Earnings Guidance? Buy Side Wall Street Says Think Long-Term. Sell Side Wants Tax Rate.

In February, Larry Fink from Blackrock sent a letter to publicly traded CEOs to think long term and to stop giving earnings guidance. Specifically, he said "Today's culture of quarterly earnings hysteria is totally contrary to the long-term approach we need."

Let's see if bankers are heeding Larry's call on their first quarter earnings call.

Christian Bolu - Credit Suisse to Goldman Sachs CFO Harvey Scwhartz: "Tax rate was a bit lower in the quarter, just curious how we should think about the go-forward tax rate?"

Schwartz - "In terms of the go forward I guess if I was to give the best estimate, I'd say something similar to last year."

Bob Ramsey - FBR & Co. to BofI Holdings CFO Andy Micheletti: "I guess putting it all together, next quarter you'll have less Block [from acquisition of H&R Block portfolio]; sounds like your loan yields are stable-ish; plus you have some lift from the equipment finance; and deposit costs maybe tick up with a little growth. Does that put you somewhere in the ballpark of 4%? Or what is the right range for next quarter?"

Micheletti: "Yes, Bob, I think we're still in that 3.80% to 4% range. I would lean to the higher end of that, given where we're coming out, without the Block impact. But certainly in the 3.90%s would be fair."

Michael Rose - Raymond James & Associates to BB&T CEO Kelly King: "Can you give us your thoughts, in light of the environment, in terms of what we could expect for the efficiency ratio"?

King: "I think we will end up this year with improvement. It may be in the 57ish kind of range. Pretty confident about that."  

Dave Rochester - Deutsche Bank to Great Western Bancorp CFO Peter Chapman: "And then just one last one on the margin. Just trying to get your sense for the trend that we should see from here?"

Chapman: "Not much change really to what guidance we have given in the past. So as we have said, Dave, I think if rates remain low, if it ticks down a point or two a quarter, then we wouldn't be surprised with that." 

Chris McGratty - KBW to UMB Financial Corporation Chairman & CEO Mariner Kemper: "And given the stock movement, should we be assuming that those 2 million shares [stock buyback] will be used kind of consistently through the year?"

Kemper: "You know, all I can really tell you is that we certainly think we are very thoughtful about how we think about how to deploy our capital. I know you want more but that is about all I can give you."

Amen Mariner!

To be fair to these banks and their executives, equity analysts bombard them with questions each quarterly call to help them with their projection models. What are they to do? 

In the spirit of Larry Fink's comments and wishes, as one of the largest investment funds in the world, and to be consistent with my belief that managing for the long-term opens doors to investments that can transform your financial institution for an enduring future, here is a sample analyst question and a proposed answer.

Joe Spreadsheet - Bank Stock Investment Firm, Inc. to Chris Evert, CEO of Schmidlap National Bank: "So, Chris, I have this spreadsheet in front of me and I have to enter in an effective tax rate to spit out net income projections. I don't want to be surprised next quarter when I make my estimates, what number should I put in cell F72?"

Evert: "Joe, our long-term strategy has been to transform our bank into a core funding machine, and away from the asset-driven strategy that resulted in large amounts of wholesale funding. As we make this strategic transition, our loan to deposit ratio will fall and, if successful, will result in greater margin as a result of lower cost of funds, offset somewhat by a lower yield because we are becoming more liquid and more assets will be in our investment portfolio. We'll manage taxes from there. Good luck to you buddy on cell F72."

How do you think we can transition from this "here's what we promised the investment community next quarter" to using the investment community to give us discipline in executing long-term strategy?

I'd like to hear from you.

~ Jeff

Bonus: Lloyd Blankfein, CEO of Goldman Sachs, talks about Fink's letter on CNBC Feb 3rd.

http://www.cnbc.com/2016/02/03/cnbc-exclusive-cnbc-transcript-goldman-sachs-chairman-ceo-lloyd-blankfein-speaks-with-cnbcs-squawk-box-today.html

My Fantasy Banking Team

Last weekend, a bunch of friends got together for our annual Fantasy Football (FFL) draft. My first pick: Tom Brady (8th overall). I'm feeling pretty good about it since he threw four touchdown passes in week one.

