Bankers: Here's What We Do

I work for The Kafafian Group, a community financial institution consulting firm based in Bethlehem, Pennsylvania. Many of my readers might not know what my firm does, so I want to dedicate this post to the problems we help community bankers solve.

Here is what The Kafafian Group does:

Performance Measurement- We measure a financial institution's line of business and product profitability on an outsourced basis. We feed customer profitability systems. We do this on an outsourced basis, meaning we custom build the model based on how the institution is managed. If line of business profitability, we follow the institution's org chart. If product profitability, we follow their

product list. We do the costing, funds transfer pricing, report building, and education. We have yet to fail setting up a client on their own profitability system. And we've built our own solution because we found other solutions so challenging. We offer an online portal where clients can view their reports down to the general ledger level. And they can download anything they see within the portal for their own analysis and dashboards. If you want the head of commercial lending or retail banking to take ownership of the continuous improvement of their spreads so the bank can improve its net interest margin, you must first measure it. Our competition in this line of business are software solutions providers. But our real competitor is indifference. You no longer have to be indifferent to how well those responsible for deposit or loan generation are also responsible for continuous improvement in deposit or loan spreads.

Contact Ben Crowley if you want this level of accountability at your institution: Benjamin T. Crowley - The Kafafian Group, Inc.

Strategic Planning- Unlike Performance Measurement where there are very few competitors to us, there are many competitors in strategic planning. We bring a team approach to the engagement using our knowledge from our industry experience and other lines of business to benefit clients. We tailor our service to the needs of the client without dogmatic and rigid processes, although we do suggest processes that work. We believe strategic plans should be made with the best possible data, using the best that your management team has to offer in terms of strategic direction. We suggest one-on-one interviews to avoid group think and uncover critical issues that are difficult to determine in groups. We make suggestions based on our experience, both in banking and with the hundreds of financial institutions we have had the honor to serve. We draft your plan based on data, interviews and a group retreat. We guide your institution into creating an operating plan, or the "how" to strategy execution. We develop projections based on what success would look like in plan execution. The plan should identify the institution you strive to become and chart your path to getting there. Without direction, any road is the right road. With a well thought out plan, course modifications can be made with confidence. Resources can be allocated efficiently. And personnel can be hired and developed with successful plan execution in mind. Some financial institutions consider strategic planning a regulatory exercise or look to do it themselves to save money. Is there a more important question than "what do we want to be?" and "how do we intend to differentiate?" An outside facilitator can ensure planning gets done in a disciplined process that gives your financial institution the best opportunity to succeed at serving its stakeholders.

We also perform ancillary services such as an institution's Risk Appetite statement, clarifying the risks the board and management are willing to take in plan execution. We also do Capital Planning, identifying how much capital will be needed for plan execution and capital impacts of various adverse events and how the institution would enhance capital should those events come to pass. We perform 360 strategic alternative reviews, identifying who a financial institution can reasonably purchase and how much they can pay, who would be strategic partner candidates, and who can buy the institution and how much they can pay. We do this unpassionately because knowing this information helps management teams create aspirational plans. We also do regulatory business plans for de novo banks, mutual to stock converting banks, and banks switching charters.

Contact me if you would like to discuss strategic planning or any of our ancillary services: Jeffrey P. Marsico - The Kafafian Group, Inc.

Process Improvement- In every institution we have served with process improvement services we have found onerous processes, inefficient technology utilization, and silos prohibiting a near frictionless employee or customer experience. Most of these engagements result in cost savings as resources are allocated to unneeded processes, or technology can do the job. Most seasoned bankers have been through these types of engagements and have a bad taste about them because overbearing consultants come in and make declarations and pronouncements. Not so with us. We take a partnership approach where we keep supervisors informed every step of the way so there are no surprises. We think the engagement goes smoother and our recommendations more informed if we ask, for example, the head of wire transfer why the system isn't used to its fullest or why the institution is applying belts and suspenders processes to sending a wire. Supervisors may not agree with one of our process improvement recommendations, but they'll know about them before they end up in our report. It is a solemn responsibility that the institution be better situated with scalable processes when we leave from a process improvement engagement than when we started.

