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MBTF > SEC Filings for MBTF > Form 10-Q on 14-Aug-2013All Recent SEC Filings

Show all filings for MBT FINANCIAL CORP

Form 10-Q for MBT FINANCIAL CORP


14-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

MBT Financial Corp. (the "Company") is a bank holding company with one subsidiary, Monroe Bank & Trust ("the Bank"). The Bank is a commercial bank with a wholly owned subsidiary, MB&T Financial Services. MB&T Financial Services is an insurance agency which sells insurance policies to the Bank. The Bank operates 17 branch offices in Monroe County, Michigan and 7 offices in Wayne County, Michigan. The Bank's primary source of income is interest income on its loans and investments and its primary expense is interest expense on its deposits and borrowings. The discussion and analysis should be read in conjunction with the accompanying consolidated statements and footnotes.

Executive Overview

The Bank is operated as a community bank, primarily providing loan, deposit, and wealth management products and services to the people, businesses, and communities in its market area. In addition to our commitment to our mission of serving the needs of our local communities, we are focused on improving asset quality, profitability, and capital.

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The national economic recovery is continuing slowly, and the recovery in southeast Michigan is gaining strength. Local unemployment rates improved significantly since 2011, and while they are now comparable to the state and national averages, they remain above the historical norms. Commercial and residential development property values are beginning to improve slightly, but remain below pre-recession levels. Our total problem assets, which include nonperforming loans, other real estate owned, non accrual investments, and performing loans that are internally classified as potential problems, improved significantly during the second quarter of 2013. Problem assets went down $9.8 million, or 7.8% during the second quarter of 2013, and decreased $11.1 million or 8.7% compared to a year ago. Overall asset quality has improved over the past year and net charge offs were only $1.1 million in the second quarter of 2013, enabling us to decrease our Allowance for Loan and Lease Losses (ALLL) from $17.9 million to $17.2 million in the second quarter. The decrease in the ALLL was mainly due to a decrease of $0.4 million in the general allocation. The smaller general allocation was caused by improving economic conditions, improving historical loss ratios, and the decrease in the amount of the portfolio subject to the general allocation. The specifically identified impairments decreased $0.3 million. The loan portfolio held for investment decreased $1.0 million during the quarter, and the ALLL as a percent of loans decreased slightly from 2.90% to 2.79%. We anticipate that the recovery in our local markets will continue at a slow pace though 2013, which may result in increased lending activity and problem asset reductions. We will continue to focus our efforts on improving asset quality, maintaining liquidity, strengthening capital, and controlling expenses.

Net Interest Income decreased $695,000 compared to the second quarter of 2012 as the average earning assets decreased $12.7 million, or 1.1% and the net interest margin decreased from 3.15% to 2.92%. The provision for loan losses decreased from $1.05 million in the second quarter of 2012 to $0.4 million in the second quarter of 2013. Decreases in the historical loss rates and in the amount of loans compared to a year ago decreased the amount of ALLL required. Also, net charge offs were $1.1 million in the second quarter of 2013 compared to $2.0 million in the second quarter of 2012, allowing the reduction in the provision for loan losses. Non interest income for the quarter increased $425,000 or 11.9%, primarily due to an increase in wealth management fees. Non interest expenses increased $560,000, or 5.8%, as salaries and employee benefits increased and losses on sales of other real estate owned (OREO) increased. The increase in OREO losses was due to the liquidation of several properties at an auction, and we expect credit related expenses to improve in the second half of 2013.

Critical Accounting Policies

The Company's Allowance for Loan Losses, Deferred Tax Asset Valuation Allowance, Fair Value of Investment Securities, and Other Real Estate Owned are "critical accounting estimates" because they are estimates that are based on assumptions that are highly uncertain, and if different assumptions were used or if any of the assumptions used were to change, there could be a material impact on the presentation of the Company's financial condition. These assumptions include, but are not limited to, collateral values, the effect of economic conditions on the financial condition of the borrowers, the Company, and the issuers of investment securities, market interest rates, and projected earnings for the Company.

To determine the Allowance for Loan Losses, the Company estimates losses on all loans that are not classified as non accrual or renegotiated by applying historical loss rates, adjusted for current conditions, to those loans. In addition, all non accrual loan relationships over $250,000 that are classified by Management as nonperforming as well as selected performing accounts and all renegotiated loans are individually tested for impairment. Any amount of monetary impairment is included in the Allowance for Loan Losses.

