M B T Financial Corp. (NASDAQ:MBTF) Q4 2015 Earnings Conference Call January 26, 2016 10:00 AM ET
Doug Chaffin - President and CEO
John Skibski - EVP and CFO
Tom Myers - EVP and Chief Lending Manager
Welcome to the MBT Financial Corp. Fourth Quarter 2015 Earnings Conference Call. There will be a question-and-answer period at the end of the presentation. [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 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 maybe 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 cost 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 begin the call with management’s prepared remarks and then open the call to questions.
At this point, I’d like to turn the conference call over to Mr. Chaffin. Sir, you may begin.
Thank you, Jamie and good morning, everyone and welcome to the exciting world of banking in the state of Michigan, Ohio today. At the close of business yesterday we announced net income for the fourth quarter of 2016 totaling $4 million a dramatic improvement from the fourth quarter of 2015, which reflected net income of $2.1 million. Fourth quarter results were positively impacted by a $2 million reduction in the loan loss reserve due to improved asset quality. In the fourth quarter of 2014 there were no additions or reductions to the reserve.
Net of the impact of the change in loan loss provision, pre-tax income for the fourth quarter of 2015 improved by 27% over that of the fourth quarter of 2014. The net interest margin remained unchanged in the linked quarter basis and then comparing the 12 months throughout 2015 to 2014 net interest margins remained relatively stable and in spite of a flattening yield curve.
Growth in earning assets therefore resulted in an increase in the net interest income totaling $526,000 in the fourth quarter of 2015 compared to 2014 with a $2.3 million improvement in net interest income for the year. Net of security to gains and ORE gains and losses non-interest income for the fourth quarter remained relatively flat in 2015 compared to 2014 as a decrease in wealth management fee income was offset by increases in service charge and debit card income.
Non-interest expenses declined by 3.4% in the fourth quarter compared to a year ago due to reductions in salaries and benefits, the FDIC deposit insurance premium and bonding and other insurance cost. Our previously announced efficiency initiatives was completed during the fourth quarter of 2015 and we should see the full effect of this cost savings beginning in the first quarter of 2016. Asset quality continues to improve; total classified assets declined by another $6.2 million during the fourth quarter and is declined by a total of $23.7 million or 44% from the year ago. This improvement as well as the year-to-date net recovery of loans previously charged-off allowed us to reduce the allowance for loan losses by $2 million in the fourth quarter as previously mentioned.
While allowance remains well above peer levels at 1.76% of total loans. Our capital position remains quite strong and tangible common equity and tangible asset ratio of 10.8% at year ago and the Tier 1 leverage ratio equaling 10.9%. Tom Myers will discuss the details concerning our asset quality improvement and the positive lending activity later during this call, but first John Skibski will discuss our financial results in a greater detail.
Thank you, Doug. The net profit for the fourth quarter of 2015 was $4,014,000 an increase of $1,865,000 or 86.8% compared to the fourth quarter of 2014 profit. The earnings per share of $0.18 this quarter doubles the $0.09 reported a year ago. Net income for the full year of 2015 was almost $12.1 million, an increase of 65.2% compared to 2014.
The net interest income for the fourth quarter 2015 increased $526,000 or 6% compared to the fourth quarter of 2014 even though the net interest margin decreased from 3.14% to 3.11% as the average earning assets increased $79.9 million or 7.1%. The cost of interest bearing liabilities decreased to 8 basis points from 0.39% in the fourth quarter of 2014 to 0.31% in the fourth quarter of 2015 while the yield on earning assets decreased 10 basis points from 3.39% to 3.29%.
The loan portfolio yield decreased from 4.65% to 4.60% and the investment yield decreased from 1.94% to 1.91%. After four consecutive quarters of increases loans decreased in the fourth quarter of 2015, while lower yielding investments increased and this change in the mix of earning assets contributed to the decrease in the asset yield and the net interest margin. We continue to look for opportunities to grow our loan portfolio to improve our asset yields and we expect our quarterly net interest income to average in excess of access of $9 million in 2016.
The provision for loan losses decreased $2 million compared to the fourth quarter of 2014 as we recorded a negative provision expense of $2 million this quarter compared to no provision expense in the fourth quarter of 2014. Along with the net charge-offs of $100,000 this quarter, this resulted in a decrease of $2.1 million in the allowance for loan losses. The allowance is now $10.9 million or 1.76% of loans compared to 2.08% last quarter and 2.16% a year ago.
