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Edited Transcript of MBTF earnings conference call or presentation 26-Oct-18 2:00pm GMT

Preliminary Q3 2018 MBT Financial Corp Earnings Call

MONROE Nov 1, 2018 (Thomson StreetEvents) -- Edited Transcript of MBT Financial Corp earnings conference call or presentation Friday, October 26, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* H. Douglas Chaffin

MBT Financial Corp. - President, CEO & Director

* John L. Skibski

MBT Financial Corp. - Executive VP, CFO, Risk Management Director, Treasurer & Director

* Thomas G. Myers

MBT Financial Corp. - Executive VP, Chief Lending Manager and MBTeam/CARE Sales Director of Monroe Bank & Trust

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Conference Call Participants

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* Damon Paul DelMonte

Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director

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Presentation

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Operator [1]

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Welcome to the MBT Financial Corp. Third Quarter 2018 Earnings Conference Call. (Operator Instructions) This discussion may contain certain forward-looking statements about MBT Financial Corp. pertaining to our financial condition, results of operations, plans and objectives. These 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 SEC on Form 8-K and in the risk factors discussed in MBT Financial Corp.'s Form 10-K for 2017. 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.monroe.bank. You may also access the slides that are being displayed on the webcast by viewing the 8-K filed by the company this morning.

Please note, this event is being recorded. 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.

At this point, I would like to turn the call over to Mr. Chaffin.

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H. Douglas Chaffin, MBT Financial Corp. - President, CEO & Director [2]

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Thank you, Chad, and good morning, everyone. At the close of business yesterday, we announced results for the third quarter of 2018. While many of you will want to hear more detail concerning our pending merger with First Merchants Corporation, we'll address our third quarter results first, make some comments concerning our merger and respond to the questions at the end of this call.

Now I will start this presentation with Page 5 on the presentation deck. For the third quarter, we reported a net profit of $4,974,000 compared to a profit of $3,933,000 for the third quarter of 2017, or an increase of 26.5%. Earnings for the 9 months ending September 30 totaled $13,821,000 compared to $10,753,000 for the first 9 months of 2017, or an increase of 28.5%. Netting out the effect of the Tax Cuts and Jobs Act of 2017 and some nonrecurring items, core pretax income increased by 14.5% for the 9 months ending 9/30 compared to last year.

Net interest income has increased $2.7 million compared to last year or 9.6%. This was largely a result of an increase in interest rates and the continued shift in the earning asset mix. The loan portfolio increased $57.6 million since year-end 2017 for an increase of 8.3% thus far this year. Noninterest income, net of securities and ORE transactions increased by 6.5% compared to the first 9 months of 2017 and noninterest expenses increased by only 2.3%. Asset quality remained strong with recoveries during the quarter and solid quality metrics justifying no increase in the loan loss reserve this quarter. The allowance for loan losses remained strong at 1.06% of total loans.

Tom Myers will speak to the specifics regarding our loan portfolio activity and asset quality metrics later during the call. But first, I'll ask John Skibski to discuss our financial results in greater detail. John?

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John L. Skibski, MBT Financial Corp. - Executive VP, CFO, Risk Management Director, Treasurer & Director [3]

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Thank you, Doug. Good morning. The net interest income for the third quarter of 2018 increased $986,000 or 9.6% compared to the third quarter of 2017, as the average earning assets increased $17.6 million and the taxable equivalent net interest margin increased 24 basis points from 3.38% to 3.62%. The cost of interest-bearing liabilities increased 10 basis points from 0.19% in the third quarter of 2017 to 0.29% in the third quarter of 2018 and the yield on earning assets increased 35 basis points from 3.46% to 3.81%.

The loan portfolio yield increased from 4.68% to 4.84% and the investment portfolio yield increased from 1.90% to 2.22%. The $59 million in loan growth over the past year was partially funded by reductions in interest-bearing bank deposits and the investment portfolio, and this shift in earning assets from cash and investments to loans is driving the increase in the yield on earning assets. The $1,234,000 improvement in net interest income -- in interest income consisted of $763,000 due to the growth in the loan portfolio; $306,000 due to the improvement in the loan portfolio yield; $391,000 due to the improvement in the investment portfolio yield; and minus $226,000 due to the reduction in the size of the investment portfolio.

