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Edited Transcript of MBTF earnings conference call or presentation 28-Apr-17 2:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 MBT Financial Corp Earnings Call

MONROE May 2, 2017 (Thomson StreetEvents) -- Edited Transcript of MBT Financial Corp earnings conference call or presentation Friday, April 28, 2017 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. - CEO, President, Director, CEO of Monroe Bank & Trust, President of Monroe Bank & Trust and Director of Monroe Bank & Trust

* John L. Skibski

MBT Financial Corp. - CFO, EVP, Risk Management Director, Treasurer, Director, CFO of Monroe Bank & Trust, EVP of Monroe Bank & Trust, Risk Management Director of Monroe Bank & Trust, Treasurer of Monroe Bank & Trust and Director of Monroe Bank & Trust

* Thomas G. Myers

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

* Wendy Warrington-Parker

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Conference Call Participants

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* Matthew Reader Forgotson

Sandler O'Neill + Partners, L.P., Research Division - Director of Equity Research

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Presentation

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Operator [1]

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Welcome to the MBT Financial Corp. first quarter 2017 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 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.mbandt.com.

On the conference today, from MBT Financial Corp., we have Doug Chaffin, President and Chief Executive Officer; Wendy Warrington-Parker, Senior Vice President Organizational Effectiveness, 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 note today's event is being recorded. At this point, I would like to turn the call over to Mr. Chaffin.

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H. Douglas Chaffin, MBT Financial Corp. - CEO, President, Director, CEO of Monroe Bank & Trust, President of Monroe Bank & Trust and Director of Monroe Bank & Trust [2]

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Thank you, Laura, and good morning, everyone. At the close of business yesterday, we announced earnings for the first quarter of 2017 totaling $3,180,000 compared to the first quarter of 2016, which reflected net income of $2,997,000. Net of the effect the reversals in the provision for loan losses and security gains taken in each of these periods, core earnings increased by 25% in the first quarter, compared to the first quarter 2016. Net interest income for the quarter improved by 3.3% compared to a year ago, and was up slightly on a linked quarter basis. The trend in improved asset quality continued with total asset -- total classified assets declining by $13 million from a year ago and by a $1.3 million on a linked quarter basis.

This allowed us to reverse another $200,000 from the loan-loss reserve despite of a respectable 6.4% annualized growth on the loan portfolio for the quarter. The provision for loan losses continue to be relatively robust at 1.26% loans outstanding. Total deposits increased on both the linked quarter basis and compared to balances as of a year ago. Period and deposits increased by 3.5% compared to March 31, of 2016, and year-to-date deposits have increased by 1.1% on an annualized basis. Tom Myers will speak to the specifics regarding our loan portfolio activity and asset quality improvements later during the call. I'll also ask John Skibski to discuss our financial results in greater detail. But first I would like to introduce you to Wendy Warrington-Parker, our Senior Vice President and Organizational Effectiveness Director. You may recall that last year at this time we announced this new position and Wendy's responsibility for overseeing both our human resources department as well as our retail branches. In this capacity, Wendy is responsible for ensuring that the customer experience and employee experience are closely aligned to meet the overall goals and objectives of our company. Wendy is focused on a variety of strategic and tactical initiatives in this regard, so I'll ask her to briefly describe her role as organizational effectiveness director and the implementation for strategies. Wendy?

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Wendy Warrington-Parker, [3]

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Thanks, Doug, and good morning, everyone. It's my pleasure to join the call today. As you know, our industry continues to change due to regulatory requirements, market changes and shifting customer behaviors and expectations. Finding ways to adapt to an era of anytime, anywhere and right now is becoming increasingly important and MBT has been focused on positioning itself to ensure adaptability and flexibility in response to these changes to our big 4 strategies, top 4 tactics and differentiating our culture.

As the organizational effectiveness director, it is my responsibility to ensure our customers' experience and employees experience are both aligned with our culture, vision and values. Our emphasis on how matters amplifies an additional level for my role to collaborate with the executive team, to ensure that evolving strategies, ideas, implementations generated at all levels of the organization are in alignment and in synch with MBT's overall culture, goals and objectives. Some examples included employee engagement strategies, connecting employee performance to the bank’s overall goals and objectives, and to the belief that everyone contributes to and impacts the customers experience. Branch optimization and ensuring our compensation philosophy supports our culture while supporting the bank’s visions and values all have been a focus for me this past year.

