Terrific idea, thanks. Any thoughts on the management team and how you rate them? Corporate governance and the quality of the management team are always of paramount importance, but especially so in banking.
I do like FFDF management more than most bank management teams:
(1) Same CEO, Trent Troyer, for last 20+ years, which included the Financial Crisis years. The fact they remained profitable with limited loan losses says a lot. He also owns just under 3% of the company, which helps align interests with shareholders. Management + directors combined own ~13% and employee ESOP owns ~10%, for ~23% combined insider ownership. Again, helps to keep everyone thinking about shareholder interests.
(2) No whole bank M&A - I worked previously as an investment professional focused on banks. I saw a lot of questionable deals occur by bank CEOs that were overly optimistic. Many times it made more sense to repurchase their own stock instead but repurchases do not “grow the kingdom”. The fact that they have not bought another bank during the CEOs tenure is very appealing. Investment bankers have surely shown them many potential transactions, so the ability to resist that temptation itself is impressive.
(3) share repurchase program announced in October of last year for $2mm. Although that does not amount to much on an ~$85mm market cap bank, it does show - to some extent - that they are shareholder-oriented. The stock is very illiquid so the small amount may have been a realistic sum they could buy in the near term.
There are some negatives, such as although they have a tiny securities portfolio, they did choose to buy longer-dated bonds, as many banks did. The fact that it that the securities portfolio is very small relative to assets makes it somewhat immaterial.
1Q24 ROA impacted by lower net interest margin (NIM), as most of the banking industry experienced, and small spike in noninterest expense/assets (NIE/assets), which seems to happen annually (prior year bonus payouts possibly).
Since this NIE impact happens yearly, I'd expect for remainder of 2024, NIE/assets to be lower than the 1Q24 figure, helping ROA.
On NIM, I think they key continues to be growth in core deposits. FFDF ranked #2 of 9 among the peers I used above, for core deposit growth in the quarter. The ~3% annual rate for the quarter implies 12% annualized. Not saying 12% will happen for the year but just 3% in a quarter is an impressive absolute rate.
Final point - If you think about each new dollar of deposits, the incremental NIM should be much higher than current NIM. Say each new deposit dollar averages their current funding cost of 1.92% (interest expense / average assets), but that new dollar will yield higher than their current asset yield of 5.13%. This is due to new loan yields being much higher than the 5.66% Yield on Loans that FFDF reported in 1Q24. Mortgages alone at FFDF are currently quoted at 7.1%+. The offset here is deposits continue to move from non interest-bearing to interest-bearing, although that seems to be slowing.
There are a few other smaller factors that could help NIM, that I'll leave out for now. But, as long as FFDF continues to grow core deposits rapidly and does not experience some odd, extremely high level of loan losses, I think it's still very undervalued.
Terrific idea, thanks. Any thoughts on the management team and how you rate them? Corporate governance and the quality of the management team are always of paramount importance, but especially so in banking.
I do like FFDF management more than most bank management teams:
(1) Same CEO, Trent Troyer, for last 20+ years, which included the Financial Crisis years. The fact they remained profitable with limited loan losses says a lot. He also owns just under 3% of the company, which helps align interests with shareholders. Management + directors combined own ~13% and employee ESOP owns ~10%, for ~23% combined insider ownership. Again, helps to keep everyone thinking about shareholder interests.
(2) No whole bank M&A - I worked previously as an investment professional focused on banks. I saw a lot of questionable deals occur by bank CEOs that were overly optimistic. Many times it made more sense to repurchase their own stock instead but repurchases do not “grow the kingdom”. The fact that they have not bought another bank during the CEOs tenure is very appealing. Investment bankers have surely shown them many potential transactions, so the ability to resist that temptation itself is impressive.
(3) share repurchase program announced in October of last year for $2mm. Although that does not amount to much on an ~$85mm market cap bank, it does show - to some extent - that they are shareholder-oriented. The stock is very illiquid so the small amount may have been a realistic sum they could buy in the near term.
There are some negatives, such as although they have a tiny securities portfolio, they did choose to buy longer-dated bonds, as many banks did. The fact that it that the securities portfolio is very small relative to assets makes it somewhat immaterial.
Overall, I do like them more than most.
Thanks MJS! Great colour.
Love the write up! Any updated thoughts following last Q earnings and lower prints on ROA and ROE?
1Q24 ROA impacted by lower net interest margin (NIM), as most of the banking industry experienced, and small spike in noninterest expense/assets (NIE/assets), which seems to happen annually (prior year bonus payouts possibly).
Since this NIE impact happens yearly, I'd expect for remainder of 2024, NIE/assets to be lower than the 1Q24 figure, helping ROA.
On NIM, I think they key continues to be growth in core deposits. FFDF ranked #2 of 9 among the peers I used above, for core deposit growth in the quarter. The ~3% annual rate for the quarter implies 12% annualized. Not saying 12% will happen for the year but just 3% in a quarter is an impressive absolute rate.
Final point - If you think about each new dollar of deposits, the incremental NIM should be much higher than current NIM. Say each new deposit dollar averages their current funding cost of 1.92% (interest expense / average assets), but that new dollar will yield higher than their current asset yield of 5.13%. This is due to new loan yields being much higher than the 5.66% Yield on Loans that FFDF reported in 1Q24. Mortgages alone at FFDF are currently quoted at 7.1%+. The offset here is deposits continue to move from non interest-bearing to interest-bearing, although that seems to be slowing.
There are a few other smaller factors that could help NIM, that I'll leave out for now. But, as long as FFDF continues to grow core deposits rapidly and does not experience some odd, extremely high level of loan losses, I think it's still very undervalued.