Kicking the tires on a few banks

A few interesting banks from Bank Director's Top Banks listing, including a merger arb opportunity

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Disclosures: None

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One of my regular reads is Bank Director, a quarterly banking magazine. The magazine periodically lists top banks, typically using criteria like return on assets, return on equity, leverage, and asset quality.¹

I decided to look at a few from the list, focusing first on ones with the lowest reported nonperforming assets.

Westamerica Bancorp (WABC)

WABC is listed first on the list of Top 25 banks. Its comparatively tiny loan portfolio jumped out at me first. At year-end 2024, the bank had $6.1 billion in assets, of which just 13% or $820 million were in loans. It had $3.4 billion of available-for-sale debt securities (56% of assets) and another $845 million (14%) in held-to-maturity securities. Such a setup is almost the exact inverse of the typical bank, which might be 80% loaned up with 10-15% in securities.

On the funding side, WABC reported an impressive $2.3 billion of noninterest-bearing deposits and $2.7 billion of interest-bearing deposits. It collects its deposits over a 70-branch network located in northern and central California.

Equity of $890 million includes $122 million intangibles/goodwill, leaving $768 million of tangible equity.

Shares trade at $50/share or $1.27 billion market cap. That’s 1.43x book value and 1.65x tangible book.

The bank’s CEO, David Payne, owns 4.2% of the company and has been a director of the bank since 1984. The proxy also discloses that Payne “manages his family printing, publishing and cable television business”. Interesting… He was paid a relatively modest $371,000 base salary and took home $787,000 in total.

Next steps would include digging into the bank’s history and assessing the huge securities portfolio. According to the 10K, there’s $1.2 billion in collateralized loan obligations and MBS securities, plus a sizable amount ($1.1 billion) of mainly corporate securities in the 5 to 10 year maturity bucket. That’s just the AFS portfolio. The HTM portfolio has another $57 million in MBS and $426 million in 5 to 10 year maturities.

I also don’t love that $14 million of noninterest income came from deposit account service charges.

There’s enough here to like, but enough to pause. I’d like to keep the bank on my radar and learn more.

Farmers & Merchants Bancorp (FMAO)

This was an “oops” moment where I analyzed the wrong Farmers & Merchants Bancorp. I mean to look at FMCB but landed on FMAO. My quick look at FMCB (California-based) found an bank with a decent history of ROA and ROE metrics. But when adjusted for held-to-maturity losses it trades at 2.0x book value.

FMAO, an Ohio-based, largely agricultural bank, was an interesting find. It has a farm-heavy business model and operates in Northwest Ohio, Northeast Indiana, and Southeast Michigan. It also has an insurance agency and a brokerage/investment services division.

This bank trades at a price/book of just over 1.00x and has a historical ROA of over 1.00%, though the most recent two years were 0.70x, and 0.80x.

I found the conversational tone of its 10K very refreshing, with plain language clearly directed toward smaller individual owners and not Wall Street. For example, here’s the bank’s discussion of net interest margin:

Sometimes mistakes lead to interesting finds!