Farmers & Merchants Bank Of Long Beach: Q1 2021 Update

by The Compound Investor

Farmers & Merchants Bank Of Long Beach (FMBL) was last covered back in May. You may recall this is the ultra-conservative bank operating around two dozen branches down in Southern California. Like most banks, it had been hit hard by the pandemic, with its stock price slumping down to around $5,875, which at the time represented a 25% drop year-to-date. The ultra-strong balance sheet stood it in good stead, though, and it traded on a price-earnings ratio (“PE”) of less than 10. COVID notwithstanding, it looked like a low bar to clear in terms of double-digit annual returns.

FY20 results released a couple of weeks back showed a large rise in loans and deposits. Net loans jumped from $4.3b to $5.3b on the back of a surge in commercial loans in the early months of the pandemic. Pre-COVID, over 80% of the loan book was in commercial and residential real estate (mostly commercial). That had dropped to under 70% in 2020. Deposits also rose substantially, increasing from $5.8b to $7.6b during FY20. The Paycheck Protection Program (“PPP”) accounts for a big chunk of these moves – with the bank processing around $700m in PPP loans in Q2 of last year.


Like most banks, 2020 served up two issues for the firm. The economic impact of COVID was one, with the bank unsurprisingly setting aside more for bad debt. Credit loss provision came in at $10.5m in FY20, up from the meagre $250k set aside in FY19. That brought loan loss reserves to around $72.3m, equal to 1.34% of gross loans.

The other issue is ultra-low interest rates. The bank makes most of its money from net interest income (“NII”). Put simply, that is the spread between what it takes on interest-bearing assets like mortgages and what it pays out on interest-bearing liabilities like deposits. The bank’s net interest margin (“NIM”) fell to 2.99% last year, down from 3.43% in FY19. It has some non-interest revenue – credit card fees for example – but they are less than 10% of the pie here.

Still, there is quite a lot to like. Firstly, the bank’s funding costs are very low. It funds a large portion of its assets via deposits, and almost 40% of these don’t attract any interest at all. Interest expense was $24.9m last year, which was down on the $33m posted in FY19. That contributed to a circa 5.6% rise in NII, which clocked in at $261m last year. That was up from $247.5m in FY19. The increased loan loss provision, plus a rise in the ‘salaries and employee benefits’ line, saw FY20 net profit fall to $79m, or $622.74 per share. That was down from $85.6m, or $661.23 per share, in FY19.

Excess Capital

As mentioned in the preamble, this is one well capitalized bank. Its CET1 ratio clocked in at over 18% at the end of last year, and that pretty much tells you what you need to know. A lot of folks wonder why it doesn’t simply return its excess capital to stockholders, which is a valid point.

In fairness, it looks like share buybacks are now very much on the table. The board authorized a $20m program earlier last year, with just over half that amount spent in FY20. That followed on from another $20m program which expired in FY19. Buybacks took out around 1.5% of the share count last year if my math is right – a prudent move given how cheap the stock got during the COVID sell-off.

Aside from that, remember that the bank is very much a family affair, with heirs of founder Charles Walker still in control today. That probably explains the cautiousness, doubly so since the firm is not subject to the whims of Wall Street. It suits me fine but it is not for everyone. The general ethos here has also always been one of prudence.


The stock price is $6,850 at time of writing. That represents a welcome 16.5% rise on May’s article and puts the shares at a PE of 11. Bear in mind that the stock trades over-the-counter and volume is thin. The dividend yield is 1.6%, albeit that is based solely on the ordinary quarterly dividend of $27 per share. The bank also typically pays out a ‘special’ Christmas dividend in Q4. That amounted to $15 per share last year and bumps the dividend yield up to 1.8%.

As for the outlook here, the near-term is probably going to be characterized by low interest rates. That will naturally put pressure on interest income and profit. It is also worth keeping an eye on potential tax hikes given that FMBL benefited substantially from the 2017 Tax Cuts and Jobs Acts. A proposed corporate tax hike under the Biden administration would naturally have the reverse impact.

Longer-term, this one is a fairly steady stock. California has historically put in average GDP growth of around 3% per annum (real terms), and perhaps unsurprisingly asset growth at FMBL registered in the 6% per annum area pre-COVID. That, in turn, helped power annual returns in the high single-digit area in the two decades before the pandemic. In any case, the stock trades at a PE of 11, so shareholders can afford to see future performance clock in lower while still grinding out acceptable returns. If you want a no-frills rock solid bank stock, this one is still it.


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