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Results of Operations

Quarter ended June 30, 2024:

Operating revenue, consisting of net interest income before the provision for credit losses and non-interest income, increased 1% to $24.73 million for the second quarter of 2024, compared to $24.51 million for the second quarter a year ago, and increased 5% from $23.61 million from the first quarter of 2024.

Net interest income, before the provision for credit losses, increased 6% to $17.31 million for the second quarter of 2024, compared to $16.39 million for the same quarter a year ago, and increased 7% from $16.14 million for the preceding quarter. “The increase in net interest income during the second quarter was driven by loan and investment portfolio growth at higher yields, partially offset by continued pressure on deposit rates and higher funding costs,” said Bhavneet Gill, Chief Financial Officer.

The Company’s net interest margin (“NIM”) improved by 20 basis points to 5.31% for the second quarter of 2024, compared to 5.10% for the second quarter of 2023, and increased 16 basis points from 5.15% for the preceding quarter. “Our yield on earning assets expanded 26 basis points in the second quarter with new loan production and investment purchases at higher rates, however, that was partially offset by the 10 basis point increase in the cost of funds. Our interest-bearing deposit balances increased 12% quarter over quarter while the cost of interest-bearing deposits increased 18 basis points in the second quarter,” said Gill.

The yield on earning assets was 6.40% for the second quarter of 2024, compared to 5.72% for the second quarter a year ago, and 6.15% for the linked quarter. The cost of funds increased to 1.10% for the second quarter of 2024, as customers continue to seek higher deposit rates in the current higher rate environment. The cost of funds was 0.62% for the same quarter a year earlier, and 1.00% for the preceding quarter.

Total non-interest income was $7.42 million for the second quarter of 2024, compared to $8.12 million for the second quarter of 2023, and $7.47 million for the preceding quarter. The decrease in non-interest income from the second quarter of 2023 was driven by a reduction in merchant services revenue, partially offset by a reduction in loss on sale of investment securities and increase in gain on sale of loans.

Merchant services revenue decreased 20% to $6.07 million for the second quarter of 2024, compared to $7.56 million from the second quarter a year earlier, and remained flat compared to $6.07 million for the preceding quarter. The decrease in merchant services income from the prior year was primarily due to higher seasonal volume and revenue collected on one FFB Payments direct merchant.

“We continue to see revenue growth opportunities across our ISO partner sponsorships and from our own organic ISO, FFB Payments,” said Miller. “Our team continues to build a solid pipeline of payment related partners to support further revenue expansion for both ISO partner sponsorship, FFB Payments and new payment rail use cases. Our strategic initiatives for the second half of 2024 and beyond are focused on providing our ISO partners and customers access to all payment rails and growing our deposit franchise through the payment ecosystem. Late in the 2nd quarter we were able to launch a new Cross Border payment rail developed by Visa. In the past, all of cross border wires were processed through our correspondent bank partner, but the Bank did not receive a revenue share and the pricing for our customers was poor. Now we have a much more competitive product offering and a new revenue stream since we can now control our FX margin in this transaction. We will look to expand this revenue stream going forward.”

*ISO Partnership Sponsorship is recognized net of expense in Merchant Services Income. FFB Payments revenues are recognized gross in Merchant Services Income and Merchant Services expenses are recognized in Non-Interest Expense.

Total deposit fee income increased 15% to $847,000 for the second quarter of 2024, compared to $738,000 for the second quarter of 2023, and increased 6% from $796,000 for the preceding quarter.

There was a $509,000 gain on sale of loans during the second quarter of 2024, compared to a gain on sale of loans of $133,000 during the second quarter 2023, and a gain on sale of loans of $451,000 in the linked quarter. There was a loss on sale of investments of $459,000 during the second quarter of 2024, compared to a loss of $708,000 million during the second quarter 2023, and $373,000 loss in the linked quarter. “We monitor the sale of loans and investment securities and manage concentrations accordingly. During the second quarter, we sold $2.00 million in bank subordinated debt securities to further reduce credit exposure in the investment portfolio. We sold $5.89 million in SBA loans during the quarter,” added Gill.

