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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004 Commission File Number: 000-30973
MBT FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-3516922
(State of Incorporation) (I.R.S. Employer Identification No.)
102 E. FRONT ST.
MONROE, MICHIGAN 48161
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (734) 241-3431
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock, No Par
Value
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any of the
amendments of this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES [X] NO [ ]
As of June 30, 2004, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $317,694,160.
As of March 11, 2005, there were 17,487,184 shares of Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Shareholders to be held
May 5, 2005 are incorporated by reference into Part III of this report on Form
10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
MBT Financial Corp. (the "Corporation") operates as a bank holding company
headquartered in Monroe, Michigan. The Corporation was incorporated under the
laws of the State of Michigan in January 2000, at the direction of the
management of Monroe Bank & Trust (the "Bank"), for the purpose of becoming a
bank holding company by acquiring all the outstanding shares of Monroe Bank &
Trust. At the April 6, 2000 Annual Meeting of Shareholders of Monroe Bank &
Trust, shareholders approved a proposal that resulted in the Bank merging with
Monroe Interim Bank, a state chartered bank, which was a subsidiary of the
Corporation. On July 1, 2000, the merger of Monroe Bank & Trust and Monroe
Interim Bank was completed, with Monroe Bank & Trust becoming the wholly owned
subsidiary of MBT Financial Corp.
Monroe Bank & Trust was incorporated and chartered as Monroe State Savings Bank
under the laws of the State of Michigan in 1905. In 1940, Monroe Bank & Trust
consolidated with Dansard Bank and moved to the present address of its main
office. Monroe Bank & Trust operated as a unit bank until 1950 when it opened
its first branch office in Ida, Michigan. It then continued its expansion to its
present total of 25 branch offices, including its main office. Monroe Bank &
Trust changed its name from "Monroe State Savings Bank" to "Monroe Bank & Trust"
in 1968.
Monroe Bank & Trust provides customary retail and commercial banking and trust
services to its customers, including checking and savings accounts, time
deposits, safe deposit facilities, commercial loans, personal loans, real estate
mortgage loans, installment loans, IRAs, ATM and night depository facilities,
treasury management services, telephone and internet banking, personal trust,
employee benefit and investment management services. Monroe Bank & Trust's
service areas are comprised of Monroe and Wayne counties in Southern Michigan.
Monroe Bank & Trust's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") to applicable legal limits and Monroe Bank & Trust is
supervised and regulated by the FDIC and Michigan Office of Financial and
Insurance Services Division of Financial Institutions.
COMPETITION
MBT Financial Corp., through its subsidiary, Monroe Bank & Trust, operates in a
highly competitive industry. Monroe Bank & Trust's main competition comes from
other commercial banks, national or state savings and loan institutions,
securities brokers, mortgage bankers, finance companies and insurance companies.
Banks generally compete with other financial institutions through the banking
products and services offered, the pricing of services, the level of service
provided, the convenience and availability of services, and the degree of
expertise and personal manner in which these services are offered. Monroe Bank &
Trust encounters strong competition from most of the financial institutions in
Monroe Bank & Trust's extended market area.
The Bank's primary market area is Monroe County, Michigan. According to the most
recent market data, there are eight other deposit taking/lending institutions
competing in the Bank's market. According to the most recent market data for
deposits, the Bank ranks first in market share in Monroe County with 60.35% of
the market. In 2001 the Bank began expanding into Wayne County, Michigan, and
currently ranks eighteenth out of thirty-one institutions with a market share of
0.19%. For the combined Monroe and Wayne County market, the Bank ranks sixth of
thirty-three institutions with a market share of 3.51%.
2
SUPERVISION AND REGULATION
MBT Financial Corp., as a bank holding company, is regulated under the Bank
Holding Company Act of 1956, as amended (the BHC Act), and is subject to the
supervision and examination of the Board of Governors of the Federal Reserve
System (the Federal Reserve Board). The BHC Act requires the prior approval of
the Federal Reserve Board for a bank holding company to acquire or hold more
than a 5% voting interest in any bank. The BHC Act allows interstate bank
acquisitions anywhere in the country and interstate branching by acquisition and
consolidation in those states that have not opted out by January 1, 1997.
In addition, MBT Financial Corp. is generally prohibited by the BHC Act from
acquiring direct or indirect ownership or control of more than five percent of
the voting shares of any company which is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of managing
or controlling banks or furnishing services to its subsidiaries. MBT Financial
Corp. may, however, subject to the prior approval of the Federal Reserve Board,
engage in, or acquire shares of companies engaged in activities which are deemed
by the Federal Reserve Board by order or by regulation to be so closely related
to banking or managing and controlling a bank as to be a proper activity.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted
into law. The GLB Act made sweeping changes with respect to the permissible
financial services which various types of financial institutions may now
provide. The Glass-Steagall Act, which had generally prevented banks from
affiliation with securities and insurance firms, was repealed. Pursuant to the
GLB Act, bank holding companies may elect to become a "financial holding
company," provided that all of the depository institution subsidiaries of the
bank holding company are "well capitalized" and "well managed" under applicable
regulatory standards.
Under the GLB Act, a bank holding company that has elected to become a financial
holding company may affiliate with securities firms and insurance companies and
engage in other activities that are financial in nature. Activities that are
"financial in nature" include securities underwriting, dealing and
market-making, sponsoring mutual funds and investment companies, insurance
underwriting and agency, merchant banking, and activities that the Federal
Reserve Board has determined to be closely related to banking. MBT Financial
Corp. has not elected to become a financial holding company.
MBT Financial Corp.'s banking subsidiary is subject to limitations with respect
to transactions with affiliates.
A substantial portion of the MBT Financial Corp.'s cash revenues is derived from
dividends paid by its subsidiary bank. These dividends are subject to various
legal and regulatory restrictions.
MBT Financial Corp.'s banking subsidiary, Monroe Bank & Trust (the "Bank") is
subject to primary supervision, regulation and examination by the Michigan
Office of Financial and Insurance Services and the Federal Deposit Insurance
Corporation (FDIC).
Federal regulators adopted risk-based capital guidelines and leverage standards
for banks and bank holding companies. A discussion of the impact of risk-based
capital guidelines and leverage standards is presented in Note 14 of the MBT
Financial Corp. financial statements included in Part II, Item 8 of this Form
10-K.
The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides
that a holding company's controlled insured depository institutions are liable
for any loss incurred by the Federal
3
Deposit Insurance Corporation in connection with the default of any
FDIC-assisted transaction involving an affiliated insured bank or savings
association.
Noncompliance with laws and regulations by financial holding companies and banks
can lead to monetary penalties and/or an increased level of supervision or a
combination of these two items. Management is not aware of any current instances
of noncompliance with laws and regulations and does not anticipate any problems
maintaining compliance on a prospective basis. Recent regulatory inspections and
examinations of MBT Financial Corp. and the Bank have not disclosed any
significant instances of noncompliance. The minor instances of noncompliance
detected during these inspections and examinations were promptly corrected by
management and no action was taken by the regulators against MBT Financial Corp.
or the Bank.
The earnings and growth of MBT Financial Corp. are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government and its agencies, particularly the Federal Reserve Board. Its
policies influence the amount of bank loans and deposits and the interest rates
charged and paid thereon, and thus have an effect on earnings. The nature of
future monetary policies and the effect of such policies on the future business
and earnings of MBT Financial Corp. and its subsidiary bank cannot be predicted.
EMPLOYEES
MBT Financial Corp. has no employees other than its three officers, each of whom
is also an employee and officer of Monroe Bank & Trust and who serve in their
capacity as officers of MBT Financial Corp. without compensation. As of December
31, 2004, Monroe Bank & Trust had 384 full-time employees and 12 part-time
employees. Monroe Bank & Trust provides a number of benefits for its full-time
employees, including health and life insurance, workers' compensation, social
security, paid vacations, numerous bank services, and a 401(k) plan.
EXECUTIVE OFFICERS OF THE REGISTRANT
<Table>
<Caption>
NAME AGE POSITION
- ---- --- --------
H. Douglas Chaffin 49 President & Chief Executive Officer
Donald M. Lieto 49 Executive Vice President, Senior
Administration Manager, Monroe Bank & Trust
James E. Morr 58 Executive Vice President, Senior Trust
Officer & General Counsel, Monroe Bank & Trust
Thomas G. Myers 48 Executive Vice President & Chief
Lending Manager, Monroe Bank & Trust
John L. Skibski 40 Executive Vice President & Chief
Financial Officer, Monroe Bank & Trust;
Treasurer, MBT Financial Corp.
Herbert J. Lock 58 Senior Vice President & Investment
Officer, Monroe Bank & Trust;
Secretary, MBT Financial Corp.
</Table>
There is no family relationship between any of the Directors or Executive
Officers of the registrant and there is no arrangement or understandings between
any of the Directors or Executive Officers and any other person pursuant to
which he was selected a Director or Executive Officer nor with any respect to
the term which each will serve in the capacities stated previously.
4
The Executive Officers of the Bank are elected to serve for a term of one year
at the Board of Directors Annual Organizational Meeting, held in May.
H. Douglas Chaffin was President & Chief Executive Officer in 2004, President &
Chief Operating Officer in 2003, Executive Vice President, Senior Lending
Manager in 2002 and 2001, and Senior Vice President & City Executive, Lakeshore
Corporate Group, Huntington National Bank, in 2001 and 2000. Donald M. Lieto was
Executive Vice President, Senior Administration Manager in 2004 and 2003, and
Senior Vice President, Information Services Manager in 2003, 2002, 2001, and
2000. James E. Morr was Executive Vice President, Senior Trust Officer and
General Counsel for each of the last five years. Thomas G. Myers was Executive
Vice President & Chief Lending Manager in 2004 and 2003, Senior Vice President,
Commercial Group Manager in 2003 and 2002, and Corporate Banking Group Manager,
Huntington National Bank, in 2001 and 2000. John L. Skibski was Executive Vice
President & Chief Financial Officer in 2004, Senior Vice President & Controller
in 2003, and Vice President & Controller in 2002, 2001 and 2000. Herbert J. Lock
was Senior Vice President and Investment Officer for each of the last five
years.
AVAILABLE INFORMATION
MBT Financial Corp. makes its annual report on Form 10-K, its quarterly reports
on Form 10-Q, its current reports on Form 8-K, and all amendments to those
reports available on its website as soon as reasonably practicable after they
are filed with or furnished to the SEC, free of charge. The website address is
www.mbandt.com.
ITEM 2. PROPERTIES
MBT Financial Corp. does not conduct any business other than its ownership of
Monroe Bank & Trust's stock. MBT Financial Corp. operates its business from
Monroe Bank & Trust's main office facility. Monroe Bank & Trust operates its
business from its main office complex and 24 full service branches in the
counties of Monroe and Wayne, Michigan. In addition, MBT Credit Company, Inc., a
wholly owned subsidiary of Monroe Bank & Trust, operates a mortgage loan
origination office in Monroe, Michigan. The Bank owns its main office complex
and 21 of its branches. The remaining three branches and the MBT Credit Company,
Inc. locations are leased.
ITEM 3. LEGAL PROCEEDINGS
MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their
property the subject of any material pending legal proceedings other than
ordinary routine litigation incidental to their respective businesses, nor are
any such proceedings known to be contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the vote of holders of MBT Financial Corp. securities
during the fourth quarter of 2004.
5
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SECURITY HOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock consists of 17,465,839 shares with a book value of $8.89. Dividends
declared on common stock during 2004 amounted to $.62 per share. The common
stock is traded on the NASDAQ National Market under the symbol MBTF. Below is a
schedule of the high and low trading price for the past two years by quarter.
These prices represent those known to Management, but do not necessarily
represent all transactions that occurred.
<Table>
<Caption>
2004 2003
HIGH LOW HIGH LOW
-------- -------- -------- --------
1st quarter $ 17.90 $ 16.59 $ 13.50 $ 13.00
2nd quarter $ 19.01 $ 16.85 $ 18.80 $ 13.20
3rd quarter $ 20.60 $ 17.24 $ 17.40 $ 14.50
4th quarter $ 26.00 $ 19.25 $ 18.10 $ 15.20
</Table>
Dividends declared during the past three years on a quarterly basis were as
follows:
2004 2003 2002
---------- ---------- ----------
1st quarter $ 0.15 $ 0.14 $ 0.13
2nd quarter $ 0.15 $ 0.14 $ 0.13
3rd quarter $ 0.16 $ 0.15 $ 0.14
4th quarter $ 0.16 $ 0.15 $ 0.14
As of December 31, 2004, the number of holders of record of the Corporation's
common shares was 1,306. Management's present expectation is that dividends will
continue to be paid in the future.
The following table summarizes the repurchase activity of the Corporation's
common stock during the three months ended December 31, 2004:
<Table>
<Caption>
Total Number of Shares Maximum Number of
Average Purchased as Part of Shares that May Yet
Total Number of Price Paid Publicly Announced Be Purchased Under
Shares Purchased per Share Plans or Programs the Plans or Programs
---------------- ---------------- ---------------------- ---------------------
October 1, 2004 - October 31, 2004 70,000 $ 18.70 70,000 880,441
November 1, 2004 - November 30, 2004 -- $ -- -- 880,441
December 1, 2004 - December 31, 2004 -- $ -- -- 880,441
---------------- ---------------- ---------------- ----------------
Total 70,000 $ 18.70 70,000
---------------- ---------------- ---------------- ----------------
</Table>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 2004 are
derived from the audited Consolidated Financial Statements of the Corporation.
The financial data set forth below contains only a portion of our financial
statements and should be read in conjunction with the Consolidated Financial
Statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Form 10-K.
6
SELECTED CONSOLIDATED FINANCIAL DATA
<Table>
<Caption>
Dollar amounts are in thousands,
except per share data 2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS OF INCOME
Interest Income $ 79,703 $ 77,774 $ 84,604 $ 101,324 $ 99,570
Interest Expense 26,998 27,467 34,387 49,535 49,681
------------ ------------ ------------ ------------ ------------
Net Interest Income 52,705 50,307 50,217 51,789 49,889
Provision for Loan Losses 2,491 8,005 6,101 7,400 6,298
------------ ------------ ------------ ------------ ------------
Net Interest Income after
Provision for Loan Losses 50,214 42,302 44,116 44,389 43,591
Other Income 13,776 13,803 12,791 10,651 8,709
Other Expenses 32,616 30,179 26,989 23,810 23,094
------------ ------------ ------------ ------------ ------------
Income before Provision
for Income Taxes 31,374 25,926 29,918 31,230 29,206
Provision for
Income Taxes 8,775 6,611 8,114 8,307 8,031
------------ ------------ ------------ ------------ ------------
Net Income $ 22,599 $ 19,315 $ 21,804 $ 22,923 $ 21,175
============ ============ ============ ============ ============
Net Income available to
Common Shareholders $ 22,599 $ 19,315 $ 21,804 $ 21,923 $ 21,168
============ ============ ============ ============ ============
PER COMMON SHARE*
Basic Net Income $ 1.30 $ 1.02 $ 1.12 $ 1.10 $ 1.06
Diluted Net Income 1.29 1.01 1.12 1.10 1.06
Cash Dividends Declared 0.62 0.58 0.54 0.50 0.37
Book Value at Year End 8.89 8.20 8.72 8.19 7.55
Average Common Shares
Outstanding 17,444,165 19,026,369 19,458,737 19,933,580 20,000,000
============ ============ ============ ============ ============
CONSOLIDATED BALANCE SHEETS (YEAR END)
Total Assets $ 1,552,279 $ 1,457,788 $ 1,409,694 $ 1,394,168 $ 1,379,386
Total Securities 505,441 508,482 539,737 497,501 452,405
Loans, Net of Deferred Loan Fees 945,881 863,850 773,805 787,825 812,123
Allowance for Loan Losses 13,800 14,500 12,400 13,000 10,600
Deposits 1,100,711 1,039,117 1,010,960 998,880 994,596
Borrowings 286,500 270,000 225,000 225,000 225,000
Total Shareholders' Equity 155,346 143,446 166,999 161,730 150,955
============ ============ ============ ============ ============
SELECTED FINANCIAL RATIOS
Return on Average Assets 1.52% 1.33% 1.55% 1.56% 1.66%
Return on Average Equity 15.18% 11.39% 13.29% 13.70% 14.42%
Net Interest Margin 3.75% 3.67% 3.79% 3.88% 4.13%
Dividend Payout Ratio 47.69% 56.14% 47.99% 45.40% 34.95%
Allowance for Loan Losses
to Period End Loans 1.69% 1.68% 1.60% 1.65% 1.31%
Allowance for Loan Losses
to Non Performing Loans 34.57% 30.41% 27.93% 46.90% 51.53%
Non Performing Loans
to Period End Loans 4.22% 5.50% 5.74% 3.52% 2.53%
Net Charge Offs to Average Loans 0.35% 0.72% 0.87% 0.59% 0.73%
============ ============ ============ ============ ============
</Table>
* The reorganization into a one-bank holding company in 2000 resulted in an
exchange of Monroe Bank & Trust stock for MBT Financial Corp. stock. The
exchange rate was two shares of MBT Financial Corp. for each share of Monroe
Bank & Trust, causing an increase of 10,000,000 shares outstanding. All
per-share amounts have been restated to reflect this transaction.
