Last week, United Bank and Trust held its 2011 Shareholder Meeting. Unfortunately, I was unable to attend, but today I listened to the recording from the bank's website.
I could have misinterpreted some things since I was not in attendance, but here is my overall sense of the discussion and some of the comments that people made:
- I get the sense that there is some unhappiness in the ranks of the shareholders. I sense this because there were more comments questioning why the board and management were doing things the way they are.
- People are concerned with the TARP money that the bank took a few years ago. I believe that the bank is being asked about that alot and is paying lip service to wanting to pay it back. However it staunchly defends taking the money.
- Mr. Chapman, heading off the question about when will dividends be reinstated, said not this year. He said the bank is still too fragile to support a dividend. (Though he was proud of being able to pay the yearly $1 Million dividend to the US Treasury for the TARP money). He said a dividend wouldn't be forthcoming until earnings got stronger.
- Somebody actually asked about the process to nominate other people to the board of directors.
- One gentleman mentioned that he had inquired of the outgoing chairman (Mr. Hickman) how he might be nominated for the board of directors, but was rebuffed by Mr. Hickman who told him that the gentleman did not fit the "dynamic" of the current board.
- Sensing increasing criticism, the new chairman of the board staunchly defended the board's performance over the past several years, saying that the board was hardworking and committed to the success of the bank.
- In the second to the last comment, somebody (Mark somebody), suggested to the new chairman that he take charge and chart his own course with regard to the bank's future. I can't tell if he was unhappy with the past performance and if that was backhanded swipe at the outgoing chairman, or if he was a plant by the new chairman, to calm investor ire.
The comments above are from the meeting, and I've tried to present them impartially. What follows are my comments and opinions about the presentation and other specific comments made by the board or by management. Where I mention pages, I am referencing the handout that is available on the UBT website. Oh where do I start?
My Comments on the Presentation:
Core Earnings: The chart on page 9 shows a comparison between UBT and other banks regarding core earnings as a percent of total assets, and shows that UBT is pretty strong in comparison to the other banks.
Why don't they show a comparison between United and these banks regarding loan loss expense and provision for loan loss? I made a quick spreadsheet and it shows that for the Michigan banks (only had time to do Michigan banks), UBT is second from the bottom in loan loss expense to total assets, and loan loss expense to total loans. Why not just show how bad UBT's loan loss problem is when compared to other Michigan banks or the other two peer groups? Why not be completely transparent, instead of having us do the work ourselves?
Strength of Core Earnings: Mr. Rabe said that Core earnings were strong because much of the financing came from demand deposits and transaction accounts. My question is: When people start demanding more return from the money they lend the bank (in the form of deposits, this relatively low cost financing), what will the bank do then to keep its interest cost low? Since the economy is still in neutral, this is probably not a concern yet, but there should be some strategy, what is it?
Net Earnings: I believe that Mr. Chapman said he thought the stock price would go up and there would be dividends when the bank showed consistently good earnings. But as I've said several times, what is net earnings? It is simply core earnings (which apparently is pretty strong) minus loan loss expense (or loan loss accrual, same thing).
This next part is important and answers most questions:
Net Income (ignoring taxes) = Core Earnings – Loan Loss Expense
The question that everyone should be asking management is: When will loan loss expense be immaterial? Whenever loan loss expense goes to zero (or almost zero for a long period of time) then there could be dividends, because then there will be a profit.
But right now, we shareholders are paying for the sins that were made between 2005 and 2008 when loans were made, were defaulted on, and now loan loss expense must be taken. Whenever that stops, we may see dividends.
Stock Price: People were indirectly asking when the stock price would go up. Mr. Chapman said he didn't know, but in his opinion (ie the company line) is that the stock is undervalued (or at least it could be argued that it is). I have a different suggestion:
I have a different take: I suggest that the market is correct in its valuation of UBT. It sees a bank that doesn't know how to lend money, takes bad risks, has to write off tons of loans and will eventually go out to get additional capital and dilute the value of the shares that people may invest in.
Prize for Being the Closest to Admit that They Screwed up: Page 14 (Construction and Land Development Trend), shows the percentage of Construction and Land Development loans in 2006 make up 15.7% of the entire loan portfolio, and the percentage declined to 7% in 2010. Mr. Rabe made the statement that the percentage in 2006 was probably the median of all banks, but in retrospect it was higher than it should have been. The decrease between 2006 and 2010 is in the neighborhood of $50M. Perhaps some of the decrease was refinanced, but it's more likely that of the $70M in loan loss expense over this period, $50M was from the Construction and Land Development loans.
