FFB Bancorp Earns Record $9.42 Million, or $2.97 per Diluted Share, for Second Quarter 2023

FRESNO, Calif., July 19, 2023 (GLOBE NEWSWIRE) -- FFB Bancorp, formerly Communities First Financial Corporation (the “Company”) (OTCQX: CFST), the parent company of FFB Bank (the “Bank”), today reported net income increased 52% to $9.42 million, or $2.97 per diluted share, for the second quarter of 2023, compared to $6.21 million, or $1.84 per diluted share, for the second quarter of 2022, and increased 22% compared to $7.70 million, or $1.98 per diluted share, for the first quarter of 2023. Second quarter 2023 results were highlighted by continued net interest margin expansion, which improved to 5.09% at June 30, 2023. For the first six months of 2023, net income increased 43% to $17.12 million, or $5.40 per diluted share, compared to $12.00 million, or $3.82 per diluted share, for the first six months of 2022. All results are unaudited.

Second Quarter 2023 Highlights: As of, or for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022:

• Pre-tax, pre-provision income increased 59% to $13.81 million.
• Net income grew 52% to $9.42 million, or $2.97 per diluted share.
• Return on average equity (“ROAE”) increased 20% to 36.31%.
• Return on average assets (“ROAA”) increased 23% to 2.78%.
• Net interest margin expanded 103 basis points to 5.09% from 4.06% a year earlier.
• Gross revenue (net interest income, before the provision for credit losses, plus non-interest income) increased 64% to $24.51 million.
• Total assets grew 14% to $1.30 billion.
• Total portfolio loans grew 21% to $875.18 million.
• Total deposits increased 7% to $1.08 billion.
• Shareholder equity grew 34% to $109.56 million.
• Book value per common share was $34.56.
• The Company’s tangible common equity ratio was 8.40%, while the Bank’s regulatory leverage capital ratio was 12.16% and total risk-based capital ratio was 18.88%, at June 30, 2023.

"We generated record earnings for the second quarter of 2023, boosted by top line revenue growth, strong year-over-year growth in net interest income and noninterest income, an expanded net interest margin and in line operating expenses. Loan growth was robust, and we saw good momentum in our payments businesses reflecting strong execution of our business plan,” said Steve Miller, President and Chief Executive Officer. “Merchant services income was up 159% from a year ago and almost doubled from the linked quarter, adding significantly to our noninterest income. The progress we are making in advancing our digital offerings for deposit and borrowing customers is substantial and we are continuing to expand our payment services capabilities. The market is challenging and there are many unknowns, but our best-in-class deposit franchise, our earnings engine, and our ability to leverage technology give us the confidence to go on the offensive and continue our organic growth path.”

“Our total deposits increased 7% from a year ago, with a number of our existing and new customers moving to higher yielding accounts. As a result, certificates of deposits grew 126% from the second quarter a year earlier and increased 40% from the linked quarter. Like many of our peers, we continue to respond to customer demand for higher returns on their deposits. We were able to let several large deposits leave the bank due to extreme pricing demands, because we continue to add new relationships to the bank and expand existing relationships at a more balanced margin,” said Miller. “In addition, we had a large non-interest bearing deposit amounting to over $100 million that came in at the beginning of second quarter and left at quarter-end. The short-term deposit resulted in higher average deposit balances, lower borrowings and higher fed funds interest income from the interest earned on this deposit during the quarter.” Non-interest bearing deposits represented 67% of total deposits at June 30, 2023.

“Our credit quality remains solid with nonperforming assets to total assets at 0.47%, down from 0.49% on a linked quarter basis,” said Miller. “Due to strong loan growth, both year-over-year and from the preceding quarter, and taking into consideration a small charge-off we took during the current quarter, we provisioned $612,000 for credit losses replenishing our allowance for credit losses to $9.8 million at quarter end.”

“Together with our ample liquidity and strong capital levels, we believe we are well positioned to navigate these challenging economic headwinds and continue to grow our franchise. During the quarter, we changed the name of our holding company to FFB Bancorp to align with the renaming of FFB Bank during the first quarter. In addition, we will update the Company’s ticker symbol in the third quarter 2023 to reflect the name changes. The name changes are part of our Northern and Southern California expansion strategy and will better resonate with new customers in these markets, and eventually the greater U.S. In addition, we brought on a senior banker and several key business development staff to build out our Southern California expansion. They have already developed a strong pipeline for the 2^nd half of 2023,” said Miller.

