Secure at last in reducing excess capital, more community banks and thrifts are buying back their own stock.
"We feel its a legitimate use of capital," said Fred Redslob, chief financial officer of First Harrisburg (Pa.) Bancorp, which has plans to buy back a whopping 10% of its stock. "But we also simply need the stock to supply our stock option and dividend reinvestment programs."
But what is driving most of the stock repurchases, though some chief financial officers are reluctant to say it, is price. Bank stocks slumped last year, hitting bottom in December before slowly climbing back up again.
"Now, the (Securities and Exchange Commission) doesn't like to hear this, but one of the benefits of stock repurchase programs is price support," said a chief financial officer who wished to remain anonymous.
Take MLF Bancorp, which just completed buying back 5% of its stock.
"When we started this thing our stock was trading at 65% of book value," said Brian Hartline, chief financial officer at the Villanova, Pa.-based company. "When it became clear that we were going to do the repurchase, our price went from $13.50 to over $15. It's now at $16."
So far this year, according to SNL Securities, 25 banks and 34 thrifts, most of them midsize institutions, announced plans to buy back stock in the open market.
One of the most prolific stock repurchasers has been Albank Financial Corp, a thrift holding company in Albany, N.Y., that converted from a mutual exactly three years ago. All told, its bought back 5% of its outstanding stock on five different occasions during the last three years. Just this week, it said it would buy another 7.5%, or 913,589 shares, of its outstanding common stock.
"It's a good investment for us," said Richard Heller, chief financial officer. "Simply, we deemed it to be an effective use of our capital."
Mr. Heller said the stock repurchases have accomplished several goals more effectively than alternative investments, including lending money. It increased earnings per share and return on equity. Second, it reduces Albank's hefty capital position while - since the company is buying the stock at a discount to book - increasing book value per share.
But why are so many institutions buying back stock now, whereas even capital-heavy banks didn't do so a few years back when trading values were low? Analysts and chief financial officers cite several reasons.
For one, the regulatory pressure to build capital has decreased. And loan demand is still too soft to leverage the capital adequately.
"From an earnings perspective it was the best use of our cash at that time," Mr. Hartline said.
One problem with the repurchases is it can put a crimp in mergers and acquisitions. Accounting rules require that stock-swap mergers be accounted as a cash deal if one of the institutions recently bought back some of its stock.
"We certainly thought about that," said Mr. Hartline. "But look at us. Our tangible capital is in the (9% range) and our risk-based capital is over 23%.
"We still want to grow and still want to have acquisitions as an option. But in order to do acquisitions we need to have some currency in our stock, and with the stock trading at just 70% of book we don't have the currency."