But it got me thinking about who would be my picks if I were assembling a fantasy banking team. So I thought I would give it a shot.

First, I needed to decide positions needed. The owner... Chairman. The quarterback... CEO. The running back... Chief Retail Officer. The wide receiver... Chief Loan Officer. The kicker... Chief Information Officer. And defense/special teams... CFO.

The Owner/Chairman

Criteria: I looked to Bank Director Magazine's annual scorecard for my pick. I used the $1-$5 billion in assets category, and limited my pick to a non-executive chairman, because an executive chairman can influence excellence from the CEO role regardless of holding the Chairman position. No, I wanted a top notch Chairman/Owner of my team that worked his/her magic with the gavel alone.

Selection: Chan Martin, CommunityOne Bancorp (NASDAQ: COB).

Chan was a former Bank of America senior executive, serving as the Corporate Treasurer, Enterprise Risk, and various other functions during his career. He retired in 2008 from BofA, but they thought so much of him they brought him back to assist with the Merrill Lynch integration.

He joined COB's board in 2009 after its $310 million recapitalization which was needed from a disastrous slew of losses incurred starting in 2008 as a result of awful credit decisions, leading to a 21% NPA/Asset ratio peak in 2010. Chan came as part of the recap, and rose to Chairman in 2014. Since his joining the Board, the bank has stabilized, returned to profitability, recaptured it's deferred tax asset, and NPAs/Assets have declined to less than 3%. Yeah, Chan can own my team.

The Quarterback/CEO

Criteria: I am an aficionado of long-term total return. So when selecting my quarterback, I want the guy/girl that has the best three-year total return. I had to eliminate penny stocks, low-trading stocks, and merger targets.

Selection: Greg Garrabrants, BofI Holding, Inc, (NASDAQ: BOFI)

Greg has been in charge of the Bank since 2007. Prior to BofI, he was an investment banker, management consultant, and attorney to the banking industry. Imagine that. What has he delivered to his team? A 367% three-year total return to shareholders, when the industry averaged 60%, according to the SNL Bank & Thrift Index. He can QB my team.

The Running Back/Chief Retail Officer

Criteria: I sifted through banks with the best cost of funds and cost of interest bearing liabilities. Building a low-cost core deposit base is arguably the most difficult task in banking, and it creates significant value to the publicly traded bank because it is difficult to replicate.

Selection: Mitch Englert, EVP of Community Banking, Capital City Bank Group, Inc. (NASDAQ: CCBG)

When you dig deep into the organizational structure beyond the folks you see at investor presentations, you find people like Mitch, who started his career at Capital City in Tallahassee, FL as a part-time teller. What has he accomplished? Thirty-four percent of Capital City's deposits are non-interest bearing. A mere 9% are time deposits. Cost of funds: 9 basis points. Let that sink in a bit. I'll give Mitch the ball.

The Wide Receiver/Chief Lending Officer

Criteria: I searched for banks with the best yield on loans coupled with excellent asset quality as represented by NPAs/Assets. I focused on traditional community banks and did not consider high yield type banks such as credit card banks. But I also wanted to find a community bank that focused on lending to the businesses of today, and not solely the owners of the buildings these businesses reside. They "received" their funds, and lent it into their communities.

Selection: Monty Rogers, EVP and Chief Lending Officer, Security Bank

Is there any doubt that the leader of my receiving corp would be a Texan? Security Bank in Midland, Texas lends to business, period. Their loan portfolio is 47% C&I loans... i.e. true business loans. None of this "we support businesses so long as they have real estate collateral". Sure, Monty does real estate lending too, representing 50% of the loan portfolio. But last week I was at a bank whose loan portfolio had 94% real estate loans. What has Monty delivered to Security Bank? A 6.94% yield on loans combined with a 31 basis points NPA/Asset ratio. Go ahead Monty, spike the ball!

