Shareholders Shocked After Stock Does the Splits

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Tamara Gurney, president and chief executive of Mission Valley Bancorp, admits she was a bit surprised when the company’s stock jumped 24 percent within days of a 6-for-5 stock split.


So Gurney called one of the Sun Valley firm’s market makers to find out what had happened after the April 3 split, which should lower a share’s price.


She discovered something not uncommon among small cap stocks: One of the firm’s five market makers hadn’t adjusted for the split, which meant shares were traded at artificially high prices. Moreover, a post-split trade priced at $17.25 a share had to be unwound and corrected at a lower price.


“Somebody wasn’t paying attention, which isn’t that infrequent with small dividends,” said Dave Bonaccorso, a market maker at investment banking firm Hoefer & Arnett in San Francisco. “Either a market maker put the order in at the wrong price, or somebody entered an order before the split and it shot the stock up a bit.”


Shares of closely-held Mission Valley, parent of Mission Valley Bank, have since settled down to $15.50 a share, from $17.75 a share earlier this month.


Mission Valley, which opened in 2001 and has two branches, has used stock splits as a way to reward its shareholders. A 5-for-4 split in 2003, and 3-for-2 split last year preceded the current one.


Start-up banks are prohibited from issuing dividends, so splits are one of the few methods of returning profits. The bank raised $6 million from 300 investors in 2001, and raised another $3.3 million from the same group in 2003.


“The splits are really about rewarding those shareholders,” said Gurney.


Though stock splits can be dilutive to share prices, Mission Valley has found that its shares tend to creep back up again in a short period of time, primarily because small bank stocks have been popular among individual investors. That leaves investors with more shares often at the same price before the split.


There are also tax reasons why investors prefer stock splits to dividends.


“This particular group liked the fact that they control the taxable situation as opposed to dealing with a dividend,” said Gurney, who was chief operating officer at American Pacific State Bank before it was acquired for $89 million in 1999 by City National Corp.

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