During the recent Virtual Investor Conference I was introduced to a group of bank stocks traded on the OTCQX market. This article begins my analysis of a handful of stocks that I found of particular interest. I provide the basic information that was provided at the Virtual Investor Conference such as the company overview, company leadership, and highlights from the presentation. Presentation highlights are a combination of statements made by the presenter and my interpretation and takeaways from the discussion for each section. This articles concludes with an overall assessment of the company based on my impression of the presentation.
First Resource Bank is a community bank headquartered in Chester County, Pennsylvania, located about 35 miles west of Philadelphia. The Bank opened ten years ago with a single branch and currently has approximately $180 million in assets. The combination of high touch branches with a product offering that includes the same cutting edge technology options offered by national providers makes it a “hybrid community bank”. The Chester County market has strong demographics, including the highest median household income in the state of Pennsylvania. A second retail branch opened in April 2015 and the Bank now operates two branches in the two largest deposit markets in Chester County. Management operates a loan driven business model, with approximately 85% loans to assets at all times. First Resource Bank common stock (FRSB) was recently named to the OTCQX Best 50, the first ever ranking of 50 of the top performing companies on OTCQX.
President & CEO – Glenn B. Marshall
Glenn has been the President and CEO of First Resource Bank, since its’ formation in September of 2004 and the opening of the first retail office in May 2005. Glenn and his team raised $10.2 million in capital, established all functional systems for the operation of the Bank, and assembled a full staff to operate the institution. Glenn began his banking career with Central Penn National Bank in 1980 and moved to Chester County and joined Hamilton Bank in 1983 as a Commercial Lender. Mr. Marshall served in various roles at Chester County based institutions from 1987 to 2004. Glenn graduated from Drexel University with a BS in Business with double majors in Accounting and Marketing. Glenn has his MBA from St. Joseph’s University with a concentration in Finance and Banking.
Prior to the First Resource Bank presentation I had virtually no interest in community banking. However, after watching what I believe to be an excellent company overview and update, my interest piqued. President & CEO Glenn Marshall did an excellent job at presenting First Resource Bank and conveying past accomplishment, the path forward and overall vision of the company. Within the following section I step through the slides within the presentation that I found of interest. There is quite a bit in this section, which reflects my strong interest in this company.
Exton, PA Deposit Market Share
Within the Exton, PA region First Resource Bank exceeded national players such as Bank of America and Citizens Bank in terms of deposits. This is not an easy task given the longevity and resources of national banks and reflects the bank’s strong focus on their niche within their region.
Efficient Branching Strategy
Overall regional market size:
-Chester County Deposit Market = $11.4B
-Exton Deposit Market (first location) = $1.3B
-West Chester Deposit (second location) = $2.7B
While watching the presentation live I felt as if the regional focus may have been a bit limiting. However, when watching the replay and revisiting the regional market potential I reconsidered my original stance. I feel as if First Resource Bank is going for smart, targeted growth. Know your customers and serve them well. The Exton Deposit Market at $1.3B was sizable, but their second location has more than doubled the potential and there is plenty of market left in terms of $11.4B in potential deposits in the overall Chester County Deposit Market.
Another interesting, if not unique aspect of First Resource Bank is their focus on the Hybrid Model, which was presented as great locations with high deposit branches linking them with as much technology as the customers will bear. This seems to be an interesting way to position the bank – not a traditional franchised bank with branches on every corner, and not quite a dotcom, but leveraging the advantages of each while minimizing overhead. First Resource Bank believes that this is the future of community banking and they may be right.
Two High Profile Locations
The First Resource Bank physical locations are characterized by consistent branding, which appears to be the beginnings of a potential branded franchise. Each First Resource Bank branch is a high profile stand-alone location and is not, or will not be in a shopping center, end-cap, or mini-branch. The physical branches serve as billboards highlighting the brand, high presence, consistent branded look, and very recognizable. Both existing branches are on streets that have high traffic counts, strategic paces people need to drive by when going somewhere else, in this instance the local turnpike and county seat.
My first impression of the physical locations is that they stand out with clean, consistent branding. This is the type of location that existing customers can easily spot and possibly pique the interest of new potential customers. The bank presents a clean, eye-catching image – just as a franchise should.
Technology Focused – FRed
As stated earlier the Hyrid Model is a combination of physical locations and technology. Two slides focused on the technology adopted by the bank starting with the First Resource Easy Deposit (FRed) system and following up with the consumer mobile capability. The following are highlights from the technology slides:
-44% of deposits now flowing through remote deposit capture system
-Customers do all the work that once required a teller, branch, etc.