7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Corporation's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of these terms. Actual results could differ materially
from those set forth in forward-looking statements, due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
CRITICAL ACCOUNTING POLICIES - The Bank's Allowance for Loan Losses is a
"critical accounting estimate" because it is an estimate that is 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 Corporation's financial condition. These assumptions
include, but are not limited to, collateral values and the effect of economic
conditions on the financial condition of the borrowers. To determine the
Allowance for Loan Losses, the Bank estimates losses on all loans that are not
classified as substandard or doubtful by applying historical loss rates to those
loans in accordance with SFAS 5. In addition, all loans that are classified as
substandard or doubtful and any loans that are nonaccrual or renegotiated are
individually tested for impairment. Any amount of monetary impairment is
included in the Allowance for Loan Losses in accordance with SFAS 114.
Substandard, doubtful, nonaccrual, or renegotiated loans that do not have any
monetary impairment identified are assigned an allowance following the same
method as unclassified loans. Management is of the opinion that the Allowance
for Loan Losses of $13,800,000 as of December 31, 2004 was adequate.
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at the lower of fair value or the loan carrying amount at
the date of foreclosure. Subsequent to foreclosure, valuations are periodically
performed by Management and the assets are carried at the lower of carrying
amount or fair value less cost to sell.
RESULTS OF OPERATIONS - Net Income increased 17.0% in 2004 to $22.6 million as
the economy continued to gain strength and the Fed began to raise managed
interest rates. Net Interest Income increased $2.4 million as the average
earning assets increased $37.6 million and the net interest margin increased
from 3.67% to 3.75%. During 2004, Net Loans increased $83.4 million, or 9.8%,
and Deposits increased $61.6 million, or 5.9%. The Bank also increased its
longer term Federal Home Loan Bank borrowings and Repurchase Agreements while
reducing its overnight federal funds borrowed. The most significant improvement
in the earnings was due to the decrease of $5.5 million, or 68.9% in the
Provision for Loan Losses. This decrease was due to the exceptionally large
provision recorded in 2003. Non Interest Income decreased slightly in 2004 as
securities gains and mortgage origination fees both declined as rates began to
rise. Excluding these two items, non interest income increased $937,000, or 8%
compared to 2003. Non Interest Expenses increased $2.4 million, or 8.1%,
primarily due to increases in compensation and occupancy expenses related to the
Bank's expansion efforts into the Downriver area of southern Wayne County. As a
result of the above, Income Before the Provision for Income taxes increased $5.4
8
million, or 21.0%. The percentage of the Bank's income that is generated by tax
exempt securities and Bank Owned Life Insurance decreased in 2004, causing the
effective tax rate to increase from 25.5% in 2003 to 28.0%. The increase in
Income Before taxes and the increase in the effective tax rate resulted in an
increase of $2.2 million or 32.7% in the Provision for Income Taxes. Net Income
increased $3.3 million, or 17% to $22.6 million.
In 2003, the deterioration of some large credit relationships led to a $5.5
million addition to the Allowance for Loan Losses. This caused Net Income to
decrease $2.5 million, or 11%, compared to 2002. Although average earning assets
increased $44.2 million, the net interest margin decreased ten basis points. As
a result, the net interest income increased only $90,000. Equity markets began
to recover late in 2003, but the low market values for most of the year caused
our income from trust services to decline $181,000, or 5%. We were able to
increase our deposit account service charges in 2003. While remaining one of the
lowest cost providers of deposit services in our market, our fee income
increased by $787,000, or 17%. In 2003, we increased our investment in Bank
Owned Life Insurance resulting in an increase of $508,000, or 64% in the
earnings on these policies. Total non-interest income increased $1,012,000, or
8%. Non-interest expenses increased as we continued our expansion into the
southern Wayne County market. During 2003 we opened two full service branches
and we increased our total staffing from 375 to 389. These changes contributed
to the increase of $3.2 million, or 12% in our non-interest expenses. Income
before Provision for Income Taxes decreased $4.0 million, or 13% compared to
2002. The lower amount of income resulted in a decrease of $1.5 million, or 19%
in our Provision for Income Taxes. The effective tax rate decreased from 27.1%
in 2002 to 25.5% in 2003.
Net Income decreased slightly in 2002 as we encountered continued low interest
rates and a sluggish national and local economy. Net Income decreased $121,000,
or less than 1%, compared to 2001. While Deposits and Total Assets each
increased 1%, Net Loans decreased 2%. Commercial and industrial loans decreased
8% and loans to individuals for household, family, and other personal
expenditures decreased 22% while real estate loans showed a slight increase of
3%. The decrease in loans was partially attributable to the transfer of $12.9
million of loans to other real estate and charge offs of $8.7 million, which
enabled us to reduce our allowance for loan losses $600,000. Income before
Provision for Income Taxes decreased $1.3 million, or 4%, compared to 2001. A
larger percentage of our income was in interest on Obligations of States and
Political Subdivisions in 2002, resulting in a decrease of $193,000, or 2% in
our Provision for Income Taxes. The effective tax rate decreased from 27.5% in
2001 to 27.1% in 2002.
Earnings for the Bank are usually highly reflective of the Net Interest Income.
In 2004 the Federal Open Market Committee of the Federal Reserve raised the fed
funds rate for the first time since 2000 as the economy continued to grow.
During the year, the fed funds target rate was increased five times, from 1.00%
to 2.25%. In spite of these increases, rates on new and renewing loans were
still below the average rates in the loan portfolio. As a result, the average
yield on loans decreased from 6.73% to 6.30%. Investment yields did improve
slightly and the cost of funds decreased, resulting in an increase in the net
interest margin and net interest income. In 2003, rates remained low, with the
Fed lowering the managed rates 25 basis points in June. This caused refinance
activity to continue, and the Bank's yield on loans declined from 7.70% to
6.73%. Market rates also were low, and the investment yield dropped from 4.74%
to 4.18% in 2003. During the year, the Bank restructured its portfolio of
Federal Home Loan Bank advances, converting $95 million, or 42% of its
portfolio, from fixed rate to floating rate. This lowered the cost of these
borrowings from 5.72% in 2001 and 2002 to 5.05% in 2003. In 2002, market
interest rates remained at historically low levels, prompting many borrowers to
refinance their existing debt. The low interest rate environment also resulted
in an increase in the amount of investment securities called. These factors lead
to a decrease in the yield on earning assets from 7.4% in 2001 to 6.2% in 2002.
Total Interest Income decreased $16.7 million while Total Interest Expense
decreased only $15.1
9
million, resulting in a decrease of $1.6 million in Net Interest Income. The
Provision for Loan Losses decreased $1.3 million after a large increase in 2001.
Other Income increased $2.1 million as service charges on deposit accounts
increased due to an overdraft program started late in 2001 and gains on the
sales of investment securities also increased. Non-interest expenses increased
9% compared to 2001. Salaries and Employee Benefits increased 9% as the Bank
continued to add staff, particularly in the loan, credit analysis, and loan
review areas. This additional staff will allow the Bank to provide better
customer service to existing customers, resume the growth in the loan portfolio,
and improve the monitoring of existing credit relationships. The average cost of
interest bearing deposits was 1.65%, 1.74%, and 2.41% for 2004, 2003, and 2002
respectively. The table below shows selected financial ratios for the same three
years.
<Table>
<Caption>
2004 2003 2002
---------- ---------- ----------
Return on Average Assets 1.52% 1.33% 1.55%
Return on Average Equity 15.18% 11.39% 13.29%
Dividend Payout Ratio 47.69% 56.14% 48.21%
Average Equity to Average Assets 10.02% 11.71% 11.67%
</Table>
The following table shows the investment portfolio for the last three years
(000s omitted).
<Table>
<Caption>
Held to Maturity
---------------------------------------------------------------------------
December 31, 2004 December 31, 2003 December 31, 2002
----------------------- ----------------------- -----------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
U.S. Government agency and corporation
obligations .................................. $ 527 $ 578 $ 536 $ 590 $ 588 $ 649
Securities issued by states and political
subdivisions in the U.S. ..................... 80,622 82,636 95,634 99,234 113,255 117,968
Other domestic securities (debt and equity) ... 2,992 3,074 2,984 3,116 2,976 2,975
---------- ---------- ---------- ---------- ---------- ----------
Total ......................................... $ 84,141 $ 86,288 $ 99,154 $ 102,940 $ 116,819 $ 121,592
========== ========== ========== ========== ========== ==========
Pledged securities ............................ $ 19,659 $ 20,373 $ 23,903 $ 25,175 $ 31,972 $ 33,672
========== ========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
Available for Sale
---------------------------------------------------------------------------
December 31, 2004 December 31, 2003 December 31, 2002
----------------------- ----------------------- -----------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
---------- ---------- ---------- ---------- ---------- ----------
U.S. Government agency and corporation
obligations (excluding mortgage-backed
securities) .................................. $ 315,410 $ 314,381 $ 315,004 $ 311,944 $ 322,878 $ 325,131
Securities issued by states and political
subdivisions in the U.S. ..................... 28,635 29,187 26,047 26,473 14,680 14,723
Other domestic securities (debt and
equity) ...................................... 64,472 64,785 57,876 59,225 84,554 83,064
---------- ---------- ---------- ---------- ---------- ----------
Total ......................................... $ 408,517 $ 408,353 $ 398,927 $ 397,642 $ 422,112 $ 422,918
========== ========== ========== ========== ========== ==========
Pledged securities ............................ $ 304,004 $ 303,300 $ 285,427 $ 283,103 $ 249,436 $ 251,994
========== ========== ========== ========== ========== ==========
</Table>
10
The following table shows average daily balances, interest income or expense
amounts, and the resulting average rates for interest earning assets and
interest bearing liabilities for the last three years. Also shown are the net
interest income, total interest rate spread, and the net interest margin for the
same periods.
<Table>
<Caption>
Years Ended December 31,
------------------------------------------------------------------------------------------
2004 2003
-------------------------------------------- ------------------------------------------
Average Interest Average Interest
Daily Earned Average Daily Earned Average
(Dollars in Thousands) Balance or Paid Yield Balance or Paid Yield
---------------------- ------------ ------------ ------------ ------------ ------------ ------------
Investments
Obligations of US
Government Agencies $ 303,121 $ 13,090 4.32% $ 326,442 $ 12,429 3.81%
Obligations of States &
Political Subdivisions(1) 115,590 5,614 4.86% 123,489 6,206 5.03%
Other Securities 69,538 3,330 4.79% 84,725 3,737 4.41%
------------ ------------ ------------ ------------ ------------ ------------
Total Investments 488,249 22,034 4.51% 534,656 22,372 4.18%
------------ ------------ ------------ ------------ ------------ ------------
Loans
Commercial 600,551 36,364 6.06% 549,558 34,671 6.31%
Mortgage 194,072 12,217 6.30% 166,665 11,829 7.10%
Consumer 120,327 9,079 7.55% 104,971 8,754 8.34%
------------ ------------ ------------ ------------ ------------ ------------
Total Loans(2) 914,950 57,660 6.30% 821,194 55,254 6.73%
Federal Funds Sold 538 9 1.67% 13,894 148 1.07%
------------ ------------ ------------ ------------ ------------ ------------
Total Interest Earning Assets 1,403,737 79,703 5.68% 1,369,744 77,774 5.68%
Cash & Due From Banks 25,230 25,277
Interest Receivable and Other
Assets 64,256 60,631
------------ ------------
Total Assets $ 1,493,223 $ 1,455,652
============ ============
Savings Accounts $ 129,075 $ 325 0.25% $ 132,780 $ 560 0.42%
NOW Accounts 69,072 172 0.25% 67,290 281 0.42%
Money Market Deposits 329,480 11,815 3.59% 372,177 4,219 1.13%
Certificates of Deposit 378,959 2,611 0.69% 348,847 10,932 3.13%
Federal Funds Purchased 32,894 491 1.49% 9,136 120 1.31%
Repurchase Agreements 13,525 422 3.12% 0
FHLB Advances 242,104 11,162 4.61% 225,000 11,355 5.05%
------------ ------------ ------------ ------------ ------------ ------------
Total Interest Bearing
Liabilities 1,195,109 26,998 2.26% 1,155,230 27,467 2.38%
Non-interest Bearing Deposits 143,759 126,874
Other Liabilities 5,438 3,971
------------ ------------
Total Liabilities 1,344,306 1,286,075
Stockholders' Equity 148,917 169,577
------------ ------------
Total Liabilities &
Stockholders' Equity $ 1,493,223 $ 1,455,652
============ ============
Net Interest Income $ 52,705 $ 50,307
Interest Rate Spread 3.42% 3.30%
Net Interest Income as a
percent of average
earning assets 3.75% 3.67%
<Caption>
Years Ended December 31,
------------------------------------------
2002
------------------------------------------
Average Interest
Daily Earned Average
(Dollars in Thousands) Balance or Paid Yield
---------------------- ------------ ------------ ------------
Investments
Obligations of US
Government Agencies $ 288,438 $ 13,106 4.54%
Obligations of States &
Political Subdivisions(1) 130,046 6,741 5.18%
Other Securities 105,876 5,028 4.75%
------------ ------------ ------------
Total Investments 524,360 24,875 4.74%
------------ ------------ ------------
Loans
Commercial 489,498 35,081 7.17%
Mortgage 160,764 13,333 8.29%
Consumer 118,026 10,766 9.12%
------------ ------------ ------------
Total Loans(2) 768,288 59,180 7.70%
Federal Funds Sold 32,950 549 1.67%
------------ ------------ ------------
Total Interest Earning Assets 1,325,598 84,604 6.38%
Cash & Due From Banks 30,306
Interest Receivable and Other
Assets 49,585
------------
Total Assets $ 1,405,489
============
Savings Accounts $ 127,826 $ 1,521 1.19%
NOW Accounts 66,648 752 1.13%
Money Market Deposits 336,370 5,661 1.68%
Certificates of Deposit 358,846 13,535 3.77%
Federal Funds Purchased 2,052 38 1.85%
Repurchase Agreements 0
FHLB Advances 225,000 12,880 5.72%
------------ ------------ ------------
Total Interest Bearing
Liabilities 1,116,742 34,387 3.08%
Non-interest Bearing Deposits 119,613
Other Liabilities 5,044
------------
Total Liabilities 1,241,399
Stockholders' Equity 164,090
------------
Total Liabilities &
Stockholders' Equity $ 1,405,489
============
Net Interest Income $ 50,217
Interest Rate Spread 3.30%
Net Interest Income as a
percent of average
earning assets 3.79%
</Table>
(1) Interest income on Obligations of States and Political Subdivisions is not
on a taxable equivalent basis.
