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MBT Financial Corp. (NASDAQ:MBTF)

Q2 2014 Earnings Conference Call

July 25, 2014 10:00 AM ET


H. Douglas Chaffin – President and Chief Executive Officer

John L. Skibski – Executive Vice President and Chief Financial Officer

Thomas G. Myers – Executive Vice President and Chief Lending Manager


Jonathan Evans – JWest LLC


Welcome to the MBT Financial Corp. Second Quarter 2014 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. (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 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 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 have – already have a copy of the press release issued by MBT Financial yesterday, you can access it at the company’s website at

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, please also note this call is being recorded.

I would now like to turn the conference over to Mr. Douglas Chaffin, President and CEO. Please go ahead, sir.

H. Douglas Chaffin

Thank you, Chad, and good morning everyone. At the close of business yesterday, we announced a pretax profit for the second quarter of 2014 of $2.2 million, which compares favorably to the second quarter of 2013, which reflected $1.5 million in pretax earnings and it’s a 50% increase.

This represents a 12th consecutive quarter, in which we’ve posted positive earnings, as both asset quality and core earnings continue their positive trends. Pretax earnings for the six months ending 6/30/2014 totaled $4.6 million, compared to $2.6 million for the first half of 2013, or an increase of 76%.

The net interest margin increased from 2.92% in the second quarter of 2013 to 3.15% in the second quarter of 2014, as the yield on earning assets was unchanged and the cost of interest bearing liabilities decreased. Income generated within our Wealth Management Group continues to show respectable gains, with an 8% increase for the quarter, compared to a year ago, and a 5.7% improvement for the first six months.

Debit card income reflected the quarterly improvement as well. these improvements were offset by declines in origination fees from mortgage loans sold due to the continued softness in the mortgage market, as well as declines in overdraft income.

Non-interest expenses increased by a total of 3.7%, as declines in occupancy, equipment expense, professional fees and other expenses were offset by increased salaries and benefits expenses, which were primarily affected by an increase in the Officer Incentive Plan accrual. Asset quality continues to improve, allowing us to reduce the provision for loan losses from $400,000 in the second quarter 2013, $100,000 for the second quarter of 2014.

Total classified assets declined by $7.4 million on a linked quarter basis and by $34.8 million over the last 12 months or 30%. As a result, all credit-related charges continued to decline. Tom Meyers will discuss the details concerning our progress within our loan portfolio.

But first, John Skibski will discuss our financial results in greater detail.

John L. Skibski

Thank you, Doug. The net profit for the second quarter of 2014 was $1,687,000, or $0.08 per share. this is an increase of $191,000, or 12.8% compared to the second quarter of 2013 profit of $1,496,000, which was also $0.08 per share. Year-to-date profit is $3,454,000, or $0.16 per share, compared to $2,610,000, or $0.15 per share last year.

We have recorded tax expense of $1,151,000 in the first half of this year, while we did not record a tax expense in the first half of last year due the valuation allowance on our deferred tax asset. So the year-to-date pretax improvement in earnings is $1,995,000, or 76.4%.

Net interest income for the second quarter of 2014 increased $163,000, or 5.7%, compared to the second quarter of 2013, even though the average earning assets decreased $21.1 million, or 1.8%, because the net interest margin increased from 2.92% to 3.15%.

The cost of interest-bearing liabilities decreased 26 basis points from 0.71% in the second quarter of 2013 to 0.45% in the second quarter of 2014, while the yield on earning assets was unchanged to 3.46%, as the loan portfolio yield decreased from 4.93% to 4.71%, and the investment yield increased from 1.69% to 1.99%. The investment portfolio yield improved as we’ve reduced the amount of the low yield and cash balances [that is consulting] (ph) federal reserve. Loans increased $7.8 million on a linked quarter basis and if we continue to increase loans as a percent of earning assets in the second half of the year. This change in the mix of earning assets will help improve our asset yield and keep our quarterly net interest income at about $8.5 million through the rest of the year.

Provision for loan losses, decreased $300,000 compared to the second quarter of 2013. Because of continuing improvement in loan quality and the decrease in the size of the portfolio allowed us to reduce the size of our allowance for loan losses.

