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A small bank has shown that it's easy to boost its equity capital through a simple accounting maneuver - all you need is a little government bailout money.

While big banks can't wait to repay their government aid, Superior Bancorp (SUPR) got creative in using the $69 million it got last year from the Troubled Asset Relief Program. The bank converted the preferred stock owned by the Treasury Department as a result of TARP into trust preferreds - which will add $22.5 million to tangible common equity.

Jim White, Superior's chief financial officer, said in an interview with Dow Jones Newswires, "I did get a sense in our conversations with the Treasury that we are not alone" with the idea of converting government shares to improve capital. The transaction generated an accounting gain because the terms of the newly issued securities compared favorably to current market rates.

The stock of the tiny bank in Birmingham, Ala., rose 6.3% Tuesday, to $1.87, after the bank completed the transaction the night before; it lifted its tangible common equity capital to 5.81% of total capital - improving a key ratio for regulators and investors. Most other bank stocks declined on Tuesday. Superior has $3 billion in assets, and its stock market capitalization is $22 million.

The idea could spread, particularly among small banks suffering from sharp stock price declines. Often they have difficulties finding investors to beef up their capital, said Sandler O'Neill & Partners LP analyst Kevin Fitzsimmons. Superior's stock is down 41% so far this year.

The accounting gain may not be enough to make up for low capital levels, but "it's a gain nonetheless," Fitzsimmons said. And even incrementally improved capital might make it easier to persuade investors to help capitalize a bank further, he said.

Popular Inc. (BPOP) got the ball rolling this summer when it converted the preferred stock it issued the Treasury Department for TARP funds into trust preferred securities. It booked a $500 million accounting gain.

Popular's aim was not accounting; rather the move was designed to force private preferred stock holders to convert their shares to common stock. After allowing the government to convert to a more secure investment, Popular eliminated the preferred stock dividend. Still, the gain helped to convince Wall Street of the merit of Popular's move.

For the government, the move is a good one because the Treasury is in a more secure position as trust preferred holders. "We went to Treasury" with the proposal, said White, Superior's CFO, "and found Treasury extremely helpful."

Investment bank Keefe, Bruyette & Woods Inc. (KBW) introduced the idea to Superior, White said. And Treasury approved the proposal in as little as nine days, the CFO said. A Treasury spokeswoman said, "we don't provide details on individual institutions or private discussions about their agreement with Treasury."

White said the gain "is the initial stage in a multi-faceted program" to increase equity capital. "We will take other steps as market conditions seem appropriate," and the initial improvement in capital and the rise of Superior's stock Tuesday could make an equity offering easier.

Fitzsimmons wrote in his research report, "many investors will view the improvement as fairly modest and perhaps as little more than 'smoke and mirrors'"

But White said the transaction doesn't increase the bank's expenses and is not diluting shareholders. "It may be an accounting gain," he said, but he doesn't think it should be dismissed out of hand.

- By Matthias Rieker, Dow Jones Newswires; 212-416-2471; matthias.rieker@dowjones.com

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