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Published: Sunday, 7/27/2008

Monroe Bank & Trust is celebrating, with clouds

BY JON CHAVEZ
BLADE BUSINESS WRITER
CThe bank, which built this new downtown headquarters early this century, operates in a state burdened with the nation s highest jobless rate, 8.5 percent, and the fifth-highest foreclosure rate. CThe bank, which built this new downtown headquarters early this century, operates in a state burdened with the nation s highest jobless rate, 8.5 percent, and the fifth-highest foreclosure rate.
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MONROE Bank & Trust will celebrate on Friday 150 years of serving residents and businesses in Monroe County, Michigan.

Weighing down that milestone, however, is a millstone around the community bank s neck:

The struggling economy of the state with the nation s highest unemployment rate, 8.5 percent, and the fifth-highest foreclosure rate.

Obviously, these are challenging times for a number of institutions, H. Douglas Chaffin, president and chief executive officer of the bank s parent firm told Wall Street analysts last week after release of its less-than-robust second-quarter financial report.

MBT Financial Corp. did respond to calls seeking comment.

Few would argue that the current period ranks among the most challenging MBT, Monroe County s largest bank, has ever faced.

Quarterly profits exceeded $5 million in 2005 but have since declined, to a $2.7 million loss at the end of last year and a $1.7 million profit in the most recent quarter.

MBT s provisions for loan and lease losses allotments banks set aside to cover loans that default have ballooned.

They totaled $2.5 million in 2004, rose to $16.5 million in 2006, and hit $11.4 million last year, the bank said. In the first half of this year, they are at $4 million.

The losses stem from the county s poor economy, resulting in home and business loans going sour.

MBT s nonperforming loans those either in default, delinquent by 90 days, or restructured so that the bank no longer gets full payment total $44 million, more than twice what they were just 12 months ago.

Add in $18 million worth of foreclosed properties the bank has acquired, and MBT s overall nonperforming assets total $62 million, or about 6.2 percent of all its loans and leases.

That s a very large number. You d like to see it a lot lower, said David Scharf, an analyst with FTN Midwest Securities Corp.

Investors, no doubt, would like to see a better numbers.

The firm s stock traded at more than $19 at the end of 2004, when the company announced plans to build an $8 million headquarters in downtown Monroe.

Since then, MBT stock has plummeted, trading below $5 a share several days last week.

In its call with analysts and in other statements, the bank s management has sent clear signals that its steady dividend of 18 cents may be reduced by the end of the third quarter.

Brad Millsaps, an analyst with Sandler O Neill, said he doesn t expect the dividend to be suspended, but a significant cut could be likely.

MBT, he said, isn t earning enough profit now to cover its dividend costs, and I don t have them making enough money in 2009.

A dividend cut would let MBT quickly raise capital and strengthen its financial reserves. It might get its stock going back in the right direction, Mr. Millsaps said.

But Mr. Millsaps was critical of another $41 million worth of loans the bank has on its watch list for potential trouble.

They have their challenges, and they have had them for some time, he said.

Although MBT is sailing troubled financial waters, its situation is neither unique for a Michigan bank nor all that bad by comparison.

According to BauerFinancial Inc., of Coral Gables, Fla., a financial institutions research firm, 28 banks and credit unions in Michigan have been labeled problematic, troubled, or worse. It rates banks from zero (failure) to five stars (superior).

MBT s latest rating was 3 stars, or between adequate and excellent.

Monroe Bank & Trust is well capitalized and profitable. They had a small loss in the fourth quarter last year, but they came back to profitability, said Karen Dorway, BauerFinancial president.

They have had a fairly significant jump in their nonperforming assets, which you don t like to see.

Rick Maroney, a bank industry adviser and managing director of Austin Associates LLC in Sylvania, said that MBT has hit rough times, but so has most of Michigan s banking industry.

Anybody in Michigan is having these kinds of problems, Mr. Maroney said. The thing about MBT is they have over $120 million capital and $120 million in reserves set aside for loan losses. That s a pretty strong institution.

Mr. Scharf, with FTN Midwest, has a sell rating on MBT stock. He said the bank is strong and in no danger of failing or being acquired despite its $103 million worth of problem assets (troubled loans and those on the watch list) and swooning stock price.

I suppose it s always a possibility they could be taken out by another bank. They have a strong presence and are a good retail franchise, Mr. Scharf said. But I don t get the sense anyone else is ready to step up to that plate.

In his talk with analysts, Mr. Chaffin said MBT is well positioned and we look forward to getting through this.

It has a plan to raise capital quickly and has a strong capital rating, twice that of the federally mandated minimum of 4 percent, he said.

Still, loan demand is slow, he added.

Tom Myers, MBT s chief lending officer, said residential mortgage loans are a problem, representing $30 million, or 29 percent of the bank s problem assets. And of the bank s $104 million worth of problem assets either nonperforming loans or those on the watch list two-thirds are from homeowners.

An additional 6 percent is attributable to one loan to an unnamed auto supplier, believed to be Plastech Engineered Products, which filed Chapter 11 bankruptcy in February.

Brian Martin, an analyst with Howe Barnes Hoefer & Arnett, said MBT has it tough because it is unlikely to clear its bad loans from its books until the Monroe real estate market turns around.

The bank clearly would like to unload many foreclosed properties it holds, but doing so is unlikely.

If you had to sell your house tomorrow and you know the market [stinks], would you take $100,000 for it knowing you re taking a big loss? You probably wouldn t, he said.

Mr. Myers, of MBT, said even though housing values have declined nearly 25 percent in Monroe the last three years, houses just are not selling.

We have been pretty aggressive but when there s no buyers period we re not going to take that additional step of logic and say there s no value at all to these properties. There s just no buyers right now.

Frank Pisanti, an agent with Gerwick Real Estate in Monroe, said foreclosures are slowing but are still high, and inventory is getting whittled away, which is a good sign.

But the number of sold properties is still about the same. So while the inventory is shrinking a bit, it s still a slow recovery, Mr. Pisanti said.

He predicts the housing market where 50 real estate agents quit the local association in the last year probably won t rebound until year s end. Meanwhile, housing values have dropped 15 percent in the last year.

Complicating MBT s woes, Mr. Pisanti said, Michigan law lets the owner of a foreclosed property remain in the house for six months after a sheriff s sale to try to redeem the property.

If a bank is not on good terms with the people, they take everything before they leave, the wiring, plumbing. They trash the house and then you have another 20 percent drop in value when you go to sell, Mr. Pisanti said.

So most banks do short sales, buying a mortgaged property back for less than the outstanding loan balance. Short sales save a property from potential destruction, but add to a bank s property portfolio.

The bank, which is heavily involved in its community, has a big anniversary celebration planned for 2 to 6 p.m. Saturday at the county fairgrounds.

But unless Monroe s economy improves, the company is likely to continue to have problems.

We have another 12 months or so ahead us that will be difficult, said Bill Morris, president of the private Monroe Industrial Development Corp.

Still, he said, the suffering may be bottoming out.

We are working with more companies now, either new companies or those planning expansions, than we have in the last two years, he said.

Overall, we are seeing things starting to pick up right now.

Contact Jon Chavez at:jchavez@theblade.comor 419-724-6128.



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