F&T Financial Services FTFS
January 19, 2013 - 10:03pm EST by
david101
2013 2014
Price: 66.00 EPS $0.00 $0.00
Shares Out. (in M): 0 P/E 0.0x 0.0x
Market Cap (in $M): 19 P/FCF 0.0x 0.0x
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT 0.0x 0.0x

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  • Illiquid
  • Discount to Tangible Book
  • Subprime Lending
  • Banks
  • Community Bank

Description

“Come to the dark side.” – Darth Vader

 

A long time ago, in a galaxy far, far away…but yet somehow in the future…there was, and is, F&T Financial Services (“F&T”). This idea is an illiquid gnat-cap and probably of no interest to the 2 & 20 crowd. However, it does present an interesting opportunity for those willing to enter the hypoactive trading space of companies not filing with the SEC, a.k.a. dark companies.

 

F&T is a bank that trades around 63% of tangible book value (TBV) and is profitable. It has 292K shares outstanding for a mere $19 million market capitalization. Management has focused on using earnings to repair the balance sheet, pay a nice dividend and buyback some shares. Oh, by the way, it also specializes in subprime auto loans, including marketing to non-resident Hispanic, immigrant farm workers. There is probably a support group out there for investors in subprime auto lenders that I should join, but not today.

 

Description: F&T is unusual because it is one of only nine state-chartered industrial banks in California. Industrial banks gained some notoriety in recent years because they are exempt from bank holding laws. Industrial banks are state-chartered but are overseen by the FDIC, which has raised some concerns as to how effective this arrangement is. The industrial bank charter allows large corporations, like Wal-Mart and GE, to have bank subsidiaries. The Dodd-Frank Act set a three-year moratorium on issuing new industrial bank charters while Congress debates who should, and how, regulate industrial banks. From an operational standpoint, industrial banks have more latitude in making consumer loans but are prohibited from offering demand deposit accounts, i.e., checking. F&T relies on savings accounts, certificates of deposits (CD’s) and money market accounts (MMA) to fund its operations.

 

The bank is located in the verdant San Joaquin Valley of southern California. There are five branches and they follow the Route 99 corridor.

 

F&T does not disclose what its average loan rate is but annualizing the quarterly interest income and dividing by the gross loan amount, the current yield is around 16.6%. California obviously caps consumer interest at levels that are not attractive to companies like Nicholas Financial but this is offset by the ability of the bank to use cheap deposits to leverage the balance sheet. Using the FFEIC data, I was able to piece together an operational history of the bank subsidiary:

 

Bank Subsidiary Data from FDIC

Year

EPS

Bank Assets

Bank Equity

ROA

ROE

2001

 $             8.36

      101,369,000

    17,119,000

2.49%

14.77%

2002

 $           10.09

      107,532,000

    13,789,000

2.84%

22.11%

2003

 $           11.03

      109,358,000

    16,423,000

3.05%

20.29%

2004

 $           10.44

      115,508,000

    18,439,000

2.73%

17.12%

2005

 $             6.43

      114,573,000

    20,229,000

1.70%

9.61%

2006

 $             9.80

      119,028,000

    21,509,000

2.49%

13.78%

2007

 $             5.88

      118,511,000

    23,007,000

1.50%

7.72%

2008

 $             1.50

      113,965,000

    24,597,000

0.40%

1.85%

2009

 $             2.11

      114,193,000

    25,042,000

0.56%

2.55%

2010

 $             5.93

      120,382,000

    26,325,000

1.49%

6.80%

2011

 $             7.20

      129,716,000

    28,164,000

1.68%

7.72%


Several things to note from the above data. One is that the bank was profitable even during the financial crisis. The other is that the bank has delevered a bit. The bank tends to be conservatively positioned, as its tangible equity to tangible assets is over 20%. A large part stems from subprime auto loans requiring more regulatory capital. While it looks over-capitalized compared to traditional banks, I would not expect any significant changes to its capital structure. The bank did buyback some stock starting in 4th Qtr 2010 and bought back about 11K shares in 2011. There is no mention of this, or of the subsequent reissue, albeit a small amount of shares.

