Banks Have Many Reasons to Put Off Stock Repurchases

A number of community banks have expressed an interest in repurchasing stock but, for now, it makes more sense to stand pat.

Preserving capital, for offensive and defensive reasons, remains a major deterrent to buybacks, even though several banks have recently authorized new repurchase plans.

"Some banks are walking a fine line with capital," says Anita Newcomb, president of bank consulting firm A.G. Newcomb & Co. in Columbia, Md. "They are being mindful of Basel III and retaining a war chest" for deals.

Other reasons bolster an argument against buying back stock right now. Companies usually aim to repurchase undervalued stock. But the KBW Bank Index is up nearly 8% this year and has risen 35% since its 52-week low in early June.

Banks with big private equity investors may also have a disincentive to buy back stock, says Lee Burrows, chief executive of Banks Street Partners in Atlanta. A lower share count can push big investors over regulatory thresholds, including the 25% stake that triggers bank holding company status.

Smaller banks largely seem to be avoiding repurchases. Shares outstanding at publicly traded banks with $20 billion or less in assets rose 0.8% in the fourth quarter from a quarter earlier, according to SNL Financial.

"When you look at what people are actually doing right now, you find that there's a lot of talk and not a lot of substance" about stock buybacks, says Christopher Marinac, an analyst at FIG Partners in Atlanta.

Repurchase activity could potentially rise later this year if banks get more comfortable with capital levels. Tepid loan demand and a dearth of acquisitions would also spur buybacks.

"Many banks would like to deploy capital in a meaningful way, such as strategic opportunities that provide growth and profitability," Newcomb says. "But those opportunities may not avail themselves."

Some banks are warming up to the possibility of buybacks. In recent weeks, at least 20 community banks have announced authorizations to buy more than 22 million shares of stock.

When the timing is right, buybacks provide liquidity for shareholders. They can also boost earnings per share and stock prices by reducing outstanding shares. "They also show investors that you're paying attention to your stock price," Marinac adds.

There are scenarios where repurchasing stock makes more sense than acquisitions, says Burrows. He says a situation could arise where management can choose between buying a bank at 120% of tangible book value or repurchasing stock at a discount. "In that case, why not buy your own stock back?" he says.

That debate surfaced recently at HopFed Bancorp in Hopkinsville, Ky., where investor Joseph Stilwell is objecting to the company's purchase of Sumner Bank & Trust in Gallatin, Tenn. Stilwell claims that HopFed is better off buying its own stock at a discount instead of paying a premium for Sumner.

Another piece of intelligence embedded in the recent spike in repurchase authorizations: Banks are struggling to find ways to put capital to work.

"You have to look at the big picture," Marinac says. Authorizations are "an admission by some companies that they can only do so much with their capital."