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) Q2 2013 Earnings Call July 26, 2013 10:00 AM ET
Welcome to the MBT Financial Corp.'s Second Quarter 2013 Earnings Conference Call. [Operator Instructions] 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 those terms or the negative of those 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 U.S. government; changes in government regulations affecting financial institutions, including regulatory fees and capital improvements; 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 of and costs associated with sources of liquidity; and the ability of the company to resolve or dispose of problem loans.
MBT Financial 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, 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 CEO -- 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 now begin the call with management's prepared remarks, and then open the call 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 second quarter of 2013, totaling $1.5 million, or $0.08 per share. This compares favorably to the second quarter of 2012, which reflected a net profit of $253,000, or $0.01 per share. This represents the eighth consecutive quarter in which we posted positive earnings as credit-related charges have continued to decline.
The net interest margin declined from 3.15% in the second quarter 2012, to 2.92% in the second quarter of 2013. However, the second quarter margin is an improvement from the 2.82% net interest margin in the first quarter of 2013, due to the maturity of some higher cost borrowings.
Asset yields continue to be challenged due to relatively low loan demand and a highly liquid balance sheet. As a result, net interest income for the second quarter of 2013 declined by $695,000, compared to that of the second quarter of 2012. It is notable, however, that noninterest income, net of securities gains, increased by $311,000, or 9% in the second quarter of 2013, compared to that of the -- of 2012, including a 30% increase in wealth management income. Big news, of course, is the improvement in asset quality, which continues to be reflected in reductions of credit-related expenses.
One-time losses incurred from the sale and write-down of other real estate properties was offset by reductions in the quarterly loan loss provision or re-expenses and collection costs. Credit-related costs declined by a net amount of $375,000 in the second quarter, or a reduction of 20%.
We continue to be engaged with the IRS for an ongoing audit for the years 2007 through 2010. We remain optimistic that a settlement agreement will be reached in the near future, without the need to report significant additional tax expenses beyond what has previously recorded. Total expenses regarding this pending settlement have been recorded in 2013. However, we are currently in $25,000 each quarter for additional interest costs regarding the settlement.
We continue to see gradual improvements in local economic conditions. Total problem assets have declined by $11 million since June of 2012, with the reduction in nonperforming loans representing $3 million of this decline.
Delinquencies continue to improve in a number of categories. And as of the end of the second quarter, we experienced an increase in both the consumer and loan portfolios, compared to the first quarter of 2013.
Tom Myers will discuss the details concerning our progress within our loan portfolios. But first, I'll ask John Skibski to discuss the financial results in greater detail. John?
John L. Skibski
Thank you. The net profit increased from $253,000, or $0.01 per share in the second quarter of 2012 to $1,496,000, or $0.08 per share, in the second quarter of 2013. Profit in the second quarter last year was negatively impacted by an accrual of tax expense for the proposed settlement of the IRS audit.
The net interest income decreased $695,000, as the average earning assets decreased $12.7 million, and the net interest margin decreased 23 basis points from 3.15% to 2.92%. The decrease in the margin was the result of the continued lower interest rate environment and the change in the mix of earning assets. Last year, investments made up 41.4% of our average earning assets, and this year, they account for 45.2%. These are primarily short-duration assets, which yielded 1.69% in the second quarter, compared to our loan yield of 4.93%.
During the second quarter of 2013, we paid off $95 million of maturing debt with Federal Home Loan Bank. The average cost of this debt was more than 2% above the yield on the earning -- on the assets used to pay it off, which was a primary cause of the 10 basis point improvement in the net interest margins compared to the first quarter.
We will realize a full benefit of the debt retirement in the third quarter, with a margin expected to increase approximately 12 more basis points.
With the decrease in earning assets and the increase in the net interest margin, we expect our net interest income to be between $8 million and $8.5 million, per quarter for the second half of 2013.
The provision for loan losses decreased $650,000, compared to the second 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.
Our loan portfolio decreased by $52.8 million, or 7.9%, compared to a year ago.
Our total problem assets, which include nonperforming loans, other real estate, nonperforming investments and problem loans still performing, decreased by $11.1 million, or 8.7%, compared to a year ago.
On a linked-quarter basis, our analysis of our allowance for loan losses indicated that we should decrease the allowance from $17.9 million at the end of the first quarter of 2013, to $17.2 million at the end of the second quarter. This is the result of an increase of $502,000 in the specific allocations and a decrease of $1.2 million in the general allocations, which occurred due to decreases in the historical loss factors.
