Dennis Garrels/iStock Editorial by way of Getty Photos
Introduction
Greater than half a 12 months in the past, I anticipated Farmers & Retailers Bancorp’s (OTCQX:FMCB) ebook worth improve to be slower than earlier than because the California-focused financial institution needed to take care of the moderately abrupt improve in rates of interest. Whereas that is excellent news in the long term because the financial institution’s web curiosity margin ought to improve as nicely, the issue with rising rates of interest is the mark-to-market requirement on the portfolio of securities out there on the market.
It is all about conserving the harm restricted
The final time I had a take a look at FMCB was in June and at that time I used to be solely capable of base my opinion on the financial institution’s Q1 outcomes. As we are actually only a few weeks away from FMCB reporting its full-year monetary outcomes for 2022, I already needed to examine how my thesis was evolving.
Earlier than diving into the particular points associated to the portfolio with securities out there on the market, I believe it is sensible to take a look at how the financial institution was performing within the third quarter and the three quarters main as much as the Q3 reporting date as in the end the lower in ebook worth associated to the revaluation of the portfolio of securities out there on the market can be compensated by retained earnings.
Throughout the third quarter, FMCB noticed its curiosity revenue improve to nearly $52M whereas the curiosity bills barely elevated in any respect: This resulted in a web curiosity revenue of $50.5M which is greater than 25% greater than within the third quarter of the previous 12 months.
FMCB Investor Relations
The financial institution actually wants the online curiosity revenue (and thus wants robust web curiosity margins) to generate a revenue because the financial institution’s whole non-interest revenue was simply $1.6M for the quarter. Granted, that additionally was brought on by a $3M loss on the sale of funding securities out there on the market, however even excluding that component, the whole non-interest revenue would have been simply over $4.5M. And seeing how the whole non-interest expense elevated to in extra of $24M, these few million {dollars} – though very welcome- wouldn’t have made a significant distinction within the web non-interest bills.
Together with the $3M loss on the sale of Securities AFS, the pre-tax and pre mortgage loss provision revenue was roughly $27.6M. The financial institution recorded a $1.5M mortgage loss provision which implies the pre-tax revenue was roughly $26.1M and the online revenue got here in at $19.5M for an EPS of $25.20 per share. Necessary takeaway right here is that regardless of the mortgage loss provision and the loss on the securities AFS, the online revenue elevated in comparison with the third quarter of 2021.
The overall web revenue within the first 9 months of 2022 got here in at $55M, for an EPS of simply over $70.
In an article revealed in 2021, I anticipated FMCB would be capable to develop its ebook worth per share by $60/12 months. That concentrate on won’t be met in 2022. Not as a result of the financial institution’s earnings had been (or can be) disappointing as FMCB stays on the right track to report an EPS north of $90 whereas the dividend (on an annual foundation) can be lower than $20/share.
The principle perpetrator is the worth of the portfolio of the securities out there on the market. The excellent revenue assertion supplied by FMCB exhibits there was an unrealized loss on the worth of those securities to the tune of just about $40M and simply over $25M on an after-tax foundation.
That being mentioned, FMCB’s ebook worth really nonetheless elevated within the first 9 months of 2022. The financial institution ended 2021 with an fairness worth of $463M and slightly below 790,000 shares excellent for a ebook worth of $586 per share. As of the top of September, the fairness worth was barely greater however the financial institution had additionally repurchased about 2.5% of its share rely (at costs above the ebook worth) which supplied an extra drag.
FMCB Investor Relations
Dividing the $468M in fairness over the share rely of slightly below 771,000 shares leads to a ebook worth of $607 per share. Deducting the $18/share in goodwill and different intangibles leads to a tangible ebook worth of roughly $589 per share.
And as I count on the fallout of the portfolio of securities AFS within the fourth quarter of 2022 and Q1 2023 to be comparatively restricted, I believe FMCB is able to slowly begin to improve its ebook worth per share once more.
Funding thesis
The truth is, I believe FMCB has a very good shot at accelerating its ebook worth per share above the $60/share per 12 months I initially had in thoughts. The efficient tempo may even depend upon how briskly FMCB is shopping for again inventory: shopping for again shares at a 60% premium will enhance the EPS (because of the decrease share rely) however could have a unfavourable impression on the ebook worth per share.
Whereas I am normally not too eager on paying 1.6-1.7 instances the ebook worth, I like FMCB for its robust mortgage ebook efficiency (and I am trying ahead to seeing the financial institution’s full 12 months replace) and deal with constructing ebook worth moderately than maximizing the dividend. The FY 2022 dividend will very probably stay beneath $20/share which implies the sub-2% dividend yield doesn’t make FMCB enticing for yield-focused buyers. However I do not thoughts investing in a financial institution the place ebook progress worth is a vital driver.
I have never pulled the set off on FMCB but, however I am getting more and more . Whereas I usually do not prefer to pay a hefty premium to ebook, FMCB may very well be value it.
Editor’s Word: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please concentrate on the dangers related to these shares.