Contact Chris Jacobsen if you are considering improving processes for scalability, near frictionless customer and/or employee experiences, and/or cost savings: Christopher Jacobsen - The Kafafian Group, Inc.

Financial Advisory- Whole bank mergers and acquisitions, fee-based lines of business, branch transactions, fairness opinions, valuation services for private financial institutions, 360-degree strategic alternatives analysis, are all part and parcel to our Financial Advisory line of business. One client told us he felt he was getting JPMorgan service from a community financial institution consultancy, a duty we continuously sharpen in a changing environment and a badge we wear with honor. We consider this line of business complementary to our consultancy so we are responsive to client needs without the typical reticence to engage in talks about combining for fear of going down a slippery slope. Once a client determines to pursue a transaction based on the facts of it, we pursue it to achieve success based on the client's definition of success. We put our experience and transaction accomplishments against any in the business. 

Contact Rich Trauger if you are considering a strategic combination or any of our ancillary services: Richard B. Trauger, Jr. - The Kafafian Group, Inc.

Management Advisory- We do a menu of different things based on our individual and collective skill sets that are difficult to categorize but fall under the Management Advisory umbrella. Examples of engagements we are or have executed on: interim executive officer, management assessments, board evaluations, executive coaching, technology implementation, organizational structure, general ledger mapping, data needs and governance, regulatory assistance based on formal orders or memorandums, etc. Our talented staff with over a century of banking and bank consulting experience are drawn upon to successfully complete the engagement to the client's satisfaction. 

Contact Chris Jacobsen if you are considering an engagement that may fall under our expertise to see if we are a fit. Christopher Jacobsen - The Kafafian Group, Inc.

That's it! If you are a client, we sincerely thank you for your trust in us and leveraging our capabilities to improve your financial institution.

If you're thinking of becoming a client, please contact us. We are not pushy salespeople calling you weekly wondering "where are you at?" If we are a fit for your needs, let's roll!

Happy New Year!

~ Jeff

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! 

#3 Citizens Bancshares Corporation (OTCPK: CZBS)

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.

Bank Shareholder Liquidity Matters

Annually 1,500 bankers and those that advise them gather in the Arizona desert for Bank Director's Acquire or Be Acquired (AOBA) conference. In spite of the conference name, it's not all about bank M&A, or the Hobson's Choice of hunting or being hunted.

And I usually try to bring to Jeff4Banks.com readers at least one of the takeaways I gleaned from the conference. In a prior post, I highlighted a sidebar conversation I had with a fellow industry pro on ChatGBT. Here, I want to focus on a session I attended that I think would be valuable to all readers that are private, or trade thinly on exchanges like Pink Sheets.

This post is a complement to one that I did a year ago titled, Bank Shareholder Succession Matters. Are our retail shareholders aging? Will they soon want to exit, or pass down their shares to heirs that may or may not be interested in holding a thinly traded bank stock with opaque value? For larger, publicly traded financial institutions, this might not be a strategic challenge because they trade significant amounts of shares per day and over half of their shareholders are institutional, many of whom automatically buy into shares that trade on indices. 

But for most of you, shareholder liquidity takes intentional effort. And at AOBA, Laura Hamilton of OTC Markets Group, Inc., and Ciaran McMullan, former CEO of Suncrest Bank CA extolled the benefits of OTC listing, particularly OTCQX market listing in a session titled How to Maximize Your Stock as Currency.

Having Ciaran onstage with Laura as a case study added credibility to the presentation. Suncrest started in 2008 with a $19 million capital raise, and did three small follow-ons of $5, $8, and $7 million to support growth. Ten years after opening Suncrest did another $25 million raise led by p/e firm Castle Creek Capital LLC. During its existence Suncrest acquired three banks, one a smaller deal for $8 million, then another for $20 million and another much larger, at $69 million. All deals included Suncrest stock in the consideration. And to do stock deals, your stock has to be considered valuable by the target.

Suncrest sold in 2022 to CVB Financial Corp. for $234 million for 162% of tangible book when regional targets were selling for 146% of tangible book. It was a success story, and Ciaran attributed part of the success to having a liquid and visible stock via the OTCQX.

