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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2007
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-30973
MBT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3516922
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 E. FRONT STREET
MONROE, MICHIGAN 48161
(Address of principal executive offices)
(Zip Code)
(734) 241-3431
(Registrant's telephone number, including area code)
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 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 May 7, 2007, there were 16,610,345 shares of the Company's Common Stock
outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2007 DECEMBER 31,
Dollars in thousands (UNAUDITED) 2006
-------------- ------------
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 25,425 $ 27,903
---------- ----------
Total cash and cash equivalents 25,425 27,903
Securities - Held to Maturity 53,203 64,938
Securities - Available for Sale 383,259 374,087
Federal Home Loan Bank stock - at cost 13,086 13,086
Loans held for sale 908 721
Loans - Net 974,345 984,513
Accrued interest receivable and other assets 23,870 27,961
Bank Owned Life Insurance 39,927 39,631
Premises and Equipment - Net 33,686 33,979
---------- ----------
Total assets $1,547,709 $1,566,819
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 143,831 $ 158,688
Interest-bearing 952,379 957,369
---------- ----------
Total deposits 1,096,210 1,116,057
Federal Home Loan Bank advances 256,500 256,500
Federal funds purchased 2,500 3,500
Repurchase agreements 40,000 40,000
Interest payable and other liabilities 15,888 14,700
---------- ----------
Total liabilities 1,411,098 1,430,757
---------- ----------
STOCKHOLDERS' EQUITY
Common stock (no par value) -- --
Additional paid-in capital 6,209 6,979
Retained Earnings 134,868 134,162
Accumulated other comprehensive loss (4,466) (5,079)
---------- ----------
Total stockholders' equity 136,611 136,062
---------- ----------
Total liabilities and stockholders' equity $1,547,709 $1,566,819
========== ==========
The accompanying notes to consolidated financial statements are integral part of
these statements.
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MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
THREE MONTHS ENDED MARCH 31,
----------------------------
Dollars in thousands, except per share data 2007 2006
------- -------
INTEREST INCOME
Interest and fees on loans $17,761 $17,169
Interest on investment securities-
Tax-exempt 1,009 1,157
Taxable 4,915 5,348
Interest on federal funds sold 32 54
------- -------
Total interest income 23,717 23,728
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INTEREST EXPENSE
Interest on deposits 7,955 7,497
Interest on borrowed funds 4,579 4,063
------- -------
Total interest expense 12,534 11,560
------- -------
NET INTEREST INCOME 11,183 12,168
PROVISION FOR LOAN LOSSES 750 675
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,433 11,493
------- -------
OTHER INCOME
Income from trust services 1,067 1,062
Service charges and other fees 1,525 1,464
Net gain (loss) on sales of securities -- 20
Origination fees on mortgage loans sold 183 141
Bank owned life insurance income 296 283
Other 692 614
------- -------
Total other income 3,763 3,584
------- -------
OTHER EXPENSES
Salaries and employee benefits 5,449 5,178
Occupancy expense 880 767
Equipment expense 845 798
Marketing expense 252 372
Professional fees 370 328
Net (gain) loss on other real estate owned 18 (50)
Other 1,298 1,096
------- -------
Total other expenses 9,112 8,489
------- -------
INCOME BEFORE INCOME TAXES 5,084 6,588
INCOME TAX EXPENSE 1,381 1,862
------- -------
NET INCOME $ 3,703 $ 4,726
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.22 $ 0.28
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.22 $ 0.28
======= =======
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.18 $ 0.17
======= =======
The accompanying notes to consolidated financial statements are integral part of
these statements.
