A struggling Michigan banking company in a county with a sluggish economy is investing in a nearby start-up bank as it searches for loan growth and a return to profitability.
MBT Financial Corp. in Monroe says it is looking to bulk up a balance sheet that it pruned in recent quarters through sales of nonperforming loans and low-yielding securities.
The company, which has $1.6 billion of assets, disclosed in its third-quarter earnings release that it will buy a 5% stake in the parent company of First Michigan Bank, a start-up in Troy. First Michigan Bancorp Inc. has said it plans to raise $9.4 million of capital, according to the Michigan Office of Financial and Insurance Services, putting MBT's investment at about $470,000.
H. Douglas Chaffin, the president and chief executive officer of MBT, said First Michigan should open by yearend. MBT, he said, hopes to pick up loans or portions of loans that exceed the start-up's lending limits.
"We're looking for the opportunity to grow assets through overlines, but we're going to ensure it's profitable growth - we're not just after volume," Mr. Chaffin said in an interview.
Profits have eluded MBT for much of this year. It reported a $1.1 million third-quarter loss, largely due to a $10 million loss on a sale of nonperforming assets. It lost $3.6 million in the second quarter due to credit problems and a restructuring in which it sold $83 million of securities at a loss of $5 million.
Shares of MBT stock have fallen almost 17% in the past year; an index of midwestern banking companies maintained by SNL Financial LC rose about 8% in the same period.
The First Michigan investment is an important part of the Monroe company's attempt to break out of the dismal economic conditions in its home market, which Mr. Chaffin characterized in the Oct. 19 earnings release as "not favorable for bank growth."
Though Troy is only 60 miles north of Monroe, its Oakland County market is much stronger. The median family income in Oakland County is $81,239, compared with $65,542 in Monroe County, according to recent census data. The business environment is more vibrant, and unemployment is lower.
"They're in a different market geographically than we are," said Mr. Chaffin. "It is an area that has seen more growth than we have seen traditionally."
Most banking companies that invest in start-ups do so in search of stock-market gains and dividends - though MBT is not the first to do so in search of assets.
The $1 billion-asset German American Bancorp Inc. in Jasper, Ind., has invested in four start-ups in the last two years with the stipulation that they share loans. And $626 million-asset Fentura Financial Inc. in Fenton, Mich., also has a minority interest in four banks.
John C. Donnelly, a managing director at Donnelly Penman & Partners, an investment banking firm in Grosse Pointe, Mich., said the strategy can help established banks get high-quality loans in new markets. He has advised on a handful of similar deals and said "it has been highly successful for both parties."
Mr. Donnelly, whose firm is helping First Michigan raise capital, said the start-up typically benefits from the higher effective lending limit that the partner enables by sharing the credit. This lets the start-up serve a wider range of businesses, he said.
Brian Martin, an analyst at Howe Barnes Hoefer Arnett in Chicago, said the strategy is a sound one for MBT. "The Michigan economy is just in a difficult state of affairs right now," he said, "and prudently growing their portfolio is what they need to do."
The company has been struggling with credit problems for years, but its nonperforming assets dropped 41% in the third quarter, to $19 million, largely as a result of the sales.
Mr. Chaffin said the company decided to sell the assets because going through the workout process was taking too long and costing too much.
The loans sold "fell across all industry types; there wasn't any concentration," said Mr. Chaffin, who has worked at MBT since 2001.
Mr. Martin said MBT's investment in the start-up should help it grow without the risk that usually accompanies market expansions. "If they can help this bank and get some participations out of it, it should be a benefit from a balance sheet perspective," he said.
