How should community bankers respond to movements in the their banks stock prices? The best way is to ignore them.
The head of one large community bank told me how relieved he was The New York Times stopped quoting his share price daily. Now I wont get those calls from shareholders every time our stock went down, he said.
This is not shortsighted. The steps you take to influence your stock price can cause a lot more damage than doing nothing.
For example, a bank can boost its price at least temporarily by initiating a share repurchase program. But unless the program continues, the stock is likely to decline irritating those who bought stock or received options priced when the shares were high.
Similar mistakes include selling assets that should be kept in the portfolio and slowing the buildup in reserves to temporarily improve earnings. Again, doing nothing would be better.
Nor do you want bank employees to base decisions on the likely effect on their shares or options. You want those decisions based on whats good for the bank.
Friends in the brokerage business have told me that when their firms went public, traders and salespeople would follow the share price minute by minute instead of concentrating on what might have helped meet long-range corporate goals.
At banks, focusing on the share price can also lead to leverage and capital-adequacy decisions that enhance immediate profits but make the structure riskier. The role of capital is to support growth, meet regulatory requirements, pay shareholders, and absorb losses; letting stock price movements play a role in determining capital policy can be dangerous.
In short, let your stock price manage itself. When the market fails to reward improved performance, just grin and bear it.
Mr. Nadler, an American Banker contributing editor, is a professor of finance at Rutgers University Graduate School of Management in Newark, N.J.
