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 Officer, Executive Vice President, Chief Lending Manager of Monroe Bank & Trust and Executive Vice President of Monroe Bank & Trust
MBT Financial (MBTF) Q3 2013 Earnings Call October 30, 2013 10:00 AM ET
Welcome to the MBT Financial Corp. Third 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 terminology, such as may, will, believe, expect, estimate, anticipate, continue, or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in 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 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 Corp. does not undertake, and specifically disclaims, any obligation to publicly release the result 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 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 up for questions.
At this point, I would like to turn the call over to Mr. Chaffin.
H. Douglas Chaffin
Thank you, Chad. Good morning. At the close of business yesterday, we announced net profit for the third quarter of 2013 totaling $21.3 million, inclusive of a reversal of the remaining $18.8 million in our deferred tax asset valuation allowance. After taking into account the DTA valuation recovery, our core earnings for the third quarter totaled $2.5 million. This compares favorably to the third quarter of 2012, which reflected a net profit of $1.4 million and represents a ninth consecutive quarter in which we posted positive earnings, as credit-related charges have continued to decline.
The net interest margin increased from 3.05% in the third quarter 2012 to 3.17% in the third quarter 2013. Margins for the third quarter reflect the full improvement in lower funding costs, as $95 million in higher cost borrowings matured near the end of the second quarter 2013.
While loan demand remains relatively soft, we began to see some signs of improvement during the second half of the third quarter. In fact, loans outstanding declined slightly on a linked-quarter basis, but would have reflected an increase of net for [ph] declines in problem loan outstandings.
Noninterest income, net of securities gains, increased by $50,000 in the third quarter of 2013, compared to that of the third quarter of 2012, in spite of the 55% decline in mortgage origination fees. With that exception, stable to slightly improved levels of revenue were experienced in nearly all noninterest income categories.
Noninterest expenses increased by 2.8% in the third quarter compared to that of the third quarter 2012, primarily due to a $259,000 or 69% increase in net losses on other real estate properties. These losses and valuation adjustments were offset by a $188,000 decline in ORE expenses. A 4.8% increase in salaries and benefits expense was primarily attributed to an increase in the accrual for the officers' incentive plan.
Asset quality continues to improve, allowing us to reduce the provision from loan losses from $1,550,000 in the third quarter of 2012 to $200,000 for the third quarter of 2013. Total problem assets declined by $14.4 million on a linked-quarter basis and by $30.5 million over the last 12 months, or 23%.
The IRS audit for the years 2007 through 2010 continues, although there has been very little progress, as the IRS appears to be distracted with a number of issues. We are optimistic that a settlement agreement will be reached without the need to report significant additional tax expenses beyond what has been reported previously.
No expenses regarding this pending settlement has been recorded in 2013. However, we are accruing $25,000 each quarter for additional interest cost regarding the settlement.
Tom Myers will discuss the details concerning our progress within our loan portfolios. But first, John Skibski will discuss our financial results in greater detail.
John L. Skibski
Thank you, Doug. The net profit increased from $1,388,000 or $0.08 per share in the third quarter of 2012 to $21,287,000 or $1.19 per share, basic and $1.17 per share, diluted, in the third quarter of 2013. Although the profit in the third quarter of this year was significantly boosted by the reversal of the deferred tax asset valuation allowance, third quarter pretax income was 77.4% higher in 2013 than in 2012.
The net interest income decreased $82,000, even though the net interest margin increased from 3.05% to 3.17%, because the average earning assets decreased $60.5 million. The increase in the margin was the result of the repayment of $95 million of high-cost federal home loan bank borrowings in the second quarter of 2013. The retirement of that maturing debt was funded by cash reserves and sales of investments, and contributed to the linked quarter increase of $450,000 in net interest income.
Market interest rates have remained in a rather narrow range for several quarters, but we do not expect our margin to change much due to repricing of our assets and liabilities. However, ongoing changes in the mix of earning assets may result in small changes in our margin going forward. In the third quarter of 2013, investments comprised 43.6% of our average earning assets and yielded 1.81%, while loans yielded 4.94% and accounted for 56.4% of our earnings assets. A year ago, investments yielded 1.88% and made up 42.3% of our average earning assets, and loans yielded 5.23%, and accounted for 57.7% of average earning assets. While loan demand is improving, new loan activity is still less than existing loan runoff.