According to their presentation, the OTCQX Best Market offers transparent and efficient trading of established, investor-focused U.S. and global companies. To qualify for listing, companies must meet high financial standards, follow best practice corporate governance, demonstrate compliance with U.S. securities laws, be current in their disclosure, and be sponsored by a third-party advisor. 

Banks can leverage OTC Markets' Bank Reporting Standards to complete their Reg D or registered offering to trade on OTCQX, whereas NASDAQ and NYSE require full SEC registration pursuant to the '34 Act, which can be costly and burdensome. OTC Markets offers a diverse network of 90+ broker-dealers, including some of the largest community bank trading brokers such as Raymond James, DA Davidson, Janney Montgomery Scott, Piper Sandler, and KBW Stifel. It graduates a bank that trades thinly out of the CEO's desk or on the Pinks when a shareholder has a block of shares to trade from "I got a guy/gal", to "we have a market and trading volume." 

The cost, according to their presentation, was a $5,000 application fee, and $24,600 annually. Not a significant financial cost, and much of the disclosure and governance requirements are already in place at most banks. According to the presentation, the bid-ask spread was 2%, compared to 1.95% for NASDAQ, and OTCQX average shares per trade was slightly larger than NASDAQ. 

More important were some tips Ciaran had to achieve greater liquidity and visibility for your shares:

-  Increase your share count. Suncrest did it through follow-on offerings and using stock in deals. In addition, a bank could do stock splits or stock dividends.

-  Hold unique earnings webcasts, open to all stakeholders, and pick a hot-topic each quarter to add value to attendees and be different from the blah, blah, blah earnings webcasts from larger financial institutions.

-  Implement incentives for all staff to be shareholders. ESOP, DRIP, stock and option awards, etc.

-  All staff should be part of your investor relations programs. They'll be asked in the community about the bank and its prospects. Why not educate them about bank valuations and where the bank stands in terms of performance and valuation to peers?

-  Build credibility through transparency. There can be power through your shareholder disclosures. 

-  Work to get every customer interested in owning your shares.

There is psychological value for existing and would-be shareholders that know if they need to liquidate your shares that they can. It might be the difference between them buying or wanting to buy or being "not interested." Hiding in the Pinks or being private might exclude large populations of potential investors, leaving you few options when your older shareholder base wants to liquidate. 

Implement your plan before you need it. Because when you need it, will be too late.

~ Jeff

Debunked! Are Bank Merger Approvals Taking Longer?

I enjoy my Twitter community because I get diverse views on banking, sports, politics and entertainment. One of my Tweeps, Rick Childs, a Crowe partner, recently tweeted about the amount of time it is taking merger deals to get regulatory approval. His numbers are raw, and buck the conventional wisdom that regulators are dragging their feet on approvals. A conventional wisdom that our clients are asking us about, so it is tremendously beneficial to have actual data, instead of my standard answer: "we haven't noticed it at smaller bank deals." Data rules.

Conventional wisdom must result in actual wisdom, right?

Average Months From Announcement to Closing

Average Months From Announcement to Closing (Terminated Deals Separate)

Average Months From Announcement to Closing by Asset Size

Average Months From Announcement to Closing by NPA/Assets

Average Months From Announcement to Closing by Tang. Eq./Assets

Average Months From Announcement to Closing by ROA

Average Months From Announcement to Closing In-State vs. Out-of-State Acquirors

Average Months From Announcement to Closing for Merger of Equals

There you have it. Merger deals are taking no longer from announcement to closing this year versus recent history. Terminated deals intuitively take longer because the regulatory approach is not to reject the merger, but to inflict pain on the parties until they withdraw their application and subsequently terminate, a process that obviously would take longer.

Larger deals are taking longer, as has been the case in recent history. I should note there is likely a smaller universe to calculate averages, that likely skew the numbers for >$50B bank deals. Also intuitive is bank deals where targets have lower capital levels and profitability (ROA) took longer.

Not intuitive is that there doesn't seem to be a correlation between the seller's asset quality and time to complete a deal. And rounding out Rick's deep dive into the merger completion timeline rabbit hole, MOE's and out-of-state transactions take longer for approval.

There you have it. Now bankers don't have to rely on investment banker opinion as to the length of time it takes deals to get done. 

