M B T Financial Corp. (NASDAQ:MBTF)
Q2 2016 Earnings Conference Call
July 29, 2016 10:00 ET
Don Lieto - EVP, Continuity and Integration of Acquisitions Director
Doug Chaffin - President and Chief Executive Officer
John Skibski - Executive Vice President and Chief Financial Officer
Tom Meyers - Executive Vice President and Chief Lending Manager
Matthew Forgotson - Sandler O'Neill & Partners
All participants, please stand by; your meeting is ready to begin. Welcome to the MBT Financial Corp Second Quarter 2016 Earnings Conference Call. There will be a question-and-answer period at the end of the presentation. If you do have a question at that time, please press star and then one using a touch tone telephone.
This discussion may contain certain forward-looking statements about MBT Financial Corp pertaining to our financial condition, results of operations, plans and objectives. The statements involve risks and uncertainties that could cause results to differ materially from historical performance and these statements. We've identified some of these risks and uncertainties in our forward-looking cautionary statement at the end of our earnings release issued yesterday and filed with the FCC on Form 8-K and in the risk factors discussed in MBT Financial Corp's Form 10-K for 2015 and the Form 10-Q for the first fiscal quarter of 2016. MBT Financial Corp assumes no obligation to update any forward-looking statements or information which speak as of their respective dates.
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.mbt.com. On the conference today from MBT Financial Corp, we have Doug Chaffin, President and Chief Executive Officer; Don Lieto, Executive Vice President, and Continuity and Integration of Acquisitions Director; John Skibski, Executive Vice President and Chief Financial Officer; and Tom Meyers, Executive Vice President and Chief Lending Manager.
We will begin the call with management's prepared remarks and then open the call to questions. At this point I would like to turn the converse call over to Mr. Chaffin.
Thank you. And good morning, everyone. At the close of business yesterday, we announced earnings for the second quarter of 2016 totaling $4.239 million, compared to the second quarter of 2015 which reflected net income of $2.285 million, for an improvement at 85%. Net interest income was relatively flat on a linked quarter basis and increased by 2% for the second quarter of 2016, compared to the second quarter of 2015. In addition, there was a positive effect from a $200,000 reversal of the loan loss reserve for the quarter, compared to no provision reported for the second quarter of 2015.
Core earnings remain strong and continues to improve. The results for the quarter was positively impacted by a 46% increase and non-interest income, primarily the result of a $1.8 million gain in securities portfolio. Fees from debit card transactions also increased by 24%. Another positive factor in second quarter results was a 9% decline in non-interest expenses compared to 2015. Last year's efficiency initiative resulted in a 6% decline in salaries and benefits expenses for the second quarter, and we continue to manage overhead effectively, resulting in an 8% decline in equipment expense and a 7% decline in marketing expense. Improved performance, continued improvement in asset quality, and the relief of all regulatory agreements during 2015 resulted in a 55% reduction in the FDIC deposit insurance assessment during the second quarter. And sales of OREO assets resulted in a decrease of OREO expenses of 83%. Total deposits were flat on a linked quarter basis but reflected an increase of 3.8% compared to a year ago.
The big story, of course, is the successful booking in a number of loans that have been pending in our pipeline for the past few months, resulting in an increase in our loans outstanding of over $20 million on the linked quarter basis, which equates to an annualized growth rate of over 6.5%, year to date. Tom Myers will speak to the specifics regarding our loan portfolio activity and quality improvements later during the call. I’ll also ask John Skibski to discuss our financial results in greater detail, as well.
But first, I'd like to introduce you to Don Lieto, our Executive Vice President in Continuity and Integration of Acquisitions Director. As you may recall from prior announcements, Don recently accepted this new assignment, which is focused in part on preparing our Company to effectively execute the operational product and cultural integration of any new acquisition that might take place in the future. I’ve asked Don to briefly describe his role in greater detail, and his focus in the past few months.