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MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
THREE MONTHS ENDED
MARCH 31,
-------------------
Dollars in thousands 2007 2006
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 3,703 $ 4,726
Adjustments to reconcile net income to net cash from
operating activities
Depreciation 681 624
Provision for loan losses 750 675
(Increase) decrease in net deferred Federal income
tax asset (228) (241)
Net amortization of investment premium and discount (87) 32
Net increase (decrease) in interest payable and
other liabilities 1,293 999
Net decrease in interest receivable and other assets 3,311 64
Equity Compensation 170 120
Net (gain) loss on sales of securities -- (20)
Increase in cash surrender value of life insurance (296) (283)
-------- --------
Net cash provided by operating activities $ 9,297 $ 6,696
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and redemptions of
investment securities held to maturity $ 12,433 $ 9,148
Proceeds from maturities and redemptions of
investment securities available for sale 4,271 1,620
Proceeds from sales of investment securities
available for sale -- 15,055
Net (increase) decrease in loans 9,231 (14,542)
Proceeds from sales of other real estate owned 663 555
Proceeds from sales of other assets 26 --
Purchase of investment securities held to maturity (700) (111)
Purchase of investment securities available for sale (12,517) --
Purchase of bank premises and equipment (388) (3,214)
-------- --------
Net cash provided by investing activities $ 13,019 $ 8,511
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits $(19,847) $(37,325)
Net increase (decrease) in short term borrowings (1,000) 15,300
Proceeds from issuance of common stock 28 96
Repurchase of common stock (968) (2,503)
Dividends paid (3,007) (2,923)
-------- --------
Net cash used for financing activities $(24,794) $(27,355)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (2,478) $(12,148)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 27,903 37,330
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,425 $ 25,182
======== ========
The accompanying notes to consolidated financial statements are integral part of
these statements.
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MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL
---------- -------- ------------- --------
BALANCE - JANUARY 1, 2007 $6,979 $134,162 $(5,079) $136,062
Repurchase of Common Stock (71,500 shares) (968) -- -- (968)
Issuance of Common Stock (2,003 shares) 28 -- -- 28
Equity Compensation 170 -- -- 170
Dividends declared ($0.18 per share) -- (2,997) -- (2,997)
Comprehensive income:
Net income -- 3,703 -- 3,703
Change in net unrealized loss on securities
available for sale - Net of tax effect of ($293) -- -- 545 545
Change in postretirement benefit obligation
Net of tax effect of ($37) -- -- 68 68
--------
Total Comprehensive Income 4,316
------ -------- ------- --------
BALANCE - MARCH 31, 2007 $6,209 $134,868 $(4,466) $136,611
====== ======== ======= ========
The accompanying notes to consolidated financial statements are integral part of
these statements.
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MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of MBT
Financial Corp. (the "Company") and its subsidiary, Monroe Bank & Trust (the
"Bank"). The Bank includes the accounts of its wholly owned subsidiaries, MBT
Credit Company, Inc. and MB&T Financial Services, Inc. The Bank operates
twenty-one branches in Monroe County, Michigan and five branches 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 Company's sole business segment is community
banking.
The accounting and reporting policies of the Bank conform to practice within the
banking industry and are in accordance with accounting principles generally
accepted in the United States. Preparation of financial statements in conformity
with generally accepted accounting principles requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes in
the near term are the determination of the allowance for loan losses and the
valuation of other real estate owned.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting of normal recurring
adjustments), which are, in the opinion of Management, necessary for fair
statement of results for the interim periods.
The significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary. All material intercompany transactions and balances have been
eliminated. Certain prior period amounts have been reclassified to conform to
the current period presentation.
COMPREHENSIVE INCOME
Accounting principles generally require that revenue, expenses, gains, and
losses be included in net income. Certain changes in assets and liabilities,
however, such as unrealized gains and losses on securities available for sale,
are reported as a separate component of the equity section of the balance sheet.
Such items, along with net income, are components of comprehensive income.
BUSINESS SEGMENTS
While the Company's chief decision makers monitor the revenue streams of various
products and services, operations are managed and financial performance is
evaluated on a company wide basis. Accordingly, all of the Company's operations
are considered by management to be aggregated in one reportable segment.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS 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
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when granted, and this cost is expensed over the required service period, which
is normally the vesting period of the options.