 

The holding company does have some goodwill and was related to the purchase of a collections agency about seven years ago. Given the nature of the lending, it made sense to have a unit focused on collections.

 

History: Unfortunately, the company has never filed any reports with the SEC and their financial reports are two pages per quarter, consisting of the balance sheet and the income statement. The annual report does provide more details but you have to be a shareholder to receive it. Posting the financials to investors is not a high priority. Despite the F&T web site providing an investor relations contact, I’d expect to receive a call from Chewbacca before getting a response from this IR.

 

Through various newspaper articles and state databases, I have been able to piece together a vague timeline of events. Finance And Thrift Company, Inc. was founded as Peoples Finance & Thrift Company of Porterville in 1925 and changed its name to Finance and Thrift Company, Inc. in 1965. It became FDIC insured in 1984. There were 22 branches at one point and there was a push in the early 2000’s to expand. The expansion included creating a Nevada holding corporation in 2001, creating a Hispanic lending company, opening a mortgage origination company and buying a collection agency in 2006. The expansion was orchestrated by the CEO, David Stuck.

 

In September 2007, a new CEO, Robert Hughes, was brought in from Ohio (more details on him in Management section). A number of changes have occurred under Hughes. In 2008, F&T elected two new members to the board, including its first Hispanic member, Gil Jaramillo. However, the Hispanic lending subsidiary has been dissolved. Branches have been reduced to five now. The loan portfolio shrank in 2008/2009 due to significant write-offs, rebounded in 2011 and has actually shrunk back a bit.

 

In November 2007, noted board member Edward “Ted” Cornell died. It appears that he was the chairman of the board. His obituary notes that he was born and raised in Porterville, went to Stanford, had a sizable cattle ranch and was a major benefactor of a community college, Porterville College. Another article noted that the city of Porterville was debating whether to buy a 3,400 acre tract of land from Ted Cornell, called Rocky Hill, to create a municipal park.

Another board member, and current chairman, is J. Less Guthrie, who is also chairman of the Federal Farm Credit Banks Funding Corporation:

J. Less Guthrie, chairman, owns and operates a cow/calf and stocker cattle ranch and a diversified farming operation in Porterville, California. He is a member of Farm Credit West, ACA and a member of the board of directors of U.S. AgBank, FCB. Mr. Guthrie serves on the boards of directors of Guthrie Investment Co., Inc., (farming and investments) and F&T Financial Services (consumer loans and debt collections). He also serves on the board of directors of the California Cattlemen’s Association (trade association). Mr. Guthrie also serves on the Funding Corporation Compensation Committee. Mr. Guthrie became a director in 2000 and his term expires in 2014.

My sense from reading about Cornell and Guthrie, plus having a link for obtaining an ITIN on the FTFS web site, is that the bank seems to serve workers in the agricultural industry, particularly those from outside the US (see, this is about aliens after all).

Another nifty factoid is that the bank has declared the 343th consecutive quarterly dividends, an impressive span of 86 years. Here is the most recent annual dividend history:

 

Year

Dividends

2001

 $   2.00

2002

 $   2.20

2003

 $   2.60

2004

 $   2.65

2005

 $   2.85

2006

 $   2.35

2007

 $   1.40

2008

 $   0.85

2009

 $   0.20

2010

 $   0.60

2011

 $   1.00

2012

 $   1.25

 

The current quarterly dividend is $0.25/share that has been paid since November 2010. A special dividend of $0.25/share was paid in December 2012, which revives a tradition that stopped after 2006.