Results of Operations

Operating revenue, consisting of net interest income and non-interest income, increased 64% to $24.51 million for the second quarter of 2023, compared to $14.95 million for the second quarter a year ago, and grew 27% from $19.34 million from the first quarter of 2023. For the first six months of 2023, operating revenue increased 53% to $43.85 million, compared to $28.75 million for the first six months of 2022.

Net interest income, before the provision for credit losses, increased 53% to $16.39 million for the second quarter of 2023, compared to $10.70 million for the second quarter a year ago, and increased 11% from $14.78 million for the first quarter of 2023. “The increase in net interest income in the second quarter was mainly due to higher yields from our investment and loan portfolios, partially offset by an increase in deposit and borrowing costs,” said Bhavneet Gill, EVP and Chief Financial Officer. For the first six months of 2023, net interest income before the provision for credit losses increased 47% to $31.17 million, compared to $21.25 million for the first six months of 2022.

The Company’s net interest margin (“NIM”), which excludes interest expense on the holding company’s sub-debt, improved by 103 basis points to 5.09% for the second quarter of 2023, compared to 4.06% for the second quarter of 2022, and expanded 12 basis points from 4.97% for the preceding quarter. “Our earning assets have repriced higher in the current higher interest rate environment and new loan production is at higher rates, but our interest-bearing deposit balances increased, and the cost of interest-bearing deposits increased 59 basis points in the second quarter,” said Gill.

The yield on earning assets was 5.75% for the second quarter of 2023, compared to 4.37% for the second quarter a year ago, and 5.59% on a linked quarter basis. The cost of funds increased to 0.62% for the second quarter of 2023, as customers continue to seek a higher yield in the current higher rate environment. The cost of funds was 0.25% for the second quarter a year earlier, and 0.58% for the first quarter of 2023. "Although we increased interest rates paid on interest-bearing deposits during the first half of 2023 to retain and grow deposit balances, non-interest bearing checking accounts represented 67% of total deposits at quarter end,” commented Gill. Uninsured deposit balances, excluding affiliate deposits (FFB Bank-owned funds) and collateralized deposits, totaled $512.71 million or 46.6% of total deposits as of June 30, 2023.

Total non-interest income was $8.12 million for the second quarter of 2023, compared to $4.24 million for the second quarter of 2022, and $4.56 million for the preceding quarter. The growth in non-interest income during the second quarter of 2023 was primarily due to the growth in merchant services revenue, both from a year ago and from the linked quarter, as a result of increases in ISO Partner sponsorship net revenue and organic FFB Payments gross revenue. Gross expenses related to organic FFB Payments lines of business are recognized in non-interest expense. Deposit fee income also increased year-over-year and from the preceding quarter. Partially offsetting the growth in non-interest income from the first quarter of 2023 and from the second quarter a year ago was the strategic decrease in gain on sale of loans and losses recognized on sale of investments.

Merchant services income more than doubled to $7.6 million for the second quarter of 2023 and increased 159% from the second quarter a year earlier. For the first six months of 2023, merchant services income grew 145% to $11.3 million, compared to the first six months of 2022. “We continue to see significant progress across our ISO partner sponsorships and from our own organic, FFB Payments, ISO business. Compared to the linked quarter, Organic ISO net revenue grew $1.8 million to $2.3 million, while ISO Partner Sponsorship revenue increased 14.0% to $2.24 million,” said Miller. “The overall payments ecosystem is changing rapidly, and we are excited about having a front row seat as a smaller bank. Many of our strategic initiatives for 2023 and beyond are focused on ensuring that the bank and our partners capitalize on current and future payment rails. In the meantime, the team continues to build a solid pipeline of payment related partners that will support further revenue expansion.”