Thanks, Doug. Good morning, everybody. It's my pleasure to join in on a call today. As our industry continues consolidating, regulatory compliance challenges increase. Growth and scale is becoming increasingly important. Actually, increasing scale is one of MBT’s four key strategies. Our primary approach to increasing MBT scale is through organic growth in the markets we presently serve. However, we anticipate merger and acquisition activity to continue at a steady pace, providing MBT with acquisition opportunities to augment our organic growth.
As the Continuity and Integration of Acquisitions Director, it is my responsibility to proactively prepare our Company to effectively execute the integration of acquisitions once the opportunities are presented. Over the past three months, the bulk of my CIA directorship focus has been on collaborating with colleagues to develop a comprehensive acquisition playbook to serve as a guide, or map, to successfully achieve the maximum value of an acquisition, while maintaining continuity of our normal business activities. Of critical importance within the acquisition playbook is the attention to detail relating to operational and cultural aspects of activities that are essential in the integration planning and execution phases.
The overall objective is to ensure that we are prepared, assignments and responsibilities are established well in advance and that the results of our integration process provides meaningful and positive results that benefit our shareholders, customers, employees and communities alike. As one of our core values states, and it strongly applies to our acquisition strategy, we are committed to success.
At this time, I'll turn the call over to our Chief Financial Officer, John Skibski.
Thank you, Don. The net profit for the second quarter of 2016 was $4.239 million, an increase of $1.954 million, or 85.5%, compared to the second quarter of 2015 profit. The diluted earnings per share of $0.18 this quarter is an increase of 80%, compared to the $0.10 reported a year ago. The net interest income for the second quarter 2016 increased $163,000 or 1.8%, compared to the second quarter of 2015, even though the net interest margin decreased 2 basis points. As the average earnings increased $35.3 million. The cost of interest-bearing liabilities decreased 8 basis points, from 0.35% in the second quarter of 2015 to 0.27% in the second quarter of 2016, while the yield on earning assets decreased 9 basis points, from 3.35% to 3.26%.
The loan portfolio yield was unchanged at 4.62%, and the investment yield decreased from 1.94% to 1.82%. The average amount of loans increased $4.4 million, or 0.7%, while the average investments increased $30.8 million, or 5.5%. The investment portfolio was expected to decrease in the third quarter due to calls of higher-yielding bonds, but the improved loan growth late in the second quarter is expected to offset that decrease. And the maturity of high-cost borrowed funds late in the second quarter should contribute to a decrease in the cost of funds, resulting in an increase in the net interest margin in the third quarter of 2016.
We expect our quarterly net income interest to continue to average in excess of $9 million for the rest of 2016. The provision for loan losses decreased $200,000, compared to the second quarter of 2015, as we recorded a negative provision expense of $200,000 this quarter compared to no provision in the second quarter of 2015. The negative provision was required in order to bring our calls from loan losses down to $9.9 million, or 1.55% of loans.
Total loans outstanding increased $20.6 million, or 3.3% during the quarter, while the amount of non-performing loans decreased $1.7 million, or 6.4%. The loans include $1.7 million of specific allocations on $22.5 million of loans evaluated for impairments and $8.2 million of general allocations on the remainder of the portfolio. The general allocation is based on the historical charge-off experience of the previous 16 quarters. For the last several quarters, we have been replacing high charge-off quarter - high charge-off periods in the calculation of our historical charge-off rate, necessitating the negative preventions.
We expect the historical charge-off rate to continue to decrease; however, loan growth may prevent us from may prevent us from reporting additional negative provisions. Non-interest income, excluding gains and losses on securities and other real estate transactions, was unchanged at $3.8 million, compared to the second quarter of 2015.
Wealth management income decreased $86,000, or 7.2% due to a decrease in assets managed. Debit card income increased $144,000, or 24.4%, due to the increases in both non-customer surcharges and interchange income. Other non-interest income decreased $43,000, or 8.7%, as rental income on OREO properties decreased $97,000 and other fees increased $54,000.