Income tax accounting standards require companies to assess whether a valuation allowance should be established against deferred tax assets based on the consideration of all evidence using a "more likely than not" standard. We reviewed our deferred tax asset, considering both positive and negative evidence and analyzing changes in near term market conditions as well as other factors that may impact future operating results. Significant negative evidence is our net operating losses for the years 2009 through 2011, combined with a difficult economic environment and the slow pace of the economic recovery in southeast Michigan. Positive evidence includes our history of strong earnings prior to 2008, our eighth consecutive quarterly profit in the second quarter of 2013, our strong capital position, our steady core earnings, our improving asset quality, our non interest expense control initiatives, and our projections for future taxable earnings. Based on our analysis of the evidence, we believed that it was appropriate to reduce our valuation allowance by $5 million in the fourth quarter of 2012. The valuation allowance is now $19.4 million, compared to the deferred tax asset of $24.4 million as of June 30, 2013. We will continue to assess the evidence and if the amount of positive evidence continues to increase, we may recognize additional tax benefits in 2013.

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To determine the fair value of investment securities, the Company utilizes quoted prices in active markets for identical assets, quoted prices for similar assets in active markets, or discounted cash flow calculations for investments where there is little, if any, market activity for the asset.

To determine the fair value of Other Real Estate Owned, the Company utilizes independent appraisals to estimate the fair value of the property.

Financial Condition

National economic conditions began to recover in the second half of 2009, but regional conditions remained weak through 2010. Local unemployment and property values stabilized during 2011 and began to improve in 2012. The economic environment in southeast Michigan is continuing to slowly improve, and we expect the slow recovery to continue in our market area throughout 2013. Management intends to continue to focus efforts on improving credit quality, managing capital, and mitigating enterprise risk.

With respect to credit quality, our nonperforming assets ("NPAs") decreased 10.0% during the quarter, from $87.7 million to $78.9 million, and total problem assets decreased from $125.5 million to $115.7 million. Both of these measures were impacted by a small number of large credit relationships, and both reflect improvement compared to a year ago. Over the last twelve months, NPAs decreased $3.0 million, or 3.7%, with nonperforming loans decreasing 3.0% from $66.3 million to $64.3 million, and Other Real Estate Owned ("OREO") decreasing 10.2% from $12.8 million to $11.5 million. Total problem assets, which includes all NPAs and performing loans that are internally classified as substandard, decreased $11.1 million, or 8.7%. The Company's Allowance for Loan and Lease Losses ("ALLL") decreased $2.3 million over the last four quarters due to a decrease in the size of the portfolio and an improvement in the quality of the assets in the loan portfolio. The ALLL is now 2.79% of loans, down from 2.91% at June 30, 2012. The ALLL is 26.76% of nonperforming loans ("NPLs"), compared to 24.78% at year end and 29.4% at June 30, 2012. In light of current economic conditions, we believe that this level of ALLL adequately estimates the potential losses in the loan portfolio.

Since December 31, 2012, total loans held for investment decreased 1.9% because new loan activity was not sufficient to cover payments received and other reductions. New loan production increased in the second quarter of 2013, but payoffs of some large problem credit relationships during the quarter resulted in a net reduction of total loans held for investment. As local economic activity increases, the amount of loans in our pipeline is increasing, and new loan production may exceed run off, resulting in an increase in loans outstanding.

Since December 31, 2012, deposits decreased $8.0 million, or 0.8% due to normal seasonal fluctuations in local deposit activity. We also repaid $95.0 million of borrowings from the Federal Home Loan Bank of Indianapolis in the second quarter of 2013. This reduction in funding was offset by a reduction in cash and investment securities, causing our total assets to decrease $105.9 million, or 8.3% since the end of 2012. The cost of the non deposit funding exceeded the yield on the assets utilized to pay off the debt, so this reduction in assets is expected to improve net interest income in the second half of 2013. The Company also expects deposit funding to be relatively stable for the remainder of 2013.

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Total capital decreased $4.5 million, or 5.4%, during the first six months of 2013 as the profit of $2.6 million and a private placement stock offering of $1.7 million were exceeded by the decrease of $8.9 million in the accumulated other comprehensive income (AOCI). AOCI decreased mainly due to a decrease in the value of our securities available for sale. Even with the decrease in capital, the decrease in total assets caused the capital to assets ratio to increase from 6.59% at December 31, 2012 to 6.80% at June 30, 2013.