SFAS 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 compensation expense recorded under FAS 123(R) in the
three months ended March 31, 2007 and March 31, 2006 was $170,000 and $120,000,
respectively.
The weighted average fair value of options granted was $2.76 in 2007 and $3.61
in 2006. The fair value of each option grant is estimated on the date of the
grant using the Black-Scholes option pricing model with the following
assumptions: expected option lives of seven years for both years; expected
volatility of 20.3% in 2007 and 22.9% in 2006; and risk-free interest rates of
4.7% in 2007 and 4.5% in 2006.
ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board "FASB" issued FAS No.
159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS
159). FAS 159 is effective for fiscal years beginning after November 15, 2007.
Early adoption is permitted subject to specific requirements outlined in the new
Statement. Calendar year companies are able to adopt FAS 159 for their first
quarter 2007 financial statements.
FAS 159 allows the Company to choose, at specified election dates, to measure
eligible financial assets and financial liabilities at fair value that are not
otherwise required to be measured at fair value. If a company elects the fair
value option for an eligible item, changes to that item's fair value in
subsequent reporting periods must be recognized in current earnings. FAS 159
also establishes presentation and disclosure requirements designed to draw
comparison between entities that elect different measurement attributes for
similar assets and liabilities.
In April 2007, the Company elected early adoption of FAS 159 as of January 1,
2007. The Company did not select any financial assets or financial liabilities
for fair value measurement, but elected early adoption in order to be able to
apply the fair value option to financial assets and financial liabilities that
may be acquired prior to the effective date of the statements.
In September 2006, FASB issued FAS No. 157, Fair Value Measurements (FAS 157).
FAS 157 defines fair value, establishes a framework for measuring fair value,
and expands disclosures about the use of fair value measurements. FAS 157 is
effective for fiscal years beginning after November 15, 2007. Upon adoption of
FAS 159, the Company concurrently adopted the provisions of FAS 157, effective
January 1, 2007. Accordingly, the Company has developed a framework to measure
the fair value of financial assets and financial liabilities. Upon election to
apply fair value measurement of financial assets or financial liabilities, the
Company will expand disclosures in accordance with the requirements of FAS 157.
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2. EARNINGS PER SHARE
The calculation of net income per common share for the three months ended March
31 is as follows:
2007 2006
----------- -----------
BASIC
Net income $ 3,703,000 $ 4,726,000
Less preferred dividends -- --
Net income applicable to common stock $ 3,703,000 $ 4,726,000
----------- -----------
Average common shares outstanding 16,686,983 17,111,913
----------- -----------
Earnings per common share - basic $ 0.22 $ 0.28
=========== ===========
2007 2006
----------- -----------
DILUTED
Net income $ 3,703,000 $ 4,726,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 3,703,000 $ 4,726,000
----------- -----------
Average common shares outstanding 16,686,983 17,111,913
Stock option adjustment 29,702 50,824
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Average common shares outstanding -
diluted 16,716,685 17,162,737
----------- -----------
Earnings per common share - diluted $ 0.22 $ 0.28
=========== ===========
3. STOCK BASED COMPENSATION
The following table summarizes the options that have been granted to
non-employee directors and certain key executives in accordance with the
Long-Term Incentive Compensation Plan that was approved by shareholders at the
Annual Meeting of Shareholders on April 6, 2000.
