Farmers & Merchants Bancorp: Exceptional Performance, Big Dividend Growth

seekingalpha11-05

Farmers & Merchants Bancorp has consistently raised dividends for nearly 60 years and offers strong dividend growth potential, making it a solid long-term buy.The bank demonstrated resilience with ...

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There had been great concern with persistently high interest rates that loan demand would fizzle and/or the economy would work its way into a recession. However, we just have not seen that occur. Now we are in a rate cutting environment, and so long as this is orderly and slow, it bodes well for the regional banks. You can see how many of the stocks in the space have rallied in the last few months. Now one special subgroup of the economy to watch in America is the fiscal health of our farmers, and their need for capital to purchase machinery, livestock, etc. to produce food goods. Thus, we want to return to look at Farmers & Merchants Bancorp (OTCQX:FMCB). The stock has been relatively stable (sideways action) for a few months. It looks cheap here, but the best thing we like about this bank is that the company has raised its dividend for nearly 60 consecutive years, and has paid dividends for 89 consecutive years. We like it for dividend growth investing. The bank just reported Q3 earnings, and in this column we examine the critical metrics we follow for regional banks. This is, of course, a small regional bank, with nearly three dozen branches across the Central Valley and East Bay areas in California. It is a major bank lender to agriculture in the U.S. In our opinion, the key metrics are holding up well, and we like a buy here. In Q3, Farmers & Merchants Bancorp saw strength. There have been concerns with deposit declines, or lack of loan growth, but this was not the case with this bank. Growth in deposits was 2.4% from the sequential Q2, and loans grew 0.6% compared to the second quarter of 2024. Many other regionals we have covered have seen declines in one or the other, if not both. Loans are up 4% from a year ago, while deposits are about flat. Overall, this is positive. Now, the main concern has been a narrowing of margins in the sector. Earlier this year we made a call that margins in the sector have bottomed out. Farmers and Merchants expanded their margins. For Q3 2024 the net interest margin increased to 4.07% compared to 3.91% in the sequential Q2 2024 driven by a decrease in the average cost of total deposits from 1.51% in Q2 2024 to 1.39% in Q3 2024. This drove net interest income to $52 million from $50.8 million in the sequential quarter. On the earnings front, this bank is incredibly profitable. Net income was $22.1 million, or $29.96 per share. This EPS was up 2.5% from a year ago and was a record for the company. For all of 2024, we are projecting $122 in EPS, putting the stock at just 8X FWD EPS. This is a very attractive price in our opinion. What is most impressive is that the bank maintains industry-leading asset quality, on top of being toward the top of the industry for net interest margins. The return on average assets was 1.65% and the return on average equity was 15.03% in the quarter. These returns were on par with a year ago, although there was a dip in the return on equity was as a result of a 13.6% increase in equity even after paying record dividends and repurchasing $14 million shares in the past 12 months. The efficiency ratio remains incredibly strong at 47.6%, also among the top in the industry. Very few regional banks have a sub-50% efficiency. While the credit quality remained incredibly strong, the allowance for credit losses was 2.11%. All told, there were only $677,000 of non-accrual loans, while net charge-offs were just $216,000. Further, there have been no provisions for credit losses all year. Capital ratios are also strong. Take home The bank remains in a stable trading range, which is just fine for a major dividend growth name. We continue to expect annual dividend hikes. We like the margins here, the income power, and the exceptional asset quality. Thus, we think this bank is a great long-term buy and hold.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2481560192"}