Results of Operations - Second Quarter 2013 vs. Second Quarter 2012

Net Interest Income - A comparison of the income statements for the three months ended June 30, 2012 and 2013 shows a decrease of $695,000, or 7.9%, in Net Interest Income. Interest income on loans decreased $1.3 million or 15.0% as the average loans outstanding decreased $50.7 million and the average yield on loans decreased from 5.38% to 4.93%. The interest income on investments, fed funds sold, and interest bearing balances due from banks decreased $254,000 as the average amount of investments, fed funds sold, and interest bearing balances due from banks increased $38.0 million but the yield decreased from 2.04% to 1.69%. The yield on investments decreased because the Company is maintaining its strong liquidity position by keeping its excess funds in low yielding short term investments and deposits in the Federal Reserve Bank. A continued low overall level of interest rates and the maturity of some high cost borrowings helped reduce the funding costs. The interest expense on deposits decreased $522,000 or 31.9% even though the average deposits increased $25.1 million because the average cost of deposits decreased from 0.65% to 0.43%. The cost of borrowed funds decreased $376,000 as the average amount of borrowed funds decreased $49.3 million and the average cost of the borrowings decreased from 2.89% to 2.77%.

Provision for Loan Losses - The Provision for Loan Losses decreased from $1.05 million in the second quarter of 2012 to $0.4 million in the second quarter of 2013. Net charge offs were $1.1 million during the second quarter of 2013, compared to $2.0 million in the second quarter of 2012. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. Due to a decrease in the size of the portfolio, an improvement in portfolio risk indicators, and a decrease in the historical loss percentages, the amount of provision required to maintain an adequate ALLL in the second quarter of 2013 decreased 61.9% compared to the amount required in the second quarter of 2012. The ALLL is 2.79% of loans as of June 30, 2013, and, in light of current economic conditions, we believe that at this level the ALLL adequately estimates the potential losses in our loan portfolio.

Other Income - Non interest income increased $425,000, or 11.9% compared to the second quarter of 2012. Wealth management income increased $253,000 due to a one time fee refund of $172,000 in the second quarter of 2012. The wealth management income also increased due to an increase in the market value of assets managed and new business brought in to the bank. Securities gains increased $114,000 as the Bank sold available for sale securities in the second quarter of 2013 in order to pay off maturing debt. Other non interest income increased $98,000 primarily due to higher income from brokerage services and rental income on OREO properties.

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Other Expenses - Total non interest expenses increased $560,000, or 5.8% compared to the second quarter of 2012. Salaries and Employee Benefits increased $261,000, or 5.3%, as salaries increased due to an increase in the number of employees and annual merit increases. Occupancy expense increased $96,000 due to higher utilities and maintenance costs. Equipment expense decreased $72,000 due to lower computer and data processing expenses. Losses on Other Real Estate Owned (OREO) properties increased $517,000 compared to the second quarter of 2012 as several properties were liquidated at losses in an auction in the second quarter of 2013. Other OREO expenses decreased $146,000 as property tax and maintenance costs decreased due to the reduction in the number of properties owned.

As a result of the above activity, the Profit Before Income Taxes in the second quarter of 2013 was $1,496,000, a decrease of $180,000 compared to the pre tax profit of $1,676,000 in the second quarter of 2012. Due to our net operating loss carry forward, we did not record a federal income tax expense in the second quarter of 2013. If we did not have the benefit of the NOL carry forward, we would have incurred a federal income tax expense of $297,000, for an effective tax rate of 19.9%. The income tax expense of $1,423,000 that was recorded in the second quarter of 2012 was to accrue for an IRS audit adjustment. The Net profit for the second quarter of 2013 was $1,496,000, an increase of 491.3% compared to the net profit of $253,000 in the second quarter of 2012.

Results of Operations - Six months ended June 30, 2013 vs. Six months ended June 30, 2012

Net Interest Income - A comparison of the income statements for the six months ended June 30, 2012 and 2013 shows a decrease of $1,579,000, or 8.9%, in Net Interest Income. Interest income on loans decreased $2.6 million or 14.3% as the average loans outstanding decreased $50.6 million and the average yield on loans decreased from 5.42% to 5.04%. The interest income on investments, fed funds sold, and interest bearing balances due from banks decreased $652,000 as the average amount of investments, fed funds sold, and interest bearing balances due from banks increased $60.4 million but the yield decreased from 2.11% to 1.63%. The yield on investments decreased because the Company is maintaining its strong liquidity position by keeping its excess funds in low yielding short term investments and deposits in the Federal Reserve Bank. A continued low overall level of interest rates and the maturity of some high cost borrowings and brokered certificates of deposit helped reduce the funding costs. The interest expense on deposits decreased $1,148,000 or 33.0% even though the average deposits increased $27.5 million because the average cost of deposits decreased from 0.68% to 0.45%. The cost of borrowed funds decreased $501,000 as the average amount of borrowed funds decreased $27.3 million and the average cost of the borrowings decreased from 2.91% to 2.71%.