Weighted Average
Shares Exercise Price
------- ----------------
Options Outstanding, January 1, 2007 510,143 $17.73
Granted 94,500 15.33
Exercised -- --
Forfeited -- --
------- ------
Options Outstanding, March 31, 2007 604,643 $17.36
------- ------
Options Exercisable, March 31, 2007 407,991 $17.32
------- ------
On January 2, 2007, performance restricted stock units were awarded to certain
key executives in accordance with the Long-Term Incentive Compensation Plan that
was approved by shareholders at the Annual Meeting of Shareholders on April 6,
2000. Each performance stock unit (PSU) is equivalent to one share of MBT
Financial Corp. common stock. Stock will be issued to the participants following
a three year performance period that ends on December 31, 2009 based on the
cumulative earnings per share during that three year period. The PSUs vest on
December 31, 2009. There were 23,800 PSUs granted, and none will be considered
vested and earned for payment if the Company's three year cumulative earnings
per share are less than $2.91. The expense recorded for the PSUs in accordance
with FAS 123(R) was $22,000 in the first quarter of 2007. The total expense for
equity based compensation was $170,000 in the first quarter of 2007 and $120,000
in the first quarter of 2006.
4. LOANS
The Bank grants commercial, consumer, and mortgage loans primarily to customers
in Monroe County, Michigan, southern Wayne County, Michigan, and surrounding
areas. Although the
-8-
Bank has a diversified loan portfolio, a substantial portion of its debtors'
ability to honor their contracts is dependent on the automotive, manufacturing,
and real estate development economic sectors.
Loans consist of the following (000s omitted):
March December
31, 2007 31, 2006
-------- --------
Residential real estate loans $507,460 $513,289
Non-residential real estate loans 327,735 328,145
Loans to finance agricultural production and
other loans to farmers 4,560 3,739
Commercial and industrial loans 97,885 97,959
Loans to individuals for household, family,
and other personal expenditures 51,068 55,443
All other loans (including overdrafts) 399 473
-------- --------
Total loans, gross 989,107 999,048
Less: Deferred loan fees 693 771
-------- --------
Total loans, net of deferred loan fees 988,414 998,277
Less: Allowance for loan losses 14,069 13,764
-------- --------
$974,345 $984,513
======== ========
Loans are placed in a nonaccrual status when, in the opinion of Management, the
collection of additional interest is doubtful. All loan relationships over
$250,000 that are classified by Management as nonperforming as well as selected
performing accounts are reviewed for impairment. Allowances for loans determined
to be impaired are included in the allowance for loan losses. All cash received
on nonaccrual loans is applied to the principal balance. Nonperforming assets
consist of nonaccrual loans, loans 90 days or more past due, restructured loans,
and other real estate owned. Other real estate owned includes real estate that
has been acquired in full or partial satisfaction of loan obligations or upon
foreclosure and real estate that the bank has purchased but no longer intends to
use for bank premises.
The following table summarizes nonperforming assets (000's omitted):
March December
31, 2007 31, 2006
-------- --------
Nonaccrual loans $19,527 $19,152
Loans 90 days past due 61 69
Restructured loans 572 888
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Total nonperforming loans $20,160 $20,109
Other real estate owned 2,598 2,432
------- -------
Total nonperforming assets $22,758 $22,541
======= =======
Nonperforming assets to total assets 1.47% 1.44%
Allowance for loan losses to
nonperforming assets 61.82% 61.06%
-9-
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000's omitted):
3 Months 12 Months
Ended Ended
March December
31, 2007 31, 2006
-------- --------
Balance beginning of year $13,764 $ 13,625
Provision for loan losses 750 16,475
Loans charged off (1,089) (18,377)
Recoveries 644 2,041
------- --------
Balance end of period $14,069 $ 13,764
======= ========
For each period, the provision for loan losses in the income statement is based
on Management's estimate of the amount required to maintain an adequate
Allowance for Loan 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, or 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 is netted against loans on the consolidated statements
of condition. When it is determined that a customer will not repay a loan, 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. INVESTMENT SECURITIES
The following is a summary of the Bank's investment securities portfolio as of
March 31, 2007 and December 31, 2006 (000's omitted):
March 31, 2007 December 31, 2006
--------------------- ---------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- --------- --------- ---------
Held to Maturity
Obligations of U.S. Government Agencies $ 9 $ 9 $ 10 $ 10
Obligations of States and Political
Subdivisions 53,194 53,520 64,928 65,330
Other Securities -- -- -- --
------- ------- ------- -------
$53,203 $53,529 $64,938 $65,340
======= ======= ======= =======
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March 31, 2007 December 31, 2006
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Available for Sale
Obligations of U.S. Government Agencies $338,156 $335,052 $326,808 $322,934
Obligations of States and Political
Subdivisions 23,211 23,130 23,226 23,129
Other Securities 25,007 25,077 28,004 28,024
-------- -------- -------- --------
$386,374 $383,259 $378,038 $374,087
======== ======== ======== ========
The unrealized losses on investment securities are primarily the result of
increases in market interest rates and not the result of credit quality of the
issuers of the securities. The Company has the ability and intent to hold most
of these securities until recovery, which may be until maturity. For securities
in which the Company no longer has the intent to hold until recovery, the
securities are treated as other than temporarily impaired and the amount of
impairment is charged to earnings.
