Our Finest Hour

Things look grim for us: community financial institutions (collectively, "banks") and those that serve those august institutions.

We lost the mortgage business a generation ago to category killers like Countrywide, Golden West, Fannie Mae, and Freddie Mac and the mortgage brokers that fed the beast. When the beast collapsed, we inexplicably donned the bullseye of blame.

But we faltered in our own right. We bought the bonds that kept that mortgage machine running. Those bonds cost us dearly. We lent to one another in the form of Trust Preferred Securities, and our investment portfolios choked as these banks faltered under the weight of poor decisions.

When the economy took its nosedive, we found ourselves over-invested in construction and investment property commercial real estate that were one or two bits of bad news away from disaster. The result: a rapid need to recapitalize. With no investor appetite to invest in us, the government stepped in.

We immediately regretted it. We were encouraged to take government capital, only to have the government change the rules on us afterward, and the public decry "government bailout". Even though the government made a significant return on its investment in us, the public thinks they gave us the money. Yet, the only losses the government suffered from TARP is because of AIG Insurance and General Motors. We still bear the badge of shame.

Now our politicians are doing everything in their power to get us to lend, while their examiner surrogates are doing everything in their power to criticize our loans. Regulations are nipping at our revenue, and piling on our expenses. The Fed, under the guise of helping the economy, is doing what it can to keep long and short term rates low, wreaking interest rate risk havoc on our balance sheets. Much is working against us these days.

But in our darkest hour, I envision tremendous opportunity. Our industry is changing. Excess regulation and costs are driving weak competitors such as mortgage brokers out of the market. Can we re-ascend as the place our customers get a mortgage? I think so.

Large banks, that own a significant part of the banking market, move farther and farther from the customers... turning them to self-service delivery channels to chart their own path in a complex financial world. Can we help our customers navigate turbulent and complex times? I think so.

We don't have the resources to make large technology investments to develop efficient processes, comply with the myriads of regulations, and deliver products and services to today's tech-savvy customer. But community FIs have access to robust, vendor-driven solutions that are on par with our larger brethren. Can we have competitive products and delivery channels delivered with similar efficiency to the large banks? I think so.

In times of great strain, opportunity rises from the ashes like a phoenix. We are closer to our communities, our customers, and our employees. Decisions are made in the office down the street, or the next town over. We don't have to navigate a bureaucracy in a different state or across the country to get to the closing table. Local depositors provide the capital to local borrowers and businesses.

Can we be different, more local, faster, friendlier, better?

We are a community bank. What we do next, is up to us. This can be our finest hour.

~ Jeff

Top 5 Total Return to Shareholders: #1 BofI Holdings Inc.

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I wrote about the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I have reviewed my top five in descending order. Last post was dedicated to the #2 Signature Bank of New York, New York (see post here). The rest of this post goes to our number 1 bank and winner:

#1: BofI Holdings Inc. (Nasdaq: BOFI) of San Diego, California

Old school bankers are rapping their fists on mahogany desks, mumbling under their breath, and turning over in their graves at the notion that the best performing FI based on five-year total return to shareholders is an Internet bank. Yet here we are.

Bank of the Internet was formed in 2000 and went public in 2005. Over the past five years, it has returned over 80%, compared to -4% for the S&P and -66% for SNL Bank & Thrift Index (see chart). As Mel Allen would say, "how about that".

In spite of the stellar five-year performance, the stock currently trades around book value, and a 9x earnings multiple... low by industry standards. The trading multiples are in spite of a 1.26% ROA and 14.83% ROE year-to-date. Why such low multiples for such high performance? I'm not sure, but I have to think some high-brow snobbery regarding Internet banks is involved, much like fine wine drinkers' attitudes while quaffing a Sam Adams.

Not sure why you would have a high-brow attitude towards this bank, since its management team is made up of investment bankers, blue-chip consultants, and engineers (see here for management bios).

BofI prides itself on process discipline, delivering the best technology at the lowest cost, without the millstone of branches dragging down performance. Their efficiency ratio was 40% for their fiscal year 2011 (ended June 30, 2011).