We have been controlling our interest expense by keeping our deposit rates low but a decrease in the investment portfolio cash flow and a decrease in deposits required us to use borrowings to fund some of the loan growth, and this caused a small increase in the cost of funds. For the third quarter of 2018, the average balances in the funding mix consisted of $304.9 million of noninterest-bearing demand deposits, $500.6 million of non-maturity interest-bearing deposits at a cost of 20 basis points, $124.8 million of time deposits at a cost of 66 basis points and $36.8 million of borrowed funds at a cost of 2.36%. We are seeing more upward pressure on deposit rates in our market area but we plan to pay off $25 million from borrowed funds in the fourth quarter. So our overall cost, funding cost should be stable and we expect improvement in the net interest margin.

We did not record a provision for loan losses expense in the third quarter of 2017 or 2018. Loans charged-off totaled $97,000 in the third quarter of 2018, while recoveries of previously recorded charge-offs were $125,000 for net recoveries of $28,000 or 0.01% of average loans annualized. The $28,000 of net recoveries provided the increase in the allowance for loan losses that was required due to the growth in the loan portfolio. The allowance includes $931,000 of specific allocations on $12.1 million of loans evaluated for impairment and $7.1 million of general allocations on the remainder of the portfolio. Excluding gains and losses on securities and ORE transactions, noninterest income increased $253,000 or 6.5% compared to the third quarter of 2017.

Change in fee income increased as activity continues to grow and mortgage loan origination income increased because we sold more of the fixed-rate loans we originated this year. Noninterest expenses increased $206,000 or 2.3% compared to the third quarter of 2017. Salaries and benefits increased $68,000, equipment expense increased $98,000 and EFT and ATM expenses increased $41,000. These increases were mitigated by decreases in occupancy expense and professional fees. The Tax Cuts and Jobs Act of 2017 lowered our statutory tax rate from 34% to 21%, and this quarter our tax expense of $1,127,000 reflected an effective tax rate of 18.5%. The tax expense of $1,383,000 in the third quarter of 2017 was an effective rate of 26%.

Our capital and liquidity positions remained strong and the quarterly dividend of $0.10 per share reflects a payout ratio of approximately 46% of net income. Total shares outstanding increased slightly during the quarter and our book value per share decreased from $5.79 at the end of 2017 to $5.28 at the end of the third quarter of 2018. During the first 3 quarters of 2018, the company's capital assets ratio decreased from 9.85% to 9.06% and the bank's Tier 1 leverage ratio decreased from 10.33% to 9.86%.

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

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Thomas G. Myers, MBT Financial Corp. - Executive VP, Chief Lending Manager and MBTeam/CARE Sales Director of Monroe Bank & Trust [4]

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Thanks, John. Loan totals increased for the quarter with the average balance increasing by $24.2 million or 3.3%. The increase over the past 12 months totaled $64.7 million or 9.4%. Year-to-date our average loan balances increased by $57 million, which is an annualized rate of 11%. I remain optimistic for further loan growth as our loan pipeline totals remain at a consistently healthy level. The commercial pipeline averaged $82 million in 2017 and has averaged $95 million, thus far, in 2018.

It's also noteworthy that our level of unfunded commitments over the past 12 months increased from $102 million to $135 million, a 32% increase. The increase was largely due to commercial construction projects with unfunded commitments totaling just over $20 million. Based on these factors, I expect average loan balances to increase further in the fourth quarter of 2018.

Our asset quality totals are sound. The bank-wide delinquency total has been at or below 1% for 8 consecutive quarters and [ended] the quarter at 0.6%. Although our level of NPAs did increase by just over $800,000 in the third quarter, the overall trend remains positive with a $1.8 million or 12% reduction over the past 12 months.

Classified assets did increase in the third quarter by $1.9 million. This is largely due to a single commercial account on which full recovery is expected. These changes led to an increase in our ratio of classified assets to capital from 7.2% to 8.4% for the quarter. Despite the negative result for the quarter, I expect the long-term positive trend to continue with improved asset quality totals during the fourth quarter.