7. 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
statements of condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for its other lending activities.
Financial instruments whose contractual amounts represent off-balance sheet
credit risk were as follows (000s omitted):
Contractual Amount
------------------------
March 31, December 31,
2007 2006
--------- ------------
Commitments to extend credit:
Unused portion of commercial lines of credit $122,108 $100,265
Unused portion of credit card lines of credit 5,835 5,802
Unused portion of home equity lines of credit 21,374 20,873
Standby letters of credit and financial guarantees written 11,276 12,234
All other off-balance sheet assets 12,522 3,922
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, and generally have fixed expiration dates or other termination
clauses. 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
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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 counterparty.
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
MBT Financial Corp. (the "Company) is a bank holding company with one
subsidiary, Monroe Bank & Trust ("the Bank"). The Bank is a commercial bank with
two wholly owned subsidiaries, MBT Credit Company, Inc. and MB&T Financial
Services. MBT Credit Company, Inc. conducts lending operations for the Bank and
MB&T Financial Services is an insurance agency which sells insurance policies to
the Bank. The Bank operates 21 branch offices in Monroe County, Michigan and 5
offices in Wayne County, Michigan. The Bank's primary source of income is
interest income on its loans and investments and its primary expense is interest
expense on its deposits and borrowings.
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 Company'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, changes in the financial and securities markets, including changes
with respect to the market value of our financial assets, the availability of
and costs associated with sources of liquidity, and the ability of the Company
to resolve or dispose of problem loans.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Critical Accounting Policies
The Company'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
Company'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
Company estimates losses on all loans that are not classified as non accrual or
renegotiated by applying historical loss rates to
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those loans in accordance with SFAS 5. In addition, all loans that are non
accrual 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.
Financial Condition
The flat yield curve environment that began in 2005 persisted through the first
quarter of 2007. In this environment the spread between the yield on assets and
the cost of funds is narrow, providing little opportunity for profitable growth
without increasing exposure to interest rate risk. The Company continued its
strategy of controlling the decline in its net interest margin by restricting
its growth and changing the mix of its assets to increase the percent invested
in loans. Compared to the March 31, 2006, the loan to asset ratio increased from
62.1% to 63.9% and total assets decreased $67.4 million.
Since December 31, 2006, total loans decreased $10.2 million (1.0%) as weak
regional economic conditions have resulted in slower loan demand. Total cash and
investments decreased $5.0 million (1.1%), and total assets decreased $19.1
million (1.2%). Consumer loans decreased $4.4 million, or 7.9% due to a
reduction in lending for autos and other personal expenditures. Loan growth
efforts are focused on real estate secured loans, particularly home equity
lending. Deposits decreased $19.8 million, or 1.8%, primarily due to the normal
seasonal reduction in public fund deposits as property tax funds are disbursed
by the municipalities. Total capital increased $549,000, or 0.4% as the Company
repurchased 71,500 shares of its stock for $1.0 million, net income exceeded
dividends declared by $0.7 million, and accumulated other comprehensive income
increased $0.6 million. The capital to assets ratio increased from 8.68% at
December 31, 2006 to 8.83% at March 31, 2007.