We realized $1.752 million on gains on securities transactions this quarter due to bonds owned at discounts being called at par. While the market rates are still very low, we have few discount bonds remaining, and we do not expect this activity to continue in the third quarter. Non-interest income, excluding securities gains and other real estate activities, should continue to average near $4 million per quarter for the remainder of 2016. Non-interest expenses decreased $858,000, or 8.8%, compared to the second quarter of 2015.
Salaries and benefits decreased $351,000, or 6.1%, as the number of full-time equivalent employees decreased from 350 in the second quarter of 2015 to 288 in the second quarter of 2016. EFTA and ATM expenses increased $119,000 due to increased debit card activity and higher card reissuance costs. Other real estate expense decreased $149,000 due to a decrease in the number of properties owned. the FDIC deposit insurance assessment went down $238,000 and determination of the informal agreement with our regulators in 2015 resulted in a decrease in the FDIC assessment rate. We expect our total non-interest expense to average around $9 million per quarter of this year.
This quarter, our tax expense of $1.888 million reflects an effective rate of 30.8% of our pretax operating income, compared to 27.6% in the second quarter of 2015. Our marginal rate is 34% and, due to our protected tax exempt income from municipal securities bank on life insurance, we expect our objective rate to be about 30% throughout 2016.
Our capital liquidity positions are very strong and we comfortably exceed the requirements to be considered well capitalized by federal banking regulators. In addition to providing a source of liquidity, the large size of our investment portfolio allows us to manage interest rate risk effectively. We have more than adequate liquidity to fund lending opportunities while remaining in balance sheet. We are continuing our efforts to improve the asset mix in order to increase the margin in earnings.
We're also actively managing our capital so that we can provide a good return to our shareholders, while planning for longer-term growth. Our capital management included payment of a special dividend and resumption of quarterly dividends in the first quarter of 2016 and the repurchase a 192,000 shares of stock in the second quarter. The resulting decreases in common stock and retained earnings were partially offset by an increase in accumulated and other comprehensive income. Our book value per share decreased from $6.46 at the end of 2015 to $6.41 at the end of the second quarter of 2016.
During the first half of 2016, the bank’s Tier I leverage ratio decreased from 10.91% to 10.33%. The tall risk based capital ratio decreased from 19.59% to 18.08% and the common Tier I ratio decrease from 18.33% to 16.82%, still indicating a very strong capital position.
This concludes my remarks. I’ll now turn the call over to Tom Myers.
Thanks, John. Loan totals increased for the quarter as the average balance went from $5.5 million, nine-tenths of a percent. We anticipate the average balance to improve further in the third quarter, based on positive pipeline totals and the fact that the period end loan balance increased by $20.6 million, or 3.3% over the past quarter. We placed increasing levels of emphasis on generation of new business opportunities over the past six months and it's encouraging to see further positive results. Local economic activity improved over the past quarter and over the past year. The unemployment rate for Michigan totaled 4.6% as of June and the rate for the Munroe area as of May totaled 3.7%. Both of these results are significantly better than twelve months ago. Our asset quality showed further improvement. The bankwide was just over 1% for the past two quarter ends.
Classified asset total is now $26.2 million, which represents an 8% decline for the quarter and a 43% improvement over the past twelve months. Non-performing assets improve by 5% during the second quarter and by 32% over the past twelve months. It's also noteworthy that 40%, or 10.5 million of our NPAs consist of renegotiated loans that are both performing and pass rated. We clearly expect to continue to receive payments on these loans and are taking steps to transition many of these accounts out of renegotiated status. With the exposure of that component, the ratio of non-performing loans to gross loans will be reduced from 3.8% to 2.2%.
The first two quarters of 2016, we recorded a $57,000 loss related to the value or OREO properties owned or sold. This is a significant improvement over the $305,000 loss reported in the same period of 2015. Other OREO expenses showed similar improvement. The expense per person after 2016 is $94,000, compared to $305,000 for the same period in 2015. These positive trends are anticipated to continue for the remainder of 2016.
We recorded a negative provision expense of $200,000 in the second quarter. For the past twelve months, we recorded a negative provision expense of $2.5 million, compared to the negative provision expense of $1.5 million for the twelve-month period ending on June 30, 2015. Correspondingly, the allowance for loan losses declined during the second quarter to 1.55%, compared to a total of 2.09% one year ago.