They collect deposits primarily through three online brands, and are seeking affinity relationships to expand their brands. At June 30, 2011, the online bank had 32,000 accounts being served by nine CSRs (see below). BofI has also launched BofI Advisors, giving financial planning firms the ability to offer banking to their clients through a self-branded portal. In other words, the financial advisory firms serve as the point of entry to the bank, with BofI providing the back end banking services.

Vietnam, a communist country, did not develop the infrastructure for a nationwide telephone system. When cellular technology advanced to the point that telephone lines, poles, and in-home wiring wasn't required, they embraced it. The result: Vietnamese can talk to one another as easily as we can in the U.S., but don't have telephone poles delivering outdated technology. BofI is Vietnam, without the beef noodles. Bankers should take note.

Congratulations to BofI Holdings Inc.. They are the best performing financial institution nationwide in total return to shareholders over the past five years. Here is our list of winners:

#1 BofI Holdings Inc.
#2 Signature Bank
#3: ESB Financial Corporation
#4: Bank of the Ozarks, Inc.
#5: German American Bancorp

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. FINRA makes people take a test to ensure they know what they are doing before recommending securities. I'm sure that strategy works out.

Top 5 Total Return to Shareholders: #2 Signature Bank

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I wrote about the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I will review my top five in descending order. Last post was dedicated to the #3 ESB Financial Corporation of Ellwood City, Pennsylvania (see post here). The rest of this post goes to our number 2 bank:

#2: Signature Bank (Nasdaq: SBNY) of New York, New York

 

Signature Bank is a very interesting story. Started in 2001 with a significant investment from Bank Hapoalim, Israel's largest bank, it has been on an upward trajectory ever since. Signature has been so successful that it's growth was beginning to put strains on Bank Hapoalim's capital. So in 2004, Signature went public and in 2005 Bank Hapoalim divested its controlling interest.

From 2006 through the second quarter of 2011, the bank's assets grew from $5.4 billion to $13.1 billion. It made no acquisitions. During that period return on average assets went from 0.72% in 2006 to 1.15% year to date. It did not lose money during the financial crisis. This superior performance led to superior total return to shareholders (see chart).

How did Signature do it? As stated, they did not do it through whole bank, branch, or asset acquisitions. Instead, they do it by attracting high performing private banking teams. This strategy started from the very beginning by wooing former Republic National Bank of New York  bankers. Republic was acquired by HSBC in 1999. Apparently, HSBC's treatment of key bankers created fertile ground for their recruitment by Signature.

But it is not the disenfranchisement of HSBC bankers that is fueling their current success. It is their commitment to building a bank designed to support private bankers serve their clients extraordinarily well. Read their vision statement, which is different than any I have ever read or helped design:

"Signature Bank was created to provide talented, passionate, and dedicated financial professionals a supportive environment in which they can conduct their practice to the maximum benefit of their clients.

The result is a special feeling clients associate with Signature Bank professionals and, ultimately, the Signature Bank brand: the experience of being financially well cared for."

How many vision statements have we read that takes great strains to offend no one, and commit to nothing? In this alone, Signature stands tall.

If you roll your eyes at the thought of a vision, don't lose track of Signature because they may roll over you.

Another key differentiator of Signature's strategy is their single point of contact delivery system. Banks that try to deliver multiple products and services to customers often have different customer touch points. For cash management, call John, for a loan, call Jane, etc. But Signature simplifies for their clients, and lets their relationship manager find the resources necessary to serve client needs. In fact, in an era where it's difficult to tell one bank from another, Signature prides itself in how it is different. See the below slide from their investor presentation.

Congratulations to Signature Bank. They rank #2 in total return to shareholders over the past five years. So far, our list is:

#3: ESB Financial Corporation
#4: Bank of the Ozarks, Inc.
#5: German American Bancorp


~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. My bank stock broker chuckles when I phone in trades. Get the picture?

Top 5 Total Return to Shareholders: #3 ESB Financial Corporation

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I wrote about the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I will review my top five in descending order. Last post was dedicated to the #4 Bank, Bank of the Ozarks of Little Rock, Arkansas (see post here). The rest of this post goes to our number 3 bank:

#3: ESB Financial Corporation (Nasdaq: ESBF) of Ellwood City, Pennsylvania

ESB started in 1915 as the Ellwood Federal Savings and Loan in Ellwood City. It converted to a public company through a Mutual Holding Company conversion in 1990 and performed the second step conversion in 2001. Since its humble beginnings, it has grown to 24 offices and $2.0 billion in assets. Since 2006, it has returned 32% to shareholders as the industry returned -62% (see chart).

