H. Douglas Chaffin - Chief Executive Officer, President, Director, Chief Executive Officer of Monroe Bank & Trust and President of Monroe Bank & Trust
John L. Skibski - Chief Financial Officer, Executive Vice President, Treasurer, Director, Chief Financial Officer of Monroe Bank & Trust and Executive Vice President of Monroe Bank & Trust
Thomas G. Myers - Chief Lending Manager, Executive Vice President, Chief Lending Manager of Monroe Bank & Trust and Executive Vice President of Monroe Bank & Trust
MBT Financial (MBTF) Q1 2013 Earnings Call April 26, 2013 10:00 AM ET
Welcome to the MBT Financial Corp. First Quarter Earnings Conference Call. [Operator Instructions] Please note, today's conference is being recorded.
Before we begin today's call, I would like to remind everyone that this call may involve certain statements that are not based on historical facts and are forward-looking statements within the meaning of the Section 21A of the Securities Exchange Act of 1934. Forward-looking statements, which are based on various assumptions, some of which are beyond the company's control, may be identified by reference to a future period or periods or by the use of forward-looking terminologies such as may, will, believe, expect, estimate, anticipate, continue or similar terms or variations on these terms or the negative of these terms. Actual results could differ materially from those set forth in the forward-looking statements due to a variety of factors, including but not limited to, those related to the economic environment, particularly in the market areas in which the company operates; competitive products and pricing; fiscal and monetary policies of the U.S. government; changes in government regulations affecting financial institutions, including regulatory fees and capital requirements; changes in prevailing interest rates; acquisitions and the integration of acquired businesses; credit risk management; asset liability management; changes in the financial and securities markets, including changes with respect to the market value of our financial assets; the availability and costs associated with sources of liquidity; and the ability of the company to resolve or dispose of problem loans. MBT Financial Corp. does not undertake and specifically disclaims any obligation to publicly release the results of any revisions, which may be made to any forward-looking statements made to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. If anyone does not already have a copy of the press release issued by MBT Financial yesterday, please check. You can access it at the company's website at www.mbandt.com.
On the conference today from MBT Financial Corp., we have Doug Chaffin, President and Chief Executive Officer; John Skibski, Executive Vice President and Chief Financial Officer; and Tom Myers, Executive Vice President and Chief Lending Manager. We will begin the call with management's prepared remarks and then open the call up to questions.
At this point, I would like to turn the call over to Mr. Chaffin.
H. Douglas Chaffin
Thank you, Laura, and good morning, everyone. At the close of business yesterday, we announced a net profit for the first quarter of 2013, totaling $1.1 million or $0.06 per share. This compares favorably to the first quarter of 2012, when considering actual quarter earnings for both periods. And in the effect of securities gains for both periods, net income for the first quarter of 2012 totaled $117,000, compared to $1.1 million for the first quarter of 2013. This represents the seventh consecutive quarter in which we posted positive earnings. Credit related charges have continued to decline.
The net interest margin, however, declined from 2.92% in the fourth quarter of 2012 to 2.82% in the first quarter of 2013.
Asset yields continue to be challenged due to relatively low loan demand and a high -- highly liquid balance sheet. As a result, net interest income for the quarter of 2013 declined by $884,000, compared to that of first quarter of 2012. It is notable, however, that noninterest income, net of securities gains, increased by $401,000 or 11% in the first quarter of 2013 compared to the first quarter of 2012. Increases in wealth management income and origination fees for mortgage loans sold led the way for this improvement, with increases of 13% and 137%, respectively.
Our occupancy, marketing and equipment expenses showed notable declines in the first quarter, compared to a year ago of $176,000 for a interest and improvement. The most [ph] significant improvement in noninterest expenses occurred in credit-related charges.
Collection expenses, losses on ORE properties and expenses related to these -- expenses related to carrying these properties combined for a reduction of $420,000 in cost for the first quarter 2013, compared to that in 2012, or 53%.
In addition, due to reductions in loan portfolio balances and improvements in underlying asset values, we were able to reduce our provision for loan losses by $750,000 in the first quarter compared to last year, with 33%.
We continue to be engaged with the IRS for an ongoing audit for the years 2007 through 2010 . We are optimistic that a settlement agreement will be reached in the near future, without the need to record significant additional tax expenses beyond what has been previously recorded. No expense regarding this pending settlement was recorded for the first quarter.