In summary, key results for the quarter include continued reductions in the loan of both classified assets and NPA totals. Further improvements in collection-related expenses, improved unemployment totals and steady economic activity in a market area, positive loan growth, and indications of further loan growth during the third quarter.
That completes my comments and I’ll turn the call over to Doug for additional remarks.
Thanks, Tom. While there was a little bit of noise during the second quarter, core earnings reflected slight improvements in interest income and non-interest income, with significant improvement in non-interest expense. As that quality continues to improve through trends, and we're pleased to be on track with the growth objectives in our own portfolio.
As mentioned earlier, yesterday, our Board approved an increase in the quarterly dividend for the third quarter of 2016 to $0.04 per common share, an increase of $0.01 or 33%. This dividend will be payable to shareholders of record as of August 11, 2016, payable on August 18. We continue our strategic focus of improving all aspects of our earnings and growth performance and feel (inaudible) take advantage of future growth opportunities for acquisitions should they become available in the future.
I now accept any questions you may have.
[Operator Instructions]. Our first question today comes from Matthew Forgotson from Sandler O'Neill & Partners. Please go ahead with your question.
Just wonder if you could talk to us a little bit about what drove the loan growth this quarter, which particular segments and were there any geographic contributions that were outside.
Yes. But the loan growth in the quarter was driven by two things. We made an additional purchase of a student loan portfolio that we participated in starting, it's going to close to two years ago. So that was a $50 million purchase that the rest total was commercial, commercial loans. Within the commercial loan activity we had roughly 50-50 among some participation we share with some bank partners and then the rest will be organic growth.
Okay this is a $15 million participation I'm assuming that was a commercial loan with a partner institutions?
No the 15 million was the student loan portfolio that we had to do.
How about the pipeline at quarter end? I know is it at highest level last, last quarter. Can you tell us where it is today and what the complexion of that pipeline looks like?
It's yeah made of still is in the mid '70s I think in our last, our last conversation or last call. It's been bouncing around that area for the entire quarter that's where it is today. That's a $70million today. We had I guess I can share at this point we has a good July, we had some great activity in July with that the pipeline straightened in the '70s.
Okay. In terms of the, the margin outlook I believe you had a $15 million FHLB advances come do can you remind us when it that came due in the second quarter and then how you ultimately refinance that?
That there was actually a repurchase agreement we signed June 8 that matured this $15 million, 4.65% and we just founded that out of our cash.
Okay. Your credit profile continues to improve nicely, but there was a slight uptake in the charge-offs this quarter. Could you give us a little bit of color there and your expectations for net charge-offs at this level?
I certainly don't see a trends of increase in charge-offs. The couple of accounts that we decided to write down at this point we're in the specific reserve for the most part and I just don't see any increase trend there.
Okay. Lastly and then I'll hop out in terms of a capital return can you give us a sense of your appetite for incremental share repurchase with the stock at this level?
Yes let me, I'll be a little critic on that if you don't mind that we proactively sit down with our Board periodically and have been since the reauthorized provided the authority to repurchase stock early in the year. And we do a pretty mindful analysis on where we think intrinsic value is, where we think it should be in, and where the market is. And combining all those things, we set out some guidelines. I think it's safe to say at where we are right now, we a bit above those guidelines. So there's not a whole appetite although we still think there's some additional value that we can provide in our Company, it's like [indiscernible] where we'll see a lot of purchase activity today.
[Operator Instructions]. And gentlemen, at this time, I'm showing no additional questions. I like to turn the conference back over to management for any closing remarks.
Thanks, Jamie. Well, thanks everyone for joining us this morning, we obviously continue to work on our four key strategies as Don mentioned earlier, which includes scale but also include continuing improving net interest income, continue to improve what we refer to as effectiveness, which is really greater efficiencies and to keep an eye on asset quality. So we continue to work on that and we will continue to keep you informed. Thanks for joining us.
Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines.
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