Shares of community banking companies have fallen out of favor with investors, but many bankers say now appears to be a good time to gobble them up.
Skittish about making acquisitions or booking risky loans right now, many capital-rich small banks are repurchasing their shares instead.
In doing so, they are sending a message to Wall Street that they are bullish on their own earnings prospects — while propping up their sagging stock prices.
Shares of the $900 million-asset Bank of Marin Bancorp, for example, have jumped more than 8.2% since the Novato, Calif., company announced Nov. 29 that its board had authorized the repurchase of up to $5 million of its stock.
Russell Colombo, the president and chief executive of Bank of Marin, said the repurchase plan "shows our shareholders and the market that we have a lot of confidence, and we view our stock to be a bargain at the price it was trading at."
Bank of Marin's stock was trading at 1.6 times book value the day the announcement was made.
Of course, it is hardly uncommon for bankers to buy back their own stock. But data from Thomson Financial show that the difference between this year's activity and last year's is that this year's is being driven largely by small companies.
As of Dec. 3, 23 banking companies had announced plans to repurchase shares this quarter, compared with just eight in the same period last year. However, dollar volume actually has dropped — by 18.2%, to $2.7 billion — because the bulk of the dollar amount last year came from large banking companies.
The year-to-date figures tell a similar story. As of Dec. 3, 129 banking companies had announced plans this year to repurchase $20.3 billion of stock. In the same period last year 63 companies had announced plans to repurchase $29.3 billion.
Of course, repurchasing is not right for every banking company. Only those that are well capitalized, feel confident in the quality in their portfolios, and do not see better opportunities for deploying capital for growth will be able to take advantage of the buying opportunities, industry experts said.
Credit quality at many small banks has deteriorated in recent quarters as the housing market has softened and developers have struggled to repay loans. Such banks need to preserve capital to shore up reserves, observers said.
Large banking companies, meanwhile, have put the brakes on stock repurchases until they can get a handle on losses related to subprime mortgages.
More large companies "are focusing on capital levels, given the uncertainty in the markets right now," said Brent Christ, an analyst with Fox-Pitt, Kelton Cochran Caronia Waller. "Some are in a capital preservation mode."
Community bankers say now is a good time to buy back shares, because they are cheap. Turmoil in the credit markets and fear of subprime exposure have diminished investors' interest in the financial sector, and many bank stocks are trading at their lowest levels in years.
Jack Webb, the chairman, president, and chief executive officer at the $1.3 billion-asset Alliance Financial Corp. in Syracuse, N.Y., said he believes its share price has been punished unfairly as a result of the meltdown in the subprime markets. Alliance, which has no subprime mortgage lending exposure, reported a 33% increase in third-quarter net income from a year earlier, yet its shares were trading near a five-year low late last month.
"From our perspective, the community bank sector … [has] been painted with the broader brush of our brethren who are reeling from their subprime decisions," Mr. Webb said.
Last week Alliance announced that it has been authorized to buy back up to $3.4 million of its shares — and its share price has climbed almost 9% since then.
Several bankers said they would prefer to use their capital to buy back stock, rather than for acquisitions, because sellers' asking prices are too high, and their own stock prices are too low to make a deal work.
"While we are interested in continuing to grow via acquisitions, we don't see anything on the horizon," Mr. Webb said. "We think this is a good use of our capital today."
Still, Brian Klock, an analyst with KBW Inc.'s Keefe, Bruyette, & Woods Inc., said that just because community bankers are authorizing buybacks does not guarantee that they are going to make purchases.
"What is going to be interesting is, as credit losses continue to increase, seeing how many managements are going to decide to put buybacks on hold to get through the credit cycle," Mr. Klock said. "Although they say credit quality is strong, if they aren't buying back, that may be telling that they are more concerned than they are talking about."
First Midwest Bancorp in Itasca, Ill., has used stock repurchases consistently as a capital management tool. The $7.8 billion-asset company announced last week that its board had authorized an $80 million buyback plan.
Cynthia A. Lance, an executive vice president and the corporate secretary for First Midwest, said it views buybacks as a tool to improve shareholder value, though it would prefer to create such value through growth opportunities.
"If I have some excess capital lying around, this is a good environment to repurchase stock, but I'd rather use it to put a good loan on the book," she said.