On the funding side, our deposit base remains very stable, and our cost of interest-bearing liabilities decreased from 0.96% in the third quarter of 2012 to 0.54% in the third quarter of 2013. This leaves little room for margin improvement through reduction of the cost of funds. We expect our net interest income to remain near $8.5 million per quarter for the next few quarters.
The provision for loan losses decreased $1,350,000 compared to the third 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 $40.1 million or 6.2% 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 $30.5 million or 23.1% 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 $17.2 million at the end of the second quarter of 2013 to $16.8 million at the end of the third quarter. This is the result of a decrease of $212,000 in the specific allocations and a decrease of $217,000 in the general allocations. As a result, our provision for loan losses was $200,000 compared to our net charge-offs for the quarter of $629,000. The allowance is 2.74% of loans as of September 30, down from 2.94% a year ago and 2.79% last quarter. We believe that our allowance adequately provides for the risk in our portfolio, and we will continue to assess the adequacy of our allowance each quarter and adjust it as needed.
Noninterest income increased $93,000 or 2.3% compared to the third quarter of 2012. There were small improvements in wealth management income, debit card income and gains on securities transactions. The most significant changes were in origination fees on mortgage loans sold, which went down $165,000, as an increase in market rates significantly decreased the amount of activity, and other income which increased $238,000, mainly due to collection of rent on other real estate owned. We expect total noninterest income to remain near $4 million per quarter through the first half of 2014.
Noninterest expenses increased $274,000, or 2.8%, compared to the third quarter of 2012.
Salaries and benefits increased $241,000, or 4.8%, and salaries expense increase due to an increase in the number of employees, annual salary and wage increases and an increase in the incentive compensation accrual.
Losses on other real estate increased $259,000 compared to the third quarter last year. Almost all of the $632,000 expense this quarter was due to valuation adjustments, as we sold $1.1 million worth of properties during the quarter for a net loss of $2,000.
We have reduced the number of properties owned over the last few quarters, and this quarter, our carrying costs decreased $188,000 compared to last year, due to a reduction in our accrual for property taxes. We expect our total noninterest expense to average about $10 million per quarter through the first half of 2014.
Since 2010, we maintained a valuation allowance against our deferred tax asset based on our analysis of positive and negative evidence regarding our ability to utilize the deferred tax asset in the future. In the fourth quarter of 2012, we reversed a portion of the valuation allowance based on our 6 consecutive quarterly profits and our forecast for taxable income. Since that time, our string of profitable quarters increased to 9, our 12-quarter accumulative earnings became positive, our taxable income exceeded our forecast, and our forecast for future taxable income improved.
Based on these factors, we determine that it is now more likely than not that we will be able to utilize our net operating loss carryforwards and that it is appropriate to reverse the remaining valuation allowance. We accomplished this by recording a tax benefit of $18.8 million this quarter. Beginning with the fourth quarter, we expect to resume accruing tax expense based on our quarterly taxable income.
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, which is useful in controlling interest rate risk and has us well prepared for an increase in loan demand. During this quarter, we moved most of our cash to the investment portfolio in order to improve our net interest income.
The capital-to-assets ratio increased from 6.80% as of June 30 to 8.42% as of September 30 due to the large profit this quarter. However, regulatory capital ratios deduct most of the deferred taxes assets from capital, so those ratios did not receive the full impact of this quarter's earnings. The Bank's Tier 1 leverage ratio increased during the quarter from 6.86% to 7.46%, and the total risk-based capital ratio increased from 12.09% to 12.59% 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 $6.7 million, or 1.1%, in the third quarter and $50 million, or 7.5%, for the past 12 months. However, it's noteworthy that end of the period loan totals declined by only $4.7 million during the third quarter, and this was largely due to a decline in problem loan totals of $14 million. This result is consistent with an increase in loan activity, with new loans booked during each of the past 2 quarters of roughly $25 million. While our backlog of perspective loans has declined from roughly $65 million to $50 million over the past quarter, this level still represents a significant improvement over the past several years.
