United Western Bancorp Inc. has decided that it needs to spend capital to attract capital.
The $2.6 billion-asset Denver company said Tuesday that it had agreed to buy Legent Clearing LLC, an Omaha securities clearing firm, for $13 million in cash and $2.7 million in stock. The timing is noteworthy: United Western faces a June 30 deadline to raise capital at its thrift.
Some analysts have doubts the deal will get the green light, and said it appears counterintuitive, because dozens of struggling companies, including United Western, have sold ancillary businesses to harvest capital in the past few years.
"It is interesting that they are making this acquisition. It is going to bring in $400 million worth of low-cost deposits, which is nice," said Terry Keating, managing director at Amherst Partners in Chicago. "But if they are under regulatory pressure I wonder what makes them think that this deal will be approved?"
As Guy Gibson, United Western's chairman, sees it, the acquisition would improve his company's access to low-cost deposits. That, he maintained, should make United Western more attractive to equity investors.
"We think this transaction only helps us in a capital raise. From shareholders and investors I have talked to, they look at this business as a very attractive acquisition," Gibson said in a conference call Wednesday. "I think it's an important part of the capital raise to get this transaction done."
The stock market appeared to like the deal, which United Western expects to close in the third quarter — the banking company's shares closed Wednesday at $1.19 a share, up 41.3%.
Still, the deal had its detractors, who noted that Legent has been losing money for several years and that United Western suspended payments on its trust-preferred securities in the first quarter.
"I don't think it is the most prudent use of capital or the most prudent use of their time," said Kevin Parks, an analyst with Hildene Capital Management LLC, a New York hedge fund with exposure to the trust-preferreds. "Sure, they are getting the deposits, but it is hard to see the justification of the deal at this time."
United Western has been dealing with a troubled $286.5 million mortgage-backed securities portfolio. It sold a trust unit last year for $62 million and raised another $80 million in September. But continued red ink, including a $25 million net loss in the first quarter, have eaten away at capital.
The company reached an informal memorandum of understanding with the Office of Thrift Supervision that gives the thrift until June 30 to boost its leverage ratio to 8% and its total risk-based capital ratio to 12%. Analysts have estimated the company needs to raise $50 million in capital.
Gibson acknowledged in an interview Wednesday that only a successful capital-raising effort would allow United Western to meet its deadline. Though the company has hired Goldman Sachs to advise it, Gibson would not say if a capital raise was imminent. But he said regulators are looking for signs of progress.
"We are doing what we can. We are cutting expenses where we can," Gibson said. "We are making progress and we feel that they will give you time so long as you are making progress."
Paul Miller, head of research at FBR Capital Markets Corp., wrote in an e-mail to clients that while the deal does not address capital, it does address deposit concentration issues outlined in the OTS order and suggests "the regulators could be working with [United Western] to fix issues of concern rather than taking a hard stance."
Gibson called the $13 million price tag a bargain — it is near Legent's book value — and said it wouldn't take much of a bite out of United Western's capital.
Gibson is familiar with the processing business, and with Legent in particular. He founded the company in 2002 and sold it in 2005. Henry "Ric" Duques, former chairman of First Data Corp. and the controlling owner of Legent Group LLC, the parent company of Legent Clearing, would become an adviser to United Western. Keating said those ties likely helped persuade the sellers to accept stock in United Western. "Clearly, the sellers have some confidence in the company," he said.
And Gibson said becoming part of a banking company would solve one of Legent's big problems — low interest rates have stymied its earning power. He also predicted there will be more opportunities to pick up such businesses in coming years. "Processing businesses' values have come down in value because their bottom line is solely based on what they can make on deposits," he said. "There is a great opportunity over the next couple of years to acquire some of these businesses."
