Observations from the FFBW 10-Q

Cheap + overcapitalized = a solid opportunity to continue repurchasing shares

Greetings and welcome to another edition of Conversion Confidential! This week, I’ll be reviewing the recent 10-Q from FFBW, a thrift in which I own shares. For the abridged version, I’m not sure you need much more than Jim Royal’s summary below.

Jim Royal, Ph.D. @JimRoyalPhD

$FFBW out with its quarterly report: TBV of $13.89, equity/assets of 25.5%, announces third repurchase authorization of 10%. They've blown through the first two authorizations in the last 16 months or so.

But for those of you who would like a few more details on my takeaways, read on!

• The share count as of May 9th remains at the same 6.254 million as it did on March 23rd, the 10-K release date. FFBW has been a strong repurchaser of shares since their one year conversion anniversary so I was hoping to see this continue to decline, but it appears there was no opportunity to do so with the blackouts/quiet periods relating to the release of the 2021 10-K and 1Q22 10-Q.

  • A good indication of their intentions however is the announcement of a third repurchase authorization, once again at a meaningful 10% clip. Expect to see meaningful decreases in the share count going forward!

• FFBW took a modest $2.3 million unrealized loss on their available for sale (AFS) securities portfolio. $2.3 million on starting equity of $94 million isn’t too bad, although depending on what rates do, it’s worth noting it could get worse before it gets better. The AFS loss comes through on the other comprehensive income statement and impacts AOCI on the balance sheet. I wrote about the topic in Conversion Confidential a couple weeks ago.

• Total deposits are down 3.4% from December, or about $8.8 million in the quarter, driven by declines in non-interest bearing checking and money market deposits. This is not something I was hoping to see. Rising rates are largely considered a good thing for banks, but with them comes increasing competition/alternatives for yield. This is something banks haven’t had to deal in several years so it will bear watching going forward.

• I came across this report about residential rental markets from Redfin about a month ago. Most are intimately familiar with its findings of rapid increases across the country. What stood out to me however was the fact Milwaukee (FFBW’s market) was one of only two notable outliers.

  • Management confirms the real estate market in Milwaukee is somewhat flat and has seen supply come online in multi-family, and industrial properties. Of larger concern to them is office, of which they expect to see a lot of space come to market (accompanied by rental declines) in the coming years.

• Credit quality looks fine for now. NPLs are very low. There wasn’t a provision for loan losses or any net charge-offs in the quarter. Very few accruing loans are past due and some special mention loans from YE21 have actually disappeared.

• Capital remains at extraordinarily high levels with TCE and CET1 ratios at 25.5% and 31.5%, respectively. Ideally, FFBW would have more organic opportunities to deploy the excess, but with the valuation where it is, buybacks provide a nice release valve.

That’s it for this week. If you think I missed anything on FFBW, please leave a comment. Thanks for reading!

Disclaimer: I and others I advise are long FFBW shares. This is not investment advice nor a recommendation to buy or sell any security. Everything written is for general educational/entertainment purposes and I have not considered your specific financial situation.