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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, 2006
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)
(734) 241-3431
(Registrant's Telephone Number, Including Area Code)
NONE
(Former name, former address and former fiscal year, if changed since last
report)
Securities registered pursuant to section 12(b) of the Act: Common Stock, No Par
Value, Registered on NASDAQ Global Select Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. YES [ ] NO [X]
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of June 30, 2006, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $269.9 million based on the
closing sale price as reported on the National Association of Securities Dealers
Automated Quotation System National Market System.
As of March 9, 2007, there were 16,659,904 shares of the registrant's common
stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2007 Annual Meeting of Shareholders of
MBT Financial Corp. to be held on May 3, 2007 are incorporated by reference in
this Form 10-K in response to Part III, Items 10, 11, 12, 13, and 14.
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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 26 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, credit
unions, 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 ten 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 56.82% of
the market. In 2001, the Bank began expanding into Wayne County, Michigan, and
currently ranks seventeenth out of thirty-two institutions with a market share
of 0.28%. For the combined Monroe and Wayne County market, the Bank ranks sixth
of thirty-five institutions with a market share of 3.46%.
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
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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 13 of the MBT
Financial Corp. financial statements included in Part II, Item 8 of this Form
10-K.
The Financial Institutions 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 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
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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, 2006, Monroe Bank & Trust had 399 full-time employees and 36 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
NAME AGE POSITION
- ---- --- --------
H. Douglas Chaffin 51 President & Chief Executive Officer
Donald M. Lieto 51 Executive Vice President, Senior Administration
Manager, Monroe Bank & Trust
James E. Morr 60 Executive Vice President, Senior Wealth
Management Officer & General Counsel, Monroe
Bank & Trust; Secretary, MBT Financial Corp.
Thomas G. Myers 50 Executive Vice President & Chief Lending
Manager, Monroe Bank & Trust
John L. Skibski 42 Executive Vice President & Chief Financial
Officer, Monroe Bank & Trust; Treasurer, MBT
Financial Corp.
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.
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 2006, 2005, and
2004, President & Chief Operating Officer in 2003, and Executive Vice President,
Senior Lending Manager in 2002. Donald M. Lieto was Executive Vice President,
Senior Administration Manager in 2006, 2005, 2004 and 2003, and Senior Vice
President, Information Services Manager in 2003 and 2002. James E. Morr was
Executive Vice President, Senior Wealth Management Officer and General Counsel
for each of the last five years. Thomas G. Myers was Executive Vice President &
Chief Lending Manager in 2006, 2005, 2004 and 2003, Senior Vice President,
Commercial Group Manager in 2003 and 2002. John L. Skibski was Executive Vice
President & Chief Financial Officer in 2006, 2005 and 2004, Senior Vice
President & Controller in 2003, and Vice President & Controller in 2002.
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 1A. RISK FACTORS
An investment in the Corporation's common stock is subject to risks inherent to
the Corporation's business. The material risks and uncertainties that Management
believes affect the Corporation are described below. Before
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making an investment decision, investors should carefully consider the risks and
uncertainties described below together with all the other information included
or incorporated by reference in this report. The risks and uncertainties
described below are not the only ones facing the Corporation. Additional risks
and uncertainties that Management is not aware of or focused on or that
Management currently deems immaterial may also impair the Corporation's business
operations. This report is qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Corporation's financial
condition and results of operations could be materially and adversely affected.
If this were to happen, the value of the Corporation's common stock could
decline significantly, and investors would lose all or part of their investment.
RISKS RELATED TO THE CORPORATION'S BUSINESS
INTEREST RATE RISK - The Corporation's earnings and cash flows are largely
dependent upon its net interest income. Net interest income is the difference
between interest earned on interest earning assets such as loans and securities
and interest paid on interest bearing liabilities such as deposits and
borrowings. Interest rates are highly sensitive to many factors that are beyond
the Corporation's control, including general economic and market conditions and
policies of various governmental and regulatory agencies and, in particular, the
Board of Governors of the Federal Reserve System. Changes in monetary policy,
including changes in interest rates, could influence not only the interest the
Corporation receives on loans and investment securities and the amount of
interest it pays on deposits and borrowings, but such changes could also affect
the Corporation's ability to originate loans and obtain deposits and the fair
values of the Corporation's financial assets and liabilities. If the interest
rates paid on deposits and other borrowings increase at a faster rate or
decrease at a slower rate than the interest rates received on loans and
investments, the Corporation's net interest income, and therefore earnings,
could be adversely affected.
Although Management believes it has implemented effective asset and liability
management strategies to reduce the potential effects of changes in interest
rates on the Corporation's results of operations, any substantial, unexpected,
or prolonged change in market interest rates or in the term structure of
interest rates could have a material adverse effect on the Corporation's
financial condition and results of operations. See Item 7A. Quantitative and
Qualitative Disclosures about Market Risk in this report for further discussion
related to the Corporation's management of interest rate risk.
LENDING RISK - There are inherent risks associated with the Corporation's
lending activities. These risks include, among other things, the impact of
changes in interest rates and changes in economic conditions in the markets
where the Corporation operates as well as those across the State of Michigan and
the United States. Increases in interest rates and/or weakening economic
conditions could adversely impact the ability of borrowers to repay outstanding
loans or the value of the collateral securing these loans. The Corporation is
also subject to various laws and regulations that affect its lending activities.
Failure to comply with applicable laws and regulations could subject the
Corporation to regulatory enforcement action that could result in the assessment
of significant civil money penalties against the Corporation.
As of December 31, 2006, more than 80% of the Corporation's loan portfolio was
secured by real estate. These types of loans are generally viewed as lower risk
of default than commercial and industrial or consumer loans. The Corporation's
loan portfolio contains a significant amount of non-performing loans. The
Corporation's portfolio also contains some loans with relatively large balances,
and the deterioration of one or a few of these large loans could cause a
significant increase in non-performing loans. An increase in non-performing
loans could result in a net loss of earnings from these loans, an increase in
the provision for loan losses, and an increase in loan charge-offs, all of which
could have a material adverse effect on the Corporation's financial condition
and results of operations.
The Corporation maintains an Allowance for Loan Losses, which is a reserve
established through a provision for loan losses charged to expense, that
represents Management's best estimate of probable loan losses that have been
incurred within the existing portfolio of loans. The Allowance, in the judgment
of Management, is necessary to reserve for estimated loan losses and risks
inherent in the loan portfolio. The level of the Allowance reflects
5
Management's continuing evaluation of loan loss experience, current loan
portfolio quality, present economic, political, and regulatory conditions, and
unidentified losses inherent in the current loan portfolio. The determination of
the appropriate level of the Allowance inherently involves a high degree of
subjectivity and requires the Corporation to make significant estimates of
current credit risks and future trends, all of which may undergo material
changes. Changes in economic conditions affecting borrowers, new information
regarding existing loans, identification of additional problem loans, and other
factors, both within and outside of the Corporation's control, may require an
increase in the Allowance. In addition, bank regulatory agencies periodically
review the Corporation's Allowance and may require an increase in the provision
for loan losses or the recognition of further loan charge-offs, based on
judgments different from those of Management.
ECONOMIC RISK - The Corporation's success depends significantly on the general
economic conditions of the State of Michigan. Unlike larger regional or national
banks that are more geographically diversified, the Corporation provides banking
and financial services to customers primarily in Southeast Michigan and
Northwest Ohio. The local economic conditions in these areas have a significant
impact on the demand for the Corporation's products and services as well as the
ability of the Corporation's customers to repay loans, the value of the
collateral securing loans, and the stability of the Corporation's deposit
funding sources. A significant decline in general economic conditions caused by
inflation, recession, acts of terrorism, unemployment, changes in securities
markets or other factors could impact these local economic conditions and, in
turn, have a material adverse effect on the Corporation's financial condition
and results of operations.
COMPETITIVE RISK - The Corporation faces substantial competition in all areas of
its operations from a variety of different competitors, many of which are larger
and may have more financial resources. Such competitors primarily include
regional and national banks within the Corporation's market. The Corporation
also faces competition from many other types of financial institutions,
including savings and loan institutions, credit unions, finance companies,
brokerage firms, insurance companies, and other financial intermediaries. The
financial services industry could become even more competitive as a result of
legislative, regulatory, and technological changes and continued consolidation.
Banks, securities firms, and insurance companies can merge under the umbrella of
a financial holding company, which can offer virtually any type of financial
service, including banking, securities underwriting, and insurance. Also,
technology has lowered barriers to entry and made it possible for non-banks to
offer products and services traditionally provided by banks, such as automatic
transfer and automatic payment systems. Many of the Corporation's competitors
have fewer regulatory constraints, and may have lower cost structures.
Additionally, many competitors may be able to achieve economies of scale, and as
a result, may offer a broader range of products and services as well as better
pricing for those products and services than the Corporation can. Increased
competition could adversely affect the Corporation's growth and profitability,
which, in turn, could have a material adverse effect on the Corporation's
financial condition and results of operations.
REGULATORY RISK - The Corporation is subject to extensive federal and state
regulation and supervision. Banking regulations are primarily intended to
protect depositors' funds, federal deposit insurance funds, and the banking
system as a whole, not shareholders. These regulations affect the Corporation's
lending practices, capital structure, investment practices, dividend policy, and
growth, among other things. Congress and federal regulatory agencies continually
review banking laws, regulations, and policies for possible changes. Changes to
statutes, regulations, or regulatory policies, including changes in
interpretation or implementation of statutes, regulations, or policies, could
affect the Corporation in substantial and unpredictable ways. Such changes could
subject the Corporation to additional costs, limit the types of financial
services and products the Corporation may offer and/or increase the ability of
non-banks to offer competing financial products and services, among other
things. Failure to comply with laws, regulations, or policies could result in
sanctions by regulatory agencies, civil money penalties, and/or reputation
damage, which could have a material adverse effect on the Corporation's
business, financial condition, and results of operations. While the Corporation
has policies and procedures designed to prevent any such violations, there can
be no assurance that such violations will not occur.
FAILURE OR CIRCUMVENTION OF CONTROLS AND PROCEDURES - Management regularly
reviews and updates the Corporation's internal controls, disclosure controls,
and procedures, and corporate governance policies and
6
procedures. Any system of controls, however well designed and operated, is based
in part on certain assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure or
circumvention of the Corporation's controls and procedures or failure to comply
with regulations related to controls and procedures could have a material
adverse effect on the Corporation's business, results of operations, and
financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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 25 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 23 of its branches. The remaining two 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.
MBT Financial Corp. and its subsidiaries have not been required to pay a penalty
to the IRS for failing to make disclosures required with respect to certain
transactions that have been identified by the IRS as abusive or that have a
significant tax avoidance purpose.
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 2006.
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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 16,713,960 shares with a book value of $8.14. Dividends
declared on common stock during 2006 amounted to $.70 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.
2006 2005
HIGH LOW HIGH LOW
---- --- ---- ---
1(st) quarter $ 18.01 $ 15.80 $ 23.80 $ 18.25
2(nd) quarter $ 17.10 $ 15.46 $ 20.50 $ 17.82
3(rd) quarter $ 16.58 $ 14.45 $ 21.95 $ 17.64
4(th) quarter $ 15.95 $ 14.44 $ 19.10 $ 16.03
Dividends declared during the past three years on a quarterly basis were as
follows:
2006 2005 2004
---- ---- ----
1st quarter $ 0.17 $ 0.16 $ 0.15
2nd quarter $ 0.17 $ 0.16 $ 0.15
3rd quarter $ 0.18 $ 0.17 $ 0.16
4th quarter $ 0.18 $ 0.17 $ 0.16
As of December 31, 2006, the number of holders of record of the Corporation's
common shares was 1,277. 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, 2006:
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, 2006 - October 31, 2006 4,600 $ 15.30 4,600 1,658,226
November 1, 2006 - November 30, 2006 49,200 $ 15.33 49,200 1,609,026
December 1, 2006 - December 31, 2006 109,000 $ 15.28 109,000 1,500,026
-------------------------------------------------------------------
Total 162,800 $ 15.30 162,800
-------------------------------------------------------------------
The stock was repurchased pursuant to an authorization granted by the
Corporation's Board of Directors on December 22, 2005. The authorization allowed
the purchase of up to 2 million shares of the Corporation's stock during 2006.
8
The following graph shows a comparison of cumulative total shareholder returns
for the Corporation, the Nasdaq Composite Index, and the Nasdaq Bank Index for
the five year period ended December 31, 2006. The total shareholder return
assumes a $100 investment in the common stock of the Corporation, and each index
on December 31, 2001 and that all dividends were reinvested.
[PERFORMANCE GRAPH]
PERIOD ENDING
-----------------------------------------------------------------
INDEX 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06
- ----- -------- -------- -------- -------- -------- --------
MBT Financial Corp. 100.00 100.96 128.56 187.09 135.04 133.42
NASDAQ Composite 100.00 68.76 103.67 113.16 115.57 127.58
NASDAQ Bank 100.00 106.95 142.29 161.73 158.61 180.53
9
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 2006 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.
