding company that owns FNCB Bank, a small community bank in Pennsylvania where it operates 17 branches. A very small bank with a balance sheet total of around $1.66 billion trading at less than 10 times its 2021 earnings. I wanted to take a closer look at the bank’s balance sheet assets to see if this $190 million market cap bank could make it onto my shortlist of regional banks and community banks.

FNCB fee schedule
Data by Y-Charts

Good results in 2021 and the low amount of provisions does not bother me

2021 has indeed been a very good year for FNCB Bancorp thanks to the relatively low amount of provisions for credit losses. Total interest income increased by more than 10% to $51.7 million while interest expense decreased by nearly 60% to $2.7 million. The combination of these two elements led to an increase in net interest income of more than 20% to $49 million.

FNCB Investor Relations

FNCB Investor Relations

The bank also recorded total net non-interest expense of just under $23 million (which is higher than $19.7 million in fiscal 2020 due to data processing expenses). and higher general and administrative expenses), which translated into income before taxes and provisions for loan losses of $25.9. M The total tax bill was only $4.7 million and the bank recorded only $166,000 in loan loss provisions, resulting in net income of $21.4 million. dollars for EPS of $1.06.

Keep in mind that EPS is based on the average number of shares outstanding of 20.11 million, but the total number of shares had fallen to just under 20 million shares at the time of publication. of the annual report as ETF Bancorp continues to repurchase its own shares. This would increase EPS by an additional cent to $1.07 per share.

Sounds good, but keep in mind that the bank added next to nothing to loan loss provisions, which means that once loan loss provisions normalize, reported net income will likely decline (unless , of course, the interest margin increases). We should not overstate the impact of increased loan loss provisions, as the total amount of provisions remained below $1 million in 2019, the pre-COVID year.

The balance sheet favors liquid securities

But that means I’d like to get a better idea of ​​what the bank actually invested their money in. And the screenshot below of the asset side of the balance sheet immediately shows you that the bank invests a very large percentage of its assets in securities that should be very liquid.

FNCB balance sheet

FNCB Investor Relations

Of the $1.66 billion, approximately $100 million (6%) is held in cash, while the total amount invested in debt securities has increased by nearly 50% over the past year and now represents 31% of total assets. This means that around 37% of assets are invested in cash and liquid securities (compared to 34.5% at the end of 2020) and this is a rather high percentage. It is also interesting to see that the total amount of assets has increased by $200 million and that the bank is taking a “safe” approach by increasing its exposure to debt securities.

FNCB Loan Passbook Details

FNCB Investor Relations

Looking at the breakdown of the loan portfolio, I’m pleased to see that around 25% of the loan portfolio consists of residential real estate. The relatively large amount of commercial and industrial loans is also interesting. These include nearly $22 million in PPP loans that should also be considered “very safe” given that they are backed by the Small Business Administration.

fncb Performing and non-performing debt

FNCB Investor Relations

Interestingly, less than $2 million of the total loan portfolio is now classified as non-accrued, and less than $4 million of the loan portfolio has an overdue status. This means that the current accumulated loan loss provision of $12.4 million appears to be more than sufficient to cover potential loan losses based on the current situation. Also keep in mind that there is collateral on these home loans, so even if the bank has to seize the $1.8 million in residential and commercial home loans that are over 90 days past due, it’s very unlikely that FNCB Bancorp cannot recover a substantial part of the loan.

FNCBCredit Quality Indicators

FNCB Investor Relations

Investment thesis

Although the total amount of loans classified as non-mature loans is small, I would have liked to see more data on the average LTV ratios of the loan portfolio, because neither the annual report nor the latest investor presentation on the bank’s website offer more color on this.

Even when loan loss provisions normalize (increase), EPS should remain above $1, especially as ETF continues to buy back its own shares. Trading at less than 10 times earnings, Bancorp ETFs are not expensive at all. The current quarterly dividend is $0.075 per share, giving an annual dividend of $0.30 for a dividend yield of 3.16%. It’s not high, but keep in mind that this bank’s payout ratio is less than 30% because FNCB retains a substantial portion of its earnings to further expand its balance sheet.

The tangible book value per share was about $8.12 at the end of last year, and since ETF retains about 70% of its earnings, we can reasonably assume that the book value will increase by about 70 to 75 cents per year, which makes the current valuation of less than 1.2 times TBV and less than 10 times earnings very attractive.

I don’t have a position in FNCB Bancorp, but I’m adding the bank to my watchlist.


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