The Shareholder meeting will occur tomorrow April 27 as follows:
- Time: 4:30 PM
- Location: Downing Center, 209 E. Russell Road, Tecumseh, MI 49286
You might try to attend if you can.
I’ve spent a little time looking at the 2009 Annual Report and the 2010 Q1 report. I used to have a few more questions, but maybe I’ve answered some of them. Here are some of my general observations:
- Loan Portfolio: It looks like the loan portfolio has shrinked significantly over the past year. I don’t think this is necessarily bad because perhaps there are fewer opportunities where the risk matches the reward. To me it doesn’t make sense to loan money just to say you’ve increased your loan portfolio. Having said that, the loan portfolio is usually the major source of income for a bank and when it shrinks, the longer term earning potential shrinks too.
- Balance Sheet Liquidity: Regarding liquidity, the bank is more liquid than it’s been in a while. I don’t know if this is intentional on its part or if it’s a consequence of not having good places to loan money. I don’t think there should be a focus on increasing liquidity unless it’s a problem, and when we’re not in crisis mode, increasing liquidity should not be a focus. However if the increased liquidity is a result of few good loan opportunities, then increased liquidity in the short term is OK.
- Loan Loss Expense and Writeoffs: It looks like to me, the bank will accrue an additional roughly $20M in loan loss expense this year. From the notes, it looks like they stil have around $12M of problem loans for which they should accrue. Maybe I’m wrong, but from the notes, it appears they will write off around $25M in loans this year. I think this means that without a capital infusion, the bank will be down to about $56M in Common Equity at the end of the year (about 8.5% capital ratio). If this is the sum total of the Loan Loss expense, maybe the worst is behind the bank.
- Memorandum of Understanding: From the Q1 earnings report, they still haven’t talked about how they’ll address the capital requirements for which they’ve made commitments. Based on a few assumptions and quick calculations, it looks to me like the bank will need to add around $35M in capital to meet it’s obgligation of having a capital ratio of 12%. Add another $20M to get the Treasury out of the Bank’s business (ignoring the Warrants).
- Stock Price and Dividends: No Dividends this year, no dividends until the bank gets rid of the Treasury’s equity position, and until the Memorandum of Understanding expires. Stock Price: My quick estimate is that at the end of the year, common equity will be in the neighborhood of $56M, ignoring any capital infusion required. With about 5M shares, that’s a stock price of about $11. The market says $7.00 as of today. In my opinion the market price reflects the write offs, it reflects a discount due to the relative illiquidity of the shares, and it is factoring in uncertainty. Bottom Line: Probably no price increase, and almost certainly no dividends.
Here are the questions that I hope they answer tomorrow:
- Are we looking at another around $12M in Loan Loss Expense and a total writeoff of the $32M in loans mentioned in the Annual report and the Q1 report?
- What policies and procedures has the bank instituted so that this magnitude of loan writeoffs doesn’t happen again? What has the bank learned and how has it changed its underwriting policies?
- What is the bank going to do about reaching its capital requirements as stated in the Memorandum of understanding? It seems to me that the Treasury and the FDIC have been patient with the bank during these last two years, but their patience will eventually run out.
- I’ll be honest, I haven’t had a chance to compare the situation here at UBT with that of other similar sized banks in SE Michigan. I’d like to see how it compares to others. I’m sure they will tell us tomorrow that UBT is better than most and certainly no worse than any other bank in SE Michigan.
I think those are my main questions. I hope that if they’re not answered (and if I can’t make it) somebody asks management about these issues. I hope this helps make the meeting tomorrow more useful than it might have otherwise been.