(2) Total Loans excludes Overdraft Loans, which are non-interest earning. These
loans are included in Other Assets. Total Loans includes nonaccrual loans.
When a loan is placed in nonaccrual status, all accrued and unpaid interest
is charged against interest income. Loans on nonaccrual status do not earn
any interest.
11
The following table summarizes the changes in interest income and interest
expense attributable to changes in interest rates and changes in the volume of
interest earning assets and interest bearing liabilities for the period
indicated:
<Table>
<Caption>
Years Ended December 31,
--------------------------------------------------------------------------------
2004 versus 2003 2003 versus 2002
-------------------------------------- --------------------------------------
Changes due to Changes due to
increased (decreased) increased (decreased)
-------------------------------------- --------------------------------------
(Dollars in Thousands) Rate Volume Net Rate Volume Net
---------------------- ---------- ---------- ---------- ---------- ---------- ----------
Interest Income
- ------------------------
Investments
Obligations of US
Government Agencies $ 1,549 $ (888) $ 661 $ (2,403) $ 1,727 $ (676)
Obligations of States &
Political Subdivisions (195) (397) (592) (195) (340) (535)
Other Securities 262 (670) (408) (287) (1,004) (1,291)
---------- ---------- ---------- ---------- ---------- ----------
Total Investments 1,616 (1,955) (339) (2,885) 383 (2,502)
---------- ---------- ---------- ---------- ---------- ----------
Loans
Commercial (1,525) 3,217 1,692 (4,715) 4,304 (411)
Mortgage (1,556) 1,945 389 (1,993) 489 (1,504)
Consumer (955) 1,280 325 (822) (1,191) (2,013)
---------- ---------- ---------- ---------- ---------- ----------
Total Loans (4,036) 6,442 2,406 (7,530) 3,602 (3,928)
Federal Funds Sold 3 (142) (139) (84) (318) (402)
---------- ---------- ---------- ---------- ---------- ----------
Total Interest Income (2,417) 4,345 1,928 (10,499) 3,667 (6,832)
Interest Expense
- ------------------------
Savings Accounts (219) (16) (235) (1,021) 59 (962)
NOW Accounts (116) 7 (109) (479) 7 (472)
Money Market Deposits (1,124) 944 (180) (2,045) 603 (1,442)
Certificates of Deposit (61) (484) (545) (2,226) (377) (2,603)
Federal Funds Purchased 57 313 370 (48) 130 82
Repurchase agreements 422 0 422 0 0 0
FHLB Advances (1,056) 863 (193) (1,525) 0 (1,525)
---------- ---------- ---------- ---------- ---------- ----------
Total Interest Expense (2,097) 1,627 (470) (7,344) 422 (6,922)
---------- ---------- ---------- ---------- ---------- ----------
Net Interest Income $ (320) $ 2,718 $ 2,398 $ (3,155) $ 3,245 $ 90
========== ========== ========== ========== ========== ==========
<Caption>
Years Ended December 31,
--------------------------------------
2002 versus 2001
--------------------------------------
Changes due to
increased (decreased)
--------------------------------------
(Dollars in Thousands) Rate Volume Net
---------------------- ---------- ---------- ----------
Interest Income
- ------------------------
Investments
Obligations of US
Government Agencies $ (5,440) $ 5,464 $ 24
Obligations of States &
Political Subdivisions (220) 140 (80)
Other Securities (1,172) (2,505) (3,677)
---------- ---------- ----------
Total Investments (6,832) 3,099 (3,733)
---------- ---------- ----------
Loans
Commercial (5,631) (2,595) (8,226)
Mortgage (380) (2,643) (3,023)
Consumer (847) (993) (1,840)
---------- ---------- ----------
Total Loans (6,858) (6,231) (13,089)
Federal Funds Sold (587) 689 102
---------- ---------- ----------
Total Interest Income (14,277) (2,443) (16,720)
Interest Expense
- ------------------------
Savings Accounts (1,149) 217 (932)
NOW Accounts (673) 145 (528)
Money Market Deposits (5,244) 2,553 (2,691)
Certificates of Deposit (5,523) (5,485) (11,008)
Federal Funds Purchased (62) 73 11
Repurchase agreements 0 0 0
FHLB Advances 0 0 0
---------- ---------- ----------
Total Interest Expense (12,651) (2,497) (15,148)
---------- ---------- ----------
Net Interest Income $ (1,626) $ 54 $ (1,572)
========== ========== ==========
</Table>
Due to a variety of reasons, including volatile interest rates in the past and
successful bidding in securing local municipal deposits, we have attempted, for
the last several years, to maintain a liquid investment position. The percentage
of securities held as Available for Sale increased from 80% as of December 31,
2003 to 83% as of December 31, 2004. As reflected in Note 3 to the consolidated
financial statements, the percentage of securities that mature within five years
was 12% as of December 31, 2004 and 13% as of December 31, 2003. The table below
presents the scheduled maturities for each of the investment categories, and the
average yield on the amounts maturing. The yields presented for the Obligations
of States and Political Subdivisions are not tax equivalent yields. The interest
income on these securities is exempt from federal income tax. The Corporation's
statutory federal income tax rate is thirty-five percent.
<Table>
<Caption>
Maturing
-----------------------------------------------------------------------------
Within 1 year 1 - 5 years 5 - 10 Years
----------------------- ----------------------- -----------------------
Amount Yield Amount Yield Amount Yield
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
----------------------
Obligations of US
Government Agencies $ -- 0.00% $ 15,960 3.58% $ 207,895 4.47%
Obligations of States & Political
Subdivisions 5,536 5.21% 31,472 5.21% 50,606 4.83%
Other Securities 2,992 4.91% -- 0.00% 5,991 7.43%
---------- ---------- ---------- ---------- ---------- ----------
Total $ 8,528 5.10% $ 47,432 4.66% $ 264,492 4.61%
========== ========== ========== ========== ========== ==========
<Caption>
Maturing
--------------------------------------------------
Over 10 Years Total
----------------------- -----------------------
Amount Yield Amount Yield
---------- ---------- ---------- ----------
(Dollars in Thousands)
----------------------
Obligations of US
Government Agencies $ 91,053 5.35% $ 314,908 4.68%
Obligations of States & Political
Subdivisions 9,248 4.69% 96,862 4.96%
Other Securities 71,741 5.06% 80,724 5.23%
---------- ---------- ---------- ----------
Total $ 172,042 5.19% $ 492,494 4.83%
========== ========== ========== ==========
</Table>
12
Our loan policies also reflect our awareness of the need for liquidity. We have
shortened the average terms for most of our loan portfolios, in particular real
estate mortgages, the majority of which are normally written for five years or
less. The following table shows the maturities or repricing opportunities
(whichever is earlier) for the Bank's interest earning assets and interest
bearing liabilities at December 31, 2004. The repricing assumptions shown are
consistent with those established by the Bank's Asset and Liability Management
Committee (ALCO). Savings accounts and regular NOW accounts are non-maturing,
variable rate deposits, which may reprice as often as daily, but are not
included in the zero to six month category because in actual practice, these
deposits are only repriced if there is a large change in market interest rates.
The effect of including these accounts in the zero to six-month category is
depicted in a subsequent table. Super NOW accounts and Money Market deposits are
also non-maturing, variable rate deposits, however, these accounts are included
in the zero to six-month category because they may get repriced following
smaller changes in market rates.
<Table>
<Caption>
Assets/Liabilities at December 31, 2004, Maturing or Repricing in:
----------------------------------------------------------------------------
0 - 6 6 - 12 1 - 2 2 - 5 Over 5 Total
(Dollars in Thousands) Months Months Years Years Years Amount
---------------------- ---------- ---------- ---------- ---------- ---------- ----------
Interest Earning Assets
-----------------------
US Treas Secs & Obligations of
US Gov't Agencies $ 255,756 $ 20,700 $ 18,800 $ 18,133 $ 1,519 $ 314,908
Obligations of States & Political
Subdivisions 16,895 8,877 29,132 12,638 29,320 96,862
Other Securities 65,311 3,000 -- 2,000 10,413 80,724
Commercial Loans 318,899 31,085 89,073 168,246 1,892 609,195
Mortgage Loans 8,487 4,846 47,401 119,372 33,876 213,982
Consumer Loans 26,567 11,331 38,493 23,676 22,637 122,704
Federal Funds Sold 14,000 -- -- -- -- 14,000
---------- ---------- ---------- ---------- ---------- ----------
Total Interest Earning Assets $ 705,915 $ 79,839 $ 222,899 $ 344,065 $ 99,657 $1,452,375
---------- ---------- ---------- ---------- ---------- ----------
Interest Bearing Liabilities
----------------------------
Interest Bearing Demand Deposits $ 56,970 $ -- $ -- $ -- $ -- $ 56,970
Savings Deposits 321,701 -- -- -- -- 321,701
Other Time Deposits 122,275 66,734 161,514 74,169 11,119 435,811
FHLB Advances 123,000 -- -- 15,000 118,500 256,500
Repurchase Agreements 5,000 10,000 5,000 10,000 30,000
---------- ---------- ---------- ---------- ---------- ----------
Total Interest Bearing Liabilities $ 628,946 $ 76,734 $ 166,514 $ 99,169 $ 129,619 $1,100,982
---------- ---------- ---------- ---------- ---------- ----------
Gap $ 76,969 $ 3,105 $ 56,385 $ 244,896 $ (29,962) $ 351,393
Cumulative Gap $ 76,969 $ 80,074 $ 136,459 $ 381,355 $ 351,393 $ 351,393
Sensitivity Ratio 1.12 1.04 1.34 3.47 0.77 1.32
Cumulative Sensitivity Ratio 1.12 1.11 1.16 1.39 1.32 1.32
</Table>
13
If savings and regular NOW accounts were included in the zero to six months
category, the Bank's gap would be as shown in the following table:
<Table>
<Caption>
Assets/Liabilities at December 31, 2004, Maturing or Repricing in:
-------------------------------------------------------------------------------
0-6 6-12 1-2 2-5 Over 5
Months Months Years Years Years Total
---------- ---------- ---------- ---------- ---------- ----------
Total Interest Earning Assets $ 705,915 $ 79,839 $ 222,899 $ 344,065 $ 99,657 $1,452,375
Total Interest Bearing Liabilities $ 765,704 $ 76,734 $ 166,514 $ 99,169 $ 129,619 $1,237,740
---------- ---------- ---------- ---------- ---------- ----------
Gap $ (59,789) $ 3,105 $ 56,385 $ 244,896 $ (29,962) $ 214,635
Cumulative Gap $ (59,789) $ (56,684) $ (299) $ 244,597 $ 214,635 $ 214,635
Sensitivity Ratio 0.92 1.04 1.34 3.47 0.77 1.17
Cumulative Sensitivity Ratio 0.92 0.93 1.00 1.22 1.17 1.17
</Table>
The amount of loans due after one year with floating interest rates is
$269,071,000.
The following table shows the remaining maturity for Certificates of Deposit
with balances of $100,000 or more as of December 31, 2004 (000s omitted):
<Table>
<Caption>
Year Ended December 31,
----------------------------------------
(Dollars in Thousands) 2004 2003 2002
---------------------- ---------- ---------- ----------
Maturing Within
3 Months $ 72,125 $ 67,574 $ 58,859
3 - 6 Months 9,481 6,933 7,456
6 - 12 Months 17,262 5,007 10,948
Over 12 Months 85,789 36,140 42,106
---------- ---------- ----------
Total $ 184,657 $ 115,654 $ 119,369
========== ========== ==========
</Table>
For 2005, we expect the FOMC to continue to increase short term managed rates
through the first half of the year as the economic growth and potential for
inflation will allow the Fed to gradually move the fed funds rate from an
accommodative level to a neutral level. Since the fed began removing
accommodation in the second half of 2004, longer term market rates have
decreased. This flattening of the yield curve presents a challenge for us, as
the yields on our fixed rate assets are influenced by the longer term market
rates while the cost of many of our liabilities is influenced by shorter term
rates. This condition will make it difficult for us to increase our net interest
margin, and if it persists, we may experience a decrease in our margin. Recovery
in our region, which lags behind other areas due to the connection to the
automotive industry, is slowly gaining strength. We expect local loan demand
comparable to that which we experienced in 2004, with total loans increasing
between five and ten percent. We opened a new full service branch and regional
center in Wyandotte, Michigan in 2004. This is our fourth branch in southern
Wayne County, a market which is expected to contribute to our projected
increases in loans and deposits in 2005. This growth is expected to produce an
increase in Net Interest Income. We believe that our Allowance for Loan Losses
provides adequate coverage for the losses in our portfolio, and we expect that
we will be able to maintain the adequacy of the allowance without a significant
increase in the Provision for Loan Losses. We anticipate that slower mortgage
refinance activity and less gains on the sales of investment securities will
result in a small increase in non-interest income. Expenses related to our
additional offices and staffing increases will cause non-interest expenses to
increase. Primarily due to the anticipated increase in Net Interest Income, we
expect Net Income to increase slightly in 2005.
14
The following table shows the loan portfolio for the last five years.
<Table>
<Caption>
Book Value at December 31,
--------------------------------------------------------------
(Dollars in Thousands) 2004 (a) 2003 (a) 2002 (a) 2001 (a) 2000 (a)
---------------------- ---------- ---------- ---------- ---------- ----------
Loans secured by real estate:
Construction and land development ........................... $ 155,703 $ 86,221 $ 56,780 $ 47,025 $ 36,146
Secured by farmland (including farm residential
and other improvements) ................................... 8,499 7,438 7,925
6,172 4,354
Secured by 1-4 family residential properties ................ 301,620 287,638 258,157 275,489 275,299
Secured by multifamily (5 or more) residential properties ... 6,429 8,022 6,810 6,714 3,322
Secured by nonfarm nonresidential properties ................ 301,802 305,755 280,136 258,879 227,024
Loans to finance agricultural production and other
loans to farmers ............................................... 2,333 2,263 2,182
2,856 2,832
Commercial and industrial loans to U.S. addresses (domicile) ..... 87,068 92,313 90,838 99,186 150,805
Loans to individuals for household, family, and
other personal expenditures (includes purchased paper):
Credit cards and related plans .............................. 390 442 1,471 3,353 9,415
Other ....................................................... 80,761 72,542 68,942 87,322 102,089
Nonrated industrial development obligations (other than
securities) of states and political subdivisions in the U.S .... -- -- 67 133 228
Other loans:
Loans for purchasing or carrying securities (secured
and unsecured) ............................................ -- -- -- -- --
All other loans ............................................. 1,297 1,228 497 696 609
Less: Any unearned income on loans ............................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total loans and leases, net of unearned income ................... $ 945,902 $ 863,862 $ 773,805 $ 787,825 $ 812,123
========== ========== ========== ========== ==========
Nonaccrual loans ................................................. $ 29,896 $ 34,248 $ 22,332 $ 22,712 $ 17,161
Loans 90 days or more past due ................................... $ 230 $ 100 $ 81 $ 450 $ 193
Troubled debt restructurings ..................................... $ 3,715 $ 4,755 $ 6,807 $ -- $ 1,057
</Table>
(a) Loan categories are presented net of deferred loan fees. The presentation
in Note 4 to the consolidated financial statements differs from this
schedule presentation by presenting the loan categories, gross, before
deferred loan fees have been subtracted.