SELECTED CONSOLIDATED FINANCIAL DATA
Dollar amounts are in thousands,
except per share data 2006 2005 2004 2003 2002
- --------------------------------- ------------ ------------ ------------ ------------ ------------
CONSOLIDATED STATEMENTS OF INCOME
Interest Income $ 95,923 $ 89,695 $ 79,703 $ 77,774 $ 84,604
Interest Expense 49,288 38,583 26,998 27,467 34,387
------------ ------------ ------------ ------------ ------------
Net Interest Income 46,635 51,112 52,705 50,307 50,217
Provision for Loan Losses 16,475 6,906 2,491 8,005 6,101
------------ ------------ ------------ ------------ ------------
Net Interest Income after
Provision for Loan Losses 30,160 44,206 50,214 42,302 44,116
Other Income 9,542 14,449 13,776 13,803 12,791
Other Expenses 36,308 33,818 32,616 30,179 26,989
------------ ------------ ------------ ------------ ------------
Income before Provision
for Income Taxes 3,394 24,837 31,374 25,926 29,918
Provision for Income Taxes (379) 6,858 8,775 6,611 8,114
------------ ------------ ------------ ------------ ------------
Net Income $ 3,773 $ 17,979 $ 22,599 $ 19,315 $ 21,804
============ ============ ============ ============ ============
Net Income available to
Common Shareholders $ 3,773 $ 17,979 $ 22,599 $ 19,315 $ 21,804
============ ============ ============ ============ ============
PER COMMON SHARE
Basic Net Income $ 0.22 $ 1.04 $ 1.30 $ 1.02 $ 1.12
Diluted Net Income 0.22 1.03 1.29 1.01 1.12
Cash Dividends Declared 0.70 0.66 0.62 0.58 0.54
Book Value at Year End 8.14 8.82 8.89 8.20 8.72
Average Common Shares
Outstanding 16,941,432 17,334,376 17,444,165 19,026,369 19,458,737
============ ============ ============ ============ ============
CONSOLIDATED BALANCE SHEETS (YEAR
END)
Total Assets $ 1,566,819 $ 1,638,356 $ 1,552,279 $ 1,457,788 $ 1,409,694
Total Securities 439,025 533,709 505,441 508,482 539,737
Loans, Net of Deferred Loan Fees 998,998 989,311 945,881 863,850 773,805
Allowance for Loan Losses 13,764 13,625 13,800 14,500 12,400
Deposits 1,116,057 1,184,710 1,100,711 1,039,117 1,010,960
Borrowings 300,000 291,500 286,500 270,000 225,000
Total Shareholders' Equity 136,062 151,619 155,346 143,446 166,999
============ ============ ============ ============ ============
SELECTED FINANCIAL RATIOS
Return on Average Assets 0.24% 1.13% 1.55% 1.33% 1.55%
Return on Average Equity 2.59% 11.57% 15.18% 11.39% 13.29%
Net Interest Margin 3.12% 3.42% 3.75% 3.67% 3.79%
Dividend Payout Ratio 313.16% 63.52% 47.88% 56.14% 47.99%
Allowance for Loan Losses
to Period End Loans 1.38% 1.38% 1.69% 1.68% 1.60%
Allowance for Loan Losses
to Non Performing Loans 61.06% 51.49% 34.57% 30.41% 27.93%
Non Performing Loans
to Period End Loans 2.26% 2.67% 4.22% 5.50% 5.74%
Net Charge Offs to Average Loans 1.62% 0.71% 0.35% 0.72% 0.87%
============ ============ ============ ============ ============
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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 non-accrual or renegotiated by applying historical loss rates to
those loans in accordance with SFAS 5. In addition, all 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. Management is of the opinion that the Allowance for Loan Losses
of $13,764,000 as of December 31, 2006 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 decreased 79.0% in 2006 from $18.0 million to
$3.8 million as the bank conducted strategic initiatives to abate the reduction
in its net interest margin and improve its asset quality. In the second quarter
the Bank sold $83 million of its federal agency securities portfolio at a loss
of $5.0 million, reinvesting the proceeds in federal agency securities that
provided higher yields and better interest rate risk management characteristics.
In the third quarter, the Bank sold $25.0 million of credit related assets,
including non-performing loans, troubled performing loans, and Other Real Estate
Owned. This sale required a charge to the Provision for Loan Losses of $10.4
million.
The Fed raised the fed funds rate at their first four meetings in 2006. The
treasury yield curve became inverted, contributing to the 8.8% decrease in net
interest income. The net interest income was also negatively impacted because
the Bank utilized a deposit pricing strategy that restricted asset growth. The
Bank's asset yields are primarily influenced by the longer end of the treasury
yield curve while its funding costs are more closely related to the shorter end
of the curve. With the inversion of the yield curve, any balance sheet growth
would have been at a very small spread and may have resulted in an increase in
interest rate risk. By keeping the rates on certificates of deposit low, we were
able to control the decrease in our net interest margin, but the lack of asset
growth contributed to the decrease in net interest income. During 2006, the
yield on earning assets increased from 6.00% to 6.42% while the average earning
assets only increased $0.9 million. As a result, the interest income increased
6.9% from $89.7 million to $95.9 million. The cost of earning assets increased
from 2.58% to 3.30% and the interest expense increased 27.7% from $38.6 million
to $49.3 million. The Net Interest Margin decreased from 3.42% to 3.12% and the
net interest income decreased $4.5 million, or 8.8%.
The Provision for Loan Losses increased $9.6 million, or 138.6%. This occurred
primarily due to the write down of the loans that were sold in the third
quarter. The Bank continues to have an elevated level of non-performing assets,
but the sale helped reduce the amount of Problem Assets from $90.5 million at
December 31, 2005 to
11
$58.8 million at December 31, 2006. The Bank defines Problem Assets as
non-performing loans, other real estate owned, and performing loans that have
been internally classified as potential problem loans.
Non interest income decreased $4.9 million, or 34.0% in 2006 due to the loss on
the sale of investment securities in the second quarter. Wealth management
income increased slightly in 2006 as assets under management did not change
significantly. Deposit account service charges decreased $167,000, or 14.1%
because the earnings credit rate on deposit account balances increased. Other
deposit account fees increased $543,000, or 11.7% as NSF fees increased due to
an increase in NSF activity and the implementation of a new fee for accounts
that remain overdrawn for more than five days. Origination fees and gains on
mortgage loans sold decreased $106,000 or 15.9% due to a decrease in mortgage
loan originations caused by higher interest rates and slower real estate sales
in southeast Michigan. The table below shows the details for the non interest
income for the years ended December 31, 2006, 2005, and 2004, (000s omitted):
Years Ended December 31,
Non Interest Income 2006 2005 2004
- ------------------- -------- ------- -------
Wealth Management Income $ 4,268 $ 4,244 $ 3,746
Deposit Account Service Charges 1,020 1,187 1,515
Other Deposit Account Related Fees 5,189 4,646 3,961
Origination Fees/Gains on Loans Sold 560 666 579
Gains (Losses) on Securities Transactions (5,057) 295 567
BOLI Earnings 1,142 1,100 1,371
Other Income 2,420 2,311 2,037
------- ------- -------
Total Non Interest Income $ 9,542 $14,449 $13,776
Non interest expenses increased $2.5 million in 2006 compared to 2005. Salaries
and employee benefits increased $1.3 million. Salary expense increased $726,000
as the implementation of FAS 123(R) caused an increase of $440,000, incentive
compensation decreased $292,000 as the Bank did not achieve the profit goal
required by its bonus plan, and base salaries and wages increased $578,000, or
4.2%. Occupancy expense decreased in 2006 primarily because depreciation expense
was higher in 2005 as the Bank accelerated the depreciation of a parking lot
that is now the location of its new headquarters building. Marketing expense
increased significantly in 2006 due to increased advertising expenses and the
purchase of the naming rights for the new exhibition building at the Monroe
County Fairgrounds. Professional fees increased significantly in 2006 due to
expenses related to the loan sale in the third quarter and legal and accounting
expenses in the fourth quarter to comply with accounting pronouncements and
proxy disclosure requirements. Losses on other real estate owned increased
during the year as the Bank sold several properties, reducing the amount of OREO
assets from $8.3 million to $2.4 million.
Income Before the Provision for Income taxes decreased $21.4 million, or 86.3%
in 2006. Due to our tax exempt income on municipal securities, we recorded a tax
benefit of $379,000 on taxable income of $3,394,000 in 2006. Net Income
decreased $14.2 million, or 79% to $3,773,000.
Net Income decreased 20.4% from $22.6 million in 2004 to $18.0 million in 2005
as the Bank recorded significant increases in the Provision for Loan Losses and
in Other Real Estate Owned losses and expenses. The Provision for Loan Losses
increased $4,415,000 as net charge offs increased $3,615,000 and losses on the
sales and write downs of Other Real Estate Owned increased $845,000. Although
credit related charges to earnings increased $5.3 million compared to 2004,
non-performing assets decreased $13.5 million during 2005.
The Fed continued to raise managed interest rates in 2005 and the yield curve
flattened, contributing to the decrease of 3.0% in the Net Interest Income.
Although the Bank manages its assets and liabilities to minimize risk to
earnings caused by changes in interest rates, the change in the shape of the
yield curve had a negative impact on earnings. The pricing of assets such as
investment securities and fixed rate loans is influenced by the long end of the
yield curve while the pricing of liabilities such as Money Market Deposits,
Certificates of Deposit, and variable rate borrowings is influenced by the short
end of the yield curve. During 2005, the yield on earning assets increased from
5.68% to 6.00% and interest income increased $9,992,000, or 12.5%. The cost of
earning assets increased from 1.93% to 2.58% and interest expense increased
$11,585,000, or 42.9%. The result was a decrease in the Net Interest Margin from
3.75% to 3.42% and a decrease of $1,593,000 in Net Interest Income.
12
Non interest income increased 4.9%, or $673,000 in 2005 due to improvements in
Wealth Management income and Other Deposit Account Related Fees, which includes
fees assessed for overdrawn checking accounts. Non interest expenses increased
only 3.7%, from $32.6 million in 2004 to $33.8 million in 2005. Salaries and
benefits increased only 0.8%, or $139,000 due to a reduction of $611,000 in the
bonus compensation. The profit goal was not accomplished in 2005 and bonuses
were not paid to the executive officers.
Income Before the Provision for Income taxes decreased $6.5 million, or 20.8% in
2005. The effective tax rate decreased from 28.0% in 2004 to 27.6% in 2005. The
decrease in Income Before Taxes and the decrease in the effective tax rate
resulted in a decrease of $1.9 million or 21.8% in the Provision for Income
Taxes. Net Income decreased $4.6 million, or 20.4% to $18.0 million.
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 million, or 21.0% in 2004.
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.
Earnings for the Bank are usually highly reflective of the Net Interest Income.
The Federal Open Market Committee (FOMC) of the Federal Reserve raised the fed
funds target rate at their first four meetings in 2006, from 4.25% to 5.25%. At
the same time, the yield on the ten-year U. S. Treasury Note only increased from
4.39% to 4.70%. This inversion of the yield curve had a negative impact on the
Bank's Net Interest Margin, which declined from 3.42% in 2005 to 3.12% in 2006.
Loan and investment yields more closely follow long term market yields, and the
yield on our loans increased from 6.71% in 2005 to 7.02% in 2006. The yields on
our investment securities increased from 4.75% in 2005 to 5.15% in 2006, largely
due to the restructuring of the investment portfolio in the second quarter of
2006. Funding costs are more closely tied to the short term rates, and the
average cost of our deposits increased from 2.08% in 2005 to 2.73% in 2006 and
our average cost of borrowed funds increased from 5.05% in 2005 to 5.77% in
2006. As a result, the net interest income decreased 8.8% in 2006. In 2005, the
FOMC raised the fed funds target at each of their eight meetings, increasing the
rate from 2.25% to 4.25%. During this time, the yield on the ten-year U. S.
Treasury Note only increased from 4.22% to 4.39%. This flattening of the yield
curve began to cause our net interest margin to decline from 3.75% to 3.42% as
our cost of funds began to rise faster than our asset yields. In 2004, the FOMC
raised the fed funds rate for the first time since 2000 as the economic recovery
continued. 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% in 2003 to 6.30% in 2004. Investment
yields did improve slightly and the cost of funds decreased, resulting in an
increase in the net interest margin and net interest income. The average cost of
interest bearing deposits was 3.16%, 2.42%, and 1.65% for 2006, 2005, and 2004,
respectively. The following table shows selected financial ratios for the same
three years.
