NEW YORK (
) -- Which bank CEO -- holding his first-ever investor conference call since taking his company public in 2007 -- described a conversation he'd had earlier that morning with his deceased parents?
Since that Aug. 9 call, this bank's stock is down more than 10% while
SPDR KBW Regional Banking
, an exchange traded fund that tracks regional bank stocks, is up nearly 13%.
The movement of a stock over a single year only gets you so far when you're looking at CEO performance, and in our efforts to find the worst-performing financial sector CEOs in 2010, we may have relied on that metric a bit too heavily. That's why we followed up our analysis by looking at longer term share performance and calls to the CEOs and others who follow their companies. We didn't allow positive marks in those areas to alter our list, but we certainly take note of those factors.
Consider this list, then, the beginning of a discussion on weak CEO performance in the financial sector in 2010. Investors in financial stocks during the past year often favored shares of companies that had been beaten down during the crisis that preceded it. Look at
, two of the biggest recipients of government bailouts during the crisis, both of which proved to be great investments over the past year. Should credit be given to the CEOs of those companies? Probably, but past performance had set the bar pretty low.
Perhaps not surprisingly, a few of the CEOs who turned up on our list called us up immediately to defend their records and generally had strong cases to make. A few of those that didn't, however, are among the highest paid chief executives on our list and the companies they run have posted several years of share price declines. They would appear to have some explaining to do.
To arrive at our list, we used SNL Financial software to screen for financial sector companies with a market cap greater than $1 billion that saw share price declines in 2010 through Dec. 21. Why that date? So we could bring you our analysis by year-end, and as you'll see, we had to do lots of interviews and fact-checking after we came up with our list.
Then we looked at CEOs who received a pay increase for 2009, the latest year for which data was available.
Finally, we gave a pass to CEOs who started in that role after Jan. 1 2008. Among the CEOs spared by that decision was
Bank of America
chief executive Brian Moynihan,
Here, then, is our list. Take good notes and remember to vote at the end for the CEO you think was the worst performer.
10.Craig Donohue, CEO,
2009 Compensation: $4.73 million (+16% vs 2008)
Ytd total return through Dec. 21:-1.43%
Three year total return: +2.11%
Five year total return: -51.28%
Trained as an attorney, Donohue has run the giant Chicago futures exchange since the start of 2004. While his five-year record looks bad and one- and three-year returns aren't much to speak of, CME's stock nearly tripled in Donohue's first year at the helm, and it's now up four and a half times from where it was when he took over leadership of the company.
That said, since we aren't including CEOs on this list who are in their first or second year at the helm, why should we give credit to a CEO for the fact that the stock happened to triple while he was presumably too green to have had much to do with it?
CME spokeswoman Anita Liskey said Donohue was unavailable for an interview, but in an email Liskey argued that "the exchange sector crashed during the time frame you're reviewing." Relatedly, Liskey said investors have been assigning much lower multiples to exchange stocks than they had previously. She points out CME earned $3.60 per share in 2003 and is expected to earn $15.43 this year, according to analysts. As for compensation, Liskey wrote, "his contract was up last year so he was re-signed for 3 additional years. Not given a raise."
Donohue's pay of $4.73 million may seem like a lot to most of us, but considering that CME's market cap is three times that of
, where CEO Duncan Niederauer earned $7.27 million in 2009, you can be sure Donohue feels downright poor.
"The investment community views the CME management team in general-- and Craig Donohue is probably at the forefront of who they identify that management team with--I think they view them as a particularly experienced and kind of steady hand," says Ed Ditmire, analyst with Macquarie Research, adding "I wouldn't necessarily disagree."
Ditmire gives Donohue and CME chairman Terry Duffy high marks for leading consolidation in the exchange industry during their tenure, and for pushing for political reforms leading to increased electronic trading and improved transparency for investors.
However, Ditmire thinks the CME and leaders of other exchanges are vulnerable to criticism for not capitalizing on the migration of derivatives from private "over-the-counter" markets onto centralized trading and clearing platforms.
"People would have thought they'd have been able to develop meaningful businesses out of this over the counter clearing opportunity earlier and in a more profound way than we've seen to date," he says.
9.Scott Dueser, Chairman, President and CEO,
First Financial Bancshares
2009 Compensation: $677,482 (+14% vs 2008)
Ytd total return through Dec. 21:-1.93%
Three year total return: +40.98%
Five year total return: +63.49%
Dueser's compensation is the lowest on our list, his bank's shares were barely negative this year, and the returns he provided for shareholders over the past three and five years are impressive, especially given the difficult environment.