The customer experience and branch optimization are 2 of MBT's top 4 tactics. And its core to create customer experiences, start at each individual employee and their personal experience at MBT. Not only should employees be empowered to deliver the best customer experience possible, they should have an intrinsic desire to do so. It's well-known that employee's attitudes towards an organization have a significant effect on how they approach their jobs and how they treat customers. But recent research suggests that high level of employee engagement are also associated with higher risk of profitability growth. As mentioned, over this past year, a major focus has been on branch optimization. Specifically, taking a deeper look at our branch system, processes, effectiveness, culture, technologies and roles.

We define branch optimization as striving to differentiate our products and services and to develop a deeper understanding of our customer needs. Our objective is to anticipate changing expectations and to build customer relationships through understating needs, superior service and competitive pricing that leads to meaningful profit. We currently have a branch network of 20 locations and are looking at some key indicators for success, after the efficiency initiative in 2015 and the closing of 4 branches, we have retained over 90% of deposits within those markets, as well as experienced market share and deposit growth. Of critical importance within branch optimization has been to develop a plan to shift to a customer-centric model, that will breakdown the product silos, understand customer needs and changing behaviors to enhance the customer experience. The overall objective is to ensure that we are delivering on the promises that we make to our customers, finding ways to add value to these relationships, that benefit our shareholders, customers, employees and communities alike. At this time, I will turn the call over to our Chief Financial Officer, John Skibski.

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John L. Skibski, MBT Financial Corp. - CFO, EVP, Risk Management Director, Treasurer, Director, CFO of Monroe Bank & Trust, EVP of Monroe Bank & Trust, Risk Management Director of Monroe Bank & Trust, Treasurer of Monroe Bank & Trust and Director of Monroe Bank & Trust [4]

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Thank you, Wendy. As Doug mentioned earlier, the net profit for the first quarter of 2017 was $3,180,000, an increase of $183,000 or 6.1% compared to the first quarter of 2016 profit. Today, I will review some of the details of the first quarter results and provide an update of our expectations for the rest of 2017.

The net interest income for the first quarter of 2017 increased to $305,000 or 3.3% compared to the first quarter of 2016, as the net interest margin increased from 3.09% to 3.21%, and the average earning assets increased to $2.2 million. The cost of interest-bearing liabilities decreased 10 basis points from 0.30% in the first quarter of 2016, to 0.20% first quarter of 2017. And the yield on earning assets increased 4 basis points from 3.27% to 3.31%. The loan portfolio yield decreased from 4.56%, to 4.55%, and the investment yield decreased from 1.95% to 1.90%, with the improvement in the mix of earning assets, caused the total yield to improve. The average amount of loans increased $36.5 million, or 5.9% on the average investments decreased $34.3 million, or 5.6%.

On a linked quarter basis, the cost of interest-bearing liabilities was unchanged and yield on earning assets increased 7 basis points and the net interest margin increased 6 basis points. The total cost in interest-bearing liabilities is expected to remain low and the earning asset yield is expected to improve due to the recent Fed fund rate increase and the improvement in the mix of earning assets, resulting in continued improvement in the net interest margin.

We expect our quarterly net interest income to average approximately $10 million for the rest of this year. The provision for loan losses expense increased $100,000 compared to the first quarter of 2016, as we recorded a negative provision expense of $200,000 this quarter, compared to a negative expense of $300,000 in the first quarter of 2016. During the first quarter, loans charged-off totaled $112,000 and recoveries of previously recorded charge-offs were $188,000 for net recoveries of $76,000, or 0.05% of average loans annualized. The negative provision was necessitated by the net recoveries and to bring our allowance for loan losses down to $8.3 million or 1.26% of loans. Total loans outstanding increased $10.5 million or 1.6% during the quarter while the amount of nonperforming loans decreased $3.5 million or 18.6%.

The allowance includes $1.2 million of specific allocations on $13.7 million of loans evaluated from impairment and $7.1 million of general allocations on the remainder of the portfolio. General allocation is based on the historical charge-off experience of the previous 16 quarters. We do not expect the historical charge-off rate to decrease significantly and with continued loan growth there will be less need for additional reductions in the allowance and negative provisions for the rest of this year.