Local economic activity continues to be relatively stable, but modest. The unemployment rate for Michigan totaled 9% as of August, 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 7.9% as of August, compared to the prior year total of 8.1%. This corresponds with the slightly positive trend seen in the number of persons employed in Monroe County, which increased by just over 1% over the past 12 months.
Credit quality has shown significant improvement since 2009. Our problem asset total is $101.3 million, which is a $14.4 million or 12.5% improvement for the quarter, and a $31 million or 23% improvement over the past 12 months.
H. Douglas Chaffin
Nonperforming assets improved by $6.8 million, or 8.6% during the third quarter, and by $17 million, or 19%, over the past 12 months. It is noteworthy that over 40% of the NPAs 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. Nonaccrual loans have declined by $16 million or 37% over the past year, and by 51% over the past 2 years.
The bank-wide delinquency total improved from 4.0% to 3.5% during the quarter, which represents significant improvement over the 5.9% total reported 12 months ago, and is the lowest total reported since 2008. A further encouraging result occurred with the delinquency total for accruing loans 30 to 89 days past due. The result was 1%, 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 $24 million, or 24% of the total. The second largest category consists of conventional residential mortgage loans, with $16 million or 16% of the total.
Among the NPAs, the largest concentration by industry type is commercial investment property with $15 million or 20% of -- 21% of the total, followed by residential mortgage assets with $14 million or 20% of the total.
Included within the NPA and problem asset totals, other real estate owned totaled $10.8 million, which is $700,000 less than the prior quarter and $3 million less than 12 months ago. The present total is comprised of 21 commercial properties, totaling $6 million; 18 residential development assets, totaling $1 million; and 37 single-family properties, totaling $3 million.
Year-to-date, we've reported a loss of $1.3 million to write down the value of OREO. This is 407 -- $467,000 higher than the expense for the same period in 2012; however, the difference is largely due to a $530,000 expense related to 2 properties that we elected to sell in a public auction in May. The value of the remaining assets in OREO is believed to be stable.
Overall, we've experienced a positive trend in the level of expenses related to our ownership and OREO properties. These expenses declined from $1.2 million for the initial 3 quarters of 2012 to $800,000 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 a provision expense of $200,000 during the third quarter compared to $1.6 million in the third quarter of 2012. Provision expense has shown significant improvement for the initial 3 quarters of the year, as it has declined from $4.85 million in 2012 to $2.1 million in 2013. The provision expense, thus far, in 2013 is less the net charge-off total of $2.6 million. However, due to the changes in various loan categories, the allowance for loan losses has shown virtually no change for the year, and totaled 2.74% as of September 30.
The results for the third quarter reflect a continuation of steady improvement in credit quality metrics that has been experienced since 2009. Key results include: reductions in the level of both problem asset and NPA totals over the past 12 months; a 37% reduction in the level of nonaccrual loans over the past 12 months; continued improvement in the 30- to 89-day delinquency totals; further improvement in overall delinquency totals; and stable unemployment totals in our market area; and a slight increase in employment totals over the past year.
Although increased resources are being devoted to the generation of new business opportunities, credit quality remains an overriding concern in areas of emphasis for the Bank. Our strategies in these areas -- in this area has been successful, and we'll continue with those efforts and that approach for the foreseeable future.
We're encouraged by the continued improvements in asset quality, earnings and capital ratios. We will monitor our loan portfolio closely. We feel the trends for improved asset quality as well as a recent improvement in loan demand continues to reflect a gradual improvement in our local economy.
Our liquidity position remains strong, and our capital ratios remain adequate by applicable regulatory standards. We have now recorded improvements in all the applicable regulatory capital ratios for 10 consecutive quarters, and effective with the end of the second quarter of this year, we've met the requirement under our consent order to obtain a 12% total risk-based capital ratio. We remain short, however, of the 9% Tier 1 leverage ratio requirement, with that ratio equal to 7.46% as of September 30. While we continue our focus on reducing problem assets, improving net interest margins and noninterest income, controlling expenses and considering new sources of capital, we're also taking advantage of new business opportunities throughout our market area within our various lines of business.