An e-mailed statement from spokesman and investor relations chief Dave Hogan says the Texas-based bank is among the best in the country by several metrics, such as price-to-earnings and price-to-tangible book.
"Capital is strong and is at levels rarely seen anywhere else in the industry, especially given the fact that capital has grown organically," states an Oct. 22 research note from Keefe, Bruyette & Woods.
Andy Stapp, analyst at B. Riley & Co, who doesn't formally cover the bank, says its ability to post returns on equity in the low to mid double digits is an impressive feat few banks have been able to equal in the latter half of the decade given low profitability across the industry and the need to boost capital levels.
8. David Zalman, Senior Chairman of the Board and CEO,
2009 Compensation: $3.38m (+280%)
Ytd total return through Dec. 21:-2.32%
Three year total return: +36.68%
Five year total return: +41.85%
El Campo, Texas-based Prosperity is another example of a conservative lender that held up well during the crisis, but fell out of favor with investors in 2010. Non-performing loans amounted to just 0.3% of Prosperity's total loans--a better ratio than any other bank among the top 100 by assets, according to
and SNL Financial.
"From a fundamental standpoint we've actually done better at making money and our asset quality than we did last year," Zalman says, arguing that investors have likely been buying up weaker banks in 2010 on the theory that healthier banks like Prosperity will buy them out.
"They're really going up in value despite the fact that they do have a lot of problem assets and despite the fact that they're not making any money," Zalman says of 2010's top performing bank banks.
As for the big jump in Zalman's pay, more than $1.9 million is restricted stock, a performance-based award that Zalman says pays out over several years. His base pay rose to $691 thousand from $606 thousand in 2008.
B. Riley & Co. analyst Stapp says Prosperity is extremely well run, and, pointing to a measure called the efficiency ratio, he says Prosperity spends about 42 cents to earn a dollar of revenue, ranking it among the best banks in the industry by that measure.
"They've gone through this recession almost like it didn't exist," he says.
Stapp, who downgraded Prosperity to "neutral" from "buy" on Oct. 25, believes the low interest rate environment has caused investors to punish Prosperity's stock, as in order to avoid the risk of a sharp rise in interest rates it is forced to invest in short term securities, resulting in low returns.
"While we completely understand management's desire to shrink time deposits and manage interest rate risk by restricting growth in the securities portfolio, both of these decisions constrain earning asset growth," he wrote in a report explaining the rationale for his downgrade.
7. Ron Hermance,
Hudson City Bancorp
CEO since Jan. 1 2002.
2009 Compensation: $11.47 million (+26% vs. 2008)
Ytd total return through Dec. 21:-2.97%
Three year total return: -4.88%
Five year total return: +27.39%
We were surprised to see Hudson City on our list, as
it has been one of our favorite stocks for some time
. Hudson City's stock has more than quadrupled in value since Hermance took the helm of the company, as the CEO oversaw rapid growth while remaining a conservative lender.
"In a bigger picture sense, Ron has certainly done a great job," says FBR Capital Markets analyst Bob Ramsey.
But Hermance wasn't surprised to hear he'd shown up on our list of underperformers.
"The guys who did the worst this year are the guys that did the best last year," Hermance told
, adding "We and the others are out of favor, but we didn't fall as far."
Hermance's compensation seems pretty lofty for a company with a market cap of $6.6 billion, but it isn't difficult to find higher paid CEOs of similar-sized companies who have done far less for their shareholders.
FBR's Ramsey says the shape of the Treasury yield curve and competition from
in the jumbo mortgage lending space as the government-run lenders began offering bigger mortgages than they had previously done have given Hudson City headaches in 2010.
Still, Ramsey gives Hudson City and Hermance credit for pursuing what he thinks will prove to be a good long-term strategy in a tough year.
"I think they've done a very good job of sticking to what they know best, of having very good credit quality, of keeping good capital levels and really I think probably the smartest thing they've done this year is slowing growth, recognizing that the opportunities and the economics are not there," Ramsey says.
6. Carl Chaney President and CEO, and John Hairston, COO and CEO,
Hancock Holding Co.
2009 Compensation: $1.25m (+16% vs. 2008)
Ytd total return through Dec. 21:-13.05%
Three year total return: -0.11%
Five year total return: +8.08%
Chaney and Hairston stress they are both CEOs, as opposed to co-CEOs. The difference, says Hairston, is that they do not need to consult with each other before making a decision. The unusual partnership is part of a multi-decade tradition at the 112 year-old Gulfport, Miss.-based institution.
