bank's stock price.
Of course, making a market in your own stock is now a no-no. But it was not always so. Most community bank presidents used to make the markets for their stock in their own desk drawers. If shareholders wanted to sell, the bank president would buy. If they wanted to buy, he would sell from the shares he had bought. (That is, if he wanted those would-be buyers to have the shares).
And all too often the president would set a low buying price and sell the tendered shares to board members and other favored people. A widow might come in with stock her husband had owned through the years and offer it for sale. The president would say, "Well, the last sale was at $12, so I'll offer you $12." Therefore the stock would stay at $12 through the months, no matter how well the bank itself was doing. Thus insiders slowly took over the shares at prices well below true value -- and made a killing when the bank was sold.
Such action can bring lawsuits galore, so today bank chief executives turn the process over to independent market makers.
What should the attitude toward market makers be?
First, try to encourage several securities firms to take positions and become dealers. This involves meeting with dealers who serve the region, telling them the bank's story, and, most important, being honest with them. (The dealers should get no surprises -- pleasant or unpleasant. Pleasant surprises are just as bad. A dealer firm may have just sold a part of its position at one price, only to learn that the bank had done exceptionally well or has received good news that will boost share value substantially.)
Second, don't play favorites. If a block of stock comes to market, the bank should let all market makers bid. It should not reserve the stock for insiders, leaving the independent dealers to bid on dribs and drabs that are costly to position and handle.
Third, give market makers the opportunity to bid on bank business apart from market making. Nothing bothers local dealers more than trying to position the local bank's shares and then finding that some cushy deal, like selling a large position from the investment account, goes to a large New York dealer instead. (This does not mean the bank should accept lower prices to trade with local dealers. It should, however, give them a fair chance to bid.)
Trying to influence your bank's price can be dangerous. If performance does not justify a price stimulus, the stock will invariably slide once the pressure has been removed. And shareholders and optionholders are much better off with a steady price than one that jumps and then falls back.
Public announcements of temporary developments can fool a market maker only once. These firms put their own capital into the stock. If the earnings boost cannot be maintained, they will be stuck as it recedes. (This means that even a repurchase plan can be dangerous if the price paid is out of sync with price/earnings and price/book ratios at similar banks. The stock may look cheap when compared with past levels, but the biggest mistake is to buy on the basis of price rather than fundamentals. What looks cheap today may just have been more overpriced before.)
The bottom line? It is best to resist the impulse to manage your stock price.
Sure, it is frustrating to perform well but see your stock do nothing, or even decline. And sure, you may be able to manage your earnings by selling assets or minimizing loan-loss reserves -- but only for a short time.
Over the long run, though, the market judges a bank on fundamentals -- and the wise executive accepts that fact.