Thank you to Rick Childs and the Crowe researchers for keeping us steeped in facts!

~ Jeff

Bank Shareholder Succession Matters

I'm growing more concerned about the time and effort by community financial institutions to understand the needs of next generation shareholders and build a strategy around shareholder succession.

I recently met with a former partner at Wellington Management. You may be aware that Wellington is a significant institutional investor in community bank stocks. I wanted to know from him what he thought community banks should do about shareholder succession. Prior to this post I sent the below summary to our thinly traded clients, and I suspect it might be useful to you. Hope it helps.

 

Here is a summary of our conversation, with my comments/ ideas in red.

1. Hold regular meetings with local wealth managers to generate interest for them to invest their client’s money in your local bank stock. Emphasize that the dividend yield is superior to bonds in many respects (if true) and your bank is more transparent than large banks because the wealth managers can see what you are doing in your communities. (Cocktail hours: Make them feel special. Although any information you give them you would likely have to publicly post.)

 

2. Offer prizes to shareholders. Use a barcode with your annual report. When they scan you capture their name and how many shares they own and their e-mail. And send them some prize. Keep in mind you might have to do this annually, so perhaps set a minimum of share ownership after year 1 for them to get the prize. This way you have a list of your actual shareholders, including street name, to send periodic information to. (This is to keep an accurate and up-to-date list of your shareholders with contact information so you can maintain consistent communication. Probably should check with SEC counsel first.)

 

3. Non-Financial: Tell the stories of how you are meaningful to the community and that it does matter that you are part of the community(s). (Give them that feel-good feeling of owning a local stock.)

 

4. Actually calculate the jobs supported through local lending. Many of us did this for PPP, but did we leverage it well and can we do more of it with our traditional lending. (Can this be executed by having the number of employees of a prospective borrower in the write-up that can be tabulated to tell the story? This might be the same for large bank lending, but my guess is that they are not counting the number of jobs supported in your markets by lending to businesses in them.)

 

5. Much like we expect our lenders and branch managers to consistently build relationships with customers, consistently build relationships with bank trading shops (including friendly institutional investors) so when shareholder xx passes and the estate has 10k shares, you have multiple people to call. This is beyond going to the institutional investor road shows. This is having people with interest in your stock that you can call when large blocks become available. You know each other by name.

 

6. Create your own institutional investor: Consider an ESOP. A built-in friendly institutional investor that can purchase blocks of shares that come available and provide a valuable employee benefit that aligns employees with shareholders.

 

7. Dividends- Emphasize to your shareholders how much in income per year the investment generates (if true) so they think of that investment as an income generator rather than a thinly traded bank stock that they might rather deploy in cryptocurrency. Emphasize how long you’ve paid the dividend and growth rate.

 

8. Why is marketing un-involved or only tangentially involved with what appears to be a marketing function? Marketing follows regulation in advertising so the skill set of complying with SEC rules should be an easy transition.

9. Make shareholder meeting an event. Perhaps a "state of the community" presentation (who else does this?) that accompanies a "state of the bank." An exclusive event that perhaps non-shareholder would feel they wanted to attend.

What ideas do you have?

~ Jeff

Banking's Top 5 Total Return to Shareholders: 2021 Edition

For the past decade 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 ten years I have been keeping track. The first bank to crack the Top 5 over $50 billion did so last year. As a reference, the best SIFI bank in five year total return was Bank of America at 26th 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. This, naturally, eliminated many of the smaller, illiquid FIs. I also filtered for anomalies such as recent merger announcements as a seller, turnaround situations (losses suffered from 2016 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 27, 2021 was 60.4%.

