I want to talk about the Bank's Balance Sheet, and (in my opinion) the most important Balance sheet item is the Loan Portfolio and the Loan activity of the bank. Some might argue that deposits and liquidity are more important, but the Loan Portfolio and the accompanying loan loss accruals have been the source of the bank's poor performance since 2008. The poor performance of the loan portfolio has been the reason the bank has suffered monumental losses, and why it's had to reach into the capital markets, issuing and selling more stock which has diluted the value of our shares even further than the quarterly losses.
I think I've mentioned before that the total Gross Loans issued by the bank has been declining over the past few years. At first I wasn't too worried, thinking that it takes time to rebuild a loan portfolio, but now I'm beginning to be concerned.
In 2011, Gross Loans have decreased from $592.0 M to $563.7 M, or a decrease of $28.3M (~5%). Here is the makeup of the decrease:
- Decrease in New Loan Generation: $11.6 M
- Write off of Bad Loans: $16.7 M
Since 2007, the bank has written off $69.9 M in loans. I am assuming this is a net number, meaning that whatever money has been obtained by selling associated loans and assets is included in this number. Put another way, since 2007, the bank has written off over 10% of its loan portfolio. This almost $70M is our investment wiped out in bad loan decisions. This is why bank management had to go to the capital markets (and the US Treasury) to ask for more capital.
Long term, a shrinking loan portfolio does not bode well for the bank. A shrinking loan portfolio can mean that there is an overall shrinking demand for loans, or that the people asking for loans are not good risks, so the bank tells them no.
There may be seriously bad reasons behind the shrinking loan portfolio. Perhaps other stronger banks are able to grab most of the business (Banks like Chase, Fifth Third, Huntington, etc) in Washtenaw and Livingston counties. Perhaps they are able to get the business because they are able to offer borrowers loans (where UBT cannot) or offer loans at better rates than UBT. Perhaps by the time the stronger banks are through picking up the good customers, there is nothing left but risky customers. Perhaps UBT cannot compete against bigger stronger banks who are able to offer more and cheaper loans to the same customers that UBT is competing for. Perhaps it was a bad strategy to venture out from Lenawee county and compete against the larger banks that can provide cheaper loans to its customers. I don't know,
Question 1: So that is a question I hope someone asks, namely: Why is your loan portfolio shrinking? When's it going to stop? Can you compete with these larger banks like the ones I just mentioned?
Loan Loss Accrual:
It always seems like I have to talk about the Loan Loss Accrual. People who have read my opinions in the past know that I think management has no idea what's going on with their loan portfolio, so they're just reacting each quarter.
Reading note 5, I noticed that there were three periods in the recent past where they changed their loan loss philosophy.
- Period 1: Up to Q4 2009,
- Period 2: Q4 2009 to Q2 2011,
- Period 3: Q3 2011 to now.
They don't explain why they changed, but they do explain in general how they changed. In my opinion, the bottom line is that the loan loss expense change in 2011, improved earnings by $3.7 M over what it would have been if the change had not happened.
So there is a profit in 2011 because the bank changed its loan loss philosophy. I'll bet they don't spin it like that at the meeting next week. I wonder if the auditors are going to be present to ask them questions about the change?
Here are questions I hope get asked next week:
Question 2: Next questions: Why did you change your loan loss accrual methodology in 2011? Why should we not believe that it was simply to manage earnings? When this new loan loss philosophy doesn't give you the earnings you want next year, are you going to change it again?