We continue to see gradual improvements in local economic conditions as well, while total problem assets and nonperforming loans have remained at the same level for the past couple of quarters, there are underlying improvements in asset quality. Over 40% of our NPAs are performing renegotiated loans. We continue to see reduced levels of past dues.
We continue our focus to improve asset quality by aggressively pursuing all avenues of resolutions for these challenged credits, and we're confident that these improvements will continue.
Tom Myers will discuss the details concerning our progress within our loan portfolios later, but first, I'll ask John Skibski to discuss our financial results in greater detail.
John L. Skibski
Thank you, Doug. The net profit decreased from $1,217,000 or $0.07 per share in the first quarter of 2012 to $1,114,000 or $0.06 per share in the first quarter of 2013.
We restructured a portion of our investment securities portfolio in the first quarter of 2012, which produced a gain of $1.1 million. Excluding securities gains in both periods, pre-tax income increased from $243,000 or $0.01 per share to $1,104,000 or $0.06 per share.
The net interest income decreased $884,000, even though the average earning assets increased $32.7 million because the net interest margin decreased 37 basis points and because the first quarter was only 90 days this year, compared to 91 days last year.
The decrease in the margin was a result of the continued low interest rate environment and the change in the mix of the earning assets. Last year, investments made up 41.3% of our earning assets, and this year, they account for 47.2%.
These are primarily short duration assets, which yielded 1.57% in the first quarter, compared to our loan yield of 5.15%. We're keeping so much in short-term assets due to our low loan demand and our need for liquidity to pay off borrowings that are maturing in the second quarter.
We repaid $55 million in Federal Home Loan Bank advances this week, and we will repay another $40 million at the end of June. This debt is at a higher cost than the yield on the investments, and its repayment will improve the net interest margin by approximately 8 basis points in the second quarter and another 12 basis points in the third quarter.
As a result, we expect our net interest income to average around $8.5 million per quarter for the rest of 2013.
The provision for loan losses decreased $750,000, compared to the first quarter of 2012 because the overall improvement in loan quality and decrease in the size of the portfolio allowed us to reduce the size of our allowance for loan losses.
The loan portfolio decreased by $50.5 million or 7.6% compared to a year ago. Our total problem assets, which include nonperforming loans, other real estate and nonperforming investments and problem loans still performing decreased $3.7 million or 2.8% compared to a year ago.
On a linked-quarter basis, our analysis of our allowance for loan losses indicated that we needed to increase the allowance from $17.3 million at the end of 2012 to $17.9 million at the end of the first quarter. This was due to a small increase of $351,000 in the specific allocations, and an increase of $249,000 in the general allocations, due to a very small increase in the qualitative factors.
As a result, our provision for loan losses was $1.5 million, compared to our net charge-offs for the quarter of $900,000. The allowance is 2.90% of loans as of March 31, down from 3.70 -- 3.07% a year ago, but up from 2.75% at the end of 2012.
We believe that our allowance adequately provides for the risk in our portfolio, and we will continue to assess the adequacy of our loans each quarter and adjust it as needed.
Noninterest income, excluding securities gains, increased $401,000 or 11.2% compared to the first quarter of 2012. The main improvements were wealth management income, which increased $129,000; origination fees on mortgage loans sold, which increased $167,000; and other income, which increased $133,000.
We expect total noninterest income to remain near $4 million for the quarter for the rest of 2013.
Noninterest expenses decreased $594,000 or 5.9% compared to the first quarter of 2012.
Salaries and benefits increased $217,000 or 4.2%, and salaries expense increased due to an increase in the number of employees and annual salary and wage increases.
Equipment expense decreased $103,000 due to lower computer and data processing expenses.
Losses on other real estate decreased $309,000, because real estate values are improving, requiring less write-downs and allowing us to realize gains on sales of some properties that were previously written down.
In the first quarter of 2013, our gains on sales of other real estate exceeded our losses and write-downs by $40,000.
Other real estate expenses decreased $95,000 or 20.3% due to lower property tax and maintenance costs.
We expect our total noninterest expense to average less than $10 million per quarter for the rest of 2013.
In 2008, due to our net operating loss and core earnings outlook, we established a valuation allowance against a portion of our deferred tax assets. We recorded a larger loss in 2009, and increased the valuation allowance to 100% of the deferred tax asset.