Our loan portfolio decreased by $16 million or 2.6% compared to the year ago. Our total non-performing loans which include non-accrual loans, 90 days past due loans, and performing troubled debt restructurings increased by $15.5 million or 24.2% compared to a year ago.

On a linked quarter basis our analyses of the allowance for loan losses indicated that we should maintain the allowance at approximately $15 million. So we recorded a provision expense of $100,000. This provision is less than the net charge-offs during the quarter because we charged off a large portion of a loan that previously had a specific allocation in the allowance.

The specific allocations decreased $1,198,000 million and the general allocations increased $41,000. As a result our provision for loan loss was $100,000 compared to our net charge-offs for the quarter of $1,257,000 million. The allowance is 2.5% of loans as of June 30, down from 2.79% a year-ago. If current trends in the portfolio in the economy continue, we should be able to continue to decrease our allowance by recording a provision that is smaller than our net charge-offs through the rest of this year.

Non-interest income increased $342,000, or 10.5% compared to the second quarter of 2013 due to an increase in gains and securities transactions, and a decrease in losses under the real estate. Excluding securities and other real estate activity, non-interest income decreased $128,000 or 3.3%. Wealth Management income increased $87,000, but service charges on a deposit accounts decreased $90,000 due to lower overdraft activity.

And origination fees on mortgage loans decreased $96,000, as higher mortgage rates decreased refinance activity. We expect total non-interest income to remain between $3.5 million and $4 million per quarter for the remainder of the year. Non-interest expense has increased $356,000, or 3.8% compared to the second quarter of 2013.

Salaries and benefits increased $590,000, or 11.3% due to an increase of $262,000 in the accrual for the Officer Incentive program, an increase of $201,000 in salaries and wages, and an increase of $53,000 in benefits expenses. Occupancy expense decreased $52,000 due to lower repairs and maintenance and rent expenses, and the FDIC deposit insurance assessment went down $74,000 due to a decrease in the assessment base. We expect our total non-interest expense to remain below $10 million per quarter for the rest of the year.

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 of $558,000, reflects an effective tax rate of 24.9% 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 about 25% throughout 2014.

We continue to emphasize capital, liquidity and interest rate risk management in our balance sheet structure. We successfully completed accounting stock rates offering in the second quarter of 2014, which brought our capital ratios above the regulators requirement and now provides us with capital to grow or address our remaining asset quality issues. Our cash and available securities portfolio rise sufficient liquidity to fund lending opportunities and helps us maintain a slightly asset sensitive balance sheet in this moment for trade environment.

Since the beginning of the year, our capital increased $18.2 million through our earnings of $3.5 million, the issuance of $8.2 million of common stock and a decrease of $6.6 million in the accumulated other comprehensive loss. Our total capital to total assets ratio increased from 9.05% to 10.65% during the first six months of the year and our book value per share increased from $5.37 at year-end, $5.68 at the end of the second quarter.

The Bank’s Tier 1 Leverage ratio increased during the quarter from 8.65% to 9.24% and the total risk based capital ratio increased from 14.8% to 15.57% during the quarter. With the termination of the consent order effective June 30, we now meet the requirements to be considered, well capitalized by federal banking regulators.

This concludes my remarks. I’ll now turn the call over to Tom Myers.

Thomas G. Myers

Thanks, John. Loan totals showed improvement for the quarter as the average balance increased by $1.5 million, or 2x 1%, and the end of the period balance increased by $7.8 million or 1.3%. Although, the average loan totals for the past 12 months continue to show a decline with a reduction of $22.5 million, remains noteworthy that this was accompanied by a $35 million decline in classified assets.

New loan activity has definitely increased in comparison to recent years, although the pipeline of perspective loans decline of just $140 million as of June 30, this range between $50 million and $65 million for virtually all of the preceding six quarters and expect that level of activity return in the near future.

Local economic activity continues to be modest that showing increasing signs of improvement, and the unemployment rate for Michigan totals 7.5% as of June, and remains above the 6.1% national average, the unemployment rate for the Monroe area totaled 6.8% as of May, compared to the prior year total of 8.2%.

The number of people employed in the Monroe area also showed meaningful improvement over the past 12 months with roughly a 4% increase, but it probably have shown steady improvements since 2009. Our classified asset total is now $81 million that represents $7.4 million, or 8% improvement for the quarter and $35 million or 30% improvement over the past year.