Total deposit fee income increased 36% to $738,000 for the second quarter of 2023, compared to $541,000 for the second quarter of 2022, and grew 13% from $655,000 for the first quarter of 2023. Year-to-date, total deposit fee income increased 37% to $1.4 million, compared to $1.0 million for the first six months of 2022. There was a $133,000 gain on sale of loans during the second quarter, compared to a gain on sale of loans of $497,000 during the second quarter 2022, and a gain on sale of loans of $904,000 in the linked quarter. In addition, there was a $708,000 loss on sale of investment securities during the second quarter, compared to the $1.32 million loss in the preceding quarter related to the sale of one bank holding company subordinated debt security. “We monitor the sale of loans and investments and will strategically sell a portion of the loans and investments to expand capacity, generate liquidity, and manage concentrations. This strategy is expected to position the balance sheet for improved earnings in the long term,” added Miller.

Non-interest expense increased 70% to $10.70 million for the second quarter of 2023, compared to $6.29 million for the second quarter of 2022, and increased 22% from $8.75 million for the first quarter of 2023. Year-to-date operating expenses increased by 60% to $19.5 million from $12.2 million for the first six months of 2022. “The higher operating expenses incurred during the second quarter were primarily related to the increase in merchant operating expense, which is a result of higher merchant operating revenue,” said Miller. “Expenses were higher from a year ago as we invested in technology and hired additional key talent as we continued to expand into new markets and build out our risk management and back office. We expect to continue to invest in key positions, as well as technology and sales.”

Full-time employees increased to 119 at June 30, 2023, compared to 94 full-time employees a year earlier, and 107 full-time employees from the linked quarter. As a result of the increased headcount from a year ago, salaries and employee benefits increased 32% to $4.83 million at June 30, 2023, compared to $3.36 million at June 30, 2022, and increased 2% from $4.12 million at March 31, 2023. Occupancy and equipment expenses increased 39% from a year ago, representing 4% of non-interest expense, and increased 14% from the preceding quarter. Other operating expense increased 33% to $2.49 million from a year earlier and increased 3% from the preceding quarter. Increases in data processing expense, software licenses and subscriptions, consulting fees, and regulatory assessments were the primary drivers of the year-over-year increase. Merchant operating expense increased to $2.98 million for the second quarter of 2023, compared to $754,000 for the second quarter of 2022 and $1.24 million for the preceding quarter. The increase in merchant operating expense is attributed to an increase in volume and revenue for the FFB Payments lines of business. Merchant operating expenses include interchange fees, chargebacks, partnership fees, and other card brand fees.

The efficiency ratio was 42.45% for the second quarter of 2023, compared to 42.08% for the second quarter a year ago, and 42.35% for the first quarter of 2023.

Balance Sheet Review

Total assets increased 14% to $1.30 billion at June 30, 2023, compared to $1.14 billion at June 30, 2022, and increased 2% from $1.28 billion at March 31, 2023.

The total portfolio of loans increased 21%, or $152.55 million, to $875.18 million, compared to $722.63 million at June 30, 2022, and grew 2%, or $14.00 million, from $861.18 million on a linked quarter basis. The remaining SBA-PPP loans were down to $186,000 at June 30, 2023, representing a fraction of the total loan portfolio. “During the current quarter we recorded a $559,000 gain on sale of $10.5 million in SBA loans and a $513,000 loss on the sale of $20.5 million in multi-family loans,” said Gill.

Commercial real estate loans increased 25% year-over-year to $504.9 million, representing 58% of total loans at June 30, 2023. The CRE portfolio includes approximately $227.08 million in multi-family loans originated by the Southern California team that the Company may consider selling at some point in the future. The multi-family portfolio includes $103.26 million in short-term bridge loans for modest transitional projects of multi-family properties. The short-term bridge loans are conservatively underwritten with minimum DSCR and liquidity requirements. Approximately 31.5% of the bridge loan portfolio will come due during the second half of 2023 to roll off or get refinanced and sold. The remaining bridge loans will come due in 2024. Real estate construction and land development loans increased 52% from a year ago to $75.47 million, or 9% of total loans, while residential RE 1-4 family loans totaled $17.13 million, or 2% of loans, at June 30, 2023.

The commercial and industrial (C&I) portfolio increased 6% to $212.00 million, at June 30, 2023, compared to $184.62 million a year earlier, and increased 6% from $200.71 million at March 31, 2023. C&I loans represented 24% of total loans at June 30, 2023. Agriculture loans represented 7% of the loan portfolio at June 30, 2023, increasing 3% to $65.36 million from a year ago and grew 11% from $63.37 million at March 31, 2023. At June 30, 2023, the SBA, USDA, and other government agencies guaranteed loans totaled $58.17 million, or 6.7% of the loan portfolio.