The Kicker/Chief Information Officer

Criteria: If you believe, as I do, that more people interact with your Bank via technology channels than all other channels combined, then you need a solid CIO on your fantasy team. There are no financial metrics to rank your CIO's for the fantasy draft. 

Selection: Robert Landstein, EVP and CIO and Chris Tremont (pictured), EVP of Virtual Banking, Radius Bank

Ok, I hedged. Call this one my first add/drop of the year. In my league, that cost 10 bucks. But Radius Bank in Massachusetts, the former First Trade Union Bank, is forming the type of FinTech partnerships necessary to drive community bank relevance into the future. Read more about their initiative in an American Banker Bank Technology News article here. Welcome to the team Bob and Chris!

Defense/Special Teams/CFO

Criteria: I want a strong balance sheet manager in the CFO role. The rumblings of Fed Funds rate hikes are strong, and a rate hike this year, perhaps this month, seems likely. So I wanted a solid one-year GAP, so the bank and therefore my team doesn't get pummeled in a rising rate environment. I also wanted a solid liquidity ratio, so the bank doesn't have to reprice rapidly to maintain liquidity. Lastly, if they can do that with an enviable yield on securities, then you're on the squad!

Selection: Greg Hollier, CFO, Gulf Coast Bank and Trust Company

My "Girl with the Dragon Tattoo" investigation could not dig up much on Greg from a personal standpoint. But let me tell you this... the Bank has a 1.98% ROA, and a 22% ROE. Its liquidity ratio is 28% and only 3% of its securities are pledged. Cumulative one year repricing GAP/Assets= (5.56%). Oh, and the yield on securities is 3.22%. I think he is doing work managing the $1.3 billion balance sheet. You?

There's my team. I think it's a winner, not just for this season, but to lead our industry into the future.

Who is on your banker fantasy team?

~ Jeff

Banking's Total Return Top 5: 2014 Edition

For the past three years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale and all that goes with it are correct, then the largest FIs should logically demonstrate better shareholder returns. Right?

Not so over the three years I have been keeping track.

My method was to search for the best banks based on total return to shareholders over the past five years... capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered for those FIs that trade over 1,000 shares per day. This, naturally, eliminated many of the smaller, illiquid FIs.

For comparison purposes, here are last year's top five, as measured as of December, 2013:

#1.  BofI Holdings, Inc.
#2.  Marlin Business Services Corp.
#3.  Fidelity Southern Corp.
#4.  Eagle Bancorp, Inc.
#5.  Bancorp, Inc.

This year's list is in the table below:

BofI Holdings celebrates its third straight year on this august list. Congratulations to them. A summary of the banks, their strategies, and links to their website are below. 

#1. Open Bank (OTCQB: OPBK)

Open Bank commenced operations in 2005 as First Standard Bank in the Koreatown section of Los Angeles. They are built as a relationship bank serving the Korean community in LA and surrounding areas. It is a significant SBA 7(a) lender, ranking in the top 100 (#54) in the country in that category, ahead of much larger financial institutions like Bank of America. Year to date through September 30th, Open Bank had $4.5 million gain on sale of loans, representing 24% of its total revenue for that period. The lion's share of their growth, profitability, and capital have come since their re-branding to Open Bank in 2010. In June, the bank raised an additional $30 million of common equity, positioning it to continue its strong growth.


#2. BofI Holding, Inc. (Nasdaq: BOFI)

BofI Holdings Inc. and its subsidiary BofI Federal Bank aspire to be the most innovative branchless bank in the United States providing products and services superior to their competitors, branch-based or otherwise. In its latest investor presentation, BofI claims that its business model is more profitable because its costs are lower. It supports the claim by highlighting its efficiency ratio is in the top 2% of UBPR peers, and its operating expenses as a percent of average assets are in the top 12% of peer banks. So, as a branchless bank, BofI has leveraged its significantly lower operating expenses into profit. That profit led to the top spot in five year total return to shareholders, three years running. Well done!