 

Management & Directors: Robert W. Hughes, 54 years old, was brought in as CEO in September 2007. He had previously led Ohio Central (OCFL), which has an interesting story. OCFL began as a federal credit union in 1949. Mr. Hughes joined the credit union as president and CEO in 1989. The primary focus was auto loans, which credit unions are sometimes known for doing. In 1998, it converted to a mutual savings society. It switched to being a non-stock mutual holding company (MHC) in September 2001 and became affiliated with TFS Financial, serving as its auto loan underwriter. Ohio Central was divested from TFS Financial in March 2005 via a stock conversion from mutual. (TFS Financial would itself convert to stock ownership in 2007.)

 

The treasurer/secretary/investor relations director of F&T is Diane Gregg, who is 45 years old. Her experience includes joining Ohio Central as vice president and chief operating officer in 1989, at the age of 22. I can only imagine that her talents were light years ahead to be hired for such a position. After Hughes left OCFL for F&T, Gregg became CEO of OCFL, which was sold to First Place Financial in July 2008. At that time, OCFL had two branches, $63 million in assets and equity of $6.0 million. She somehow managed to find a job at F&T.

 

The board consists of just six members. Mr. Guthrie, Jay Warnke and Paul Klippenstein have been longtime board members while Gil Jaramillo, John Richardson and Dr. Debra Hanks have all joined since 2007.

 

Information: Although banks tend to be black boxes even when reporting financials to the SEC, a dark bank is better than a dark company because it still has to report quarterly information, albeit for the bank subsidiary and not the bank holding company. Here is a useful web site:

 

https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

 

The company’s web site includes several years of financials, although the posting is slow (only up to 2nd Qtr2012), and brief director bios:

 

https://www.financeandthrift.com/

 

Here is a brief overview of the holding company financials:

 

Date

Net Loans

Reserves

Equity

Net Income

3/31/2008

91,906,340

3,667,276

30,224,096

321,730

6/30/2008

90,131,429

3,623,907

30,422,553

304,233

9/30/2008

87,330,544

4,375,872

29,954,934

-437,395

12/31/2008

81,937,322

3,896,301

30,265,546

445,358

3/31/2009

75,162,702

3,547,380

30,402,032

151,597

6/30/2009

70,675,446

3,322,342

30,538,868

146,733

9/30/2009

66,767,730

3,337,956

30,490,663

-33,773

12/31/2009

80,141,587

3,376,956

30,762,395

369,331

3/31/2010

82,323,746

3,316,277

31,341,559

497,027

6/30/2010

82,891,314

3,958,653

31,810,291

425,613

9/30/2010

86,586,795

2,073,140

32,146,523

380,608

12/31/2010

86,356,740

2,467,749

32,527,386

480,376

3/31/2011

89,232,938

3,414,602

32,292,461

183,833

6/30/2011

96,275,308

3,644,982

32,711,676

466,781

9/30/2011

100,277,759

3,604,738

33,197,722

688,433

12/31/2011

96,807,494

3,130,241

33,960,441

846,092

3/31/2012

95,359,234

2,914,688

34,666,780

757,046

6/30/2012

92,101,232

3,457,539

35,013,963

417,197

 

You will note that 3rd quarter tends to be the worst. In looking at the FFEIC data, this appears largely due to its collections agency business which tends to catch up in the 4th quarter. I suspect that this stems from the vagaries of working in agriculture. TBV was $103.94 as of 6/30/2012 and might be $2-3 more by now.

 

The decline in the loan book since last September does not bother me. We do not know for certain why but seeing how other banks and lenders have seen tepid loan demand, it is better to see a shrinking loan book than a growing one that might be fueled by looser standards.

 

Risks: Lack of liquidity is a big risk. Investing in subprime auto loans to migrant farm workers. Dark.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

This is a watching-paint-dry investment.

