Much of the banking sector has seen share prices decline in 2020 due to the coronavirus pandemic. Not only did the pandemic result in rising credit costs for banks, but it also caused the Federal Reserve in March to drop its benchmark lending rate to practically zero, which significantly hurt the sector's revenue outlook. But not all banks struggled -- in fact some will likely remember this year for a long time to come. Here are five bank stocks that excelled in 2020.
1. Silvergate Capital
Based in beautiful La Jolla, California, Silvergate Capital (SI 4.17%) went public at the end of 2019, and has rode the recent surge in bitcoin to a 148% jump in its stock price year to date. The bank as of this writing trades around $39.50 per share.
Put simply, Silvergate is the crypto bank. Management realized years ago that bitcoin would one day be an investable asset and built a real-time payments network called the Silvergate Exchange Network (SEN).
SEN essentially allows institutional investors looking to trade crypto assets to clear transfers instantly with crypto exchanges around the clock, 365 days a year. In October, SEN surpassed $100 billion in transfer volume. SEN has allowed Silvergate to bring in tons of non-interest-bearing deposits and solid levels of fee income as well. Although the bank may be a bit volatile considering the stock price seems to at least partially move with bitcoin, expect a strong fourth quarter as much of bitcoin's recent surge has occurred in the last few months .
2. Live Oak Bancshares
If you follow bank stocks, then you have probably heard about Live Oak Bancshares (LOB 0.95%) this year. The $8 billion asset bank based in North Carolina had a breakout year, and recently has seen its stock price grow 124% year to date. The bank has really good technology built into its infrastructure and is the No. 1 lender of U.S. Small Business Administration (SBA) loans in the country. Because the Paycheck Protection Program (PPP) is built on top of the SBA program, it set up the bank for a once-in-a-lifetime opportunity.
Live Oak originated about $1.7 billion in PPP loans, which is a massive amount for a bank of its size. Those loan originations translate into more than $60 million in fees for the bank that will eventually roll into interest income. The bank has only recognized a small portion of those fees as profits, and the majority remain on the balance sheet until the PPP loans are forgiven. So there are likely some more strong earnings quarters ahead for the bank. Congress may also pass a second stimulus bill at some point with more PPP funding, which would be another boon for the bank.
3. Merchants Bancorp
The $9.5 billion asset Merchants Bancorp (MBIN 2.46%) in Carmel, Indiana, has taken advantage of the ultra-low-rate environment and the surge in mortgage activity to generate outstanding performance. Recently trading around $28.50, the stock is up about 46% year to date, and honestly, that doesn't seem like enough growth given the performance. Merchants' main business is in mortgage warehouse lending, which is providing short-term lines of credit to other mortgage originators so they can fund mortgage loans. This business tremendously benefited both the bank's net interest income and fee income this year.
In the third quarter of this year, Merchants generated a 2.34% return on average assets, meaning the bank generated 2.3 cents in profit for every dollar of assets. It may not sound like much, but in banking, delivering more than a 1% return on assets is considered strong. Merchants also delivered a 41% return on tangible common equity in the third quarter, which again, is pretty unheard of. The bank also had a jaw-dropping efficiency ratio of 25%, meaning it only used $0.25 of expenses to generate every $1 of revenue.
All of these numbers are just incredible, leading me to believe that even while trading around 154% of tangible book value, Merchants may be trading cheap. While mortgage activity is expected to remain strong in 2021, it will also likely begin to normalize, so these kinds of return metrics are not likely to stay this strong forever.
4. SVB Financial Group
SVB Financial Group (SIVB.Q), the holding company of the nearly $100 billion asset Silicon Valley Bank, has seen its stock price grow by 39% year to date and recently traded at more than $353 per share. By far the largest bank in this group, Silicon Valley Bank caters to the start-up, venture capital, and private equity communities.
The company's investment bank division got in on many lucrative venture-backed IPOs in 2020, and the bank also found commercial loan activity among the venture capital community. While shares are trading high relative to tangible book value, the outlook for the bank in 2021 once again looks good.
5. Triumph Bancorp
Triumph Bancorp (TFIN -0.19%) is a $5.8 billion asset bank based in Dallas, Texas, that specializes in lending to the transportation industry. The company's stock recently traded around $48 per share, which is up about 27% year to date.
The bank has several attractive lending segments in this low-rate environment. It offers mortgage warehouse lending, but also a product called factoring, which provides working capital to businesses -- mainly in transportation -- by essentially using customer invoices as collateral. These specialized financial products come with attractive returns. Triumph's net interest margin at the end of the third quarter was 5.83%, which is incredibly good for a commercial bank right now. The margin has also managed to hold steady year over year despite the low-rate environment, largely because factoring volume this year has increased.