#3. BNCCORP, Inc. (OTCQX: BNCC)

BNCCORP, Inc., through its subsidiary BNC National Bank, offers community banking and wealth management services in Arizona, Minnesota, and North Dakota from 14 locations. It also conducts mortgage banking from 12 offices in Illinois, Kansas, Nebraska, Missouri, Minnesota, Arizona, and North Dakota. BNC suffered significant credit woes during 2008-09 which led to material losses in '09-10, and the decline in their tangible book value to $5.09/share at the end of 2010. Growth, supported by the oil boom in North Dakota's Bakken formation, and a robust mortgage refinance business resulted in a tangible book value per share at September 30th of $17.18... a significant recovery and turnaround story that landed BNC in our top 5 for the first time.

#4. Western Alliance Bancorporation (NYSE: WAL)

Western Alliance, through its subsidiary Western Alliance Bank, provides comprehensive business banking and related financial services, operating full service banking divisions in local markets as Alliance Bank of Arizona, Bank of Nevada, First Independent Bank, and Torrey Pines Bank. It also has a national platform of specialized finance units in homeowners' associations, public finance, resort finance, and warehouse lending. Its diversified and primarily commercial loan portfolio and a loan/deposit ratio of 91% resulted in a year to date net interest margin of 4.41%. This margin plus a 2.07% operating expense ratio resulted in a YTD efficiency ratio of 47%. That type of financial performance plus picking yourself up from credit problems leads to top 5 total returns for your shareholders. Well done!

#5. Mercantile Bank Corporation (Nasdaq: MBWM)

In June, Mercantile Bank and Firstbank Corporation closed on a merger of equals to form the fourth largest Michigan-based bank by deposit market share. Firstbank traced its roots back to the 1800's, while Mercantile was founded in 1997. As part of the transaction, Mercantile shareholders received a $2/share special dividend prior to closing, shaving off of tangible book value. But the total return story is similar to others on the list. Mercantile suffered through its share of credit snafus, losing a collective $70 million 2008-10, only to recover and negotiate a franchise changing merger of equals. Best of luck on the integration and congratulations for landing on the JFB top 5 total return to shareholders list! 

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $10 billion in total assets. No SIFI banks on the list. What about that economies of scale crowd? Hmm.

The flavor of this year's winners is recovery, with the exception of our consistent top performer, BofI. 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.

Banking's Total Return Top 5: 2013 Edition

For the past two years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale and all that goes with it are correct, then the largest FIs should logically demonstrate better shareholder returns. Right?

Not so over the three years I have been keeping track.

My method was to search for the best banks based on total return to shareholders over the past five years... capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered for those FIs that trade over 1,000 shares per day. This, naturally, eliminated many of the smaller, illiquid FIs.

For comparison purposes, here are last year's top five, as measured during December, 2012:

#1.  BofI Holdings, Inc.
#2.  Bank of the Ozarks, Inc.
#3.  Access National Corporation
#4.  Hingham Institution for Savings
#5.  Texas Capital Bancshares, Inc.

This year's list is in the table below:

BofI Holdings celebrates its third year on this august list. Congratulations to them. A summary of the banks, their strategies, and links to their website are below. 

#1. BofI Holdings Inc. (Nasdaq: BOFI)

BofI Holdings Inc. and its subsidiary BofI Federal Bank aspire to be the most innovative branchless bank in the United States providing products and services superior to their competitors, branch-based or otherwise. In its latest investor presentation, BofI claims that its business model is more profitable because its costs are lower. It supports the claim by highlighting its efficiency ratio compared to peer banks (38.7% versus 68.5%, respectively) and its operating expenses as a percent of average assets compared to peer banks (1.66% versus 3.09%, respectively).So, as a branchless bank, BofI has leveraged its significantly lower operating expenses into profit. That profit led to the top spot in five year total return to shareholders, three years running. Well done!