The investment portfolio decreased 5% to $304.04 million at June 30, 2023, from $320.28 million at June 30, 2022, and declined 7% compared to $328.58 million at March 31, 2023. The investment portfolio consists of mortgage-backed and municipal securities, both tax exempt and taxable, treasury securities as well as other domestic debt. At June 30, 2023, the Company had a net unrealized loss position on its investment securities portfolio of $33.45 million, compared to a net unrealized loss of $31.71 million at March 31, 2023. Held to maturity securities totaled $3.27 million, or 0.96% of the portfolio, at June 30, 2023. The Company’s investment securities portfolio had an effective duration of 5.12 years at June 30, 2023, compared to 5.13 years at March 31, 2023. During the second quarter, the Company sold $27.66 million in securities to re-invest $11.69 million of the proceeds in the investment portfolio at higher yields and to generate liquidity.

Total deposits increased $74.89 million, or 7%, to $1.08 billion at June 30, 2023, compared to $1.00 billion from a year earlier, and declined 2% from $1.10 billion at March 31, 2023. Noninterest-bearing demand deposits increased 4%, or $27,030, at June 30, 2023, compared to $695.98 million at June 30, 2022, and declined 5% from $759.42 million at March 31, 2023. Noninterest-bearing demand deposits represented 67% of total deposits at June 30, 2023. Included in noninterest-deposit deposits are $161.1 million from ISO partners for merchant reserves and $30.2 million in ISO partner operating accounts.

Total short-term borrowings were $22 million at June 30, 2023, compared to no borrowings at June 30, 2022, and decreased 66% from $65 million at March 31, 2023.

The following table summarizes the Company's primary and secondary sources of liquidity which were available at June 30, 2023

The total primary and secondary liquidity of $668.47 million represents 130% of uninsured deposits as of June 30, 2023.

Shareholders’ equity increased 34% to $109.56 million at June 30, 2023, compared to $81.75 million from a year ago, and grew 8% from $100.99 million at March 31, 2023. Book value per common share increased to $34.56, at June 30, 2023, compared to $26.29 at June 30, 2022, and increased 8% from $31.87 at March 31, 2023.

“The tangible common equity ratio was 8.40% at June 30, 2023, compared to 7.14% a year earlier, and 7.90% at March 31, 2023,” stated Gill. “With the Federal Reserve aggressively raising interest rates, market rates have risen considerably. Consequently, our tangible common equity and tangible book value have been adversely impacted by the increase in rates and the related impact on our securities portfolio through marks on accumulated other comprehensive income (‘AOCI’).”

At the Bank level, unrealized losses and gains reflected in AOCI are not included in regulatory capital. As a result, Tier-1capital at the Bank for regulatory purposes was $168.33 million at quarter end excluding the unrealized loss. The regulatory leverage capital ratio was 12.16% for the current quarter, while the total risk-based capital ratio was 18.88%, exceeding regulatory minimums to be considered well-capitalized.

Asset Quality

Nonperforming assets declined to $6.10 million, or 0.47% of total assets, at June 30, 2023, compared to $6.32 million, or 0.49% of total assets, from the preceding quarter. Included in nonperforming assets was one loan totaling $725,000 restructured and performing under the terms of its agreements at June 30, 2023, compared to $740,000 in performing restructured loans at March 31, 2023, and $771,000 in performing restructured loans at June 30, 2022. Of the $6.32 million nonperforming loans, $4.04 million are covered by SBA guarantees.

Total delinquent loans declined to $6.51 million at June 30, 2023, compared to $7.53 million at March 31, 2023, and were primarily related to government guaranteed loans purchased by the Bank.

Past due loans 30-60 days were $2.85 million at June 30, 2023, compared to $2.63 million at June 30, 2022, and $148,000 at March 31, 2023. There were $2.29 million past due loans from 60-90 days at June 30, 2023, compared to $1.81 million at June 30, 2022, and $98,000 at March 31, 2023. Past due loans 90+ days at quarter end totaled $1.38 million at June 30, 2023, compared to $7.29 million three months earlier and $10.96 past due loans at June 30, 2022. Of the $6.51 million in past due loans, $3.36 million were purchased government guaranteed loans with an unconditional guarantee.