13
2006 2005 2004
------ ------ ------
Return on Average Assets 0.24% 1.13% 1.55%
Return on Average Equity 2.59% 11.57% 15.18%
Dividend Payout Ratio 313.2% 63.52% 47.88%
Average Equity to Average Assets 9.14% 9.76% 10.02%
LIQUIDITY AND CAPITAL - The Corporation has maintained sufficient liquidity to
fund its loan growth and allow for fluctuations in deposit levels. Internal
sources of liquidity are provided by the maturities of loans and securities as
well as holdings of securities Available for Sale. External sources of liquidity
include a line of credit with the Federal Home Loan Bank of Indianapolis, the
Federal funds lines that have been established with correspondent banks, and
Repurchase Agreements with money center banks that allow us to pledge securities
as collateral for borrowings. As of December 31, 2006, the Bank utilized $256.5
million of its authorized limit of $275 million with the Federal Home Loan Bank
of Indianapolis and $3.5 million of its $110 million of federal funds lines with
its correspondent banks.
Total stockholders' equity of the Corporation was $136.1 million at December 31,
2006 and $151.6 million at December 31, 2005. The ratio of equity to assets was
8.7% at December 31, 2006 and 9.3% at December 31, 2005. Federal bank regulatory
agencies have set capital adequacy standards for Total Risk Based Capital, Tier
1 Risk Based Capital, and Leverage Capital. These standards require banks to
maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of
at least 8% to be adequately capitalized. The regulatory agencies consider a
bank to be well capitalized if its Total Risk Based Capital is at least 10% of
Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, and
Leverage Capital Ratio is at least 5%.
The following table summarizes the capital ratios of the Corporation:
December 31, December 31, Minimum to be
2006 2005 Well Capitalized
----------- ------------ ----------------
Leverage Capital 8.9% 9.6% 5.0%
Tier 1 Risk Based Capital 12.8% 13.7% 6.0%
Total Risk Based Capital 14.0% 15.0% 10.0%
At December 31, 2006 and December 31, 2005, the Bank was in compliance with the
capital guidelines and is considered "well-capitalized" under regulatory
standards.
Market risk for the Bank, as is typical for most banks, consists mainly of
interest rate risk and market price risk. The Bank's earnings and the economic
value of its equity are exposed to interest rate risk and market price risk, and
monitoring this risk is the responsibility of the Asset/Liability Management
Committee (ALCO) of the Bank. The Bank's market risk is monitored monthly by the
ALCO.
14
The following table shows the investment portfolio for the last three years
(000s omitted).
Held to Maturity
-------------------------------------------------------------------------------
December 31, 2006 December 31, 2005 December 31, 2004
----------------------- ---------------------- ------------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- ---------- --------- ---------- --------
U.S. Government agency and corporation
obligations.......................... $ 10 $ 10 $ 11 $ 12 $ 527 $ 578
Securities issued by states and
political subdivisions in the U.S... 64,928 65,330 76,456 77,293 80,622 82,636
Other domestic securities (debt
and equity)......................... -- -- -- -- 2,992 3,074
------- ------- ------- ------- ------- -------
Total................................ $64,938 $65,340 $76,467 $77,305 $84,141 $86,288
======= ======= ======= ======= ======= =======
Pledged securities................... $ 4,209 $ 4,258 $13,863 $14,125 $19,659 $20,373
======= ======= ======= ======= ======= =======
Available for Sale
-------------------------------------------------------------------------------
December 31, 2006 December 31, 2005 December 31, 2004
----------------------- ---------------------- ------------------------
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).......... $ 326,808 $ 322,934 $ 358,412 $ 351,074 $ 315,410 $ 314,381
Securities issued by states and
political subdivisions in the U.S... 23,226 23,129 26,206 26,081 28,635 29,187
Other domestic securities
(debt and equity)................... 28,004 28,024 67,098 66,866 64,472 64,785
--------- --------- --------- --------- --------- ----------
Total................................ $ 378,038 $ 374,087 $ 451,716 $ 444,021 $ 408,517 $ 408,353
========= ========= ========= ========= ========= ==========
Pledged securities................... $ 325,445 $ 321,477 $ 316,379 $ 309,552 $ 304,004 $ 303,300
========= ========= ========= ========= ========= ==========
15
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.
Years Ended December 31,
------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Daily Earned Average Daily Earned Average Daily Earned Average
(Dollars in Thousands) Balance or Paid Yield Balance or Paid Yield Balance or Paid Yield
---------------------- ---------- ----------- ------- ---------- -------- ------- ---------- --------- -------
Investments
Obligations of US
Government Agencies $ 331,600 $ 16,778 5.06% $ 343,348 $ 15,878 4.62% $ 303,121 $ 13,089 4.32%
Obligations of States &
Political Subdivisions(1) 90,032 4,356 4.84% 105,373 5,036 4.78% 115,590 5,614 4.86%
Other Securities 61,756 3,768 6.10% 75,602 3,986 5.27% 69,538 3,330 4.79%
---------- ----------- ---- ---------- --------- ---- ---------- --------- ----
Total Investments 483,388 24,902 5.15% 524,323 24,900 4.75% 488,249 22,033 4.51%
---------- ----------- ---- ---------- --------- ---- ---------- --------- ----
Loans
Commercial 654,945 46,987 7.17% 621,365 41,971 6.75% 600,551 36,364 6.06%
Mortgage 228,960 13,746 6.00% 213,645 12,946 6.06% 194,072 12,217 6.30%
Consumer 126,074 10,217 8.10% 127,046 9,661 7.60% 120,327 9,079 7.55%
---------- ----------- ---- ---------- --------- ---- ---------- --------- ----
Total Loans(2) 1,009,979 70,950 7.02% 962,056 64,578 6.71% 914,950 57,660 6.30%
Federal Funds Sold 1,553 71 4.57% 7,687 217 2.82% 538 10 1.86%
---------- ----------- ---- ---------- --------- ---- ---------- --------- ----
Total Interest Earning Assets 1,494,920 95,923 6.42% 1,494,066 89,695 6.00% 1,403,737 79,703 5.68%
Cash & Due From Banks 24,421 24,839 25,230
Interest Receivable and Other
Assets 81,629 71,724 64,256
---------- ---------- ----------
Total Assets $1,600,970 $1,590,629 $1,493,223
========== ========== ==========
Savings Accounts $ 106,065 $ 264 0.25% $ 119,437 $ 298 0.25% $ 129,075 $ 325 0.25%
NOW Accounts 66,394 165 0.25% 66,900 169 0.25% 69,072 172 0.25%
Money Market Deposits 289,849 9,846 3.40% 294,070 5,561 1.89% 329,480 2,611 0.79%
Certificates of Deposit 512,780 20,574 4.01% 494,974 17,551 3.55% 378,959 11,815 3.12%
Federal Funds Purchased 18,913 981 5.19% 8,613 287 3.33% 32,894 491 1.49%
Repurchase Agreements 37,836 1,564 4.13% 32,164 1,055 3.28% 13,525 422 3.12%
FHLB Advances 256,500 15,894 6.20% 256,500 13,662 5.33% 242,104 11,162 4.61%
---------- ----------- ---- ---------- --------- ---- ---------- --------- ----
Total Interest Bearing
Liabilities 1,288,337 49,288 3.83% 1,272,658 38,583 3.03% 1,195,109 26,998 2.26%
Non-interest Bearing Deposits 154,327 156,289 143,759
Other Liabilities 13,456 6,313 5,438
---------- ---------- ----------
Total Liabilities 1,456,120 1,435,260 1,344,306
Stockholders' Equity 144,850 155,369 148,917
---------- ---------- ----------
Total Liabilities &
Stockholders' Equity $1,600,970 $1,590,629 $1,493,223
========== ========== ==========
Net Interest Income $ 46,635 $ 51,112 $ 52,705
Interest Rate Spread 2.59% 2.97% 3.42%
Net Interest Income as a
percent of average earning
assets 3.12% 3.42% 3.75%
(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.
16
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:
Years Ended December 31,
-------------------------------------------------------------------------------------------------
2006 versus 2005 2005 versus 2004 2004 versus 2003
-------------------------------------------------------------------------------------------------
Changes due to Changes due to Changes due to
increased (decreased) increased (decreased) increased (decreased)
-------------------------------------------------------------------------------------------------
(Dollars in Thousands) Rate Volume Net Rate Volume Net Rate Volume Net
---------------------- ------- ------- -------- ------- ------- -------- ------- ------- -------
Interest Income
Investments
Obligations of US
Government Agencies $ 1,443 $ (543) $ 900 $ 1,051 $ 1,737 $ 2,788 $ 1,549 $ (888) $ 661
Obligations of States &
Political
Subdivisions 53 (733) (680) (80) (497) (577) (195) (397) (592)
Other Securities 512 (730) (218) 366 290 656 262 (670) (408)
------- ------- -------- ------- ------- -------- ------- ------- -------
Total Investments 2,008 (2,006) 2 1,337 1,530 2,867 1,616 (1,955) (339)
------- ------- -------- ------- ------- -------- ------- ------- -------
Loans
Commercial 2,748 2,268 5,016 4,346 1,261 5,607 (1,525) 3,217 1,692
Mortgage (128) 928 800 (503) 1,232 729 (1,556) 1,945 389
Consumer 630 (74) 556 75 507 582 (955) 1,281 326
------- ------- -------- ------- ------- -------- ------- ------- -------
Total Loans 3,250 3,122 6,372 3,918 3,000 6,918 (4,036) 6,443 2,407
Federal Funds Sold 27 (173) (146) (87) 120 33 3 (142) (139)
------- ------- -------- ------- ------- -------- ------- ------- -------
Total Interest Income 5,285 943 6,228 5,168 4,650 9,818 (2,417) 4,346 1,929
Interest Expense
Savings Accounts 0 (33) (33) (3) (24) (27) (219) (16) (235)
NOW Accounts (3) (1) (4) 3 (6) (3) (116) 7 (109)
Money Market Deposits 4,365 (80) 4,285 3,229 (280) 2,949 (1,124) (483) (1,607)
Certificates of Deposit 2,392 631 3,023 2,119 3,617 5,736 (61) 944 883
Federal Funds Purchased 350 344 694 160 (363) (203) 57 313 370
Repurchase agreements 322 186 508 51 582 633 422 0 422
FHLB Advances 2,232 0 2,232 1,836 664 2,500 (1,056) 863 (193)
------- ------- -------- ------- ------- -------- ------- ------- -------
Total Interest Expense 9,658 1,047 10,705 7,395 4,190 11,585 (2,097) 1,628 (469)
------- ------- -------- ------- ------- -------- ------- ------- -------
Net Interest Income $(4,373) $ (104) $ (4,477) $(2,227) $ 460 $ (1,767) $ (320) $ 2,718 $ 2,398
======= ======= ======== ======= ======= ======== ======= ======= =======
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 was 85% as of December 31, 2006 and
2005. As reflected in Note 3 to the consolidated financial statements, the
percentage of securities that mature within five years was 21% as of December
31, 2006 and 17% as of December 31, 2005. The following table 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 was thirty-four percent in 2006.
17
Maturing
---------------------------------------------------------------------------------------------------
Within 1 year 1 - 5 years 5 - 10 Years Over 10 Years Total
----------------- -------------------- ----------------- ---------------- -----------------
(Dollars in Thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------- -------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Obligations of US
Government Agencies $ -- 0.00% $ 41,697 4.30% $247,123 5.43% $ 34,118 5.55% $322,938 5.30%
Obligations of States
& Political
Subdivisions 16,048 4.64% 32,308 5.22% 30,164 4.42% 9,544 4.67% 88,064 4.78%
Other Securities 3,004 6.98% -- 0.00% -- 0.00% 25,019 5.89% 28,023 6.01%
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Total $ 19,052 5.01% $ 74,005 4.70% $277,287 5.32% $ 68,681 5.55% $439,025 5.24%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Our loan policies also reflect our awareness of the need for liquidity. We have
short 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, 2006. The repricing assumptions shown are consistent
with those established by the Bank's Asset and Liability Management Committee
(ALCO). Savings accounts and interest bearing demand deposit 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. 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.