After 6 consecutive quarterly profits and a significantly improved outlook for earnings going forward, we evaluated positive and negative evidence and determined in the fourth quarter of 2012 that it was more likely than not that we will be able to utilize some of our deferred tax assets. As a result, we recorded a tax benefit of $5 million in the fourth quarter of 2012 to reduce our deferred tax asset valuation allowance.
Valuation allowance is currently $19.7 million, which equates to approximately $1.10 per share.
A key factor in determining when to reverse more of the remaining DTA valuation allowance is our outlook for future taxable income. That outlook has not changed significantly since the end of 2012, but we did not make an adjustment to the valuation allowance this quarter.
Our balance sheet management is focused on maintaining liquidity, managing interest rate risk and improving capital ratios.
We continue to maintain a high level of liquidity in order to be able pay off maturing borrowings and to be prepared for an increase in loan demand. As I mentioned earlier, we will pay off $95 million of Federal Home Loan Bank borrowings in the second quarter, which will improve our net interest income.
Because this will also decrease our total assets, our capital assets ratio is expected to increase from 6.68% as of March 31, to about 7.25% in the second quarter.
In addition, we issued 500,000 shares of stock in a private placement offering in the first quarter of 2013. This raised $1.7 million of capital at the holding company. And along with first quarter profit, our total capital increased $2.4 million in the first quarter of 2013.
The bank's Tier 1 leverage ratio increased during the quarter from 6.38% to 6.43%. Total risk-based capital ratio also increased from 11.46% at year-end to 11.85% during the quarter.
These ratios exceed the regulatory requirements to be classified as adequately capitalized.
This concludes my remarks, and I'll now turn the call over to Tom Meyers.
Thomas G. Myers
Thanks, John. Average loan totals decreased by $18 million or 2.8% in the first quarter and $51 million or 7.5% for the past 12 months. Backlog total have shown meaningful improvement over the past 6 months, and for the commercial group, now seeing -- exceeds $60 million. Based on this and other anticipated loan activity, modest growth for the second quarter is a possibility.
However, the local economic environment is continuing to recover at a slow pace. The employment rate for Michigan totaled 8.5% as of March, and as has been the case for each of the past 7 years, remains higher than the national average.
The rate for the Monroe area totaled 8.2% as of February, compared to the prior total of 8.7%. More importantly, based on preliminary reports, the number of persons employed in Monroe County rose slightly over the past 12 months.
Credit quality has stabilized and generally showing steady improvement since 2009. Our problem asset totals $125.5 million, which corresponds to a minor increase for the quarter and a $3.7 million or 2.8% improvement over the past 12 months.
Nonperforming assets increased by $532,000 or 0.6% during the first quarter, but improved by $882,000 or 1% over the past 12 months.
It is noteworthy that an increasingly large portion of the NPAs is comprised of renegotiated loans that are on accrual status. This is reflected in the steady improvement in the level of nonaccrual loans.
Although an increase of $215,000 was reported for the quarter, nonaccrual loans have declined by $14 million or 31% over the past year, and by 52% over the past 2 years.
Bank-wide delinquency total improved from 5.3% to 4.8% during the quarter, also represents improvement over the 5.6% total reported 12 months ago.
The further encouraging result incurred was the delinquency total for accruing loans 30 to 89 days past due. The result was a relatively positive total of 1.6%, which is similar to totals for both the prior quarter and 12 months ago.
Among the total problem assets, the largest concentration by industry type remains commercial investment property at $29 million or 23% of the total. The second largest category consists of conventional residential mortgage loans, with $16 million or 13% of the total; followed by residential development assets at $11 million or 8% of the total.
Among the NPAs, the largest concentration by industry type is commercial investment property, with $17 million or 20% of the total; followed by residential mortgage loans, with $15 million or 18% of the total; and residential development assets, with $10 million or 12% of the total.
Included within the NPA and problem asset totals, other real estate owned totaled $15.2 million, which is roughly $900,000 more than both the prior quarter and 12 months ago.
The present total is comprised of 29 commercial properties, totaling $8 million; 23 residential development assets totaling $3 million; and 51 single-family properties, totaling $4 million.
We're continuing to review the value of each of our OREO properties on at least a quarterly basis.
Further evidence of the stability in the economic environment is reflected in the small net gain we recognized for the quarter, related to OREO valuations. This is the combination of net write-downs on owned property, plus gains on properties sold.
We saw similar improvements in the level of expenses related to our ownership of OREO properties. These expenses declined from $469,000 for the first quarter of 2012 to $374,000 in 2013.