How has ESB done it? Upon reviewing their financial performance and reading their annual report and website, it appears as they do it through plain vanilla banking, a style that this blogger has expressed concerns about its future viability.

But you can't argue with results. ESB operates like many other thrifts... i.e. low net interest margins (currently 2.75% at the bank level), accompanied by a low non-interest expense to average assets ratio (currently 1.44%/the "expense ratio"). The expense ratio is extraordinary, as typical commercial banks hover around 3% and thrifts register in the 2.50% range.

ESB does traditional mortgage lending, with some commercial real estate too, funded by retail deposits with a heavy dose of CDs. Whether you like this model or not, it has delivered tangible book value and earnings per share growth that has driven its total return to shareholders (see table).

If you believe traditional thrifts currently trade on book value, as I do, then 12.42% compound annual tangible book value per share growth should deliver superior returns, all things being equal. Add a 3.68% current dividend yield, and the "plain vanilla" thrift is delivering to their shareholders.

Part of the secret sauce may be management longevity, as most senior managers, including CEO Charlotte Zuschlag, have been with ESB for 20 years or more. This gives employees comfort in management consistency, management a deep understanding of bank operations, and customers comfort in seeing familiar faces at the bank and in the community.

The CEO describes their success in the 2010 annual report as follows:

"Throughout our 95-year history, ESB has continually and successfully responded to change. However, we believe that sticking to basics and maintaining our commitment to the strategies that have made us a leading financial service provider remains a solid roadmap for continued growth and success. In this regard our priorities have not changed and remain:

• Focusing on per share results and working diligently to maintain our reputation as a company that creates superior shareholder value;

• Being financially conservative and managing our Company to the highest ethical standards;

• Growing the Company in a controlled and safe manner;

• Maintaining strong credit quality;

• Continuing to strive to exceed our customer expectations for quality products and services;

• Continuing to make investments in human capital, technology and physical infrastructure to ensure our long-term success;

• Continuing to provide a productive work environment that maximizes the alignment of customer and employee objectives and

• Seeking and consummating acquisition opportunities when practical."

She didn't say anything about economies of scale, regulators, or leading edge technology. The first bullet is very telling. Perhaps other bankers should take note.

Congratulations to ESB Financial. They rank #3 in total return to shareholders over the past five years. So far, our list is:

#3: ESB Financial Corporation

#4: Bank of the Ozarks, Inc.

#5: German American Bancorp

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. My year to date return on bank stocks... negative. Need I say more?

Top 5 Total Return to Shareholders: #4 Bank of the Ozarks

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I spoke of the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I will review my top five in descending order. Last post was dedicated to the #5 Bank, German American Bancorp of Jasper, Indiana (see post here). The rest of this post goes to our number 4 bank:

#4: Bank of the Ozarks, Inc. (Nasdaq: OZRK) of Little Rock, Arkansas

Over a 100-year banking history, Bank of the Ozarks expanded from its headquarters in Little Rock, Arkansas, to more than 100 locations throughout the Southeast and is consistently ranked among the top performing banks in America (see chart).

Bank of the Ozarks began in 1903 as a small community bank in Jasper, Arkansas, and by 1937, included an additional bank in Ozark, Arkansas. In 1979, George Gleason, a 25-year-old attorney, purchased controlling interest and assumed active management of the bank as Chairman of the Board and Chief Executive Officer. At the time, the bank had a couple dozen employees and total assets of $28 million.

What is interesting about the success of Bank of the Ozarks and its CEO is the fact that he wasn't the "experienced banker" regulators almost insist upon when approving the appointment of bank leadership. There are plenty of sad stories of bank demise at the hands of experienced bankers. Bank of the Ozarks and their regulators were not so myopic in their view. If our industry is to change, then who should be change agents?