Assets/Liabilities at December 31, 2006, 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 $ 204,502 $ 25,176 $ 17,383 $ 43,121 $ 36,636 $ 326,818
Obligations of States &
Political Subdivisions 20,782 15,275 11,421 18,889 21,787 88,154
Other Securities 12,000 -- 2,000 12,000 15,630 41,630
Commercial Loans 223,168 39,885 116,294 245,419 21,299 646,065
Mortgage Loans 7,257 37,092 54,360 107,474 22,715 228,898
Consumer Loans 30,661 9,573 18,292 42,533 22,495 123,554
--------- --------- --------- -------- -------- ----------
Total Interest Earning Assets $ 498,370 $ 127,001 $ 219,750 $469,436 $140,562 $1,455,119
--------- --------- --------- -------- -------- ----------
Interest Bearing Liabilities
Savings Deposits $ 290,637 $ -- $ -- $ -- $ -- $ 290,637
Other Time Deposits 247,312 85,728 90,754 77,424 231 501,449
FHLB Advances 123,000 -- -- 133,500 -- 256,500
Repurchase Agreements 5,000 -- 5,000 10,000 20,000 40,000
Federal Funds Borrowed 3,500 -- -- -- -- 3,500
--------- --------- --------- -------- -------- ----------
Total Interest Bearing
Liabilities $ 669,449 $ 85,728 $ 95,754 $220,924 $ 20,231 $1,092,086
--------- --------- --------- -------- -------- ----------
Gap $(171,079) $ 41,273 $ 123,996 $248,512 $120,331 $ 363,033
Cumulative Gap $(171,079) $(129,806) $ (5,810) $242,702 $363,033 $ 363,033
Sensitivity Ratio 0.74 1.48 2.29 2.12 6.95 1.33
Cumulative Sensitivity Ratio 0.74 0.83 0.99 1.23 1.33 1.33
18
If savings and interest bearing demand deposit accounts were included in the
zero to six months category, the Bank's gap would be as shown in the following
table:
Assets/Liabilities at December 31, 2006, Maturing or Repricing in:
-----------------------------------------------------------------------
0-6 6-12 1-2 2-5 Over 5
Months Months Years Years Years Total
--------- --------- --------- -------- -------- ----------
Total Interest Earning Assets $ 498,370 $ 127,001 $ 219,750 $469,436 $140,562 $1,455,119
Total Interest Bearing
Liabilities $ 835,077 $ 85,728 $ 95,754 $220,924 $ 20,231 $1,257,714
--------- --------- --------- -------- -------- ----------
Gap $(336,707) $ 41,273 $ 123,996 $248,512 $120,331 $ 197,405
Cumulative Gap $(336,707) $(295,434) $(171,438) $ 77,074 $197,405 $ 197,405
Sensitivity Ratio 0.60 1.48 2.29 2.12 6.95 1.16
Cumulative Sensitivity Ratio 0.60 0.68 0.83 1.06 1.16 1.16
The amount of loans due after one year with floating interest rates is
$241,392,000.
The following table shows the remaining maturity for Certificates of Deposit
with balances of $100,000 or more as of December 31 (000s omitted):
Years Ended December 31,
------------------------------------
(Dollars in Thousands) 2006 2005 2004
- --------------------- -------- -------- --------
Maturing Within
3 Months $ 80,897 $107,782 $ 72,125
3 - 6 Months 25,343 29,286 9,481
6 - 12 Months 23,107 9,312 17,262
Over 12 Months 27,393 56,781 85,789
-------- -------- --------
Total $156,740 $203,161 $184,657
======== ======== ========
For 2007, we expect the FOMC to maintain short term managed rates at their
current levels through the first half of the year as the economic growth and
potential for inflation appear to have stabilized. While the fed was removing
accommodation from the second half of 2004 through the first half of 2006,
longer term market rates have not kept pace, and we are now experiencing an
inversion of the yield curve. This shape of the yield curve historically has
preceded a decline in economic conditions and interest rates; however, due to
the increased impact of global events on our economy, we cannot assume that we
are headed for a downturn in economic conditions and a change to more
accommodative monetary policy. Rather than trying to predict when positive slope
will return to the yield curve, and whether it will occur as the long end
increases or the short end decreases, we will continue to manage our balance
sheet to control overall interest rate risk and to minimize the negative effect
the prolonged flat or inverted yield curve has on our net interest margin. In
the near term, our focus will be on controlling the decline in our net interest
margin by trying to slow the rate of increase in our interest expense. We will
also attempt to continue to increase the percent of our assets that are invested
in loans by growing our loan portfolio in the northern and southern parts of our
market area. We plan to continue to limit our growth in total assets, funding
the loan growth through maturities and sales of investment securities.
The domestic automotive industry continues to struggle and we are experiencing
localized economic weakness in southeast Michigan. The housing market slowed
during 2006 and the rate of increase in property values is slowing. We expect
total loans to increase between five and ten percent in 2006. We opened a new
full service branch in Dundee, Michigan in 2006. The Dundee area is the fastest
growing area in our market, and it is expected to contribute to our projected
increases in loans and deposits in 2007. We also continue to have good growth
prospects in the southern Wayne County portion of our market, and our southern
Monroe County branches, which serve customers in northwest Ohio. Although we do
not expect significant asset growth, we anticipate that we will be able to
improve our net interest income slightly in 2007.
In 2006 we increased our Provision for Loan Losses significantly in order to
write down the assets that we sold in the third quarter and to increase the
general allocation portion of our Allowance for Loan Losses due to our
19
concerns about regional economic conditions and local real estate values. 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 while reducing our Provision for Loan Losses more than
75% from the level recorded in 2006. We believe that we will be able to decrease
the Provision for Loan Losses because we do not anticipate a significant decline
in economic conditions or real estate values in our market area.
We anticipate that a decrease in losses on the sales of investment securities
and improvements in service charges and other fees will result in a sizable
increase in non interest income. We expect non-interest expenses to increase
less than five per cent as lower OREO expenses and lower legal and other
professional fees will offset increases in other expenses. Primarily due to the
anticipated decrease in the Provision for Loan Losses, we expect Net Income to
increase significantly in 2007.
The following table shows the loan portfolio for the last five years (000s
omitted).
Book Value at December 31,
----------------------------------------------------
2006 (a) 2005 (a) 2004 (a) 2003 (a) 2002 (a)
-------- -------- -------- -------- --------
Loans secured by real estate:
Construction and land development $160,566 $150,179 $155,703 $ 86,221 $ 56,780
Secured by farmland (including farm residential
and other improvements) 10,057 9,891 8,499 7,438 7,925
Secured by 1-4 family residential properties 331,775 309,061 300,821 286,220 258,157
Secured by multifamily (5 or more) residential properties 10,124 6,718 6,429 8,022 6,810
Secured by nonfarm nonresidential properties 328,145 337,408 301,802 305,755 280,136
Loans to finance agricultural production and other loans to
farmers 3,738 3,519 2,333 2,263 2,182
Commercial and industrial loans to U.S. addresses (domicile) 97,512 99,220 87,068 92,313 90,838
Loans to individuals for household, family, and other personal
expenditures (includes purchased paper):
Credit cards and related plans 377 393 390 442 1,471
Other 55,510 70,853 80,761 72,542 68,942
Nonrated industrial development obligations (other than
securities) of states and political subdivisions in the U.S. -- -- -- -- 67
Other loans:
Loans for purchasing or carrying securities (secured and
unsecured) -- -- -- -- --
All other loans 473 1,635 1,297 1,228 497
Less: Any unearned income on loans -- -- -- -- --
-------- -------- -------- -------- --------
Total loans and leases, net of unearned income $998,277 $988,877 $945,103 $862,444 $773,805
======== ======== ======== ======== ========
Nonaccrual loans $ 19,152 $ 16,212 $ 29,896 $ 34,248 $ 22,332
Loans 90 days or more past due and accruing $ 69 $ 101 $ 230 $ 100 $ 81
Troubled debt restructurings $ 888 $ 1,813 $ 3,715 $ 4,755 $ 6,807
(a) Loan categories are presented net of deferred loan fees. The presentation
in Note 4 to the consolidated financial statements differs from this
schedule's presentation by presenting the loan categories, gross, before
deferred loan fees have been subtracted.
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.
20
The following is an analysis of the transactions in the allowance for loan
losses:
Years Ended December 31,
(Dollars in Thousands) 2006 2005 2004 2003 2002
---------------------- ------- ------- ------- ------- -------
Balance Beginning of Period $13,625 $13,800 $14,500 $12,400 $13,000
Loans Charged Off (Domestic)
Commercial, Financial, and Agricultural 1,600 313 2,045 1,838 4,383
Secured by Real Estate 14,910 6,800 468 3,389 2,859
Loans to Individuals 1,867 2,227 1,935 1,456 1,455
Recoveries (Domestic)
Commercial, Financial, and Agricultural 815 1,358 335 206 1,351
Secured by Real Estate 421 211 57 33 135
Loans to Individuals 805 965 865 539 510
------- ------- ------- ------- -------
Net Loans Charged Off 16,336 6,806 3,191 5,905 6,701
Transfer to establish reserve for unfunded loan
commitments -- 275 -- -- --
Provision Charged to Operations 16,475 6,906 2,491 8,005 6,101
------ ------- ------- ------- -------
Balance End of Period $13,764 $13,625 $13,800 $14,500 $12,400
======= ======= ======= ======= =======
Ratio of Net Loans Charged Off to
Average Total Loans Outstanding 1.62% 0.69% 0.34% 0.69% 0.87%
======= ======= ======= ======= =======
The following analysis shows the allocation of the allowance for loan losses:
Years Ended December 31,
---------------------------------------------------------------------
2006 2005 2004
---------------------- ---------------------- -----------------------
$ % of loans $ % of loans $ % of loans
(Dollars in Thousands) Amount to total loans Amount to total loans Amount to total loans
- ---------------------- ------- -------------- ------- -------------- -------- --------------
Balance at end of period
applicable to:
Domestic
Commercial, Financial,
and Agricultural $ 1,533 11.1% $ 2,209 11.4% $ 1,421 10.3%
Real Estate -
Construction 2,212 16.1% 1,959 15.2% 2,277 16.5%
Real Estate - Mortgage 9,241 67.1% 8,504 66.0% 8,901 64.5%
Loans to Individuals 778 5.7% 953 7.4% 1,201 8.7%
Foreign -- 0.0% -- 0.0% -- 0.0%
------- ----- ------- ----- ------- -----
Total $13,764 100.0% $13,625 100.0% $13,800 100.0%
======= ===== ======= ===== ======= =====
Years Ended December 31,
---------------------------------------------
2003 2002
---------------------- ----------------------
$ % of loans $ % of loans
(Dollars in Thousands) Amount to total loans Amount to total loans
- ---------------------- ------- -------------- ------- --------------
Balance at end of period
applicable to:
Domestic
Commercial, Financial,
and Agricultural $ 1,582 11.7% $ 2,933 13.1%
Real Estate -
Construction 367 9.9% 94 7.3%
Real Estate - Mortgage 11,506 69.7% 8,108 70.4%
Loans to Individuals 1,045 8.7% 1,265 9.2%
Foreign -- 0.0% -- 0.0%
------- ----- ------- -----
Total $14,500 100.0% $12,400 100.0%
======= ===== ======= =====
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
$3.9 million, or 15%, from 2005 to 2006. Nonperforming assets as a percent of
total assets at year-end decreased from 1.6% in 2005 to 1.4% in 2006. The
Allowance for Loan Losses as a percent of nonperforming assets at year-end
increased from 51.5% in 2005 to 61.1% in 2006.
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
21
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.
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 $296,500 $5,000 $33,000 $131,500 $127,000
Operating Lease Obligations 1,152 315 455 304 78
Salary Continuation Obligation 580 -- 58 116 406
-------- ------ ------- -------- --------
Total Contractual Obligations $298,232 $5,315 $33,513 $131,920 $127,484
-------- ------ ------- -------- --------
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 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, 2006 and 2005.
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
- --------------------------- ---------- -------- ---------
Year-End 2006 12 Month
Projection
Interest Income $97,925 $100,633 $95,723
Interest Expense 51,324 54,753 48,765
------- -------- -------
Net Interest Income $46,601 $ 45,880 $46,958
Percent Change From Base
Projection -1.5% 0.8%
ALCO Policy Limit (+/-) 5.0% 5.0%
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
- --------------------------- ---------- -------- ---------
Year-End 2005 12 Month
Projection
Interest Income $97,353 $99,475 $95,344
Interest Expense 43,750 46,501 41,615
------ ------ ------
Net Interest Income $53,603 $52,974 $53,729
Percent Change From Base
Projection -1.2% 0.2%
ALCO Policy Limit (+/-) 5.0% 5.0%
22
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 2006, 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.
Fair Value at December 31, 2006
------------------------------------------------------------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
- ----------------------- ---------- ---------- ---------- ---------- ----------
Assets $1,547,587 $1,521,680 $1,495,774 $1,572,574 $1,594,950
Liabilities 1,379,062 1,361,793 1,344,925 1,396,752 1,414,865
---------- ---------- ---------- ---------- ----------
Stockholders' Equity $ 168,525 $ 159,887 $ 150,849 $ 175,822 $ 180,085
Change in Equity -5.1% -10.5% 4.3% 6.9%
ALCO Policy Limit (+/-) 10.0% 20.0% 10.0% 20.0%
Fair Value at December 31, 2005
------------------------------------------------------------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
- ----------------------- ---------- ---------- ---------- ---------- ----------
Assets $1,612,025 $1,580,635 $1,550,016 $1,642,850 $1,671,653
Liabilities 1,447,518 1,422,535 1,398,378 1,473,363 1,500,118
---------- ---------- ---------- ---------- ----------
Stockholders' Equity $ 164,507 $ 158,100 $ 151,638 $ 169,487 $ 171,535
Change in Equity -3.9% -7.8% 3.0% 4.3%
ALCO Policy Limit (+/-) 10.0% 20.0% 10.0% 20.0%
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. The Bank has reduced its average equity as a percent of assets each year
since 2003. During 2005, the Bank revised its policy limits to reduce the limits
on changes in the economic value of equity from 25% to 20% in the 200 basis
point rate shift and from 15% to 10% in the 100 basis point rate shift.
Throughout 2006, 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 24 - 45.
