Tuesday, July 28, 2009

CVB Gets Ready To Get Out Of TARP (Updated)

CVB Financial has announced a stock offering of about $115 million, the proceeds of which are to be used to help repurchase the $130 million in TARP preferreds currently held by the U.S. government..."[s]ubject to approval from the U.S. Treasury and banking regulators" of course.

After closing down 0.97% on July 20th, the stock got hammered a further 5.54% in after-hours trading. Its last trade, as of 5:53 PM ET, was at $5.80.

I still believe that my earlier analysis holds up, although a plummet of that sort does tend to shake confidence. There's no fundamental damage that can come from CVB getting out of TARP, which increasingly resembles a monkey on the back. There are currently 83.3 million shares outstanding, and the offering would add another 20 million at the last trading price. Had it been retroactive to 2Q, its 2Q earnings of 17 cents/share would be 13.7 cents when counting the dilution. The lifting of the 5% TARP burden, though, will save the bank about $1,625,000 per quarter. Had that as well as the dilution factor been applied to 2Q earnings, they'd have been 15.3 cents.

So, as indicated by the above calculation, the offering will be net dilutive. Had it kicked in as of March 31st, all else being equal, it would have diluted earnings by 10%. There's also a financing factor: at CVB's July 20 closing price of $5.80, the dividend yield is 5.87%. If the offering price is the same, then CVB is taking on a 5.87% obligation to get rid of a 5% one. I know of the TARP-strings, and I believe that it's better for the bank long-term, but the additional payout is going to be a drag on retained earnings.

I note in closing that getting out of TARP ain't what it used to be. Instead of the "yippee!", a sense of sobriety is settling in - at least, for CVB. Perhaps the fortunes of Citigroup have something to do with it.


Update: That last paragraph turned out to be somewhat pessimistic given CVB's subsequent performance: two days subsequent to the original post, CVB closed at $6.30.

As it turned out, even though I was using $5.80 as a hypothetical number, I was close to the real offering price and number of shares to be issued. Last night, it was announced that there will be 19.7 million shares offered at $5.85/share. As is often the case in an underwriting, the price was lowballed a bit so as to make the offering attractive. Oversubscribed offerings makes the offeror happy...not to mention the brokers who get an allotment to dispense to their favored clients.

Update 2: As of the end of trading on July 23rd, CVB got up to $6.72. I wonder if the point will be reached when someone complains about a "giveaway" offering price for the secondary.

Update 3: The offering was consummated last night, and (needless to say) the underwriters exercised their over-allotment option. So, CVB ended up issuing 22,655,000 shares at $5.85 per. Since the stock closed at $7.31 today, I don't think that the dilution factor has caused any near-term nervousness. A recalculation of the above earnings, using the real number of shares to be issued as the dilutor, gives 13.4 and 14.9 cents respectively. 14.9 cents implies a dilution factor of -12.3%. Had it been reported instead of 17 cents, CVB would have beaten the Street consensus by 4.9 cents instead of 7 cents.

1 comment: