Banking's Top 5 in Total Return to Shareholders: 2017 Edition

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

Not so over the six 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. 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.

Total return includes two components: 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. I also filtered for anomalies such as recent merger announcements, mutual-to-stock conversions, and penny stocks. 

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2016:

#1.  Independent Bank Corporation (Nasdaq: IBCP)
#2.  Waterstone Financial, Inc. (Nasdaq: WSBF)
#3.  Summit Financial Group, Inc. (Nasdaq: SMMF)
#4.  MBT Financial Corp. (Nasdaq: MBTF)
#5.  BNCCORP, Inc. (OTCQX: BNCC)

Here is this year's list:

#1. Old Second Bancorp, Inc. (Nasdaq: OSBC)

Old Second is a single-bank holding company headquartered in Aurora, Illinois. It has $2.4 billion of assets and operates twenty five branches in the western suburbs of Chicago.  The Bank, Old Second National Bank, lost a whopping $156 million in 2009 and 2010. Whopping because it went into those years with $247 million in tangible equity. How did they lose it? Bad loans. Their non-performing loans (NPL)/total loans ratio peaked at 12.54% in 2010, and between 2009-12, the Bank charged off over 11% of its loan portfolio. That got regulator's attention in the form of a May 2011 Consent Order

(CO). But they didn't bury their head in the proverbial sand. They hit their challenges hard, and had the CO lifted a little over two years later. Quite an accomplishment given the gravity of their problems. Today, NPL/total loans is a manageable 0.94%, and the Bank ROA/ROE year-to-date is 1.22% and 11.61% respectively. These comeback kids have delivered a 958% total return to shareholders over the past five years. Welcome to the list!

#2. Independent Bank Corporation (Nasdaq: IBCP)

Independent Bank dates back to 1864 as the First National Bank of Iona. Its size today, at $2.8 billion in assets, is smaller than it was a decade ago. It is a turnaround story because the bank was hammered with credit problems between 2008-11, when it lost over $200 million. In 2011, at the height of its problems, non-performing assets/assets was nine percent. Today that number is 2.6%. Exclude

performing restructured loans, and that number plummets to 0.38%. Net charge offs are negligible. In
fact, year to date they have a net recovery. Interestingly, IBCP recently announced an acquisition in northwest Michigan, five years after they sold 15 branches in the northeast part of the state. Times change. And IBCP has delivered a five-year total return to their shareholders of 620%. This is their third straight Top 5 recognition!

#3. Summit Financial Group, Inc. (Nasdaq: SMMF)

Summit Financial Group, Inc. is a $2.1 billion in asset company headquartered in West Virginia, providing community banking services primarily in the Eastern Panhandle and South Central regions of the state, and the Northern and Shenandoah Valley regions of Virginia. Summit also operates an insurance subsidiary. In 2012, the company had net income of $7.0 million on assets of $1.4 billion.

Today, the company has annualized net income of $13.2 million. Actually, the Bank had a one-time after tax litigation settlement (from a 2002-04 event) of $6.2 million. So their normalized net income is $19.4 million. A 50% growth in assets, and a 177% growth in net income. Positive operating leverage! And Summit has a couple of new acquisitions under their belt. One in 2016 and one this year. This marks Summit's second consecutive year in the Top 5! Well done!

#4. HMN Financial, Inc. (Nasdaq: HMNF)

Similar to Old Second, HMN is a turnaround story. It is the holding company for Home Federal Savings Bank, a $715 million in asset thrift headquartered in Rochester, Minnesota with retail banking and loan production offices in Minnesota, Iowa, and Wisconsin. In 2007, the Bank had $1.1 billion of assets, $11 million in net income, and a 1.01% ROA. Then, kaboom! Over the next four years the Bank lost $58 million. A princely some to a Bank with $107 million of capital at the time. In 2008, the Bank had $216 million of Construction & Land Development (CLD) loans, 12% of them were either past due or on non-accrual. As the saying goes, in CLD, when the music stops, you don't want to be the one without the chair. And HMN found itself without a chair. So they took TARP, and

aggressively dealt with their asset quality problems, and shrank their balance sheet quickly to bolster capital ratios. By 2014, they cut the balance sheet in half. And since that time have grown loans over $200 million and deposits over $130 million. Today, they earned an 0.89% ROA, although that number has been bolstered by negative loan loss provisions. Their NPL/Loans shrank to 0.56%. Quite a recovery indeed and their shareholders that jumped in during the bleak days were rewarded!