Provision for Loan Losses - The Provision for Loan Losses decreased from $3.3 million in the first six months of 2012 to $1.9 million in the first six months of 2013. Net charge offs were $2.0 million during the first six months of 2013, compared to $4.7 million in the first six months of 2012. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. Due to a decrease in the size of the portfolio, an improvement in portfolio risk indicators, and a decrease in the historical loss percentages, the amount of provision required to maintain an adequate ALLL in the first six months of 2013 decreased 42.4% compared to the amount required in the first six months of 2012. The ALLL is 2.79% of loans as of June 30, 2013, and, in light of current economic conditions, we believe that at this level the ALLL adequately estimates the potential losses in our loan portfolio.

Other Income - Non interest income decreased $264,000, or 3.2% compared to the first six months of 2012. The income in the first six months of 2012 included gains on securities transactions that were the result of restructuring activity in the investment portfolio. Excluding securities gains in both years, non interest income increased $712,000 or 10.0%. Wealth management income increased $202,000 due to an increase in the market value of assets managed, new business brought in to the bank, and a reversal of previously recorded income in the first six months of 2012. Origination fees on mortgage loans sold increased $147,000, or 45.1%, due to an increase in mortgage loan origination volume compared to 2012, and other non interest income increased $239,000 primarily due to income on brokerage services and rental income on OREO properties.

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Other Expenses - Total non interest expenses decreased $34,000, or 0.3% compared to the first six months of 2012. Salaries and Employee Benefits increased $478,000, or 4.8%, as salaries increased due to an increase in the number of employees and annual merit increases. Equipment expense decreased $175,000 due to lower computer and data processing expenses. Losses on Other Real Estate Owned (OREO) properties increased $208,000 compared to the first six months of 2012. Although property values stabilized over the last year, requiring fewer write downs of properties owned and producing some gains on the sales of select OREO property sales, we liquidated some large properties at losses in 2013. Other OREO expenses decreased $241,000 as property tax and maintenance costs were lower due to the decrease in the number of properties owned.

As a result of the above activity, the Profit Before Income Taxes in the first six months of 2013 was $2,610,000, a decrease of $409,000 compared to the pre tax profit of $3,019,000 in the first six months of 2012. Due to our net operating loss carry forward, we did not record a federal income tax expense in the first six months of 2013. If we did not have the benefit of the NOL carry forward, we would have incurred a federal income tax expense of $452,000, for an effective tax rate of 17.3%. The income tax expense of $1,549,000 that was recorded in 2012 was to accrue for an audit adjustment. The Net profit for the first six months of 2013 was $2,610,000, an increase of 77.6% compared to the net profit of $1,470,000 in the first six months of 2012.

Cash Flows

Cash flows provided by operating activities increased $0.9 million compared to the first six months of 2012 as the non cash charge for the provision for loan losses that is included net income decreased $1.4 million. Cash flows from investing activities increased $8.9 million in the first six months of 2013 compared to the first six months of 2012 as the amount of securities available for sale that were sold increased $17.7 million as the Bank sold investments to generate cash to pay off maturing debt. The decrease of $87.3 million in maturities and redemptions of securities caused a decrease of $76.2 million in securities purchases. The amount of cash used for financing activities increased $96.6 million due to the repayment of $95.0 million of maturing Federal Home Loan Bank advances in the first six months of 2013. The Company also issued $1.7 million of common stock in a private placement in the first six months of 2013. Total cash and cash equivalents decreased $77.0 million in the first six months of 2013 compared to the increase if $9.8 million in the first six months of 2012.

Liquidity and Capital

The Company believes it has sufficient liquidity to fund its lending activity and allow for fluctuations in deposit levels. Internal sources of liquidity include the maturities of loans and securities in the ordinary course of business as well as our available for sale securities portfolio. External sources of liquidity include a line of credit with the Federal Home Loan Bank of Indianapolis, the Federal funds line that has been established with our correspondent bank, and Repurchase Agreements with money center banks that allow us to pledge securities as collateral for borrowings. As of June 30, 2013, the Bank utilized $12 million of its authorized limit of $265 million with the Federal Home Loan Bank of Indianapolis, none of its $10 million overdraft line of credit with the Federal Home Loan Bank of Indianapolis, and none of its $25 million of federal funds line with a correspondent bank.