"Each of us can have the complete authority to do anything we need to do in the bank and the other supports whatever that decision may be," Hairston says.
Chaney tends to deal with investors, analysts and other external relationships, with Hairston is more focused on internal operations.
Chaney says he and Hairston are compensated based on performance versus similar-sized peers across the country. Since 2006, Hancock "has performed consistently in the top quartile," both in terms of return on assets "as well as taking into account asset quality metrics" among banks with $3-10 billion in assets, according to Chaney.
Chaney believes the weakness in Hancock's shares in 2010 was the result of a $10 million charge-off the bank took as a reserve against potential losses related to the Gulf oil spill. B. Riley & Co.'s Stapp believes fears over losses related to the spill are overblown.
Regardless, Chaney says Hancock has not reduced its dividend nor reported a loss in any single quarter since the crisis began in 2007.
Sandler O'Neill analyst Kevin Fitzsimmons argues Hairston and Chaney are doing a good job "broadly," and agrees with Chaney's assessment that they were punished by investors over the oil spill and because they had outperformed the sector in 2009.
Fitzsimmons notes that Hancock missed analyst estimates in a couple of quarters in what he retrospectively believes was "kitchen sinking, to an extent: kind of taking two quarters worth of credit costs and putting them into one. But the bottom line is when you're a high multiple stock and investors don't expect you to miss a beat, things like that, even though they're deliberately done, can have some impact on the stock."
Hancock struck a deal to acquire
Dec. 22, agreeing to a price Fitzsimmons and other analysts have argued was too high. Hancock, however, has
defended the deal
and the stock has recovered somewhat after a sharp selloff that followed the its announcement.
5. Dominic Frederico, President and CEO,
2009 Compensation: $7.66m (+15% vs 2008)
Ytd total return through Dec. 21:-13.55%
Three year total return: -27.88%
Five year total return: -22.46%
Frederico's pay for performance looks defensible only if one compares it to competitors
, which filed for bankruptcy protection this year, and
which, despite rallying some 200% in 2010, is still down about 80% over the past five years.
Assured Guaranty spokeswoman Betsy Castenir said Frederico wasn't available for an interview, but she e-mailed a prepared statement which read that "while shareholder return is an important factor in judging CEO performance, the Compensation Committee looks at a number of factors in judging the performance of the Company and its senior management."
The statement went on to say that "Frederico was compensated for successfully guiding Assured Guaranty through the worst financial crisis since the Great Depression and for completing the highly accretive acquisition of Financial Security Assurance Holdings. Today, Assured Guaranty is the leading provider of bond insurance to the U.S. municipal market and, due to it's(sic) underwriting discipline, has maintained the highest ratings in it's(sic) industry, as well as among most financial institutions."
Ed Grebeck, CEO of Tempus Advisors, an NYU finance professor, and a longtime critic of the credit insurance industry, said he was unaware of the size of Frederico's compensation, which he called "scandalous."
Grebeck believes monoline bond insurers continually misprice credit risk by looking at historical models in the typical fashion of the property and casualty insurance business, rather than being forward looking, as he says credit-based businesses should be.
"I'm looking at Dom Frederico as just another property and casualty insurance guy wrongly put in running a credit-based business, which is what a financial guarantor/monoline bond insurer is."
Grebeck believes Assured Guaranty's status as "the leading provider of bond insurance to the U.S. municipal market," could easily blow up in its face.
Grebeck says he has no short position in Assured Guarantee securities.
Asked about the risks Assured Guaranty faces as a guarantor of muni bonds, Castenir replied via email with a single sentence: "In answer to your question: The Company said it limits its guaranty to investment grade or higher issues."
Yes, and AIG was triple-A rated before it required a $182 billion bailout.
4. Roy Whitehead, Chairman, President and CEO,
2010 Compensation (fiscal year ended Sept. 30):$1.44m (+76% vs. 2009)
Ytd total return through Dec. 21:-16.01%
Three year total return: -21.65%
Five year total return: -22.07%
Whitehead has been CEO since 2000, according to
, and Washington Federal's stock hasn't done much in that time, though the 26% it has lost during the past four years is less than the 43% loss for the SPDR KBW Regional Banking ETF.
Whitehead says Washington Federal has beat the industry average in return on assets every year since it went public in 1982. It has been profitable every quarter through the crisis except for one, when it took a $90 million hit in September 2008 largely as a result of Fannie Mae and Freddie Mae preferred stock that essentially became worthless when the government put those companies into conservatorship.