#5. Parke Bancorp, Inc. (Nasdaq: PKBK)

Parke Bancorp, Inc. is the holding company for Parke Bank, a $1.1 billion in assets commercially focused community bank based in southern New Jersey, serving Philadelphia and its suburbs. Unlike the three of the banks above, this is not a turnaround story. Their ROA has been greater than 1% the past five years. In fact, I can't explain exactly how they do it. I'm going to have to ask Vito Pantilione, their CEO. One strategy is limited branching. They have only seven, averaging $120 million in

deposits per branch, which is nearly twice The Kafafian Group (my firm) peer average for branch deposit size. Their cost of funds is slightly above average, at 86 basis points. But their non-interest expense/average assets was 1.40%. You read that right. Apparently, Vito is cheap. Their NPAs/Assets has always, to my recollection, been above their peers. But their charge offs are not. And they have a 5.02% yield on their loan portfolio. Pretty good. That's why they returned 580% to their shareholders the past five years!

Here's how total return looks for you chart geeks, with the lower green, and flat line being the S&P 500 Bank and Thrift Index.

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $2.8 billion in total assets. No SIFI banks on the list. Ask your investment banker why this is so.

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: 2016 Edition

For the past five years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the persistent "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 five 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. 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.

Total return includes two components: 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. I also filtered for anomalies that result from recent mutual-to-stock conversions and penny stocks. 

Before we begin and for comparison purposes, here are last year's top five, as measured in December 2015:

#1.  Independent Bank Corporation (Nasdaq: IBCP)
#2.  Fentura Financial, Inc. (OTCQX: FETM)
#3.  BNCCORP, Inc. (OTCQX: BNCC)
#4.  Carolina Bank Holdings, Inc. (Nasdaq: CLBH)
#5.  Coastal Banking Company, Inc. (OTCQX: CBCO)

Here is this year's list:

Independent Bank Corporation celebrates its second straight Top 5 recognition, and BNCCORP celebrates its third straight year on this august list. Congratulations to them. A summary of the banks, their stories, and links to their website are below. 

#1. Independent Bank Corporation (Nasdaq: IBCP)

Independent Bank dates back to 1864 as the First National Bank of Iona. Its size today, at $2.5 billion in assets, is smaller than it was a decade ago. It is a turnaround story because the bank was hammered with credit problems between 2008-11, when it lost over $200 million. In 2011, at the height of its problems, non-performing assets/assets was nine percent. Today that number is 3.6%. Exclude performing restructured loans, and that number plummets to 0.62%. The result: those investors that jumped onboard at the end of 2011 were well rewarded. Their total return was greater than 1,500%. You read it right.


#2. Waterstone Financial, Inc. (Nasdaq: WSBF)

Waterstone is a single-bank holding company headquartered in Wauwatosa, Wisconsin. It has $1.8 billion of assets and operates eleven branches in the metropolitan Milwaukee market, a loan production office (LPO) in Minneapolis, Minnesota, and 45 mortgage banking offices in 21 states. The mortgage bank has more than 3x the employees of the bank. Year-to-date, the company has generated more fee income, at $95.2 million, than it has in operating expense, at $95.0 million. I don't know any other bank that accomplished this. I'm sure there are some. But I haven't heard the tale. This tale is true. That means their year-to-date $31.8 million net interest income after provision... is gravy. And that is a key reason why their five-year total return exceeded 1,000%!


#3. Summit Financial Group, Inc. (Nasdaq: SMMF)

Summit Financial Group, Inc. is a $1.7 billion in asset company headquartered in West Virginia, providing community banking services primarily in the Eastern Panhandle and South Central regions of the state, and the Northern and Shenandoah Valley regions of Virginia. Summit also operates an insurance subsidiary. In 2011, the company had net income of $4.1 million on assets of $1.5 billion. Today, the company has annualized net income of $16.8 million. A reversal of fortune from a 0.28% ROA to a 1.09%. How did they do it, from my perspective? 1: Margin expansion, and 2: Expense discipline. Annual operating expenses were $36.6 million in 2011, and are $33.2 million today. And that includes some of the expenses associated with an acquisition that is set to close shortly. So they grew. And spent less to do it. A bank that viewed its operating expenditures as investments. Amazing!


#4. MBT Financial Corp. (Nasdaq: MBTF)

In 1858, while Lincoln and Douglas debated for a US Senate seat, Benjamin Dansard started Dansard State Bank to operate from the back of Dansard General Store. Ultimately renamed Monroe Bank and Trust, this bank pre-dates the Civil War! Similar to IBCP above, MBT is a turnaround story. In 2011, non-performing assets/assets was at 7.7%. Today they are at 1.8%, and below 1% if you exclude restructured yet performing loans. The asset quality issues led to a $3.8 million loss in 2011. Since that time, nothing but black ink, leading to a year-to-date ROA of 1.10%, and ROE of 10.13%. How did they get there? A dramatic improvement in asset quality, a process and efficiency initiative that led to reduced costs and improved processes, and motivation. Insiders own over 22% of the company. That's motivation! Well done!  