As a result, our provision for loan losses was $400,000, compared to our net charge-offs for the quarter of $1.1 million. The allowance is 2.79% of loans as of June 30, down from 2.91% a year ago, and 2.90% last quarter. We believe that our allowance adequately provides for the risk in our portfolio, and we'll continue to assess the adequacy of our allowance each quarter and adjust it as needed.
Noninterest income, excluding securities gains, increased $311,000, or 8.8%, compared to the second quarter of 2012. The main improvements were wealth management income, which increased $253,000 and Other Income, which increased $114,000.
The sudden increase in interest rate near the end of the quarter significantly reduced mortgage loan origination activity, so we expect total noninterest income to remain slightly below $4 million per quarter for the second half of 2013.
Noninterest expenses increased $560,000, or 5.8%, compared to the second quarter of 2012.
Salaries and benefits increased $261,000, or 5.3%, and salaries expense increased due to the increase in the number of employees and annual salary and wage increases.
Occupancy expense increased $96,000 due to higher maintenance and utility costs.
Losses on other real estate increased $517,000, because we liquidated several properties at an auction, and we wrote down the carrying values of some other properties. We reduced the number of properties owned over the last few quarters, and our carrying costs, which primarily consist of property taxes, maintenance and insurance, increased $146,000, or 33.3%, compared to the second quarter of 2012.
We expect our total amount of interest expense to average less than $10 million per quarter for the second half of 2013.
Since 2008, we have maintained a valuation allowance against our deferred tax asset. As of June 30, 2013, the deferred tax asset is $24.4 million, and the valuation allowance is $19.4 million, or approximately $1.09 per share. The amount of the valuation allowance is based on our analysis of the positive and negative evidence regarding our ability to utilize the deferred tax asset in the future. A key factor in determining when to reverse more of the remaining DTA valuation allowance is our outlook for future taxable income. That outlook continues to improve as the economic environment strengthens. If conditions continue to improve, and taxable earnings continue to exceed our forecast, we will reassess the evidence and we may reduce the valuation allowance in 2013.
Our balance sheet management is focused on maintaining liquidity, managing interest rate risk and improving capital ratios. Along with the use of cash and investments to pay off the maturing debt this quarter, we continue to maintain a very high level of liquidity. This high level of liquidity is useful in controlling interest rate risk and has us well prepared for an increase in loan demand or decrease in deposits, but it hinders our ability to improve our net interest income.
The repayment of the borrowings in the second quarter reduced our total assets, with the larger accumulated other comprehensive loss reduced our book capital, so the capital to assets ratio only increased from 6.68% as of March 31, to 6.80% as of June 30.
Interest rates increased sharply near the end of the second quarter, which caused the value of our investment securities to go down. The unrealized loss on investments exceeded our profit for the quarter and resulted in a decrease in our total capital and the book value per share.
Regulatory capital ratios did not include any unrealized gain or loss on securities but they are based on average assets for the quarter, so we will not see the full benefit of the decrease in assets until the third quarter.
The bank's Tier 1 leverage ratio increased during the quarter from 6.43% to 6.86%, and the total risk-based capital ratio increased from 11.85% to 12.09% 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 Myers.
Thomas G. Myers
Thanks, John. Average loan totals decreased by $4.5 million, or 0.7%, in the second quarter, and $51 million, or 7.6% for the past 12 months.
As noted in recent quarters, our backlog of perspective loans has shown significant improvement over the past year, and the total amount we're seeing is $65 million, which is the highest level in over 6 years. As a result, we're definitely experiencing an increase in loan activity, with new loans booked during the quarter of roughly $25 million. However, this was offset by scheduled repayments on performing loans, a $5 million reduction in residential loan balances related to refinancing activity, and a strategic $7 million reduction in problem loan totals.
Local economic activity continues to be stable but modest. The unemployment rate for Michigan totaled 8.7% as of June, and as has been the case for at least the past 7 years, remains higher than the national average. The rate for the Monroe area totaled 8.2% as of May, compared to the prior year total of 8.4%. However, a slightly positive trend can be seen in the number of persons employed in Monroe County. Over the past 12 months, this total rose by just under 2%.
Credit quality has stabilized and generally showing steady improvement since 2009.
Our problem asset total is $115.7 million, which a $9.8 million, or 7.8% improvement for the quarter, and an $11 million, or 8.7% improvement over the past 12 months.
