Sunday, December 28, 2014

Year End Message to Community Financial Institutions

Thank you, my readers, for taking the time to read Jeff For Banks. I appreciate all of you.

If you were curious why I enjoy working with community financial institutions, below is my weak attempt at explaining myself. Hey, I recorded while on vacation, so there's that!

But the over-riding message is: Let's go get the big boys in 2015!

Happy New Year everyone!

In case you can't watch directly from my blog, here is the YouTube link:

Thursday, December 18, 2014

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!


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.

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.

Tuesday, December 09, 2014

Why Does Kim Kardashian Kick Your Bank's A**?

I have never heard Kim Kardashian speak. I never watched her show. I don't know the family story. I can't name family members beyond Bruce Jenner. Until today, I never searched on her name.

But I know who she is. I know she's pretty. I have heard her claim to fame is an online sex video. I have seen her butt. But not in person. I saw it on a prime time news program. That's right, her derier was featured on a prime time news story.

How has this person turned nothing into significant brand recognition and revenue stream?

By typing Kim Kardashian, and adding her as a label, I just significantly increased this blog post's SEO, or search engine optimization. According to Yahoo, she was the  sixth most popular search during the year. There were no banks in the top 10. If I add her picture, which I am contemplating doing, I would increase my traffic. This is known as "click bait". Put a pretty girl next to any post... be it about fishing or the Victoria's Secret fashion show, and you'll get more clicks, so they tell me.

In fact, when I searched (via Bing) "Washington Trust Bank", a $4.7 billion in asset community bank based in Spokane and founded in 1902, I had 74,900 hits. I did the same for "Wells Fargo" and got 3.4 million hits. Kim Kardashian: 4.3 million hits.

Strategy teams perform a Situation Analysis prior to developing bank strategy, surveying reams of facts to get an accurate assessment of their operating environment. One particular part of a US bank's environment, sadly, is that we are celebrity obsessed. You want to follow Will and Kate, our crack news coverage has you covered. Wonder how far along Iran is in their nuclear program? Good luck.

This became apparent to me when I was speaking to a Washington state banker about his most famous customer, Sig Hansen, the captain of the F/V Northwestern, a crab fishing vessel. Yes, I hot linked to a crab fishing vessel. They have a website, and a pretty nifty one too. How could this be? Because Sig and the Northwestern are front and center on Discovery Channel's Dangerous Catch. Click over to their website and you can buy the coffee Sig drinks. Clearly, Sig's celebrity has aided the cash flow ups and downs typical of a fishing vessel.

How can banks respond to our celebrity obsessed culture? I don't think it is by hiring a celebrity to pitch your bank. Society has grown accustomed to this, and I'm not convinced it moves the needle much. Honda recognized this by enlisting Stretch Armstrong as spokesman for its line of cars this holiday season.

But perhaps we can make a celebrity or two out of our senior executives. For example, I live in Central Pennsylvania, where a credit union uses its CEO in all of its advertisements, billboards, etc. Forget the fact that he wears tights and a cape in most ads. No, seriously, I'm trying to forget that fact. But you get my point. This credit union has made a celebrity out of their CEO, and he is widely recognized in the community.

If done properly, this strategy could leave you exposed to the new celebrity departing the bank, or demanding higher compensation due to their new found status. There are ways to mitigate this risk. Progressive Insurance did so with Flo.

Do you think turning key employees into celebrities would help execute your strategy?

~ Jeff

P.S. I went with Sig Hansen's photo. Not as pretty as Kim.