A Buyback Boost

“The final shares repurchased were more than twice what we had originally estimated.”    —Craig Huffman, Community First Bank of Indiana
“The final shares repurchased were more than twice what we had originally estimated.”
—Craig Huffman, Community First Bank of Indiana

To boost shareholder value, Community First Bank of Indiana bought back some of its circulating stock

By Karen Hoffman

Community First Bank of Indiana

Headquarters: Kokomo, Ind.
Assets: $185 million
Retail locations: Three
Full-time employees: 45
Founded: 2003
Website: www.cfbindiana.com

Stock Shopping

Two years ago Community First Bank of Indiana in Kokomo, Ind., organized and implemented a voluntary stock repurchase plan to give its shareholders a temporary window of greater liquidity. The repurchase also boosted the bank’s earnings per share of those who held onto their bank stock.

“Even though the issue was oversubscribed from our listed amount in the legal documents, we were still able to fulfill each and every shareholder request,” explains Craig Huffman, the bank’s chief financial officer.

Offering shareholders greater liquidity and value are goals many privately held community banks have set forth in recent years, particularly in the wake of the rise of more cautious bank investors since the Wall Street financial crisis. Community First Bank of Indiana found a solution to help with these challenges by pursuing a stock repurchase program.

Kicking off the fourth quarter of 2013, Community First Bank’s stock buyback effort had several objectives, according the bank’s executives. The stock buyback program, running for 30 days, was primarily undertaken to provide the bank’s shareholders with a fresh opportunity to sell their stock. Since Community First’s stock is privately held and not listed on an exchange, “the ability of our shareholders to move their stock is very limited,” explains Craig Huffman, the bank’s chief financial officer.

After first opening its doors in 2003, the $185 million-asset community bank was only a few years old when some of its stock became harder to sell amid the Wall Street financial crisis upending the economy and investor interest in banking stocks in particular. At the time, Huffman says, loan demand was slowly increasing, but not at a pace to absorb the bank’s excess cash on hand.

“Using some of this excess cash to repurchase our stock was the best investment at this point,” Huffman says. “We were able to use the cash to improve the various shareholder financial ratios such as book value per share, earnings per share and return on average equity.”

Community First Bank’s offer to buy back its stock, Huffman points out, was totally voluntary for its stockholders and did not target any specific group of shareholders. “Some plans are designed to repurchase [stock] only from out-of-state shareholders or small shareholders, but we opened it up to all shareholders,” he explains. “If a shareholder wanted to remain a shareholder, we still wanted to partner with him or her to provide a local community bank that is here to meet the needs of our community.”

Moreover, according to the bank’s president, Robert D. Blume, the stock buyback demonstrated the confidence that the bank’s board of directors and top executives had in the future of banking industry investments in general and in Community First Bank in particular. Since its buyback offering the bank has paradoxically seen more interest from investors in the bank’s stock.

A timely transaction?

Community First Bank is not alone in looking to a stock buyback plan to achieve strategic goals. A stock repurchase transaction is a process more community banks are now planning to undertake as banks begin to emerge from the financial crisis, says management consultant Philip K. Smith, president of Gerrish McCreary Smith PC of Memphis, Tenn.

“The bottom line is that all financial institutions need to be seeking ways to improve stockholder value,” Smith says. “That typically means trying to find ways to grow earnings per share, increase return on equity, provide liquidity to stockholders who need it and increase cash flow for stockholders.”

Working with Smith, Community First Bank sorted through several legal requirements of a stock repurchase plan. Huffman says the key component of the stock repurchase plan for Community First Bank was the stock price the bank offered its shareholders, $12.75 per share, a price determined by an independent valuation firm. Another important step was deciding the minimum number of shares that had to be presented for repurchase, which was 500. Another was carefully planning what would occur if the stock repurchase offer became oversubscribed.

Having just come out of a rough economic period when retaining capital has been vitally important to community banks, Huffman says, Community First Bank performed detailed analyses to project capital ratios under different scenarios on the number of shares the bank could repurchase and how current and future earnings and dividends would affect the overall value of the bank’s stock.

What went right

According to Smith, one of the key things Community First Bank did well as part of its stock buyback—which some organizations take for granted—is that the bank’s executives made sure that the stockholders understood the true benefits of the repurchase program and that it was voluntary for all of them. The bank’s executives made their shareholders “understand there is not some type of sinister intent behind it,” he says.

Community First Bank’s executives developed a simple, straightforward question-and-answer document to explain to its shareholders why the bank was offering to buy back its stock, how the repurchases would benefit all stockholders, as well as how they would improve the bank’s capital position and long-term competitiveness. “The main concern when initiating the plan was to ensure that the shareholders were provided very clear and concise documentation of why the bank was offering the stock repurchase plan and the parameters of the plan,” Huffman points out.

The result? The level of stockholder participation in the repurchase program was higher than the bank’s executives had anticipated. A total of 54,640 shares owned by 15 shareholders were sold back to the bank—4 percent of Community First Bank’s outstanding shares at the time. “The final [number of] shares repurchased [was] more than twice what we had originally estimated,” Huffman explains. “Even though the issue was oversubscribed from our listed amount in the legal documents, we were still able to fulfill each and every shareholder request.”

For other community banks that might pursue a stock repurchase, Blume advises them to engage good legal counsel. “Financial institutions need to realize it is not quite as simple as just sending a letter out asking stockholders if they want to sell their shares,” he says.

Strategic benefits

For shareholders who kept their Community First Bank stock, their reward was an 11-cents-per-share increase in the book value of their stock, which “gave them an instant increase in the value of their holdings,” Huffman says. As a side bonus, Blume says, the stock repurchase program “got shareholders thinking about our stock again and reaffirmed our dedication to shareholder value.”

Another plus has been that Community First Bank has seen an increase in the valuation price per share of its stock, which was performed by an independent party approximately two months after the end of the plan. Since the company’s stock is so lightly traded, Huffman explains, “this was a way to establish a floor on the stock price and with the increased liquidity, the value per share was enhanced by the program.”

Since the most recent valuation of the bank’s stock was completed in 2014, there have been four private stock trades at the same price as the valuation price, he adds.

Smith says that if a stock repurchase transaction is priced appropriately, the stockholders selling their shares receive immediate cash and, therefore, instant liquidity. Meanwhile, stockholders who choose not to participate in the program typically have their earnings per share and their return on equity increase.

Another important potential benefit of a stock repurchase transaction—one that makes the transaction more common for community banks—is that it continues to consolidate ownership as the stockholder base ages, Smith says. “When stockholders have the need or desire to sell, if the holding company can be the purchaser of first resort to repurchase those shares, that can be an appropriate allocation of capital, and for all the stockholders who do not sell, their ownership percentages continue to increase without spending any of their own money,” he says. “It is really a win-win situation.”

For those reasons, Smith says community bank executives should have a “good feel” for what the stockholder base needs and wants so that the organization gets a “true benefit from the time and cost it puts in.”

“For a community bank that perhaps does not have the opportunity to go out and buy another bank or undertake some type of huge growth plan, the best way to return value to stockholders may be offering a stock repurchase program,” he says.

Karen Hoffman is a financial writer working from Europe.