FFB Bancorp: A Davis Double Play in the Making
FFB leverages its payment services as a differentiator in the industry.
Background
FFB Bancorp (FFBB) is one of the most interesting banks out there today. The bank focuses on high-touch banking for small to medium-sized businesses through a sole branch in Fresno, CA. Additionally, FFB has a technology business that does automated banking services and payments for small businesses. These include services like an integrated point of sale, which FFB built itself. On the lending side, the loan book is 63% CRE, about half is multi-family, 24% C&I, and 10% Agriculture, being the top 3 sector concentrations. The total $1.07bn loan book has 2.5% non-performing loans and 0.29% delinquent loans. This converts to $26.29m and $2.86m, respectively, of which $11.1m and $958k are secured by real estate. For the remainder, $10.98m and $1.47m are government guaranteed.
Competitive Advantages
On the performance side, FFB has yielded some of the highest ROEs in the industry, reporting 20.1% in the first 6 months of 2025 and reaching as high as 30.1% in 2023. This high performance is fueled by the investment in payments & technology, low deposit costs, and strong non-interest income from payments and merchant services.
Looking beyond the short term, the payments and merchant services business is a long-term key differentiator for FFB, setting them apart from the competition.
Why FFB is allowed to be ambitious
Oftentimes, when I talk about banks, I talk about the idea of not being too ambitious. This runs counter to almost everything we’ve seen in any other industry. Especially today, in most industries, everyone is focused on maximizing growth. For banks, we’ve seen time and again that excessive ambition in growth leads to huge amounts of negligence and general stupidity. The banks that have continuously performed, even through banking crises, are the banks that stick to common sense and values when too good to be true opportunities arise.
Banking is a very competitive, often commodity-like industry where there are a relatively limited number of viable business models. FFB leverages its payment services as a differentiator in the industry. There are not many running a similar playbook, much less at scale. Competitive advantages in banking are usually tied to geographies or microcosms in markets that have been capitalized on. For FFB, this is a more robust and growable competitive advantage.
Based on this idea of values-based as opposed to an outperformance focus, what gives FFB the license to try and outperform? The bank yields extremely high returns on equity, the balance sheet has almost doubled since 2020 while primarily retaining credit quality. This seems like outperformance. But this isn’t the whole story. FFB isn’t operated like any other small-town one-branch bank. Instead, FFB is differentiated by offering payment services and technology that also bring along low-cost deposits. These, aside from driving revenue on their own, give additional balance sheet flexibility on the lending side.
Diving into the bank’s balance sheet at the end of 2024, FFB had $1.5bn in assets: $1.07bn in loans, $322.2m in securities, and $63.4m in cash. The securities portfolio is 99% available-for-sale, which has clearer associated accounting standards. These securities are predominantly backed by government subagencies or mortgages.
Payment services are a focus of FFB. FFB operates in payments with independent sales organizations (ISOs). ISOs partner with acquiring banks and payment processors, providing credit and debit card processing tools. They handle the transactions, disputes, etc. FFB operates in this space in two capacities: ISO Partner Sponsorships and FFB Payments.
Going back to a key idea in banking of game selection versus game play. The selection of the payments business has so far proven to be a strong one and likely will continue to be an increasingly important part of the business. Some of the ISO partnerships (discussed further below) appear to be a partial misstep in gameplay. However, that does not undermine the entire business unit or its possibility. FFB’s investment in payments creates deeper relationships for FFB and is a major part of their moat.
In 2Q25, Merchant Services accounted for 24.2% of operating revenue. The ISO Partner Sponsorships works with 35k merchants in all 50 states. This is remarkable reach for a one-branch bank in Fresno, CA. As a part of the consent notice (discussed below), FFB exited business with 6 merchants. These relationships accounted for $1.1m in 2Q25. For reference, ISO Partner Sponsorships brought in $9.2m in revenue, and the total Merchant Service business brought in $14.3m in 2024. This is clearly a meaningful hit to this area of revenue; however, the segment is still in the growth stage, and management is confident in its ability to replace the revenue through higher volumes of other ISO partners and more FFB Payments customers.
