The wave of stock repurchases washing across the banking industry may cleanse some balance sheets of excess capital, but it could also complicate potential consolidation efforts.
Wells Fargo & Co. and National City Corp., both of which announced large stock repurchase programs last month, are among the banks that could have difficulty orchestrating a merger though a pooling of stock, analysts said.
Stock repurchase programs are a natural outgrowth of improved conditions in the banking business.
With loan levels rising, capital surging and few apparent storm clouds on the horizon, National City, Norwest Corp., NationsBank Corp. and Golden West Financial last week joined the rush of banks buying back their shares, in each case announcing an extension of an existing share repurchase program.
The surge prompted more than one analyst to warn that, in the euphoria over their financial health, banks could be overlooking the potential side effects of the buybacks.
"Buying back stock when done at very high levels limits the ability of a bank to pursue an acquisition that is treated as a pooling of interest," said Michael Mayo, of Lehman Brothers.
Financial Accounting Standards Board regulations treat repurchased shares as "tainted stock" for a pooling of interest transaction. And under FASB rules, no more than 10% of shares can be tainted in a pooling deal, which is most commonly executed as a stock swap.
According to Mr. Mayo, this means that National City's net repurchase last Monday of 8.2 million shares restrict the bank from entering pooling transaction with less than 82 million shares issued, 8.2 million being 10% of that amount.
Thus at National's current stock price of $26.50 the rule would restrict the bank from making a pooling of interest deal smaller than $2.17 billion.
Not Tainted Stock
Under FASB rules, the restrictions arc waived for shares repurchased for stock options, dividend reinvestment, and other corporate purposes like employee benefit programs, he said.
National City repurchased 10 million shares, but for a pending transaction, it used 1.8 million which are not considered tainted under FASB rules, Mr. Mayo said.
The bank could always reissue stock outside the pooling arrangement, which would have the effect of detainting the stock, another analyst pointed out.
The rules also only extend for two years from the date of repurchase. Nonetheless, Mr. Mayo said the rules could hinder merger plans for many banks.
Wells Fargo & Co. announced this month it would buy back 5.4 million shares. That means for Wells Fargo, any pooling of interest transaction would have to entail issuing more than 54 million shares, minus any employee benefit and other acceptable USES.
Even if half the repurchased shares were directed at FASB approved uses, at Wells' $153 share price, a pooling deal would have to be well in excess of $4 billion.
Wells did not return calls seeking comment. But comments by officials of other banks indicate that they are fully aware of the ramifications of the programs.
Won't Be Big in Buybacks
In a conference call with analysts last week, Keycorp said it would not pursue a large stock repurchase program. Its director of investor relations Jay Gould said the bank rejected a buyback because it wanted to avoid tying its hands.
But National City's treasurer, Thomas A. Richlovsky, said the bank knew its large repurchase would prevent all but the largest of pooling transactions.
"Our view on acquisitions stems from our capital position," he said. "We are generating capital faster than assets, and as a consequence when we have an opportunity to acquire, we should do it as a purchase. Buying assets makes more sense given our capital position."
Golden West's chief financial officer, H.L. Helevy, said his company had not executed a pooling transaction since 1972, and in any event planned to retire most of the shares it would repurchase.
Gene Sherman, director of research for M.A. Schapiro & Co., which owns a large portfolio of bank stocks, complained the buybacks unwisely paid high price-to-book-value ratios.
Banks are paying high prices for their shares, plus the brokerage fees, he said. And when down the line if and when the banks need more capital, more brokerage fees will be paid when issuing new stock, he said.
"It is a very... profligate use of capital," he said. "We think it is driven by a short term strategy of seeking to improve quarterly results, earnings per share, dividends per share over the next few quarters at the expense of long term growth and financial flexibility, which would be available with the higher capital positions."
Mr. Richlovsky at National City disagreed. He argued more banks should be pursuing share repurchases because there was too much capital available in the industry. National City did not pay a lot for its stock, he added.
Gregory P. Anderson of Chicago Corp. said while large banks were indeed trading at high price-to-book-value ratios, smaller banks, and particularly thrifts, were a bargain. As a result, he said, many thrifts had undertaken stock buyback programs of their own.
Many of the repurchases are also driven by employee benefits programs, he added.
In the past month a number of major banks have announced stock repurchase programs, most of them extensions of existing ones. These banks include Huntington Bancshares Inc., First of America Corp. and AmSouth Bancorp.
But unlike National City and Wells Fargo, these three banks did not buy back as great a percentage of their stock, and directed some of the shares to FASB approved uses.
In fact, all of AmSouth's shares will be directed at its employee benefits program.