The amount of nonperforming assets ("NPAs") increased $0.2 million or 1.0% since
year end, but total problem assets decreased $3.6 million, or 5.8%. The
Company's Allowance for Loan and Lease Losses ("ALLL") increased $305,000 since
December 31, 2006, as the provision for loan losses exceeded the net charge offs
during the first quarter. The ALLL is now 1.42% of loans, compared to 1.38% at
year end. The ALLL is 61.8% of NPAs, an increase from 61.1% at year end and
52.8% a year ago. Because a significant portion of the Bank's lending is secured
by real estate, we believe that at this level the ALLL adequately estimates the
potential losses in the loan portfolio.
Results of Operations - First Quarter 2007 vs. First Quarter 2006
Net Interest Income - A comparison of the income statements for the three months
ended March 31, 2006 and 2007 shows a decrease of $1.0 million, or 8.1% in Net
Interest Income. Interest income on loans increased $0.6 million or 3.4% as the
average loans outstanding decreased $4.3 million but the average yield on loans
increased from 6.98% to 7.25%. Even though the yield on investments and fed
funds sold increased from 5.00% to 5.34%, the interest income on investments and
fed funds sold decreased $0.6 million as the average amount of investments and
fed funds sold decreased $79.5 million. The yields on assets increased slightly
due to the increases in market interest rates and the restructuring of the
investment portfolio that was completed early in the third quarter of 2006.
Shorter term market interest rates have increased more rapidly than the longer
term rates, causing funding costs to rise faster than asset yields. The interest
expense on deposits increased $0.5 million, or 6.1% as average deposits
decreased $72.1 million but the average cost of those deposits increased from
2.59% to 2.93%. The cost of borrowed funds increased $0.5 million as the average
amount of borrowed funds increased $7.0 million and the average cost of the
borrowings increased from 5.48% to 6.04%.
Provision for Loan Losses - The Provision for Loan Losses increased from
$675,000 in the first quarter of 2006 to $750,000 in the first quarter of 2007
to provide for the net charge offs and to
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increase our Allowance for Loan Losses as regional economic conditions remain
weaker than the rest of the country. Net charge offs were $445,000 during the
first quarter of 2007, compared to $96,000 in the first quarter of 2006. Each
quarter, the Company conducts a review and analysis of its ALLL to ensure its
adequacy. This analysis involves specific allocations for impaired credits and a
general allocation for losses expected based on historical experience adjusted
for current conditions.
Other Income - Non interest income increased $179,000 or 5.0% in the first
quarter of 2007 compared to the first quarter of 2006. Service Charges and other
fees increased due to increased NSF and Stop Payment fees. Origination Fees and
Gains on Mortgage Loans Sold increased slightly as the amount of mortgage loans
sold increased. Bank Owned Life Insurance earnings increased due to an increase
in the investment in BOLI from $36.5 million as of March 31, 2006 to $39.9
million at March 31, 2007. Other income increased due to increased ATM and debit
card activity.
Other Expenses - Total non interest expenses increased $623,000 or 7.3% compared
to the first quarter of 2006. Salaries and Employee Benefits increased $271,000,
or 5.2%, as the number of full time equivalent employees increased 3.1% from 416
to 429. Occupancy Expense increased $113,000, or 14.7%, compared to the first
quarter of 2006. Depreciation increased, primarily due to the new headquarters
building completed in the third quarter of 2006. Various other expenses
increased $239,000, or 9.4%.
