Description

Don’t be fooled by the fact thatFFB Bancorp trades over-the-counter. This very successful 1-branch bank in Fresno has been expanding into the rest of California by providing remote banking (e.g. through video calls) to businesses, business owners and certain professionals. They also have customers in most other states and 90%+ of customers have never been in the branch; they do drive to visit clients who aren’t located too far though. The company’s very picky in terms of its assets, its liabilities and has found a good niche to generate extra income: a payment processing segment as an acquiring bank. FFB is thus building what seems to be a significant, growing moat. I believe this bank has a ton of runway and is headed for a much larger market share role in California and beyond.

CEO Steve Miller has been therefor a while (though not a founder) and he is great. Previously he’s worked in various areas in banking, including community banks, very large banks, and non-banks. A lot of his career was spent in several countries in Asia, which means he was probably exposed to a more fresh and dynamic way of doing business. He is laid back and a true “what you see is what you get” person. The board essentially consists of entrepreneurs and, together with management, they own 26% of shares. There’s also an ESOP for other employees.

Description

FFB Bank opened in 2005 in Fresno with a plan to focus on SME banking. Fresno is the5th largest city in California and 37th in the United States. Its economy features a lot of agribusiness and manufacturing. The region’s cost of living and the pace of life has attracted lots of new residents who left the bigger cities, as in other parts of the U.S. and the world. The bank prides itself on a model that leverages (and combines) a pleasant customer service and the use of modern technologies. This has driven high margins and high customer satisfaction. They are also very conservative in their choice of assets yetare able to grow the portfolio with the right stuff. ROA surpassed 2% in 2021 and was recently closer to 3%. In 6 years ROE has risen from 5% to 30%+.

The company’s priority is to maintain a culture/capability of serving and understanding businesses. They have very strong risk management on the underwriting side and no desire to expand into consumer financing. All they offer on the personal side is checking/savings accounts, connected services andFFB credit cards.

Total assets are about$1.3B. Of that, 0.4B is securities, including 40% MBS and 25% state/municipal paper. The other 0.9B is loans, including 25% C&I and 60% CRE, which is further subdivided into 1/3 multifamily, 1/3 owner-occupied commercial, and 1/3 other.

In addition to core banking, the company has chosen to specialize inpayment processing and use its competitive advantage there to onboard clients into the complete banking solution, first attracting corporate deposits, then bringing in the company’s managers as clients as well, and perhaps others through word-of-mouth. More importantly, as a payment processor, they’re an acquiring bank. There are medium-level barriers to entry to become an acquiring bank (e.g. compliance) and because the space is laden with many legacy players, it’s worth getting into if one thinks they can provide a better and more cost-efficient service. And that is exactly FFB is doing. Technology and superior customer service are giving them an edge. The company’s merchant business consists of both serving merchants directly as well as indirectly through ISOs. This is done using terminals, e-commerce user interfaces, smartphones and tablets; the transactions are Visa and MasterCard. Payment processing is now 50% of the bank’s fee revenue (which in turn is 30% of operating revenue) yet they don’t want to let it become so big that it overtakes the importance of the bank itself. In fact, their end goal is always to grow low-cost deposits. Therefore the main priority in this division is prompt and friendly customer service. There are only about 75 banks in the U.S. with an acquiring license so there’s room to grow this division. In 2021 they got approved by Visa and MasterCard to process payments that are considered high-risk (e.g. porn, cannabis, crypto, MLM) so things are definitely going in the right direction as this is quite impressive for a bank this size.

Thanks in part to the growing payments business, 65% of deposits are non-interest bearing.Deposits grew 16% last year and are on pace to grow 8% this year. The payments business leads to increasing deposits in two ways: (i) sticky clients who came in because of their satisfaction with the service, as mentioned before (ii) funds being held by FFB for ISO partners.

Recent Results and Valuation

This year’s merchant service fees are more than double last year’s and there’s still a pipeline of new ISO partners. Deposit fee income has been is mid-20s% above last year and net income has grown even more. Shareholders’ equity grew 39% YoY in Q3. ROE has surpassed 30% and ROA was 2.76%. NIM was 4.5% in 2022 and is now over 5%. Just for some color, in each of the 2 most recent quarters they had about 18mm interest income vs 2mm interest expense. Obviously rising rates have worked in their favor but they’re still hitting the ball way farther than your average bank is; ROE is around 13% for the industry as a whole.

During the SVB scandal, FFB was able to open new accounts within the same day for clients who wanted to switch over; in other banks the wait was 1-2 weeks and many couldn’t even keep up with requests. The company’s been delevering in selected areas bit due to the rocky economic situation. Specifically, they’ve been getting rid of SBA loans and PPP loans, as well as letting go of several large deposits where there was rate competition. This is an example of great discipline. The office market has not hurt them so much because in the Central Valley things are more stable than in the larger cities. Their tangible common equity ratio has risen from 7.1% to 8.7% over the past few quarters, which leaves ample room to add some new quality loans at current higher rates.

The Opportunity

So we have a BV that has grown at a CAGR of 25% since 2017; a huge future with their expansion into the rest of California; clients hearing about them in all parts of the U.S.; a balance sheet that is conservative and well-positioned to capture the juiciest low-hanging fruit in a tough economy; a set of motivated and happy employees. How much is that worth? Their Price/Book is 1.94 right now. This kind of ratio is likely to be the ratio they deserve for a very long time because they probably won’t lose much money and will continue to grow above-average. Ifwe assume the ratio stays fixed, the share price grows at the same pace as the balance sheet, i.e. easily 15-20% per year. But realy, the market is not giving the stock enough credit for all the extras that could boost this, from geographical expansion, to exponential growth in how many people discover the bank or its merchant services. When this happens, I do expect a higher multiple.

Catalyst

- Continued execution will eventually lead people to really pay attention to these guys