23
[PLANTE & MORAN, PLLC LOGO] PLANTE & MORAN, PLLC
Suite 500
2601 Cambridge Court
Auburn Hills, MI 48326
Tel: 248.375.7100
Fax: 248.375.7101
plantemoran.com
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, 2006 and December 31,
2005 and the related consolidated statements of income, stockholders'
equity, and cash flows for each year in the three year period ended
December 31, 2006. 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, 2006 and December 31,
2005 and the consolidated results of its operations and its cash flows for
each year in the three year period ended December 31, 2006, in conformity
with U.S. generally accepted accounting principles.
As described in Notes 1 and 9 to the financial statements, the Company
adopted the provisions of FASB 158 Employer's Accounting for Defined
Benefit Pensions and Other Postretirement Benefit Plans, as of December 31,
2006.
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, 2006, based on criteria established in
Internal Control-Integrated Framework issued by the committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 5,
2007, expressed an unqualified opinion thereon.
[PLANTE & MORAN, PLLC]
Auburn Hills, Michigan
March 5, 2007
[MRI LOGO]
24
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
Dollars in thousands 2006 2005
- -------------------- ----------- -----------
ASSETS
Cash and Cash Equivalents (Note 2)
Cash and due from banks $ 27,903 $ 32,330
Federal funds sold -- 5,000
----------- -----------
Total cash and cash equivalents 27,903 37,330
Securities - Held to Maturity (Note 3) 64,938 76,467
Securities - Available for Sale (Note 3) 374,087 444,021
Federal Home Loan Bank stock - at cost 13,086 13,221
Loans held for sale 721 434
Loans - Net (Notes 4 and 5) 984,513 975,252
Accrued interest receivable and other assets (Note 12) 27,961 28,748
Bank Owned Life Insurance (note 9) 39,631 36,252
Premises and Equipment - Net (Note 6) 33,979 26,631
----------- -----------
Total assets $ 1,566,819 $ 1,638,356
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing $ 158,688 $ 178,116
Interest-bearing (Note 7) 957,369 1,006,594
----------- -----------
Total deposits 1,116,057 1,184,710
Federal Home Loan Bank advances (Note 8) 256,500 256,500
Federal funds purchased 3,500 --
Securities sold under repurchase agreements (Note 8) 40,000 35,000
Interest payable and other liabilities (Note 9) 14,700 10,527
----------- -----------
Total liabilities 1,430,757 1,486,737
----------- -----------
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized, 16,713,960
and 17,197,116 shares issued and outstanding) (Note 10) -- --
Additional paid-in capital 6,979 14,417
Retained Earnings 134,162 142,205
Accumulated other comprehensive loss (5,079) (5,003)
----------- -----------
Total stockholders' equity 136,062 151,619
----------- -----------
Total liabilities and stockholders' equity $ 1,566,819 $ 1,638,356
=========== ===========
The accompanying notes are an integral part of these statements.
25
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
Dollars in thousands 2006 2005 2004
- -------------------- -------- ------- -------
INTEREST INCOME
Interest and fees on loans $ 70,950 $64,578 $57,660
Interest on investment securities-
Tax-exempt 4,356 5,036 5,613
Taxable 20,546 19,864 16,420
Interest on federal funds sold 71 217 10
-------- ------- -------
Total interest income 95,923 89,695 79,703
-------- ------- -------
INTEREST EXPENSE
Interest on deposits 30,849 23,578 14,923
Interest on borrowed funds 18,439 15,005 12,075
-------- ------- -------
Total interest expense 49,288 38,583 26,998
-------- ------- -------
NET INTEREST INCOME 46,635 51,112 52,705
PROVISION FOR LOAN LOSSES (Note 5) 16,475 6,906 2,491
-------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 30,160 44,206 50,214
-------- ------- -------
OTHER INCOME
Income from trust services 4,268 4,244 3,746
Service charges and other fees 6,210 5,833 5,476
Net gain (loss) on sales of securities (5,057) 295 567
Bank owned life insurance income 1,142 1,100 1,371
Other 2,979 2,977 2,616
-------- ------- -------
Total other income 9,542 14,449 13,776
-------- ------- -------
OTHER EXPENSES
Salaries and employee benefits (Notes 9 and 15) 19,572 18,248 18,109
Occupancy expense (Note 6) 3,113 3,320 3,029
Equipment expense 3,096 3,011 2,950
Marketing expense 1,623 1,213 1,205
Professional fees 1,835 1,445 1,971
Net loss on other real estate owned 1,755 1,198 353
Other 5,314 5,383 4,999
-------- ------- -------
Total other expenses 36,308 33,818 32,616
-------- ------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES 3,394 24,837 31,374
PROVISION FOR INCOME TAXES (Note 12) (379) 6,858 8,775
-------- ------- -------
NET INCOME $ 3,773 $17,979 $22,599
======== ======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.22 $ 1.04 $ 1.30
======== ======= =======
DILUTED EARNINGS PER COMMON SHARE (Note 14) $ 0.22 $ 1.03 $ 1.29
======== ======= =======
The accompanying notes are an integral part of these statements.
26
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL
- -------------------- ---------- --------- -------------- ---------
BALANCE - JANUARY 1, 2004 $ 20,414 $ 123,867 $ (835) $ 143,446
Repurchase of Common Stock (220,000 shares)
(Note 10) (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 $(591) -- -- 1,097 1,097
Reclassification adjustment for losses included
in net income - Net of tax effect of $198 -- -- (369) (369)
-------- --------- ------- ---------
Total Comprehensive Income 23,327
-------- --------- ------- ---------
BALANCE - DECEMBER 31, 2004 $ 19,806 $ 135,647 $ (107) $ 155,346
Repurchase of Common Stock (364,420 shares)
(Note 10) (6,984) -- -- (6,984)
Issuance of Common Stock (95,697 shares)
Stock options exercised (88,162 shares) 1,248 -- -- 1,248
Other stock issued (7,535 shares) 147 -- -- 147
Tax benefit from exercise of options 200 -- -- 200
Dividends declared ($0.66 per share) -- (11,421) -- (11,421)
Comprehensive income:
Net income -- 17,979 -- 17,979
Change in net unrealized loss on securities
available for sale - Net of tax effect of $2,533 -- -- (4,704) (4,704)
Reclassification adjustment for losses included
in net income - Net of tax effect of $103 -- -- (192) (192)
-------- --------- ------- ---------
Total Comprehensive Income 13,083
-------- --------- ------- ---------
BALANCE - DECEMBER 31, 2005 $ 14,417 $ 142,205 $(5,003) $ 151,619
Repurchase of Common Stock (499,974 shares)
(Note 10) (8,141) -- -- (8,141)
Issuance of Common Stock (16,818 shares)
Stock options exercised (5,999 shares) 81 -- -- 81
Other stock issued (10,819 shares) 177 -- -- 177
Tax benefit from exercise of options 5 -- -- 5
Equity compensation 440 -- -- 440
Dividends declared ($0.70 per share) -- (11,816) -- (11,816)
Comprehensive income:
Net income -- 3,773 -- 3,773
Change in net unrealized loss on securities
available for sale - Net of tax effect of $459 -- -- (853) (853)
Reclassification adjustment for losses included
in net income - Net of tax effect of $(1,770) -- -- 3,287 3,287
Change in postretirement liability - Net of tax
effect of $1,353 -- -- (2,510) (2,510)
-------- --------- ------- ---------
Total Comprehensive Income 3,697
-------- --------- ------- ---------
BALANCE - DECEMBER 31, 2006 $ 6,979 $ 134,162 $(5,079) $ 136,062
======== ========= ======= =========
The accompanying notes are an integral part of these statements.
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
Dollars in thousands 2006 2005 2004
- -------------------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,773 $ 17,979 $ 22,599
Adjustments to reconcile net income to net cash from operating activities
Provision for deferred taxes (1,059) 215 195
Provision for loan losses 16,475 6,906 2,491
Depreciation 2,353 2,781 2,817
Net (Accretion) Amortization on investment securities (84) 190 496
Net (gain) loss on sales of securities 5,057 (295) (567)
Increase in cash surrender value of life insurance (1,142) (1,100) (1,371)
Stock based compensation expense 440 -- --
Change in assets and liabilities
(Increase) decrease in accrued interest receivable and other assets (5,563) (10,049) (4,261)
Increase (decrease) in accrued interest payable and other liabilities 316 1,005 4,822
--------- --------- ---------
Net cash provided by operating activities $ 20,566 $ 17,632 $ 27,221
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held to maturity $ 24,058 $ 19,826 $ 25,610
Proceeds from maturities of investment securities available for sale 17,887 50,222 66,369
Proceeds from sales of investment securities held to maturity -- 3,021 --
Proceeds from sales of investment securities available for sale 144,718 75,446 73,520
Net increase in loans (26,023) (50,511) (85,222)
Proceeds from sales of other real estate owned 8,283 6,732 6,235
Proceeds from sales of other assets 83 101 71
Purchase of investment securities held to maturity (12,524) (15,682) (10,565)
Purchase of bank owned life insurance (2,238) -- --
Purchase of investment securities available for sale (93,769) (168,528) (150,701)
Purchase of bank premises and equipment (10,701) (7,587) (7,035)
--------- --------- ---------
Net cash provided by (used for) investing activities $ 49,774 $ (86,960) $ (81,718)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (68,653) $ 83,999 $ 61,594
Net increase (decrease) in short term borrowings 3,500 -- (45,000)
Net increase in Federal Home Loan Bank borrowings -- -- 31,500
Net increase in securities sold under repurchase agreements 5,000 5,000 30,000
Repurchase of common stock (8,141) (6,984) (3,873)
Issuance of common stock 258 1,395 2,940
Dividends paid (11,731) (11,292) (10,649)
--------- --------- ---------
Net cash provided by (used for) financing activities $ (79,767) $ 72,118 $ 66,512
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (9,427) $ 2,790 $ 12,015
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (Note 1) 37,330 34,540 22,525
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 1) $ 27,903 $ 37,330 $ 34,540
--------- --------- ---------
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 49,259 $ 37,975 $ 26,835
Cash paid for federal income taxes $ 4,474 $ 5,957 $ 6,810
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES
Transfer of loans to other real estate owned $ 4,072 $ 9,881 $ 5,461
Transfer of loans to other assets $ 150 $ 202 $ 55
========= ========= =========
The accompanying notes are an integral part of these statements.
28
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-two 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, the fair
value of investment securities, 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 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 and 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.
29
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 and general components. The specific
component relates to loans that are classified as non-accrual or
renegotiated. 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.
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 $27,552,000 in 2006 and $27,826,000 in 2005. 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 $2,353,000 in 2006, $2,781,000 in 2005, and $2,817,000
in 2004.
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, and amounts recognized related to postretirement
benefit plans (gains and losses, prior service costs, and transition assets
or obligations), are reported as a direct adjustment to 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:
Dollars in thousands 2006 2005 2004
- -------------------- ------- ------- -----
Unrealized gains (losses) on securities available for sale $(9,008) $(7,401) $ 403
Reclassification adjustment for losses (gains) realized in income 5,057 (295) (567)
------- ------- -----
Net unrealized gains (losses) $(3,951) $(7,696) $(164)
Post retirement benefit obligations (3,863) -- --
Tax effect 2,735 2,693 57
------- ------- -----
Accumulated other comprehensive income (loss) $(5,079) $(5,003) $(107)
======= ======= =====
30
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
On January 1, 2006, the Company adopted FAS 123(R), "Accounting for Stock Based
Compensation" for all share based payments to employees, including grants of
stock options and restricted stock units. The amount of compensation is measured
at the fair value of the options when granted, and this cost is expensed over
the required service period, which is normally the vesting period of the
options.
FAS 123(R) applies to awards granted or modified after January 1, 2006.
Compensation cost is also recorded for prior option grants that vest after the
date of adoption.
The Company's as reported and pro forma information for the years ended December
31 were as follows:
Dollars in thousands, except per share data 2006 2005 2004
- ----------------------------------------------- -------- -------- --------
Net Income as Reported $ 3,773 $ 17,979 $ 22,599
Add: Stock based compensation determined under
the fair value method, net of related tax
effects included in Net Income 290 - -
Less: Stock based compensation determined under
the fair value method, net of related tax
effects included in Net Income (290) (338) (225)
-------- -------- --------
Pro Forma Net Income $ 3,773 $ 17,641 $ 22,374
======== ======== ========
Earnings per Share as Reported
Basic $ 0.22 $ 1.04 $ 1.30
Diluted $ 0.22 $ 1.03 $ 1.29
Pro Forma Earnings per Share
Basic $ 0.22 $ 1.02 $ 1.28
Diluted $ 0.22 $ 1.01 $ 1.28
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 $3.61, $5.10, and $3.52
in 2006, 2005, and 2004, 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 2006, 2005, and 2004: expected
option lives of seven years for all three; expected volatility of 22.9%, 24.3%,
and 25.3%, risk-free interest rates of 4.5%, 3.8%, and 3.8%, and dividend yields
of 3.5%, 3.5%, and 3.5%, 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. Such financial
instruments are recorded when they are funded.
ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued FAS
No. 158, Employer's Accounting for Defined Benefit Pensions and Other
Postretirement Benefit Plans ("FAS 158"). FAS 158, which became effective for
the Company on December 31, 2006, requires the Company to recognize a liability
for its unfunded postretirement benefit plans. FAS 158 requires companies to
recognize changes in the funded status of a defined benefit plan in the year in
which the changes occur and report those changes in comprehensive income. The
Company provides postretirement health benefits to all of its employees hired
before January 1, 2007, and postretirement death benefits to certain directors
and executive officers.
The standard was effective as of December 31, 2006 for the recognition of our
plans' funded status. Upon adoption of the standard, to recognize the amounts
currently recorded in the consolidated statement of condition, the Company
recorded an after-tax reduction of accumulated other comprehensive income of
$2,510,000. The incremental effect of applying FAS 158 on individual line items
in the balance sheet as of December 31, 2006 is as follows (000s omitted):
31
BEFORE AFTER
APPLICATION OF APPLICATION OF
Dollars in thousands FAS 158 ADJUSTMENTS FAS 158
- -------------------------------------- -------------- ----------- ---------------
Deferred income taxes $ 8,424 $ 1,352 $ 9,776
Total assets 1,565,467 1,352 1,566,819
Liability for postretirement benefits 2,325 3,862 6,187
Total liabilities 1,426,895 3,862 1,430,757
Accumulated other comprehensive income (2,569) (2,510) (5,079)
Total stockholders' equity 138,572 (2,510) 136,062
Additional disclosures required by the new standard are included in
Note 9.
(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 $2,514,000
and $2,205,000 at December 31, 2006 and 2005, 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, 2006 and 2005 (000s omitted):
HELD TO MATURITY
DECEMBER 31, 2006
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government
Agencies $ 10 $ -- $ -- $ 10
Obligations of States and Political
Subdivisions 64,928 453 (51) 65,330
--------- ---------- ---------- ---------
$ 64,938 $ 453 $ (51) $ 65,340
========= ========== ========== =========
AVAILABLE FOR SALE
DECEMBER 31, 2006
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government
Agencies $ 326,808 $ 965 $ (4,839) $ 322,934
Obligations of States and Political
Subdivisions 23,226 132 (229) 23,129
Other Securities 28,004 126 (106) 28,024
--------- ---------- ---------- ---------
$ 378,038 $ 1,223 $ (5,174) $ 374,087
========= ========== ========== =========
HELD TO MATURITY
DECEMBER 31, 2005
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government
Agencies $ 11 $ 1 $ -- $ 12
Obligations of States and Political
Subdivisions 76,456 902 (65) 77,293
--------- ---------- ---------- ---------
$ 76,467 $ 903 $ (65) $ 77,305
========= ========== ========== =========
32
AVAILABLE FOR SALE
DECEMBER 31, 2005
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government
Agencies $ 358,412 $ 158 $ (7,496) $ 351,074
Obligations of States and Political
Subdivisions 26,206 197 (322) 26,081
Other Securities 67,098 506 (738) 66,866
--------- ---------- ---------- ---------
$ 451,716 $ 861 $ (8,556) $ 444,021
========= ========== ========== =========
The amortized cost and estimated market value of securities at December
31, 2006, 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
(000s omitted).
HELD TO MATURITY AVAILABLE FOR SALE
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
Maturing within
1 year $ 20,186 $ 20,212 $ 3,118 $ 3,123
1 to 5 years 22,207 22,406 49,275 48,280
5 to 10 years 15,239 15,396 159,176 157,011
Over 10 years 7,306 7,326 164,456 163,638
Securities with no stated maturity -- -- 2,013 2,035
--------- --------- --------- ---------
$ 64,938 $ 65,340 $ 378,038 $ 374,087
========= ========= ========= =========
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, 2006 and
December 31, 2005 are as follows (000s omitted):
DECEMBER 31, 2006
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 $ 36,613 $ 329 $ 216,302 $ 4,510 $ 252,915 $ 4,839
Obligations of States and
Political Subdivisions 5,277 17 11,507 263 $ 16,784 $ 280
Other Securities -- -- 6,906 106 $ 6,906 $ 106
---------- ---------- ---------- ---------- ---------- ----------
$ 41,890 $ 346 $ 234,715 $ 4,879 $ 276,605 $ 5,225
========== ========== ========== ========== ========== ==========
DECEMBER 31, 2005
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 $ 198,750 $ 3,146 $ 132,167 $ 4,350 $ 330,917 $ 7,496
Obligations of States and
Political Subdivisions 16,237 181 3,929 206 $ 20,166 $ 387
Other Securities 14,726 237 2,499 501 $ 17,225 $ 738
---------- ---------- ---------- ---------- ---------- ----------
$ 229,713 $ 3,564 $ 138,595 $ 5,057 $ 368,308 $ 8,621
========== ========== ========== ========== ========== ==========
The amount of investment securities with unrealized losses and the amount
of unrealized losses on investment securities are primarily the result of
market interest rates and not the result of the credit quality of the
issuers of the securities. The company has the ability and intent to hold
these securities until recovery, which may be until maturity.
Investment securities carried at $325,687,000 and $323,415,000 were
pledged or set aside to secure borrowings, public and trust deposits, and
for other purposes required by law at December 31, 2006 and December 31,
2005, respectively.
33
At December 31, 2006, Obligations of U. S. Government Agencies included
securities issued by the Federal Home Loan Bank with an estimated market
value of $155,914,000. At December 31, 2005, Obligations of U. S.
Government Agencies included securities issued by the Federal Home Loan
Bank with an estimated market value of $216,643,000.
For the years ended December 31, 2006, 2005, and 2004, proceeds from sales
of securities amounted to $144,718,000, $78,467,000, and $73,520,000,
respectively. Gross realized gains amounted to $423,000, $690,000, and
$1,174,000, respectively. Gross realized losses amounted to $5,480,000,
$395,000, and $607,000, respectively. The tax provision applicable to
these net realized gains and losses amounted to ($1,770,000), $103,000,
and $179,000, respectively.
During 2005, sales of securities classified as Held to Maturity totaled
$3,021,000. This transaction consisted of a single fixed rate debt
security issued by Ford Motor Credit Company. The credit rating of the
issuer declined below investment grade and Management decided to sell the
bond. The Bank has no more corporate securities classified as Held to
Maturity.
(4) LOANS
Loan balances outstanding as of December 31 consist of the following (000s
omitted):
2006 2005
-------- ---------
Residential real estate loans $513,289 $476,545
Non residential real estate loans $328,145 $337,408
Loans to finance agricultural production and
other loans to farmers 3,739 3,519
Commercial and industrial loans 97,959 100,289
Loans to individuals for household, family,
and other personal expenditures 55,443 71,244
All other loans (including overdrafts) 473 1,635
-------- ---------
Total loans, gross $999,048 $990,640
Less: Deferred loan fees and costs 771 1,763
-------- ---------
Total loans, net of deferred loan fees and costs $998,277 $988,877
Less: Allowance for loan losses 13,764 13,625
-------- ---------
$984,513 $975,252
======== ========
The following is a summary of impaired loans (000s omitted):
2006 2005 2004
------- ------- -------
Year-end impaired loans with no allowance for loan losses
allocated $ 3,089 $ 1,601 $ 3,809
Year-end impaired loans with allowance for loan losses allocated 19,258 14,713 30,136
Year-end allowance for loan losses allocated to impaired loans 3,712 2,156 6,014
Average investment in impaired loans 29,354 23,375 33,410
Interest income recognized on impaired loans 1,288 438 1,120
Cash basis interest income recognized on impaired loans during
the year 1,288 438 1,120
======= ======= =======
Non-accrual loans totaled $19,152,000 as of December 31, 2006 and
$16,212,000 as of December 31, 2005. Loans ninety days or more past due
and still accruing interest were $69,000 as of December 31, 2006 and
$101,000 as of December 31, 2005.
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 $25,690,000 and $26,262,000 at
December 31, 2006 and 2005, respectively. In 2006, new loans and other
additions amounted to $31,194,000, and repayments and other reductions
amounted to $31,766,000. In 2005, new loans and other additions amounted
to $32,477,000, and repayments and other reductions amounted to
$25,510,000. 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 $194,276,000 and $195,357,000 at December 31, 2006 and
2005, respectively, were pledged to secure Federal Home Loan Bank
advances.
34
(5) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000s omitted):
2006 2005 2004
-------- -------- --------
Balance beginning of year $ 13,625 $ 13,800 $ 14,500
Provision for loan losses 16,475 6,906 2,491
Loans charged off (18,376) (9,340) (4,447)
Transfer to establish reserve for
unfunded loan commitments - (275) -
Recoveries 2,040 2,534 1,256
-------- -------- --------
Balance end of year $ 13,764 $ 13,625 $ 13,800
======== ======== ========
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.
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of year end are as follows (000s omitted):
2006 2005
------- -------
Land, buildings and improvements $41,483 $33,478
Equipment, furniture and fixtures 20,048 20,979
------- -------
Total Bank premises and equipment $61,531 $54,457
Less accumulated depreciation 27,552 27,826
------- -------
Bank premises and equipment, net $33,979 $26,631
======= =======
Bank Premises and Equipment includes Construction in Progress of $581,000
as of December 31, 2006 and $5,578,000 as of December 31, 2005.
The Company has entered into lease commitments for office locations.
Rental expense charged to operations was $256,000, $314,000, and $377,000
for the years ended December 31, 2006, 2005, and 2004, respectively. The
future minimum lease payments are as follows:
Minimum
Year Payment
- ------------ ---------
2007 $208,000
2008 199,000
2009 78,000
2010 81,000
2011 83,000
Thereafter 64,000
(7) DEPOSITS
Interest expense on time certificates of deposit of $100,000 or more in
the year 2006 amounted to $7,974,000, as compared with $6,217,000 in 2005,
and $3,358,000 in 2004. At December 31, 2006, the balance of time
certificates of deposit of $100,000 or more was $156,740,000, as compared
with $203,161,000 at December 31, 2005. The amount of time deposits with a
remaining term of more than 1 year was $170,674,000 at December 31, 2006
and $306,630,000 at December 31, 2005. The following table shows the
scheduled maturities of Certificates of Deposit as of December 31, 2006:
35
$100,000 and
Under $100,000 over
-------------- ------------
2007 $ 201,254,000 $129,347,000
2008 78,681,000 14,585,000
2009 39,489,000 9,114,000
2010 13,401,000 1,416,000
2011 11,490,000 2,278,000
Thereafter 220,000 0
-------------- ------------
Total $ 344,535,000 $156,740,000
============== ============
Time certificates of deposit under $100,000 include $71,830,000 of
brokered certificates of deposit as of December 31, 2006, and $69,359,000
as of December 31, 2005.
(8) FEDERAL HOME LOAN BANK ADVANCES AND REPURCHASE AGREEMENTS
The following is a summary of the Bank's borrowings from the Federal Home
Loan Bank of Indianapolis as of December 31, 2006 and 2005 (000s omitted):
DECEMBER 31, 2006
FLOATING RATE FIXED RATE
MATURING IN AMOUNT RATE AMOUNT RATE
- --------------- -------- ---- --------- ----
2009 $ 13,000 5.55% $ 15,000 5.52%
2010 -- -- 115,000 5.40%
2011 3,000 5.51% 3,500 5.08%
2013 95,000 7.65% --
2014 12,000 5.52% -- --
-------- ---- --------- ----
$123,000 7.17% $ 133,500 5.41%
======== ==== ========= ====
DECEMBER 31, 2005
FLOATING RATE FIXED RATE
MATURING IN AMOUNT RATE AMOUNT RATE
- --------------- -------- ---- --------- ----
2009 $ 13,000 4.50% $ 15,000 5.52%
2010 -- -- 115,000 5.40%
2011 3,000 4.65% 3,500 5.08%
2013 95,000 6.61% -- --
2014 12,000 4.66% -- --
-------- ---- --------- ----
$123,000 6.15% $ 133,500 5.41%
======== ==== ========= ====
The interest rates on the floating rate advances reset quarterly based on
the three month LIBOR rate plus a spread ranging from 15 to 260 basis
points. The fixed rate advances have a put option that allows the Federal
Home Loan Bank to require repayment of the advance or conversion of the
advance to floating rate at the three month LIBOR rate plus a spread
ranging from 0 to 2 basis points.
