Categories : Capital Issues


On August 18, the bank officially filed with the SEC the notice that it would ask shareholders to authorize an additional 20 M shares.  The bank will then sell some of these shares to bolster its capital position.  The bank mentioned that at this moment, it couldn’t say for sure how many shares it would sell or how much money it would raise.

I’ll just discuss the letter to shareholders, because this is the crux of the filing.

From the first paragraph:

We are requesting your approval to increase the number of authorized shares of our common stock in order to provide us with the flexibility to raise the capital necessary to solidify our capital position, satisfy regulatory requirements, and, most importantly, to assist us in achieving our long term strategic goals and building shareholder value.

My Comments: The main reason they need capital is to solidify the capital position and to satisfy regulatory requirements.  The piece about building shareholder value is nonsense, otherwise, every year they’d be asking for more shares.  (OK, maybe it’s theoretically true in the long term).

From the Second Paragraph:

We believe that the current financial and regulatory environment provides the Company with unique opportunities to enhance shareholder value. Many of the larger financial institutions operating in our market area have shifted their focus away from business development and have focused on internal operational, capital and regulatory issues. At the same time, we believe that many community banks operating in our market area have been more adversely affected by the recession than we have. We believe that our unique performance-based culture and diverse and efficient operating model, coupled with our client service focus, provide us with a significant opportunity to attract new clients and seize other unique growth opportunities.

My Comments:

  • “Unique opportunities to enhance shareholder value”.  Please.  They said something similar about taking TARP money.
  • “Many large banks have shifted their focus away from business development to operations” and “many community banks have been more adversely affected than UBT.”  Again, Please.  How could they possibly know that?

From the Third Paragraph:

We need additional capital in order to take advantage of the opportunities presented to us. Management believes that with additional capital, the Company will be able to act upon opportunities to improve its profitability, enhance its franchise, reinstate the cash dividend on its common shares and enhance overall shareholder value. While additional capital will give us a tool we believe will build shareholder value, we also need capital in order to preserve value. As we discussed at our Annual Shareholder meeting, we need to raise additional capital to comply with the terms of our regulatory memorandum of understanding, to provide an increased ability to absorb potential future losses and to provide us with the foundation for future growth. We are requesting your approval to increase the number of authorized shares of our common stock.

My Comments: The statement in red above in my opinion is the real heart of the matter.  If they are not allowed to authorize more shares to sell, they will not comply with the Memorandum of Understanding.  Then any further losses will further lower their capital ratio and then they’re looking at significant regulatory scrutiny.

From the final Paragraphs of the letter:

Our capital is at a level which is below that required to comply with our memorandum of understanding with the FDIC and state bank regulators. The failure of the bank to comply with the terms of its memorandum of understanding could result in additional regulatory actions against the bank. These actions, if taken, could have a severely adverse effect on the business of the bank and the value of your investment. Without additional capital, the Bank could also be forced to further curtail operations and reduce its assets and deposits which could diminish the value of the Bank’s franchise and cause it to be unable to respond to business opportunities.

Your Board of Directors believes our current levels of capital are insufficient in light of our current financial condition. We believe the recent economic downturn and our recent operating results underscore the strategic importance of increasing capital levels to enhance our ability to continue working through the ongoing impact of the recession on our loan portfolio and absorb potential future losses. Your Board of Directors believes that it will be in the best interests of the Company and its shareholders to increase capital to levels higher than required to comply with the memorandum of understanding to provide a foundation for growth, position the Company to be prepared to take advantage of business opportunities as they may arise, and create conditions necessary to enhance shareholder value in the future.

We continue to identify and evaluate a broad range of strategic alternatives to increase our capital levels, including capital-raising transactions. Some of the strategic alternatives available will require additional authorized shares of our common stock.

My Comments: Here is the bottom line of all this:

  • United Bank and Trust needs more capital, so management believes shareholders must authorize more shares.
  • The bank will then sell some of the shares to generate as much money as possible.
  • It is probably shooting for a capital ratio of at least 10%.
  • Their comments about possibly providing a dividend:  I believe it is crazy to talk about a dividend at this point in time.  No competent management of a bank in this situation would issue and sell stock and use part of it just to give it back to shareholders.  You don’t sell stock just so you can generate money to give some back.  (or as one person put it, “don’t ask me to give you $5, just so you can give me back 5 cents.”).  The bank is facing a crisis in the short term, and it’s irresponsible to imply that some of the money generated from a stock sale could be used for dividends.  Any shareholder who believes that a dividend is forthcoming (or expects to receive a dividend in the short term) should sell his stock now.  If management is able to declare a dividend after it raises capital, it would be highly irresponsible on its part.  However, I do not believe that regulators will allow management to issue a dividend if it does successfully raise capital.

What you should do: (My opinion only- you can do what you want)

  • If you believe that the bank will indeed use the money for “unique opportunities to enhance shareholder value”, and if you have the money to buy more shares then you should probably vote for authorizing more shares.
  • If you believe that the bank will indeed use the money for “unique opportunities to enhance shareholder value”, but you do not have money to buy more shares, then you might consider selling your existing shares, and being done with United Bank and Trust.  If more shares are eventually authorized and sold, your existing shares will be diluted, if you are unable to purchase more shares.  If you’re OK with a diluted position, then you might keep them if you are truly optimistic in the long term.
  • If you don’t believe in the “unique opportunities” argument posited by UBT management, then I believe you should also sell your shares.  Quite clearly the bank needs more capital.  It does you no good to hold on to the shares and vote no.

It’s clear to me that likely one of two things is going to happen in the next year or so:

  1. The bank will get the authorization needed for more shares, it will sell some, get its capital cushion, and muddle through (though not doing anything about the “unique opportunities”) and maybe in five to ten years, things will get back to an OK level but not near any optimistic level that management is picturing now.  There’s just too much uncertainty and risk in the short term in Michigan’s economy, in the political and regulatory climate, and in the business climate for any short term recovery for UBT.
  2. The bank will not get authorization for more shares.  Then during the next year, it will be closely managed by the FDIC or the OFIR because it will not have complied with the Memorandum of Understanding.  Anything the bank does will probably have to be approved by one of these two regulators, and the regulators will probably push to shrink the size of the bank (sell loans to generate cash) so to improve capital ratios.  During this year, the FDIC or Treasury will try to get a larger, better capitalized bank to buy out UBT.  If the bank is not bought out in a year, and if regulators don’t think UBT can get its capital levels to acceptable levels quickly, then it might get taken over.

This is my take on things, sorry to be pessimistic.  Since about December, I’ve been predicting that the bank will need more capital, and now it must take action. If you have different ideas, feel free to opine.

When you get your proxy material, consider my suggestions above for how you might vote, but remember, regulators have mandated that the bank does indeed need more capital.  Whether you want to be part of this or not is up to you.

 Posted on : August 22, 2010
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