Non-interest expense increased 24% to $13.29 million for the second quarter of 2024, compared to $10.70 million for the second quarter 2023, and increased 5% from $12.70 million for the linked quarter.

“We made strategic investments in people and technology during the first half of 2024 to support our payment ecosystem, product development, and regional expansion initiatives. These investments included hiring a team of data engineers and individuals focused on treasury management and product development. We had the opportunity to onboard talent ahead of our original expectations, allowing us to accelerate several key foundational initiatives,” said Miller. Full-time employees increased to 157 at June 30, 2024, compared to 119 full-time employees a year earlier, and 147 full-time employees from the linked quarter. As a result of the increased headcount, salaries and employee benefits increased 39% to $6.72 million for the second quarter of 2024, compared to $4.83 million for the second quarter of 2023, and increased 2% from $6.58 million in the linked quarter.

Occupancy and equipment expenses increased 6% from a year ago, representing 3% of non-interest expense, and increased 14% from the preceding quarter. Other operating expense increased 39% to $3.46 million from a year earlier and increased 2% from the preceding quarter. Increases in data processing expense, software licenses and subscriptions, professional fees, and marketing expense were all primary drivers of the year-over-year increase. Merchant operating expense totaled $2.66 million for the second quarter of 2024, compared to $2.98 million for the second quarter of 2023 and $2.36 million for the preceding quarter. The change in merchant operating expense is attributed to fluctuations 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 52.74% for the second quarter of 2024, compared to 42.45% for the same quarter a year ago, and 52.96% for the preceding quarter. The efficiency ratio can fluctuate period over period based on changes in merchant services gross revenues and associated expenses. The Company also calculates an adjusted efficiency ratio where the merchant services gross expense, which is included in noninterest expense, is netted against merchant services revenue in noninterest income. The adjusted efficiency ratio was 47.15% for the second quarter of 2024, compared to 34.75% for the same quarter a year ago, and 47.82% for the linked quarter.

Six months ended June 30, 2024:

For the six months ended June 30, 2024, operating revenue increased 10% to $48.34 million, compared to $43.85 million for the same period in 2023. For the six months ended June 30, 2024, net interest income before the provision for credit losses increased 7% to $33.44 million, compared to $31.17 million for the same period in 2023. The increase in revenue is attributed to growth in the loan portfolio and higher asset yields, partially offset by an increase in interest bearing liabilities and cost of funds. For the six months ended June 30, 2024, the yield on earning assets was 6.27% compared to 5.65% for the same period in 2023, while the cost to fund earning assets was 1.05% six months ended June 30, 2024, compared to 0.60% for the same period in 2023.

For the six months ended June 30, 2024, non-interest income increased 18% to $14.90 million compared to $12.67 million for the same period in 2023. The year-over-year growth in non-interest income was largely due to the decrease in loss on sale of investments and an increase in merchant services revenue.

For the six months ended June 30, 2024, operating expenses increased by 34% to $25.99 million from $19.45 million for the same period in 2023. Salaries and employee benefits expense increased 39% to $13.31 million as a result of increases in FTE. Other operating expenses increased 39% to $6.84 million due to higher education, travel, marketing, professional fees, and technology related expenses.

For the six months ended June 30, 2024, the efficiency ratio was 52.85%, compared to 42.40% for the same period ended June 30, 2023. The adjusted efficiency ratio was 47.48%, compared to 36.57% for the same period ended June 30, 2023.

Balance Sheet Review

Total assets increased 11% to $1.44 billion at June 30, 2024, compared to $1.30 billion at June 30, 2023, and increased 3% from $1.40 billion at March 31, 2024.

The total portfolio of loans increased 11%, or $94.58 million, to $969.76 million, compared to $875.18 million at June 30, 2023, and increased $42.98 million, from $926.78 million on a linked quarter basis.