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2020:

#1.  Silvergate Capital Corporation (NYSE: SI)

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

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

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

#5.  Bank First Corporation (Nasdaq: BFC)

Here is this year's list:

#1. Silvergate Capital Corporation (NYSE: SI)

Here we are again. The first crypto currency bank to crack the Top 5 has landed the top position two years running, delivering a 1,257% 5-year total return. You read that right. Silvergate had $150 million in total revenue over the past twelve months, and has a market capitalization of $4.7 billion, or 31.4x revenues. It's five-year compound annual growth rate ("CAGR") in earnings per share was a very strong 27.2% (actually 5.75 years starting full-year 2016 ending LTM 9/30/21). It's Price/LTM EPS is 57x. Investors must be expecting much faster earnings growth to earn the valuation this bank currently enjoys. Average digital currency customer deposits were $11.2 billion at September 30, 2021. Silvergate also facilitates payments between crypto exchanges via its Silvergate Exchange Network, or SEN. It's current performance for the LTM ended September 30, 2021 was a 0.78% ROA and 10.04% ROE, which doesn't merit the valuation, so growth and greater profitability must be what investors see. Here is Silvergate CEO Alan Lane after third quarter earnings announcement on CNBC. Give Silvergate credit, they picked a niche and are executing on it to the delight of investors. Crypto is blazing hot!

#2. MetroCity Bankshares, Inc. (Nasdaq: MCBS)

MetroCity Bankshares, Inc., and it's banking subsidiary Metro City Bank are headquartered in Atlanta. The bank was founded in 2006 and operates 19 full-service branch locations in multi-ethnic communities in Alabama, Florida, Georgia, New York, New Jersey, Texas and Virginia. Quite the geographic expanse, but not uncommon for ethnic banks. What is unique is, after reviewing the management team and board, there are people of Korean, Malaysian, Indian, and Chinese descent in leadership positions. At least that is what I can tell from the bios. The bank has grown over $1 billion in assets over the last twelve months, from $1.7 billion at September 30, 2020 to $2.8 billion at September 30, 2021. This was fueled mainly with loan growth. No acquisitions during this period. MCBS, with a market cap of $705 million, and LTM revenues (net interest income plus fee income) of $125.5 million, trades at 5.6x revenues. And it had an eye popping LTM ROA of 2.49% and ROE of 21.3%. We see these numbers from heavy SBA or, more recently, heavy residential mortgage producers. And for sure, MCBS is both, but it looks like they have been booking their residential mortgages, showing no YTD gain on sale from their residential mortgage loan production. Given that residential mortgages make up 73% of their loan portfolio, and their yield on loans was 5.16%, it makes me think they do a significant volume of non-conforming loans. But still, they have delivered a five-year total return of 439%! Well done!

#3. Triumph Bancorp, Inc. (Nasdaq: TBK)

Triumph Bancorp, and it's subsidiary TBK Bank, SSB were founded in Dallas, Texas in 1981 and provides commercial and consumer banking products focused on meeting client needs in Texas, Colorado, Kansas, New Mexico, Iowa and Illinois. Triumph also serves a national client base with carrier payment solutions through TriumphPay, invoice factoring through Advance Business Capital LLC d/b/a Triumph Business Capital, insurance through Triumph Insurance Group, Inc. and equipment lending and asset based lending through Triumph Commercial Finance. Phew! Needless to say, they have diverse revenue streams and geographies, which produced a LTM net interest margin of 6.35%, driving an ROA/ROE of 1.98% / 15.42%. Profit numbers were aided by an allowance recapture. You would think such a margin would come with higher non-performing assets to total assets but no, as NPAs/Assets were 30 basis points at September 30th. The bank has nearly doubled in size in the past five years, aided by three whole-bank and one multi-branch acquisition. But during that span they delivered a 375% total return to shareholders. Wow!

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

After being conspicuously absent from prior JFB Top Fives, LOB makes it's second showing in a row.  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. It's five year total return: 371%! Well done!

#5. SVB Financial Group (Nasdaq: SIVB)