 

Ain't nothin' gonna save you
From a love that's blind
You slip to the dark side
Across that line
On the dark side, oh yeah
On the dark side, oh yeah
    sort by    

    Description

    “Come to the dark side.” – Darth Vader

     

    A long time ago, in a galaxy far, far away…but yet somehow in the future…there was, and is, F&T Financial Services (“F&T”). This idea is an illiquid gnat-cap and probably of no interest to the 2 & 20 crowd. However, it does present an interesting opportunity for those willing to enter the hypoactive trading space of companies not filing with the SEC, a.k.a. dark companies.

     

    F&T is a bank that trades around 63% of tangible book value (TBV) and is profitable. It has 292K shares outstanding for a mere $19 million market capitalization. Management has focused on using earnings to repair the balance sheet, pay a nice dividend and buyback some shares. Oh, by the way, it also specializes in subprime auto loans, including marketing to non-resident Hispanic, immigrant farm workers. There is probably a support group out there for investors in subprime auto lenders that I should join, but not today.

     

    Description: F&T is unusual because it is one of only nine state-chartered industrial banks in California. Industrial banks gained some notoriety in recent years because they are exempt from bank holding laws. Industrial banks are state-chartered but are overseen by the FDIC, which has raised some concerns as to how effective this arrangement is. The industrial bank charter allows large corporations, like Wal-Mart and GE, to have bank subsidiaries. The Dodd-Frank Act set a three-year moratorium on issuing new industrial bank charters while Congress debates who should, and how, regulate industrial banks. From an operational standpoint, industrial banks have more latitude in making consumer loans but are prohibited from offering demand deposit accounts, i.e., checking. F&T relies on savings accounts, certificates of deposits (CD’s) and money market accounts (MMA) to fund its operations.

     

    The bank is located in the verdant San Joaquin Valley of southern California. There are five branches and they follow the Route 99 corridor.

     

    F&T does not disclose what its average loan rate is but annualizing the quarterly interest income and dividing by the gross loan amount, the current yield is around 16.6%. California obviously caps consumer interest at levels that are not attractive to companies like Nicholas Financial but this is offset by the ability of the bank to use cheap deposits to leverage the balance sheet. Using the FFEIC data, I was able to piece together an operational history of the bank subsidiary:

     

    Bank Subsidiary Data from FDIC

    Year

    EPS

    Bank Assets

    Bank Equity

    ROA

    ROE

    2001

     $             8.36

          101,369,000

        17,119,000

    2.49%

    14.77%

    2002

     $           10.09

          107,532,000

        13,789,000

    2.84%

    22.11%

    2003

     $           11.03

          109,358,000

        16,423,000

    3.05%

    20.29%

    2004

     $           10.44

          115,508,000

        18,439,000

    2.73%

    17.12%

    2005

     $             6.43

          114,573,000

        20,229,000

    1.70%

    9.61%

    2006

     $             9.80

          119,028,000

        21,509,000

    2.49%

    13.78%

    2007

     $             5.88

          118,511,000

        23,007,000

    1.50%

    7.72%

    2008

     $             1.50

          113,965,000

        24,597,000

    0.40%

    1.85%

    2009

     $             2.11

          114,193,000

        25,042,000

    0.56%

    2.55%

    2010

     $             5.93

          120,382,000

        26,325,000

    1.49%

    6.80%

    2011

     $             7.20

          129,716,000

        28,164,000

    1.68%

    7.72%


    Several things to note from the above data. One is that the bank was profitable even during the financial crisis. The other is that the bank has delevered a bit. The bank tends to be conservatively positioned, as its tangible equity to tangible assets is over 20%. A large part stems from subprime auto loans requiring more regulatory capital. While it looks over-capitalized compared to traditional banks, I would not expect any significant changes to its capital structure. The bank did buyback some stock starting in 4th Qtr 2010 and bought back about 11K shares in 2011. There is no mention of this, or of the subsequent reissue, albeit a small amount of shares.

     

    The holding company does have some goodwill and was related to the purchase of a collections agency about seven years ago. Given the nature of the lending, it made sense to have a unit focused on collections.

