2023-03-30 11:30:00 ET
Summary
- FMBL operates 25 branches in LA County, Orange County and Santa Barbara County.
- The bank has in excess of $12B in assets, the balance sheet is backed by a healthy equity position.
- The stock is trading at a discount of 40% to the tangible book value and at just over 7 times 2022 earnings.
- The bank mentioned it saw a cash inflow since the banking crisis erupted.
- The average LTV ratio of the loan book is less than 50%. This should protect the bank.
Introduction
Farmers & Merchants Bank of Long Beach (FMBL) has a rich 116 year history active in LA County, Orange County and Santa Barbara County. Not only was the bank profitable in every single year since 1907, it also hasn’t decreased its dividend at all in the past 106 years. That’s an achievement but not necessarily a unique selling point as FMBL has been very slow at increasing dividends. It pays a quarterly dividend of $28/share and pays a ‘Christmas Dividend’ of $15/share. This means the total annual dividend is $127/share for a yield of approximately 2%. Needless to say FMBL isn’t really a stock you should hold for the dividend yield. And just to emphasize the dividend history of the bank, the dividend payable on March 31 st is the 521 st dividend payment. And the dividend has never been decreased since 1916. The average daily volume on the market is just over 100 shares per day for a monetary value of just over $600,000. The current market cap of the bank is approximately $780M.
A strong result in 2022
The bank hasn’t published its full annual report just yet but the press release discussing the 2022 results does contain all the information we need.
We really saw the interest income increase in the final quarter of the year but the net interest income didn’t increase substantially as the total amount of interest expenses obviously also started to increase. The total interest and dividend income jumped from $76M in Q4 2021 to $95.9M in Q4 2022 but the total interest expenses almost seven-folded to $18.6M. Despite that, the net interest income still increased by approximately $4M to $77.3M.
No provisions for loan losses had to be recorded and after deducting the $45M in net non-interest expenses, the pre-tax income generated by the bank was $30.8M and after deducting the $5.4M in taxes the net income was $25.4M or $206/share. This indeed means the current payout ratio for the dividend is just under 14% (excluding the impact of the Christmas dividend).
Looking at the full-year results, the net interest income came in at $309M and the net income was $109M or $876/share despite recording a $3.5M loan loss provision. Despite recording that provision, the payout ratio remained below 15%.
The balance sheet is safe
Of course the market has special attention to balance sheets these days. Let’s have a look at the asset side of the $12.1B balance sheet.
We see the bank has almost no securities available for sale so the impact of mark-to-market regulations is minimal. That being said, the bank does have about $4.8B in securities held to maturity which undoubtedly have some unrealized losses attached to them if you would have to mark them to market. That goes without saying. The question of course is how manageable that is. Looking at the liabilities and equity side of the balance sheet, the bank has about $1.3B in equity. So even if Farmers would have to liquidate a portion of its securities held to maturity to meet cash needs, its equity won’t be wiped out. Perhaps it’s also important to know these securities have maturity dates that are still very far away. About 80% of the portfolio of securities held to maturity are maturing more than 10 years from now .
And just to be clear: I do not expect a liquidity issue at this point. Quite the opposite is happening: the Farmers & Merchants Bank of Long Beach appears to benefit from the recent nervosity in the banking sector as the bank confirmed it has been experiencing a steady inflow of new deposits . As the current crisis mainly is a liquidity crisis and not necessarily a solvency crisis (in most cases, at least), it is very reassuring to see FMBL increasing its liquidity and it will for sure be interesting to see if and how the bank has put these deposits to work.
The loan book mainly consists of commercial real estate loans. We’ll have to wait for the bank to publish its final annual report for 2022 to figure out the exact breakdown but in 2021 for instance, the CRE segment accounted for about 65% of the total loan book.
While that is high, just 0.2% of all loans were non-accruing. And the majority of those non-accruing loans weren’t even in the CRE segment but were related to residential mortgages. While we still have to wait for the updated annual report to be filed, it looks like the loan book is pretty safe. At the end of 2022 the total percentage of non-performing assets versus total assets was just 0.31% .
This was also confirmed in a recent update wherein the bank confirmed the average LTV ratio of the assets that act as collateral for the loan book is less than 50%. So if there’s $3.5B in commercial real estate on the books, it likely is backed by $6-8B in real estate value and while that value will for sure fluctuate now higher capitalization rates will have to be used to determine the fair value of the assets, I don’t expect the LTV ratio to suddenly become an issue.
Investment thesis
The combination of all those elements actually makes FMBL quite interesting. The stock is currently trading at just over 7 times last year’s earnings while the tangible book value per share came in at $10,655/share, which means the current share price represents a discount of approximately 40%. Meanwhile, the capital ratios are very strong despite the increase in Risk-Weighted Assets. As of the end of 2022, the CET1 ratio came in at 15.44% . While that is lower than the 19.4% at the end of 2010, keep in mind the total amount of RWAs increased by $3B while the total capital increased by $250M thanks to FMBL’s low payout ratio and high earnings retention ratio.
The single digit earnings multiple and the discount to the tangible book value (excluding unrealized gains on the portfolio of securities held to maturity) make FMBL an interesting option for a value-oriented investor. I currently have no position but will start to follow FMBL from close by.
For further details see:
Farmers & Merchants Bank Of Long Beach: Trading At 0.6x Tangible Book Value