-Ability to accept deposits 24/7 with a friendly business cut-off of 7PM for next day credit
-Technology Focused – Mobile
-Free consumer deposits 24/7
-First Resource Bank views mobile app as a branch in each customers hands
-P2P payments available Q3 2015 – seems similar to remittance aspect of digital currency
There are a couple of points that caught my attention here. First, I found it fascinating that from the perspective of the bank, the mobile app is “a branch in each customers hands.” This is an interesting perspective and if used wisely, will hopefully drive the design of the app (if it hasn’t done so already) and permeate the overall user experience. Additionally, this perspective allows for a significant reduction of overhead considering it reduces the amount of infrastructure required to accept deposits – part of the core of the First Resource Bank business model. First Resource Bank has the opportunity to continue to increase revenue, while at the same time continuing to reduce costs.
Another interesting point is the addition of the capability to accept Peer-to-Peer payments, which I believe is similar to remittances in the digital currency markets. If this is truly the capability – provide each bank customer the ability to send money to another individual without a fee – this would lessen the divide between fiat currency and digital currency capability as well as bring First Resource Bank closer to a fiat service like PayPal. It should be noted that there was not discussion of a fee structure, or lack thereof associated with this service, and this is based solely on my assessment of the existing money transfer/digital currency markets and my personal speculation.
One question I do have relating to the two technology slides is the difference between FRed and the mobile capability. Upon further reflection I am assuming that FRed is more of a commercial B2B application meant for the processing of larger volumes of checks, where as the mobile app is targeted towards the individual consumer. I may request clarification on this through follow up questions.
Loan Driven Business Model
Beyond clear communication of company vision and strategy, another thing that First Resource Bank did very well during this presentation was provide key metrics and illustrate how these metrics relate to their competition. The first metric was loan to assets, in this area First Resource Bank performs very well. First Resource Bank has demonstrated consistent loan growth even through the recession and has a high loan to asset ratio – consistently above 85%, well above their peers who are in the 60-65% range.
It’s also worth pointing out that each of the metric related charts are simple, clear, and concise but point out an important element of the business. The charts strike a nice balance between simplicity without sacrificing meaningful data.
Net Interest Margin
First Resource Bank outperforms their peer group in terms of net interest margin. One point made during the presentation was that their high loan throughput was not the result of low margin rates. The First Resource Bank net margin is between 3.85% – 3.95% whereas their peer group has a lower, and less consistent net margin rate.
Key Operating Strategies
The following were identified as First Resource Bank key operating strategies during the presentation:
-Competitive deposit rates – Want to attract people to a limited number of branches, get them in and service them well, offer free technology to retain them – all demonstrated through solid margin
-Focus on core, organic deposits – Want people walking in off the street from Chester County and fund loans in this area
-Hired business development people who are solely calling for core deposits, similar to a concierge basis – demonstrated traction so far
The focus on drawing in additional deposit customers through personalized concierge type treatment could be another aspect that sets First Resource Bank apart from the competition. This type of activity could set the foundation for longer term relationships that drive future profitability and growth while maintaining alignment to the bank’s core strategy and existing customer base.
Balance Sheet Growth
The following statements were made concerning First Resource Bank balance sheet growth:
-Loan growth continued to expand at 12%
-Goal is to have equilibrium between deposits and loans
-Added second location in 2012, took a couple years to get up and running due to regulatory hurdles
-In 2014 loans exceeded deposits, but in 2015 they have started to see an equilibrium where they are back to funding their own loans without using wholesale deposits
Being new to banks as a form of stock investment I had to do a bit of research to determine the difference between loans and wholesale deposits. According to Wikipedia, wholesale funding is:
“Wholesale funding is a method that banks use in addition to core demand deposits to finance operations and manage risk. Wholesale funding sources include, but are not limited to, Federal funds, public funds (such as state and local municipalities), U.S. Federal Home Loan Bank advances, the U.S. Federal Reserve’s primary credit program, foreign deposits, brokered deposits, and deposits obtained through the Internet or CD listing services.”
The Wikipedia article goes on to explain the rationale for using wholesale funding:
“Although core deposits continue to be a key liability funding source, many insured depository institutions have experienced difficulty attracting core deposits and are increasingly looking to wholesale funding sources to satisfy funding and liability management needs.”
Based on this description and my limited understanding – loans are customer revenue, whereas wholesale funding is a form of subsidy. Wholesale funding was likely used to get through a tight spot when the tightening economy converged with their expansion. Based on the presented slide it looks that loans and deposits were equal, or perhaps loans exceeded deposits only slightly in 2013. Although 2015 could very well be a reversal as discussed within the presentation.