Commercial real estate loans increased 11% year-over-year to $562.55 million, representing 58% of total loans at June 30, 2024. The CRE portfolio includes approximately $239.11 million in multi-family loans originated by the Southern California team that the Company may consider selling at some point in the future for liquidity and concentration management. The multi-family portfolio includes $58.62 million in short-term bridge loans for transitional projects of multi-family properties. The short-term bridge loans are conservatively underwritten with minimum DSCR and liquidity requirements. Approximately 69.7% of the current bridge loan portfolio will come due during the second half of 2024 to roll off or get refinanced and sold. The bank continues to market our bridge loan product in a more measured approach keeping to our conservative underwriting standards. Real estate construction and land development loans increased 5% from a year ago to $79.13 million, representing 8% of total loans, while residential RE 1-4 family loans totaled $17.44 million, or 2% of loans, at June 30, 2024.

The commercial and industrial (C&I) portfolio increased 10% to $232.79 million, at June 30, 2024, compared to $212.19 million a year earlier, and increased 4% from $224.55 million at March 31, 2024. C&I loans represented 24% of total loans at June 30, 2024. Agriculture loans represented 8% of the loan portfolio at June 30, 2024. At June 30, 2024, the SBA, USDA, and other government agencies guaranteed loans totaled $59.34 million, or 6.1% of the loan portfolio.

The investment portfolio totaled $345.49 million at June 30, 2024, compared to $304.04 million a year earlier, and increased 5% compared to $328.91 million at March 31, 2024. The investment portfolio consists of mortgage-backed and municipal securities, both tax exempt and taxable, treasury securities as well as other domestic debt. The quarterly increase in the investment portfolio balance is attributed to purchases of $21.96 million in agency backed securities, partially offset by investment sales of $2.00 million and regular paydowns. At June 30, 2024, the Company had a net unrealized loss position on its investment securities portfolio of $26.58 million, compared to a net unrealized loss of $28.50 million at March 31, 2024. The Company’s investment securities portfolio had an effective duration of 5.39 years at June 30, 2024, compared to 5.36 years at March 31, 2024.

Total deposits increased 8%, or $89.92 million, to $1.17 billion at June 30, 2024, compared to $1.08 billion from a year earlier, and decreased 3% from $1.20 billion at March 31, 2024. The quarter over quarter decrease in deposit balances is primarily attributed to a decrease in wholesale deposits. Non-interest bearing demand deposits increased 1% to $731.03 million at June 30, 2024, compared to $723.01 million at June 30, 2023, and decreased 3% from $751.64 million at March 31, 2024. Non-interest bearing demand deposits represented 63% of total deposits at June 30, 2024. Included in non-interest bearing deposits are $87.4 million from ISO partners for merchant reserves, $133.8 million from ISO partners for settlement, and $6.9 million in ISO partner operating accounts. These deposits represent 31.2% of non-interest bearing deposits and 19.5% of total deposits.

There were $68.00 million short-term borrowings at June 30, 2024, compared to no borrowings at March 31, 2024, and $55.00 million at June 30, 2023. The Company primarily utilizes FHLB advances and the Federal Reserve discount window for short-term borrowings. The following table summarizes the Company's primary and secondary sources of liquidity which were available at June 30, 2024:

The total primary and secondary liquidity of $685.88 million at June 30, 2024 represents a decrease of $56.6 million in primary and secondary liquidity quarter over quarter.

Shareholders’ equity increased 36% to $148.64 million at June 30, 2024, compared to $109.56 million from a year ago, and grew 7% from $138.72 million at March 31, 2024. Book value per common share increased 36% to $46.79, at June 30, 2024, compared to $34.48 at June 30, 2023, and increased 7% from $43.69 at March 31, 2024. The Company has a program to repurchase up to $7.5 million of its outstanding common stock. The timing of purchases will depend on certain factors including, but not limited to, performance of the Company's stock price, general market and economic conditions, applicable legal and regulatory requirements, availibility of funds and other relevant factors. The stock repurchase program may be carried out through open-market purchases or privately negotiated transactions. For the quarter ended June 30, 2024, no shares were repurchased.

