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Mark Yu
Mark Yu
Articles (396)  | Author's Website |

Is Farmers & Merchants Bancorp a Good Pick?

Insider buying prompted a look at the 10-K

Seeking news or updates about Farmers & Merchants Bancorp (FMCB) was fairly difficult to do. One thing that made me pursue this brief research in the company was that I have noticed its insiders have been buying its shares for the past two years. Further, I believe dissecting its financial numbers may bear fruit, too.

After searching for bank and its annual report on the internet, I got into trouble finding which company was which. As shown below, there is not just one Farmers & Merchants Bank, but there were several (websites can be accessed here, here, here and here):

Here is a table that listed several Farmers & Merchants Bancorp names and its businesses (thanks to Wikipedia):

Farmers and Merchants Bank Building in White Bluff, Tennessee appeared to be just a historical land mark and not a bank. Interestingly enough, most of these banks are identified with United States National Register of Historic Places. These banks are ancient! Farmers and Merchants Bank of Western Pennsylvania looked to be the oldest among the group. The bank has existed during the late 1800’s until present with less than 100 employees.

Making sure I am reviewing the bank of interest and not other Farmers and Merchants Banks, I sought other publicly listed Farmers and Merchants Bank. Here is a summary of the several listed Farmers and Merchants Banks:

  • Farmers & Merchants Bancorp (FMCB): serves mid-Central Valley of California, including Sacramento, San Joaquin, Stanislaus and Merced counties.
  • Farmers & Merchants Bank of Long Beach (FMBL): serves Long Beach, California and South Bay areas as well as Orange County.
  • F & M Bank Corp. (FMBM): a Virginia-based bank holding company. The bank owns 100% of the outstanding stock of its two affiliates, Farmers & Merchants Bank and TEB Life Insurance Company (a life insurance company).
  • Farmers & Merchants Bancorp Inc (NASDAQ:FMAO): serves Northwest Ohio. The bank has 22 offices and over 36 ATMs located in Fulton, Williams, Henry, Defiance, Lucas, and Wood counties in Ohio, as well as DeKalb and Steuben Counties in Indiana.

Competitors comparison

Using Barron’s and GuruFocus’ peer list, I identified three more possible peers (Seacoast Banking, Bridge Bancorp and Republic Bancorp). According to recent filings, F&B Bank in Long Beach tops the group with asset holdings followed by Republic Bancorp. FMCB ranked third to the smallest of the group with $2.6 billion in total assets.

Net interest margin (NIM; peers and big banks)

*Big Banks (average NIM of Bank of America, Citigroup, JPMorgan Chase and Wells Fargo)

**Peer average total (average NIM of the eight peer banks)

(Source: Companies' 10-Ks)

Net interest margin is a performance metric that examines how successful a firm's investment decisions are compared to its debt situations. As it turned out, FMCB has outperformed the big U.S. banks and its peers. On the other hand, general NIM direction appeared to be headed south in recent years.

Total assets growth

FMCB appeared to have a similar asset growth rate with its peers over the past decade. The bank had its most asset growth in 2014 with 14%; this rate compared to its five- and 10-year average of about 7%. Nevertheless, I did not observe any acquisitions the bank had made in that year to justify the good asset growth it had made. Further, FMCB had not made any acquisition in the past decade.

Percentage loan/assets

As FMCB has more than half of its assets in the loan business, the bank appeared to be performing similarly compared to its peers. Further, FMCB’s non-performing loans (close to default accounts) were declining over the recent years.

In contrast, the bank is still keeping huge amount of money for its loan loss provisions. In 2015, the bank kept $42 million for its loan loss provision, while on a five-year average, the bank only had 0.31% or $6.28 million NPLs. This will make sure that there would be enough coverage for any jump in NPL whenever the bank had gone too lax in becoming a creditor to its consumers and suffered several defaults, such as in a recession.

Dissecting a little bit more about FMCB’s loan structure made me realized that the company is primarily engaged in making commercial real estate loans.

FMCB defined Commercial Real Estate Loans (CRE) on page 38 of its 2015 10-K as follows: “Commercial real estate mortgage loans are generally considered to possess a higher inherent risk of loss than the Company’s commercial, agricultural and consumer loan types. Adverse economic developments or an overbuilt market impact commercial real estate projects and may result in troubled loans. Trends in vacancy rates of commercial properties impact the credit quality of these loans. High vacancy rates reduce operating revenues and the ability for properties to produce sufficient cash flow to service debt obligations.”

According to FRED data, CRE loans have been climbing. The amount of CRE loans is currently higher than the Great Recession, though CRE loans were not the cause of that recession, as sub-prime mortgage loans were.

(Wells Fargo’s 2014 10-K, p. 63)

FMCB serves mid-Central Valley of California and adjacent counties. I decided to compare FMCB’s business to a conservative big bank’s loan exposure to California CRE. I ended up browsing through Wells Fargo’s (NYSE:WFC) 10-K. As it turned out, Wells Fargo also has more exposure to California in terms of CRE loans than in any other state. Wells Fargo had $32.9 billion or 3.71% of its total loans in California CRE in 2014. No other state went over 1% in terms of exposure with CRE lending as can be observed in the picture above. Further, Wells Fargo’s CRE loan business demonstrated 15% of its $862 billion loan portfolio in 2014. On the other hand, FMCB had $609 million or 30.5% of its total loans allocated to CRE lending.

A good question to follow up with this assessment is whether California’s CRE lending business in a bubble or in any detectable weakness. According to a latest survey in August 2015 by Allen Matkins' UCLA Anderson Forecast California Commercial Real Estate Survey, the overall California CRE condition remains strong secondary to falling vacancy and overall positive outlook for the U.S. economy. To quote further, “while the outlook remains positive through 2018 with no weakening in occupancy rates, a few of the survey panel participants did express slight caution with regard to this next stage of the CRE building cycle.” 

As long as vacancy rate in California CRE holds steady, FMCB’s loan portfolio would just be fine.

Recession performance

As the finance sector collapsed 79% during the Great Recession, dragging the S&P 500 down 54% during that period, FMCB held to 19% loss.

Some more numbers

Efficiency ratio

In this ratio, 50% or less would be more appreciated, as this means that the bank committed less capital to operational costs in order to produce revenue. FMCB demonstrated good ratio at a three-year average of 56%.

Debt to equity and shares outstanding

FMCB appeared to have been lessening its debt for the past decade. Further, the company has kept it shares outstanding for the same time period.

Despite these good numbers, I noticed that FMCB has been increasing its selling, general and administrative expenses. As defined in Investopedia, these are expenses for marketing, rent, and personnel. Interestingly, the bank has a current head count of 316 employees. The bank’s SG&A had a 10-year computed annual growth rate of 4.18% (from $28 million in 2006 to $42 million in 2014).


FMCB currently trades at a premium compared to its peers in both the traditional price to earnings and price to book ratios.

Price action

As of today, the bank is trading near its all time high at $565 a share back in September 2006. In summary, I would definitely like to have some FMCB shares in my portfolio, but only at the right price.

Happy investing!


About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings per day. Dislikes goodwill and intangible assets.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

"The only source of knowledge is experience"

"I have no special talent. I am only passionately curious." Albert Einstein

"To strive, to seek, to find, and not to yield." Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." Warren Buffett

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