Farmers & Merchant Bank: A Solid Investment in Family Tradition

Jun. 4.07 | About: Farmers & (FMBL)

I have an affinity for closely-held, thinly traded companies that are heavily owned, operated, and controlled by a single family - especially if there is a long history involved. This is no secret per my Seaboard Corp (NYSEMKT:SEB) and Ash Grove Cement (OTCPK:ASHG) holdings which are about 80% owned and controlled by the Bresky Family and the Sunderland Family, respectively. Additionally, SEB's formation dates back to 1918 when the Bresky's acquired their first flour mill and ASHG which has an even longer history, going back to 1882. I have also recently taken an interest in J.G. Boswell (OTCPK:BWEL) which was started in the 1930s and today is still family controlled and operated. Another good example of Crowley Maritime (OTC:CWLM). I recently missed the boat on this one - it last traded at $1,805 and a few months ago, the family conducted a going private transaction at around $2,990 - a 65% premium on a stock that has performed rather well over the years.

Before I delve into Farmers & Merchant Bank of Long Beach (OTCQB:FMBL), I will tell you why I like the general set up I described above. First, since they do not trade much, you can get a really good feel for how the stock moves on any form of volume. Watching the bid/ask spread change, basically in slow motion, is a fantastic learning experience and you can really get some insight as to what is going on in the marketplace from a supply/demand standpoint.

Next, the family typically has no reason to sell their shares and more often than not, sales do not happen. Whether it is family pride or a general contentment, the deals are typically structured to provide generous salaries and a fair dividend payout that does not empty the company's coffers, but provides a very generous stream of income. For instance, ASHG founding family takes approximately $12M-$14M of dividends each year. SEB's founding family officer receives a $1.5M salary and about $2.5M of dividends each year. BWEL - well, no idea. Anyway, back to the point about not selling, this removes a lot of the downward, selling pressure from the market. Compare to some companies where executives dump their shares as soon as they receive them.

Finally, the founding family typically acts like owners. Obviously, while the founding family is the primary beneficiary and receives the overwhelming lion's share of the spoils, as a shareholder, you are entitled to a small sliver of that pie. In short, you might as well jump on the bandwagon and share in the success that has been good to their families. You typically see less, if any, dilutive stock grants or options. Stock splits are not common. In short, they are the owners and are glad to have new ones, but you have to pay the fiddler. They seem to have an understanding of the exclusivity of ownership and if that practice is apparent in a family owned/controlled company, shareholders are typically rewarded over the long term.

Of course, anything can happen. Take the Adelphia mess where the founding family basically treated the company's bank account as their own personal allowance. Fraud can happen, yes. But, really, for many of these companies, there is no reason to do so. Fraud would actually be easier to indicate and track down in these family owned companies than it would in a company like Adelphia where there was a significant base of shareholders. Basically, when things are simpler, it is just not as easy to hide wrong-doing and concisely, there is less reason to commit such.

Without sounding too supernatural, finding companies like this is almost like a loophole in the system. I am unsure why they are public in the first place and many do not talk about it - or even make reference to not being public. Yet, they have stock symbols so anyone can purchase shares, but more often than not, people do not.

Anyway, onto Farmers & Merchant Bank of Long Beach.

FMBL is a business bank with 22 branches in Long Beach and Orange Counties in Southern California. The bank has been established since 1907 and have over 600 employees. The company is controlled, owned, and operated by the Walker Family. The bank itself has an interesting history and founding story which can be read at their web site at www.fmb.com by clicking on the 'About Us' link. Should the integrity described in the history remain, we are likely dealing with some very genuine owners.

First, it is important to note that FMBL is primarily a business bank. Business banks have been somewhat shielded from the subprime lending meltdown and have actually faired very well over the past few years. Yes, FMBL offers personal banking services, but they focus on the commercial banking aspect.

FMBL has 151,000 or so shares outstanding, with the bulk of them being owned by the Walker Family. I am unsure of how many exactly they own, as I cannot locate any SEC filings, but I assume it is 70%, at the absolute minimum. The stock is off from its relatively recent $7,095 all-time high and is up from its $5,700 52-week low. The stock has increased nearly 4-fold over the past 7 years and has more than doubled since 2003. FMBL also pays $20/quarter dividend, which is about a 1.2% yield. FMBL is also proud that they have paid a dividend for 442 consecutive quarters.

FMBL is certainly not a stock that is going to move very quickly, but it should be a solid investment and I feel it is worth closer to $12,000 per share. I am hesitant to put that price target on it as the nature of the family controlling the bulk of the shares in a pretty much "I'm not for sale" attitude will likely prohibit FMBL shares reaching a full market valuation. I get that $12,000 price target by looking at FMBL's price to book ratio of 1.6. The best comparison I can offer is/was Business Bank of Nevada that traded on the OTC BB under the symbol BBNV before being acquired for about 3x book value. BBNV was obviously for sale unlike FMBL which may not be the case, ever), but it is important to know that FMBL is larger and more established and appears to be cheaper when you look at the various ratios, even pre-acquisition.

FMBL banking ratings are pristine with maxxed out high ratings, among others, from the IDC (300 on a scale of 0-300), A+ from Weiss Ratings, 5-Stars from Bauer Financial, and a 91/99 from Highline Data. You will be hard pressed to find a bank that is as of high of a quality as FMBL is and they maintain a capital ratio 4 times greater than regulations require. Many banks somewhat preclude themselves from achieving as high of marks due to the nature of their operations - it is not that they are bad by any means, but bigger banks cannot be selective - or sacrifice quality for quantity.

FMBL continues to generate lots of shareholders equity on a consistent basis and by in large, and as FMBL improves their shareholders equity and book value, FMBL becomes cheaper by the day, as long as the stock stays where it is at.

FMBL will likely not reach $12,000 per share, at least not anytime soon, but I expect, realistically, we will see a $9,000 stock sometime in the next 3-5 years. This is certainly one that requires patience and is not going to be the biggest winner you have ever seen, but it appears to be a very shareholder-friendly, limited downside place to stock some of your cash. Furthermore, with such high-ratings and high quality status when it comes to financial ratings, if anything, this stock should be trading at a premium when compared to other banks, and not a discount.

Disclosure: Author holds a long position in FMBL.OB

FMBL 1-yr chart

FMBL