The following is a summary of the Bank's borrowings under repurchase
agreements as of December 31, 2006 and 2005 (000s omitted):
DECEMBER 31, 2006
FLOATING RATE FIXED RATE
MATURING IN AMOUNT RATE AMOUNT RATE
- --------------- -------- ---- --------- ----
2007 $ -- -- $ 5,000 3.61%
2008 -- -- 5,000 4.05%
2011 -- -- 10,000 4.65%
2012 -- -- 5,000 4.12%
2016 15,000 4.39% -- --
-------- ---- --------- ----
$ 15,000 4.39% $ 25,000 4.22%
======== ==== ========= ====
36
DECEMBER 31, 2005
FLOATING RATE FIXED RATE
MATURING IN AMOUNT RATE AMOUNT RATE
- --------------- -------- ---- --------- ----
2006 $ 10,000 3.45% $ 10,000 3.38%
2007 -- -- 5,000 3.61%
2008 -- -- 5,000 4.05%
2012 -- -- 5,000 4.12%
-------- ---- --------- ----
$ 10,000 3.45% $ 25,000 3.71%
======== ==== ========= ====
(9) RETIREMENT PLANS AND POSTRETIREMENT BENEFIT 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 $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
$1,188,000 for the year ended December 31, 2006, $1,184,000 for the year
ended December 31, 2005, and $1,257,000 for the year ended December 31,
2004. This included profit sharing contributions of one percent in 2005,
and three percent in 2004. There was no profit sharing contribution in
2006.
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 $221,000 in 2006, $107,000 in 2005, and $101,000 in 2004.
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):
2006 2005
------- -------
APBO $ 1,890 $ 1,988
Unrecognized net transition obligation (321) (375)
Unrecognized prior service costs (29) (32)
Unrecognized net gain 261 62
------- -------
Accrued benefit cost at fiscal year end $ 1,801 $ 1,643
======= =======
The changes recorded in the accumulated postretirement benefit obligation
were as follows (000s omitted):
2006 2005
------- -------
APBO at beginning of year $ 1,988 $ 1,811
Service cost 104 86
Interest cost 106 101
Actuarial loss (gain) (199) 97
Plan participants' contributions 112 --
Benefits paid during year (221) (107)
------- -------
APBO at end of year $ 1,890 $ 1,988
======= =======
Components of the Bank's postretirement benefit expense were as follows:
2006 2005 2004
---- ---- ----
Service cost $104 $ 86 $ 79
Interest cost 106 101 123
Amortization of transition obligation 54 54 54
Prior service costs 4 4 4
---- ---- ----
Net postretirement benefit expense $268 $245 $260
==== ==== ====
37
The APBO as of December 31, 2006 and 2005 was calculated using assumed
discount rates of 6.00% and 5.50%, 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.
The Bank Owned Life Insurance policies fund a Death Benefit Only (DBO)
obligation that the Bank has with each of its active directors, 5 retired
directors, 19 active executives, and 5 retired executives. The DBO plan,
which replaced previous split dollar agreements, provides a taxable death
benefit. The benefit for directors is grossed up to provide a net benefit
to each director's beneficiaries based on that director's length of
service on the board. 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. The executives' beneficiaries will receive a grossed
up benefit that will provide a net benefit equal to two times the
executive's base salary if death occurs during employment and a
postretirement benefit equal to the executive's final annual salary rate
at the time of retirement if death occurs after retirement.
In addition to the contributory postretirement health care benefit plan
covering substantially all of its employees, the Company has a
noncontributory death benefit plan that covers its executive officers. The
Death Benefit Only plan (DBO plan) provides a taxable postretirement
benefit to executive officers that is grossed up to provide a net benefit
equal to the participant's final salary at retirement. Information for the
postretirement death benefits and health care benefits is as follows as of
the December 31 measurement date (000s):
POSTRETIREMENT DEATH BENEFIT POSTRETIREMENT HEALTH CARE
OBLIGATIONS BENEFITS
-----------------------------------------------------------
2006 2005 2006 2005
------------ --------- --------- -----------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ -- -- $ 1,988 $ 1,811
Service cost 60 -- 104 86
Interest cost 203 -- 106 101
Plan participants' contributions -- -- 112 --
Amendments 4,131 -- -- --
Actuarial loss (gain) (97) -- (199) 97
Benefits paid -- -- (221) (107)
------------ --------- --------- -----------
Benefit obligation at end of year $ 4,297 $ -- $ 1,890 $ 1,988
------------ --------- --------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of
year $ -- $ -- $ 1,643 $ 1,505
Actual return on plan assets -- -- - --
Employer contributions 524 -- 268 245
Plan participants' contributions -- -- 111 --
Benefits paid during year -- -- (221) (107)
------------ --------- --------- -----------
Fair value of plan assets at end of year $ 524 $ -- $ 1,801 $ 1,643
------------ --------- --------- -----------
Funded status at end of year $ (3,773) $ -- $ (89) $ (345)
============ ========= ========= ===========
Amounts recognized in other liabilities consist of $4,297,000 for
postretirement death benefits as of December 31, 2006 and $1,890,000 and
$1,643,000 for postretirement health care benefits as of December 31, 2006
and 2005, respectively.
Amounts recognized in accumulated other comprehensive income consist of
(000s):
POSTRETIREMENT DEATH BENEFIT POSTRETIREMENT HEALTH CARE
OBLIGATIONS BENEFITS
-----------------------------------------------------------
2006 2005 2006 2005
------------ --------- --------- -----------
Net loss (gain) $ (96) -- $ (261) $ --
Transition obligation (asset) -- -- 321 --
Prior service cost (credit) 3,869 -- 29 --
------------ --------- --------- -----------
$ 3,773 $ -- $ 89 $ --
============ ========= ========= ===========
No amounts were recognized in 2005 because FAS 158 applies to fiscal years
ending after December 31, 2006.
(10) STOCKHOLDERS' EQUITY
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,
2002, the Board of Directors extended the repurchase program until
December 31, 2004. On December 23, 2004, the Board of Directors issued a
new authorization to repurchase up to 2 million shares during 2005. On
December 22, 2005, the Board of Directors authorized the repurchase of up
to 2 million shares during 2006. Shares purchased are as follows:
38
Shares
Repurchased Cost
----------- -----------
2004 220,000 3,873,000
2005 364,420 6,984,000
2006 499,974 8,141,000
--------- -----------
Total 1,084,394 $18,998,000
========= ===========
On December 21, 2006, the Corporation's Board of Directors authorized the
repurchase of up to 1 million shares of MBT Financial Corp. common stock
during the 12 month period ending December 31, 2007.
(11) 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 (Cash and cash equivalents, Federal funds sold, Federal
Home Loan Bank stock, Accrued interest receivable and other assets, Bank
Owned Life Insurance, Federal funds purchased, and Interest payable and
other liabilities) are estimated to be equal to their carrying values as
of December 31, 2006 and 2005.
INVESTMENT SECURITIES
Fair value for the Bank's investment securities was determined using the
market value at December 31, 2006 and 2005. These Estimated Market Values
are disclosed in Note 3.
LOANS, NET
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, 2006, net of the allowance for loan losses, is $981,379,000, compared
to the carrying value of $985,234,000. The estimated fair value of loans
at December 31, 2005, net of the allowance for loan losses, was
$977,042,000, compared to the carrying value of $975,252,000.
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, 2006 is $501,105,000, compared to the carrying value of $502,137,000.
The estimated fair value of other time deposits at December 31, 2005 was
$551,648,000, compared to the carrying value of $547,544,000.
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, 2005 is $132,538,000, compared to the carrying value of
$130,000,000.
The fair value and carrying value of the variable rate advances at
December 31, 2005 is $123,000,000. The estimated fair value of the fixed
rate Federal Home Loan Bank advance at December 31, 2005 was $3,475,000,
compared to the carrying value of $3,500,000.
The estimated fair value of putable Federal Home Loan Bank advances at
December 31, 2005 was $134,065,000, compared to the carrying value of
$130,000,000. The fair value and carrying value of the variable rate
advances at December 31, 2005 was $123,000,000. The estimated fair value
of the fixed rate Federal Home Loan Bank advance at December 31, 2005 was
$3,517,000, compared to the carrying value of $3,500,000.
The estimated fair value of the Securities Sold under Repurchase
Agreements at December 31, 2006 was $39,670,000, compared to the carrying
value of $40,000,000. The estimated fair value of the Securities Sold
under Repurchase Agreements at December 31, 2005 was $35,307,000, compared
to the carrying value of $35,000,000.
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.
(12) FEDERAL INCOME TAXES
39
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.
The provision for Federal income taxes consists of the following (000s
omitted):
2006 2005 2004
------- ------- -------
Federal income taxes currently payable (refundable) $ 680 $ 6,643 $ 8,580
Provision (credit) for deferred taxes on:
Book (over) under tax loan loss provision (251) 71 245
Accretion of bond discount (39) (72) (43)
Net deferred loan origination fees (147) 265 56
Accrued postretirement benefits (267) (219) (81)
Tax over (under) book depreciation (45) 178 (258)
Alternative minimum tax (680) -- --
Other, net 370 (8) 276
------- ------- -------
Total deferred provision (credit) (1,059) 215 195
------- ------- -------
$ (379) $ 6,858 $ 8,775
======= ======= =======
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:
2006 2005 2004
----- ----- ----
Statutory rate 34.0% 35.0% 35.0%
Municipal interest income (43.6) (8.0) (6.3)
Other, net (1.6) 0.8 (0.7)
----- ----- ----
Effective tax rate (11.2)% 27.8% 28.0%
===== ===== ====
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):
2006 2005
-------- --------
Deferred Federal income tax assets:
Allowance for loan losses $ 4,914 $ 4,663
Net deferred loan origination fees 427 280
Tax versus book depreciation differences 341 296
Net unrealized losses on securities available for sale 1,383 2,694
Accrued postretirement benefits 2,390 771
Alternative minimum tax 680 --
Other, net -- 199
$ 10,135 $ 8,903
-------- --------
Deferred Federal income tax liabilities:
Accretion of bond discount $ (188) $ (227)
Other (171) --
- ----- --
$ (359) $ (227)
- ----- - -----
Net deferred Federal income tax asset $ 9,776 $ 8,676
======== ========
(13) 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, 2006, 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
40
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, 2006 that Management believes have changed
the Corporation's category. Management believes, as of December 31, 2006,
that the Corporation meets all capital adequacy requirements to which it
is subject.
The Corporation's and Bank's actual capital amounts and ratios are also
presented in the table (000s omitted in dollar amounts).
Minimum to Qualify as
Actual Well Capitalized
-------------------- -----------------------
Amount Ratio Amount Ratio
-------- ----- -------- ------
AS OF DECEMBER 31, 2006:
Total Capital to Risk-Weighted Assets
Consolidated $154,792 14.0% $110,181 10.0%
Monroe Bank & Trust 153,730 14.0% 110,126 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 141,006 12.8% 66,109 6.0%
Monroe Bank & Trust 139,951 12.7% 66,075 6.0%
Tier 1 Capital to Average Assets
Consolidated 141,006 8.9% 78,869 5.0%
Monroe Bank & Trust 139,951 8.9% 78,841 5.0%
Minimum to Qualify as
Actual Well Capitalized
-------------------- -----------------------
Amount Ratio Amount Ratio
-------- ----- -------- ------
AS OF DECEMBER 31, 2005:
Total Capital to Risk-Weighted Assets
Consolidated $170,347 15.0% $113,895 10.0%
Monroe Bank & Trust 169,434 14.9% 113,892 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 156,432 13.7% 68,337 6.0%
Monroe Bank & Trust 155,519 13.7% 68,335 6.0%
Tier 1 Capital to Average Assets
Consolidated 156,432 9.6% 81,161 5.0%
Monroe Bank & Trust 155,519 9.6% 81,159 5.0%
(14) EARNINGS PER SHARE
The calculation of earnings per common share for the years ended December
31 is as follows:
2006 2005 2004
----------- ----------- -----------
BASIC
Net income $ 3,773,000 $17,979,000 $22,599,000
Less preferred dividends -- -- --
----------- ----------- -----------
Net income applicable to common stock $ 3,773,000 $17,979,000 $22,599,000
----------- ----------- -----------
Average common shares outstanding 16,941,432 17,344,376 17,444,165
----------- ----------- -----------
Earnings per common share - basic $ 0.22 $ 1.04 $ 1.30
=========== =========== ===========
2006 2005 2004
----------- ----------- -----------
DILUTED
Net income $ 3,773,000 $17,979,000 $22,599,000
Less preferred dividends -- -- --
----------- -------------- -----------
Net income applicable to common stock $ 3,773,000 $17,979,000 $22,599,000
----------- -------------- -----------
Average common shares outstanding 16,941,432 17,344,376 17,444,165
----------- -------------- -----------
Stock option adjustment 30,778 73,991 83,500
----------- -------------- -----------
Average common shares outstanding - diluted 16,972,210 17,418,367 17,527,665
----------- -------------- -----------
Earnings per common share - diluted $ 0.22 $ 1.03 $ 1.29
=========== ============== ===========
(15) 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. As of December 31, 2006, the
number of shares available under the plan is 159,752. This includes 78,583
shares that were previously awarded that have been forfeited.
41
Stock Option Awards - 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 2006 and 2005 vest annually, beginning December 31, 2006, and
December 31, 2005, respectively. The options granted to key employees in
2004, 2003, 2002 and 2000 are vested as of December 31, 2006, December 31,
2005, 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.
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:
2006 2005 2004
---- ---- ----
Volatility 22.9% 24.3% 25.3%
Expected term, in years 7 7 7
Risk free interest rate 4.5% 3.8% 3.8%
Expected dividend yield 3.5% 2.0% 2.0%
A summary of the status of stock options under the plan is presented in
the table below.
