Discover more from Exploring with Alluvial Capital
An Update on Friendly Hills Bancorp - FHLB
The branch acquisition is complete, but the problems continue.
Back in June, I wrote about a small California bank called Friendly Hills that was poised to do an ill-advised thing: acquire three poorly-performing branches from a much more successful bank. Despite the poor rationale and the losses that would likely result, the deal went through in late September.
Acquiring these branches will not solve Friendly Hills’ problems. Under the leadership of CEO Jeff Ball and the board of directors, the bank already struggles to make profitable loans and struggles with bloated costs and poor efficiency. For the 9 months ended September 30, Friendly Hills recorded an awful efficiency ratio of 78%, a figure which will only climb once the expenses of three additional branches and their staff hit the income statement in the fourth quarter.
What’s done is done, but at least the more sensible shareholders remain engaged and continue to push for change. I have been talking about Friendly Hills with a shareholder for some time, and this shareholder asked if I would be willing to pass along a writeup documenting the bank’s mismanagement and urging change. I present the full text below. Please keep in mind I am not a shareholder of Friendly Hills Bank, but I share a distaste for under-performing and over-compensated management that squanders shareholder capital. Except for minor formatting changes, the shareholder’s memo is presented just as it was provided to me.
Revisiting Friendly Hills Bank’s Dubious Acquisition (OTCBB: FHLB)
Chairman Greenbeck, Vice-Chair Casford, and CEO Ball continue to destroy shareholder value.
This is an update on a classic story of a small bank in Southern California called Friendly Hills. The original article by David Waters can be found here.
If only shareholders had listened.
To remind readers, Friendly Hills Bank purchased three branches from Bank of Southern California. The results are in the Chairman, Vice Chairman and CEO are consistent as they again have significantly eroded shareholder value while they reward amply reward an incompetent leader and themselves.
Jeff Ball, CEO for life, and his board of directionless directors wasted millions of shareholder dollars to take an unprecedented risk by buying three (3) failed (not successful) bank branches from one of the smartest and most successful bank CEOs in California who was DUMPING them.
The initial results are in: We recommend the CEO, Chairman, and Vice Chair be replaced.
If you summarized banking in a few sentences it would read:
"A bank takes money from depositors and lends it to borrowers. The bank makes a spread between the rate borrowers pay the bank and what depositors are paid. Out of their spread they pay their operating expenses, taxes and are left with net income."
When a well-managed organization takes risk, they require a plan and key performance indicators to insure they increase their capability as an organization. According to disclosures, the board of directors reviewed management’s models and sought relevant information core to the evaluation in making this decision. If these results reflect their plan, they need to identify new leadership that can build value for shareholders.
This was the most important financial decision made in the bank’s history, and NO independent third party was engaged as part of the evaluation process. I hope the board members understood the risks because shareholders will be asking lots of questions.
Start with the 3rd quarter results Friendly Hills has gifted shareholders. The figures tell us quite a bit; Return on Average Assets and Return on Average Equity well below peer levels.
· The Bank is extremely top heavy for a bank this size, with four executives earning more than $200,000 in base salary and together over $1 million annually including bonuses and expenses.
· CEO and Board Leadership fail at the basics of banking as return on assets is mired around 0.45% with no accountability, a good bank would be at 1% - 1.5%.
· Federal Home Loan Bank borrowings total $20.5 million and cost $491,000 in interest expense in 2020 without a need wasting precious shareholder capital.
· Net Interest Margin well below peers as a result of the low level of earning assets.
· Loan to Deposit Ratio of 35% at 9/30/21 is extremely low and well below peers.
· Organic asset growth well behind peers over the past several years.
· Efficiency Ratio of 72% continues to be much worse than peers.
· The Tangible Common Equity Leverage Ratio was 6.13% at 9/30/21 dangerously close to falling out of the "Well Capitalized" level.
· The executive team has not built franchise value for the shareholders which is reflective of the stock trading below book value.
15 years of taking instead of making.
Jeff Ball led Friendly Hills bank for 15+ years with board Chairman and Vice Chairman as his confidants. The results are positive, but only for Jeff Ball – a six-figure salary, ample expenses, stock options, significant benefits, a five-year employment agreement all while he spends time with the political elite in Washington DC, at the Federal Home Loan Bank meetings, and at boondoggles like the ABA all on the company’s dime.
If only all that time & money was used to create value instead of “being a big-shot”.
Great deal for their egos, terrible for community shareholders.
· CEO Jeff Ball, Chairman Chris Greenbeck, and Vice Chairman Rich Casford’s branch deposit deal was costly and exacerbated the historical excess liquidity issues with no clear strategy to utilize the liquidity and created a significant drag on earnings.
· Net interest income: Interest earned on loans & securities less interest paid on deposits. Friendly Hills’ performance in growing net interest income has been uniquely bad. From 2014 to 2019, Friendly Hills grew its net interest income at a paltry 4% annual rate. Friendly Hill returns zero capital to shareholders.
· Efficiency: Friendly Hills runs an efficiency ratio in the high 70%s/low 80%s. A high efficiency ratio often indicates excessive compensation, poor-quality branches, marginal non-bank operations or a combination. It is rare for a sub-scale institution with an incompetent leadership team who has not built shareholder value in 15+ years suddenly make a difference by acquiring failing unwanted branches.
The data suggests Friendly Hills Board of Directors needs to terminate the CEO and replace board leadership with people who create value with bank assets while there is still time.
“Just hoping the shareholders at Friendly Hills have their life preservers on. I’m sure the board of directors has lifeboats, like Jeff Ball’s five (5) year agreement because (sic) need to take care of the important people!”
Protect shareholders, or step down.
Friendly Hills Bank board members, you have authorized spending shareholder capital and destroyed significant shareholder value, then rewarded incompetence. Think about liability and the responsibility to shareholders. Time to replace failed board leadership and support the shareholders who trusted you with capital.
Thanks for reading. I hope Friendly Hills shareholders are successful in pushing for improvements. So often at small companies sub-par management skates by for years because shareholders are too unorganized or demoralized to stop them. I am glad that is not the case here.
Alluvial Capital Management, LLC does not hold shares of Friendly Hills Bank for client accounts it manages. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at firstname.lastname@example.org.