MBT Financial (NASDAQ:MBTF)
Q4 2013 Earnings Call
January 31, 2014 10:00 am ET
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
Welcome to the MBT Financial Corp. Fourth Quarter 2013 Earnings Conference Call and Webcast. [Operator Instructions] Please note today's conference is being recorded.
Before we begin today's call, I'd 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 referencing 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 these terms, or the negative of these terms. Actual results could differ materially from those set forth in these 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 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 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 Chief Executive Officer; John Skibski, Executive Vice President and Chief Financial Officer; and Tom Myers, Executive Vice President and Chief Lending Manager.
We'll 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, Lauren, and good morning, everyone. At the close of business yesterday, we announced a pre-tax profit for the fourth quarter 2013, totaling $2.3 million compared to the fourth quarter of 2012, which reflected a pre-tax profit of $618,000, an increase of 275%. Pre-tax profit for the year ending 12/31/13 totaled $7.4 million compared to the pre-tax profit of -- for 2012 totaling $5 million, or an increase of 47%. I'll ask John Skibski to provide the details concerning the net effect of the reversal of our DTA valuation allowance during the fourth quarter of 2012 and the third quarter of 2013 later during the call.
The fourth quarter profit represents the 10th consecutive quarter in which we posted positive earnings and is representative of continuing trends and improved asset quality and core earnings metrics.
The net interest margin increased from 2.92% in the fourth quarter of 2012 to 3.23% in the fourth quarter of 2013, as funding costs decreased at a greater rate than that of yields on earning assets.
Non-interest income, net of securities gains, declined in the fourth quarter, primarily due to a 65% decline in mortgage origination fees and a onetime event in 2012 related to the settlement of a client's estate by our Wealth Management Group. Non-interest expenses increased primarily due to an increase in the accrual for the officers' incentive plan and increasing accruals for anticipated costs on occupancy expense.
Asset quality continues to improve, allowing us to reduce the provision from loan losses from $2.5 million in the fourth quarter of 2012 to $100,000 for the fourth quarter of 2013. Total problem assets declined by $6.8 million on a linked-quarter basis and by $30.7 million over the last 12 months, or 25%.
As a result, all credit-related charges showed significant reductions in the fourth quarter, including professional fees, collection expenses, loss from the sale or write-down of OREO properties and the carrying costs related to foreclosed properties.
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 non-related issues. We are optimistic that a settlement agreement will be reached without the need to record significant additional tax expenses beyond what has been reported previously.
No expenses regarding this pending settlement have been recorded in 2013. However, we are accruing $25,000 each quarter for additional interest costs regarding that 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. As Doug mentioned, the pre-tax profits for the fourth quarter and the full year reflected significant improvements over the prior year periods. However, the net income of $1.6 million, or $0.09 per share for the fourth quarter of 2013, was down compared to the net income of $5.7 million or $0.33 per share in the fourth quarter of 2012. The decrease in net income occurred because of the $5 million tax benefit recorded in the fourth quarter of 2012, when we reversed a portion of the valuation allowance on our deferred tax asset.
The outlook for our ability to generate taxable income continued to improve in 2013. And in the third quarter, we were able to reverse the remaining deferred tax asset valuation allowance, by recording a tax benefit of $18.8 million. As a result, our net income for the full year 2013 was $25.5 million, or $1.43 per share, compared to $8.5 million, or $0.49 per share for 2012.
The net interest income for the fourth quarter of 2013 increased $213,000, or 2.6%, compared to the fourth quarter of 2012, even though the average earning assets decreased $88.4 million, or 7.7%, because the net interest margin increased from 2.92% to 3.23%. The cost of interest-bearing liabilities decreased 38 basis points from 0.90% in the fourth quarter of 2012 to 0.52% in the fourth quarter of 2013, while the yield on earning assets only decreased 2 basis points, from 3.62% to 3.60%.
The loan portfolio yield decreased from 5.14% to 4.84%, but the investment yield increased from 1.74% to 1.98%. We have kept the duration of the investment portfolio relatively short in order to manage our interest rate risk and the increase in market rates in 2013 improved our yields.
The cost of funds decreased sharply from the fourth quarter of 2012 due to the repayment of high-cost borrowed funds in the second quarter of 2013. We expect our loans, as a percent of earning assets, to begin to increase in 2014. And this change in the mix of earning assets will help improve our asset yield, keeping our quarterly net interest income near $8.5 million through the year.
