Description

Fentura Financial (ticker: FETM) is the holding company for The State Bank, a fifteen branch bank in central Michigan. Given the relative illiquidity, this $107M market cap, $971M assets bank is only suitable for p.a. and small funds. However, the bank is trading at 1.12x tangible book of $20.59/share and 9.6x TTM earnings of $2.40/share. 

Furthermore, the bank’s most recently reported quarter of $0.73 shows a continued upswing in earnings, which was a good sign as net interest margins are likely to narrow in 2020, and earnings seem robust enough to weather this narrowing and prove the current purchase price to still be representative of single digit P/E’s. YTD through the third quarter, the bank boasts the following metrics:

• ROA: 1.27%

• ROE: 12.7% 

• ROTCE: 13.9%

• Efficiency ratio: 61.8 

• NIM: 3.85%

• NPA’s: 0.09%

Interestingly, the bank has produced these ROE’s despite digesting a significant secondary offering just over a year ago. In November, 2018, Fentura sold 980k shares at $22.00/share in a private placement. Note, for those looking at non updated Bloomberg numbers, the sharecount is now 4,658,722 shares. Clearly, the stock has lagged since last year’s placement. This is despite steadily improving performance as demonstrated by the last five quarters:

The loan portfolio is fairly straightforward:

Year over year, FETM has increased gross loans by 13.5% and tangible book value per share by 18.9%. Clearly, issuing shares at $22/share when its then previously reported TBV was $17.32 shows that management gets it when protecting shareholder value.

Fentura issued shares when its Tier 1 leverage ratio reached 8.9%. It is currently at 11.2% and there is still plenty of room for healthy growth. It has managed its previous five years of growth quite successfully. Earnings nearly doubled from $1.35/share in 2014 to $2.65/share in 2018. This is despite shares outstanding increasing 85%. During this period of growth, rather than the increasing share count proving to be a drag on performance, the ROA has steadily increased from 0.94% to 1.20% while NIM’s have ranged between 3.81% and 4.08%. 

Three years ago (December, 2016), Fentura closed on its $21.6M acquisition of Community Bancorp in an all cash transaction. At the time, this doubled Fentura’s branch network. The purchase price represented $3.2M of goodwill. Relative to Community State Bank’s (CSB) $171.4M of deposits, that would be a deposit premium of just under two percent.

While CSB wasn’t integrated until 2017’s financials, the pro-forma 2016 earnings for Fentura including CSB would have been $2.06 versus the $1.70 reported. The CSB acquisition was immediately earnings accretive and followed up by FETM with a $15M private placement at $14.00/share, effectively offsetting some of the decrease in TBV/share from the CSB acquisition.

The path forward for this bank and its investment case seems relatively straightforward over the next several years. The bank continues to grow prudently, taking advantage of the opportunity in 2016 to double its branch network while accretively raising capital to fund its growth. It was the leading SBA lender in Michigan in 2017 (total SBA loans of $14.6M versus total Commercial Loans of $134.8M) and continues to grow its SBA lending business ($18.3M in 2018). 

Fentura seems to be making the necessary investments in technology to keep its online presence competitive, and it is an active part of the local community. It added a Public Funds Management Program in 2018 and $62M was added in funds from municipalities last year.

Several years from now, if not before then, it seems likely that the bank will make another smart acquisition to expand its footprint, capture the cost savings, perhaps do an accompanying financial raise and then be the right market cap to join in an index—if it chooses to uplist. If this bank was trading on the NASDAQ, it would undoubtedly experience a significant rerating. Given management’s eye toward making accretive moves, these steps seem within the realm of possibility. Given its low NPA’s and steadily increasing efficiencies and metrics, Fentura controls its own destiny. 

Disclaimer: The views and analysis expressed in this post are solely my own and do not represent the views, analysis, or opinion of our firm or any other entity with which I have been or am now affiliated with or employed by.  The content of this post is solely for informational purposes. It is critical to perform your own independent analysis and consult with a financial professional prior to making any and all investment decisions.

Catalyst

Attractive earnings yield.

Continued ramping up of growth initiatives following the recent acquisition that doubled its branch network.