The following is an analysis of the transactions in the allowance for loan
losses:
<Table>
<Caption>
Year Ended December 31,
--------------------------------------------------------------------------
(Dollars in Thousands) 2004 2003 2002 2001 2000
---------------------- ---------- ---------- ---------- ---------- ----------
Balance Beginning of Period $ 14,500 $ 12,400 $ 13,000 $ 10,600 $ 9,900
Loans Charged Off
Domestic
Commercial, Financial, and Agricultural 2,045 1,838 4,383 3,399 7,035
Secured by Real Estate 468 3,389 2,859 1,242 --
Loans to Individuals 1,935 1,456 1,455 1,523 1,091
Recoveries
Domestic
Commercial, Financial, and Agricultural 335 206 1,351 619 2,138
Secured by Real Estate 57 33 135 111 --
Loans to Individuals 865 539 510 434 390
---------- ---------- ---------- ---------- ----------
Net Loans Charged Off 3,191 5,905 6,701 5,000 5,598
Provision Charged to Operations 2,491 8,005 6,101 7,400 6,298
---------- ---------- ---------- ---------- ----------
Balance End of Period $ 13,800 $ 14,500 $ 12,400 $ 13,000 $ 10,600
========== ========== ========== ========== ==========
Ratio of Net Loans Charged Off to
Average Total Loans Outstanding 0.34% 0.69% 0.87% 0.59% 0.73%
========== ========== ========== ========== ==========
</Table>
15
The following analysis shows the allocation of the allowance for loan losses:
<Table>
<Caption>
Year Ended December 31,
----------------------------------------------------------------------------------------------
2004 2003 2002 2001
---------------------- ---------------------- ---------------------- ----------------------
$ % of loans $ % of loans $ % of loans $ % of loans
(Dollars in Thousands) Amount to total loans Amount to total loans Amount to total loans Amount to total loans
---------------------- ------ -------------- ------ -------------- ------ -------------- ------ --------------
Balance at end of period
applicable to:
Domestic
Commercial, Financial, and
Agricultural $ 1,421 10.3% $ 1,582 11.7% $ 2,933 13.1% $ 4,119 13.8%
Real Estate - Construction 2,277 16.5% 367 9.9% 94 7.3% 260 6.0%
Real Estate - Mortgage 8,901 64.5% 11,506 69.7% 8,108 70.4% 8,038 68.6%
Loans to Individuals 1,201 8.7% 1,045 8.7% 1,265 9.2% 583 11.6%
Foreign -- 0.0% -- 0.0% -- 0.0% -- 0.0%
------ -------------- ------ -------------- ------ -------------- ------ --------------
Total $13,800 100.0% $14,500 100.0% $12,400 100.0% $13,000 100.0%
====== ============== ====== ============== ====== ============== ====== ==============
</Table>
<Table>
<Caption>
Year Ended December 31,
-----------------------
2000
-----------------------
$ % of loans
(Dollars in Thousands) Amount to total loans
---------------------- ------ --------------
Balance at end of period
applicable to:
Domestic
Commercial, Financial, and
Agricultural $ 4,426 19.0%
Real Estate - Construction 185 4.5%
Real Estate - Mortgage 5,172 62.8%
Loans to Individuals 817 13.7%
Foreign -- 0.0%
-------- --------------
Total $10,600 100.0%
======== ==============
</Table>
Each period the provision for loan losses in the income statement results from
the combination of an estimate by Management of loan losses that occurred during
the current period and the ongoing adjustment of prior estimates of losses.
To serve as a basis for making this provision, the Bank maintains an extensive
credit risk monitoring process that considers several factors including: current
economic conditions affecting the Bank's customers, the payment performance of
individual loans and pools of homogeneous loans, portfolio seasoning, changes in
collateral values, and detailed reviews of specific loan relationships. For
loans deemed to be impaired due to an expectation that all contractual payments
will probably not be received, impairment is measured by comparing the Bank's
recorded investment in the loan to the present value of expected cash flows
discounted at the loan's effective interest rate, the fair value of the
collateral, or the loan's observable market price. Year-end nonperforming
assets, which include nonaccrual loans, loans ninety days or more past due,
renegotiated debt, nonaccrual securities, and other real estate owned, decreased
$7.8 million, or 20% from 2003 to 2004. Nonperforming assets as a percent of
total assets at year-end decreased from 3.3% in 2003 to 2.6% in 2004. The
Allowance for Loan Losses as a percent of nonperforming assets at year-end
increased from 30.4% in 2003 to 34.5% in 2004.
The provision for loan losses increases the allowance for loan losses, a
valuation account which appears on the consolidated statements of condition. As
the specific customer and amount of a loan loss is confirmed by gathering
additional information, taking collateral in full or partial settlement of the
loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the
allowance for loan losses. If, subsequent to a charge off, the Bank is able to
collect additional amounts from the customer or sell collateral worth more than
earlier estimated, a recovery is recorded.
CONTRACTUAL OBLIGATIONS - The following table shows the Corporation's
contractual obligations.
<Table>
<Caption>
Payment Due by Period
------------------------------------------------------------
Less than 1 - 3 3 - 5 Over 5
(Dollars in Thousands) Total 1 year Years Years Years
-------------------- -------- -------- -------- -------- --------
Long Term Debt Obligations $286,500 $ 5,000 $ 15,000 $ 28,000 $238,500
Operating Lease Obligations 913 227 254 204 228
Salary Continuation Obligation 580 0 0 58 522
-------- -------- -------- -------- --------
Total Interest Earning Assets $287,993 $ 5,227 $ 15,254 $ 28,262 $239,250
======== ======== ======== ======== ========
</Table>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank faces market risk to the extent that the fair values of its financial
instruments are affected by changes in interest rates. The Bank does not face
market risk due to changes in foreign currency exchange rates, commodity prices,
or equity prices. The asset and liability management process of the Bank seeks
to monitor and manage the amount of interest rate risk. This is accomplished by
analyzing the differences in repricing opportunities for assets and
16
liabilities (gap analysis, as shown in Item 7), by simulating operating results
under varying interest rate scenarios, and by estimating the change in the net
present value of the Bank's assets and liabilities due to interest rate changes.
Each month, the Asset and Liability Committee (ALCO), which includes the senior
management of the Bank, estimates the effect of interest rate changes on the
projected net interest income of the Bank. The sensitivity of the Bank's net
interest income to changes in interest rates is measured by using a computer
based simulation model to estimate the impact on earnings of a gradual increase
or decrease of 100 basis points in the prime rate. The net interest income
projections are compared to a base case projection, which assumes no changes in
interest rates. The table below summarizes the net interest income sensitivity
as of December 31, 2004 and 2003.
<Table>
<Caption>
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ---------- -------- -------
Year-End 2004 12 Month Projection
Interest Income $86,596 $89,810 $83,098
Interest Expense 33,813 36,269 31,589
------- ------- -------
Net Interest Income $52,783 $53,541 $51,509
Percent Change From Base Projection 1.4% -2.4%
ALCO Policy Limit (+/-) 5.0% 5.0%
</Table>
<Table>
<Caption>
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ---------- -------- -------
Year-End 2003 12 Month Projection
Interest Income $73,037 $76,410 $70,860
Interest Expense 26,907 31,027 24,558
------- ------- -------
Net Interest Income $46,130 $45,383 $46,302
Percent Change From Base Projection -1.6% 0.4%
ALCO Policy Limit (+/-) 5.0% 5.0%
</Table>
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in the Bank's projected net interest income, in
its policy. Throughout 2004, the estimated variability of the net interest
income was within the Bank's established policy limits.
The ALCO also monitors interest rate risk by estimating the effect of changes in
interest rates on the economic value of the Bank's equity each month. The actual
economic value of the Bank's equity is first determined by subtracting the fair
value of the Bank's liabilities from the fair value of the Bank's assets. The
fair values are determined in accordance with Statement of Financial Accounting
Standards Number 107, Disclosures about Fair Value of Financial Instruments. The
Bank estimates the interest rate risk by calculating the effect of market
interest rate shocks on the economic value of its equity. For this analysis, the
Bank assumes immediate increases or decreases of 100 and 200 basis points in the
prime lending rate. The discount rates used to determine the present values of
the loans and deposits, as well as the prepayment rates for the loans, are based
on Management's expectations of the effect of the rate shock on the market for
loans and deposits. The table below summarizes the amount of interest rate risk
to the fair value of the Bank's assets and liabilities and to the economic value
of the Bank's equity.
17
<Table>
<Caption>
Fair Value at December 31, 2004
-------------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
- ----------------------- ---------- ---------- ---------- ---------- ----------
Assets $1,543,108 $1,513,190 $1,483,923 $1,572,426 $1,600,092
Liabilities 1,387,831 1,358,581 1,330,434 1,418,237 1,449,845
---------- ---------- ---------- ---------- ----------
Stockholders' Equity $ 155,277 $ 154,609 $ 153,489 $ 154,189 $ 150,247
Change in Equity -0.4% -1.2% -0.7% -3.2%
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
</Table>
<Table>
<Caption>
Fair Value at December 31, 2003
-------------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
- ----------------------- ---------- ---------- ---------- ---------- -------
Assets $1,459,412 $1,424,925 $1,390,429 $1,492,973 n/a
Liabilities 1,328,318 1,301,174 1,275,051 1,355,079 n/a
---------- ---------- ---------- ---------- -------
Stockholders' Equity $ 131,094 $ 123,751 $ 115,378 $ 137,894 n/a
Change in Equity -5.6% -12.0% 5.2% n/a
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
</Table>
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. Throughout 2004, the estimated variability of the economic value of
equity was within the Bank's established policy limits.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data
See Pages 20 - 38.
18
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
MBT Financial Corp. and Subsidiaries
Monroe, Michigan
We have audited the accompanying consolidated balance sheet of MBT
Financial Corp. and Subsidiaries as of December 31, 2004 and December 31,
2003 and the related consolidated statements of income, stockholders'
equity, and cash flows for each year in the three year period ended
December 31, 2004. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MBT
Financial Corp. and Subsidiaries as of December 31, 2004 and December 31,
2003 and the consolidated results of its operations and its cash flows for
each year in the three year period ended December 31, 2004, in conformity
with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of
MBT Financial Corp. and Subsidiaries' internal control over financial
reporting as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework issued by the committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 28,
2005, expressed an unqualified opinion thereon.
/s/ Plante & Moran, PLLC
Auburn Hills, Michigan
February 28, 2005
19
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
Dollars in thousands 2004 2003
- -------------------------------------------------------------------- ----------- -----------
ASSETS
Cash and Cash Equivalents (Note 2)
Cash and due from banks $ 20,540 $ 22,525
Federal funds sold 14,000 --
----------- -----------
Total cash and cash equivalents 34,540 22,525
Securities - Held to Maturity (Notes 3 and 12) 84,141 99,154
Securities - Available for Sale (Notes 3 and 12) 408,353 397,642
Federal Home Loan Bank stock - at cost 12,947 11,686
Loans held for sale (Notes 4 and 12) 778 1,406
Loans - Net (Notes 4, 5, and 12) 931,303 847,944
Accrued interest receivable and other assets (Notes 7 and 13) 58,047 59,407
Premises and Equipment - Net (Note 6) 22,170 18,024
----------- -----------
Total assets $ 1,552,279 $ 1,457,788
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing $ 149,469 $ 135,536
Interest-bearing (Note 8) 951,242 903,581
----------- -----------
Total deposits 1,100,711 1,039,117
Federal Home Loan Bank advances (Notes 9 and 12) 256,500 225,000
Federal funds purchased -- 45,000
Securities sold under repurchase agreements 30,000 --
Interest payable and other liabilities (Note 10) 9,722 5,225
----------- -----------
Total liabilities 1,396,933 1,314,342
----------- -----------
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized, 17,465,839
and 17,491,784 shares issued and outstanding) (Note 11) -- --
Additional paid-in capital 19,806 20,414
Retained Earnings 135,647 123,867
Accumulated other comprehensive loss (107) (835)
----------- -----------
Total stockholders' equity 155,346 143,446
=========== ===========
Total liabilities and stockholders' equity $ 1,552,279 $ 1,457,788
=========== ===========
</Table>
The accompanying notes are an integral part of these statements.
20
CONSOLIDATED STATEMENTS OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
Dollars in thousands 2004 2003 2002
- ------------------------------------------------ ------- ------- -------
INTEREST INCOME
Interest and fees on loans $57,660 $55,253 $59,180
Interest on investment securities-
Tax-exempt 5,613 6,206 6,741
Taxable 16,420 16,166 18,134
Interest on federal funds sold 10 149 549
------- ------- -------
Total interest income 79,703 77,774 84,604
------- ------- -------
INTEREST EXPENSE
Interest on deposits 14,923 15,991 21,469
Interest on borrowed funds 12,075 11,476 12,918
------- ------- -------
Total interest expense 26,998 27,467 34,387
------- ------- -------
NET INTEREST INCOME 52,705 50,307 50,217
PROVISION FOR LOAN LOSSES (Note 5) 2,491 8,005 6,101
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 50,214 42,302 44,116
------- ------- -------
OTHER INCOME
Income from trust services 3,746 3,316 3,497
Service charges and other fees 5,476 5,309 4,522
Net gain on sales of securities 567 1,041 1,325
Other 3,987 4,137 3,447
------- ------- -------
Total other income 13,776 13,803 12,791
------- ------- -------
OTHER EXPENSES
Salaries and employee benefits (Notes 10 and 16) 18,109 16,122 14,224
Occupancy expense 3,029 2,696 2,328
Other 11,478 11,361 10,437
------- ------- -------
Total other expenses 32,616 30,179 26,989
------- ------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES 31,374 25,926 29,918
PROVISION FOR INCOME TAXES (Note 13) 8,775 6,611 8,114
------- ------- -------
NET INCOME $22,599 $19,315 $21,804
======= ======= =======
BASIC EARNINGS PER COMMON SHARE $ 1.30 $ 1.02 $ 1.12
======= ======= =======
DILUTED EARNINGS PER COMMON SHARE (Note 15) $ 1.29 $ 1.01 $ 1.12
======= ======= =======
</Table>
The accompanying notes are an integral part of these statements.