The provision for loan losses decreased $2.4 million compared to the fourth quarter of 2012, because the overall improvement in the 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 $30.5 million, or 4.9%, compared to 1 year ago. Our total problem assets, which include nonperforming loans, other real estate, nonperforming investments and problem loans still performing, decreased by $30.7 million, or 24.5%, compared to 1 year ago.
On a linked-quarter basis, our analysis of the allowance for loan losses indicated that we should decrease the allowance from $16.8 million at the end of the third quarter of 2013 to $16.2 million at the end of the fourth quarter. This is the result of a decrease of $223,000 in the specific allocations and a decrease of $334,000 in the general allocations. As a result, our provision for loan losses was $100,000 compared to our net charge-offs for the quarter of $657,000. The allowance is 2.71% of loans as of December 31, down from 2.75% a year ago and 2.74% last quarter.
If current trends in the portfolio and the economy continue, we should be able to continue to decrease our allowance by recording a provision expense that is smaller than our net charge-offs in 2014.
Non-interest income decreased $335,000, or 8%, compared to the fourth quarter of 2012. Wealth Management income was good in the fourth quarter of 2013, but with $74,000 less than in 2012, due to a large estate settlement fee collected in the fourth quarter of 2012.
Service charges and other fees and deposit accounts went down $75,000, as customers maintained larger balances and transaction accounts, reducing the service charge income and the amount of overdrafts.
Origination fees on mortgage loans sold, decreased $182,000, or 65.5%, as the increase in mortgage rates caused a decrease in refinance activity. Other non-interest income decreased $53,000, mostly due to lower rent income on other real estate owned. We expect total non-interest income to remain near $4 million per quarter in 2014.
Non-interest expenses increased $574,000, or 6.2% compared to the fourth quarter of 2012.
Salaries and benefits increased $488,000, or 9.4%, as the incentive compensation accrual increased $475,000.
Occupancy expense increased $288,000, due to higher property tax expense and an additional accrual for the estimated cost to complete the environmental cleanup at our branch in Temperance.
Professional fees decreased $230,000, or 37.3%, mostly due to lower collection-related legal expenses. Losses on other real estate decreased $103,000, or 50%, compared to the fourth quarter of last year.
We have reduced the number of properties owned over the last several quarters, and this quarter our carrying costs decreased $66,000, or 27.7%, compared to the fourth quarter of 2012. We expect our total non-interest expense to average about $10 million per quarter in 2014.
Since we reversed the valuation allowance against our deferred tax asset in the third quarter of 2013, we have resumed recording an expense for federal income tax. This quarter our tax expense is $682,000, reflects an effective rate of 29.4% of our pre-tax operating income. Our margin rate is 34%. And due to our projected tax-exempt income from municipal securities and bank-owned life insurance, we expect our effective rate to be slightly less than 25% in 2014.
We continue to emphasize liquidity and interest rate risk management in our balance sheet structure. We invested more of our excess cash liquidity and securities in the fourth quarter to improve our yields. We are maintaining sufficient liquidity to fund lending opportunities and to maintain a slightly asset sensitive balance sheet.
During the fourth quarter, we increased our capital through our earnings of $1.6 million and the issuance of $10.4 million of common stock. This was partially offset by an increase of $2.3 million in the accumulated other comprehensive loss, our capital-to-assets ratio increased from 8.41%, as of September 30, to 9.04%, as of year end. Regulatory capital ratios exclude the AOCL and most of the deferred tax asset, and those ratios improved significantly this quarter. The bank's Tier 1 leverage ratio increased during the quarter from 7.46% to 8.43%, and the total risk-based capital ratio increased from 12.59% to 14.28% during the quarter.
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 $7.3 million, or 1.2%, in the fourth quarter and $47 million, or 7.1%, year-over-year. However, end of period loan totals for the year declined by just under $31 million, and it's noteworthy that this compares closely to the problem asset reduction for the same period. New loan activity, especially in the second half of 2013, has clearly increased in comparison to recent years and the pipeline of perspective loans remains at a relatively healthy level of $55 million.
Modest net loan growth for 2014 is feasible, assuming that new loan activity remains steady and that an anticipated decline in the level of problem loan reductions occurs.