Noninterest income excluding gains and losses on securities transactions increased $16,000 compared to the first quarter of 2016. Wealth Management income increased $31,000 or 2.8%, the origination fees on mortgage loans sold decreased $71,000. Securities gains went down $310,000 due to large gains recognized on prior calls of this kind of bonds in the first quarter 2016. Total noninterest income excluding securities gains activities should average nearly $4 million per quarter the rest of 2017. Noninterest expenses decreased $421,000 or 4.4% compared to the first quarter of 2016. Salaries and benefits decreased $184,000 or 3.3% due to lower salary expense, more salary expense deferred with lower origination cost and lower employee benefits expenses. Professional fees decreased $63,000 or 9.7% compared to 2016, due to the decrease in consulting services used and actually I see deposit insurance expense decreased $62,000 due to a reduction in the assessment rate effective in the third quarter of 2016. We expect our total noninterest expense to remain slightly over $9 million per quarter for the remainder of 2017. This quarter our tax expense of $1,373,000 reflects an effective rate of 30.2% of our pretax operating income. Compared to 29.0% in the first quarter of 2016. If our marginal rate remains at 34% in 2017, we expect that our tax-exempt income from municipal securities and bank-owned life insurance, will result in an effective rate near 30%.

Our capital and liquidity positions are very strong, and we comfortably exceed the requirements to be considered well capitalized by federal banking regulators. The large size of our investment portfolio provides a source of liquidity, which will enable us to fund growth in our loan portfolio. The investment portfolio also allows us to manage interest rate risk effectively, and our (inaudible) assets on to the balance sheet will provide a benefit to earnings if rates continue to increase. We are also actively managing our capital so we can provide a good return to our shareholders while planning for longer-term growth. Our capital management plan includes the authority to repurchase up to 1.8 million shares of our stock in 2017, if conditions change and we determine the repurchase activity would be the proper use of capital. Due to loans paid in the first quarter of 2017 exceeded net income, causing retained earnings to decrease by $13.1 million, and stock-based compensation activity decreased capital by $233,000. However, the increase in the market value of securities available for sale, caused a decrease of $1.8 million in the accumulated other comprehensive lost. In total capital decreased $11.6 million during the quarter. Total shares outstanding increased during the first quarter of 2017, and our book value per share decreased from $6.20 at the end of 2016 to $5.67 at the end of the first quarter of 2017.

Turning to first quarter of 2017 the bank's Tier 1 leverage ratio decreased from 10.75% to 9.65%. The total risk-based capital ratio decreased from 18.12% to 16.40%. And the common equity Tier 1 ratio decreased from 17.07% to 15.38%. These ratios still indicate a very strong capital position to support future growth opportunities. This concludes my remarks, and I will now turn the call over to Tom Myers.

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Thomas G. Myers, MBT Financial Corp. - Chief Lending Manager, EVP, MBTeam/CARE Sales Director, Chief Lending Manager of Monroe Bank & Trust, EVP of Monroe Bank & Trust and MBTeam/CARE Sales Director of Monroe Bank & Trust [5]

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Thanks, John. Average loan total increased for the quarter with the balance increasing by $2.5 million. The increase for the past year totaled $36.5 million up 5.9% and it's noteworthy that the increase was lower due to our successful completion of the strategic loan offer of roughly $9 million of Classified Loans. None of that reduction or growth in the trailing 4 quarters would have totaled roughly 7.3%. Local economic activity has softened over the past year but remained stable. The unemployment rate for Michigan totaled 5.1% as of March and as of February the rate for the (inaudible) area rose to 5.5% from the prior year's total of 4%. However, our commercial pipeline total continues to show improvement. The pipeline averaged $84 million thus far in 2017, compared to $65 million for the first quarter of 2016. Correspondingly, our level of new commercial loan commitments increased from $31 million in the first quarter of 2016 to $47 million in the first quarter of 2017. A portion of these commitments were booked late in the quarter and that is reflected in the period and loan balance which is roughly $7 million higher than the average total. Based on these factors, I expect average loan balances to increase further in the second quarter of 2017.

Our asset quality totals were sound. The bank-wide delinquency total was below 1% for the fourth consecutive quarter and ended the quarter at 0.86%. The ratio of classified assets-to-capital rose modestly for the quarter from 11% to 11.2%. While the increase was due to a reduction in capital related to the payment of special dividend in February. The classified asset total declined by 7% for the quarter and improved by 46% over the past year. In addition, NPAs improved by 18% for the quarter and 39% over the past year. In the quarter, we recorded a negative provision expense for $200,000, which is the 11th consecutive quarter in which we had either a negative or zero provision expense. Our allowance for loan losses has declined slightly for the quarter and over the past year it has been reduced from 1.7% to 1.26%. In summary, key results for the quarter include continued reductions in the level of both classified assets and NPA totals, positive loan delinquency totals, steady economic activity in the market area, and improving loan in commercial pipeline growth and indications of further loan growth during the second quarter. That completes my comments and I'll turn the call back over to Doug.

