Berkshire Hathaway 1994 Annual Meeting Audience Question # 18

How to judge bank stock buybacks

Warren Buffett:

Zone 7.

Audience Member:

I’m Edward Barr from Lexington, Kentucky, and I’d like to ask, given the amount of capital in the banking industry, do you think that more banks should be buying back significant amounts of their stock, like SunTrust, versus just the token amounts that they’re buying back or just the authorized amounts?

And then also, related question in banking. Are they… are banks too focused on goodwill amortization when declining to buy other banks for cash, thereby using purchase accounting versus the normal practice in the industry of pooling accounting even when the stock they issue may be depressed or undervalued?

Warren Buffett:

Well, the first question about the capital in the industry… that… you really have to look at that on a bank-by-bank basis and there is a lot more repurchasing of shares by banks taking place.

You mentioned SunTrust, but National City is… they bought it back, I think, 5 percent of their — National City of Cleveland… bought back 5 percent of their stock in the first quarter.

There’s much more repurchasing going on, and that’s simply a judgment call by management that… as to the level of capital they need going forward, and what level of capital enables them to earn the return on equity that they think appropriate and whether they… what they feel like paying for their own shares.

So, I think you have to look at that on case-by-case.

We certainly like it, if we were to own a bank, we would… or own shares in a bank… we would like the idea of the bank repurchasing its stock at a price that we thought was attractive.

We would think that they probably knew more about their own bank than some other bank they were going to buy and that if the numbers are right, it’s an attractive way to use capital.

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