Local economic activity continues to be relatively stable, but modest. The unemployment rate for Michigan totaled 8.8% as of November, and as has been the case for at least the past 7 years, remains above the national average. The rate for the Monroe area totaled 7.3% as of November, compared to the prior year total of 6.4%. Despite the increase, the number of persons employed in Monroe County has been steady over the last 12 months and is essentially unchanged.
Credit quality has shown steady improvements since 2009. Our problem asset total is $94.5 million, which is a $6.8 million, or 6.7% improvement for the quarter, and a $31 million, or 25% improvement for the year.
Nonperforming assets improved by $3 million, or 4.2% during the fourth quarter, and by $18 million, or 21% over the past 12 months. It is noteworthy that $58 million, or 61% of the problem assets, consist of loans that are in performing status and essentially paying as agreed. The large majorities of loans are expected to continue to perform indefinitely and as a group not experience a significant reduction over the next year.
Among the remainder of the problem assets, it is also noteworthy that non-accrual loans declined by 24% over the year to a level of $23.7 million. This group has anticipated to be the source of the greatest reduction of problem loan totals in 2014, with a targeted net reduction for the year of $10 million.
The bank-wide delinquency total showed significant improvement for the year as a decline from 5.3% to 2.5%, which is the lowest total reported in over 5 years. A further encouraging result occurred with a delinquency total for accruing loans of 30 to 89 days past due, which declined to a very satisfying level of 0.7%. This result strongly suggests that a further migration of loans into the NPA category should be limited.
Among those total problem assets, the only significant concentrations by industry type consist of commercial investment property at $21 million, or 22% of the total, and residential mortgage loans worth $15 million, or 16% of the total.
Among the NPAs, the largest concentration consist of residential mortgage assets, with $14 million, or 20% of the total, and commercial investment property with $11 million, or 16%.
Included within the NPA and problem asset totals, other real estate owned totaled $9.6 million, which is $1.2 million less than the prior quarter and $4.7 million less than 12 months ago. The present total is comprised of 19 commercial properties, totaling $5 million; 19 residential development assets, totaling $1 million; and 38 single-family properties, totaling $3 million.
During 2013, we recorded a loss of $1.4 million to write down the value of other real estate owned, which is $364,000 higher than the expense for 2012. The increase 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 other real estate is believed to be stable.
Overall, we've experienced a positive trend in the level of expenses related to our ownership of other real estate properties. Year-over-year these expenses declined by 33% to $1 million. Based on declines in both the number and dollar amount of properties owned, OREO expenses are anticipated to show further improvement in 2014. We recorded a provision expense of $100,000 during the fourth quarter, compared to $2.5 million in the fourth quarter of 2012. Year-over-year provision expense improved considerably from $7.4 million to $2.2 million. Although the provision expense is less than the $3.2 million net charge-off total for the year, due to changes in various loan categories, the allowance for loan losses has shown little change for the year, and totaled 2.71% as of December 31.
Results for the fourth quarter and for the year reflect a continuation of the steady improvement in credit quality metrics that has been experienced since 2009. Key results include: meaningful reductions in both the level -- in the level of both problem asset and NPA totals over the past 12 months; a 24% reduction in the level of nonaccrual loans over the past 12 months; continued improvement in the 30- to 89-day delinquency totals; significant improvement in the overall delinquency totals; continued improvement in the level of credit related-expenses; stable unemployment totals in our market area; and a slight increase in employment totals over the past year.
Particularly over the past 6 months, increased resources are being devoted to the generation of new business opportunities and modest net loan growth for 2014 appears feasible. Our credit quality remains an area of emphasis for the bank and recent strategies in that area will continue for the foreseeable future.
That completes my comments. I'll turn the call back over to Doug.
H. Douglas Chaffin
Thanks, Tom. We closed 2013 on a number of positive notes. Improved asset quality and earnings were certainly near the top of the list. In addition, we're very pleased to announce the successful capital raise [ph]. Capital raise began with funding and commitments through a private placement of common stock totaling $14 million and will conclude with the completion of the shareholder rights offering totaling $6 million. The complete details of the rights offering will be announced upon SEC approval, which is anticipated to be completed within the next couple of weeks.
This rights offering is also supported by standby commitments. These standby commitments as well as the initial private placement are supported by 2 highly respected community bank institutional investors. Castle Creek Capital and Patriot Financial Partners are widely considered among the industry's premier, long-term investment firms. We're thrilled to have both companies join us as shareholders, and we consider our options -- as we consider our options for future growth.
