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Word that a banking pool had returned its money to investors prompted our assistant managing editor to take a second look at the state of banking. The answers are discomforting.
October 4 -
Calvin B. Taylor Bankshares Inc. in Berlin, Md., disclosed that its board has reinstated a stock repurchase program that had been dormant for nearly two years.
September 20
Since hope is bleak for a wave of bank consolidation any time soon, many community banks are hoarding shares of common stock to redeploy whenever acquisition activity returns.
More than two dozen community banks of various sizes have authorized repurchase programs since early August, according to American Banker research. Buyback programs are also taking place at banking companies in virtually every region across the country.
A key catalyst for a surge in repurchase activity is an overall reticence by banks to aggressively use capital for acquisitions due in part to global economic concerns and stock market volatility.
"The capital exists at some banks" for acquisitions, said Eric S. Nadeau, the treasurer and chief financial officer at Home Federal Bancorp Inc. in Nampa, Idaho, which is among the banks planning to buy back common stock.
"But the discount on bank stocks is so strong, and there is the realization that acquisition opportunities are still several years off," Nadeau said. "That's why you're seeing so many banks coming out" with repurchase programs.
Repurchase programs can benefit both the company and the investor by reducing shares outstanding, said Sydney Garmong, a partner at Crowe Horwath.
For investors, they can reverse prior dilution that might have taken place, perhaps due to a capital raise pursued in the aftermath of the financial crisis. Banks also like the "optical" boost to earnings per share, Garmong said.
Often, banking companies will retire the shares, removing them from future circulation. Today, many are instead holding onto the stock, preferring to keep their powder dry for future acquisitions.
Such is the case at Home Federal, which is planning to buy back up to 900,000 shares of common stock. Based on Home Federal's closing stock on price on Sept. 28, the day of its repurchase announcement, the company could spend up to $7.4 million buying back stock.
A growing number of bank investors have concluded that now is not the time to go on a shopping spree for banks. For instance, Stephen Ross, the CEO of Related Cos., said earlier this month that he plans to return more than $1 billion to investors. Ross, who planned to use the funds for bank acquisitions, reportedly said he expects banks to struggle for three more years due to weak loan demand, low interest rates and other headwinds.
Some big banks are struggling to gain regulatory approval for repurchases, as debates continue over acceptable capital levels.
"Big banks are under heavier scrutiny because regulators want to build capital levels to get past too big to fail," said Marty Mosby, an analyst at Guggenheim Partners LLC in Memphis, Tenn. (Mosby is also a former chief financial officer at First Horizon National Corp. in Memphis.)
Despite some regulatory pushback, repurchase activity surged in the second quarter, as financial firms spent $14.4 billion on buybacks, said Howard Silverblatt, an analyst at Standard & Poor's. The amount was nearly double the $7.3 billion those companies spent a quarter earlier.
At least 29 community banks have unveiled new repurchase programs since Aug. 1, such as the $11.5 billion-asset Umpqua Holdings Corp. in Portland, Ore.; Simmons First National Corp., a $3.3 billion-asset company in Pine Bluff, Ark.; Territorial Bancorp Inc., a $1.5 billion-asset company in Honolulu, Hawaii; and the $345.9 million-asset FedFirst Financial Corp. of Monessen, Pa.
"There's a phenomenon going on right now" with repurchases, said Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP. "It's not a buyer story. It's a buy your own stock story, which is a reasonable route" for deploying capital.
Home Federal was not required to obtain regulatory approval to buy back shares, Nadeau said. Still, shareholders were "begging" the $1.3 billion-asset company to repurchase shares because it makes their shares more valuable on a cost basis.
"Our best investment right now is our stock," Nadeau said of Home Federal, which in June converted to a state-chartered commercial bank from a federally chartered stock savings bank. "It's like I'm paying myself a dividend, because I'm not paying someone else a dividend."
Repurchases serve a dual purpose for Home Federal, which hoped to be an active acquirer this year of financially struggling banks in the Pacific Northwest. It has bought two failed banks in Oregon though loss-share agreements with the Federal Deposit Insurance Corp.
But several Pacific Northwest banks that seemed on the verge of failure raised capital, forestalling a demise. Those efforts will force Home Federal to the sidelines until the time when the market becomes conducive to deals, Nadeau said.
"Some of these zombie banks are putting off death through hedge fund capital and prolonging the time when the consolidation would happen," Nadeau said.
Meanwhile, there is no immediate pressure to actually buy back common stock. Banks often bake in generous timelines to make purchases — extending them out a year or more — and there usually is no provision forcing them to actually buy shares. There is also the option of extending a program as it nears its expiration date.
Home Federal, for instance, has until September 2012 to repurchase shares under the buyback program its board authorized late last month.