Risks
Being different from other banks comes with some costs along with higher performance. In 1Q25, FFB was issued a consent notice from the FDIC related to their ISO partnerships. This had an immediate effect on the share price that the company has still not recovered from. For our purposes, it is important to understand the tangible effect on the company versus simply changes of perception. Perception changes can have a meaningful impact on a company, but as a value investor at my core, I am far more concerned with intrinsic value.
The consent notice aimed at the ISO relationships stems from the range of the kinds of transactions and deposits that FFB’s partner bank used. FFB is working through the findings with the cost of additional BSA/AML team members and focus. Since the consent notice last winter, FFB is realizing these costs now. Assuming the issues are wholly related to FFB Partner and not FFB, this may be an issue that doesn’t break the thesis or shut down the opportunity.
There are clear signals in how the consent notice was written and the reaction by FFB that show that FFB appears to be on the front foot, tackling these issues. For example, the process of fortifying the fraud team was already in action when the notice was issued, showing that FFB was given lead time to tackle these issues. Further, there was no insurmountable associated fine; this is a common method to critically limit or shut down a bank by a regulator. Further, even before this issue, FFB was already fortifying their focus on compliance with the addition of an 8-year FDIC attorney as the head of compliance in summer 2024.
Going forward, there are a number of contrasting dynamics FFB will experience. For NIM, while interest rates still remain above the origination level of many loans FFB likely will see increased interest income from many loans. Further, while interest rates are appearing to continually be decreasing the more sensitive deposit costs should decrease. This by itself should give FFB some NIM expansion. However, with more strict ISO standards and the ending of multiple relationships FFB lost $150m in non-interest bearing deposits. This will lead to likely higher deposit costs or slowed loan growth. Overall, I expect to see some NIM stability, but nothing drastically positive of negative.
FFB has historically been an efficient operation with efficiency ratios as low as 38%. This has risen to 57% or 52% (including versus excluding merchant service business). A significant amount of this increase was likely driven by increased investment in compliance personnel and risk monitoring, and may continue to decrease efficiency. Going forward, the relative efficiency is a key area to watch for the company. Beyond efficiency, looking into non-interest expense/assets or deposits at 3.46% and 4.05%, respectively, in 2024 and 2.98% and 3.55% in 2023. These are more stable measures of relative efficiency and an important reference point going forward.
FFB is run by Steve Miller, a banker I personally greatly respect. Miller has extensive experience in transaction processing and small business lending. His experience in the payments space at MBNA was likely a driving force in launching the transaction processing business in 2017.
A short note on regulatory capital. As shown below, FFB operates at reserve levels far above capital adequacy minimums. This is another example of regulator-friendly behavior that likely can soften the blow of missteps in other areas.
Conclusion
FFB currently trades at a 1.43x Price/Tangible Book Value multiple compared to a 5-year average of 1.85x. At many points, the bank has been consistently over 2x book value. This is a high-performance company with strong returns on equity. This leads the company to deserve a more premium multiple than most banks.
The company is growing at a strong rate, creating an opportunity for a Davis Double Play (named for legendary investor Shelby Davis), achieving growth in both the valuation multiple as well as the balance sheet/income. Additionally, FFB in 2025 so far has repurchased 5.33% of shareholders’ equity or ~$10m. The company still has a remaining ~$5m available to continue to repurchase shares through the end of the year. These repurchases occurred at $74.58/share and $76.79/share signally that management likely perceives these to be meaningful discounts to intrinsic value.
The beginning of 2025 marked a pivotal moment for FFB, but with sustained efforts to resolve the consent order and enhance internal controls, the company is positioned for potential continued outperformance. FFB is still one of the most interesting companies out there today. More than anything, the compressed share price makes the company more enticing.
Until Thursday,
Soren