We'll now accept any questions you may have.
[Operator Instructions] Our first question comes from Jon Evans with JWest.
Can you talk just a little bit about -- I mean, you guys have done a great job kind of navigating through the tough time. It seems like your focus now more is on growth. So can you talk a little bit about the pipeline, what you see? And, I mean, it looks like x the DTA, you did about $0.14 in the quarter, and I guess, can you talk about the potential for growing loans?
H. Douglas Chaffin
Yes. We have -- I think we've talked in the past about our historic pipeline going down to almost next to nothing in 2011 -- 2010, 2011. We started to see some growth in that pipeline in 2012, and we hit a level of about $65 million last quarter. That's dipped a little bit. I think the shutdown of the federal government kind of decreased our local -- confidence level of local businesses. It's starting to pick back up. We are seeing -- we got a $50 million pipeline to-date, and historically, we've closed about 50% of that. So that remains somewhat consistent. And it remains somewhat consistent with Tom's earlier comments on the $25 million in new loans order. We've recently realigned our staff in a couple of key areas. We've seen some growth potential in our immediate market in Monroe, particularly in the southern part of the county. We're directly adjacent to Ohio, as you all know. And even though we don't have a physical presence in Ohio, we, about a year ago, hired a new lender who is an active calling officer in that Toledo market with good experience, and we're seeing some good activity there. We've also added to our staff in our Western Wayne County area, which has always been a very -- I'll call it a very stable economic market, Southeast Michigan. And we have offices in Northville and Plymouth. Those 2 communities, I think, peaked at about 5% unemployment rate during the financial crisis. And although we saw some slowdown, there was always some good activity, partly because our market share is relatively new in that area. And we've added lenders in that areas as well to take advantage of some opportunities we see there. So the 3 keys on the commercial side, at least, is really taking advantage of what we seem to feel as continued opportunities with the community bank model in our adjacent markets in Wayne County and in Northwest Ohio, and just now starting to see some growth and increased confidence in our more traditional market area in Monroe County. That answers that question.
Yes, that's helpful. And then the other question. I mean, it looks like you're about 71% of book value there. I don't think I can find if any other companies that are public that are trading below book now. So are you guys going to try to go out and tell your story more now? Or now that you've kind of come through this, the bad patch and you're looking to grow the company, or help us understand that. Because it's kind of disappointing for shareholders.
H. Douglas Chaffin
Understood. That is disappointing for us as well. I have to be a little careful about our discussions concerning our announcement last week, Jon, as you might understand. However, we will be having discussions with -- and with telling our story more so in the next months ahead.
[Operator Instructions] Our next question comes from Richard Stein.
I have a question about the capital ratio. You announced the offering of some additional stock, I believe on Monday to... and I assume that, from what I read, it's going to get you close to the 9% Tier 1 capital ratio, that you need to hit. I guess my question is, if you're not successful with that, or for some reason you don't fulfill the entire offering and get close to that 9% level next year, which again I think I read in the statement, how much longer do you think it's going to take you to hit that 9% based on where you see the growth and profits of the Bank going?
H. Douglas Chaffin
All right. Thanks, Richard. I'll repeat this a little bit. I kind of alluded that earlier with Jon, but we filed a registration statement with the SEC last week and it's not been declared effective. And in accordance with their rules and regulations, we really can't discuss the offering at this time. We're in what's called a quiet period, so we have to be careful about our comments for any of that. We do project continued profitability over the next couple of years relative to our capital ratios. We feel that it's possible to obtain that 9% over time. And then I'll just stop at that.
[Operator Instructions] There appears to be no further questions at this time. I would like to turn the conference back over to management for any closing remarks.
H. Douglas Chaffin
Well, thank you again for joining us this morning. Obviously, a good quarter for us. This past quarter. We're pleased, but certainly not satisfied. We'll continue to keep you informed of our progress, and we'll talk to you next time. Thank you.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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