Banking's Total Return Top 5: 2014 Edition

For the past three years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale and all that goes with it are correct, then the largest FIs should logically demonstrate better shareholder returns. Right?

Not so over the three years I have been keeping track.

My method was to search for the best banks based on total return to shareholders over the past five years... capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered for those FIs that trade over 1,000 shares per day. This, naturally, eliminated many of the smaller, illiquid FIs.

For comparison purposes, here are last year's top five, as measured as of December, 2013:

#1.  BofI Holdings, Inc.
#2.  Marlin Business Services Corp.
#3.  Fidelity Southern Corp.
#4.  Eagle Bancorp, Inc.
#5.  Bancorp, Inc.

This year's list is in the table below:

BofI Holdings celebrates its third straight year on this august list. Congratulations to them. A summary of the banks, their strategies, and links to their website are below. 

#1. Open Bank (OTCQB: OPBK)

Open Bank commenced operations in 2005 as First Standard Bank in the Koreatown section of Los Angeles. They are built as a relationship bank serving the Korean community in LA and surrounding areas. It is a significant SBA 7(a) lender, ranking in the top 100 (#54) in the country in that category, ahead of much larger financial institutions like Bank of America. Year to date through September 30th, Open Bank had $4.5 million gain on sale of loans, representing 24% of its total revenue for that period. The lion's share of their growth, profitability, and capital have come since their re-branding to Open Bank in 2010. In June, the bank raised an additional $30 million of common equity, positioning it to continue its strong growth.


#2. BofI Holding, Inc. (Nasdaq: BOFI)

BofI Holdings Inc. and its subsidiary BofI Federal Bank aspire to be the most innovative branchless bank in the United States providing products and services superior to their competitors, branch-based or otherwise. In its latest investor presentation, BofI claims that its business model is more profitable because its costs are lower. It supports the claim by highlighting its efficiency ratio is in the top 2% of UBPR peers, and its operating expenses as a percent of average assets are in the top 12% of peer banks. So, as a branchless bank, BofI has leveraged its significantly lower operating expenses into profit. That profit led to the top spot in five year total return to shareholders, three years running. Well done!

#3. BNCCORP, Inc. (OTCQX: BNCC)

BNCCORP, Inc., through its subsidiary BNC National Bank, offers community banking and wealth management services in Arizona, Minnesota, and North Dakota from 14 locations. It also conducts mortgage banking from 12 offices in Illinois, Kansas, Nebraska, Missouri, Minnesota, Arizona, and North Dakota. BNC suffered significant credit woes during 2008-09 which led to material losses in '09-10, and the decline in their tangible book value to $5.09/share at the end of 2010. Growth, supported by the oil boom in North Dakota's Bakken formation, and a robust mortgage refinance business resulted in a tangible book value per share at September 30th of $17.18... a significant recovery and turnaround story that landed BNC in our top 5 for the first time.

#4. Western Alliance Bancorporation (NYSE: WAL)

Western Alliance, through its subsidiary Western Alliance Bank, provides comprehensive business banking and related financial services, operating full service banking divisions in local markets as Alliance Bank of Arizona, Bank of Nevada, First Independent Bank, and Torrey Pines Bank. It also has a national platform of specialized finance units in homeowners' associations, public finance, resort finance, and warehouse lending. Its diversified and primarily commercial loan portfolio and a loan/deposit ratio of 91% resulted in a year to date net interest margin of 4.41%. This margin plus a 2.07% operating expense ratio resulted in a YTD efficiency ratio of 47%. That type of financial performance plus picking yourself up from credit problems leads to top 5 total returns for your shareholders. Well done!

#5. Mercantile Bank Corporation (Nasdaq: MBWM)

In June, Mercantile Bank and Firstbank Corporation closed on a merger of equals to form the fourth largest Michigan-based bank by deposit market share. Firstbank traced its roots back to the 1800's, while Mercantile was founded in 1997. As part of the transaction, Mercantile shareholders received a $2/share special dividend prior to closing, shaving off of tangible book value. But the total return story is similar to others on the list. Mercantile suffered through its share of credit snafus, losing a collective $70 million 2008-10, only to recover and negotiate a franchise changing merger of equals. Best of luck on the integration and congratulations for landing on the JFB top 5 total return to shareholders list! 