SVB Financial Group, formerly Silicon Valley Financial Group is the parent company of Silicon Valley Bank, long considered a go-to bank for startups. At $191 billion in total assets, SVB remains the largest financial institution to ever break into the Top 5 Total Return to Shareholders. It's going to be difficult to describe what they do in summary. But here I go. They are a diversified financial services company that operates through four segments: Global Commercial Bank, which provides traditional banking services plus some not so traditional like mezzanine lending, acquisition, finance, and corporate working capital facilities, foreign exchange, export/import and standby letters of credit, vineyard development loans, and on and on I could go. SVB Private Bank segment offers traditional private banking and wealth services. The SVB Capital segment provides venture capital investment services that manage funds on behalf of third party limited partner investors. SVB Leerink segment engages in capital markets activities, M&A, and investment banking services. SVB operates through 30 offices in the USA, Canada, UK, Israel, Germany, Denmark, India, Hong Kong, and China. It was founded in 1983. It's largest acquisition in the last five years was Boston Private Holdings, but it has been active in its other segments, including the acquisition of Leerink. It has a LTM ROA of 1.50%, and an ROE of 19.91%. Even at it's relatively large size and battling the law of large numbers, SVB remains known for it's niche in the venture capital and founders space. It's not easy to fight "general bank", but they seem to be doing it. And delivered a 296% five-year total return!  Nice!

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. In fact, all on the list are niche financial institutions. #Instructive

Congratulations to all of the above that developed a specific strategy and is clearly executing well. Your shareholders have been rewarded!

~ 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.

And please consider reading my book: Squared Away-How Can Bankers Succeed as Economic First Responders. 

Ten percent of author royalties go to K9sForWarriors.org, who work to bring down the suicide rate among our veterans. 

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Fintech Buys Bank. Keeps Stratospheric Valuation.

Imagine a fintech, with off-the-chart valuations such as 2.6x book value and 51x EBITDA, buying a bank. For 1.85x book. 

In today's M&A valuations, 1.85x is pretty lofty. Especially for a community bank. But you don't have to imagine it. Because that was what LendingClub paid for Radius Bank. Since the deal closed, LendingClub has kept its valuations. In fact, since February 17, 2020, one day prior to the Radius Bank deal announcement, LC's share price has risen 58% versus the S&P BMI Software & Services Index increase of 20% (see chart). 

LendingClub bought a bank and didn't trade down to traditional bank valuations. Their valuation grew loftier. Making for even better currency to buy even more banks. And putting them at a strategic advantage over other would-be financial institution buyers mired in the lowly yet more rational bank stock valuations. Truth be told, LC paid mostly cash in the deal. What's cash worth these days? And there are plenty of examples of investors throwing barrelfuls of cash to technology firms.

This is a clear threat to financial institutions. How can we overcome such a hurdle? I wrote that one primary reason banks need scale is to enjoy greater trading multiples. It was one of my most read posts and is a chapter in my upcoming book, Squared Away (soon to be available in your favorite bookstore). 

But we can't pay 2x book for a target when our stock is trading at 1.2x book. Even if we enjoy higher bank-like trading multiples because of scale we may get to 1.5x. Green Dot Corporation is currently trading at 2.6x book and over 6x tangible book. They can easily afford 2x book with that valuation. With more experience acquiring banks in the rearview mirror, fintech's who might have once been worried about bank valuations weighing them down, will be more confident to bid on for-sale banks, to be aggressive, to get deals done. 

Having said that, net interest income is a very small part of  LendingClub's revenue mix, at 22% for 2020, which was prior to the close of the Radius Bank transaction. And they're in the business of lending! Green Dot Corporation showed less than 2% revenue attributed to net interest income. So the continued lofty valuation might be relating to the relative size of the bank within the fintech. 

We were worried that credit unions would be buying banks. Using their ample cash positions, which aren't earning much in the investment portfolio or at other financial institutions, and turning taxable earnings from target banks into non-taxable earnings at credit unions.

What about fintechs that may not be too concerned about profit? I reviewed LendingClub's last five years and see nothing but red ink. Radius Bank had net income of $6.7 million in 2020. On a consolidated basis with the currently bleeding LendingClub, that might revert to tax-free money. Just what we feared with credit unions. 

Should we be worried about more fintechs stepping up to buy banks? (Ref: SoFi and Golden Pacific Bancorp) 

Will these precedents be part of a trend?

~ Jeff

Twitter Reacts to M&T / Peoples United Bank Deal

The headlines for subject deal, which dealmakers hope beyond all hope starts a robust bank M&A frenzy, were like the following:

(you can click on articles and tweets to enlarge)

Conversely, here are what some Twitter users thought of the deal, which starts with a factual tweet from yours truly. Keep in mind most tweets were from investors, not other stakeholders.

Any other reactions?

~ Jeff