21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL
- ---------------------------------------------------- -------------- -------------- -------------- --------------
BALANCE - JANUARY 1, 2002 $ 58,989 $ 104,056 $ (1,315) $ 161,730
Repurchase of Common Stock (591,101 shares)
(Note 11) (7,909) -- -- (7,909)
Dividends declared ($0.54 per share) -- (10,465) -- (10,465)
Comprehensive income:
Net income -- 21,804 -- 21,804
Change in net unrealized loss on securities
available for sale - Net of tax effect of
$990 and reclassifications of $875 -- -- 1,839 1,839
-------------- -------------- -------------- --------------
Total Comprehensive Income -- 21,804 1,839 23,643
-------------- -------------- -------------- --------------
BALANCE - DECEMBER 31, 2002 $ 51,080 $ 115,395 $ 524 $ 166,999
Repurchase of Common Stock (1,692,475 shares)
(Note 11) (31,008) -- -- (31,008)
Issuance of Common Stock
Stock options exercised (23,818 shares) 272 -- -- 272
Other stock issued (4,171 shares) 70 -- -- 70
Dividends declared ($0.58 per share) -- (10,843) -- (10,843)
Comprehensive income:
Net income -- 19,315 -- 19,315
Change in net unrealized loss on securities
available for sale - Net of tax effect of
$732 and reclassifications of $685 -- -- (1,359) (1,359)
-------------- -------------- -------------- --------------
Total Comprehensive Income -- 19,315 (1,359) 17,956
-------------- -------------- -------------- --------------
BALANCE - DECEMBER 31, 2003 $ 20,414 $ 123,867 $ (835) $ 143,446
Repurchase of Common Stock (220,000 shares)
(Note 11) (3,873) -- -- (3,873)
Issuance of Common Stock (194,055 shares)
Stock options exercised (183,915 shares) 2,753 -- -- 2,753
Other stock issued (10,140 shares) 187 -- -- 187
Tax benefit from exercise of options 325 -- -- 325
Dividends declared ($0.62 per share) -- (10,819) -- (10,819)
Comprehensive income:
Net income -- 22,599 -- 22,599
Change in net unrealized loss on securities
available for sale - Net of tax effect of $(392) -- -- 728 728
-------------- -------------- -------------- --------------
Total Comprehensive Income -- 22,599 728 23,327
============== ============== ============== ==============
BALANCE - DECEMBER 31, 2004 $ 19,806 $ 135,647 $ (107) $ 155,346
============== ============== ============== ==============
</Table>
The accompanying notes are an integral part of these statements.
22
CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
Dollars in thousands 2004 2003 2002
- -------------------------------------------------------------------------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 22,599 $ 19,315 $ 21,804
Adjustments to reconcile net income to net cash from operating activities
Provision for deferred taxes 195 (737) 1,607
Provision for loan losses 2,491 8,005 6,101
Depreciation 2,817 2,471 2,102
Net (Accretion) Amortization on investment securities 496 2,981 (2,657)
Net gain on sales of securities (567) (1,041) (1,325)
Increase in cash surrender value of life insurance (1,371) (1,305) (797)
Change in assets and liabilities
(Increase) decrease in accrued interest receivable and other assets (4,261) (3,666) 1,623
Increase (decrease) in accrued interest payable and other liabilities 4,822 (1,510) (1,823)
--------- --------- ---------
Net cash provided by operating activities $ 27,221 $ 24,513 $ 26,635
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held to maturity $ 25,610 $ 27,956 $ 59,980
Proceeds from maturities of investment securities available for sale 66,369 355,635 479,090
Proceeds from sales of investment securities available for sale 73,520 176,905 52,621
Net (increase) decrease in loans (85,222) (95,950) (5,618)
Proceeds from sales of other real estate owned 6,235 12,068 1,720
Proceeds from sales of other assets 71 13 113
Purchase of investment securities held to maturity (10,565) (10,300) (10,959)
Purchase of bank owned life insurance -- (15,490) (729)
Purchase of investment securities available for sale (150,701) (522,972) (616,156)
Purchase of bank premises and equipment (7,035) (5,058) (3,038)
--------- --------- ---------
Net cash used for investing activities $ (81,718) $ (77,193) $ (42,976)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 61,594 $ 28,157 $ 12,080
Net increase (decrease) in short term borrowings (45,000) 45,000 --
Net increase in Federal Home Loan Bank borrowings 31,500 -- --
Net increase is securities sold under repurchase agreements 30,000 -- --
Repurchase of common stock (3,873) (31,008) (7,909)
Issuance of common stock 2,940 342 --
Dividends paid (10,649) (10,904) (10,349)
--------- --------- ---------
Net cash provided by (used for) financing activities $ 66,512 $ 31,587 $ (6,178)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 12,015 $ (21,093) $ (22,519)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (Note 1) 22,525 43,618 66,137
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 1) $ 34,540 $ 22,525 $ 43,618
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 26,835 $ 27,646 $ 25,295
Cash paid for federal income taxes $ 7,135 $ 7,120 $ 8,870
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES
Transfer of loans to other real estate owned $ 5,461 $ 6,169 $ 12,932
Transfer of loans to other assets $ 55 $ 44 $ 4
========= ========= =========
</Table>
The accompanying notes are an integral part of these statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of MBT Financial
Corp. (the "Corporation") and its wholly owned subsidiary, Monroe Bank &
Trust (the "Bank"). The Bank includes the accounts of its wholly owned
subsidiaries, MBT Credit Company, Inc. and MB&T Financial Services, Inc.
The Bank operates twenty-one offices in Monroe County, Michigan and four
offices in Wayne County, Michigan. MBT Credit Company, Inc. operates a
mortgage loan office in Monroe County. The Bank's primary source of revenue
is from providing loans to customers, who are predominantly small and
middle-market businesses and middle-income individuals. The Corporation's
sole business segment is community banking.
The accounting and reporting policies of the Bank conform to practice
within the banking industry and are in accordance with accounting
principles generally accepted in the United States. Preparation of
financial statements in conformity with generally accepted accounting
principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant changes in the
near term are the determination of the allowance for loan losses and the
valuation of other real estate owned.
The significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiary. All material intercompany transactions and
balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year presentation.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Corporation's activities are with customers located within
southeast Michigan. Notes 3 and 4 discuss the types of securities and
lending that the Corporation engages in. The Corporation does not have any
significant concentrations in any one industry or to any one customer.
INVESTMENT SECURITIES
Investment securities that are "held to maturity" are stated at cost, and
adjusted for accumulated amortization of premium and accretion of discount.
The Bank has the intention and, in Management's opinion, the ability to
hold these investment securities until maturity. Investment securities that
are "available for sale" are stated at estimated market value, with the
related unrealized gains and losses reported as an amount, net of taxes, as
a separate component of stockholders' equity. The market value of
securities is based on quoted market prices. For securities that do not
have readily available market values, estimated market values are
calculated based on the market values of comparable securities. Gains and
losses on the sale of securities are determined using the specific
identification method. Premiums and discounts are recognized in interest
income using the interest method over the term of the security.
LOANS
The Bank grants mortgage, commercial, and consumer loans to customers.
Loans are reported at their outstanding unpaid principal balances, adjusted
for charge offs, the allowance for loan losses, and any deferred fees or
costs on originated loans. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan
yield using the interest method.
The accrual of interest on loans is discontinued at the time the loan is 90
days delinquent unless the credit is well secured and in the process of
collection. In all cases, loans are placed on nonaccrual or charged off at
an earlier date if principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest
on these loans is accounted for on the cash basis or cost recovery method,
until qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
LOANS HELD FOR SALE
Loans held for sale consist of fixed rate residential mortgage loans with
maturities of 15 to 30 years. Such loans are recorded at the lower of
aggregate cost or estimated fair value.
24
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as doubtful or
substandard. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan is lower than the
carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience, adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
could affect management's estimate of probable losses. The unallocated
component of the allowance reflects the margin of imprecision inherent in
the underlying assumptions used in the methodologies for estimating
specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the shortfall
in relation to the principal and interest owed. Impairment is measured on a
loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent.
Large groups of homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
FORECLOSED ASSETS (INCLUDES OTHER REAL ESTATE OWNED)
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at the lower of fair value or the loan carrying
amount at the date of the foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by
Management and the assets are carried at the lower of carrying amount or
fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in net expenses from
foreclosed assets.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated
depreciation of $25,427,000 in 2004 and $22,903,000 in 2003. The Bank uses
the straight-line method to provide for depreciation, which is charged to
operations over the estimated useful lives of the assets. Depreciation
expense amounted to $2,817,000 in 2004, $2,471,000 in 2003, and $2,102,000
in 2002.
The cost of assets retired and the related accumulated depreciation are
eliminated from the accounts and the resulting gains or losses are
reflected in operations in the year the assets are retired.
COMPREHENSIVE INCOME
Accounting principles generally require that revenue, expenses, gains, and
losses be included in net income. Certain changes in assets and
liabilities, however, such as unrealized gains and losses on securities
available for sale, are reported as a separate component of the equity
section of the balance sheet. Such items, along with net income, are
components of comprehensive income.
The components of accumulated other comprehensive income (loss) and related
tax effects are as follows:
<Table>
<Caption>
Dollars in thousands 2004 2003
- ---------------------------------------------------------- ------- -------
Unrealized gains (losses) on securities available for sale $ (164) $(1,285)
Tax effect 57 450
------- -------
Accumulated other comprehensive income (loss) $ (107) $ (835)
======= =======
</Table>
25
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents include cash and due from banks and Federal funds
sold. Generally, cash equivalents have daily maturities.
INCOME TAXES
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of the
various temporary differences between the book and tax bases of the various
balance sheet assets and liabilities and gives current recognition to
changes in tax rates and laws.
STOCK-BASED COMPENSATION
The Company applies the provisions of APB Opinion No. 25, "Accounting for
Stock-Based Compensation," for all employee stock option grants and has
elected to disclose pro forma net income and earnings per share amounts as
if the fair-value based method has been applied in measuring compensation
costs.
The Company's as reported and pro forma information for the years ended
December 31:
<Table>
<Caption>
Dollars in thousands, except per share data 2004 2003 2002
- ------------------------------------------- ---------- ---------- ----------
Net Income as Reported $ 22,599 $ 19,315 $ 21,804
Pro Forma Adjustment
Due to Stock Options (403) (258) (350)
---------- ---------- ----------
Pro Forma Net Income $ 22,196 $ 19,057 $ 21,454
========== ========== ==========
Earnings per Share as Reported
Basic $ 1.30 $ 1.02 $ 1.12
Diluted $ 1.29 $ 1.01 $ 1.12
Pro Forma Earnings per Share
Basic $ 1.27 $ 1.00 $ 1.10
Diluted $ 1.27 $ 1.00 $ 1.10
</Table>
Compensation expense in the pro forma disclosures is not indicative of
future amounts, as options vest over several years and additional grants
are generally made each year.
The weighted average fair value of options granted was $3.84, $3.04 and
$3.19 in 2004, 2003 and 2002, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in
2004, 2003 and 2002: expected option lives of seven years for all three;
expected volatility of 25.3%, 23.9% and 23.9%, risk-free interest rates of
3.8%, 4.6% and 4.6%, and dividend yield of 2.0%, 3.0% and 3.0%,
respectively.
OFF BALANCE SHEET INSTRUMENTS
In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit and standby letters of credit.
In November 2002, the FASB issued Interpretation No. 45, (FIN 45)
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," which elaborates
on the disclosures to be made by a guarantor about its obligations under
certain guarantees issued. It also clarifies that a guarantor is required
to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of this Interpretation have been
applied on a prospective basis to guarantees issued or modified after
December 31, 2002. However, the value of such guarantees is immaterial and
the adoption of this Standard did not have a material effect on the
Corporation's financial statements.
ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS 123 (revised 2004), "Share Based Payment," which revises SFAS 123,
"Accounting for Stock Based Compensation," and supersedes APB Opinion 25,
"Accounting for Stock Issued to Employees." This Statement requires an
entity to recognize the cost of employee services received in share based
payment transaction and measure the cost on a grant date fair value of the
award. That cost will be recognized over the period during which an
employee is required to provide services in exchange for the award. The
provisions of SFAS 123 (revised 2004) will be effective for the Company's
financial statements issued for periods beginning after June 15, 2005. The
Company plans to adopt the modified prospective application of SFAS 123
(revised 2004) in the third quarter of 2005. The anticipated impact on net
income is not expected to be material.
In March 2004, the Financial Accounting Standards Board (FASB) ratified the
consensus reached by the Emerging Issues Task Force (EITF) in Issue 03-1,
"The Meaning of Other Than Temporary Impairment and its Application to
Certain Investments" (EITF 03-1). EITF 03-1 provides guidance for
determining when an investment is considered impaired, whether impairment
is other than temporary, and measurement of an impairment loss. In
September 2004, the FASB issued FSP 03-1-1, which delayed the effective
date for the measurement and recognition guidance contained in paragraphs
10-20 of Issue 03-1 due to additional proposed guidance. The disclosure
required by EITF 03-1 is in Note 3 to the Consolidated Financial
Statements.
26
In March 2004, the SEC issued Staff Accounting Bulletin 105, "Application
of Accounting Principles to Loan Commitments" (SAB 105). This bulletin was
issued to inform registrants of the SEC's view that the fair value of the
recorded loan commitments, which are required to follow derivative
accounting under FAS 133, "Accounting for Derivative Instruments and
Hedging Activities," should not consider the expected future cash flows
related to the associated servicing of the future loan. The provisions of
SAB 105 must be applied to loan commitments accounted for as derivative
that are entered into after March 31, 2004. The adoption of this Staff
Accounting Bulletin in the second quarter of 2004 did not have a material
impact on MBT Financial Corp.
(2) CASH AND DUE FROM BANKS
The Bank is required by regulatory agencies to maintain legal reserve
requirements based on the level of balances in deposit categories. Cash
balances restricted from usage due to these requirements were $1,954,000
and $1,532,000 at December 31, 2004 and 2003, respectively. Cash and due
from banks includes deposits held at correspondent banks in excess of FDIC
insurance limits.
(3) INVESTMENT SECURITIES
The following is a summary of the Bank's investment securities portfolio as
of December 31, 2004 and 2003 (000's omitted):
<Table>
<Caption>
HELD TO MATURITY
DECEMBER 31, 2004
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Obligations of U.S. Government
Agencies $ 527 $ 51 $ -- $ 578
Obligations of States and Political
Subdivisions 80,622 2,161 (147) 82,636
Other Securities 2,992 82 -- 3,074
---------- ---------- ---------- ----------
$ 84,141 $ 2,294 $ (147) $ 86,288
========== ========== ========== ==========
</Table>
<Table>
<Caption>
AVAILABLE FOR SALE
DECEMBER 31, 2004
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Obligations of U.S. Government
Agencies $ 315,410 $ 1,123 $ (2,152) $ 314,381
Obligations of States and Political
Subdivisions 28,635 812 (260) 29,187
Other Securities 64,472 397 (84) 64,785
---------- ---------- ---------- ----------
$ 408,517 $ 2,332 $ (2,496) $ 408,353
========== ========== ========== ==========
</Table>
<Table>
<Caption>
HELD TO MATURITY
DECEMBER 31, 2003
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Obligations of U.S. Government
Agencies $ 536 $ 54 $ -- $ 590
Obligations of States and Political
Subdivisions 95,634 3,744 (144) 99,234
Other Securities 2,984 132 -- 3,116
---------- ---------- ---------- ----------
$ 99,154 $ 3,930 $ (144) $ 102,940
========== ========== ========== ==========
</Table>
<Table>
<Caption>
AVAILABLE FOR SALE
DECEMBER 31, 2003
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
Obligations of U.S. Government
Agencies $ 315,004 $ 450 $ (3,510) $ 311,944
Obligations of States and Political
Subdivisions 26,047 829 (403) 26,473
Other Securities 57,876 1,374 (25) 59,225
---------- ---------- ---------- ----------
$ 398,927 $ 2,653 $ (3,938) $ 397,642
========== ========== ========== ==========
</Table>
27
The amortized cost and estimated market value of securities at December 31,
2004, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties
(000's omitted).
