|
|
|
|
|
|
|
|
|
|
|
|
The good news is that I am able to write my second letter to the Shareholders. The bad news is we lost $83.7 million in the first six months of this year. You undoubtedly thought that things couldn't get worse and that nobody could lose that amount of money in such a short period of time. One excuse is that I am new to the banking business and, having read about the major losses being incurred by the large money center banks, I became confused. I realize that $83.7 million is a pittance compared to the billions of dollars the big boys are losing, but we all have to start somewhere.
Seriously, two extremely critical events for the company occurred during the second quarter. The first event occurred on June 23, 1987 when the Company entered into an agreement to merge with Alaska Mutual Bancorporation (AMB), another Alaska chartered bank holding company. As part of a plan of restructuring, the FDIC will inject $295 million and the Hallwood Group Incorporated will raise $65 million for AMB, which will be the survivor of a merger between UBAI and AMB. For each share you currently own of UBAI stock, you will receive .05 shares in the merged company and you will have the right to purchase additional shares in the merged company in order to retain a proportionate interest in the merged company. If you do not purchase additional shares, your ownership interest will be substantially diluted. If the plan of restructuring is successfully implemented, UBA and Alaska Mutual Bank will not be closed by the regulators. In mid-September, if our current schedule holds, you should be receiving a long and boring joint proxy statement and prospectus that will explain the whole transaction. As you attempt to read the proxy statement, keep in mind that its main purpose is to provide attorneys an opportunity to generate hundreds of billable hours. If we did not provide this kind of make-work project for people in the legal profession, they might have to go out and find real jobs. I do recommend that your read the proxy statement as it contains important information on the proposed merger.
The second significant event for the Company involved a hard look a the Company's financial situation. Evaluations to estimate current values of real estate collateral for loans and other real estate owned were done throughout 1986 by the Company. When I came on as the new Chairman of the Board and Chief Executive Officer of the Company earlier this year, several of the previous assumptions and estimates of underlying real estate values had changed considerably since the end of 1986. The recession in Alaska has deepened during 1987 and interest rates have increased, which have produced negative influences on the real estate market.
Based on analyses completed using the revised assumptions and estimates, the Company has increased its allowance for loan losses to $74.6 million or 27.69% of loans at June 30, 1987. As a result of the increase in the allowance and a substantial write-down of other real estate owned, UBAI lost $83.7 million during the first half of 1987. This loss created a deficit in Shareholders equity of $77.5 million.
I personally have taken a very conservative view of the Alaskan real estate market. In the early 1980's, however, the majority of the people in the state felt the real estate development boom would last indefinitely. Unfortunately, the boom came to a crashing halt.
Many observers have blamed the crash of the Alaskan economy on the decline in oil prices and oil industry activity. The problems faced by the energy industry certainly contributed to Alaska's current economic problems. However, I believe a more serious problem for the banking industry here is that there is substantial over-supply of commercial and residential real estate. In more simple terms, Alaska banks were financing the building of condos, houses and shopping centers for the people who were building condos, houses and shopping centers. When the building stopped and other sectors of the economy began to disintegrate, people working in the construction industry and other ailing businesses began to leave and now we don't need all those condos, houses and shopping centers. Although blowing up tankers in the Gulf of Oman may help bring stability to the U.S. oil industry, I believe Alaska needs more than just an increase in oil prices to solve its economic woes.
The plan that has been formulated by UBAI, AMB and Hallwood should address the financial problems of UBAI and AMB and, assuming consummation, create a financially stable resulting entity.
As I have been conveying little but bad news to you since I began this job in April, you may be pleased to hear that, as a condition of contributing $295 million, the FDIC requires senior management of both UBAI and AMB to leave at the close of the transaction. With a little luck, the new CEO of the merged company should be able to report more encouraging news to you than I have been able to.
Name withheld until approval is received.
Chairman of the Board