The potential advantages of stock repurchases
By Philip K. Smith
For the vast majority of community banks, there are very few acquisitions available, if any, which will improve earnings per share and return on equity more than the simple alternative of repurchasing their institution’s own stock. Many community banks are realizing that the most efficient deployment of excess capital or leveraging ability could involve repurchasing some of their institution’s own stock.
Some of the particular advantages and uses of stock repurchase and ownership restructuring plans are as follows:
- Increase shareholder value. Earnings per share and return on equity may be immediately increased.
- Bolster market communications. Repurchase plans communicate that management is optimistic about the future and feels the stock is undervalued.
- Deter takeover attempts. Keep stock in friendly hands.
- Encourage market stabilization. Stock repurchases stabilize the market and provide a minimum price for the stock.
- Limit or reduce number of shareholders. Having 2,000-plus shareholders requires compliance with federal securities laws, including the Sarbanes-Oxley Act. Banks may use stock repurchases to take the bank holding company private or to keep the number of shareholders below 2,000. Other banks use stock repurchase programs to reduce the number of stockholders to less than 100 to elect Subchapter S corporation status.
- Consolidate ownership. Some banks wish to consolidate ownership around a long-term “core” group of shareholders.
- Avoid forced sales. Shareholders may be forced to place their stock on the market due to personal financial difficulties, estate taxes or other unanticipated events.
- Deploy excess capital. Many banks have excess capital, which can be used to support stock repurchases.
- Manage interest rates. The cost of incurring debt to retire equity is relatively low because of moderate current interest rates.
Repurchasing a bank holding company’s own shares at any reasonable price level has the following specific positive impacts on enhancing shareholder value:
- Shareholders who desire to sell receive cash and, thus, instant liquidity for their shares.
- The shareholders who do not sell become aware that the holding company has the ability to create a market and achieve “psychological” liquidity for their shares.
- A stock repurchase plan priced appropriately (and appropriately can mean at a fairly high level) will serve to enhance earnings per share for those shareholders who do not sell and therefore the overall value of the shares.
- A stock repurchase plan, by using excess capital, will increase return on equity for the remaining shareholders.
- Shareholders remaining after the repurchase will experience an increase in ownership percentage of the company without having expended any cash.
- If the company continues to pay cash dividends in the same “gross” amount to a smaller shareholder base, the remaining shareholders will receive an increase in cash flow.
Philip K. Smith (firstname.lastname@example.org) is president of Gerrish McCreary Smith Consultants and Attorneys in Memphis, Tenn. His legal work includes bank mergers and acquisitions, financial analysis, strategic planning and regulatory matters.