     

    History: Unfortunately, the company has never filed any reports with the SEC and their financial reports are two pages per quarter, consisting of the balance sheet and the income statement. The annual report does provide more details but you have to be a shareholder to receive it. Posting the financials to investors is not a high priority. Despite the F&T web site providing an investor relations contact, I’d expect to receive a call from Chewbacca before getting a response from this IR.

     

    Through various newspaper articles and state databases, I have been able to piece together a vague timeline of events. Finance And Thrift Company, Inc. was founded as Peoples Finance & Thrift Company of Porterville in 1925 and changed its name to Finance and Thrift Company, Inc. in 1965. It became FDIC insured in 1984. There were 22 branches at one point and there was a push in the early 2000’s to expand. The expansion included creating a Nevada holding corporation in 2001, creating a Hispanic lending company, opening a mortgage origination company and buying a collection agency in 2006. The expansion was orchestrated by the CEO, David Stuck.

     

    In September 2007, a new CEO, Robert Hughes, was brought in from Ohio (more details on him in Management section). A number of changes have occurred under Hughes. In 2008, F&T elected two new members to the board, including its first Hispanic member, Gil Jaramillo. However, the Hispanic lending subsidiary has been dissolved. Branches have been reduced to five now. The loan portfolio shrank in 2008/2009 due to significant write-offs, rebounded in 2011 and has actually shrunk back a bit.

     

    In November 2007, noted board member Edward “Ted” Cornell died. It appears that he was the chairman of the board. His obituary notes that he was born and raised in Porterville, went to Stanford, had a sizable cattle ranch and was a major benefactor of a community college, Porterville College. Another article noted that the city of Porterville was debating whether to buy a 3,400 acre tract of land from Ted Cornell, called Rocky Hill, to create a municipal park.

    Another board member, and current chairman, is J. Less Guthrie, who is also chairman of the Federal Farm Credit Banks Funding Corporation:

    J. Less Guthrie, chairman, owns and operates a cow/calf and stocker cattle ranch and a diversified farming operation in Porterville, California. He is a member of Farm Credit West, ACA and a member of the board of directors of U.S. AgBank, FCB. Mr. Guthrie serves on the boards of directors of Guthrie Investment Co., Inc., (farming and investments) and F&T Financial Services (consumer loans and debt collections). He also serves on the board of directors of the California Cattlemen’s Association (trade association). Mr. Guthrie also serves on the Funding Corporation Compensation Committee. Mr. Guthrie became a director in 2000 and his term expires in 2014.

    My sense from reading about Cornell and Guthrie, plus having a link for obtaining an ITIN on the FTFS web site, is that the bank seems to serve workers in the agricultural industry, particularly those from outside the US (see, this is about aliens after all).

    Another nifty factoid is that the bank has declared the 343th consecutive quarterly dividends, an impressive span of 86 years. Here is the most recent annual dividend history:

     

    Year

    Dividends

    2001

     $   2.00

    2002

     $   2.20

    2003

     $   2.60

    2004

     $   2.65

    2005

     $   2.85

    2006

     $   2.35

    2007

     $   1.40

    2008

     $   0.85

    2009

     $   0.20

    2010

     $   0.60

    2011

     $   1.00

    2012

     $   1.25

     

    The current quarterly dividend is $0.25/share that has been paid since November 2010. A special dividend of $0.25/share was paid in December 2012, which revives a tradition that stopped after 2006.

     

    Management & Directors: Robert W. Hughes, 54 years old, was brought in as CEO in September 2007. He had previously led Ohio Central (OCFL), which has an interesting story. OCFL began as a federal credit union in 1949. Mr. Hughes joined the credit union as president and CEO in 1989. The primary focus was auto loans, which credit unions are sometimes known for doing. In 1998, it converted to a mutual savings society. It switched to being a non-stock mutual holding company (MHC) in September 2001 and became affiliated with TFS Financial, serving as its auto loan underwriter. Ohio Central was divested from TFS Financial in March 2005 via a stock conversion from mutual. (TFS Financial would itself convert to stock ownership in 2007.)