The capital raise, once completed, is sufficient to meet the remaining outstanding item contained in our consent order, namely a Tier 1 leverage ratio of 9%. We anticipate that this ratio should be attained by the end of the first quarter. While we continue to monitor our loan portfolio closely, we are encouraged by the continued trends and an improved asset quality. Core earnings growth remains a focus, and we feel that we have adequate capacity to seek new growth in our loan portfolios, which should improve net interest income and core profitability further.
As a result, we are increasingly optimistic for continued improvements in our local economy and our ability to take advantage of opportunities for growth.
I'll now accept any questions you may have.
[Operator Instructions] And our first question will come from Jon Evans of JWest LLC.
Just a couple of questions. Can you -- first of all you guys did a good job sequentially on the NIM. Did you see the full benefit from the higher cost funding coming off? And maybe can you give us a little outlook on what you think NIM does sequentially?
John L. Skibski
Yes, John. We did get the full benefit of the high-cost funding. We paid that off late in the second quarter. So this fourth quarter was the total impact of that. And some of the improvement was due to improved yields in the investment portfolio. We should still see a little pick up in the asset yields. And as we increase our loans, as a percent of our earning asset, that will also help the yield. There's not much more to get in cost reduction. So the net interest margin should hold about steady and maybe up or and down a few basis points.
Okay. Great. And then you guys sound the most bullish you've been in a couple of years on being able to grow the loan book. Can you just talk a little bit about why you're so bullish and maybe kind of what you're seeing in either applications or in the pipeline? And do you think the -- do you think you grow sequentially from Q4 to Q1 in the book?
Thomas G. Myers
John, everything you said is -- or everything you alluded to is true, and are the reasons why we're a little more bullish. Our pipeline has been -- and for us, being in the $55 million range is pretty good, and it's been there for 6 -- over 6 months now. As I alluded to in my comments, I also see our level of problem loans, the rate of that decline has decreased significantly. We reached a point in a lot of our problem asset workouts that a large portion of those now are in renegotiated status, performing. In several cases those are being upgraded beyond substandard categories. So those aren't going to be -- I don't expect that group to result in large-scale reductions like we've had in prior years. The economy is better in our market area. It's better. It's not great by any stretch, and we're still in the 7% to 8% on unemployment, but it's just better.
Okay. And then so you think you grow sequentially? Or is it too -- is that more of a -- of what gets paid off?
Thomas G. Myers
No. I think we grow a little bit. I think we grow a little bit the first quarter. And again, very, very modest. But, obviously, that reverses a trend that's been negative for more than 2 years -- more than 3 years. It's been since quite a while.
Okay. And then just, John, relative to the tax rate. You gave us what the rate is going to be, but effectively you're not paying that, right? I mean that's not what the cash earnings is, is that correct? That's just a book rate because you brought the NOL through the P&L?
John L. Skibski
Exactly, John. We are not -- we are booking an expense, decreasing the deferred tax asset using the NOL carry forwards that we have. But we're not actually paying taxes, we're just recording an expense.
And then the last question that I have for you is, can you just talk a little bit about -- your currency is a little bit more valuable now. Your earnings trajectory is better. What do you think about potentially acquisitions? Combining, getting synergies, been able to grow. Can you talk about that? I mean, you've been kind of in this defensive mode for the last couple of years. And now, it seems like you're ready to play offense. So can you maybe enlighten us?
H. Douglas Chaffin
I'll probably speak to that a little bit, John. We -- and to be fair, we have no specific targets. We have no specific acquisitions in mind. We are still focused of relief from the consent order, which is largely what drove the capital raise at the end of the year in trying to complete that here in the first quarter. But we do recognize that at over $1 billion in assets in Southeast Michigan, there's not a lot of banks with our size and scope in Southeast Michigan and Northwest Ohio for that matter. We will probably start to begin to evaluate what our options are regarding growth whether its acquisitions or not. I will say this, that something -- although it's on our mind, our primary focus right now is organic growth and taking advantages of the capacity that we feel we have now. So that's going to be driving most of our activities this year.
[Operator Instructions] I'm showing no additional questions. I'd like to turn the conference back over to management for any closing remarks.
H. Douglas Chaffin
Thanks, again, Lauren. Well, thank you for joining us this morning. Obviously, we're pleased with the progress. We're certainly not satisfied just yet. We still think we got some work to do, but we think we're starting 2014 off to a good start. Thanks for joining us. And we'll talk to you next time.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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