“The tangible common equity ratio was 10.30% at June 30, 2024, compared to 8.40% a year earlier, and 9.94% at March 31, 2024,” stated Gill. “Our tangible common equity and book value increased during the quarter as a result of quarterly net income and a decrease in accumulated other comprehensive income (‘AOCI’) loss related to the investment portfolio.”

At the Bank level, unrealized losses and gains reflected in AOCI are not included in regulatory capital. As a result, Tier-1 capital at the Bank for regulatory purposes was $203.98 million at quarter end excluding the unrealized loss. The regulatory leverage capital ratio was 14.30% for the current quarter, while the total risk-based capital ratio was 20.74%, exceeding regulatory minimums to be considered well-capitalized.

Asset Quality

Nonperforming assets increased to $11.25 million, or 0.78% of total assets, at June 30, 2024, compared to $7.16 million, or 0.51% of total assets, from the preceding quarter. Of the $11.25 million nonperforming loans, $8.25 million are covered by SBA guarantees. Total delinquent loans decreased to $2.27 million at June 30, 2024, compared to $6.50 million at March 31, 2024. The increase in nonperforming assets was primarily attributed to the SBA loans originated by the Bank. Total delinquent loans as of June 30, 2024 include $1.94 million in purchased government guaranteed loans, which are guaranteed by the SBA for the full payment of the principal plus interest.

Past due loans 30-60 days were $1.05 million at June 30, 2024, compared to $3.22 million at March 31, 2024, and $2.85 million at June 30, 2023. There were $175,000 past due loans from 60-90 days at June 30, 2024, compared to $1.95 million at March 31, 2024 and $2.29 million past due loans from 60-90 days a year earlier. Past due loans 90+ days at quarter end totaled $1.05 million at June 30, 2024, compared to $1.38 million, at June 30, 2023. Of the $2.27 million in past due loans at June 30, 2024, $1.94 million were purchased government guaranteed loans with an unconditional guarantee.

There was a $291,000 provision for credit losses in the second quarter of 2024, compared to $612,000 provision for loan losses in the second quarter a year ago, and a $378,000 provision for credit losses booked in the first quarter of 2024.

"We continue to watch the SBA portfolio very closely since rates have increased so rapidly over the last two years, putting pressure on borrowers. A majority of the loans within the portfolio are floating rate loans and borrowers are unlikely to see any relief until interest rates fall significantly,” added Miller. “A 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 1.18%, as of June 30, 2024, and our total unguaranteed exposure on these SBA loans is $37.05 million spread over 203 loans.”

“We incurred net recoveries of $31,000 during the current quarter, compared to $129,000 net charge offs in the first quarter a year ago, and $4,000 in net recoveries in the preceding quarter,” said Miller. “Our loan portfolio increased 11% from a year ago with commercial real estate (“CRE”) loans representing 58% of the total loan portfolio. Within the CRE portfolio, there are $43.03 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 is not as prominent in the Central Valley. Our credit metrics remain strong as we continue to maintain conservative underwriting standards.”

The ratio of allowance for credit losses to total loans was 1.11% at June 30, 2024, compared to 1.12% a year earlier and 1.12% at March 31, 2024.

About FFB Bancorp
FFB Bancorp, formerly Communities First Financial Corporation, a bank holding company established in 2014, is the parent company of FFB Bank, founded in 2005 in Fresno, California. As a leading SBA Lender in California’s Central Valley and one of the few direct acquiring banks in the United States, FFB Bank offers clients a range of personal and business checking accounts, payment processes, and loan programs. Among the Bank’s awards and accomplishments, it was ranked #1 on American Banker’s list of the Top 20 Publicly Traded Banks under $2 Billion in Assets for 2024. For 2022, the Bank was also ranked by S&P Global as the #18 best performing community bank under $3 billion in assets. The Company has also received recognition as part of the OTCQX Best 50 Companies for 2019, 2023, and 2024. For additional information, you can visit the Company’s website at www.ffb.bank or by contacting a representative at 559-439-0200.

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.

Member FDIC

Contact: Steve Miller - President & CEO
Bhavneet Gill – EVP & CFO
(559) 439-0200