Thing 1: Insider ownership is one of the most important things to consider when analyzing bank stocks.
Before I get too engrossed in the financials of any bank investment opportunity, I first like to open the bank's Proxy Statement to find out just how much skin management has in the game. If they don't have enough confidence to have a significant chunk of their personal net worth invested in the entity - as stewards of the company with first hand knowledge of all of its affairs - why should I?
Recent case in point: Much has been made of the trading loss at JP Morgan (JPM) and its implications for CEO Jamie Dimon. Excellent articles by Tom Brown at Bankstocks.com and Karey Wutkowski at Reuters put the loss in the best perspective, I think.
However, I haven't seen a thing written about the fact that Jamie Dimon owns 5.2 Million shares of JPM valued at some $180 Million. That leads me to trust Dimon to run JPM with shareholder interests in mind. He suffers when they suffer. In contrast, Brian Moynihan, CEO at Bank of America (BAC), owns a paltry 485,000 shares worth just $3.5 Million. Given Moynihan's comp last year of $8 Million, his ownership represents about 5 months worth of pay. His shareholders can lose their shirts, while he sleeps soundly on his paycheck.
Industry snapshot: If you do nothing other than stack up banks according to Proxy information concerning their Executive Compensation and Insider Ownership, you'll obtain great insight wherein lie the best investments.
Consider the eight banks profiled in the table below, for example, which compares five of the publicly-traded community banks I've recently reviewed for the Timyan Community Bank Alert™ blog with three big money center banks. The best performing bank in the group is Horizon Bancorp (HBNC), whose CEO Craig Dwight owns stock equal to 800% of his compensation for 2011. The worst is Citigroup (C), whose CEO owns about one year's worth of compensation in shares. The third worst performer is CFS Bancorp (CITZ), of Munster, Indiana, whose CEO Daryl Pomranke earns in just 8 months the amount he has at risk in CITZ shares at today's price.
Going forward, this particular industry snapshot tells me at a glance that I'd probably be better off owning the likes of Horizon, Carter Bank and Trust (CARE.OB), and Southeast Bank Financial (SBFC.OB) than Citigroup, CFS Bancorp, or Harvest Community Bank (HCBP.OB).
Comparison of Executive Compensation and Ownership
2011 CEO comp
CEO Stock ownership
Total insider ownership
CEO ownership as % of annual comp
Stock's total 5-year return
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Best practices: I love that Horizon's board recently passed the ownership guidelines for Officers and Directors summarized below! Every bank in the country should follow suit. Until they do, before you invest, make sure you consider which side of the bread bank executives have buttered - their own compensation side or shareholder ownership side.
- All Bank Directors should own three times their annual retainer in stock.
- The CEO should have three times his base salary in shares.
- Named officers should own two times their base salary in stock.
- Other officers should own at least one year's salary in stock.
- Officers and Directors need to maintain shares equal to 75% of the after-tax profit on shares held.