#5. 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 16 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 banking business, is challenged due to  the decrease in oil and ag commodity prices. But earnings continue to increase in spite of the challenges. This has resulted in a tangible book value per share at September 30th of $22.51... a significant recovery and turnaround story that landed BNC in our top 5 for the third straight year. Your investment five years ago would have resulted in over an 800% total return!

Here's how total return looks for you chart geeks, with the lower green, and flat line being the S&P 500 Bank Index.

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $2.5 billion in total assets. No SIFI banks on the list. Ask your investment banker why this is so.

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: 2015 Edition

For the past four years I searched for the Top 5 financial institutions in five-year total return to shareholders because I grew weary of the persistent "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 four 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. 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.

Total return includes two components: 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. I also filtered for anomalies that result from recent mutual-to-stock conversions and penny stocks. 

Before we begin and for comparison purposes, here are last year's top five, as measured in December, 2014:

#1.  Open Bank (OTCQB: OPBK)
#2.  BofI Holdings, Inc. (Nasdaq: BOFI)
#3.  BNCCORP, Inc. (OTCQX: BNCC)
#4.  Western Alliance Bancorporation (NYSE: WAL)
#5.  Mercantile Bank Corporation (Nasdaq: MBWM)

This year's list is in the table below:

BNCCORP celebrates its second straight year on this august list. Congratulations to them. A summary of the banks, their stories, and links to their website are below. 

#1. Independent Bank Corporation (Nasdaq: IBCP)

Independent Bank dates back to 1864 as the First National Bank of Iona. It's size today, at $2.4 billion in assets, is smaller than it was a decade ago. You might be able to see where this story is going. The bank was hammered with credit problems during the financial crisis, as Michigan's economy was hit pretty hard. Between 2008-11, the bank lost over $200 million, and its equity base was cut in half. But management went to work. Selling branches, shrinking the balance sheet, raising equity, and working out bad loans.  At the height of its problems in 2011 over 9% of its assets were bad loans. Today that number is cut in half, and the equity has more than doubled. Those investors that jumped onboard at the end of 2010 were well rewarded. Their total return was greater than 1,000%. You read it right.


#2. Fentura Financial, Inc. (OTCQX: FETM)

In 2006, Fentura Financial, the holding company for the creatively named State Bank, had over $620 million in total assets, $51 million in total equity, an 0.85% ROA, and a book value per share of $24.08. Then the financial crisis hit. And yes, another Michigan bank. By 2011, total assets were cut in half, total equity was $14.7 million and book value per share was $6.27 after amassing $36.5 million of red ink 2007-11. Since those dire times, the bank has picked itself up, growing assets to $434 million and total equity to $30.8 million. Their year-to-date ROA was 0.95% and ROE was 13.3%. Not bad for a bank that was circling the toilet bowl. Investors that got in the stock at the end of 2010 were rewarded with an 862% total return. What a ride!

#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 16 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 $20.09... a significant recovery and turnaround story that landed BNC in our top 5 for the second straight year.

#4. Carolina Bank Holdings, Inc. (Nasdaq: CLBH)

Carolina Bank opened its doors in 1996 under the name Carolina Savings Bank. With nearly $690 million in total assets and eight branches, it is led by the same person since its founding, Bob Braswell. Like the other banks in the Top 5, Carolina took a little on the chin during the financial crisis, suffering small to moderate losses in 2009-10. But these were minor setbacks compared to others, and their financial performance is better than ever, recording a year-to-date ROA of 0.92% and ROE of 10.72%. Not bad for a bank that is less than $1 billion in assets. Citigroup, by comparison, had a 0.77% ROA and a 6.63% ROE for the same period. And they have $1.8 trillion in total assets. Trillion with a "T".

#5. Coastal Banking Company, Inc. (OTCQX: CBCO)

Coastal is the $439 million in assets holding company of CBC National Bank, headquartered in Fernandina Beach, Florida. Which is interesting because Coastal is headquartered in Beaufort, South Carolina. But I digress. The Company's residential mortgage division, headquartered in Atlanta, has lending offices in Arizona, Florida, Georgia, Maryland, Michigan, Indiana, Illinois and Ohio. If I haven't confused you enough, they have an SBA division that originates loans in the Jacksonville, Ft. Myers, Tampa, and Vero Beach Florida markets, as well as Greensboro, NC and Beaufort. This crew gets around. Since mortgages were a great business to be in during the financial crisis *insert sarcasm*, they too suffered meaningful losses. But to get on the jfb Top 5, you have to execute a near perfect recovery. It looks like Coastal did so, and now sports a 1.18% ROA and a 14.83% ROE, delivering a 410% five-year total return to their shareholders. Well done!

Here's how total return looks for you chart geeks, with the lower red, and flat line being the S&P 500 Bank Index.

There you have it! The JFB all stars in top 5, five-year total return. The largest of the lot is $2.4 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, as in last year, is recovery, with the possible exception of Carolina Bank, which held up well during the recession. 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.