Total loans increased by $7.9 million or 1.3% during 2015, but our total non-performing loans decreased by $8.4 million or 23.4% during the same period and our allowance remains adequate. The allowance includes $2.6 million of specific allocations on $24.9 million of loans evaluated for impairment and $8.3 million of general allocations on the remainder of the portfolio. 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.
Non-interest income excluding gains and losses on securities and other real estate transactions decreased $41,000, or 1.1% compared to the fourth quarter of 2014. Wealth management income decreased $101,000 or 8.1% mainly due to a decrease in employee benefit plan assets managed. Service charges and other fees on deposit accounts increased $90,000 or 8.8% as we added features and benefits to our primary checking account product and instituted a monthly service fee this year.
Debit card income increased $103,000, or 17.6% due to increased activity. Rental income from OREO properties decreased $60,000 or 83.3% as the amount of OREO properties decreased from $5.6 million to $2.4 million over the past year. We expect total non-interest income to continue to average nearly $4 million per quarter in 2016.
Non-interest expenses decreased $330,000 or 3.4% compared to the fourth quarter of 2014. Salaries and benefits decreased $298,000 or 4.9% as the number of full-time equivalent employees decreased from 366 in the fourth quarter of 2014 to 297 in the fourth quarter of 2015. Due to onetime cost associated with the previously announced efficiency initiative in the fourth quarter of 2015, the full benefit of the staff reduction will be realized beginning in 2016.
Marketing expenses increased $84,000 or 42.2% due to higher advertising and other expenses related to the checking account product enhancement. Other real estate expenses decreased $152,000 due to an adjustment in the accrual for property taxes caused by the reduction in properties owned. The FDIC deposit insurance assessment went down $239,000 as the termination of our informal agreement with our regulators in 2015 resulted in a decrease in the assessment rate.
We expect our total non-interest expense to average around $9 million per quarter in 2016. This quarter, our tax expense of $1,748,000 reflects an effective rate of 30.3% of our pre-tax operating income compared to 27.6% in the fourth quarter of 2014. Our marginal rate is 34% and due to our projected tax exempt income from municipal securities and bank own life insurance, we expect our effective rate to be below 29% in 2016.
We continue to emphasize capital, liquidity and interest rate risk management in our balance sheet structure. We comfortably exceeded the requirements to be considered well capitalized by federal banking regulators and we now have the opportunity to grow our balance sheet and manage our capital to improve shareholder return. We have more than adequate liquidity to fund lending opportunities, while maintaining a slightly asset sensitive balance sheet. The increase in retained earnings and accumulated other comprehensive income caused our book value per share to increase from $5.92 at the end of 2014 to $6.46 and the total capital to total assets ratio is now up to 10.98%.
During the fourth quarter the Bank’s Tier 1 leverage ratio increased from 10.63% to 10.90%. The total risk based capital ratio increased from 18.98% to 19.57% and the common equity Tier 1 ratio increased from 17.71% to 18.31% indicating a very strong capital position.
This concludes my remarks and I’ll now turn the call over to Tom Myers.
Thanks, John. Loan totals declined slightly for the quarter as the average balance reduced by $4 million or six-tenths of a percent. However, the previous four quarters each showed an increase and over the past 12 months the average balances improved by $21 million or 3.5%. Net loan growth has been limited by a continued reductions in classified loan totals, which declined by $25 million over the past 12 months. Without that reduction, net growth for the past 12 months was totaled 6%.
Our commercial loan pipeline has shown steady growth over the past six months and is roughly 25% greater than the same period in 2014. I expect continued net loan growth in 2016. Local economic activity improved over the past quarter and over the past year. The preliminary unemployment rate for Michigan for November totaled 5.1% and the unemployment rate for the Monroe area totaled 3.6% as of November, compared to 4.5% one year earlier. The number of people employed in the Monroe area also showed meaningful improvement over the past 12 months was roughly an 8% increase.
The Credit quality showed meaningful improvement. Our classified asset total is now $30.8 million, which represents a 17% decline for the quarter and a 44% improvement over the past 12 months. Among the classified assets, the only notable concentrations by category consisted commercial investment property at 27% of the total and residential mortgage assets at 11%. Non-performing assets improved by $3.8 million or 12% during the fourth quarter and by 28% over the past 12 months. A key component of NPAs is the level of non-accrual loans, which has improved by $4.4 million or 34% over the past year.
Another meaningful statistic is our level of NPAs excluding performing renegotiated debt. This total has declined to $11 million or 1.8% of total loans compared to 3.1% one year ago. Although the rate of reduction is slow, I expect continued reductions in classified asset totals. The bank-wide delinquency total was 1.4% as of December 31st compared to 2% one year ago. The improving trend is anticipated to continue. Evidence of this is seen in the delinquency total for accruing loans 30 to 89 days past due, which ended the year at 0.6% the lowest total reported over the past four years.
