A few days ago, United Bank and Trust published its Third Quarter Report. As I suspected, the news was disappointing. The bank lost $2.1M (ignoring the $284K TARP money dividend payment), due mostly to loan loss expense of $6M.
In addition to loan loss expense, for whatever reason, this quarter the bank showed increased ORE expense of $815K, a huge $561K increase over the previous quarter. ORE expense is expense for maintaining the foreclosed homes it has taken back. This expense could have come about when the bank finally sells (at a loss) the houses it has taken back, as opposed to paying the continuing costs of maintaining the homes. It would be interesting to ask the bank how it recognizes the loss upon sale, but I digress.
Other expense items that are surprisingly high are Data Processing ($392K compared to ~$320K for the prior two quarters) and Professional Fees ($476K compared to $433K in prior quarters).
So why are these expenses up? I know that banks in general are spending more money on Data Processing equipment, but that would be a capital expense, not an operating expense. And when I see professional fees increase, I always ask "Why are they paying the lawyers more? What's going on from the legal side? Are they trying to protect themselves from something? Are their lawyers talking to somebody about some legal issue that could affect the bank? Here it might be that they needed lawyers or other professionals to work with the SEC and OFIR regarding the value of a loan and the right amount of loan loss expense. You might know that the bank published a statement around November 14 saying that they would delay publishing its financial statements because it was in discussions with the SEC and OFIR regarding the value of some loans. My guess is that the SEC and OFIR thought the value of some loans were lower than the bank thought and the bank hired some experts to argue their case to these bodies.
Since 2007, the bank has taken Loan Loss expense of over $82M (from a loan portfolio of $550M to $600M). I had always been under the assumption that the $82 M was loaned prior to 2007. Now I have to ask, with the continuing Loan Loss circus, are some of the current losses from loans made since 2007? If so, that would imply that the bank's underwriting process is still impaired, just like many of its loans.
The bank is giving a lot more information about loan quality. Almost 11 pages of this quarter's report discussed loan quality, but it did not show when these loans were made.
We're all still trying to understand when the lending side of the business will be fixed. Each quarter I look for signs, but most quarters there is no evidence that the lending side is fixed. People waiting for the stock price to increase or for a cash dividend will have to keep waiting because until management fixes the lending side and it stops losing money, there will be no dividend, and there will be no price increase.
Another digression: Other topics worth writing about are: How does the bank's overhead expense compare to other banks its size? How is the bank's solvency compared to other banks it compares itself to? When I get a chance, I'll investigate the answers to these questions too.