FBR Capital Markets analyst Paul Miller says Washington Federal "might be one of the better run companies in the country." He believes the bank "is a sleepy company that is not completely understood" by investors, adding "they did get a little bit over their skis with home lending in the second home markets of Idaho, Oregon and Washington, but you're also talking about a company that went through the crisis pretty much unscathed."
3. Robert L. Moody Sr., Chairman and CEO,
American National Insurance
2009 Compensation: $22.3 million (+20% vs. 2008)
Ytd total return through Dec. 21:-26.34%
Three year total return: -22.82%
Five year total return: -13.08%
Moody's compensation seems quite large by most standards, but especially for a company with a market cap of just over $2 billion whose shares are worth the same today as they were in 1997. While his base salary fell to $2 million in 2009 from $5 million in 2008, nearly $14 million in earnings went into a column marked "change in pension value and non-qualified deferred compensation earnings," according to the company's proxy filing with the SEC.
Moody, who was 74 at the time of that filing, has been ANICO's CEO since 1991 and its chairman since 1982. He did not return calls seeking comment.
Only one equity analyst follows this diversified Texas-based insurer, according to
data, but that analyst, D.A. Ganesh of Virtua Research, could not be located in time for this article.
Standard & Poor's rates ANICO A+ with a negative outlook. A report from the credit ratings company says ANICO has shown "inconsistent operating performance, particularly in the property/casualty segment," but has "strong capitalization and liquidity" and "improving financial performance in core life and annuity operatingsegments."
2. Marc Stefanski, Chairman and CEO
TFS Financial Corp.
since 1988. Added President to his title in 2000.
2009 Compensation: $4.36 million (+61% vs. 2008)
Ytd total return through Dec. 21:-29.25%
Three year total return: -26.73%
Five year total return: not available (IPO was in May 2007)
Stefanski took over this Cleveland-based company from his parents, who founded it in 1938. The stock sold off sharply in August after TFS suspended its dividend and share repurchases and said a memorandum of understanding (MOU) from the Office of Thrift Supervision would be forthcoming as the regulator had expressed concerns about TFS's home equity loan portfolio.
On Aug. 9, the company held its first ever investor call to try and calm the markets, though it doesn't appear to have been effective. Since the Aug. 9 call (and not including the roughly 20% drop in the stock that preceded it) TFS shares are down more than 10% while the SPDR KBW Regional Banking ETF is up nearly 13%.
Shareholders might have been concerned by the less-than-orthodox commentary from Stefanski on the call, for example: "this morning I stopped at my parents' gravesite, which I do periodically for insightful wisdom and spirituality. And I felt pretty good about the discussion I had this morning until I was walking away from the gravesite, and I thought I heard a voice that said, you are on your own, my son."
A couple of shareholders on the call criticized management for not being more communicative with investors.
One, named Richard Lovin, said the call was indicative of management's "insularity," while adding "if you keep to yourself, you don't have the chance of learning. I would suggest that you reconsider how you have been running your investor relations business and how you deal with the Street."
Lovin could not be reached, and Stefanski did not respond to phone calls or an e-mail message. Despite the mishap, or maybe because of it, TFS shares may be worth a look. FBR Capital Markets rated them "outperform" in a Nov. 23 report, arguing the bank's management "has taken the correct steps to get the MOU lifted."
1. Aubrey Patterson, Chairman and CEO,
2009 Compensation: $4.51 million (+127% vs 2008)
Ytd total return through Dec. 21:-34.48%
Three year total return: -31.64%
Five year total return: -21.42%
Patterson, who was 67 years old at the time of BancorpSouth's proxy filing in March, has been Chairman and CEO of the Tupelo, Miss.-based institution since 1991. While the bank's shares have quadrupled since that time, recent performance has been a clear disappointment, said one analyst who did not want to be named for fear of harming his relationship with bank management.
"It's a name that held up better in the initial stages of the credit cycle but then got hit more in the back end," the analyst says, noting the stock traded at about two times tangible book value (TBV) as recently as a year ago, but now trades at just over TBV.
"They could have been more aggressive throughout the credit cycle instead of it coming up on them suddenly," the analyst says of bank management.
An Oct. 27 report from Sandler O' Neill states that "a reduction to the current dividend ($0.88 annualized) is likely becoming more of a 'when' than 'if' event," given the company hasn't earned its quarterly dividend since the third quarter of 2009 and may need to slash the dividend to maintain a tangible common equity ratio of over 7%.
Patterson's base salary in 2009 was unchanged from the $783,500 he earned in 2008, though the largest part of his compensation came from equity awards of $1.42 million dependent upon performance targets being met and Patterson staying on through next year.
A call to Patterson was not returned.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.