     

    The treasurer/secretary/investor relations director of F&T is Diane Gregg, who is 45 years old. Her experience includes joining Ohio Central as vice president and chief operating officer in 1989, at the age of 22. I can only imagine that her talents were light years ahead to be hired for such a position. After Hughes left OCFL for F&T, Gregg became CEO of OCFL, which was sold to First Place Financial in July 2008. At that time, OCFL had two branches, $63 million in assets and equity of $6.0 million. She somehow managed to find a job at F&T.

     

    The board consists of just six members. Mr. Guthrie, Jay Warnke and Paul Klippenstein have been longtime board members while Gil Jaramillo, John Richardson and Dr. Debra Hanks have all joined since 2007.

     

    Information: Although banks tend to be black boxes even when reporting financials to the SEC, a dark bank is better than a dark company because it still has to report quarterly information, albeit for the bank subsidiary and not the bank holding company. Here is a useful web site:

     

    https://cdr.ffiec.gov/public/ManageFacsimiles.aspx

     

    The company’s web site includes several years of financials, although the posting is slow (only up to 2nd Qtr2012), and brief director bios:

     

    https://www.financeandthrift.com/

     

    Here is a brief overview of the holding company financials:

     

    Date

    Net Loans

    Reserves

    Equity

    Net Income

    3/31/2008

    91,906,340

    3,667,276

    30,224,096

    321,730

    6/30/2008

    90,131,429

    3,623,907

    30,422,553

    304,233

    9/30/2008

    87,330,544

    4,375,872

    29,954,934

    -437,395

    12/31/2008

    81,937,322

    3,896,301

    30,265,546

    445,358

    3/31/2009

    75,162,702

    3,547,380

    30,402,032

    151,597

    6/30/2009

    70,675,446

    3,322,342

    30,538,868

    146,733

    9/30/2009

    66,767,730

    3,337,956

    30,490,663

    -33,773

    12/31/2009

    80,141,587

    3,376,956

    30,762,395

    369,331

    3/31/2010

    82,323,746

    3,316,277

    31,341,559

    497,027

    6/30/2010

    82,891,314

    3,958,653

    31,810,291

    425,613

    9/30/2010

    86,586,795

    2,073,140

    32,146,523

    380,608

    12/31/2010

    86,356,740

    2,467,749

    32,527,386

    480,376

    3/31/2011

    89,232,938

    3,414,602

    32,292,461

    183,833

    6/30/2011

    96,275,308

    3,644,982

    32,711,676

    466,781

    9/30/2011

    100,277,759

    3,604,738

    33,197,722

    688,433

    12/31/2011

    96,807,494

    3,130,241

    33,960,441

    846,092

    3/31/2012

    95,359,234

    2,914,688

    34,666,780

    757,046

    6/30/2012

    92,101,232

    3,457,539

    35,013,963

    417,197

     

    You will note that 3rd quarter tends to be the worst. In looking at the FFEIC data, this appears largely due to its collections agency business which tends to catch up in the 4th quarter. I suspect that this stems from the vagaries of working in agriculture. TBV was $103.94 as of 6/30/2012 and might be $2-3 more by now.

     

    The decline in the loan book since last September does not bother me. We do not know for certain why but seeing how other banks and lenders have seen tepid loan demand, it is better to see a shrinking loan book than a growing one that might be fueled by looser standards.

     

    Risks: Lack of liquidity is a big risk. Investing in subprime auto loans to migrant farm workers. Dark.

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    This is a watching-paint-dry investment.

     

    Ain't nothin' gonna save you
    From a love that's blind
    You slip to the dark side
    Across that line
    On the dark side, oh yeah
    On the dark side, oh yeah
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