A Charlottesville, Va., bank last week became only one of four financial institutions this year to use the so-called "modified Dutch auction" program of buying back its stock, but it probably won't be the last.
Jefferson Bancshares held the auction to boost its return on equity, now about 12%
Analysts and bankers say the rare form of a self-tender offer, allowing a company to set a date and price range to buy back large amounts of stock, is becoming more popular.
Although analysts say such self-tender offers are seldom used in the banking world, they expect the offers could become more commonplace in the current wave of stock buybacks.
"There's more pressure for financial institutions to make use of excess capital," said Frank J. Barkocy, senior vice president of Josephthal, Lyon & Ross in New York. The modified Dutch auction "is a fairly efficient way of completing a buyback program."
In a modified Dutch auction, the company will deterimine how many shares it wants to buy back and set a price range. Shareholders then select a price within that range. The final price paid works on simple supply-and- demand principles: If more shares are offered to the company than it wants to buy back, it can pay a lower price. Should fewer shares be offered, the company must pay a price in the higher end of the range.
Besides Jefferson, two thrifts - one in New Jersey and another in Maine - both bought back stock through the modified Dutch auction this year. A third, First Shenango Bancorp in New Castle, Pa., initiated such a program last week.
"It seemed to be the fairest method for all shareholders," said William J. Ryan, chairman of $4.5 billion-asset Peoples Heritage Financial Group in Portland, Maine, which bought back 2.5 million of its shares at $24 last month.
Mr. Ryan said Peoples Heritage chose the auction so that many of its shareholders - who are also customers - could participate. A tender offer to the bank's largest shareholders would have shunned those people, he said.
Jefferson completed its self-tender offer program last Friday. The $2.1 billion-asset Virginia bank bought back 1.22 million shares of its common stock - or 8% of the total - from shareholders at $28 per share.
"It would have taken us four years to buy this much stock on the open market," said O. Kenton McCartney, Jefferson's president and chief executive officer.
But Mr. Fulton acknowledges that Jefferson wasn't able to buy back as many shares as desired. The bank sought to buy back 1,250,000 shares.
Bankers and analysts say the main drawback is that a modified Dutch auction can be time consuming. Also, shareholders could be greeted with a better offer from another buyer.
But H. Rodgin Cohen, an attorney at Sullivan & Cromwell in New York, said, "I don't know why it's not done more often."
Mr. Fulton said many shareholders didn't want to sell out because they wanted to avoid capital gains taxes and some just wanted to hold onto the stock.
Pulse Bancorp, a New Jersey thrift that held a modified Dutch auction in June, also found fewer willing sellers than it had hoped for.
The $450 million-asset company asked shareholders to sell back one million shares - about 26% of its outstanding stock. The goal was to reduce the thrift's equity-to-asset ratio from 11.89% to about 9%
Pulse managed to buy back 835,000 shares, about 21% of the more than three million outstanding shares.
