Why was there a Profit in the Third Quarter?
In the previous post, I asked the question: How could United Bank and Trust take a $3.5M charge to earnings due to loan loss expense and still have a $1.3M Profit before taxes. Here is the answer:
The basic setup is that United Bank and Trust makes between $13M and $14M per year in "Core Earnings". "Core Earnings" includes everything except loan loss expense. On a quarterly basis, this comes to between $3.3M and $3.5M per quarter. In the Third Quarter, the bank took a $3.5M charge for Loan Loss Expense. This charge for loan loss expense is consistent with the quarterly loan loss charges the bank has taken since 2009. So, if the bank only expects to make on average $3.5 M per quarter in core earnings, how did it have a profit for the quarter?
It turns out that core earnings for the third quarter were somewhat higher than what is expected. In the third quarter, Core earnings were almost $4.5M. (FYI, Year to date Core earnings is $10.8M for the first three quarters of the year.) So why was it such a good quarter?
It turns out that Non Interest Income has been increasing since the first quarter of the year. In fact, the line item Loan Sales and Servicing was up over a million dollars from the previous quarter. What happened (probably) is that the majority of bank loans are made in the second and third quarters of the year, and you see an increase from $1.2 M to $2.2 M from Quarter 2 to Quarter 3 in the line item Loan Sales and Servicing. This extra Million dollars flowed to the bottom line, and provided the extra Million dollars profit that the bank showed as Net Income before Tax.
My suspicion is that Loan Sales and Servicing will retreat to somewhere between Quarter 1 and Quarter 2 (between $0.89M and $1.2M) in the fourth quarter.
Results for the Rest of 2010?
What about the rest of the year? Will it have a profitable Fourth Quarter? What about a profitable year? Here's what I think:
I think Core Earnings are on track to reach $14M. This is higher thant the $13.1M I forecast at the beginning of the year. I think they're higher because there is seasonality in the earnings (Q2 and Q3 earnings are probably higher than Q1 from which I made my estimate).
Loan Loss Expense: I predicted $19.2M Loan Loss Expense at the beginning of the year. This was my conservative estimate, and I predicted a Mid range estimate of $16.9M. 2010 YTD Loan Loss Expense is $16.6M. I think we're at the end of the loan losses, and the $3.5M loss taken in the third quarter surprised me. I don't know how they can look for more capital from investors, and not tell them that the bank has seen all the loan losses it's going to take. Having said that, it wouldn't surprise me to see Fourth Quarter Loan Loss Expense of $3M putting the total loan loss expense right near $19M
Fourth Quarter Profit? Like every other Quarter, Core earnings will be in the $3.5M range. If loan loss expense is less than $3.5M, UBT will make a profit for the quarter.
Profit for the year? Almost certainly no way. Current YTD Net Income Before Tax is -$5.8M. If the bank has Core Earnings this quarter of $3.5M, even with no Loan Loss Expense, there would be a Year End Net Loss in the $2M range. The only way I would see possible Net Income for the year would be if somehow the bank were paid back some of the loans for which it took loss provisions. This is very unlikely to happen, so I don't see a profit for the year.
During the fourth quarter, we should keep our eye out for who, if anyone, was willing to invest in our bank and buy some of our newly minted stock. Maybe the bank will make announcements to this effect when they happen, but you can also go to www.sec.gov and look for new announcements there.