|Shares Out. (in M):||0||P/E||10.6x||10.6x|
|Market Cap (in $M):||668||P/FCF||NM||NM|
|Net Debt (in $M):||0||EBIT||92||92|
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This idea won’t make anyone rich overnight, but as the market roars higher, cheap conservative names become relatively more attractive. If you’re looking for a stock that will double in the next 18 months, you can skip this one. However, if you’re looking for a very safe security that should be able to return 10%+ a year, read on.
This one is limited to smaller funds and PAs because it’s not so liquid; although it’s a sizable company, it’s closely held and listed on the pink sheets. On average over the last year daily volume has been $150k, but it’s been drier than that in the last three months.
Farmers and Merchants Bank of Long Beach is a very conservatively run bank based in Long Beach, focused on commercial and small business banking in the Orange County area. CEO Henry Walker is the 4th generation of the Walker family to run the bank, founded in 1903. He is only 47 and will probably run it for some time to come.
FMBL trades at 89% of (tangible) book and a bit over 10x current year earnings. This doesn’t scream super cheap but I’ll argue on a cyclical and risk-adjusted basis, it is. Particularly the risk adjusted part.
When I say it’s conservatively run, I’m not kidding. The bank is hilariously overcapitalized (risk-weighted Tier 1 of 28%, Tier 1 of 14%) and could probably return half of their equity to shareholders and still be very well capitalized. It won’t happen, but they could.
Conservatism is their DNA. According to a 2008 LA Times profile, “Farmers & Merchants is mainly a commercial real estate lender. But unlike many others, it won't lend money to a business based solely on its cash flow, no matter how strong. Unless you are an exceptional longtime customer, don't try borrowing more than 50% of the value of the commercial property you pledge as collateral.” Their lending policies strike me as a bit extreme, but unsurprisingly FMBL made it through the crisis with only minimal loan losses.
FMBL has a nice little franchise, and the crisis only made it better. Deposits soared from $2 billion in 2007 to $3.8 billion today. 40% of deposits are non-interest bearing. Naturally, with their stringent loan policies, a lot of their assets end up in securities, chiefly MBSs issued by Fannie and Freddie. 42% of assets are in loans while 55% are in cash or securities.
As with most other banks, FMBL’s NIMs have been crimped by the low interest rate environment. So far in 2013, FMBL has run a NIM of 3.25%; in the mid 2000s this was more like 4.5%. Whenever rates go higher, FMBL will be well-positioned because of its low-cost deposit base. A 100bps increase in NIM would push EPS from $480 per share to over $700 per share. (Ok, not exactly that much because there would be a bit of an offset from lower fee income and maybe some outflow of deposits chasing returns, but it would be much higher).
The strength of FMBL’s franchise is somewhat obscured by their conservative capital structure as well as the current environment. ROAs in 2005 and 2006 were in the 1.8%-1.9% range (you more often see banks in the low 1s), but ROEs have been much more pedestrian because of the low leverage. FMBL has a good franchise and is geographically concentrated, which keeps expenses low (efficiency ratio has been in the 40%-50% range over time). Again, I think FMBL will benefit more than others as rates rise because of their core deposits and low expenses, and overcapitalization.
Book value as of 9/30/13 was $5,737 per share. At the end of 2012, fair value of securities exceeded carrying value by about $85 million, or $650 a share before tax, as a sizable chunk had been purchased when interest rates were higher. About 2/3rds of their securities portfolio has a maturity of 5-15 years so there’s a bit of interest rate risk there, but there’s a cushion and the duration isn’t huge so it’s not too worrisome. Also a rise in interest rates would be hugely beneficial for their overall business so any loss on their securities portfolio would be overwhelmed by gains elsewhere.
Because the bank is family run, it’s hard to imagine it ever being taken over. They did a major repurchase in 2008 at $7,200 per share in part to settle a lawsuit by some dissenting family members (in the profile, the CEO referred to the dissenters as “not really much of a branch of the family; more like a couple of leaves”). Since the bank has grown rapidly in the last few years, I would expect them to continue to retain earnings. There’s a small regular dividend which is apparently enough to pay for the Walkers’ polo hobby. In a few years, if growth flattens, we’ll likely see another buyback or special dividend.
This is one you’ll have to buy and patiently wait. At the end of ZIRP and QE, it’ll be making a lot more. That could be a while off (or it may never happen), but you’re getting paid nicely in the meantime. Tangible book marked to market is probably well over $6,000, and I think there’s earning power of over $700/share over time. I reckon the stock is worth at least $8,000 based on P/E and P/TBV.
|2005||2006||2007||2008||2009||2010||2011||2012||2013 (9M ann)|
|Cash & Equiv||198||191||131||210||170||98||336||314||99|
|Bank Premises & Equip||24||24||35||56||53||52||55||61||66|
|Accrued Interest Rec.||16||17||17||15||16||17||16|
|Demand, non-interest bearing||817||770||705||810||898||1,004||1,263||1,474||1,549|
|Demand, interest bearing||237||211||211||225||255||262||301||347||379|
|Savings & money market savings||633||487||423||508||626||754||910||1,011||1,071|
|Accrued Interest & Other||8||7||7||7||6||7||40||35||30|
|2005||2006||2007||2008||2009||2010||2011||2012||2013 (9M ann)|
|Fed Funds (Cash)||3||4||4||2||1||1||0||1||1|
|Total Interest Income||152||168||183||182||190||179||179||171||160|
|Total Interest Expense||21||35||48||35||18||12||9||7||6|
|Provision for loan losses||(1)||1||6||53||41||26||14||0||0|
|NII after provision||133||132||129||94||130||141||155||164||153|
|Non Interest Income||11||11||12||14||13||15||14||23||41|
|Non Interest Expense||49||53||58||62||78||74||78||95||103|
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