Author Topic: FMBL - Farmers and Merchants Bank of Long Beach  (Read 3669 times)

ScottHall

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FMBL - Farmers and Merchants Bank of Long Beach
« on: December 09, 2015, 03:08:36 PM »
It is largely a business bank based in Long Beach, CA, managed by the controlling Walker family who started the bank over 100 years ago. The bank is run very conservatively, and has capital ratios at something like double the regulatory minimum. Because of this and their very strict lending policy, they like to call themselves "California's Strongest Bank." It's a plain vanilla deposit/lending institution; no crazy derivatives or anything of the like.

The lending policy is pretty interesting, by itself. So, as a community business bank, most of its loans are for commercial real estate. But its take to lending is quite odd. FMBL basically refuses to lend purely on the basis of cash flows; in a profile written about the company a few years ago in the LA TImes, it was pointed out that unless you've been a good customer of the bank for a long time, they won't loan you more than 50% of a commercial real estate property's worth. This is the majority of their loan book.

There's some residential real estate in there too, but apparently FMBL primarily has this business line to help some of their better customers who don't want to deal with another financial institution. As a result of this, this is a pretty small percentage of the loan portfolio and they typically do a 65% LTV on this business. So, very safe lending, generally. The bank had no provisions for loan losses last year; of the 3,000 loans on its books, only 6 were 30+ days delinquent.

But probably the most interesting thing about this bank is its base of deposits. 38% - 39% of them are non-interest bearing, and this seems to be pretty consistent through the years. My understanding is that this has to do with its status primarily as a business bank; I was reading that in many cases business checking accounts pay nothing. I don't know why this is, but it apparently is. I believe this is also a big reason for WFC's low cost deposit base, but it should be noted that WFC has a lower percentage of non-interest bearing deposits than FMBL does. FMBL is the highest I've personally seen, though there are probably companies with a higher percentage that I've missed.

So, as you can imagine, the low interest rate environment has killed profitability. As interest rates have gone down, the bank's net interest margin has compressed from the mid-to-high 4% range to about 3.5% today.

That means, over the past few years, profits haven't grown that much. Ordinarily profits would decline, all else being equal, but the bank has done a great job at gathering assets. Both loans and deposits have grown at about a 7% annual rate since 2008, which has helped keep profitability consistent despite the lower margins. In my view, this is essentially a coiled spring. When (if?) interest rates move higher, this company's earnings power should explode.

I did some back-of-the-napkin math and figured that with a 100 basis point increase in NIM, the company's 2014 earnings would rise by 61% to $767 per share, or so. It probably wouldn't be quite that much, because I imagine the bank would give employees raises or something, but needless to say a rather small rise in interest rates would end up increasing the bank's earnings power substantially as it redeployed its cash. In the meantime, you have a bank that is growing deposits like clockwork.

The one thing that concerns me a bit is the increase in the efficiency ratio over the past few years; it was in the 30s in 2010, and has risen to about 57% today. That's still perfectly reasonable for a bank, but the primary driver behind that was an increase in employee salary and benefits. I don't know if it's to handle the larger asset base/for expansion, whether they're just sharing prosperity with the employees, or whether the founding family decided to give themselves an "extra" dividend. Sort of odd but not a deal breaker to me.

Shares trade at a little over 12x earnings and at about 95% of book value. ROE hovers at around 8% because the bank is extremely overcapitalized, but in theory the bank could take half of the equity out and dividend it to shareholders. It would have a very high ROE, then. Not likely to happen, given the bank's history with dissident heirs, but it "could." The more interest thing is that the business keeps gathering assets, and should probably grow earnings roughly in line with that from here, all else being equal. If interest rates go up, ROE will skyrocket and today's prices will reflect a single digit ratio of normalized earnings.

Here are some articles about the bank. This is definitely a "sleep well" investment, which should provide decent returns without an interest rate spike and pretty attractive returns with one. I bought a stake recently.

http://articles.latimes.com/2008/mar/30/business/fi-sunprofile30

http://www.latimes.com/business/la-fi-stock-spotlight-farmers-20140811-story.html

http://articles.latimes.com/2004/mar/18/business/fi-bank18
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thepupil

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Re: FMBL - Farmers and Merchants Bank of Long Beach
« Reply #1 on: December 09, 2015, 03:11:05 PM »
are you posting this because you bought my share yesterday?  ;D

ScottHall

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Re: FMBL - Farmers and Merchants Bank of Long Beach
« Reply #2 on: December 09, 2015, 03:12:07 PM »
are you posting this because you bought my share yesterday?  ;D

What made you sell? My cost basis is $6,199, so I bought a few days before that. :)
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thepupil

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Re: FMBL - Farmers and Merchants Bank of Long Beach
« Reply #3 on: December 09, 2015, 03:17:35 PM »
nothing specific to FMBL...building an outsized position something else...try to keep all OTC 100% margin stuff in the unlevered IRA's and it was in taxable...will probably buy it back later

Spekulatius

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Re: FMBL - Farmers and Merchants Bank of Long Beach
« Reply #4 on: December 09, 2015, 04:17:33 PM »
I have owned this for years. Earnings have grown quite a bit recently, as has the asset base. I think the increased cost are basically a result of them building out the asset base. The lower interest rates have reduced their profitability ratios but overall profits still have increased. I agree that higher interest rates would do them good.

I also own QUCT, another Walker company. I think it was spun of from FMBL as their asset management business in the 70's, but they own other interesting stuff. All the Companies run by the Walker family are ridiculously overcapitalized.

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Simple Investor

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Re: FMBL - Farmers and Merchants Bank of Long Beach
« Reply #5 on: December 10, 2015, 05:15:55 AM »
I'v owned for years.  I may hold it for decades.  I'm not sure if it will outperform the S&P over a long time frame but i don't worry about the investment.  Thanks for the write up.

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Og

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Re: FMBL - Farmers and Merchants Bank of Long Beach
« Reply #6 on: January 09, 2019, 03:21:41 PM »
I have owned this for years. Earnings have grown quite a bit recently, as has the asset base. I think the increased cost are basically a result of them building out the asset base. The lower interest rates have reduced their profitability ratios but overall profits still have increased. I agree that higher interest rates would do them good.

I also own QUCT, another Walker company. I think it was spun of from FMBL as their asset management business in the 70's, but they own other interesting stuff. All the Companies run by the Walker family are ridiculously overcapitalized.

Speaking of QUCT - I did a podcast episode on this company recently with our very own Spekulatius. You can listen to the episode, here: https://intelligentinvesting.podbean.com/e/queen-city-investments-quct/

John Hjorth

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Re: FMBL - Farmers and Merchants Bank of Long Beach
« Reply #7 on: January 09, 2019, 04:17:14 PM »
Og, who are you, posting here on CoBF? Are you the provider & interviewer on this podcast? [Please leave Spekulatius out of this question.]
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