We recorded a provision expense of $1.5 million during the quarter compared to $2.5 million in the fourth quarter of 2012, and $2.25 million in the first quarter of 2012.
This, combined with a reduced level of charge-offs for the quarter, resulted in an increase from 2.75% to 2.9% in the allowance for loan losses.
While the results for the first quarter reflected some minor declines in several credit quality metrics, meaningful and relatively steady improvement has been experienced since 2009.
Key results include reductions in the level of both the problem asset and NPA totals over the past 12 months; a 31% reduction in the level of nonaccrual loans over the past 12 months; continued stability in the 30- to 89-day delinquency totals; a small gain for the quarter in net write-down expenses related to OREO properties; and stable unemployment totals in our market area; and a slight increase in employment totals over the past 12 months.
Credit quality remains an overriding concern and an area of emphasis for the bank. Our strategies in this area have been successful, and we'll continue with those efforts and that approach for the foreseeable future.
That completes my comments. I'll turn the call back over to Doug.
H. Douglas Chaffin
Thanks, Tom. Well, we are encouraged by the continued improvement in earnings and capital ratios. While we will continue to monitor our loan portfolio closely, we feel the trends for improved asset quality continue to reflect the gradual improvement in our local economy.
Our liquidity position remains strong, and our capital ratios remains adequate by applicable regulatory standards. All requirements of our consent order with the FDIC in the state of Michigan have been met, with the notable exception of capital ratios.
On that note, we have now reflected improvements in all the applicable regulatory capital ratios for 8 consecutive quarters. As mentioned previously, capital ratio improvements can be directly attributed to improved earnings and the successful completion of a modest private placement of common stock.
Our ongoing audit with the IRS continues, but we're optimistic that we'll be able to settle that audit without further significant charges.
We'll continue to keep our focus on reducing problem assets, improving net interest margins and noninterest income, controlling expenses and considering new sources of capital. We'll now accept any questions you may have.
[Operator Instructions] And our first question is from Jon Evans of JWest LLC.
Can you talk just a little bit about -- you seem -- the last couple of quarters, you've been encouraged by the pipeline. We haven't seen that really [indiscernible] into the average earning assets, going up sequentially on a loan basis, it's been more driven by securities. Can you talk a little bit about the pipeline, and then, just maybe what you're seeing? And you think you have a shot to grow the books sequentially this quarter?
H. Douglas Chaffin
Yes, John, I'll speak to that. But as I noted that the pipeline has gotten larger, and we are seeing some of those loans we booked, especially in recent weeks, whether or not that turns into -- as I've mentioned in my comments, there is a possibility of growth in the second quarter. Part of that is contingent upon, obviously, a number of things, not just how many loans we -- not how many new loans we book, but payment activity on existing loans. We're still working through a number of problem assets, as you can guess, and part of that result -- the net result for the quarter will be on how quickly we eliminate some of the problem assets, some of the problem loans at the same time. But it's as positive as I've seen it for quite a period of time, the outlook for growth, that is.
Great, that's helpful. And it sounds like -- and maybe you don't want to go into this kind of detail, but it sounds like you had a pretty strong April already. Is that fair to say?
H. Douglas Chaffin
It's been positive, yes. As far as [indiscernible] growth, it's been positive.
Okay, got it. Okay, can you talk just a little bit -- you mentioned that you had some OREO where you had a gain on it. I guess, because real estate prices are starting to move, if you look at Case-Shiller and a lot of the things in the Michigan economy in general, you're seeing home values appreciate, you're seeing commercial real estate appreciate. And I'm just curious if maybe you could help us understand, potentially, how that could help you if you've already written stuff down. It's either in OREO where you take a gain or it's in nonperforming, and all of a sudden, the value becomes worth a lot more, et cetera. So could you just help us understand that? And is that something that could benefit you down the road here?
H. Douglas Chaffin
Yes, it could. But Jon, I'm not looking at it as a tremendous opportunity for gains. But it is -- the recent results are -- gives me much more confidence in expecting fewer losses, if you will. But a little bit of additional detail on the first quarter. We sold 20 properties, 20 other real estate properties, that was just under $2 million in OREO value. The net gain on those was $200,000. And what's also important to me is that we had gains on -- at rough count, about 15 of the 20 had small gains. But I wouldn't characterize it as there's -- are huge, huge gains out there to be had. Just, I don't expect, for the time being, further losses.