In 1994, with a total of five banking offices in rural Arkansas markets, Bank of the Ozarks launched an aggressive growth strategy to expand the number of banking offices and product and service offerings. Collectively, the management team built an Arkansas franchise rivaling the largest banks in the state. The company moved its headquarters to Little Rock in 1995. The company held its initial public offering of stock in 1997. Since that time, the company has grown to more than 100 locations throughout Arkansas, Texas, Georgia, North Carolina, South Carolina, Alabama and Florida.

How did they grow so quickly? They acquired seven failed institutions in Georgia, Florida, and South Carolina from the FDIC, adding over $2 billion of acquired assets since March 2010. Such aggressive growth has led to positive operating leverage as net income and EPS has grown faster than assets (see table from their investor presentation).

Bank of the Ozarks has historically been a very good performer as they grew and prior to their recent FDIC deal binge. Their ROA in 2006 when their assets were $2.5 billion was 1.24%. Aided by the FDIC transactions and as a result of disciplined execution of those deals and the accounting of those transactions, OZRK is now a $4.0 billion bank with a 3.60% ROA year to date.

The eye-popping ROA is partially a result of the increased net interest margin, presently 5.67%, due to the accounting of the acquired loans from the FDIC. This margin will drop off as the discounted loans accrete, but if past is prologue OZRK will be well positioned to continue its historic superior performance.

So to summarize, Bank of the Ozarks Inc. achieved superior financial performance by embracing a young, forward looking CEO that clearly has a bent for successful execution. FDIC assisted transactions doubled the size of the institution, and the challenge for the next five years is how well the management team can run a much larger, and geographically sprawling franchise.

Congratulations to Bank of the Ozarks. They rank #4 in total return to shareholders over the past five years. So far, our list is:

#4: Bank of the Ozarks, Inc.
#5: German American Bancorp

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. My wife won't let me buy bank stocks without her permission, so why would you buy based on what I write?

Top 5 Total Return to Shareholders: #5 - German American Bancorp

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I spoke of the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I will review my top five in descending order. The rest of this post goes to our number 5 bank:

#5: German American Bancorp, Inc. (Nasdaq: GABC) of Jasper, Indiana

German American is a 100-year old, $1.8 billion in assets bank servicing the businesses, citizens, and communities of Southern Indiana. Upon reviewing their investor presentations, annual reports, and financials, it is clear they are a conservatively managed, geographically focused financial institution. There is no discernible niche strategy to differentiate them from competitors. The chart below demonstrates total return versus an industry and general market index.

However, the past three years have proven to be the best three in their 100-year history. Not only did they survive the financial crisis, they found a way to thrive. Net interest income grew over $10 billion when comparing 2007 to 2010, while non-interest expense grew less than $5 billion. That is positive operating leverage driven by core banking during a period when FI earnings growth is driven more by a lower loan loss provision and not top line growth.

GABC continues to look for opportunities for growth. According to their investor presentation, growth opportunities were greater in nearby markets than their legacy markets (see chart below). To thrive into the future, the bank is executing on a three-pronged strategy in addition to maintaining their market share in legacy markets.

First was a strategy where management exercises the greatest control... de novo expansion. Second was a branch acquisition that added $50 million in deposits and $44 million in loans in markets where the bank desired to grow. Lastly, they acquired a $300 million financial institution, giving them strong market share in Evansville and surrounding communities.

Upon reviewing the pricing of that transaction, their first since 2005 and the largest in their history, I thought they overpaid. But in reading the summary to the issued proxy statement from that transaction, it was clear that the structure of the transaction was designed to 1) get the prize, and 2) make it as accretive as possible given the competition (or the perceived competition) for the target. Two years from now, nobody is going to remember the price-to-book GABC paid compared to other M&A deals of the day.

Indeed, the transaction closed this year on New Year's Day, and GABC's EPS annual run rate of $1.52 is 26% higher than 2010 EPS. Non-interest expense to average assets is lower for the first six months of 2011 compared to the 2010 year. The bank has achieved positive operating leverage as a result of their acquisition strategy and has positioned themselves for further expansion into new markets.

The result: yes they are bigger. No they are not big. And yes their shareholders should be pleased.  

~ Jeff

Note: I make no investment recommendations in my blog. Please do not claim to invest in any security based on what you read here. You should make your own decisions in that regard. My 401(k) year to date return is -5.56%. Need I say more?