As a result of the above activity, the Income Before Income Taxes decreased $1.5
million to $5.1 million. The income tax expense decreased $0.5 million from $1.9
million to $1.4 million, and reflects an effective tax rate of 27.2% compared to
the effective tax rate of 28.3% in the first quarter of 2006. The Net Profit of
$3.7 million is a decrease of $1.0 million from the Profit of $4.7 million
earned in the first quarter of 2006.
Liquidity and Capital
The Company 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 March 31, 2007, the Bank utilized $256.5 million of its
authorized limit of $275 million with the Federal Home Loan Bank of Indianapolis
and $2.5 million of its $110 million of federal funds lines with its
correspondent banks.
Total stockholders' equity of the Company was $136.6 million at March 31, 2007
and $136.1 million at December 31, 2006. The ratio of equity to assets was 8.8%
at March 31, 2006 and 8.7% at December 31, 2006. Federal bank regulatory
agencies have set capital adequacy standards for Total Risk Based Capital, Tier
1 Risk Based Capital, and Leverage Capital. These standards require banks to
maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of
at least 8% to be adequately capitalized. The regulatory agencies consider a
bank to be well capitalized if its Total Risk Based Capital is at least 10% of
Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, and
the Leverage Capital Ratio is at least 5%.
The following table summarizes the capital ratios of the Company:
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Minimum to be Well
March 31, 2007 December 31, 2006 Capitalized
-------------- ----------------- ------------------
Leverage Capital 9.1% 8.9% 5.0%
Tier 1 Risk Based Capital 13.0% 12.8% 6.0%
Total Risk Based Capital 14.3% 14.0% 10.0%
At March 31, 2007 and December 31, 2006, 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 and it
has not changed significantly since year-end 2006.
ITEM 3. 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,
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 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 the first three months of 2007, 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 parallel shifts of plus or minus 100 and 200 basis points
in interest rates. 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 Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. Throughout the
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first three months of 2007, the estimated variability of the economic value of
equity was within the Bank's established policy limits.
The Bank's interest rate risk, as measured by the net interest income and
economic value of equity simulations, has not changed significantly from
December 31, 2006.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
March 31, 2007, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of March
31, 2007, in alerting them in a timely manner to material information relating
to the Company (including its consolidated subsidiaries) required to be included
in the Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended March 31, 2007, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their
property the subject of any material legal proceedings other than ordinary
routine litigation incidental to their respective businesses, nor are any such
proceedings known to be contemplated by governmental authorities.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors disclosed by the Company
in its Report on Form 10-K for the fiscal year ended December 31, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The Company has a stock repurchase program which it publicly announced on
January 9, 2007. On that date, the Board of Directors authorized the repurchase
of 1 million of the Company's common shares, which authorization will expire on
December 31, 2007. The following table summarizes the repurchase activity of the
Company's stock during the three months ended March 31, 2007:
Total
Number
of Shares
Purchased Maximum Number
as Part of of Shares that
Total Publicly May Yet Be
Number of Average Announced Purchased Under
Shares Price Paid Plans or the Plans
Purchased per Share Programs or Programs
--------- ---------- ---------- ---------------
January 1, 2007 - January 31, 2007 -- $ -- -- 1,000,000
February 1, 2007 - February 28, 2007 40,500 $14.09 40,500 959,500
March 1, 2007 - March 31, 2007 31,000 $12.81 31,000 928,500
------ ------ ------
Total 71,500 $13.54 71,500
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
No matters to be reported.
ITEM 6. 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.
31.1 Certification by Chief Executive Officer required by Securities and
Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities and
Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBT Financial Corp.
(Registrant)
May 8, 2007 By /s/ H. Douglas Chaffin
Date -------------------------------------
H. Douglas Chaffin
President &
Chief Executive Officer
May 8, 2007 By /s/ John L. Skibski
Date -------------------------------------
John L. Skibski
Executive Vice President and
Chief Financial Officer
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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.
31.1 Certification by Chief Executive Officer required by Securities and
Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities and
Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.