Non-performing assets improved by $8.4 million, or 12% during the second quarter and by $19 million, or 24% over the past 12 months. A key component of the NPAs since the level of non-accrual loans, which is improved by $13 million or 41% over the past year, correspondingly it’s noteworthy that $29.7 million or 49% of the NPAs now consist of loans that are in accrual status and essentially paying us as agreed.

The bank-wide delinquency total improved from 2.9% to 2.1% during the quarter, which is a significant improvement compared to the 4% total reported 12 months ago. The delinquency totaled for accruing loans, 30 to 89 days past due increased from 1% to 1.1% during the quarter. This represents a comfortable level as consistent with the totals reported for the past five quarters.

This result suggests that further migration of loans into the NPA category should be limited. Among the classified assets, the largest concentrations by category consist of commercial investment property at $18 million, or 22% of the total. Residential mortgage assets were $12 million, or 14% of the total and investment securities with $9 million, or 12% of the total. Among the NPAs, the largest concentrations consist of residential mortgage assets with $11 million, or 18% by total and commercial investment property with $9 million, or 15% of the total.

During the second quarter, we recorded $342,000 loss related to the value of OREO properties. The total was negatively impacted by the option of 23 properties in May, the option properties had an OREO value of $1.6 million and we’ve recorded a loss of $150,000.

The annual carrying expense for the properties was roughly $96,000. During the second quarter, we also reported OREO expense of $361,000, which is slightly better than the $339,000 expense for the first quarter. Based on continued declines in the value and number of properties owned, OREO expenses are anticipated to trend downward.

We recorded a provision expense of $100,000 in the second quarter, compared to $400,000 in the second quarter of 2013. The $500,000 provision expense for the foremost recent quarters is less than the $2.7 million net charge-off total for the same period. However, the corresponding improvement in asset quality has made it appropriate to reduce the allowance for loan losses, which declined from 2.73% to 2.5% over the past quarter.

The results for the second 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 the local built classified asset and NPA totals over the past 12 months.

A 41% reduction in the level of non-accrual loans over the past 12 months, continued positive results and 30-day to 89-day delinquency totals, the continued positive results in the overall delinquency totals, improved unemployment totals in our market area and an increase in employment totals over the past year, the increased resources are being devoted generation of our new business opportunities and new loan production is expected to continue to exceed traditional runoff and charge-offs for the remainder of 2014. Our credit quality remains an area of emphasis for the bank and recent strategies in that area will continue for the foreseeable future.

That concludes my comments. I’ll pass the call back to Doug.

H. Douglas Chaffin

Thanks, Tom. Our trends for improved asset quality and earnings continues. This improvement combined with the successful completion of our capital raise during the second quarter has allowed us to receive far more relief from the regulatory concern orders that had been in place since July of 2010. This release became effective on June 30. More importantly we continue to see signs of optimism within our local markets. This is evidenced by the growth in our loan portfolio of this past quarter and prompted our first venture in Lenawee County with the opening of loan and wealth management production office in Tecumseh on June 2.

We expect loan activity to be consistent throughout the remainder of this year. Our net interest margin should remain stable as a result, the highly liquid balance sheet migrating further from the lower earnings investment portfolio into higher yielding loans. While we are encouraged by the positive trends for improved asset quality.

For the past several years we have continue to consider various wholesale strategies to reduce classified assets further including their potential sale. While no determination of any potential sale has been made to date, the markets for these assets appear to have improved from a year ago. We will continue to keep our options open in this regard. We remain optimistic for continued improvements in our local economy, asset quality and earnings and our ability to take advantage of opportunities for growth.

We will now accept any questions you may have.

Question-and-Answer Session


Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes today from Jon Evans of JWest LLC.

H. Douglas Chaffin

Hey, Jon.

Jonathan Evans – JWest LLC

Hi, how are you guys?

H. Douglas Chaffin


Jonathan Evans – JWest LLC

Thanks for your time. Can you talk a little bit about – so just to make sure I understand your earnings, the tax rate is a book rate, so cash earnings were basically $0.11 is that the way we think about it?

