Pain and Gain in Bank Stock Offerings

Recent stock sales by banks fall into three categories: the very good, the not so bad and the downright ugly.

Mostly they were not so bad. Healthy banks ready to unplug from the Troubled Asset Relief Program-which accounted for the bulk of the sector's equity issues from November through mid-May-generally suffered little to no dilution in terms of tangible book value as they sold shares to exit the program.

Some even managed to do deals that were accretive to tangible book value per share. Those offerings contrasted sharply with the highly dilutive stock sales by struggling banks that approached the equity trough not to repay TARP, but to recapitalize.

For all the fury TARP provoked at its onset, from the public, from politicians and from banks, the atmosphere surrounding exit preparations by the program's recipients has been remarkably sedate.

Among large regionals that redeemed the government's investment, SunTrust Banks' $1 billion issuance stands out for its placidity. The company, which had advertised a patient approach to pulling out of TARP, began the process after passing this year's round of Federal Reserve stress tests. Its March offering was priced just below where the stock had been trading the month prior. Swapping common equity and newly issued debt for the Treasury's preferred shares lifted tangible book value per share by about 1 percent. Returns for investors who bought into the offering underperformed the KBW Bank Index by a modest 2.4 percentage points over the following month.

Fifth Third Bancorp, whose $1.7 billion issue is the largest of the offerings considered here, priced its shares at a comparatively deep 4.5 percent discount to its average closing price for the prior month. The deal still was about 3 percent accretive, and investors who participated in it beat the KBW Bank Index by 2.5 percent the next month.

The outcome was different for three community banks that conducted offerings to plug capital holes.

Sun Bancorp in Vineland, N.J., and United Bancorp in Ann Arbor, Mich., were subject to regulatory agreements prescribing thicker capital cushions. Each sold stock at a discount of more than 25 percent to their average closing price for the previous month, and absorbed heavy dilution.

Still, like many distressed deals, theirs have produced large returns for participants in the offerings. The gain in Sun's shares in the month after the sale exceeded the performance of the KBW Bank Index by more than 30 percentage points. At United, the gap was more than 40 percentage points. But despite strong post-stock sale returns, each name continued to trade below $5 in the month following its offering.

In May, Wilshire Bancorp in Los Angeles more than doubled its outstanding shares. The recapitalization diluted tangible book value per share by about 17 percent. F.N.B. Corp. in Hermitage, Pa., came to market the same month, but from a position of strength: the company had recently been added to the Standard & Poor's SmallCap 600. Analysts at Keefe Bruyette & Woods suspect the offering was meant to take advantage of new demand for the stock spurred by the company's arrival to the index. F.N.B. raised about $60 million. Tangible book value per share rose by about 5 percent.