Got it. And then, the other question is, could you talk a little bit, maybe, about the DTA? So last year, you took $5 million in Q4. I mean, if you're loan book is getting better, credit quality is getting better, you should make as much money as you did in the first quarter, maybe more in the next couple of quarters. So do you expect -- what you see right now, do you think you'll take another $5 million through the P&L at the end of next year? Or help us understand how you think about that because it has positive ramifications for book value.
John L. Skibski
Sure, Jon. What we did in the fourth quarter was, based on our projections for taxable income for the foreseeable future. We normally do a 2-year projection. We extended that out to 5 years and looked at how much we reasonably expected to use, discounting a little bit for uncertainty and came up with $5 million. Just 3 months later, nothing has significantly changed in our expectations for the next 5 years. So we didn't make any adjustments. We'll continue to look at that forecast and see how much we can refine it. And as that improves, we will increase the -- I'm sorry, decrease, reverse more of the valuation allowance, but until we see something that significantly changes for our intermediate term outlook, we wouldn't be making [indiscernible]. So it's too early to estimate on whether it would another $5 million or more or less, and how soon that would be. But -- and certainly, after only 3 months into it, a 5-year period, we don't have any evidence to change what we've recorded.
And our next question comes from Marc Franklin of Wells Fargo Advisors.
I just wanted to expand on the DTA question. In your press release, you've got a -- while your accrued interest receivable on other assets, I assume that the capitalization of $5 million, the DTA is in the $11.2 million. Is that true? What are the other -- what's the total amount of the accrued interest receivable in that account, so that I can see what the other assets amounts are?
John L. Skibski
Hang on just a second there, Marc. It is primarily accrued interest receivable on all our loans and investments. Actually, approximately $4 million of that is accrued interest receivable. And there are other -- various other types of assets -- miscellaneous assets that are in there. And of course, the $5 million deferred tax asset.
Okay, so the $5 million is sitting there, presumably. And did I understand you to say that the amount of the deferred tax assets that has not been capitalized is approximately $19.7 million now?
John L. Skibski
I said it was probably $1.10 per share.
All right, okay. Very good. I -- but you're still a bit disappointed with the amount of nonperforming assets still on the books in the last 6 months or so. Do I understand you to indicate that those numbers are going to diminish, and that's a pretty good chunk of your total loans or total assets, compared to a lot of other banks. Presumably, we're not accruing any income from those particular assets or at least the OREOs and the -- well, yes, just the OREO, I guess. But -- and the nonaccrual loans, of course. So do you see any significant diminution of that asset class over the next -- over this current year?
H. Douglas Chaffin
We're earning income at about 40% of that NPA number. 40% of that is accruing renegotiated loans. And as far as the trend on the total NPA number, yes, it's been steadily declining since 2009. I still expect that overall trend to continue.
Yes. It didn't -- it just didn't go down the March quarter. Some of the other banks I follow, they've been getting pretty good chunks going away in that asset category. Okay. And is there any way -- one of the things I like about some of these regional banks are the noninterest income, particularly wealth management, that kind of thing. Have you got any plans to attempt to accelerate the growth in that business? Do you have -- do you need to hire more people to be asset gatherers and that sort of thing? Do you have any plans to do that?
Thomas G. Myers
We feel right now, Marc, we've got sufficient capacity in our Wealth Management Group, but we've had some realignment in that group recently, particularly, in the investment management side. And we think we've got enough capacity to continue the growth that we've had over this -- the past 12 months. I think the -- we spoke to this briefly in the last quarter, our asset quality or our assets under management increased by $30 million in 2012, just based on build activity. And we think we've got more capacity there. What we have done, and this really speaks to the increase that we continue to see in our local market shares and residential mortgage activity, added a couple of lenders and some lending staff, particularly -- We know that they’re going to get heads up [ph] by 140%, I mean, compared to last year. We still see some opportunities for growth. Part of that, admittedly, is refinance activity, but we're also seeing some improved market share as well.
[Operator Instructions] I'm showing no further questions. I would like to turn the conference back over to management for any closing remarks.
H. Douglas Chaffin
Well, thanks again for joining us this morning. We'll continue to keep you informed of our progress. Also, please join us at our Annual Shareholders Meeting, which will be conducted at our corporate headquarters here at 10 Washington Street, Monroe, next Thursday, May 2, at 10:00 a.m. We hope to see you there.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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