John L. Skibski

I didn’t calculate the pretax earnings of per share basis, but, 25% is our effective tax rate.

Jonathan Evans – JWest LLC

Okay, but it’s not a real tax rate, is that right John I mean you are really not paying taxes, it’s just a book rate?

John L. Skibski

Right, right. We’re booking, we don’t actually have a sale, we’ve got NOLs and that we’re carrying forward…

Jonathan Evans – JWest LLC

Got it. And then on tangible book, tangible book went up a little bit more than that, was that just a gains that you had on the investment portfolio or is there any kind of mark to market?

John L. Skibski

It’s unrealized gains on the investment portfolio, there is improvement in the value certainly available to sales securities.

Jonathan Evans – JWest LLC

Got it. And then you guys did a great job I mean it’s the first time you’ve grown loans, you talk in the press release that your pipeline still is pretty strong, do you think you continue that trend of growing loans can it be sequentially that strong or what do you think kind of linked to growth potentially could be?

John L. Skibski

We expect the same level of loan production, the economy is still, it seems solid activities seems good, so the pipelines and the kind of new loan production we had for the past six to nine months I can’t expect that to continue.

Jonathan Evans – JWest LLC

Okay, if you get that then can you talk a little bit about NIM, do you think NIM actually moves up sequentially and then do you have any high cost funding that’s rolling off in the next six to nine months?

John L. Skibski

The margin if we get that will continue to move up, they are lumpy, huge we had $7 million of loan growth in the last quarter, we would repeat that it’s like a really moves the needle much, we probably will continue to be in the 315 to 320 range on the margin.

Jonathan Evans – JWest LLC

Okay. And then relative to the piece from the FDIC getting lifted or the bank regulators, can you talk a little bit about how that it affects your expense structure going forward, what line item where we see that in and when will we start to see it in. I assume it’s in your FDI insurance, but…

H. Douglas Chaffin

Yes, that’s a primary item Jon, we’ll see a reduction in the premium we paid for deposit insurance, that’s likely to take affect sometime during the third quarter I think John might speak to the specific a little more about it. There is also as you might guess in inherent cost would reporting NOI gets – it’s tougher to really pinpoint that exactly, but the most important part of it for us it just allows us to make sure we can change our focus, look to be a little more proactive in the marketplace.

Jonathan Evans – JWest LLC

Okay, so John can you give us any sense of on a run rate what do you think you save an FDIC or what do you save kind of in expenses now that it’s been lifted?

John L. Skibski

Well, the insurance savings will be approximately $1 million a year, the timing of that are not really certain on, the order which we move, they are terminated on June 30, the accrual expense for the second quarter based on the rate that we have been build at for the first quarter, we won’t know the second quarter rate, the amount building until the end of the third quarter. And so we’ll adjust the accrual if necessary in the third quarter, I’m not really sure on the timing, but we should definitely see some improvement in the fourth quarter.

Jonathan Evans – JWest LLC

Okay, got it. And then the loan offers that you alluded in the press release just from the standpoint, do you see more opportunities like these in your geography or is this kind of a one off and maybe can you give us some insight into why you choose to be here et cetera.

H. Douglas Chaffin

Sure and I’ll let Tom or John jump in at any point on this to it Jon. We first of all Lenawee County is directly to the west of Monroe County, that joins Monroe County, there is a high way that connects the two various that segues for the two areas done the Michigan in the far less west office that we have within Monroe County, and it’s not that far from Tecumseh.

We’ve been looking at Tecumseh for some time and frankly with the recent acquisition of United Bank & Trust by all national that was – they’re former headquarters of Tecumseh, we just think there is an opportunity for the disruption that may very well occur in that market.

We were offered an opportunity, where shortly after that announcement took place of a leasing, a form of branch office that was called, and it’s located right downtown, it’s in the great location, it’s a relatively new facility, and we’re kidding the big favorable lease, we have to go into that office and we’re staffing it, we have transfers, there’s is no adverse staffs. we have a commercial lender who we had segued into our special assets group during some of the more challenging times.

We’ve been looking for ways to segue those guys out of that into more production areas and since its particular gentleman had some experience in that market area in the past. And we’ve got to look at the pretty good position for them to take on.

