Should You Follow These Three Bank CEOs Who Gobbled Up Their Own Stock?

Chief executives at three regional banks bought their own companies’ stock last month.

That, coupled with the fact that bank stocks were strong in May, suggests that adding a bank stock to your portfolio now might be a good move.

First Citizens BancShares (FCNCA) is a regional bank with headquarters in Raleigh, North Carolina. Its return on assets has been more than 1.0% in the past four years. That’s the zone I like to see.

Frank Holding Jr., the bank’s chairman and CEO, bought a bit of the stock last month for about $18,900. He owns 558,286 shares, worth about $381 million as of June 3. Robert Newcomb, a director, spent more than half a million dollars to buy First Citizens stock last month. Robert Hoppe, another director, also picked up a few shares.

First Citizens shares sell for about 12 times earnings. That’s attractive at a time when the S&P 500’s earnings multiple is about 21.

At Customers BancorpCUBI
in Reading, Pennsylvania, a father-son story is unfolding. The father, Jay Sidhu, was chairman and CEO of the bank for more than a decade. He holds some $68 million of Customers stock, but has been a seller since 2017.

The son, Samvir (Sam) Sidhu, took over as CEO in July 2021. In his late 30s, he holds an undergraduate degree from the Wharton School at University of Pennsylvania and an MBA from Harvard Business School. He spent about $124,000 last month to buy 2,965 shares, bringing his stake to more than 80,000 shares.

Described by American Banker as “light on branches, heavy on technology,” the bank is a commercial lender in the Boston-Washington corridor and in Chicago. The stock seems cheap to me at four times earnings and 1.1 times book value.

Based in Carmel, Indiana, Merchants Bancorp (MBIN) has exceeded my return-on-assets guideline every year for the past seven years. Michael Dury, the CEO, bought 4,500 shares last month, bringing his total to more than 12,000 shares. The stock sells for six times earnings.

Dangerous Curve

How much of your portfolio should be in bank stocks? Crucial to the answer is the question of what will happen to the yield curve—that is, the spread between long-term and short-term interest rates.

Banks typically “lend long.” That is, their loans typically run to five years for car loans, 20 or 30 years for mortgages, and three to 25 years for business loans.

By contrast, they “borrow short.” The money they lend out comes from savings accounts, checking accounts and certificates of deposit. Money in checking and savings accounts can be withdrawn by customers at will. Certificates of deposit usually range from three months to five years.

So, banks care deeply about the yield curve. An inverted curve is awful for them, as they may have to pay more to attract deposits than they can make on loans. Earlier this year, it looked as if the yield curve might invert.

Now it appears that the curve may be reverting to normal, which bodes well for banks. But it’s not a sure thing, as the long-term vs. short-term spread isn’t very wide. So for now, I wouldn’t put more than 4% of my portfolio in banks stocks.

The Record

This is the 62^nd column I’ve written about insiders’ purchases and sales. I can tabulate results for 52 of them, all those written from 1999 through a year ago.

My picks from one year ago were awful. Tupperware Brands TUP
declined 74%, as new CEO Fernandez Calero was unable to spark the turnaround I envisioned. Container Store Group fell 43%. EvergyEVRG
did well, rising 17%, but unfortunately I said I would only buy it on weakness.

Longer-term, the results have been mixed in an odd way. Stocks I’ve recommended on the basis of insider buying have beaten the Standard & Poor’s 500 Total Return Index by 1.65 percentage points. Stocks where I noted insider selling have trailed the S&P by 1.44 points.

In cases where I noted insider buying, but recommended avoiding the stock, the stocks underperformed the S&P on average by 24 percentage points. In cases where I noted insider buying but made no recommendation or an ambiguous comment, the stocks beat the S&P by 19 percentage points.

Bear in mind that my column results are hypothetical and shouldn’t be confused with results I obtain for clients. Also, past performance doesn’t predict the future.

Disclosure: I have no positions in the stocks discussed today, personally or for clients.

John Dorfman is chairman of Dorfman Value Investments LLC in Boston, and a syndicated columnist. His firm or clients may own or trade securities discussed in this column. He can be reached at [email protected].