Troubled banks usually do not call attention to themselves, but Union Bank of Gilbert, Ariz., had little left to lose.
Last month the $128 million-asset unit of Heartland Bancshares Inc. ran advertisements in The Wall Street Journal and The Arizona Republic proclaiming it would not be the next to fail.
"We have never invested in toxic assets," the ads said. "We invest in people and our community, neither of which are toxic … no matter what a government official may say."
Dan Dunlap, Union Bank's president and chief executive, said he is trying to drum up interest in a private placement to recapitalize his bank, which regulators considered "undercapitalized" as of March 31. Close to a third of its loan portfolio was nonperforming on that date.
"I just want everyone to quit calling this stuff 'toxic.' You know, everyone who has problems isn't a loser," he said. "But that doesn't mean that we don't have to raise capital, so I also wanted to draw people, perhaps investors, to come and see what we are doing or attempting to do."
The broader point of the ad campaign is that community bankers "are not criminals, and neither are our customers," Dunlap said. "We got caught up in the cycle."
The ads invite readers to visit Union Bank's Web site to learn about the things it is doing to stay in business.
Its home page offers a link to information about the private placement of stock in Union Bank's holding company. It is looking to raise $13.75 million to $16.25 million, enough to return the company to "well-capitalized" status and give it some wiggle room to absorb further losses, Dunlap said.
He said he is in talks with potential investors and hopes to have the capital infusion — or a deal to sell the bank — in place this month.
Some observers applauded that message but questioned how effective the ads would be in rescuing Union Bank.
"I appreciate the premise. I am a big advocate of the fact that community banks fulfill the things he articulates in this ad," said Steven Reider, the president of Bancography, a consulting firm in Birmingham, Ala. "Maybe they will be successful in their capital raise, but it is a tough sell. I don't really see anyone reading that ad, going to the Web site and then making the decision to invest in the shares. … I see it as a fruitless expenditure."
Anita Gentle Newcomb, the president and managing director of A.G. Newcomb & Co., a community banking consulting firm in Columbia, Md., called the ads a "last-effort plea" on the bank's part.
"They are going down fighting and are trying to pull out all the stops," Newcomb said. "But you have to look at the fundamentals. They made some bad bets. … You think you've reached the bottom? That's a big bet. You've blown through your cushion and are now asking other people to believe in the bank? That is a very big bet."
Chip MacDonald, a partner at Jones Day in Atlanta, said the ads and the link on the Web site violate Securities and Exchange Commission rules for private placements, which are pitched narrowly to sophisticated investors.
"I'd say this crosses the line," MacDonald said. "They've run afoul here. There are a lot of ways to do a private placement, but this isn't it."
In response, Dunlap said: "Based on the information we received, we believe we are compliant."
Reider said Union Bank would have been better off hiring an investment bank, but Newcomb said that, given its condition, it may have had a hard time finding outside help to identify investors or acquirers.
"Sometimes brokers or investment bankers won't do it if they don't believe it is going to be successful," she said.
Dunlap said Union Bank preferred to go it alone.
"We've tried brokers before with little success, and an investment bank takes a lot of time to get everything together," he said. "We didn't have enough time for that."
Dunlap, a third-generation banker, started Union Bank in 1998. Its portfolio was diversified in its early years, but in 2004 it doubled down on real estate lending, which eventually grew to 85% of its portfolio.
At the end of the first quarter 31.85% of its portfolio was nonperforming, according to data from the Federal Deposit Insurance Corp. A year earlier nonperformers made up 1.73% of assets.
"In hindsight, we shouldn't have been as concentrated, but Arizona has three basic industries — tourism, agriculture and construction, so that was the basis for what we did," Dunlap said. "We aren't crying the blues. This is the type of lending we did. But no one could have anticipated a 50% drop in values here."
He also said Union Bank's market is starting to show signs of recovery. For example, a fourth of the bank's $20 million inventory of foreclosed properties went under contract in the past three weeks, suggesting local real estate markets have bottomed.
"Things are beginning to move forward," Dunlap said. "For the astute investor, today is the day to buy. Three years ago we would have sold at three times book value. Of course, our portfolio was clean then, but it is still a good buy today."
Dunlap personally invested $2 million in Union Bank in the third quarter. That helped it comply with an August consent order from the Office of the Comptroller of the Currency that required the bank to have a leverage ratio of 9% and a total risk-based capital ratio of 12% — both higher than the normal thresholds for being considered well capitalized. But on March 31 the bank had a total risk-based capital ratio of 6.19% — undercapitalized even by the normal standard.
"I've invested 100%. I've exhausted my resources and my family's to keep the capital levels up," Dunlap said. "I wouldn't be doing this raise if I still had the resources to do it myself."
Dunlap said the consent order, though a blemish on the bank, could make it more attractive to investors.
"We've been under the order for almost a year. Examiners have poked and prodded our portfolio. Everything we have has been written down to the worst-case scenario. There are no more 'hidden' assets," he said.