Sunday, December 10, 2023

Banking's Top 5 Total Return to Shareholders: 2023 Edition

What a difference a year makes! Although the 2022 Top 5 are holding their own and two of them remain in today's Top 5, the 2021 edition included one bank that failed (SVB Financial Group) and one that is voluntarily liquidating (Silvergate). So as with all lists, and especially banking lists where risks don't rear their ugly head until calamity, readers should evaluate each financial institution on their own. I am here to count numbers, and if they have the best five-year total return to shareholders within the criteria mentioned below, they are on the list.

For the past twelve 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 29th overall. Although one might argue that First Citizens BancShares of Raleigh is a SIFI as it climbed to the 19th largest in the country with its Silicon Valley Bridge Bank acquisition from the FDIC, and that the FDIC designated SVB as systemically important.

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 2018 forward), mutual-to-stock conversions, and penny stocks. 

As a point of reference, the S&P US BMI Bank Total Return Index for the five years ended December 7, 2023 was 23.32%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2022:

#1.  Communities First Financial Corporation (Now FFB Bancorp) (OTCQX: FFBB)
#2.  Coastal Financial Corporation (Nasdaq: CCB)
#3.  OFG Bancorp (NYSE: OFG)
#4.  First BanCorp (NYSE: FBP)
#5.  The Bancorp, Inc. (Nasdaq: TBBK)

Here is this year's list:

#1. M&F Bancorp, Inc. (OTCPK: MFBP)  

M&F Bancorp, Inc. is the bank holding company for M&F Bank, headquarted in Durham, NC. The bank was founded in 1907 and has operated continuously since 1908 with branches in Durham, Raleigh, Charlotte, Greensboro, and Winston-Salem. It is a Minority Depository Institution (MDI) and is one of only a few North Carolina banks designated by the U.S. Treasury as a Community Development Financial Institution (CDFI). As both an MDI and CDFI, it applied for and received $80 million from the Emergency Capital Investment Program (ECIP) distributed by the U.S. Treasury to be used to help underserved communities bounce back from the Covid-19 pandemic. Prior to the ECIP investment the bank had $370 million in total assets and $40 million of equity. It had $447 million of assets and $121 million of equity at September 30, 2023. So the relative size of the ECIP investment was very significant. The additional capital, according to the bank, will be used to support businesses in low-income communities that have been disproportionately impacted by the pandemic and further its mission to provide capital, resources, and support communities that continue to be affected by systemic neglect. Prospective shareholders must believe in them, resulting in a 601% 5-year total return to shareholders. Well done and best of luck leveraging the ECIP capital for good!

#2. The Bancorp, Inc. (Nasdaq: TBBK)

Founded in 2000, this $7.5 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. They posted a 2.53% ROA and 26.12% ROE year-to-date and that surpassed their aspirational goal (which they disclosed) of having a >2% ROA and >20% ROE. They put it out there and got it done! And have delivered a 334% five-year total return to their shareholders and their second straight Top 5 accolade! 

In 1921, Citizens Trust Bank opened its doors on Auburn Avenue in Atlanta. Its founder, Heman Perry, served as the first chairman of the board. The bank was the brainchild of Perry because he was denied being served in a white-owned store. So that Black businessmen could own and operate businesses independently of white-owned financial institution, Perry and four other partners, collectively known as the "Fervent Five", formed Citizens Trust Bank. Like M&F Bank above, CTB received over $95 million of ECIP, in addition to a $5 million investment from TD Bank as a result of its MDI and CDFI status. As a result of these investments, the bank has grown over 65% since 2019. Although deposits declined 20% since year end 2022, the bank has delivered a 2.01% year to date ROA and a 23.10% ROE. This growth and performance resulted in a 303% five-year total return. Well done Citizens Bancshares and Citizens Trust. You are doing well by doing good!

#4 First Citizens BancShares, Inc. (NasdaqGS: FCNC.A)

First Citizens Bank was founded in North Carolina in 1898 as the Bank of Smithfield. In 1935, R.P. Holding was elected Chairman and President of First-Citizens Bank & Trust, a family legacy of leadership that lasts to this day.   First Citizens includes a network of more than 500 branches and offices in 30 states spanning coast to coast, and a nationwide direct banking business. In January 2022, First Citizens did a tangible book value accretive merger of equals with CIT Group. And followed that savvy deal with another tangible book accretive deal by completing the failed Silicon Valley Bridge Bank acquisition in the first quarter 2023. For the third quarter 2023, net interest margin was 4.10%, ROA was 1.42%, and ROE was 14.95%. All this accretive deal making and prudent management has resulted in a brass ring for shareholders in the form of a 261% five-year total return. Congratulations!

#5 FFB Bancorp (OTCQX: FFBB) 

FFB Bancorp is the bank holding company for FFB Bank. You might recognize it from being number 1 in in last year's Top 5 as Communities First Financial Corporation and Fresno First Bank. No merger. They changed their name. The Bank opened in 2005 dedicated to meeting the banking needs of Central California businesses and individuals through their sole location in Fresno and online. At the end of 2021, prior to the Fed starting to raise interest rates, the Bank's yield on loans was 4.99%. For the YTD ended September 30, 2023, after the Fed raised rates 525-550 basis points, the yield on loans was 6.30%, or a 1.31% increase. For deposits, the Bank's cost of funds increased 34 basis points for that same period, from 7 basis points to 41. How you ask? Sixty five percent of their deposits are non-interest bearing. Takes pressure off in a rising rate environment. Net interest margin went from 4.22% to 5.09%. Looks like their interest rate risk model was spot-on. This performance led to a five-year total return to shareholders of 204% and a second straight year on the JFB Top 5. Congratulations! 

There they are. Interesting that two of the top 5 were MDIs and CDFIs that received ECIP capital. I am rooting that they will continue to deliver to shareholders as they serve their higher purpose improving the economic mobility of their customers. 

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

~ Jeff

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

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