<Table>
<Caption>
HELD TO MATURITY AVAILABLE FOR SALE
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---------- ---------- ---------- ----------
Maturing within
1 year $ 11,576 $ 11,717 $ -- $ --
1 to 5 years 36,212 37,311 16,985 16,977
5 to 10 years 29,227 30,112 237,659 237,405
Over 10 years 7,126 7,148 152,860 152,900
Securities with no stated maturity -- -- 1,013 1,071
---------- ---------- ---------- ----------
$ 84,141 $ 86,288 $ 408,517 $ 408,353
========== ========== ========== ==========
</Table>
The investment securities portfolio is evaluated for impairment throughout
the year. Impairment is recorded against individual securities, unless the
decrease in fair value is attributable to interest rates and management
determines that the Company has the intent and ability to hold the
investment for a period of time sufficient to allow for an anticipated
recovery in the market value. The fair values of investments with an
amortized cost in excess of their fair values at December 31, 2004 and
December 31, 2003 are as follows:
<Table>
<Caption>
DECEMBER 31, 2004
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
--------------------- --------------------- -----------------------
GROSS GROSS GROSS
AGGREGATE UNREALIZED AGGREGATE UNREALIZED AGGREGATE UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
--------- ---------- ---------- ---------- ---------- ----------
Obligations of United States
Government Agencies $144,904 $ 1,703 $ 18,551 $ 449 $163,455 $ 2,152
Obligations of States and
Political Subdivisions 6,423 58 2,692 349 $ 9,115 $ 407
Other Securities 12,795 84 -- -- $ 12,795 $ 84
-------- -------- -------- -------- -------- --------
$164,122 $ 1,845 $ 21,243 $ 798 $185,365 $ 2,643
======== ======== ======== ======== ======== ========
</Table>
<Table>
<Caption>
DECEMBER 31, 2003
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
--------------------- --------------------- ---------------------
GROSS GROSS GROSS
AGGREGATE UNREALIZED AGGREGATE UNREALIZED AGGREGATE UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
--------- ---------- ---------- ---------- ---------- ----------
Obligations of United States
Government Agencies $210,556 $ 3,510 $ -- $ -- $210,556 $ 3,510
Obligations of States and
Political Subdivisions 7,554 178 1,196 369 $ 8,750 $ 547
Other Securities 561 9 5,321 16 $ 5,882 $ 25
-------- -------- -------- -------- -------- --------
$218,671 $ 3,697 $ 6,517 $ 385 $225,188 $ 4,082
======== ======== ======== ======== ======== ========
</Table>
Investment securities carried at $322,959,000 and $307,005,000 were pledged
or set aside to secure borrowings, public and trust deposits, and for other
purposes required by law at December 31, 2004 and December 31, 2003,
respectively.
At December 31, 2004, Obligations of U. S. Government Agencies included
securities issued by the Federal Home Loan Bank with an estimated market
value of $160,741,000. At December 31, 2003, Obligations of U. S.
Government Agencies included securities issued by the Federal Home Loan
Bank with an estimated market value of $166,937,000.
For the years ended December 31, 2004, 2003 and 2002, proceeds from sales
of securities amounted to $73,520,000, $176,905,000 and $52,621,000,
respectively. Gross realized gains amounted to $1,174,000, $1,046,000 and
$1,325,000, respectively. Gross realized losses amounted to $607,000,
$5,000 and $0, respectively. The tax provision applicable to these net
realized gains and losses amounted to $179,000, $364,000 and $464,000,
respectively.
28
(4) LOANS
Loan balances outstanding as of December 31 consist of the following (000s
omitted):
2004 2003
-------- --------
Real estate loans $774,670 $695,677
Loans to finance agricultural production and
other loans to farmers 2,333 2,263
Commercial and industrial loans 88,035 93,444
Loans to individuals for household, family,
and other personal expenditures 81,119 72,972
All other loans (including overdrafts) 1,297 1,228
-------- --------
Total loans, gross $947,454 $865,584
Less: Deferred loan fees 1,573 1,734
-------- --------
Total loans, net of deferred loan fees $945,881 $863,850
Less: Allowance for loan losses 13,800 14,500
-------- --------
$932,081 $849,350
======== ========
The following is a summary of impaired loans (000s omitted):
<Table>
<Caption>
2004 2003 2002
------- ------- -------
Year-end impaired loans with no allowance for loan losses $ 3,809 $11,212 $37,201
allocated
Year-end impaired loans with allowance for loan losses allocated 30,136 32,379 60,898
Year-end allowance for loan losses allocated to impaired loans 6,014 6,873 7,291
Average investment in impaired loans 33,410 30,112 57,738
Interest income recognized on impaired loans 1,120 1,506 3,486
Cash basis interest income recognized on impaired loans during 1,120 1,506 3,486
the year
</Table>
Included in Loans are loans to certain officers, directors, and companies
in which such officers and directors have 10 percent or more beneficial
ownership in the aggregate amount of $19,295,000 and $17,451,000 at
December 31, 2004 and 2003, respectively. In 2004, new loans and other
additions amounted to $25,605,000, and repayments and other reductions
amounted to $23,761,000. In Management's judgment, these loans were made on
substantially the same terms and conditions as those made to other
borrowers, and do not represent more than the normal risk of collectibility
or present other unfavorable features.
Loans carried at $181,412,000 and $182,003,000 at December 31, 2004 and
2003, respectively, were pledged to secure Federal Home Loan Bank advances.
(5) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000s omitted):
<Table>
<Caption>
2004 2003 2002
-------- -------- --------
Balance beginning of year $ 14,500 $ 12,400 $ 13,000
Provision for loan losses 2,491 8,005 6,101
Loans charged off (4,447) (6,683) (8,697)
Recoveries 1,256 778 1,996
-------- -------- --------
Balance end of year $ 13,800 $ 14,500 $ 12,400
======== ======== ========
</Table>
Each period the provision for loan losses in the income statement results
from the combination of an estimate by Management of loan losses that
occurred during the current period and the ongoing adjustment of prior
estimates of losses occurring in prior periods.
To serve as a basis for making this provision, the Bank maintains an
extensive credit risk monitoring process that considers several factors
including: current economic conditions affecting the Bank's customers, the
payment performance of individual loans and pools of homogeneous loans,
portfolio seasoning, changes in collateral values, and detailed reviews of
specific loan relationships. For loans deemed to be impaired due to an
expectation that all contractual payments will probably not be received,
impairment is measured by comparing the Bank's recorded investment in the
loan to the present value of expected cash flows discounted at the loan's
effective interest rate, the fair value of the collateral, or the loan's
observable market price.
The provision for loan losses increases the allowance for loan losses, a
valuation account which appears on the consolidated balance sheets. As the
specific customer and amount of a loan loss is confirmed by gathering
additional information, taking collateral in full or partial settlement of
the loan, bankruptcy of the borrower, etc., the loan is charged off,
reducing the allowance for loan losses. If, subsequent to a charge off, the
Bank is able to collect additional amounts from the customer or sell
collateral worth more than earlier estimated, a recovery is recorded.
29
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of year end are as follows (000s omitted):
<Table>
<Caption>
2004 2003
------- -------
Land, buildings and improvements $27,909 $22,725
Equipment, furniture and fixtures 19,688 18,202
------- -------
Total Bank premises and equipment $47,597 $40,927
Less accumulated depreciation 25,427 22,903
------- -------
Bank premises and equipment, net $22,170 $18,024
======= =======
</Table>
The Corporation has entered into lease commitments for office locations.
Rental expense charged to operations was $311,000, $205,000, and $148,000
for the years ended December 31, 2004, 2003, and 2002, respectively. The
future minimum lease payments are as follows:
<Table>
<Caption>
Minimum
Year Payment
- ---------- --------
2005 $227,000
2006 126,000
2007 128,000
2008 126,000
2009 78,000
Thereafter 228,000
</Table>
(7) INTEREST RECEIVABLE AND OTHER ASSETS
The Bank includes the cash surrender value of Bank Owned Life Insurance
(BOLI) in Interest Receivable and Other Assets on the accompanying
consolidated balance sheets. The cash surrender value of the BOLI was
$35,152,000 at December 31, 2004 and $33,780,000 at December 31, 2003. The
following is a description of the components of the BOLI:
DIRECTOR SPLIT-DOLLAR LIFE INSURANCE
On December 21, 2000, the Bank entered into director split-dollar life
insurance agreements with each of its ten directors. Under the split-dollar
agreement, the policy's interests are divided between the Bank and the
director. The Bank owns the cash surrender value, including the accumulated
policy earnings, with each director's beneficiaries receiving a fixed
amount that is based on his or her years of director service and the Bank
receiving the remainder of the death benefits. The directors' death
benefits are $500,000 for director service of less than 3 years, $600,000
for service up to 5 years, $750,000 for service up to 10 years, and
$1,000,000 for director service of 10 years or more. In 2000, the Bank
fully paid the premiums for these ten policies with one lump sum premium
payment in the amount of $4,937,000. In 2003, the Bank paid additional
premiums of $3,661,000 to increase the coverage for each director to an
amount sufficient to provide the maximum split-dollar benefit that could be
attained.
The increase in cash surrender value is recorded as other non-interest
income. The Bank expects to recover in full the cash value from the Bank's
portion of the policies' death benefits.
SALARY CONTINUATION AGREEMENT AND LIFE INSURANCE POLICY
The Bank entered into a Salary Continuation Agreement with Ronald D.
LaBeau, then Chairman and Chief Executive Officer of the Bank on December
27, 2000. This agreement provides that the Bank will pay an annual salary
continuation benefit of $139,600 to Mr. LaBeau or his designated
beneficiaries for 10 years after his retirement on or after reaching the
normal retirement age of 65. On April 2, 2004, Mr. LaBeau retired prior to
reaching normal retirement age of 65. In accordance with the agreement, he
is eligible for an annual salary continuation benefit of $57,996 each year
for ten years, commencing in 2009.
At the same time it entered into the Salary Continuation Agreement with Mr.
LaBeau, the Bank purchased an insurance policy on Mr. LaBeau's life, with a
single premium payment of $5,880,000. While Mr. LaBeau's beneficiaries will
receive any payments to which he is entitled under the Salary Continuation
Agreement, they are not eligible for any of the life insurance proceeds of
this policy.
The life insurance policy is in addition to the split-dollar insurance
policy purchased by the Bank on Mr. LaBeau's life for his service as a
director, discussed previously, and the split-dollar insurance policy
discussed in "Executive Group Term Carve Out Split-Dollar Life Insurance
Agreements" below.
The Bank entered into a Salary Continuation Agreement with H. Douglas
Chaffin, President and Chief Executive Officer of the Bank on July 1, 2003.
This agreement provides that the Bank will pay an annual salary
continuation benefit of 65% of his final annual salary, reduced by 50% of
his Social Security benefit, his normal pension benefit, and benefits
payable attributable to the portion of the Bank's Section 401(k) plan
arising from employer contributions, to Mr. Chaffin or his designated
beneficiaries for 10 years after his retirement on or after reaching the
normal retirement age of 65.
30
EXECUTIVE GROUP TERM CARVE OUT SPLIT-DOLLAR LIFE INSURANCE AGREEMENTS
In addition to insurance policies on the lives of the directors of the
Bank, the Bank owns life insurance on the lives of several executives, for
which the Bank made premium payments of $16,242,000 in the aggregate. The
Bank and the executives share rights to death benefits payable under the
policies. An executive's beneficiaries are entitled to an amount equal to
two times the executive's current annual salary, less $50,000 if he or she
dies before retirement, or equal to his or her annual salary at the time of
termination of employment if he or she dies after retirement. The Bank will
receive the remainder of the death benefits. The Bank expects to recover in
full the premium paid by it from the Bank's portion of the policy's death
benefits or upon the cancellation or purchase of the policies by the
executives. The executives also have life insurance under the Bank's group
term life insurance program for all employees, which pays benefits up to
$50,000 to the executive's beneficiaries if he or she dies while employed
by the Bank.
(8) DEPOSITS
Interest expense on time certificates of deposit of $100,000 or more in the
year 2004 amounted to $3,970,000, as compared with $3,066,000 in 2003, and
$3,998,000 in 2002. At December 31, 2004, the balance of time certificates
of deposit of $100,000 or more was $184,657,000, as compared with
$115,654,000 at December 31, 2003. The amount of time deposits with a
remaining term of more than 1 year was $246,802,000 at December 31, 2004
and $183,060,000 at December 31, 2003. The following table shows the
scheduled maturities of Certificates of Deposit as of December 31, 2004:
<Table>
<Caption>
$100,000 and
Under $100,000 over
-------------- --------------
2005 $ 90,141,000 $ 98,868,000
2006 35,514,000 10,301,000
2007 84,819,000 30,880,000
2008 29,819,000 13,007,000
2009 10,741,000 20,602,000
Thereafter 120,000 10,999,000
-------------- --------------
Total $ 251,154,000 $ 184,657,000
============== ==============
</Table>
Time certificates of deposit include $38,811,000 of brokered certificates
of deposit as of December 31, 2004, and no brokered certificates of deposit
as of December 31, 2003. The following table shows the scheduled maturities
of the brokered certificates as of December 31, 2004.
<Table>
<Caption>
$100,000 and
Under $100,000 over
-------------- --------------
2005 $ -- $ --
2006 0 5,550,000
2007 0 6,030,000
2008 0 3,501,000
2009 0 12,731,000
Thereafter 0 10,999,000
-------------- --------------
Total $ -- $ 38,811,000
============== ==============
</Table>
(9) FEDERAL HOME LOAN BANK ADVANCES
As of December 31, 2004 the Bank had fourteen loans from the Federal Home
Loan Bank of Indianapolis totaling $256,500,000. Five of these advances,
with balances totaling $130,000,000 carry fixed rates of interest and
contain a put option that allows the FHLB to require repayment or
conversion to a variable rate advance each quarter. The average rate on the
advances is 5.42%, and no principal payments are required until the final
maturities in 2009 and 2010. If converted by the FHLB, the interest rates
would float quarterly at rates ranging from 3 month LIBOR to 3 month LIBOR
plus .02%. One of the advances has a fixed interest rate of 5.08%, matures
in 2011, and does not contain a put option. The remaining eight advances,
totaling $123,000,000, are floating rate loans that float quarterly at
rates ranging from 3 month LIBOR plus 2.06% to 3 month LIBOR plus 2.30%.
These advances are non-putable and no principal payments are required until
the final maturities in 2014. As of December 31, 2003, the Bank had ten
loans from the Federal Home Loan Bank of Indianapolis totaling
$225,000,000. Five of these advances, with balances totaling $130,000,000
carried fixed rates of interest and contained a put option that allowed the
FHLB to require repayment or conversion to a variable rate advance each
quarter. The average rate on the advances was 5.42%, and no principal
payments were required until the final maturities in 2009 and 2010. If
converted by the FHLB, the interest rates would float quarterly at rates
ranging from 3 month LIBOR to 3 month LIBOR plus .02%. The remaining five
advances, totaling $95,000,000, were floating rate loans that floated
quarterly at rates ranging from 3 month LIBOR plus 2.06% to 3 month LIBOR
plus 2.30%. These advances were non-putable and no principal payments are
required until the final maturities in 2013.