Nonperforming assets improved by $8.8 million, or 10%, during the second quarter, and by $3 million, or 3.7%, over the past 12 months. It's noteworthy that just over 40% of the NPAs now consist of renegotiated loans that are on accrual status and essentially paying as agreed. This is also reflected in the positive trend in the level of nonaccrual loans. Though a small increase here reported for the quarter, non-accruals loans have declined by $8 million, or 20%, over the past year, and by 52% over the past 2 years.
The bank-wide delinquency total improved from 4.8% to 4% during the quarter. This also represents improvement over the 5.2% total reported 12 months ago. A further encouraging result occurred with the delinquency total for accruing loans 30 to 89 days past due. The result was 1.2%, which is the most positive total reported over the past 6 years.
Among the total problem assets, the largest concentration by industry type remains commercial investment property at $32 million, or 28% of the total. The second largest category consists of conventional, residential mortgage loans, with $17 million, or 14% of the total, followed by residential development assets at $9 million, or 8% of the total.
Among the NPAs, the largest concentration is commercial investment property with $16 million, or 21% of the total, followed by residential development -- residential mortgage assets, with $14 million, or 18% of the total, and residential development assets, with $7 million, or 9% of the total.
Included within the NPA and problem asset totals, other real estate owned totaled $11.5 million, which is $3.7 million less than the prior quarter, and $1.3 million less than 12 months ago. The present total is comprised of 20 commercial properties, totaling $7 million; 18 residential development assets, totaling $1 million; and 37 single-family properties, totaling $3.5 million.
During the quarter, we recorded an expense of $747,000 to reduce the value of OREO properties. Approximately $530,000 of this expense was related to 25 properties that we elected to sell in a public auction in May. This expense will be offset in part by the elimination of annual carrying costs of roughly $260,000 for the 25 properties sold.
Overall, we've experienced a positive trend in the level of expenses related to our ownership of OREO properties. These expenses declined from $908,000 for the first half of 2012 to $667,000 for the same period in 2013. Based on declines in both the number and asset value of properties owned, OREO expenses are anticipated to show further improvement for the remainder of 2013.
We reported provision expense of $400,000 during the second quarter, compared to $1.5 million in the first quarter of 2013, and $2.5 million in the fourth quarter of 2012. Provision expense for the first half of the year totaled $1.9 million, compared to net charge-offs of $2 million. As a result, the allowance for loan losses has shown little change for the year and totaled 2.79% as of June 30.
Results for the second quarter reflected a continuation of the relatively steady improvement in credit quality metrics that 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 20% reduction in the level of nonaccrual loans over the past 12 months; continued improvement in the 30 to 89 days delinquency totals; further improvement in overall delinquency totals; a stable unemployment totals in our market area; and a slight increase in employment totals over the past year.
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 concludes my comments. I'll turn the call back over to Doug for his final comments.
H. Douglas Chaffin
Thanks, Tom. Well, obviously, we are encouraged by the continued improvements in asset quality earnings and capital ratios. While we will monitor our loan portfolio closely, we feel that trends from improved asset quality, as well as the recent improvement in loan demand, continues to reflect the gradual improvement in our local economy.
Our liquidity position remains strong, and our capital ratios remain adequate by applicable regulatory standards. We've now recorded improvements in all the applicable regulatory capital ratios for 9 consecutive quarters. And effective with the end of the second quarter, we've met the requirement under our consent order to obtain a 12% total risk-based capital ratio. We remain short, however, the 9% Tier 1 Leverage ratio requirement, with that ratio equal to 6.86% as of June 30.
Our ongoing audit with the IRS continues, but we're optimistic that we'll be able to settle the audit without further significant charges. We'll continue our strategic 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 we do have a question from Jon Evans of JWest LLC.
Can you just talk a little bit about -- in your guys' thoughts -- it seems like this is probably one of the strongest loan production quarters that you've had. It got masked by some of the payoffs, et cetera. Do you think you have a shot to grow earning assets sequentially this quarter? And can you kind of give us a sense of the book and what the pipeline looks like?
Thomas G. Myers
Yes. I'll make a -- I don't want to call it a prediction, but I expect the third and fourth quarter to look similar to the second quarter in that our backlog is strong. We are booking new loans. But I still expect more runoff in the problem loan category. But if you look at our nonaccrual loan number in the mid-$30 million range, I would hope that we can eliminate half of that over the coming 6 months. A portion of that's going to get upgraded, certainly, or hopefully, that is. But we'll see. We'll see more reductions in problem loan totals. Though perhaps over the next 6 months what we can expect to see is the loan balance may remain somewhat steady, but will be improvement, we'll have more from better-rated loans added and more problem assets go away.
