Friday, December 16, 2022

Banking's Top 5 Total Return to Shareholders: 2022 Edition

For the past eleven 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 eleven years I have been keeping track. The first bank to crack the Top 5 over $50 billion did so in 2020. As a reference, the best SIFI bank in five-year total return this year was JPMorgan Chase at 82nd 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 more than those that make those investments. I call this "pulling into the pits" in my book: Squared Away-How Can Bankers Succeed as Economic First Responders. 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 1,000 shares per day. I changed this from 2,000 shares as it was pruning too many fine institutions. But the 1,000 shares/day minimum naturally eliminates many of the smaller, illiquid FIs. I also filtered for anomalies such as recent merger announcements as a seller, turnaround situations (losses suffered from 2017 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 9, 2022 was -1.21%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2021:

#1.  Silvergate Capital Corporation (NYSE: SI)
#2.  MetroCity Bankshares, Inc. (Nasdaq: MCBS)
#3.  Triumph Bancorp, Inc. (Nasdaq: TBK)
#4.  Live Oak Banchsares, Inc. (Nasdaq: LOB)
#5.  SVB Financial Group (Nasdaq: SIVB)

Here is this year's list:

Communities First Financial Corporation is the bank holding company for Fresno First Bank, which opened in December 2005 dedicated to meeting the banking needs of businesses, professionals, and successful individuals in Central California. Its headquarters is the only location. Each employee has an ownership stake in the bank through its Employee Stock Ownership Plan. In 2021, the bank expensed over $530 thousand to the ESOP to benefit employees. Twenty-six percent of the bank is owned by the Board, Executive Management, and the ESOP. I would call that stakeholder alignment. Since 2016, over 50% of total deposits are non-interest bearing, driving superior cost of funds and net interest margin. In addition, the bank developed a niche in the payments business, sponsoring multiple independent sales organizations (ISOs) specializing in bankcard and ACH payment solutions, generating $2.5 billion in processing volume in the third quarter of this year. All this generated a year-to-date ROA / ROE slash line of 2.23% and 29.56% respectively, and a 225.3% five-year total return to shareholders. Welcome to the top of the heap!

Since 1997, Coastal Community Bank, the wholly owned bank subsidiary of Coastal Financial Corporation, has delivered a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound (Washington) area through a traditional community bank branch network in its three-county market. The bank consists of two segments: 1) the traditional community bank, and 2) CCBX, which is its Banking as a Service (BaaS) division started in 2018. Prior to starting CCBX and for the year ended 2017, the Company had $806 million in total assets and $5.4 million in net income for an ROA of 0.73%. As of or for the year-to-date September 30, 2022, the Company had $3.1 billion of total assets, $36.7 million net income (YTD annualized), and a 1.27% ROA. Their CCBX segment continues to evolve, with 19 active partners, two in testing, five signed letters of intent, and three in wind-down as the bank focuses on larger and more mature relationships. What has this bifurcated business model delivered? A 221.5% five-year total return and #2 on the JFB Top 5! Well done!

#3 OFG Bancorp (NYSE: OFG)

San Juan based OFG Bancorp is a financial holding company under U.S. and Puerto Rico banking laws and regulations. Founded in 1964, OFG's banking subsidiary, Oriental Bank, is one of Puerto Rico's largest banks, and is focused on the island and the U.S. Virgin Islands. OFG also has Trust and Insurance services, which represent 1.9% and 2.6% of total revenues, respectively. The Company has grown to $10.1 billion in total assets at September 30, 2022, fueled by organic growth and acquisitions. The bank has a diversified loan portfolio of residential, commercial, and consumer loans. Most consumer loans are auto loans which represent 28% of the total loan portfolio. Loan yields for the YTD ended September 30th was 7.32%. Which compensates for an annualized net charge-off rate of 1.16%. Risk versus Reward. Demand deposits represent 61% of the deposit base, driving a net interest margin of 4.96%. The result: a 1.57% ROA and 15.25% ROE and a robust 219.4% five-year total return. Awesome!

#4 First BanCorp (NYSE: FBP)

First BanCorp is a full service financial institution with operations in Puerto Rico, the British Virgin Islands, and Florida. Its vision is grounded in the principle that investing in its employees, supporting the communities it serves, and providing an outstanding experience to customers is paramount to being successful and delivering shareholder value long-term... i.e. they pursue stakeholder primacy, and here they are in the Top 5 total return to shareholder list. At $18.4 billion in total assets, it is the largest among our Top 5 all stars. Their net interest margin popped 30 basis points from year end 2021 to present because the balance sheet is chock full of core deposit funding accompanied by a heavy dollop of variable rate loans. This helped drive down their efficiency ratio to under 48%. But there's more! In their investor deck they told shareholders that the efficiency ratio was likely to gradually rise to 50% as they continue to invest in people, technology, and capital projects. In other words, they are pulling into the pits to further pursue stakeholder primacy and make the investments needed for a long-term future. Refreshing! Oh and they delivered 203.5% five-year total return to shareholders. That too.

#5 The Bancorp, Inc. (Nasdaq: TBBK) 

Founded in 2000, this $7.8 billion financial institution remains one of the few banks in the U.S. that specializes in providing private-label banking and technology solutions for non-bank companies ranging from entrepreneurial start-ups to those in the Fortune 500.  They provide white label payments and depository services (think Paypal, Chime) and deploy that funding into specialized lending programs such as lending to wealth management firms, commercial fleet leasing, and real estate bridge lending. Note their asset size, because their value as the BaaS bank for Chime is that they are under $10 billion in total assets and not subject to the Durbin Amendment portion of the Dodd-Frank Act that fixes interchange income pricing. It has not been all sunshine and rainbows for TBBK. They were under an FDIC consent order from 2014 through 2020 relating to their BSA and OFAC compliance and their relationship with third parties seeking access to the banking system. Bankers considering becoming a BaaS provider to such third parties should read this order. Also, The Bancorp posted a $96.5 million loss in 2016, just outside the window the JFB Top 5 looks back to determine if it's a turnaround that drove total return. There probably is some of that in their ranking. But they posted a 1.69% ROA and 18.30% ROE year-to-date and have an aspirational goal (which they disclosed) of having a >2% ROA and >20% ROE. They put it out there! And have delivered a 202.2% five-year total return to their shareholders. Welcome back! 

There they are. Interesting that three of the top 5 have some sort of BaaS operation. And there are two Puerto Rican banks. There were two major hurricanes, Maria and Fiona, during this measurement period and I'm confident that this impacted trading activity in these banks' stocks, although I can't articulate how. 

The evolution of this august list tells me that having something other than "plain vanilla" is driving performance and shareholder returns. 

I would be remiss not pointing out that the #1 total return bank for 2020 and 2021, Silvergate Capital Corporation, had a five-year total return of 71.6%. Not bad considering the -1.21% for the same period for the S&P US BMI Bank Total Return Index. But Silvergate's current 1-year total return was -87.1%, knocking it decidedly off the JFB Top 5 list (currently ranked 45th). Putting most of your eggs in the crypto basket has its highs and lows. Perhaps diversify?

~ Jeff

Note: I make no investment recommendations in this article or this blog.

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