The Company's Funds Management Policy includes guidelines for desired amounts of liquidity and capital. The Funds Management Policy also includes contingency plans for liquidity and capital that specify actions to take if liquidity and capital ratios fall below the levels contained in the policy. Throughout the first six months of 2013 the Company was in compliance with its Funds Management Policy regarding liquidity and capital.

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Total stockholders' equity of the Company was $79.1 million at June 30, 2013 and $83.6 million at December 31, 2012. Longer term market interest rates increased sharply late in the second quarter of 2013, causing a decrease in the value of our securities that are classified as Available For Sale. The unrealized loss on AFS securities in the second quarter of 2013 exceeded our profit and caused the decrease in the amount of capital. However, total assets decreased and the ratio of equity to assets increased to 6.80% at June 30, 2013 from 6.59% at December 31, 2012.

Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least 8% to be adequately capitalized. The regulatory agencies consider a bank to be well capitalized if its Total Risk Based Capital is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, and the Leverage Capital Ratio is at least 5%.

The following table summarizes the capital ratios of the Company and the Bank:

                                                                     Minimum to Qualify as
                                                Actual                 Well Capitalized
                                          Amount       Ratio          Amount           Ratio
As of June 30, 2013:
Total Capital to Risk-Weighted Assets
Consolidated                             $ 94,371       12.19 %   $       77,410           10 %
Monroe Bank & Trust                        93,497       12.09 %           77,333           10 %
Tier 1 Capital to Risk-Weighted Assets
Consolidated                               84,598       10.93 %           46,446            6 %
Monroe Bank & Trust                        83,693       10.82 %           46,400            6 %
Tier 1 Capital to Average Assets
Consolidated                               84,598        6.93 %           61,021            5 %
Monroe Bank & Trust                        83,693        6.86 %           60,982            5 %




                                                                     Minimum to Qualify as
                                                Actual                 Well Capitalized
                                          Amount       Ratio          Amount           Ratio
As of December 31, 2012:
Total Capital to Risk-Weighted Assets
Consolidated                             $ 89,615       11.53 %   $       77,691           10 %
Monroe Bank & Trust                        88,992       11.46 %           77,623           10 %
Tier 1 Capital to Risk-Weighted Assets
Consolidated                               79,776       10.27 %           46,615            6 %
Monroe Bank & Trust                        79,113       10.19 %           46,574            6 %
Tier 1 Capital to Average Assets
Consolidated                               79,776        6.43 %           62,041            5 %
Monroe Bank & Trust                        79,113        6.38 %           62,008            5 %

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On July 12, 2010, the Bank entered into a Consent Order with its state and federal regulators. While the Bank is under the Consent Order, it is classified as "adequately capitalized" even though its ratios meet the "well capitalized" guidelines. The Consent Order requires the Bank to raise its Tier 1 Leverage ratio to 9% and its Total Risk Based Capital Ratio to 12%. As of June 30, 2013, the Bank is in compliance with the Total Risk Based Capital Ratio requirement but not in compliance with the Tier 1 Leverage Ratio requirement of the Consent Order. The table below indicates the amount of capital the Bank needed to be in compliance with the Consent Order as of June 30, 2013:

                                                                                                            Additional
                                                                                                             Capital
                                                                       Minimum Capital Required            Required to
                                        Actual Capital                     by Consent Order                Comply with

Amount Ratio Amount Ratio Consent Order Tier 1 Capital to Average Assets $ 83,693 6.86 % $ 109,838 9 % $ 26,145

The Company increased its common shares authorized in 2011 and is continuing to monitor the capital market conditions. Since the date that the Consent Order was issued and up through the end of the most recent fiscal year, the Company has not believed that the market conditions were suitable for a bank holding company of our size located in the Midwest to conduct an offering large enough to generate the amount of capital required to comply with the Consent Order. While under the Consent Order, the Company completed two private placement offerings, raising a total of $3.1 million, of which $2.5 million has been invested in the Bank. Conditions in the capital markets have improved somewhat recently, and we continue our efforts to improve our capital position by generating capital by improving our earnings and reducing the size of our balance sheet by repaying our non deposit funding as it matures.

Market risk for the Bank, as is typical for most banks, consists mainly of interest rate risk and market price risk. The Bank's earnings and the economic . . .

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