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Kurt B. Feierabend
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Kurt B. Feierabend is a financial analyst and private investor. He holds an MBA from the University of Minnesota and has an engineering background including power generation, electrical engineering and software development.
  • Independent Bank Corporation's Pending Common Stock Offering 0 comments
    Jul 26, 2010 12:38 AM | about stocks: IBCP

    Independent Bank Corporation's recent S-1 filing with the SEC to issue $110 million to $126.5 million shares of new common stock is certainly enough to put shareholders on edge.  This is already after Independent received $72 million under the U.S. Government's Trouble Asset Releif Program (TARP) this past December and also converted $41 million of trust preferred stock common shares last month.

    The issuing of new shares was part of Independent's “capital plan” in which they announced three objectives during January 2010.  The first objective of the capital plan was to convert the Government's preferred stake in the bank to common shares, the second to convert $40 million face value of the trust preferred stock into common shares and, finally, the plan was to raise an additional $50 million to $150 million in cash by issuing new common shares.

    Independent hopes to be able to convert the Government's preferred shares to common shares at a 25% discount.  However after working with the Government, this conversion became contingent on Independent converting $40 million of their trust preferred stock to common in addition to raising an additional $100 million in new capital. Independent was able meet the first requirement by converting $41.4 million of their trust preferred stock, all from their IBC Capital Finance II (Nasdaq:IBCPO) preferred stock, into common, but still has to raise the additional $100 million to meet the second requirement.  Once these prerequisites are met, the Government's stake can be converted to around 78.2 million shares at the current basis, subject to some possible anti-dilution adjustments which may be triggered in certain situations.

    On July 8th, Independent filed the S-1 for the issuance of up to $126.5 million in new common shares.  As part of the S-1, Independent entered into an agreement with Dutchess Opportunity fund to sell up to $15 million worth of shares.  The shares can be issued from time to time at Independent's discretion. The price at which these shares will be issued will be determined by the volume-weighted average price for each day for the five days following the date on which Independent issues the notice.  The price will be a 5% discount to the lowest VWAP day of these five days.

    That's the background. Independent's common shares have dropped precipitously since the conversion of the IBC Capital Finance II trust preferred stock into common stock last month.  This may be partially due to arbitrage as the prices prior to the conversion made the conversion transaction favorable to the holders of the trust preferred stock.  That has since reversed and now the trust preferred stock is trading at a premium to the converted common.

    There is still considerable risk for the common at this point.  With the current oustanding shares of about 75 million and a pending additional 78 million shares for the conversion of the Government's preferred shares, there are about 153 million shares to count.  The $100 million to $126.5 million that Independent hopes to raise will quadruple the number of outstanding shares if done at the current prices so the impact of the new offering can certainly be substantial.

    Independent is currently well-capitalized as defined under federal guidelines but anticipates it will take losses which will drop their capitalization status below this guideline if they do not get the capital infusion.  Previously when determining their capital plan, Independent estimated they would need $60 million to cover losses, which they estimate may be through 2011.  If they become less capitalized, they may be subject to unfavorable restrictions by the federal government.

    At this point, it would appear much more shareholder-friendly and potentially yield a better return for the Government's stake if Independent didn't aggressively pursue the entire $100 million to $126.5 million in new capital all at once but instead raised money as needed to cover the anticipated loan losses as those losses occur.  As the U.S. moves through this difficult period of mortgage defaults, the picture will become clearer for Independent and a clearer picture will reduce the risk for investors—hopefully resulting in a higher price per share for future offerings.  The $15 million Independent can receive from Dutchess Opportunity Fund per the S-1 can cover their losses for at least for a while. While at least $100 million needs to be raised in order to convert the Government's stake, the only deadline is for a manditory conversion of the government's stake in seven years.  That provides Independent with some wiggle room.



    Disclosure: Long IBCP
    Stocks: IBCP
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