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $10 billion in total assets. No SIFI banks on the list. What about that economies of scale crowd? Hmm.

The flavor of this year's winners is recovery, with the exception of our consistent top performer, BofI. Congratulations to all of the above that developed a specific strategy and is clearly executing well. Your shareholders have been rewarded!

Are you noticing themes that led to these banks' performance?

~ 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 well.

Banking's Total Return Top 5: 2013 Edition

For the past two years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale and all that goes with it are correct, then the largest FIs should logically demonstrate better shareholder returns. Right?

Not so over the three years I have been keeping track.

My method was to search for the best banks based on total return to shareholders over the past five years... capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered for those FIs that trade over 1,000 shares per day. This, naturally, eliminated many of the smaller, illiquid FIs.

For comparison purposes, here are last year's top five, as measured during December, 2012:

#1.  BofI Holdings, Inc.
#2.  Bank of the Ozarks, Inc.
#3.  Access National Corporation
#4.  Hingham Institution for Savings
#5.  Texas Capital Bancshares, Inc.

This year's list is in the table below:

BofI Holdings celebrates its third year on this august list. Congratulations to them. A summary of the banks, their strategies, and links to their website are below. 

#1. BofI Holdings Inc. (Nasdaq: BOFI)

BofI Holdings Inc. and its subsidiary BofI Federal Bank aspire to be the most innovative branchless bank in the United States providing products and services superior to their competitors, branch-based or otherwise. In its latest investor presentation, BofI claims that its business model is more profitable because its costs are lower. It supports the claim by highlighting its efficiency ratio compared to peer banks (38.7% versus 68.5%, respectively) and its operating expenses as a percent of average assets compared to peer banks (1.66% versus 3.09%, respectively).So, as a branchless bank, BofI has leveraged its significantly lower operating expenses into profit. That profit led to the top spot in five year total return to shareholders, three years running. Well done!

#2. Marlin Business Services Corp. (Nasdaq: MRLN)

Continuing the theme of niche banks, Marlin is a direct lender providing financing to business so they can acquire new equipment and technology while preserving capital. Since 1997 Marlin has extended $3 billion in financing to small and mid-sized companies acquiring computer software and hardware, telecommunications, medical equipment, and other office equipment. I considered excluding Marlin from my rankings because it started as a straight finance company. But why exclude niche players? Especially if I believe community banks must increasingly be known for some niche to differentiate. I first became aware of Marlin at the Utah Bankers Association Executive Development Program, where a Marlin Business Bank officer was attending. Marlin Business Bank was chartered in 2008 so Marlin could fund its various financing activities. The Bank sports a year-to-date ROA of 2.90% and ROE of 19.6%. Not too shabby.

#3. Fidelity Southern Corporation (Nasdaq: LION)

One of the largest bank holding companies in the Atlanta area, you would first think that Fidelity Southern is the first plain vanilla community bank in the Top 5. But you would be wrong. How often have we seen banks pursue fee-based line of business strategies to augment their spread business but have failed miserably at running these businesses profitably? I know I have seen it more often than not. But Fidelity Southern's fee income to total revenue is between 50%-60%! Nearly half of the fee income comes from their mortgage banking business, boasting over 300 employees throughout the southeast, and ranking 2nd in the Atlanta MSA in purchased home volume. But their spread business is unique also. Over 50% of the loan portfolio is indirect auto, with originations coming from Tennessee to Florida.  Indirect auto portfolios, as many of you know, performed well during the past recessionary period. And Fidelity Southern shareholders have benefited. The bank achieved a year-to-date ROA of 1.24% and ROE of 14.16%. And earned a spot in the JFB Top 5 with a 517% five-year total return. Well done! 

