Bailout Banks Bid to Get Life Back

NEW YORK ( TheStreet) -- Two banks are looking today to exit the Troubled Assets Relief Program, or TARP, at a discount, while avoiding any dilution to their common stockholders.

The U.S. Treasury after Wednesday's market close will end its auction of preferred shares held by the government, for bailout assistance received by the banks at the height of the credit crisis.

The banks having their TARP preferred shares auctioned today include:
  • Banner Corp. (BANR) of Walla Walla, Wash., which owes $124 million in TARP money.
  • First Financial Holdings (FFCH) of Charleston, S.C., owing the government $65 million.
  • MainSource Financial Group (MSFG) of Greensburg, Ind., which owes $57 million to the government.
  • Seacoast Banking Corporation of Florida (SBCF), of Stuart, which owes the Treasury $50 million.
  • Wilshire Bancorp (WIBC) of Los Angeles, owing $62.2 million.
  • WSFS Financial (WSFS) of Wilmington, Del., which owes $52.6 million in TARP money.

All six holding companies filed prospectuses as part of the Treasury's TARP auction process, and two of the companies were granted permission by regulators to bid on their own TARP preferred shares.

It is, of course, unknown how much a discount the two banks might get if they place winning bids, because the Treasury retains the right to decide how many of the TARP preferred shares to sell at the bid prices, and also could simply cancel the auction.

Here's a quick look at the two banks set to bid on their own TARP preferred shares.

Wilshire Bancorp
Shares of Wilshire Bancorp closed at $4.92 Tuesday, returning 36% year-to-date, following a 52% drop during 2011.

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The company was included among TheStreet's recent list of cheaply priced small-cap bank stocks, because the shares trade for a relatively low multiple to forward earnings. At Tuesday's close, Wilshire Bancorp traded for seven times the consensus 2013 earnings estimate of 67 cents, among analysts polled by Thomson Reuters.

The consensus 2012 EPS estimate is 51 cents.

Since Wilshire is operating under a June 2011 memorandum of understanding with the Federal Reserve Bank of San Francisco to "act as a source of strength" to its main subsidiary Wilshire State Bank, the company requested, and was granted, permission by the Fed to bid on its own TARP shares being auctioned by the Treasury.

KBW analyst Julianna Balicka said in a report on Wednesday that she believed Wilshire "may submit several bids to optimize its position relative to the expected clearing price," of the TARP preferred shares.

Regardless of how the company fares at the auction, the silver lining for investors is that Wilshire was granted regulatory permission to upstream a dividend of $62 million from the bank subsidiary to the holding company, meaning that shareholders will not face dilution from a quick TARP repayment.

Underscoring Wilshire's strong capital position, Balicka said that the company was "the only bank in the auction group to have a pro-forma leverage ratio above 10% at the bank level after the repayment of TARP at par.

KBW rates Wilshire Bancorp "Market Perform," with a $4.00 price target. Balicka estimates the company will earn 60 cents a share this year, followed by 2013 EPS of 85 cents.

Interested in more on Wilshire Bancorp? See TheStreet Ratings' report card for this stock.

MainSource Financial Group
Shares of MainSource Financial Group closed at $11.71 Tuesday, returning 33% year-to-date, following a 15% decline during 2011.

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The shares trade for 10 times the consensus 2013 EPS estimate of $1.15. The consensus 2012 EPS estimate is $1.06.

The company recently announced that an informal regulatory agreement requiring minimum capital ratios had been lifted, and KBW analyst Christopher McGratty said on Wednesday that his firm had "learned of" MainSource's "ability to upstream $46mm of dividends from its main banking subsidiary, MainSource Bank to the parent company without seeking prior regulatory approval (up to $50mm with approval)."

So, it would appear that MainSource's shareholders will avoid a dilution of their holdings as the company exits TARP.

Following MainSource's TARP auction purchase or full repayment, McGratty does not expect the company to raise its quarterly dividend beyond its current level of a penny a share.

McGratty rates MainSource "Market Perform," with an $11 price target, and estimates the company will earn $1.05 a share this year, followed by 2013 EPS of $1.25.

Interested in more on MainSource Financial Group? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.