Beneficial Mutual Bancorp (NASDAQ:BNCL), parent of Beneficial Bank, has recently announced its intention to buy back 5 percent of its stock, subject to approval of its regulators. Remember, BNCL led by Gerald Cuddy had a stock offering several months ago in July 2007, where it sold 23,606,625 shares at $10 each.
Now why would a company pay legal and investment banking fees of a minimum of $3,716,000 and incur a substantial commitment of management time to sell shares, then just three months later start the process to buy some of them back? And not just a few shares, but a number equal to the maximum permitted by the Office of Thrift Supervision?
Beneficials's press release says it's doing it "to enhance shareholder value." Well, that’s strange to me. Several months ago the bank thought they had the need for the added capital to finance future growth and paid investment banking and legal fees to get the new dollars. Now, all of a sudden, they have too much money and are using it to shrink the capital of the bank. Whassup?
Don’t get me wrong: share repurchase programs are common and can be, pardon the pun, beneficial. But I have never heard of one being instituted 90 days after new shares were issued. I wonder if an executive compensation plan is tied to Beneficial's growth in earnings per share (EPS) or its return on equity (ROE)? In other words, as shares are repurchased, equity is reduced and, lo and behold, even with the same dollar profits, return on equity goes up.
Or another reason for the stock repurchase may be that future earnings look to be poor, even poorer than they have been in the past. And, in order to avoid a large decrease in EPS, Beneficial is shrinking the number of shares as fast as possible to mitigate a per share earnings decrease.
Since its issue in July, the stock has traded as low as $8.71 and has seldom been over $10, which was its issue price. Consequently, Beneficial directors may simply want to jack up the price of the stock and minimize shareholder complaints in the immediate present. The consequence of this, however, is that the company is forgoing earnings increases that may be realized from the profitable deployment of the capital at some future time. In either case, the repurchase seemed to pay off, at least initially. The stock price leapt from $9.70 just before the repurchase plan was announced after the market closed on October 2, to $9.96 the next day. And it has stayed around that level in the week since.
Beneficial's press release notes their regulator’s approval to repurchase stock is required only during the first year following its initial public offering. I’d bet an additional repurchase plan will be announced July, 2008…..for the same reasons outlined above. Let’s wait and see! St. Bernardine, patron saint of banking, pray for us.
- Larry Jilk is a former Pennsylvania bank executive, who does not own any BNCL but does own stock in several commercial banks headquartered in Pennsylvania.
