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First NBC Bank Holding: Underfollowed And Unloved, But Not Without A Reason


Shares of FNBC have been following a strong downtrend since late 2015 and are now by more than 60% percent below the all-time high achieved last year.

Stock’s valuation might be rather tricky here. The company had certain reporting issues that are expected to weigh on the past results – discussed in more depth below.

Even though the company has its strengths, the number of red flags is just too significant to ignore.

The bank

Through its wholly-owned subsidiary - First NBC Bank, a Louisiana state non-member bank - First NBC Bank Holding Company (NASDAQ:FNBC) provides a wide range of financial services in New Orleans (metropolitan area), Florida (panhandle) and Mississippi Gulf Coast. As of December 31, 2015, the company had 39 banking offices.

Real estate

With the main income source being customer loan issuance, First NBC is strongly dependent on Louisiana State's real estate prices. As of December 2014, approximately 50.4% of total outstanding loans issued were consumer and commercial real estate loans (I know it is 2016 already, but please bear with me). A major part of the company's business is concentrated in the New Orleans metropolitan area:

We are more sensitive than our more geographically diversified competitors to adverse changes in the local economy.

The New Orleans real estate market has been on the rise since 2012-2013 and it can be argued that the top has already been reached. Below is the market data provided by Zillow, Movoto and RealtyTrac.

Source: (2016).

Source: (2016).

Source: (2016).

Source: (2016).

Louisiana flood

Finally, most of the readers might be aware of the recent disaster happening in Louisiana. As a result of 6,900,000,000,000 gallons of rain in one week's time, total number of damaged houses is estimated at 40,000, according to CNN. Even though the company has not commented upon the situation yet, it is almost certain that the large-scale flood, being a once-in-500-years phenomenon, might have a substantial impact on the company's financials.

Source: CNN (2016).

Tax credit investments

One of the differentiating factors of the company's business model is the tax credit investments. Here is a quote from the company's President and CEO Ashton J. Ryan, Jr. (emphasis mine):

The most discussed and misunderstood part of our business is our investment in tax credits. Over the years, we have greatly expanded our financial statement disclosure in order to provide transparency on this aspect of our business. […] I am often asked why we invest in tax credits when most other banks our size do not. My response to that query follows: our investment in tax credits is an integral part of our commercial real estate business. We are commercial lenders with an emphasis on commercial real estate, and we use tax credits to enhance our commercial real estate lending. Our investment substantially increases the equity in real estate development projects which qualify for tax credits and thus results in lower loan to value and higher debt service coverage ratio, both major risk mitigators for our lending risk profile. Also, our understanding of tax credits and our investment in the projects, makes us the lender of choice for real estate projects in our markets, which has enabled us to dominate this type of lending in New Orleans since tax credit equity also enhances owner/developer profits.

Other reasons mentioned include community development and shareholder value maximization intentions.

Since tax credits are having a positive impact on the company's tax bill, the strategy is certainly paying off. However, there is...