#4. Eagle Bancorp, Inc. (Nasdaq: EGBN)

EagleBank, founded in 1998, is a traditional community-based business bank, serving the metro Washington DC market. The Company has posted 19 consecutive quarters of increased net income at September 30... a consistent financial performer. It had a 4.31% net interest margin and a 52% efficiency ratio for the third quarter. Commercial real estate and commercial and industrial loans make up 74% of its loan portfolio. Loans are funded 86% with core deposits, allowing the bank to maintain a superior net interest margin. Another key to the bank's strong efficiency ratio is average deposits per branch. At September 30, the bank had $3 billion in deposits with only 18 branches, for an average of $166 million per branch. Eagle is run by Ron Paul, a highly respected real estate investor/developer. Interesting how so many high performing financial institutions have CEOs from other industries. I salute Eagle's 463% five-year total return to their shareholders.

#5. Bancorp, Inc. (Nasdaq: TBBK)

Founded in 2000, The Bancorp creates customized banks for affinity partners in the healthcare, payments, and institutional banking industry. According to its third quarter investor presentation, the bank's greatest revenue comes from pre-paid cards (35% of revenue), followed by revenues from a traditional community bank (22% of revenues) that manages $1.4 billion of the $4 billion asset balance sheet. The branchless community bank operates in the Wilmington-Philadelphia market. Yet another niche bank for our Top 5. The strategy delivered a year-to-date ROA of 0.59% and ROE of 6.89%, and a 453% five-year total return to shareholders. Congratulations! 

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $4 billion in total assets. Bank of America... not here. Jamie Dimon, ditto. PNC, sports a Steelers-like record. But, congratulations to all of the above that developed a specific strategy and is clearly executing well. Your shareholders have been rewarded!

Are you noticing themes that led to these banks' performance?

~ 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 well.

Bank Shareholders Are Only One Seventh of the Equation

I am guilty. Guilty of elevating increasing shareholder value to Napoleonic heights. I annually rank the top five financial institutions by total return to shareholders. I write about developing a strategic plan that results in financial returns that satisfy shareholders. I confess, I contributed to the notion that the shareholder matters above all else.

But many, if not most state business corporation laws don't agree. Take my home state, Pennsylvania, Title 15, Subchapter B Fiduciary Duty, Section 515 Exercise of Powers Generally...

"In discharging the duties of their respective positions, the board of directors, committees of the board and individual directors of a domestic corporation may, in considering the best interests of the corporation, consider to the extent they deem appropriate:

(1)  The effects of any action upon any or all groups affected by such action, including shareholders, members, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located.

(2)  The short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation.

(3)  The resources, intent and conduct (past, stated and potential) of any person seeking to acquire control of the corporation.

(4)  All other pertinent factors."

So, as I read (1) above, shareholders are certainly in the mix of parties impacted by a board decision. But so are members, employees, suppliers, customers, creditors, and communities of a corporation. I don't think the order in which the law was written constitutes a ranking. As I read it, and mind you I've never passed the bar, all constituencies have equal weighting.

Shareholder held banks are not not-for-profits. They make money to grow, be safe and sound, invest in personnel and technology, give back to their communities, and yes increase the value of their franchise for shareholders. Boards should be mindful that profits are as much for other interested constituencies as the shareholders. In other words, to a board member, hearing an employee say "I love working here", a customer say "I love banking here", should resound similarly to a shareholder saying "this is a great investment".

Banks used to be owned primarily by retail investors. As the industry consolidated, banks became larger, and retail investors became weary due to the financial crisis, institutional owners filled the breach. These investors care little about the employee that loves to work there, or the customer that raves about extraordinary service. Well, they do care if it ends up dropping more money to the bottom line that can be returned to shareholders in some fashion.

Institutional shareholders are much stronger, and more concentrated and vocal advocates for shareholder returns than the retail shareholder, who once took pride in investing in the local bank. Just because they are louder, should they be at the front of the line? Or should we all read our respective state's business corporation law on fiduciary duty of directors?

~ Jeff

Banking's Total Return Top 5

Last year I searched for the Top 5 financial institutions in total return to shareholders because I grew weary of the "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale and all that goes with it are correct, then the largest FIs should logically demonstrate better shareholder returns.

Not so last year, and not so again this year.

My method was to search for the best banks based on total return to shareholders over the past five years... capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered for those FIs that trade over 2,000 shares per day. This, naturally, eliminated many of the smaller, illiquid FIs.