#2. Marlin Business Services Corp. (Nasdaq: MRLN)

Continuing the theme of niche banks, Marlin is a direct lender providing financing to business so they can acquire new equipment and technology while preserving capital. Since 1997 Marlin has extended $3 billion in financing to small and mid-sized companies acquiring computer software and hardware, telecommunications, medical equipment, and other office equipment. I considered excluding Marlin from my rankings because it started as a straight finance company. But why exclude niche players? Especially if I believe community banks must increasingly be known for some niche to differentiate. I first became aware of Marlin at the Utah Bankers Association Executive Development Program, where a Marlin Business Bank officer was attending. Marlin Business Bank was chartered in 2008 so Marlin could fund its various financing activities. The Bank sports a year-to-date ROA of 2.90% and ROE of 19.6%. Not too shabby.

#3. Fidelity Southern Corporation (Nasdaq: LION)

One of the largest bank holding companies in the Atlanta area, you would first think that Fidelity Southern is the first plain vanilla community bank in the Top 5. But you would be wrong. How often have we seen banks pursue fee-based line of business strategies to augment their spread business but have failed miserably at running these businesses profitably? I know I have seen it more often than not. But Fidelity Southern's fee income to total revenue is between 50%-60%! Nearly half of the fee income comes from their mortgage banking business, boasting over 300 employees throughout the southeast, and ranking 2nd in the Atlanta MSA in purchased home volume. But their spread business is unique also. Over 50% of the loan portfolio is indirect auto, with originations coming from Tennessee to Florida.  Indirect auto portfolios, as many of you know, performed well during the past recessionary period. And Fidelity Southern shareholders have benefited. The bank achieved a year-to-date ROA of 1.24% and ROE of 14.16%. And earned a spot in the JFB Top 5 with a 517% five-year total return. Well done! 

#4. Eagle Bancorp, Inc. (Nasdaq: EGBN)

EagleBank, founded in 1998, is a traditional community-based business bank, serving the metro Washington DC market. The Company has posted 19 consecutive quarters of increased net income at September 30... a consistent financial performer. It had a 4.31% net interest margin and a 52% efficiency ratio for the third quarter. Commercial real estate and commercial and industrial loans make up 74% of its loan portfolio. Loans are funded 86% with core deposits, allowing the bank to maintain a superior net interest margin. Another key to the bank's strong efficiency ratio is average deposits per branch. At September 30, the bank had $3 billion in deposits with only 18 branches, for an average of $166 million per branch. Eagle is run by Ron Paul, a highly respected real estate investor/developer. Interesting how so many high performing financial institutions have CEOs from other industries. I salute Eagle's 463% five-year total return to their shareholders.

#5. Bancorp, Inc. (Nasdaq: TBBK)

Founded in 2000, The Bancorp creates customized banks for affinity partners in the healthcare, payments, and institutional banking industry. According to its third quarter investor presentation, the bank's greatest revenue comes from pre-paid cards (35% of revenue), followed by revenues from a traditional community bank (22% of revenues) that manages $1.4 billion of the $4 billion asset balance sheet. The branchless community bank operates in the Wilmington-Philadelphia market. Yet another niche bank for our Top 5. The strategy delivered a year-to-date ROA of 0.59% and ROE of 6.89%, and a 453% five-year total return to shareholders. Congratulations! 

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $4 billion in total assets. Bank of America... not here. Jamie Dimon, ditto. PNC, sports a Steelers-like record. But, 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.

Banking's Total Return Top 5

Last year I searched for the Top 5 financial institutions in total return to shareholders because I grew weary of the "get big or get out" mentality of many bankers and industry pundits. If their platitudes about scale and all that goes with it are correct, then the largest FIs should logically demonstrate better shareholder returns.

Not so last year, and not so again this year.

My method was to search for the best banks based on total return to shareholders over the past five years... capital appreciation and dividends. However, to exclude trading inefficiencies associated with illiquidity, I filtered for those FIs that trade over 2,000 shares per day. This, naturally, eliminated many of the smaller, illiquid FIs.