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H. Douglas Chaffin, MBT Financial Corp. - CEO, President, Director, CEO of Monroe Bank & Trust, President of Monroe Bank & Trust and Director of Monroe Bank & Trust [6]

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Thanks, Tom. So we're pleased with the core improvements reflect during the first quarter, particularly evidenced by continued loan growth, increased net interest income, stable noninterest income, improved asset quality and our mindful control of expenses. As mentioned earlier, our Board of Directors has approved continued -- continuing our quarterly dividend of $0.05 a share which will be payable to shareholders of record as of May 11, table on May 18. To continue our strategic focus of improving all aspects of our earnings and growth performance, managing capital appropriately, and feel that we are well-positioned to take advantage of strategic growth opportunities through acquisitions should they become available in the future. We hope that you will be able to join us at our annual shareholders meeting next Thursday May 4, at 10:00 AM at our offices at 10 Washington Street in beautiful downtown Monroe, Michigan. And now I'll 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) And our first question will from come from Matthew Forgotson of Sandler O'Neill.

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Matthew Reader Forgotson, Sandler O'Neill + Partners, L.P., Research Division - Director of Equity Research [2]

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Doug, just thought I’d start high-level. One of the themes, you've been talking about a lot recently is the diversification in the underlying strength of the Southeast Michigan economy. Having said that, we have seen a bit of a deceleration here in auto sales. So, was just looking for your take and the puts and takes of the regional economy at this point? And give us a flavor of what you're hearing from your customers out there?

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H. Douglas Chaffin, MBT Financial Corp. - CEO, President, Director, CEO of Monroe Bank & Trust, President of Monroe Bank & Trust and Director of Monroe Bank & Trust [3]

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Sure. I will let everybody else weigh in on that as well a bit. I will go back historically, Matt if we go back say, oh, I’m going to say 15, 20 years ago, we could have easily related about 65%, 2/3 of our employment base, directly to the domestic auto industry. Either second, third Tier suppliers or direct suppliers. In fact, at that time, I think, we had 2 different manufacturing plants, that were owned and controlled by affiliates of Ford Motor company. Those plants have since been shut down and not reopened. I think one might have opened in a different capacity, but not totally related to the auto industry. And today, we have, I think it's probably safe to say roughly about 1/3 of our employment based on the domestic auto industry. 1/3 is still pretty significant. It is not as dramatically so as it was 15 or 20 years ago. However, so it does have an effect that's probably and likely, the reason there is a slight uptick into unemployment levels, because of the slowdown in that. But increasingly, I think our manufacturers are more diversified. Increasingly, they're not just solely relying on the auto industry, and as we talk to them, we continue to hear an ongoing theme, of the need for qualified workers, the need for skilled workers in certain sets. I think some of the growth that has occurred has been very, very slow. And part of that slowness has been due to the lack of a skilled workforce at least to that degree that we seem to be demanding it. We also have a lot of other dynamics going on locally, with BTE energy. BTE energy has 2 power plants in Monroe County. The Monroe power plant which is the coal burning power plant, which has just spent over a $1 billion in renovating and improving the -- complying with all the EPA requirements now. We have the Fermi 2 nuclear power plant. And those 2 plants combined produce about 45% of the total energy produced by DTE. As we see their activity improve there's also some direct effect in Monroe County. I think they are our largest shareholders still, I'm sorry, our largest employer in Monroe County. There is a lot of other stuff that's going on, that we look prospectively at and more positively at. The Gordie Howe bridge, the new international crossing between Detroit and Windsor is expected to be completed I think in 2021, or 2022. We think that's going to have a dramatic impact on our local economy, through distribution networks and the like. In fact, I just recently, there is a shuttered power plant by Consumers Energy, that has been shut down for 2 or 3 years. They have since negotiated with a private company to redevelop that property and they have announced that they think it's got a lot of opportunity for Intermodal transport with rail, overland and distribution networks and the like. So we've got a pretty positive outlook, even though we had a slight slowdown to the economy here of late. I don't know if anyone else has anything add to that.

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

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I will a bit, Matt. Matt, it’s Tom Myers and I’d characterize our economy as stabled. It's definitely not as vibrant as some other areas of the country. But it's stable, and I think at a sustainable level. Anecdotally, just in talking to business owners, I think, the level of confidence is high. And also, I can't help but note our delinquency levels on consumer commercial business loans is very, very low. So and also even our delinquency -- even though our unemployment number went up in the area, the number of people employed is still going up a little bit. So, the economy is steady, it's just not as booming as some areas of the country.