For the quarter, we recorded a 0 provision expense, which is the 17th consecutive quarter in which we had either a negative or 0 expense. Even with the loan growth, we were able to fund the further increase in the allowance with loan recoveries in excess of charge-offs. Our allowance for loan losses was steady for the quarter and now totals 1.06%.

In summary, key results for the quarter include positive loan delinquency totals, steady economic activity in our market area, continued net loan growth, positive core for pipeline totals and indications of further loan growth during the fourth quarter, and in anticipation for a return to the positive long-term trends and level of both classified assets and NPA totals.

That completes my comments. I'll turn the call back over to Doug for additional remarks.

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H. Douglas Chaffin, MBT Financial Corp. - President, CEO & Director [5]

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Thank you, Tom. We feel good about the various components of our earnings profile for the first 9 months of this year and our overall results and focused positions as well as we continue to take advantage of our growth opportunities in both Southeast Michigan and Northwest Ohio.

As mentioned earlier, our Board of Directors has approved a quarterly dividend of $0.10 per share for shareholders of record as of November 8, payable November 15. As you are aware, we announced on October 10 the approval by our Board of Directors to sign a definitive agreement to merge with First Merchants Corporation of Muncie, Indiana.

Strong brand we've enjoyed over the years in our marketplace, solid deposit base and strength in our lending and wealth management lines of businesses has seen us through the difficult times during the financial crisis and elevated our performance above peers in recent years. We feel that this is the right time to combine these attributes with a larger, equally successful company to foster future growth and enhance profitability going forward.

First Merchants provides access to greater lending capacity, enhanced product offerings and an understanding of the value of our engagement with our local communities as we become part of a highly successful banking franchise. An important factor for our shareholders is that First Merchants recognizes the value that our focus on employees, customers, communities and shareholders brings to our own franchise and has the capacity to provide a return to our existing shareholders at multiples that reach the high end of similar transactions in the Midwest and indeed, nationally. This merger combines a unique combination that will provide opportunities for our employees, enhance services for our customers' continued engagement with our communities and a solid return for our shareholders.

We'll now accept any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Damon DelMonte with KBW.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [2]

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Just a quick question regarding the margin outlook that you had said in your prepared remarks. Did you say that you expect it to move up from this level or to remain stable?

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H. Douglas Chaffin, MBT Financial Corp. - President, CEO & Director [3]

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Damon, we actually contracted about 2 basis points on a linked-quarter basis and that was due to the increase in the costs of funds. We temporarily used some borrowed funds, and that was at a higher cost. That will go away over the fourth quarter but there will be some deposit cost increase, so we expect the deposit cost to remain stable. But with the earning asset yield going up, the margin should improve a bit.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [4]

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Got you. Okay. And what were the cost of funds this quarter and how did that compare to last quarter?

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H. Douglas Chaffin, MBT Financial Corp. - President, CEO & Director [5]

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The cost of interest-bearing liability this quarter was 29 basis points compared to 22 last quarter.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [6]

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Okay. All right. Great. And then just to kind of circle back on the commentary for loan growth. It seems like economic trends continue to hold up quite well in your neck of the woods so you're pretty confident that going to year-end you should continue to see some pretty steady growth?

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H. Douglas Chaffin, MBT Financial Corp. - President, CEO & Director [7]

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Yes. Yes, Damon. I think the fourth quarter -- it's a very good likelihood the fourth quarter will look much like the third as far as a growth, and that gives us about 10% for the year.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [8]

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Okay. Great. And then what areas are particularly driving that? Is it more on the like the commercial real estate and construction side?

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H. Douglas Chaffin, MBT Financial Corp. - President, CEO & Director [9]

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It's definitely commercial. But the mix has been C&I and commercial real estate, probably a 60-40 mix, with 60% being commercial real estate.

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Operator [10]

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(Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Doug Chaffin for any closing remarks.

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H. Douglas Chaffin, MBT Financial Corp. - President, CEO & Director [11]

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Thank you, Chad. Well, thank you for joining us this morning, everyone. We anticipate this will be our final quarterly investor call as MBT Financial Corp., so we thank you for your support over the years and we look forward to being part of the First Merchants family going forward.

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Operator [12]

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The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.