For comparison purposes, here are last year's top five, as measured during September, 2011:

#1 BofI Holdings, Inc.

#2 Signature Bank

#3 ESB Financial Corporation

#4 Bank of the Ozarks, Inc.

#5 German American Bancorp

This year's list is in the table below:

 The two report A-listers are BofI Holdings, Inc., and Bank of the Ozarks, Inc. Special mentions are Signature Bank that was #7 this year, and German American Bancorp that was #9. No slouches there.

#1. BofI Holdings Inc.

BofI Holdings Inc. and its subsidiary BofI Federal Bank aspire to be the most innovative branchless bank in the United States providing products and services superior to their competitors, branch-based or otherwise. In its latest investor presentation, BofI highlighted it's expense ratio (operating expense as a percent of average assets) compared to peer as 1.67% versus 3.17%, respectively, and efficiency ratio (operating expense as a percent of total revenue) compared to peer as 35% versus 63%, respectively. So, as a branchless bank, BofI has leveraged its significantly lower operating expenses into profit. That profit led to the top spot in five year total return to shareholders, two years running. Well done!

#2. Bank of the Ozarks, Inc.

In 1979, George Gleason, a 25-year-old attorney, purchased controlling interest and assumed active management of the bank as Chairman of the Board and Chief Executive Officer. At the time, the bank had a couple dozen employees and total assets of $28 million. Today the bank has more than 100 offices in seven states. It's growth since 2010 has been fueled by seven purchases of failed banks. This has led to $863 million of covered loans (loss share arrangements with FDIC), and a yield on such loans of 8.69%, according to its latest investor presentation. This has led to a mind blowing net interest margin of 6.01% for the quarter ended September 30, 2012. OZRK moved up three places in total return to shareholders from last year's ranking. Well done!

#3. Access National Corporation

New to the august list is Access National, whose mission is to provide credit, treasury management and private banking services to emerging businesses with revenues of up to $100 million... very specific, and refreshing given that so many banks cannot choose a specific niche for fear of alienating other constituencies. Those buckshot banks don't have much representation in this top 5 list. Coincidence? You decide. Another interesting fact is that Access National's management team, which owns 15% of the bank, is relatively young, ranging in age between 41 and 53 years old. To be fair, Access National is headquartered in Reston, VA, one of the best banking markets in the country. Focused mission, young management team, great markets... great ingredients in a success recipe.

#4. Hingham Institution for Savings

Founded in 1834, Hingham Savings' mission is  to provide the finest in community banking, with integrity and teamwork. This usually earns the jfb blah, blah, blah statement since we can affix that mission to 90% of the banks across the US. But slow and steady wins the race, in this case. Hingham's ROA from 2007-2011 was 0.63%, 0.81%, 0.93%, 1.05%, and 1.14% respectively. It's third quarter 2012 ROA was 1.15%. Slow, steady improvement. By the way, 0.63% represented it's lowest ROA in a 10-year stretch. But looking at their performance, it's fair to ask... "what financial crisis?" Hingham's tagline, "Simple Banking. Honest Value. Happy Customers" is consistent with a typical industry theme described by one of my colleagues: "boring banking is beautiful". It's this simplicity and consistent performance that most likely resulted in their superior, long-term total return to their shareholders.

#5. Texas Capital Bancshares, Inc.

Texas Capital Bank delivers highly personalized financial services to Texas-based businesses with more than $5 million in annual revenue. Recognizing the inherent link between business owners and their personal wealth, TCB manages the personal wealth of Texans with net worth of more than $1 million. Similar to three of the five banks on our list, TCB is a relatively recent addition to banking, being founded in 1998. Actually, since Bank of the Ozarks has significantly changed since it's FDIC acquisition spree, one might include them in the list of "new" banks. TCB is largely a growth story, and mostly organic growth since it has not been very acquisitive. Since 2007, operating revenue has grown at a 22% compound annual growth rate (CAGR), while non-interest expenses grew at a 17% CAGR. This positive operating leverage generated net income CAGR of 32% during the same period, supporting their Top 5 position in total return to shareholders. Well done TCB!