So we think that’s just a pretty – a good opportunity at number one, and a very, very low cost way of going into it. We’re not certain what additional opportunities might arise as a result of that particular acquisition. but we are continuing to see what we think is a notable opportunity for us, as independent community bank in this market, we’ve talked previously about our interest into western Wayne County, specifically the Norfolk from that market that we acquired back in 2008 under receiver shift that has been a very successful market for us.

It is a very affluent market and it is growing now, that market continues to look very, very good to us and whether or not; we do any rule, physical growth as it is important as positioning our staff to take advantage of the opportunities. And so that’s why we continue to look at and I don’t know Tom has prudent comments.

Thomas G. Myers

That covers that. that covers that. There were opportunities there.

Jonathan Evans – JWest LLC

Got it. and then just did – the loan growth that you had this last quarter, did you produce any out of that new office, or is that still on the comp?

H. Douglas Chaffin

No, that’s still that we’ve got the new office so far has been a few consumer loans, and just get to start it there.

Jonathan Evans – JWest LLC

Okay, great. And then just the last question I have for you, you guys have come a long way, you’ve done a great job coming out on the other side, can you give us kind of this big picture strategic growth now, or are you looking potentially to make acquisitions and consolidate some of the community banks up in Michigan. Are you looking to put in a dividend again, just what’s kind of the longer-term thinking here? Now that you’re starting to…

H. Douglas Chaffin

Yes. Well, let me take the first question first John. our first goal – our foremost goal is that I go through our organic needs and taking advantage of the capacity we currently have, making sure we’ve got good utilization in the locations we already have and growing overly from that. That’s our number one goal always has been.

We will look for opportunities for growth beyond there. There is nothing in the words right now, and all in terms of the new acquisitions. We recognize that we’re well positioned for that both in Southeast Michigan and Northwest Ohio for that matter. There are continuing to be a limited number of potential consolidators in this market. I’m continued to be told that we are nothing in the works now; we want to get our organic growth process in place first and foremost. but we’re – we’ll just keep our eyes open for others, relative to the dividend, no plans to expand that yet.

We still have an obligation to maintain certain capital levels. we still have opportunities, I think to take advantage of the capital position that we have. We want to assess that, but there is nothing, nothing in the near future regarding dividends.

I will say that with a vast majority of our shareholders, still local shareholders. We understand the importance of the dividend; we understand the importance of the dividend to them in the past. I’m reminded with that everyday, as I go to grocery store and as I fill my car with gas. It is something that we’ll just continue to keep an eye out for and do that whenever it’s appropriate.

Jonathan Evans – JWest LLC

Got it. Hey, thank you for your time.

H. Douglas Chaffin



(Operator Instructions) Our next question comes from Walter Riebenack, a Private Investor.

Unidentified Analyst

Yes. And anyone of you can answer these questions. I just have several. If I recall, when the consent order was listed, your press release at that time talked about some other restrictions that you are still under. Could you expand on that please?

H. Douglas Chaffin

Yes. what’s really common in this case Walter, is that the FDIC in the state regulatory qualities and typically migrates down, what’s turned as in a formal agreement. The consent order is formalized; it’s published by those regulators. there are informal agreements that are not published by regulators, but that we disclose in our quarterly SEC filings. It has very similar components to it, that the consent order does, but it’s really on an informal basis, rather than a formal basis.

Unidentified Analyst

What did you agree to; I mean what restrictions still exist?

H. Douglas Chaffin

One of the things that we agreed to and maybe most permanent for you is that we would maintain a Tier 1 Leverage ratio of 9% or greater. And we would not pay a dividend until – unless we’ve received our formal approvals from those regulators.

Unidentified Analyst

Okay. just one other question, what is your OREO level now?

H. Douglas Chaffin

It’s $7.9 at the end of the quarter.

Unidentified Analyst

Okay. thanks, guys. doing a great job, keep it up.

H. Douglas Chaffin

Thank you very much.


(Operator Instructions) There appears to be no further questions. so I’d like to turn the conference back over to Doug Chaffin for any closing remarks.

H. Douglas Chaffin

All right, thank you. Thank you, Chad, and thanks very much everyone for joining us this morning. obviously, we’re making some great progress and we’re pleased with that and we’ll continue to keep you informed as we go along. 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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