For comparison purposes, here are last year's top five, as measured during September, 2011:

#1 BofI Holdings, Inc.

#2 Signature Bank

#3 ESB Financial Corporation

#4 Bank of the Ozarks, Inc.

#5 German American Bancorp

This year's list is in the table below:

 The two report A-listers are BofI Holdings, Inc., and Bank of the Ozarks, Inc. Special mentions are Signature Bank that was #7 this year, and German American Bancorp that was #9. No slouches there.

#1. BofI Holdings Inc.

BofI Holdings Inc. and its subsidiary BofI Federal Bank aspire to be the most innovative branchless bank in the United States providing products and services superior to their competitors, branch-based or otherwise. In its latest investor presentation, BofI highlighted it's expense ratio (operating expense as a percent of average assets) compared to peer as 1.67% versus 3.17%, respectively, and efficiency ratio (operating expense as a percent of total revenue) compared to peer as 35% versus 63%, respectively. So, as a branchless bank, BofI has leveraged its significantly lower operating expenses into profit. That profit led to the top spot in five year total return to shareholders, two years running. Well done!

#2. Bank of the Ozarks, Inc.

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. Today the bank has more than 100 offices in seven states. It's growth since 2010 has been fueled by seven purchases of failed banks. This has led to $863 million of covered loans (loss share arrangements with FDIC), and a yield on such loans of 8.69%, according to its latest investor presentation. This has led to a mind blowing net interest margin of 6.01% for the quarter ended September 30, 2012. OZRK moved up three places in total return to shareholders from last year's ranking. Well done!

#3. Access National Corporation

New to the august list is Access National, whose mission is to provide credit, treasury management and private banking services to emerging businesses with revenues of up to $100 million... very specific, and refreshing given that so many banks cannot choose a specific niche for fear of alienating other constituencies. Those buckshot banks don't have much representation in this top 5 list. Coincidence? You decide. Another interesting fact is that Access National's management team, which owns 15% of the bank, is relatively young, ranging in age between 41 and 53 years old. To be fair, Access National is headquartered in Reston, VA, one of the best banking markets in the country. Focused mission, young management team, great markets... great ingredients in a success recipe.

#4. Hingham Institution for Savings

Founded in 1834, Hingham Savings' mission is  to provide the finest in community banking, with integrity and teamwork. This usually earns the jfb blah, blah, blah statement since we can affix that mission to 90% of the banks across the US. But slow and steady wins the race, in this case. Hingham's ROA from 2007-2011 was 0.63%, 0.81%, 0.93%, 1.05%, and 1.14% respectively. It's third quarter 2012 ROA was 1.15%. Slow, steady improvement. By the way, 0.63% represented it's lowest ROA in a 10-year stretch. But looking at their performance, it's fair to ask... "what financial crisis?" Hingham's tagline, "Simple Banking. Honest Value. Happy Customers" is consistent with a typical industry theme described by one of my colleagues: "boring banking is beautiful". It's this simplicity and consistent performance that most likely resulted in their superior, long-term total return to their shareholders.

#5. Texas Capital Bancshares, Inc.

Texas Capital Bank delivers highly personalized financial services to Texas-based businesses with more than $5 million in annual revenue. Recognizing the inherent link between business owners and their personal wealth, TCB manages the personal wealth of Texans with net worth of more than $1 million. Similar to three of the five banks on our list, TCB is a relatively recent addition to banking, being founded in 1998. Actually, since Bank of the Ozarks has significantly changed since it's FDIC acquisition spree, one might include them in the list of "new" banks. TCB is largely a growth story, and mostly organic growth since it has not been very acquisitive. Since 2007, operating revenue has grown at a 22% compound annual growth rate (CAGR), while non-interest expenses grew at a 17% CAGR. This positive operating leverage generated net income CAGR of 32% during the same period, supporting their Top 5 position in total return to shareholders. Well done TCB!

There you have it! The jfb all stars in top 5 total return. Congratulations to all of the above that developed a specific strategy and is clearly executing well. Your shareholders have been rewarded!

Do you think there are themes that have led to these banks' performance?

~ 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: #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?