Where to Find Outsized Returns in Bank Land (Hint: Look for Differentiated Stories)

Why Some Banks Outperformed in 2025

Throughout January, I had several management teams ask me what drove some banks to outperform others in 2025, especially after hearing Jamie Dimon say, “When you see one cockroach, there’s probably more.” This comment on October 14 sparked a sell-off in bank stocks over the next two days, with the SPDR S&P Regional Banking ETF (KRE) dropping 6.2% on October 16 alone. Since then, however, the KRE rallied 11.5% into year-end, and this continued with a further 7.9% increase through February 2. Several fundamental positives fueled this rally, including management commentary for stable-to-improving net interest margins, limited expected loss content in problem loans, a softer tone from regulators and generally solid results and outlooks discussed during 4Q25 earnings season.

I don’t think it surprising that these traits drove the rally in bank ETFs, but I still wanted to understand what drove some banks to outperform the group. To answer this question, I wanted to weed out any short-term trading noise, so I took a longer timeframe and examined full-year 2025 stock performance. I also wanted to drill down my focus to banks trading on major exchanges with assets of $2-$20 billion to identify those that may have less institutional coverage than larger competitors but also bring investable liquidity. The average 2025 stock return of this universe was 7.6% (very close to the 7.4% return in the KRE) with a standard deviation of 18.0%. Table 1 contains the banks in our universe that exceeded the average by one standard deviation, and our thoughts that follow cover why they outperformed.

Share Liquidity is Important

There are many benefits to trading on a major exchange, not least of which is an improvement in share liquidity. The top two banks listed here, Isabella Bank Corporation and Central Bancompany, both uplisted to a Nasdaq exchange in 2025, which no doubt helped fuel the stocks’ returns last year. Central’s uplist was associated with its IPO in November; prior to that its OTC ticker was CBCY. Both banks also posted consistent margin throughout the year, which likely contributed to stock appreciation as well, but those characteristics have been present at many institutions for the past few quarters, and we did not see comparable stock returns from them.

M&A (as a Seller) Can Generate Outsized Returns in Bank Stocks

Three banks in this table announced they intended to sell themselves last year — MidWestOne to Nicolet; Heritage Commerce to CVB; and Blue Foundry to Fulton. Both MOFG and BLFY posted strong positive stock reactions day one after their deal announcements, jumping 39.4% and 40.0%, respectively. HTBK rose a more modest 2.0% after its acquisition announcement, though it has long-since been a rumored take-out candidate given its scarcity value in the San Francisco Bay Area. We suspect that contributed to the stock’s performance last year. Similar to Isabella and Central, Heritage’s margin was trending in the right direction (as were its ROA and ROTCE), helping to lift the stock ahead of the deal announcement.

A Discount Valuation May Not be a Catalyst, but it Can Help

Had I not seen the data presented in Table 1, I would have assumed that strong profitability would be a key driver of outsized stock performance. And I would have been wrong (mostly). Of the banks not yet discussed, 12 posted ROAs below 1.00% in 2024 (that’s nearly half this list!). So, what happened?

Well, quite simply, they entered the year with a deep discount valuation gap which narrowed in 2025. At the end of 2024, the median price / tangible book value in our universe of stocks was 132%, while it was just 90% for these 12 banks. Throughout 2025, these stocks benefited from an improved operating environment and, in many cases, they were self-help stories with profitability recovering from weak levels. After nearly 18 years as a sell-side analyst, I can attest combining a deep discount with a better outlook has always been a good recipe for robust stock returns in bank land.

The reason I would have been “mostly” wrong with my assumption is that three banks (Red River Bancshares, First Financial, and HomeTrust) posted well above average profitability over the past year, which was ultimately reflected in very strong stock performance.

These three banks entered 2025 at discount valuations, but their outlooks were solid and the management teams executed. First Financial’s discount likely stemmed from it being in the M&A penalty box, as it closed SimplyBank acquisition in mid-2024. The other two appear to have been trading at unwarranted discounts at the end of 2024, and their outperformance could simply have stemmed from investors waking up to these stories. I have seen this dynamic play out first-hand for many institutions. However, with these banks not trading at deep discounts any longer, the likelihood of them continuing to post outsized gains is lower than it was a year ago.

A Differentiated Story Sets the Bank Apart …

The remaining five banks each offer investors with a unique, differentiated story or scarcity value in their markets that is not easily replicated. They are:

Filling a unique role in the banking ecosystem provides opportunities for premium pricing for loans, and this is clearly on display when examining the net interest margins at each of these three banks. In 4Q25, Coastal posted a margin of 7.03%, Bancorp’s was 4.30% and it was 6.05% at Esquire, all three of which are well above the 3.69% average in our universe. Coastal and Bancorp have leaned heavily into the fintech space, serving as partner banks in a BaaS framework for third parties, while Esquire combines a niche focus on the legal industry with a nationwide tech-forward payment processing vertical. Plus, Coastal’s and Bancorp’s BaaS business models generate substantial fee income (noninterest income is over 40% of operating revenue for both).

These differentiated models provide unique growth avenues, which helps attract generalist investors to their stocks. The banking industry is largely viewed as being a commoditized business, but these banks offer a unique story to Wall Street with growth potential beyond traditional banking. This differentiation should not be overlooked.

The other two institutions in Table 3 are more traditional, but scarcity value is clearly on display at Northrim (based in Alaska) and The Bank of N.T. Butterfield & Son (based in Bermuda). As such, it should come as no surprise that they both boast robust profitability (core ROAs of 2.01% and 1.76%, respectively, in their most recent quarters). These banks dominate their markets from a local community banking standpoint, which helps warrant premium pricing and aids in competing against much larger brethren. 

They also differentiate themselves through noninterest income streams. Northrim is the largest mortgage originator in Alaska, and selling production into the secondary market is a major reason that noninterest income is over 30% of revenue (versus ~16% for peers). Meanwhile, Butterfield operates a large trust and wealth management business (AUA for the trust business is $135.9 billion and AUM for wealth management is $6.5 billion) and as a result, its fee income is roughly 40% of operating revenue. The combination of scarcity value and a high level of noninterest income was surely a winning combination for the stocks of these two banks last year.

… And Unique Stories Have the Potential to Repeat their Performance

So what does this all mean? Improving stock liquidity, M&A, and emerging from a deep discount valuation can certainly help drive outsized stock returns, but these are not repeatable for the same group of banks from one year to the next. There could very well be other banks that benefit from these same characteristics in 2026, but the likelihood that this collection of banks outperforms is fairly low. On the other hand, banks with differentiated stories do have the potential to repeat their performance. In fact, 2025 was already a repeatable year for Coastal, Bancorp, Esquire, and Northrim, as all four posted outsized gains in 2024 as well! And, even for Butterfield, its 2024 stock performance was essentially in line with the ~15% increase in the KRE.

Lastly, with M&A being a key theme in across many industry conversations, I would be remiss not to point out that only one bank in Table 1 (First Financial) announced an acquisition (as a buyer) in 2025. Announcing an acquisition can make all the sense in the world for the long-term, especially if it is priced appropriately and adds a target with a great deposit base that is not easily replicated. However, the market continues to tell us that there is an M&A penalty box for buyers, so investors are likely better off looking elsewhere for outsized stock returns.

Stay tuned for the second piece in this series that will examine characteristics of the most highly valued banks in the industry and what sets them apart from peers. (Here’s a sneak peek: differentiated stories win here too!)