Strategy
09/14/2020

Community Banks Are Buying Back Stock. Should You?

Banks are making lemonade out of investors’ lemons – in the form of buybacks.

Fears about how the coronavirus will impact financial institutions has depressed bank valuations. A number of community banks have responded by announcing that they’ll buy back stock.

Bank Director reached out to Eric Corrigan, senior managing director at Commerce Street Capital, to talk about why this is happening.

The Community Bank Bidder
Much of the current buyback activity is driven by community banks with small market capitalizations. The median market cap of banks announcing new buybacks now is $64 million, compared to a median of $377 million for 2019, according to an Aug. 27 report from Janney Montgomery Scott.

One reason community banks might be buying back stock now is that their illiquid shares lack a natural bidder – a situation exacerbated by widespread selling pressure, Corrigan says. By stepping in to buy its own stock, a bank can help offset the absence of demand.

“You can help support it or at least mitigate some of the downward pressure, and it doesn’t take a lot of dollars to do that,” he says.

Buybacks Are Accretive to Tangible Book Value
Many bank stocks are still trading below tangible book value. That makes share buybacks immediately accretive in terms of both earnings per share and tangible book value.

“If you can buy your stock below book value, it’s a really attractive financial trade. You are doing the right thing for shareholders, you’re supporting the price of the stock, and financially it’s a good move,” Corrigan says.

Buying Flexibility
Share buyback announcements are a statement of intention, not a promise chiseled in stone. Compared to dividends, buybacks offer executives the flexibility to stop repurchasing stock without raising concerns in the market.

“If you announce a buyback, you can end up two years later with exactly zero shares bought,” Corrigan says. “But you signaled that you’re willing, at a certain price under certain circumstances, to go out there and support the stock.”

Buybacks Follow Balance Sheet Bulk-Up
Many of the nation’s largest banks are under buyback moratoriums intended to preserve capital, following the results of a special stress test run by the Federal Reserve. Banks considering buybacks should first ensure their balance sheets are resilient and loan loss provisions are robust before committing their capital.

“I think a rule around dividends or buybacks that’s tied to some trailing four-quarter performance is not the worst thing in the world,” he says. “The last thing you want to do is buy stock at $40 and have to issue it at $20 because you’re in a pinch and need the equity back.”

Many of the banks announcing repurchase authorizations tend to have higher capital levels than the rest of the industry, Janney found. The median total common equity ratio for banks initiating buybacks in 2020 is about 9.5%, compared to 9.1% for all banks.

Why a Buyback at All?
A stock price that’s below the tangible book value can have wide-ranging implications for a bank, impacting everything from a bank’s ability to participate in mergers and acquisitions to attracting and retaining talent, Corrigan says.

Depressed share prices can make acquisitions more expensive and dilutive, and make potential acquirers less attractive to sellers. A low price can demoralize employees receiving stock compensation who use price as a performance benchmark, and it can make share issuances to fund compensation plans more expensive. It can even result in a bank taking a goodwill impairment charge, which can result in an earnings loss.

Selected Recent Share Repurchase Announcements

Bank Name Location, Size Date, Program Type Allocation Details
Crazy Woman Creek Bancorp Buffalo, Wyoming
$138 million
Aug. 18, 2020
Authorization
3,000 outstanding shares,
or ~15% of common stock
PCSB Financial Corp. Yorktown Heights, New York
$1.8 billion
Aug. 20, 2020
Authorization
Up to 844,907 shares, or
5% of outstanding common stock
First Interstate BancSystem Billings, Montana
$16.5 billion
Aug. 21, 2020
Lifted suspended program
Purchase up to the remaining
~1.45 million shares
Red River Bancshares Alexandria, Louisiana
$2.4 billion
Aug. 27, 2020
Authorization
Up to $3 million of outstanding shares
Investar Holding Corp. Baton Rouge, Louisiana
$2.6 billion
Aug. 27, 2020
Additional allocation
An additional 300,000 shares,
or ~3% of outstanding stock
Eagle Bancorp Montana Helena, Montana
$9.8 billion
Aug. 28, 2020
Authorization
100,000 shares,
~1.47% of outstanding stock
Home Bancorp Lafayette, Louisiana
$2.6 billion
Aug. 31, 2020
Authorization
Up to 444,000 shares,
or ~5% of outstanding stock
Mid-Southern Bancorp Salem, Indiana
$217 million
Aug. 31, 2020
Additional allocation
Additional 162,000 shares,
~5% of the outstanding stock
Shore Bancshares Eston, Maryland
$1.7 billion
Sept. 1, 2020
Restatement of program
Has ~$5.5 million remaining
of original authorization
HarborOne Bancorp Brockton, Massachusetts
$4.5 billion
Sept. 3, 2020
Authorization
Up to 2.9 million shares,
~5% of outstanding shares

Source: Company releases

WRITTEN BY

Kiah Lau Haslett

Banking & Fintech Editor

Kiah Lau Haslett is the Banking & Fintech Editor for Bank Director. Kiah is responsible for editing web content and works with other members of the editorial team to produce articles featured online and published in the magazine. Her areas of focus include bank accounting policy, operations, strategy, and trends in mergers and acquisitions.