For the year, we recorded a $284,000 loss related to the value of OREO properties owned or sold, this is a significant improvement over the $946,000 loss reported for 2014. Other OREO expenses showed similar improvement in 2015 as the amount declined by 65% over the prior year. The positive trend is anticipated to continue in 2016. We recorded a negative provision expense of $2 million in the fourth quarter compared to a negative provision expense of $200,000 in the prior quarter. For the year, we recorded a negative provision expense of $3 million compared to a negative provision expense of $500,000 in 2014.
The allowance for loan losses declined during the fourth quarter from 2.08% to 1.76%. The allowance totaled 2.16% one year ago and the reduction is believed to be appropriate given the continued improvement in credit quality over that time.
In summary, key results for the quarter include: continued reductions in the level of both classified assets and NPA totals; a 34% reduction in the level of non-accrual loans over the past year; continued improvements in OREO-related expenses; and improved unemployment totals in our market area and an increase in employment totals over the past year.
We set our further goals to achieve related classified assets and I expect continued steady improvement in those totals. At the same time, we are continuing to place increased emphasis on the generation of new lending opportunities. And I anticipate consistent net loan growth in future quarters.
Well obviously both the fourth quarter and the year 2015 reflected very strong results for our company highlighted by a number of milestones. We accomplished a number of objectives during the year including the final removal of our regulatory agreements, settlement of the IRS audit, dramatic improvements in asset quality, solid net growth in our loan portfolio and earning assets, a mindful reduction in FTEs through both an efficiency initiative and natural efficient resulting in 19% staffing reductions during the year and solid improvements in every aspect of our earnings metrics.
As mentioned during these calls throughout 2015, we’re mindful that our capital ratios continue to exceed regulatory requirements and standards. In light of our continued improved asset quality and earnings levels, management is reviewing the company’s capital plan with the Board of Directors to determine the earnings retention and capital target levels necessary to address any balance sheet risk factors that remained as well as provide for future growth opportunities. As always, we’ll keep you informed of any developments in this regard.
And I’ll accept any questions you may have.
Ladies and gentlemen at this time we’re ready to begin the question-and-answer session. [Operator Instructions] Our first question today comes from Walter Riebenack [ph] who is a private investor. Please go ahead with your question.
And this goes to either John or Doug, and just a little bit more clarification here the $3 million reduction in the loan loss provision, do you expect any more reductions in 2016?
Well first of all good morning Walt it’s good to hear from you always. No, we’re not anticipating of building into our model any reductions in net provision throughout the year. That’s not to say that we won’t have it because it’s something we analyze on a quarter-by-quarter basis.
Well you guys have certainly turned this Bank around, congratulations on it. Couple of other questions on the Bank owned life insurance on the asset side I believe it shows that there was an increase in Bank owned life insurance, but on the income side with the decrease in the earnings. I don’t know why that is?
Well the increase in the asset is just an increase in the cash or under value of the policies we own they’re fully paid out policies. And as that increases in value that is recorded as income. So the balance sheet will always grow as we record income. The amount of income in 2015 was down compared to 2014, but it is still producing income.
Is that because of reduction in the rate on return on the cash values by the insurance companies?
Yes, that’s it exactly.
Okay. Another question this goes to the FDIC assessments. Do you expect a decrease in the assessments once the deposit insurance fund reaches that 1.15%?
We are at the lowest assessment rate for banks of our size right now. And then once it does reach the 1.15% if it does, we should see some improvement, but not sure of the timing.
I think it’s fair to say that the industry is anticipating that once that 1.15% is achieved Walt it’s something that’s not necessarily a given, but we’re looking forward to lobbying on behalf of that.
Well good. I think that’s only fair considering what’s going on in the banking industry. Okay guys, again good job, keep it going.
[Operator Instructions] And at this time, I’m showing no additional questions, I’d like to turn the conference call back over for any closing remarks.
Yeah thanks, Jamie and thanks for joining us everyone. One of the things that we didn’t discussed, but that we’ll be talking about in the weeks to come among our team as the results that we announced this morning of mergers that affect our market we’re going to look for opportunities to take advantage of that as they arise, nothing planned at this point that we think that’s good news for us as well. So thanks for joining us. We’ll continue to keep you informed of our progress.
Ladies and gentlemen that does conclude today’s conference call. We do thank you for attending. You may now disconnect you telephone lines.
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