Tuesday, December 29, 2020

Banking's Top 5 Total Return to Shareholders: 2020 Edition

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

Not so over the nine years I have been keeping track. The first bank to crack the Top 5 over $50 billion did so this year. As a reference, the best SIFI bank in five year total return was JPMorgan at 33rd overall. 

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. Short-term focus is a common trait of banks that focus on shareholder primacy over stakeholder primacy.

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 2015 forward), mutual-to-stock conversions, stock dividends/splits without price adjustments, and penny stocks. 

As a point of reference, the S&P US BMI Bank Total Return Index for the five years ended December 23, 2020 was 46.3%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2019:

#1.  FS Bancorp, Inc. (Nasdaq: FSBW)
#2.  Fidelity D&D Bancorp, Inc. (Nasdaq: FDBC)
#3.  Plumas Bancorp (Nasdaq: PLBC)
#4.  First Capital, Inc. (Nasdaq: FCAP)
#5.  Meta Financial Group, Inc. (Nasdaq: CASH)

Here is this year's list:

Here we are. The first crypto currency bank to crack the Top 5 and in the top position no less! Most of the price runup has been over the past year, where the stock increased 330% versus 
-16% for the S&P US BMI Banks Index. It's five year total return was a whopping 452%! And in terms of bank stock valuation, Silvergate is punching well above its weight at over 4x tangible book value and 58x latest twelve months earnings per share. This bank has over $2 billion in crypto deposits, and facilitates payments between crypto exchanges via its Silvergate Exchange Network, or SEN. With that type of valuation, investors foresee rapid growth, increased economies of scale that will ultimately result in superior financial performance. It's current performance for the third quarter of 1.13% ROA and 10.14% ROE doesn't merit the valuation, so growth and greater profitability must be what investors see. And there are positive profit trends. Take note, however, the bank grew over 20% year over year, so their current 10.4% leverage ratio combined with their internal profit generation tells me they will be extending the proverbial hat to investors for more capital to support their growth. And at those valuation numbers, who wouldn't? Here is an interesting Motley Fool discussion on the bank. Give Silvergate credit, they picked a niche and are executing on it to the delight of investors. Welcome to the Top 5!

#2. Live Oak Bancshares, Inc. (Nasdaq: LOB)

I'm surprised that this is the first showing of LOB on the Total Return Top 5. It has been an industry darling due to its dedication to technology experimentation. It was the brain child for the nCino platform, which it formed in 2012 and spun off in 2014. Live Oak was founded in 2007 to provide business loans, primarily Small Business Administration (SBA) guaranteed loans, to select industries, like dentists and veterinarians. Live Oak is now the largest SBA 7(a) lender in the United States. They opened in 2007! But it goes beyond traditional banking. Subsidiaries, in addition to the bank, include: Live Oak Private Wealth, LLC, a registered investment advisor; Canapi Advisors, LLC that provides investment advisory services to new funds focused on providing venture capital to new and emerging fintechs; Live Oak Ventures, Inc. that invests in businesses that align with the company's focus on fintech; Government Loan Solutions, Inc., a management and technology consulting firm that engages in the settlement accounting, and securitization process for SBA and USDA guaranteed loans; and, get this, Live Oak Grove, LLC, which is their on-site restaurant for employees in Wilmington, North Carolina. Because of these niches, Live Oak also punches above its weight by traditional bank valuation standards, trading at over 3x tangible book and 51x trailing twelve months earnings. But it's five year total return: 250%! Well done!

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

Fidelity D&D Bancorp, Inc. is over two times the asset size it was in 2016 due to the combination of organic growth and an acquisition that was announced in late 2019 and closed in May in the middle of a pandemic. When the pandemic hit, FDBC's stock took a tumble along with most everyone in the industry. But throughout the year, their stock bounced back to where it was a year ago. While the S&P US BMI Banks Index was down 16%, FDBC held serve. This puts its price to tangible book ratio slightly north of 2x, high by traditional community bank standards today. But it's price/earnings for the 3Q annualized was 15.9x. They had special charges in earlier periods as a result of the acquisition. Their 3Q ROA was 1.15% and ROE was 12.42%. A consistent performance record, plus the ability to profitably grow even though their core franchise is in a slow growth market, earned them their third consecutive year in the Top 5 delivering a 236% total return to shareholders! This is a bank that demonstrates what I like to term operating discipline. Well done!

#4. Silicon Valley Financial Group (Nasdaq: SIVB)

This must be the year of the niche bank. One that focuses nationwide on one or more niches to generate top five shareholder returns. Silicon Valley Financial Group is the parent company of Silicon Valley Bank, long considered a go-to bank for startups. At $97 billion in total assets, SVB is the largest financial institution to ever break into the Top 5 Total Return to Shareholders. And like Silvergate Capital Corporation above, it did not conform to banking's Covid decline. It's one year price change was +51% compared to the 16% decline of the S&P US BMI Banks Index. This bank lends to startups without positive cash flow. So one would think that the pandemic would cause a spike in non-performing assets. Except their NPAs/Assets was 12 basis points at September 30th. and their YTD ROA was 1.43% and ROE 16.20%. And they're trending better! This type of through-the-cycle financial performance earned them a five year total return to shareholders of 228%, good enough for Top 5 hardware! Nice!

#5. Bank First Corporation (Nasdaq: BFC)

They are blocking and tackling in Manitowac, Wisconsin! Which is home to my favorite news parody, the Manitowac Minute where they aptly describe Midwest nice! And I got my football reference in there, especially since the Packers are having a great year. Like Fidelity, Bank First demonstrates operating discipline by consistently delivering financial performance that gives them the investor credibility needed to rebound from the pandemic driven recession. Looking at their ROA slash line 2017-YTD you'll see 1.04%/1.43%/1.37%/1.44%. That level of consistent credibility is likely the reason why their stock is down only 4% over the past year versus 16% for all bank stocks. I searched for what they do different than traditional community banks. I found that they do core processing services for other financial institutions. That's a throw back to earlier days. But that only accounts for just over 3% of their total revenue. Like Fidelity, they announced an acquisition at the end of last year and closed on it during the pandemic. But it was only a $183 million in assets bank compared to the pro forma $2.6 billion Bank First. No, what Bank First does is be good. Consistently. It earned their shareholders a five year 197% total return. Go Packers! **** the Bears!

There you have it! The JFB Top 5 all stars. As in all prior years, no SIFI banks on the list. Increasingly on the list, though, are niche financial institutions that are making strategic bets that are being rewarded by their shareholders in the form of higher valuations. 

I thought about ending my nine-year run of recognizing these best in class performers in long-term total return to shareholders. Especially since my friends at BankDirector.com do such a nice job in their RankingBanking series. Perhaps in the future they'll add five year total return! I'll keep going as long as I can add value.

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.


  1. Thanks for sharing these Jeff. Always interesting to read. Have a great new year!

  2. Happy New Year to you too, Andy!