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Matthew Reader Forgotson, Sandler O'Neill + Partners, L.P., Research Division - Director of Equity Research [5]

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Appreciate that color. Tom, I guess, maybe I will just stay with you. In terms of the loan growth, that we saw this quarter pretty nice on an ending-period basis certainly up about $11 million. Can you just give us a sense, Tom, of what drove that? Was that commercial real estate, was that C&I, was it residential? Just decompose that a little bit for us.

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Thomas G. Myers, MBT Financial Corp. - Chief Lending Manager, EVP, MBTeam/CARE Sales Director, Chief Lending Manager of Monroe Bank & Trust, EVP of Monroe Bank & Trust and MBTeam/CARE Sales Director of Monroe Bank & Trust [6]

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I guess 2 comments on that, Matt. The end of period balance being up that high is frankly a little disappointing for me. We had about $10 million of loans that unexpectedly paid off. One of those was a transactional participation, it's kind of the nature of beast. And then we also had a couple of commercial real estate loans, that have paid off, I guess for a good reason, they were borrowers who are taking profits from properties they bought 5 or 6 years ago. But the increase itself, 70% of that increase we saw for the quarter is from organic commercial loan growth. With the remaining coming from transactional participations that we've purchased. And within the commercial loan growth, about 60% of that is commercial real estate and the other 40% is C&I growth.

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Matthew Reader Forgotson, Sandler O'Neill + Partners, L.P., Research Division - Director of Equity Research [7]

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Okay, perfect, so are you seeing, I know it's always challenging to triangulate and predict. But do you think that pay-downs ought to normalize here as we move into the second quarter? And that the rate of growth will accelerate?

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Thomas G. Myers, MBT Financial Corp. - Chief Lending Manager, EVP, MBTeam/CARE Sales Director, Chief Lending Manager of Monroe Bank & Trust, EVP of Monroe Bank & Trust and MBTeam/CARE Sales Director of Monroe Bank & Trust [8]

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Yes. I do think that, and I like -- I'm very encouraged with the new money we are booking and you well know, pay-downs are always going to occur, unexpected pay-downs are always to be expected. If that make sense? We are always going to get pay-downs like that. But I like the velocity of the new money we are booking. As I said, the end of period balance number is, that's a real number. I can expect those balances to remain, and I'm very encouraged by the second quarter. What I expect to see book in the second quarter.

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Matthew Reader Forgotson, Sandler O'Neill + Partners, L.P., Research Division - Director of Equity Research [9]

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Thanks for that. And last one for me and then I will hop out. Doug, I was just wondering if we could just – give us an update on your M&A outlook?

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H. Douglas Chaffin, MBT Financial Corp. - CEO, President, Director, CEO of Monroe Bank & Trust, President of Monroe Bank & Trust and Director of Monroe Bank & Trust [10]

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Well, we are still pretty positive in terms of the opportunities, there isn't anything directly in the works today. Obviously, we'd be talking about something else during the call. I think, Matt, as we've talked in the past, and we talked to this group in the past. We have identified what's probably 25 to 30 institutions half of our size or smaller within the 30 mile – or 75 mile radius, let's call it an hour and a half hour drive of Monroe, which is kind of the sweet spot that we’d look at. We have conversations, friendly conversations on an ongoing basis and in some cases, they are very appropriate and in some cases, they're probably not the right match. So we just continue to look at that from time-to-time. I think there are probably, admittedly, there’s been a little bit of a slowdown with the new administration in place today. A little more optimism, that additional regulatory relief might come, the Choice Act is something that seems to be at the forefront right now, we’ll see where that goes. And that does have a play in whether people feel it's time to seek a strategic partner yet. That said, we're still out there. We think, we've done a good job of increasing our currency, so that we can be very competitive and we will just see what happens.

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Operator [11]

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(Operator Instructions) And I'm showing no additional questions. 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. - CEO, President, Director, CEO of Monroe Bank & Trust, President of Monroe Bank & Trust and Director of Monroe Bank & Trust [12]

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Thanks, Laura. Well, thanks for joining us this morning everyone. Obviously, we're pleased with the start of the year. We still have a lot of work to do and we will be focused on that. Again, if you are in Monroe, Michigan or thinking about it, it's beautiful weather here right now. So if you can find your way here for a shareholders meeting next Thursday the fourth we would love to see you. Thanks for joining us.

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Operator [13]

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