This is the reason for no dividends, the reason that the bank needed additional capital, and the reason employees have not had a raise in two or three years. Of course it's also the reason that the stock price has lost 90% of its value in that time.
Economic Overview (Page 22): Apparently the bank is somewhat optimistic based on the U-M prediction positive job growth in 2011 which is the first time in a decade. I have to ask, if this is so, why was the bank so anxious to make loans in the mid 2000s? Didn't they consider economic conditions when they made the loans? I know this is just one sample opinion it might have used in the mid 2000s when it made the problem CLD loans, but how else did they judge the economy? I don't think GM made a profit at all after 9-11. Same thing for Daimler Chrysler. Didn't the banks see these things?
This is one reason I think management and the Board were asleep during the mid 2000s
Prize for Most Meaningless Slide in the Presentation: I think page 26 is completely meaningless. Box 1 about the leaders- so what? Don't you develop your leaders as a normal course of business anyway? Given the conversation that transpired at the meeting, I think they're looking for yes men and women for their future leaders. Boxes 2 and 3 are saying the same thing: By deepening and broadening the client relationships, you will naturally diversify and grow revenues.
Small Business Lending Fund to Repay TARP: I think this is a red herring. I think this is something to throw out to shareholders to show that that they're listening to the TARP comments. Don't look for anything to happen on this front until it gets more defined. If things start moving in that direction, it appears all that would happen is that the bank would replace one form of equity stake by the government by a different type of equity stake. That does not sound good either. To me, it appears that the bank's plan is just what I predicted in a previous post: pay lip service, then hope that the loan losses was out by 2013, so that they can pay back the money with earnings.
My Comments on the Q/A:
- There were a few good questions in the beginning of the Q/A asking about TARP Money repayment, and how somebody could get nominated to the board of directors. I think that shows that people are starting to watch the bank more closely, or are at least signaling to management that they're watching carefully.
- Mr. Chapman said that he had no doubt whatsoever that if the mailing address of the bank were Tecumseh rather than Ann Arbor, they would not have been able to do the capital raise last year. I wish someone had asked: Well, how did the bank get into that position in the first place?
- One person made a good comment: He was talking about the stock incentive program, and how he hoped that directors and employees would not be given stock/option awards if the stock for instance went from $3 to $6. Somebody from management or the board mentioned that he was concerned that employees had not been given a raise in several years. While I understand the argument, this was a proper response to the economic and loan writing catastrophes that the bank faced in the past few years that caused net losses during those years. It would be improper for the board to give salary increases when shareholder value has decreased over 90%.
- The thing that upset me the most was toward the end, when the new chairman told shareholders that Mr. Rabe generates a lot of data about the bank and people should study it and come to the meeting well informed. That is exactly what I've been doing for three years.
- In 2008, I said that the only reason the bank was taking the TARP money was because it didn't know what it's loan loss accruals would be for 2009, and I was right.
- In 2009, I said that the bank would need to get additional capital, and in 2010, the bank raised capital.
- And what REALLY REALLY annoys me is when I come to the shareholder meeting armed with the "data" Mr. Rabe generates, and I ask questions (like the new board chairman says he wants), and only get shut down by Mr. Chapman because he doesn't want to answer tough questions in front of everyone.
I guess I shouldn't be surprised when listening to the meeting, how the management and Board of Directors are telling their story, and they will control the venue so not too much blow back occurs that may hurt them. The board may be diligent, hard workers, but I question whether they're giving the right guidance. Given some of the comments, I do get the feeling that Mr. Hickman got people on the board whom he could control, and there were a few people who made some comments to that effect. It also surprised me that the new board chairman spent time defending the board of directors.
Since 2006, he stock price has gone from $33 down to $3. Over 90% of its value destroyed. Why? The economy certainly had a lot to do with it, but also, the bank made poor loan decisions, and had to sell additional shares, and now we old shareholders (not so much the new shareholders) will pay for those mistakes until the loan losses wash out. However long it took for the bank stock to get to $33, it only took 5 years for it to $3.
One thing we know is that stocks go down faster than they go up. It will take many years, probably more than a decade, before the time and good management replace the value that was lost since 2006. For those in for the long haul, it will be a long haul.
Feel free to comment or drop me a note and tell me when and where the group meeting is at a local bar around here where you talk about the bank. I'd like to attend if I could and maybe swap notes.