In today's market, more banking companies may bite the bullet and sell favored, profitable side businesses to raise cash quickly.
United Western Bancorp Inc. is a case in point. In past years the Denver company was approached by potential buyers for its Sterling Trust but was not interested in selling.
This year, however, United Western is sitting on $97 million of unrealized losses. Its tangible common equity is thin, and shareholders have been urging it to sell the trust business to boost capital.
The change of heart has paid off. United Western's stock has surged 60% since it announced April 8 that it had agreed to sell nearly all of Sterling Trust to Equity Trust Co. for $61.2 million.
After taxes, United Western would make $35.9 million on the sale — more than its own market capitalization in the days leading up to the deal announcement.
And the $2.2 billion-asset company says the proceeds would not only boost its capital ratios, but also put it in a position to take over failed banks.
Observers said raising money by unloading lucrative, low-risk — and therefore marketable — subsidiaries can be preferable to a dilutive stock sale.
"I think we will continue to see banks looking at their balance sheets and ask, 'Where do we have an asset that we can turn into cash?' That beats doing a very expensive capital raise, if they can raise capital at all," said Terry Keating, a managing director of Amherst Partners LLC, an investment banking firm in Chicago. "It is kind of like a garage sale."
Geoff Bobroff, an analyst with Bobroff Consulting Inc. in East Greenwich, R.I., said that in addition to raising capital, selling a profitable but tangential business line "also creates a more streamlined organization."
Companies in worse shape than United Western also have resorted to selling subsidiaries.
Irwin Financial Corp. of Columbus, Ind., announced the sale of its home equity business last month and its small-ticket leasing business in August in an effort to reduce its assets by roughly a quarter.
However, those efforts have proven insufficient to get Irwin compliant with regulatory orders for higher capital ratios. It warned this month that its auditors had expressed doubt about its ability to survive.
United Community Financial Corp. of Youngstown, Ohio, has fared better. In August regulators ordered its Home Savings and Loan Co. to boost its capital ratios. To do so, United Community struck back-to-back deals to sell its brokerage and trust businesses for a combined $24.1 million last quarter.
Scot Wetzel, United Western's president and chief executive officer, said it did not shop Sterling Trust. Rather, he said, Equity Trust approached his company.
"We saw this as a strategic opportunity to build capital at the holding company or at the bank if we need it," Wetzel said.
United Western would use some of the proceeds from the sale to boost its bank's total risk-based capital ratio to 11% and the company's tangible common equity ratio to 6%. At yearend the bank's total risk-based capital ratio was 10.55%, and the company's tangible common equity ratio was 4.5%.
Despite the plans to raise those ratios, Wetzel said, "the proceeds will predominately be used opportunistically" on acquisitions.
In recent years United Western has sold a handful of specialized businesses, including a charter school financier. Wetzel said his company held on to Sterling Trust for so long because it generated fee income and kept United Western Bank flush with roughly $316 million of deposits.
(Equity Trust agreed to keep those deposits at United Western Bank for at least five years after the sale. The deal is expected to close May 15.)
Johnny Guerry, a partner and portfolio manager at Clover Partners LP, which owns 5.16% of United Western, had prodded the company to consider selling Sterling Trust on its first-quarter conference call in February.
"I was really pushing for them to get this done. A common equity raise would have taken their shares to egregious levels," he said. "The concern was capital and they had a venue to circumvent that concern."
For some companies, Guerry said, unloading an ancillary business line is likely a better option than participating in the Treasury Department's Troubled Asset Relief Program.
"If you are trading below tangible book value, this is a way to raise nondilutive and not expensive capital," he said.
Before they seek Tarp infusions, "you'll see companies look to their trust, asset management or any other smaller subsidiary to sell," Guerry said.
"They can always go back and rebuild it down the road."