There you have it! The jfb all stars in top 5 total return. Congratulations to all of the above that developed a specific strategy and is clearly executing well. Your shareholders have been rewarded!

Do you think there are themes that have 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 out.

Top 5 Total Return to Shareholders: #1 BofI Holdings Inc.

I was recently moderating a strategic planning discussion with a multi-billion dollar in assets financial institution. During the discussion, the President of one of the bank's most profitable divisions opined that less than $10 billion in assets was the "dead zone". They had to grow to survive.

I challenged the thinking. But he held firm that the regulatory environment, changing customer preferences, and the pace and expense of technology were driving the market towards bigger is better. In that, I thought, he has a point.

But I'm always looking for support. This blog has dug deep into the numbers to support the notion that bigger is better. I wrote about the best performing FIs in ROA (see link here), and how growth impacted expense and efficiency ratios (see link here). Neither supported this regional president's opinion.

This time, I searched for the top five best performing FIs by total return to shareholders over the past five years. After all, what is the point of becoming big if you cannot deliver value to shareholders? I used two filters: the FI had to trade over 2,000 shares per day so there is some level of efficiency in the stock (this created a larger FI bias in so doing); and the FI could not have a mutual-to-stock conversion during that period, which muddies the waters.

I have reviewed my top five in descending order. Last post was dedicated to the #2 Signature Bank of New York, New York (see post here). The rest of this post goes to our number 1 bank and winner:

#1: BofI Holdings Inc. (Nasdaq: BOFI) of San Diego, California

Old school bankers are rapping their fists on mahogany desks, mumbling under their breath, and turning over in their graves at the notion that the best performing FI based on five-year total return to shareholders is an Internet bank. Yet here we are.

Bank of the Internet was formed in 2000 and went public in 2005. Over the past five years, it has returned over 80%, compared to -4% for the S&P and -66% for SNL Bank & Thrift Index (see chart). As Mel Allen would say, "how about that".

In spite of the stellar five-year performance, the stock currently trades around book value, and a 9x earnings multiple... low by industry standards. The trading multiples are in spite of a 1.26% ROA and 14.83% ROE year-to-date. Why such low multiples for such high performance? I'm not sure, but I have to think some high-brow snobbery regarding Internet banks is involved, much like fine wine drinkers' attitudes while quaffing a Sam Adams.

Not sure why you would have a high-brow attitude towards this bank, since its management team is made up of investment bankers, blue-chip consultants, and engineers (see here for management bios).

BofI prides itself on process discipline, delivering the best technology at the lowest cost, without the millstone of branches dragging down performance. Their efficiency ratio was 40% for their fiscal year 2011 (ended June 30, 2011).

They collect deposits primarily through three online brands, and are seeking affinity relationships to expand their brands. At June 30, 2011, the online bank had 32,000 accounts being served by nine CSRs (see below). BofI has also launched BofI Advisors, giving financial planning firms the ability to offer banking to their clients through a self-branded portal. In other words, the financial advisory firms serve as the point of entry to the bank, with BofI providing the back end banking services.

Vietnam, a communist country, did not develop the infrastructure for a nationwide telephone system. When cellular technology advanced to the point that telephone lines, poles, and in-home wiring wasn't required, they embraced it. The result: Vietnamese can talk to one another as easily as we can in the U.S., but don't have telephone poles delivering outdated technology. BofI is Vietnam, without the beef noodles. Bankers should take note.

Congratulations to BofI Holdings Inc.. They are the best performing financial institution nationwide in total return to shareholders over the past five years. Here is our list of winners:

#1 BofI Holdings Inc.
#2 Signature Bank
#3: ESB Financial Corporation
#4: Bank of the Ozarks, Inc.
#5: German American Bancorp

~ 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 out.