The Bank also has repurchase agreements with brokerage firms that are in
the possession of the underlying securities. The securities are returned to
the Bank at the maturity of the agreements. As of December 31, 2004 the
31
Bank had five repurchase agreements totaling $30,000,000. This includes
$20,000,000 of fixed rate agreements at rates ranging from 2.14% to 4.05%,
with $5,000,000 maturing in each year from 2005 to 2008. There is also one
agreement for $10,000,000 at a rate of 2.57% with a final maturity of 2011
that contains a put option that can be exercised by the issuer each
quarter, beginning in December 2005.
(10) RETIREMENT PLANS
In 2000, the Bank implemented a retirement plan that included both a money
purchase pension plan, as well as a voluntary profit sharing 401(k) plan
for all employees who meet certain age and length of service eligibility
requirements. In 2002, the Bank amended its retirement plan to freeze the
money purchase plan and retain the 401(k) plan. To ensure that the plan
meets the Safe Harbor provisions of the applicable sections of the Internal
Revenue Code, the Bank contributes an amount equal to four percent of the
employee's base salary to the 401(k) plan for all eligible employees. In
addition, an employee may contribute from 1 to 75 percent of his or her
base salary, up to a maximum of $13,000 in 2004. This annual contribution
limit increases by $1,000 each year until it reaches $15,000 in 2006. The
Bank matches the employee's elective contribution up to the first six
percent of the employee's annual base salary. Depending on the Bank's
profitability, an additional profit sharing contribution may be made by the
Bank to the 401(k) plan. The total retirement plan expense was $911,000 for
the year ended December 31, 2004, $1,012,000 for the year ended December
31, 2003, and $915,000 for the year ended December 31, 2002. This included
profit sharing contributions of three percent in 2004, two percent in 2003,
and three percent in 2002.
The Bank has a postretirement benefit plan that generally provides for the
continuation of medical benefits for all employees who retire from the Bank
at age 55 or older, upon meeting certain length of service eligibility
requirements. The Bank does not fund its postretirement benefit obligation.
Rather, payments are made as costs are incurred by covered retirees. The
amount of benefits paid under the postretirement benefit plan was $101,000
in 2004, $95,000 in 2003, and $84,000 in 2002. The amount of insurance
premium paid by the Bank for retirees is capped at 200% of the cost of the
premium as of December 31, 1992.
A reconciliation of the accumulated postretirement benefit obligation
("APBO") to the amounts recorded in the consolidated balance sheets in
Interest Payable and Other Liabilities at December 31 is as follows (000s
omitted):
<Table>
<Caption>
2004 2003
------- -------
APBO $ 1,811 $ 2,033
Unrecognized net transition obligation (429) (482)
Unrecognized prior service costs (36) (40)
Unrecognized net gain (159) (164)
------- -------
Liability recorded in the consolidated statements of condition $ 1,187 $ 1,347
======= =======
</Table>
The changes recorded in the accumulated postretirement benefit obligation
were as follows (000s omitted):
<Table>
<Caption>
2004 2003
------- -------
APBO at beginning of year $ 2,033 $ 1,757
Service cost 79 69
Interest cost 123 114
Actuarial loss (323) 188
Benefits paid during year (101) (95)
------- -------
APBO at end of year $ 1,811 $ 2,033
======= =======
</Table>
Components of the Bank's postretirement benefit expense were as follows:
<Table>
<Caption>
2004 2003 2002
----- ----- -----
Service cost $ 79 $ 69 $ 49
Interest cost 123 114 110
Amortization of transition obligation 54 54 54
Prior service costs 4 4 4
Amortization of gains -- -- (5)
----- ----- -----
Net postretirement benefit expense $ 260 $ 241 $ 212
===== ===== =====
</Table>
The APBO as of December 31, 2004 and 2003 was calculated using assumed
discount rates of 5.75% and 6.25%, respectively. Based on the provisions of
the plan, the Bank's expense is capped at 200% of the 1992 expense, with
all expenses above the cap incurred by the retiree. The expense reached the
cap in 2004, and accordingly the impact of an increase in health care costs
on the APBO was not calculated.
(11) STOCKHOLDERS' EQUITY
On December 11, 2003, the Corporation repurchased 1,632,475 shares of its
stock at $18.50 per share in a self tender offer.
On December 21, 2000, the Corporation's Board of Directors authorized the
repurchase of up to 2 million shares of MBT Financial Corp. common stock
during the two-year period beginning January 2, 2001. On December 19,
32
2002, the Board of Directors extended the repurchase program until December
31, 2004. Shares purchased are as follows:
Shares
Repurchased Cost
----------- -----------
2002 592,101 $ 7,908,387
2003 60,000 807,650
2004 220,000 3,873,500
----------- -----------
Total 872,101 $12,589,537
=========== ===========
On December 23, 2004, the Corporation's Board of Directors authorized the
repurchase of up to 2 million shares of MBT Financial Corp. common stock
during the 12 month period ending December 31, 2005.
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Certain of the Bank's assets and liabilities are financial instruments that
have fair values that differ from their carrying values in the accompanying
consolidated balance sheets. These fair values, along with the methods and
assumptions used to estimate such fair values, are discussed below. The
fair values of all financial instruments not discussed below are estimated
to be equal to their carrying values as of December 31, 2004 and 2003.
INVESTMENT SECURITIES
Fair value for the Bank's investment securities was determined using the
market value at December 31, 2004 and 2003. These Estimated Market Values
are disclosed in Note 3.
LOANS, NET AND LOANS HELD FOR SALE
The fair value of all loans is estimated by discounting the future cash
flows associated with the loans, using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. The estimated fair value of loans at December
31, 2004, net of the allowance for loan losses, is $947,167,000, compared
to the carrying value of $932,081,000. The estimated fair value of loans at
December 31, 2003, net of the allowance for loan losses, was $865,427,000,
compared to the carrying value of $849,350,000.
OTHER TIME DEPOSITS
The fair value of other time deposits, consisting of fixed maturity
certificates of deposit, is estimated by discounting the related cash flows
using the rates currently offered for deposits of similar remaining
maturities. The estimated fair value of other time deposits at December 31,
2004 is $443,265,000, compared to the carrying value of $435,614,000. The
estimated fair value of other time deposits at December 31, 2003 was
$348,255,000, compared to the carrying value of $337,472,000.
FHLB ADVANCES AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
A portion of the Federal Home Loan Bank advances in the accompanying
consolidated balance sheets were written with a put option that allows the
Federal Home Loan Bank to require repayment or conversion to a variable
rate advance. The fair value of these putable Federal Home Loan Bank
advances is estimated using the binomial lattice option pricing method. The
estimated fair value of putable Federal Home Loan Bank advances at December
31, 2004 is $140,160,000, compared to the carrying value of $130,000,000.
The fair value and carrying value of the variable rate advances at December
31, 2004 is $123,000,000. The estimated fair value of the fixed rate
Federal Home Loan Bank advance at December 31, 2004 is $3,603,000, compared
to the carrying value of $3,500,000.
The estimated fair value of putable Federal Home Loan Bank advances at
December 31, 2003 was $144,546,000, compared to the carrying value of
$130,000,000. The fair value and carrying value of the variable rate
advances at December 31, 2003 was $95,000,000.
The estimated fair value of the Securities Sold under Repurchase Agreements
at December 31, 2004 was $29,943,000, compared to the carrying value of
$30,000,000.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The fair values of commitments to extend credit and standby letters of
credit and financial guarantees written are estimated using the fees
currently charged to engage into similar agreements. The fair values of
these instruments are not significant.
(13) FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be reversed. The Corporation
and the Bank file a consolidated Federal income tax return.
33
The provision for Federal income taxes consists of the following (000s
omitted):
<Table>
<Caption>
2004 2003 2002
------- ------- -------
Federal income taxes currently payable (refundable) $ 8,580 $ 7,348 $ 6,507
Provision (credit) for deferred taxes on:
Book (over) under tax loan loss provision 245 (639) 210
Accretion of bond discount (43) (245) 103
Net deferred loan origination fees 56 (43) 46
Accrued postretirement benefits (81) 5 (58)
Tax over (under) book depreciation (258) 441 70
------- ------- -------
Total deferred provision (credit) (81) (481) 371
Other, net 276 (256) 1,236
------- ------- -------
$ 8,775 $ 6,611 $ 8,114
======= ======= =======
</Table>
The effective tax rate differs from the statutory rate applicable to
corporations as a result of permanent differences between accounting and
taxable income as follows:
<Table>
<Caption>
2004 2003 2002
---- ---- ----
Statutory rate 35.0 % 35.0 % 35.0 %
Municipal interest income (6.3) (7.7) (7.1)
Other, net (0.7) (1.8) (0.8)
---- ---- ----
Effective tax rate 28.0 % 25.5 % 27.1 %
==== ==== ====
</Table>
The components of the net deferred Federal income tax asset (included in
Interest Receivable and Other Assets on the accompanying consolidated
balance sheets) at December 31 are as follows (000s omitted):
<Table>
<Caption>
2004 2003
------- -------
Deferred Federal income tax assets:
Allowance for loan losses $ 4,734 $ 4,979
Net deferred loan origination fees 545 601
Tax versus book depreciation differences 474 216
Net unrealized losses on securities available for sale 58 450
Accrued postretirement benefits 552 471
Other, net 191 467
------- -------
$ 6,554 $ 7,184
Deferred Federal income tax liabilities:
Net unrealized gains on securities available for sale $ -- $ --
Accretion of bond discount (299) (342)
------- -------
$ (299) $ (342)
------- -------
Net deferred Federal income tax asset $ 6,255 $ 6,842
======= =======
</Table>
(14) REGULATORY CAPITAL REQUIREMENTS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory (and possibly
additional discretionary) actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Corporation and the Bank must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios
(set forth in the accompanying tables) of Total and Tier I capital to risk
weighted assets and of Tier I capital to average assets.
As of December 31, 2004, the Corporation's capital ratios exceeded the
required minimums to be considered well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum Total risk based, Tier I
risk based, and Tier I leverage ratios as set forth in the tables. There
are no conditions or events since December 31, 2004 that Management
believes have changed the Corporation's category. Management believes, as
of December 31, 2004, that the Corporation meets all capital adequacy
requirements to which it is subject.
34
The Corporation's and Bank's actual capital amounts and ratios are also
presented in the table (000's omitted in dollar amounts).
<Table>
<Caption>
Minimum to Qualify as
Actual Well Capitalized
-------------------- --------------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
AS OF DECEMBER 31, 2004:
Total Capital to Risk-Weighted Assets
Consolidated $168,796 15.6% $108,483 10.0%
Monroe Bank & Trust 166,976 15.4% 108,483 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 155,207 14.3% 65,090 6.0%
Monroe Bank & Trust 153,387 14.1% 65,090 6.0%
Tier 1 Capital to Average Assets
Consolidated 155,207 10.0% 77,275 5.0%
Monroe Bank & Trust 153,387 9.9% 77,275 5.0%
</Table>
<Table>
<Caption>
Minimum to Qualify as
Actual Well Capitalized
-------------------- ---------------------
Amount Ratio Amount Ratio
-------- ----- -------- ------
AS OF DECEMBER 31, 2003:
Total Capital to Risk-Weighted Assets
Consolidated $156,520 15.7% $ 99,873 10.0%
Monroe Bank & Trust 156,146 15.6% 99,873 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 143,980 14.4% 59,924 6.0%
Monroe Bank & Trust 143,606 14.4% 59,924 6.0%
Tier 1 Capital to Average Assets
Consolidated 143,980 9.8% 73,767 5.0%
Monroe Bank & Trust 143,606 9.7% 73,767 5.0%
</Table>
(15) EARNINGS PER SHARE
The calculation of earnings per common share for the years ended December
31 is as follows:
<Table>
<Caption>
2004 2003 2002
----------- ----------- -----------
<c>
BASIC
Net income $22,599,000 $19,315,000$ 21,804,000
Less preferred dividends -- -- --
----------- ----------- -----------
Net income applicable to common stock $22,599,000 $19,315,000 $21,804,000
----------- ----------- -----------
Average common shares outstanding 17,444,165 19,026,369 19,458,737
----------- ----------- -----------
Earnings per common share - basic $ 1.30 $ 1.02 $ 1.12
=========== =========== ===========
</Table>
<Table>
<Caption>
2004 2003 2002
----------- ----------- -----------
DILUTED
Net income $22,599,000 $19,315,000 $21,804,000
Less preferred dividends -- -- --
----------- ----------- -----------
Net income applicable to common stock $22,599,000 $19,315,000 $21,804,000
----------- ----------- -----------
Average common shares outstanding 17,444,165 19,026,369 19,458,737
Stock option adjustment 83,500 46,260 933
----------- ----------- -----------
Average common shares outstanding - diluted 17,527,665 19,072,629 19,459,670
----------- ----------- -----------
Earnings per common share - diluted $ 1.29 $ 1.01 $ 1.12
=========== =========== ===========
</Table>
(16) STOCK-BASED COMPENSATION PLAN
The Long-Term Incentive Compensation Plan approved by shareholders at the
April 6, 2000 Annual Meeting of Shareholders of Monroe Bank & Trust
authorized the Board of Directors to grant nonqualified stock options to
key employees and non-employee directors. Such grants may be made until
January 2, 2010 for up to 1,000,000 shares of the Corporation's common
stock. The amount that may be awarded to any one individual is limited to
100,000 shares in any one calendar year.
Stock options granted under the plan have exercise prices equal to the fair
market value at the date of grant. Options granted under the plan may be
exercised for a period of no more than ten years from the date of grant.
One-third of the options granted to key employees in 2004 and 2003 vest
annually, beginning December 31, 2004, and December 31, 2003, respectively.
The options granted to key employees in 2002 and 2000 are vested as of
December 31, 2004 and December 31, 2002, respectively. The options granted
to non-employee directors in 2002 and 2001 vested on December 31, 2002 and
December 31, 2001, respectively.
35
A summary of the status of stock options under the plan is presented in the
table below.
<Table>
<Caption>
2004 2003 2002
--------------------- --------------------- -----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- --------
Options Outstanding, January 1 480,802 $ 14.73 323,949 $ 15.52 140,434 $17.71
Granted 161,000 16.69 179,500 13.20 183,515 13.85
Exercised 183,915 14.97 19,647 13.86 -- --
Forfeited/Expired 24,100 17.33 -- -- -- --
Cancelled -- -- 3,000 13.85 -- --
------- --------- ------- --------- ------- ------
Options Outstanding, December 31 433,787 $ 15.22 480,802 $ 14.73 323,949 $15.52
======= ========= ======= ========= ======= ======
Options Exercisable, December 31 266,637 $ 15.08 306,445 $ 15.49 212,615 $16.40
======= ========= ======= ========= ======= ======
Weighted Average Fair Value of
Options Granted During Year $ 3.84 $ 3.04 $ 3.19
</Table>
The options outstanding as of December 31, 2004 are exercisable at prices
ranging from $13.20 to $18.125. The options exercisable as of December 31,
2004 are exercisable at prices ranging from $13.20 to $18.125.
