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: #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?