Overhead Expense Control
Key points concerning overhead expense control:
-Very good positive gap compared to peers measured by overhead/average earning assets
-Continue to add overhead, but do so in a way that allows First Resource Bank to maintain profitability and continue to allow for addition to overhead that adds earning assets for the bank
-This chart illustrates how well they have managed the process of growing the bank while keeping expenses under control
This is a great indication of disciplined, sustainable growth.
Highlights concerning income growth:
-Banks do not typically experience hockey stick like growth
-Continually re-investing in growth (infrastructure, equipment, people, process, etc.) in a profitable fashion to create earning assets – testament of a hybrid community bank
-Concerning the illustrated difference between Net Income and Net Income – Common Shareholder: Preferred stock started out at 5% and had a flexible dividend that could decrease to 1% through meeting certain expansions of their loan portfolio – met all expansions and was able to reduce dividend to 1%
Bank growth pattern seems to be characterized by steady, consistent growth as opposed to the fits and starts normally associated with the technology sector. Growth pattern may be similar to a company like Berkshire Hathaway.
The following are highlights from the profitability discussion:
-Earning per share with existing infrastructure had a big climb between 2001 and 2013
-In 2013 added second location and smartly added people, increased profitability while also setting up the bank for the next level of growth
-Does not necessarily believe in the investment banker idea that you need to be a billion dollars – instead find the sweet spots in your asset size where you can be profitable but you add the right level of infrastructure to get there
-Considered non-interest source of income – In 2013/2014 began working on projects that would provide this to the bank and settled on SBA lending – 2014 had $100K gain from SBA loan sale and in 2015 are continuing to expand that part of the business
Completely agree with the assessment of finding your sweet spot. Often it is better to dominate your segment as opposed to undisciplined growth. It appears as if First Resource Bank is striving to build a cash generating machine of sorts.
Comments concerning First Resource Bank capitalization:
-Small Business Lending Fund (SBLF) Preferred Stock issued in September 2011 through the Treasury.
-Started at 5% dividend with established lending targets where the bank could get it down and lock the dividend down to 1%, which was achieved.
-The dividend will go to 9% in 2Q 2016. Planning to get rid of a portion of that dividend through a capital raise that was announced on Tuesday of this week.
I am of the opinion that the impending 9% dividend could be an area of risk for the company. If they are able to raise funds on more favorable terms then this risk will be mitigated. However, in the event of failure to raise funding it could impact the company cash flow.
FRSB Stock Performance
Overall the stock has performed well when measured against a number of indexes within the banking sector. FRSB stock was named the first ever OTCQX Best 50 based on one year share price performance and average daily dollar volume.
Book Value Vs. Market Value
Comments concerning First Resource Bank book value compared to market value:
-Continuing to close the gap between book value and market value
-Up 85% overall
-Recently added OTCQX in order to give shareholders an enhanced trading platform
When reviewing this chart I found it useful to revisit the meaning of book value as defined by Investopedia:
1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated depreciation.
2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.
3. The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, service charges and so on.
Also known as “net book value (NBV).” In the U.K., book value is known as “net asset value.”
Investopedia further explains the uses of book value:
1. It is the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated.
2. By being compared to the company’s market value, the book value can indicate whether a stock is under- or overpriced.
3. In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment.
Based on book value it appears that First Resource Bank stock may be undervalued by approximately $1 per share. Back in 2011, the stock may have undervalued by $3.50, therefore the gap between market perception and book value appears to be lessening as additional investors become aware of First Resource Bank.
Based on this presentation there appears to be much to like about First Resource Bank (FRSB):
-Hybrid Model – Technology focused, but remains grounding in community
-Consistent branding which lends itself to scaling business through franchising
-Entrepreneurial customer base
-Formed 10 years ago – longevity, yet young in terms of a bank
-Original President and CEO and member of founding team
-Experienced management team – over 100 years of management experience in community banks
-President & CEO has experience growing banks (this is his third bank) – The first bank where he gained early experience grew from $85M to $400M, the second de novo bank went from $0 – $450M.
-Stand alone bank branches located in affluent area
-Impressive market potential – Even with a regional focus there is a $11.4B potential deposit market
-Outperform peer group on all identified key metrics
-Demonstrated disciplined, sustained approach to growing their business
-Using existing technology solutions and outsourcing activities that fall outside of their community banking expertise
Potential downside includes:
-Reliance on wholesale deposits (2014), although this sounds like it was a temporary situation and not the norm
-Potential for forced payment of 9% dividend in second quarter 2016
Based on this analysis First Resource Bank (FRSB) has many advantages and only a couple of areas of potential downside. The bank has a strong vision followed by a solid strategy and they are presently outperforming the competition in key indicators. The potential risk areas have a mitigation plan in place and therefore appear minimal when compared to the company’s strengths.
The next step will be to perform an assessment of their historical stock price and other key areas such as liquidity.