(17) PARENT COMPANY
Condensed parent company financial statements, which include transactions
with the subsidiary, are as follows (000s omitted):
BALANCE SHEETS
<Table>
<Caption>
DECEMBER 31,
2004 2003
-------- --------
ASSETS
Cash and due from banks $ 3,994 $ 2,745
Investment in subsidiary bank 153,524 143,071
-------- --------
Total assets $157,518 $145,816
======== ========
LIABILITIES
Dividends payable and other liabilities $ 2,172 $ 2,370
-------- --------
Total liabilities 2,172 2,370
======== ========
STOCKHOLDERS' EQUITY
Total stockholders' equity 155,346 143,446
-------- --------
Total liabilities and stockholders' equity $157,518 $145,816
======== ========
</Table>
STATEMENTS OF INCOME
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2004 2003 2002
-------- -------- --------
INCOME
Dividends from subsidiary bank $ 12,829 $ 42,061 $ 18,357
-------- -------- --------
Total income 12,829 42,061 18,357
-------- -------- --------
EXPENSE
Interest on other borrowed funds -- -- --
Other expense 176 399 98
-------- -------- --------
Total expense 176 399 98
-------- -------- --------
Income before tax and equity in undistributed
net income of subsidiary bank 12,653 41,662 18,259
Income tax benefit (51) (102) (34)
-------- -------- --------
Income before equity in undistributed
net income of subsidiary bank 12,704 41,764 18,293
Equity in undistributed net income (loss)
of subsidiary bank 9,895 (22,449) 3,511
-------- -------- --------
NET INCOME $ 22,599 $ 19,315 $ 21,804
======== ======== ========
</Table>
36
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
2004 2003 2002
-------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income $ 22,599 $ 19,315 $ 21,804
Equity in undistributed net income (loss) of subsidiary bank (9,895) 22,449 (3,511)
Net increase (decrease) in other liabilities (197) (164) 80
Net decrease in other assets 325 -- --
-------- -------- --------
Net cash provided by operating activities $ 12,832 $ 41,600 $ 18,373
-------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Issuance of common stock $ 2,940 $ 342 $ --
Repurchase of common stock (3,874) (31,008) (7,908)
Dividends paid (10,649) (10,904) (10,349)
-------- -------- --------
Net cash used for financing activities $(11,583) $(41,570) $(18,257)
-------- -------- --------
NET INCREASE IN CASH
AND CASH EQUIVALENTS $ 1,249 $ 30 $ 116
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,745 2,715 2,599
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,994 $ 2,745 $ 2,715
======== ======== ========
</Table>
Under current regulations, the Bank is limited in the amount it may loan to
the Corporation. Loans to the Corporation may not exceed ten percent of the
Bank's capital stock, surplus, and undivided profits plus the allowance for
loan losses. Loans from the Bank to the Corporation are required to be
collateralized. Accordingly, at December 31, 2004, Bank funds available for
loans to the Corporation amounted to $16,743,000. The Bank has not made any
loans to the Corporation.
(18) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for its other lending
activities.
Financial instruments whose contractual amounts represent off-balance sheet
credit risk at December 31 were as follows (000s omitted):
<Table>
<Caption>
CONTRACTUAL AMOUNT
2004 2003
-------- --------
Commitments to extend credit:
Unused portion of commercial lines of credit $123,739 $118,339
Unused portion of credit card lines of credit 7,265 9,828
Unused portion of home equity lines of credit 23,709 16,907
Standby letters of credit and financial guarantees written 16,449 18,764
</Table>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, generally have fixed expiration dates or other termination
clauses, and require payment of a fee. Since the lines of credit may expire
without being drawn upon, the total committed amounts do not necessarily
represent future cash requirements. Credit card lines of credit have
various established expiration dates, but are fundable on demand. Home
equity lines of credit are secured by real estate mortgages, a majority of
which have ten year expiration dates, but are fundable on demand. The Bank
evaluates each customer's creditworthiness on a case by case basis. The
amount of the collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on Management's credit evaluation of the
counter party.
37
Standby letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support public and private borrowing
arrangements and other business transactions. Approximately $15,484,000 of
the letters of credit expires in 2005 and $965,000 extends for two to five
years. The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers.
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (000S OMITTED):
<Table>
<Caption>
2004 FIRST SECOND THIRD FOURTH
- ---------------------------------------- ------- ------- ------- -------
Total Interest Income $18,560 $19,250 $20,744 $21,149
Total Interest Expense 5,920 6,266 7,117 7,695
------- ------- ------- -------
Net Interest Income 12,640 12,984 13,627 13,454
Provision for Loan Losses 600 600 600 691
Other Income 3,226 3,361 3,396 3,793
Other Expenses 7,889 7,995 8,025 8,707
------- ------- ------- -------
Income Before Provision For Income Taxes 7,377 7,750 8,398 7,849
Provision For Income Taxes 1,977 2,102 2,289 2,407
------- ------- ------- -------
Net Income $ 5,400 $ 5,648 $ 6,109 $ 5,442
======= ======= ======= =======
Basic Earnings Per Common Share $ 0.31 $ 0.32 $ 0.35 $ 0.32
Diluted Earnings Per Common Share $ 0.31 $ 0.32 $ 0.35 $ 0.31
Dividends Declared Per Share $ 0.15 $ 0.15 $ 0.16 $ 0.16
</Table>
<Table>
<Caption>
2003 FIRST SECOND THIRD FOURTH
- ---------------------------------------- ------- ------- ------- -------
Total Interest Income $19,559 $20,020 $19,299 $18,896
Total Interest Expense 7,555 7,118 6,524 6,270
------- ------- ------- -------
Net Interest Income 12,004 12,902 12,775 12,626
Provision for Loan Losses 825 825 6,325 30
Other Income 3,203 3,516 3,882 3,202
Other Expenses 7,374 7,582 7,680 7,543
------- ------- ------- -------
Income Before Provision For Income Taxes 7,008 8,011 2,652 8,255
Provision For Income Taxes 1,951 2,230 679 1,751
------- ------- ------- -------
Net Income $ 5,057 $ 5,781 $ 1,973 $ 6,504
======= ======= ======= =======
Basic Earnings Per Common Share $ 0.26 $ 0.30 $ 0.10 $ 0.36
Diluted Earnings Per Common Share $ 0.26 $ 0.30 $ 0.10 $ 0.35
Dividends Declared Per Share $ 0.14 $ 0.14 $ 0.15 $ 0.15
</Table>
38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
MBT Financial Corp. carried out an evaluation, under the supervision and with
the participation of its management, including its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures as of December 31, 2004,
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Corporation's
disclosure controls and procedures were effective as of December 31, 2004, in
timely alerting them to material information relating to the Corporation
(including its consolidated subsidiaries) required to be in the Corporation's
periodic SEC filings.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of MBT Financial Corp. is responsible for establishing and
maintaining adequate internal control over financial reporting. MBT Financial
Corp.'s internal control over financial reporting is a process designed under
the supervision of the Corporation's Chief Executive Officer and Chief Financial
Officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the Corporation's financial statements for
external reporting purposes in accordance with U.S. generally accepted
accounting principles.
MBT Financial Corp.'s management assessed the effectiveness of the Corporation's
internal control over financial reporting as of December 31, 2004 based on
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in "Internal Control-Integrated Framework." Based on that
assessment, management determined that, as of December 31, 2004, the
Corporation's internal control over financial reporting is effective, based on
those criteria. Management's assessment of the effectiveness of the
Corporation's internal control over financial reporting as of December 31, 2004
has been audited by Plante & Moran, PLLC, an independent registered public
accounting firm, as stated in their report appearing on page 40.
ITEM 9B. OTHER INFORMATION
None.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
MBT Financial Corp. and Subsidiaries
Monroe, Michigan
We have audited management's assessment included in the accompanying Report of
Management on MBT Financial Corp. and Subsidiaries Internal Control Over
Financial Reporting, that the Company maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that MBT Financial Corp. and
Subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on COSO
criteria. Also in our opinion, MBT Financial Corp. and Subsidiaries maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2004 based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Balance Sheets of
MBT Financial Corp. and Subsidiaries as of December 31, 2004 and 2003 and the
related consolidated statements of earnings, shareholders equity and cash flow
for each of the three years in the period ended December 31, 2004 and our report
dated February 28, 2005, expressed an unqualified opinion thereon.
/s/ Plante & Moran, PLLC
February 28, 2005
Auburn Hills, Michigan
40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) EXECUTIVE OFFICERS - See "Executive Officers" in part I, Item 1 hereof.
(B) DIRECTORS AND EXECUTIVE OFFICERS - information required by this item is
incorporated by reference from the sections entitled "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement for the Annual Meeting of Shareholders that is to be
filed with the Securities Exchange Commission.
(C) AUDIT COMMITTEE FINANCIAL EXPERT - The Board of Directors has determined
that Peter H. Carlton, member of the Audit Committee, is an "audit
committee financial expert" and "independent" as defined under applicable
SEC and Nasdaq rules.
(D) MBT Financial Corp. has adopted its CODE OF ETHICS, a code of ethics that
applies to all its directors, officers, and employees, including its Chief
Executive Officer, Chief Financial Officer, and internal auditor. A copy of
the Code of Ethics is posted on our website at http://www.mbandt.com. In
the event we make any amendment to, or grant any waiver of, a provision of
the Code of Ethics that applies to the principal executive officers,
principal financial officer, principal accounting officer, or controller,
or persons performing similar functions that require disclosure under
applicable SEC rules, we intend to disclose such amendment or waiver, the
reasons for it, and the nature of any waiver, the name of the person to
whom it was granted, and the date, on our internet website.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the sections
entitled "Executive Compensation and Other Information" and "Compensation
Committee Interlocks and Insider Participation in Compensation Decisions" in the
Proxy Statement for the Annual Meeting of Shareholders that is to be filed with
the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated by reference from the section
entitled "Ownership of Voting Shares" in the Proxy Statement for the Annual
Meeting of Shareholders that is to be filed with the Securities and Exchange
Commission.
Securities authorized for issuance under equity compensation plans as of
December 31, 2004 were as follows:
<Table>
<Caption>
Number of securities remaining
Number of securities to be Weighted average available for future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, warrants, outstanding options, (excluding securities reflected in
and rights warrants, and rights first column )
------------------------------ ----------------------- -----------------------------------
Equity Compensation plans approved
by security holders 433,787 $ 15.22 331,045
Equity Compensation plans not
approved by security holders 0 0 0
------------------------------ ----------------------- -----------------------------------
Total 433,787 $ 15.22 331,045
============================== ======================= ===================================
</Table>
41
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the section
entitled "Certain Transactions" in the Proxy Statement for the Annual Meeting of
Shareholders that is to be filed with the Securities and Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated by reference from the section
entitled "Principal Accounting Firm Fees" in the Proxy Statement for the Annual
Meeting of Shareholders that is to be filed with the Securities and Exchange
Commission.
42
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Contents
Financial Statements
Reports of Independent Registered Public Accounting Firm - Page 19
Consolidated Balance Sheets as of December 31, 2004 and 2003 - Page 20
Consolidated Statements of Income for the Years Ended December 31,
2004, 2003, and 2002 - Page 21
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 2004, 2003, and 2002 - Page 22
Consolidated Statements of Cash Flows for the Years Ended December 31,
2004, 2003, and 2002- Page 23
Notes to Consolidated Financial Statements - Pages 24 - 38
Exhibits
The following exhibits are filed as a part of this report:
3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously
filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2000.
3.2 Bylaws of MBT Financial Corp.
10.1 MBT Financial Corp. Long-Term Incentive Compensation Plan. Previously
filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2000.
10.2 Monroe Bank & Trust Salary Continuation Agreement with Ronald D.
LaBeau. Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
10.3 Monroe Bank & Trust Split Dollar Life Insurance Agreement with
Directors. Previously filed as Exhibit 10.3 to MBT Financial Corp.'s
Form 10-K for its fiscal year ended December 31, 2000.
10.4 Monroe Bank & Trust Group Term Carve Out Plan Providing Life Insurance
Benefits to Executive Officers. Previously filed as Exhibit 10.4 to MBT
Financial Corp.'s Form 10-K for its fiscal year ended December 31,
2000.
10.5 MBT Financial Corp. Employment Agreement with H. Douglas Chaffin.
Previously filed as Exhibit 10.5 to MBT Financial Corp.'s Form 10-Q for
its fiscal quarter ended September 30, 2001.
10.6 Monroe Bank & Trust Group Term Carve Out Plan Providing Life Insurance
Benefits to Executive Officers. Previously filed as Exhibit 10.6 to MBT
Financial Corp.'s Form 10-K for its fiscal year ended December 31,
2001.
10.7 Monroe Bank & Trust Supplemental Executive Retirement Agreement with H.
Douglas Chaffin. Previously filed as Exhibit 10.1 to MBT Financial
Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003.
10.8 Monroe Bank & Trust Split Dollar Agreement with H. Douglas Chaffin.
Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-Q for
its fiscal quarter ended September 30, 2003.
21 Subsidiaries of the Registrant. Previously filed as Exhibit 21 to MBT
Financial Corp.'s Form 10-K for its fiscal year ended December 31,
2000.
23 Consent of Independent Auditors
31.1 Certification by Chief Executive Officer required by Securities and
Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities and
Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.1 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
43
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March 14, 2005 MBT FINANCIAL CORP.
By: /s/ John L. Skibski
John L. Skibski
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Dated: March 14, 2005
By: /s/ H. Douglas Chaffin By: /s/ John L. Skibski
H. Douglas Chaffin John L. Skibski
President, Chief Executive Chief Financial Officer
Officer & Director
By: /s/ William D. McIntyre, Jr. By: /s/ Richard A. Sieb
William D. McIntyre, Jr. Richard A. Sieb
Chairman Director
By: /s/ Peter H. Carlton By: /s/ Philip P. Swy
Peter H. Carlton Philip P. Swy
Director Director
By: /s/ Michael J. Miller
Michael J. Miller
Director
44
EXHIBIT INDEX
Exhibit Number Description of Exhibits
- -------------- -----------------------
3.1 Restated Articles of Incorporation of MBT Financial Corp.
Previously filed as Exhibit 3.1 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
3.2 Bylaws of MBT Financial Corp.
10.1 MBT Financial Corp. Long-Term Incentive Compensation Plan.
Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
10.2 Monroe Bank & Trust Salary Continuation Agreement. Previously
filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-K for
its fiscal year ended December 31, 2000.
10.3 Monroe Bank & Trust Split Dollar Life Insurance Agreement.
Previously filed as Exhibit 10.3 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
10.4 Monroe Bank & Trust Group Term Carve Out Plan. Previously
filed as Exhibit 10.4 to MBT Financial Corp.'s Form 10-K for
its fiscal year ended December 31, 2000.
10.5 MBT Financial Corp. Employment Agreement. Previously filed as
Exhibit 10.5 to MBT Financial Corp.'s Form 10-Q for its fiscal
quarter ended September 30, 2001.
10.6 Monroe Bank & Trust Group Term Carve Out Plan. Previously
filed as Exhibit 10.6 to MBT Financial Corp.'s Form 10-K for
its fiscal year ended December 31, 2001.
10.7 Monroe Bank & Trust Supplemental Executive Retirement
Agreement. Previously filed as Exhibit 10.1 to MBT Financial
Corp.'s Form 10-Q for its fiscal quarter ended September 30,
2003.
10.8 Monroe Bank & Trust Split Dollar Agreement. Previously filed
as Exhibit 10.2 to MBT Financial Corp.'s Form 10-Q for its
fiscal quarter ended September 30, 2003.
21 Subsidiaries of the Registrant. Previously filed as Exhibit 21
to MBT Financial Corp.'s Form 10-K for its fiscal year ended
December 31, 2000.
23 Consent of Independent Auditors
31.1 Certification by Chief Executive Officer required by
Securities and Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by
Securities and Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
45