2006 2005 2004
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Options Outstanding, January 1 432,642 $ 17.99 433,787 $ 15.21 480,802 $ 14.73
Granted 86,000 16.24 136,000 23.40 161,000 16.69
Exercised 5,999 13.45 88,162 14.16 183,915 14.97
Forfeited/Expired 2,500 20.72 48,983 15.34 24,100 17.33
-------- -------- -------- -------- -------- --------
Options Outstanding, December 31 510,143 $ 17.73 432,642 $ 17.99 433,787 $ 15.21
======== ======== ======== ======== ======== ========
Options Exercisable, December 31 407,991 $ 17.32 303,321 $ 16.54 266,637 $ 15.08
======== ======== ======== ======== ======== ========
Weighted Average Fair Value of
Options Granted During Year $ 3.61 $ 5.10 $ 3.52
The options outstanding as of December 31, 2006 are exercisable at prices
ranging from $13.20 to $23.40. The options exercisable as of December 31,
2006 are exercisable at prices ranging from $13.20 to $23.40. The number
of options and remaining life of options at each exercise price are as
follows:
Outstanding Options Exercisable Options
Exercise Remaining Life Remaining Life
Price Shares (in years) Shares (in years)
- -------- ------ ----------- -------- ------------------
$ 13.20 84,003 6.01 84,003 6.01
$ 13.85 35,338 5.01 35,338 5.01
$ 13.94 4,402 4.01 4,402 4.01
$ 16.69 113,500 7.01 113,500 7.01
$18.125 52,400 3.50 52,400 3.50
$ 23.40 134,500 8.01 89,673 8.01
$ 16.24 86,000 9.01 28,675 9.01
------- -------
510,143 407,991
A summary of option activity under the Plan as of December 31, 2006, and
changes during the year then ended is as follows:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic Value
Options Shares Price Term (000s)
- -------------------------------- ------- -------- ----------- ---------------
Outstanding at January 1, 2006 432,642 $17.99
Granted 86,000 16.24
Exercised (5,999) 13.45
Forfeited or expired (2,500) 20.72
Outstanding at December 31, 2006 510,143 $17.73 9.0 $236
Exercisable at December 31, 2006 407,991 $17.32 9.0 $236
42
A summary of the status of the Corporation's nonvested option shares as of
December 31, 2006 and changes during the year ended December 31, 2006 is
as follows:
Weighted
Average Grant
Nonvested Shares Shares Date Fair Value
- ------------------------------ --------- ---------------
Nonvested at January 1, 2006 129,321 $4.72
Granted 86,000 3.61
Vested (110,669) 4.18
Forfeited (2,500) 4.60
Nonvested at December 31, 2006 102,152 $4.38
Restricted Stock Awards - Restricted stock units granted under the plan
result in an award of common shares to key employees based upon earnings
performance during the vesting period. On January 3, 2006, 21,800
Performance Stock Units (PSUs) were granted to key employees. The amount
of these PSUs that will vest on December 31, 2008 is based on the three
year cumulative earnings per share achieved by the company during the
vesting period as shown in the following schedule:
Three Year Cumulative Fully
Diluted EPS for the Percent PSUs
Performance Period Vested
- --------------------------- ------------
$4.38 100%
$4.31 80%
$4.23 60%
$4.13 40%
$4.06 20%
$3.75 0%
(16) PARENT COMPANY
Condensed parent company financial statements, which include transactions
with the subsidiary, are as follows (000s omitted):
BALANCE SHEETS
--------------
DECEMBER 31,
2006 2005
-------- --------
ASSETS
Cash and due from banks $ 3,512 $ 2,962
Investment in subsidiary bank 135,007 150,706
Other assets 552 32
-------- --------
Total assets $139,071 $153,700
======== ========
LIABILITIES
Dividends payable and other liabilities $ 3,009 $ 2,081
-------- --------
Total liabilities 3,009 2,081
-------- --------
STOCKHOLDERS' EQUITY
Total stockholders' equity 136,062 151,619
-------- --------
Total liabilities and stockholders' equity $139,071 $153,700
======== ========
43
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
2006 2005 2004
-------- -------- --------
INCOME
Dividends from subsidiary bank $ 19,415 $ 15,871 $ 12,829
-------- -------- --------
Total income 19,415 15,871 12,829
-------- -------- --------
EXPENSE
Interest on other borrowed funds -- -- --
Other expense 158 150 176
-------- -------- --------
Total expense 158 150 176
-------- -------- --------
Income before tax and equity in undistributed
net income of subsidiary bank 19,257 15,721 12,653
Income tax benefit (54) (52) (51)
-------- -------- --------
Income before equity in undistributed
net income of subsidiary bank 19,311 15,773 12,704
Equity in undistributed net income (loss)
of subsidiary bank (15,538) 2,206 9,895
-------- -------- --------
NET INCOME $ 3,773 $ 17,979 $ 22,599
======== ======== ========
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
2006 2005 2004
-------- -------- --------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 3,773 $ 17,979 $ 22,599
Equity in undistributed net (income) loss of subsidiary bank 15,538 (2,206) (9,895)
Net increase (decrease) in other liabilities 928 (125) (197)
Net (increase) decrease in other assets (75) 200 325
-------- -------- --------
Net cash provided by operating activities $ 20,164 $ 15,848 $ 12,832
-------- -------- --------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Issuance of common stock $ 258 $ 1,396 $ 2,940
Repurchase of common stock (8,141) (6,984) (3,874)
Dividends paid (11,731) (11,292) (10,649)
-------- -------- --------
Net cash used for financing activities $(19,614) $(16,880) $(11,583)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 550 $ (1,032) $ 1,249
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,962 3,994 2,745
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,512 $ 2,962 $ 3,994
======== ======== ========
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, 2006, Bank
funds available for loans to the Corporation amounted to $15,385,000. The
Bank has not made any loans to the Corporation.
Federal and state banking laws place certain restrictions on the amount of
dividends a bank may make to its parent company. Michigan law limits the
amount of dividends that the Bank can pay to the Corporation without
regulatory approval to the amount of net income then on hand. Accordingly,
the Bank can pay dividends of $60,085,000 in 2007, in addition to its 2007
net income, without regulatory approval.
(17) 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.
44
Financial instruments whose contractual amounts represent off-balance
sheet credit risk at December 31 were as follows (000s omitted):
CONTRACTUAL AMOUNT
2006 2005
------- --------
Commitments to extend credit:
Unused portion of commercial lines of credit $100,265 $130,496
Unused portion of credit card lines of credit 5,802 7,529
Unused portion of home equity lines of credit 20,873 20,258
Standby letters of credit and financial guarantees written 12,234 12,736
All other off-balance sheet assets 3,922 3,427
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.
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
$11,041,000 of the letters of credit expires in 2007 and $1,193,000
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.
(18) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (000S OMITTED):
2006 FIRST SECOND THIRD FOURTH
- ---------------------------------------- -------- -------- -------- --------
Total Interest Income $ 23,728 $ 23,940 $ 24,165 $ 24,090
Total Interest Expense 11,560 12,018 12,785 12,925
-------- -------- -------- --------
Net Interest Income 12,168 11,922 11,380 11,165
Provision for Loan Losses 675 6,675 7,950 1,175
Other Income 3,584 (1,240) 3,723 3,475
Other Expenses 8,489 10,052 9,418 8,349
-------- -------- -------- --------
Income Before Provision For Income Taxes 6,588 (6,045) (2,265) 5,116
Provision For Income Taxes 1,862 (2,469) (1,147) 1,375
-------- -------- -------- --------
Net Income $ 4,726 $ (3,576) $ (1,118) $ 3,741
======== ======== ======== ========
Basic Earnings Per Common Share $ 0.28 $ (0.21) $ (0.07) $ 0.22
Diluted Earnings Per Common Share $ 0.28 $ (0.21) $ (0.07) $ 0.22
Dividends Declared Per Share $ 0.17 $ 0.17 $ 0.18 $ 0.18
2005 FIRST SECOND THIRD FOURTH
- ---------------------------------------- ------- ------- ------- -------
Total Interest Income $20,919 $21,919 $23,177 $23,680
Total Interest Expense 8,297 9,228 10,064 10,994
------- ------- ------- -------
Net Interest Income 12,622 12,691 13,113 12,686
Provision for Loan Losses 600 600 4,100 1,606
Other Income 3,446 3,664 3,683 3,656
Other Expenses 8,729 8,210 9,023 7,856
------- ------- ------- -------
Income Before Provision For Income Taxes 6,739 7,545 3,673 6,880
Provision For Income Taxes 1,860 2,176 1,102 1,720
------- ------- ------- -------
Net Income $ 4,879 $ 5,369 $ 2,571 $ 5,160
======= ======= ======= =======
Basic Earnings Per Common Share $ 0.28 $ 0.31 $ 0.15 $ 0.30
Diluted Earnings Per Common Share $ 0.28 $ 0.31 $ 0.15 $ 0.29
Dividends Declared Per Share $ 0.16 $ 0.16 $ 0.17 $ 0.17
45
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, 2006,
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, 2006, 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, 2006 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, 2006, 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, 2006
has been audited by Plante & Moran, PLLC, an independent registered public
accounting firm, as stated in their report appearing on page 47.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended December 31, 2006, that
materially affected, or is reasonably likely to affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
46
[PLANTE MORAN,PLLC LOGO] Plante & Moran, PLLC
Suite 500
2601 Cambridge Court
Auburn Hills, MI48326
Tel: 248.375.7100
Fax: 248.375.7101
Plantemoran.com
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, 2006, 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 audits 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, 2006, 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, 2005 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, 2006 and 2005 and the
related consolidated statements of earnings, shareholders equity and cash flow
for each of the three years in the period ended December 31, 2006 and our report
dated March 5, 2007, expressed an unqualified opinion thereon.
[LOGO]
March 5, 2007
Auburn Hills, Michigan
[LOGO]
47
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, 2006 were as follows:
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 the
and rights warrants, and rights first column)
------------------------------ -------------------- --------------------------------------
Equity Compensation plans
approved by security holders 510,143 $ 17.74 159,752
Equity Compensation plans
not approved by security
holders 0 0 0
------- --------- --------
Total 510,143 $ 17.74 159,752
------- --------- --------
48
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.
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 24
Consolidated Balance Sheets as of December 31, 2006 and 2005 - Page 25
Consolidated Statements of Income for the Years Ended December 31, 2006,
2005, and 2004 - Page 26
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2006, 2005, and 2004 - Page 27
Consolidated Statements of Cash Flows for the Years Ended December 31,
2006, 2005, and 2004 - Page 28
Notes to Consolidated Financial Statements - Pages 29 - 45
49
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 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as Exhibit
3.2 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31,
2004.
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 Director Death Benefit Only Plan.
10.5 Monroe Bank & Trust Group Executive Death Benefit Only Plan.
10.6 MBT Financial Corp. Amended and Restated Change in Control Agreement with H.
Douglas Chaffin. Previously filed as Exhibit 10.5 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2005.
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 MBT Financial Corp. Severance Agreements with Donald M. Lieto, James E. Morr,
Thomas G. Myers, and John L. Skibski. Previously filed as Exhibit 10 on Form
8-K filed by MBT Financial Corp. on January 26, 2006.
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.
50
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 9, 2007 MBT FINANCIAL CORP.
/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 9, 2007
/s/ H. Douglas Chaffin /s/ John L. Skibski
- --------------------------------- ------------------------------------
H. Douglas Chaffin John L. Skibski
President, Chief Executive Chief Financial Officer
Officer & Director
/s/ William D. McIntyre, Jr. /s/ Peter H. Carlton
- --------------------------------- ------------------------------------
William D. McIntyre, Jr. Peter H. Carlton
Chairman Director
/s/ Joseph S. Daly /s/ Thomas M. Huner
- --------------------------------- ------------------------------------
Joseph S. Daly Thomas M. Huner
Director Director
/s/ Rocque E. Lipford /s/ Michael J. Miller
- --------------------------------- ------------------------------------
Rocque E. Lipford Michael J. Miller
Director Director
/s/ Debra J. Shah /s/ Philip P. Swy
- --------------------------------- ------------------------------------
Debra J. Shah Philip P. Swy
Director Director
/s/ Karen M. Wilson
- ---------------------------------
Karen M. Wilson
Director
51
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 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as Exhibit
3.2 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31,
2004.
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 MBT Financial Corp. Amended and Restated Change in Control Agreement with H.
Douglas Chaffin. Previously filed as Exhibit 10.5 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2005.
10.4 Monroe Bank & Trust
Group Director Death Benefit Only Plan.
10.5 Monroe Bank & Trust Group Executive Death Benefit Only Plan.
10.6 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.
10.7 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.
10.8 MBT Financial Corp. Severance Agreement with Donald M. Lieto, James E. Morr,
Thomas G. Myers, and John L. Skibski. Previously filed as Exhibit 10 on Form
8-K filed by MBT Financial Corp. on January 26, 2006.
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.
52