Tuesday, December 17, 2019

Banking for Good

It happened. A client, a bank I owned shares in, and one that I admired announced they were selling to a nearby financial institution. In June, Stewardship Financial Corporation, and their banking subsidiary, Atlantic Stewardship Bank (ASB) announced their sale to Columbia Financial Inc. (MHC) and their banking subsidiary, Columbia Bank.

It's not that I'm selfish about losing a client. Although I wished it wasn't true. What brought me down more was such a unique bank was leaving us. One that pledged 10% of its pretax profits to charity. They embraced the Old Testament tradition of tithing. In 2018, ASB tithed over $900 thousand

From their 2018 annual report:

"From the beginning, we have been unique among American banks, founded on the Old Testament concept of stewardship. Stewardship comprises four basic tenets: ownership, responsibility, accountability and reward. We have been maintaining these ideals since our origin in 1985, particularly regarding "reward," as we tithe 10% of our annual earnings to organizations that attend to the physical, emotional and spiritual needs of others, locally and abroad. This effort includes inner-city missions, educational programs for youth, caring home environments for the elderly and spreading the Gospel. To date, we have given back over $10.1 million."

- Paul Van Ostenbridge, former President & CEO, and Michael Westra, former Chairman of the Board, Stewardship Financial Corporation

Not that Columbia Bank isn't going to pick up the mantle. When they did their first step conversion, they set up a charitable foundation, as many do when they convert from mutual to stockholder owned. The foundation pledged over $3 million last year. And as part of the ASB merger, the foundation will commit at least $500,000 per year to ASB markets. So the giving will continue.

But does this mean that a publicly traded bank, or any company, will struggle to create and honor such a pledge in the future? Nine hundred thousand dollars was over 4% of ASB's total operating expense in 2018. That means they needed 4% less somewhere else to deliver the same profits as other financial institutions. Could it have been too much of a burden to deliver the same level of profits and have the same market valuations? I realize that other banks give time and treasure to support their communities. But at ASB's level and with a public pledge to do so?

Are There Others?

There are likely others like ASB, although only one comes to mind. Providence Bank and Trust in South Holland, Illinois also pledged to tithe since its founding in 2004. Providence is now over $1 billion in total assets due to both organic and acquisition growth, and is generating solid profits. In 2018, they gave over $600 thousand to charity. The difference between Providence and ASB is that Providence is not yet public.

Is it possible to be public and to tithe?

I hope so. Because it is the natural evolution of a mixed economy that tilts more heavily towards capitalism than socialism. In a heavily socialist leaning economy, people look to government for charity. And the government looks to their people and companies to fund such charity. Eventually, the government runs out of other peoples' money.

Capitalist economies tend to generate greater innovation, efficiencies, and profit. Our public companies, in considering communities as a constituency on par with shareholders, should be able to apportion a piece of the outsized profits that a for-profit company in a capitalist economy should generate. "It is more blessed to give than to receive."

We need more Providence and Atlantic Stewardship banks. 

Because we are all in this life together.

Merry Christmas everyone!

~ Jeff


Saturday, December 07, 2019

Banking's Top 5 in Total Return to Shareholders: 2019 Edition

For the past eight years I searched for the Top 5 financial institutions in five-year total return to shareholders because I promote long-term strategic decision making that may not benefit next quarter's or next year's earnings release. And I am weary of the persistent "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale are correct, then the largest FIs should logically demonstrate better shareholder returns. Right?

Not so over the eight years I have been keeping track. The first bank over $50 billion in assets was JPMorgan Chase at 33rd on the list. Bank of America was 83rd. 

My method was to search for the best banks based on total return to shareholders over the past five years. I chose five years because banks that focus on year over year returns tend to cut strategic investments come budget time, which hurts their market position, earnings power, and future relevance than those that make those investments.

Total return includes two components: capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered out those FIs that trade less than 2,000 shares per day, 1,000 more than past Top 5's. This, naturally, eliminated many of the smaller, illiquid FIs. I also filtered for anomalies such as recent merger announcements, turnaround situations (losses suffered from 2013 forward), mutual-to-stock conversions, stock dividends/splits without price adjustments, and penny stocks. The "turnaround situations" is new this year, as it was clear that some entrants to the Top 5 were there because they started from a very low place.