I mean, basically, what you would have is -- you would have more earning assets, right? I mean, it's -- if you stay steady and you take off $15 million in bad loans and grow -- you're going to grow the book from earning assets, correct?
Thomas G. Myers
In general, yes. That's a fair statement.
H. Douglas Chaffin
That's assuming, Jon, that those runoff are nonaccruing loans, that would be correct. But not all that runoff is anticipated to be just the nonaccruals.
Thomas G. Myers
And that's certainly not a one-for-one trade off, but that's the general trend.
Okay. And then, can you talk a little bit about this provision that you have this quarter. I mean, I've gone back since the crisis, it's the lowest provision you've had. You think this -- and I'm not asking you to say it's going to be exactly $400,000 or whatever. But do you think this lower provision, in general, with what you're seeing, is sustainable over the next couple of quarters?
H. Douglas Chaffin
Well, first of all, Jon, we're going to evaluate, and we continue to evaluate, our loan loss provision requirement for the reserve every single quarter. And it's kind of a point in time valuation each quarter, so it's kind of difficult to predict exactly where that is. But certainly, the trends are that, that's become -- the requirement has become increasingly less as our environmental factors have improved, historical factors have improved, and frankly, the property values have improved in the area when we evaluate the adequacy of the reserve.
In your filing, you do a great job with the buckets in kind of showing the risk categories relative to your buckets and how they've improved. Before the filing -- can you just give us a sense of that? Are you still continuing to see the credit quality from the different buckets getting better?
Thomas G. Myers
I don't know if I can address that, Jon. I haven't -- I guess, I'll fall back on just what we're seeing in -- delinquency totals have improved, that's certainly an important category. Our charge-off levels over the past 12 months have gradually come down, so that's a category. The local economic environment, there's really no appreciable improvement there. So that one, I don't see much improvement there. Trends certainly aren't negative, but they're not dramatically improving, and I wouldn't say that.
Okay. And then, on the NIM side, you didn't get the benefit for the full quarter, so apples-to-apples, just assuming in another -- no other movements, what should you pick up sequentially in NIM?
Thomas G. Myers
The margin should increase by about 12 basis points just because of the paying off the high-cost funding. We had about $8 million in net interest income, almost $8.1 million, and we expect it to be about $8.5 million.
Okay. And then, just a last question for me, John. If you look at the valuation allowance that you talked about, it's about $1.09 a share. Do you think, most likely, you guys will do potentially what you did last year, where you'll just get to take a partial amount through? Or do you think because of the improvement in the book, et cetera, the auditors might give you a shot to take it all through?
H. Douglas Chaffin
I'll start by -- we're all smiling about the question, Jon, because I know you like to have a definite answer, but it's something that we're constantly evaluating. And it's tough to really predict what exactly what that would be. We're increasingly optimistic we're going to take something, but I can't tell you what it is because we just don't know at this point.
[Operator Instructions] And showing no additional questions, I'll turn the conference back over to management. I apologize, we do have another question from James LaBarge [ph].
A little more information relative to the IRS audit?
H. Douglas Chaffin
Sure. We've explained in the past that the audit has been ongoing for 2.5 years now. We've evaluated what we feel our liability would be under that audit and allocated that in the reserve last year. We completed that last year, at least. It's ongoing. It's -- the nature of the audit is very similar to a number of bank audits that have occurred over the country in the last 3 years, as a result of financial crisis and interpretation -- the IRS' interpretation of the code. We've -- we're confident that we have allocated all that we need to allocate for that cost. But it's, frankly, just not resolved just yet.
What's the size of the request that the IRS is going to assess you?
H. Douglas Chaffin
Well, we set aside $2 million as what we feel to be our potential liability for that, but that's not definitive just yet.
They just don't agree with you at this point?
H. Douglas Chaffin
No, that's not accurate. It's an ongoing discussion.
And that does conclude our question-and-answer session. I'll turn it back over to management for closing remarks.
H. Douglas Chaffin
Thanks, Laura, and thanks for joining us, everyone, this morning. We'll just continue to keep you apprised of our progress, including the IRS audit, and we'll talk to you next time. Thanks.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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