The Bank continues to hold approximately $24 million of the government guaranteed portion of Small Business Administration (“SBA”) and USDA loans originated by other banks. Many of these purchased loans were placed into a Direct Registration (“DR”) form by the SBA’s transfer agent, Colson Inc. Under the DR program, Colson was required to remit monthly payments to the investor holding the guaranteed balance, whether or not a payment had actually been received from the borrower. When Colson lost the contract in 2020 as the SBA’s fiscal transfer agent, they began transitioning servicing over to the new company called Guidehouse. By late 2021, Guidehouse, under their contract with the SBA, declined to continue the DR program. As a result, all payments under the DR, and several similar programs, were being held by Guidehouse until the DR program could be unwound and the DR holdings converted into normal SBA pass through certificates. Unfortunately, Colson started requesting investors, who had received payments in advance of the borrower, to return advanced funds before they would process the conversion of certificates, which caused further delays. A reconciliation between Guidehouse, Colson and the Bank has taken place, and all are in agreement. The Bank has submitted all paperwork and original certificates to Colson | Guidehouse for processing and is awaiting reissue of the certificates and payment. The Bank is fully guaranteed; however, until the unwind process is completed it will continue to carry these loans as past due. The balance of these past due loans decreased from $7.48 million at March 31, 2023 to $3.36 million at June 30, 2023.

“As detailed in the chart below, most of the delinquencies are purchased government guaranteed loans, which are guaranteed by the SBA for the full payment of the principal plus interest,” commented Miller. “The SBA continues to deal with backlogs and consequently we continue to incur delays in payments. We are assured that full payment can be expected in the coming quarters.” The chart below breaks out the government guaranteed portion compared to organic delinquencies.

There was a $612,000 provision for credit losses in the second quarter of 2023, compared to zero provision for loan losses in the second quarter a year ago, and a $217,000 provision for credit losses booked in the first quarter of 2023.

“We incurred net charge offs of $593,000 during the current quarter, compared to $36,000 net charge offs in the second quarter a year ago, and $409,000 in net charge offs in the immediate prior quarter,” said Miller. “Our loan portfolio increased 21% from a year ago with commercial real estate (“CRE”) loans representing 58% of the total loan portfolio. Within the CRE portfolio, there are $39.71 million in loans for CRE office as shown in the table below. Since the majority of our CRE office exposure is concentrated in the Central Valley, we feel the volatility that the city center markets are experiencing in regard to “return to work” dynamics is not as pronounced in our local area. Our credit metrics remain strong as we continue to maintain conservative underwriting standards.”

The ratio of allowance for credit losses to total loans was 1.12% at June 30, 2023, compared to 1.35% a year earlier and 1.08% at March 31, 2023.

“The SBA portfolio is a segment we watch very closely as rates continue to rise,” added Miller. “A substantial portion of the portfolio consists of loans guaranteed by the U.S. Government. This group of loans consists of fully guaranteed loans the Company has purchased, as well as organic SBA and USDA loans the Bank has originated. When the effect of these guarantees is considered relative to the loan portfolio, the ratio of allowance for credit losses to the total, non-guaranteed, loan portfolio was 1.20%, as of June 30, 2023, and our total unguaranteed exposure on these SBA loans is $28.21 million spread over 187 loans.”

About FFB Bancorp

Forward Looking Statements

This earnings release may contain forward-looking statements. Forward-looking statements provide current expectations or forecasts of future events and are not guarantees of future performance, nor should they be relied upon as representing management’s views as of any subsequent date. The forward-looking statements are based on managements’ expectations and are subject to a number of risks and uncertainties. Although management believes that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from those expressed or implied in such statements. Risks and uncertainties that could cause actual results to differ materially include, without limitation, the Company’s ability to effectively execute its business plans; changes in general economic and financial market conditions; changes in interest rates; and, in particular, actions taken by the Federal Reserve to try and control inflation; changes in the competitive environment; continuing consolidation in the financial services industry; new litigation or changes in existing litigation; losses, customer bankruptcy, claims and assessments; changes in banking regulations or other regulatory or legislative requirements affecting the Company’s business; international developments; and changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. The Company undertakes no obligation to release publicly the results of any revisions to the forward-looking statements included herein to reflect events or circumstances after today, or to reflect the occurrence of unanticipated events. The Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

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