As a point of reference, the SNL US Bank & Thrift index total five year return was 65%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2018:

#1.  Carolina Financial Corp. (Nasdaq: CARO)
#2.  Oregon Bancorp, Inc. (OTC Pink: ORBN)
#3.  Farmers and Merchants Bancorp, Inc. (Nasdaq: FMAO)
#4.  Fidelity D&D Bancorp, Inc. (Nasdaq: FDBC)
#5.  Plumas Bancorp (Nasdaq: PLBC)

Here is this year's list:

#1. FS Bancorp, Inc. (NASDAQ: FSBW)

FS Bancorp, Inc. busts onto the JFB Top 5 in a big way, at #1! It is the Mountlake Terrace, Washington holding company for 1st Security Bank, a $1.7 billion in assets community bank with 22 branches that encircle the Seattle Sound. FS also has the advantage of having lifelong banker, mentor, footie fanatic, Italian chef, and friend Joe Zavaglia on its board. Their vision is simple: "Build a great place to work and bank." They actually started as a credit union. But in 2004 they converted to a mutual savings bank, and then in 2012 converted to shareholder owned. In 2017, they raised an additional $26 million to facilitate growth, at $47/share. Today they trade at sixty one bucks! And it's not like their price is getting ahead of them. That's only 9x earnings, and 147% of tangible book. Their year to date ROA/ROE was 1.37% & 11.90% respectively, driven by a 6%+ loan yield built on a diversified loan portfolio that includes a significant consumer component, mostly indirect home improvement loans originated in multiple states. This drives a 4.6% net interest margin, fueling their financial performance, and delivering a 266% five-year total return to their shareholders. Well done! If Joe was truly my friend, should he have given me a call to participate in that 2017 offering?

#2. Fidelity D&D Bancorp, Inc. (Nasdaq: FDBC)

Fidelity D&D Bancorp, Inc. is "moving on up" *insert The Jeffersons theme song here* from #4 last year to #2 on the Top 5 Total Return list. In fact, Fidelity missed the top spot by less than 1%, delivering a 265% five year total return. Here's another bank that I'm happy to see on the list. Two weeks ago I was at Cara Mia's having a chicken parm two blocks from their headquarters in Dunmore, Pennsylvania. Dunmore's a suburb of Scranton where I grew up. Fidelity eclipsed the $1 billion in assets mark this year, and delivers a 1.20% ROA and a 12.07% ROE. Pretty impressive. Shareholders have rewarded the effort with a 22x earnings and a 245% of tangible book valuation, compared to a 13x earnings valuation for the SNL U.S. Bank & Thrift Index. This gives them strong acquisition currency to augment organic growth. Congratulations to the Fidelity Bankers for moving up the charts and delivering to your shareholders!

#3. Plumas Bancorp (Nasdaq: PLBC)

Another repeat on the JFB Top 5, Plumas Bancorp moved from #5 to #3. It is the $888 million holding company for Plumas Bank. Founded in 1980, Plumas Bank is a full-service community bank headquartered in Quincy in Northeastern California. The bank operates thirteen branches, eleven in northern California and two in Nevada. It also operates four loan production offices, three in California and one in Oregon. Plumas Bank is an SBA Preferred Lender. The bank was a financial crisis turnaround story, yet now they are simply a great performer. Year to date ROA/ROE were 1.83% and 21.09%, respectively. Their net interest margin was 4.86%. How you ask? Their cost of funds was 12 basis points. Twelve basis points! CD's only account for 5% of total deposits. That's why they returned 239% to their shareholders the past five years!

#4. First Capital, Inc. (Nasdaq: FCAP)

First Capital, Inc. is the parent company of First Harrison Bank, a community bank headquartered in Corydon, Indiana. It was established in 1891 as Savings and Loan Association of Corydon, changed names a couple of times, acquired three banks since 1999, and now is an $818 million in assets bank with 18 branches in Southern Indiana and Bullitt County, Kentucky. It's difficult to find a theme as to why First Capital delivers an ROA/ROE of 1.29% and 11.53% respectively other than blocking and tackling combined with thoughtful growth through both acquisition and organic. FCAP has a relatively high valuation at 255% of tangible book value and 22x earnings, likely the result of superior financial performance and membership on the Russell 2000. Plenty of dry powder for future acquisitions. All of this blocking and tackling earned their shareholders a 230% total five year return. Nice!

#5. Meta Financial Group, Inc. (Nasdaq: CASH)

I knew I was in for a unique business model based on Meta's ticker symbol. They are a $6.2 billion in asset financial institution based in Sioux Falls, South Dakota. They do have a traditional community bank with only 10 branches sprinkled in and around either Sioux Falls or Des Moines, Iowa. There's where the "traditional" ends. They are so unique I encourage you to read their investor deck here. On the funding side, Meta offers tailored solutions to facilitate money movement, enabling payments providers to grow their businesses and build more profitable customer relationships by creating and delivering payments solutions. On the lending side they provide customized business capital solutions nationally for small and mid-sized businesses with innovative lending to niche markets. This includes asset based lending, insurance premium financing, leasing, and factoring among others. That's a mouthful. A mouthful that delivered a 1.62% ROA and a 12.64% ROE! And a 212% five year total return to their shareholders. Welcome to the Top 5!

There you have it! The JFB Top 5 all stars. The largest of the lot is Meta at $6.2 billion in total assets. No SIFI banks on the list. Ask your investment banker why this is so.

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.