Why banks are reinstating share repurchase programs

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Share repurchase programs, paused earlier this year due to regulatory pressure and the banking industry's desire to conserve capital during a period of uncertainty, are regaining momentum.

More than a dozen community banks have authorized buybacks, or reinstated previously suspended programs, in the past two weeks. Others will likely follow over the rest of this year, industry experts said.

“We think COVID and macroeconomic challenges will ultimately prove manageable for banks, which should then catalyze the resumption of, or announcement of, new buyback authorizations,” Hovde analyst Joe Fenech said in an Aug. 31 note to clients.

Fenech’s note followed an announcement by Investar Holding in Baton Rouge, La., that its board had approved the repurchase of 300,000 shares, adding to the 62,000 shares remaining under an existing authorization.

Investar's announcement is “a likely harbinger of similar-type actions to come from community banks in the months ahead,” Fenech added. Such measures “offer a measure of support for the stocks that has obviously been absent for most of the past several months.”

Shore Bancshares in Easton, Md., and First Interstate BancSystem in Billings, Mont., recently reinstated their programs. HarborOne Bancorp in Boston, Mid-Southern Bancorp in Salem, Ind., and Eureka Homestead Bancorp in Metairie, La., are among the banking companies to approve new plans.

Shore and Crazy Woman Creek Bancorp in Buffalo, Wyo., are among the banking companies that are buying back stock using funds from recent issues of subordinated debt.

Share repurchases can help banks signal a belief that their stock is undervalued.

Investar’s shares, for example, are down about 40% this year, more than its earnings are down. The $2.4 billion-asset company’s second-quarter EPS of 39 cents was down 19% from a year earlier.

Buybacks are also an efficient way “to increase shareholder value and earnings per share,” said John D’Angelo, Investar’s president and CEO. Earnings per share rise because the buyback reduces shares outstanding.

Regulators required the biggest banks to put buybacks on hold until at least the final quarter of this year. Most smaller banks followed suit amid concerns that an economic malaise would lead to a spike in bad loans, higher credit costs and reduced capital.

The amount of money spent on buybacks across all industries fell by 55% in the second quarter from a quarter earlier, to $90 billion, according to preliminary data from S&P Global Market Intelligence.

Loan deferral rates have begun to improve roughly six months into the pandemic and most banks still have strong capital levels. With bank stocks still under pressure, more management teams and boards are ready to revisit repurchase activity.

Recent history supports the strategy.

Over the past decade, the S&P 500 Buyback Index, which gauges the equal-weighted performance of 100 companies with the highest buyback ratios in the S&P 500, had an annualized return of 13.6%. The return for the overall S&P 500 was 11.2%.

Historically, banks are second only to technology firms in industry buyback activity.

The $4.5 billion-asset HarborOne announced one of the biggest buyback programs in recent weeks, disclosing on Thursday that its board had authorized the repurchase of roughly 2.9 million shares, or 5% of its outstanding stock.

The $16.5 billion-asset First Interstate said in August that it had lifted a temporary suspension of its previously announced stock repurchase program — paused because of the pandemic. It can now buy back about 1.5 million shares, or about 2.2% of its outstanding stock.

First Interstate’s move signals confidence in current conditions and an “improving economic picture,” Jacquelynne Bohlen, a Keefe, Bruyette & Woods analyst, wrote in a client note. She said a resurgence in coronavirus cases or new shocks to the banking industry could lead to another pause.

To be sure, there is headline risk tied to resuming buybacks, especially for industries that have had a perceived benefited from government intervention during the pandemic, said Preston Gelman, an analyst at IHS Markit. Still, he said, investors “have an appetite for repurchases given the signal of balance sheet strength such an action would send to the markets.”

While buybacks imply a more positive view of the market, uncertainty still exists. That could deter a large wave of buyback announcements, at least in the near term.

A heated presidential election, as well as uncertainty about the duration of the pandemic and further federal aid, continues to hang over the economy, said Scott Brown, chief economist at Raymond James.

“To maintain earnings, firms may resort to further job cuts in the months ahead, which would dampen the pace of the recovery,” Brown said. “State and local governments are experiencing significant budget strains, which will likely also lead to job cuts.”

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