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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, 2007
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. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act (Check One).
[ ] Large accelerated filer [X] Accelerated filer
[ ] Non-accelerated filer [ ] Smaller reporting company
(Do not check if a smaller reporting company)
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, 2007, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $230.6 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 11, 2007, there were 16,127,870 shares of the registrant's common
stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2008 Annual Meeting of Shareholders of
MBT Financial Corp. to be held on May 1, 2008 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 54.43% of
the market. In 2001, the Bank began expanding into Wayne County, Michigan, and
currently ranks eighteenth out of twenty-nine institutions with a market share
of 0.26%. For the combined Monroe and Wayne County market, the Bank ranks sixth
of thirty-two institutions with a market share of 3.18%.
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, 2007, Monroe Bank & Trust had 394 full-time employees and 20 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 52 President & Chief Executive Officer
Scott E. McKelvey 48 Executive Vice President, Senior Wealth Management
Officer, Monroe Bank & Trust
James E. Morr 61 Executive Vice President, General Counsel, and Chief
Risk Officer, Monroe Bank & Trust; Secretary, MBT
Financial Corp.
Thomas G. Myers 51 Executive Vice President & Chief Lending Manager,
Monroe Bank & Trust
John L. Skibski 43 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 2007, 2006, 2005,
and 2004, and President & Chief Operating Officer in 2003. Scott E. McKelvey was
Executive Vice President, Senior Wealth Management Officer in 2007, and Senior
Vice President - Downriver Community President in 2007, 2006, 2005, 2004 and
2003. James E. Morr was Executive Vice President, General Counsel and Chief Risk
Officer in 2007 and Executive Vice President, Senior Wealth Management Officer
and General Counsel in 2007, 2006, 2005, 2004, and 2003. Thomas G. Myers was
Executive Vice President & Chief Lending Manager in 2007, 2006, 2005, 2004 and
2003, and Senior Vice President, Commercial Group Manager in 2003. John L.
Skibski was Executive Vice President & Chief Financial Officer in 2007, 2006,
2005 and 2004, and Senior Vice President & Controller in 2003.
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, 2007, 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
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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 headquarters 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 2007.
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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 16,124,997 shares with a book value of $7.90. Dividends
declared on common stock during 2007 amounted to $.72 per share. The common
stock is traded on the NASDAQ Global Select 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.
2007 2006
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
1st quarter $15.48 $12.26 $18.01 $15.80
2nd quarter $14.60 $12.12 $17.10 $15.46
3rd quarter $14.04 $11.15 $16.58 $14.45
4th quarter $12.25 $ 8.30 $15.95 $14.44
Dividends declared during the past three years on a quarterly basis were as
follows:
2007 2006 2005
----- ----- -----
1st quarter $0.18 $0.17 $0.16
2nd quarter $0.18 $0.17 $0.16
3rd quarter $0.18 $0.18 $0.17
4th quarter $0.18 $0.18 $0.17
As of December 31, 2007, the number of holders of record of the Corporation's
common shares was 1,253. 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, 2007:
Average Total Number of Shares Maximum Number of Shares that
Total Number of Price Paid Purchased as Part of Publicly May Yet Be Purchased Under
Shares Purchased per Share Announced Plans or Programs the Plans or Programs
---------------- ---------- ----------------------------- -----------------------------
October 1, 2007 - October 31, 2007 11,700 $ 10.30 11,700 416,638
November 1, 2007 - November 30, 2007 16,000 $ 10.10 16,000 400,638
December 1, 2007 - December 31, 2007 -- $ -- -- 400,638
------ ------- ------
Total 27,700 $ 10.19 27,700
------ ------- ------
The stock was repurchased pursuant to an authorization granted by the
Corporation's Board of Directors on December 21, 2006. The authorization allowed
the purchase of up to 1 million shares of the Corporation's stock during 2007.
On December 20, 2007 the Board of Directors approved a new authorization to
purchase up to 1 million shares in 2008.
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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, 2007. The total shareholder return
assumes a $100 investment in the common stock of the Corporation, and each index
on December 31, 2002 and that all dividends were reinvested.
(PERFORMANCE GRAPH)
PERIOD ENDING
---------------------------------------------------------------
INDEX 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07
- ----- -------- -------- -------- -------- -------- --------
MBT Financial Corp. 100.00 127.34 185.31 133.76 132.16 80.78
NASDAQ Composite 100.00 150.01 162.89 165.13 180.85 198.60
NASDAQ Bank 100.00 129.93 144.21 137.97 153.15 119.35
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 2007 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 2007 2006 2005 2004 2003
- -------------------------------- ----------- ----------- ----------- ----------- -----------
CONSOLIDATED STATEMENTS OF INCOME
Interest Income $ 93,551 $ 95,923 $ 89,695 $ 79,703 $ 77,774
Interest Expense 50,782 49,288 38,583 26,998 27,467
----------- ----------- ----------- ----------- -----------
Net Interest Income 42,769 46,635 51,112 52,705 50,307
Provision for Loan Losses 11,407 16,475 6,906 2,491 8,005
----------- ----------- ----------- ----------- -----------
Net Interest Income after
Provision for Loan Losses 31,362 30,160 44,206 50,214 42,302
Other Income 15,634 9,542 14,449 13,776 13,803
Other Expenses 37,234 36,308 33,818 32,616 30,179
----------- ----------- ----------- ----------- -----------
Income before Provision
for Income Taxes 9,762 3,394 24,837 31,374 25,926
Provision for
Income Taxes 2,049 (379) 6,858 8,775 6,611
----------- ----------- ----------- ----------- -----------
Net Income $ 7,713 $ 3,773 $ 17,979 $ 22,599 $ 19,315
----------- ----------- ----------- ----------- -----------
Net Income available to
Common Shareholders $ 7,713 $ 3,773 $ 17,979 $ 22,599 $ 19,315
----------- ----------- ----------- ----------- -----------
PER COMMON SHARE
Basic Net Income $ 0.47 $ 0.22 $ 1.04 $ 1.30 $ 1.02
Diluted Net Income 0.47 0.22 1.03 1.29 1.01
Cash Dividends Declared 0.72 0.70 0.66 0.62 0.58
Book Value at Year End 7.90 8.14 8.82 8.89 8.20
Average Common Shares
Outstanding 16,415,425 16,941,432 17,334,376 17,444,165 19,026,369
----------- ----------- ----------- ----------- -----------
CONSOLIDATED BALANCE SHEETS (YEAR END)
Total Assets $ 1,556,806 $ 1,566,819 $ 1,638,356 $ 1,552,279 $ 1,457,788
Total Securities 438,058 439,025 533,709 505,441 508,482
Loans, Net of Deferred Loan Fees 1,002,259 998,998 989,311 945,881 863,850
Allowance for Loan Losses 20,222 13,764 13,625 13,800 14,500
Deposits 1,109,980 1,116,057 1,184,710 1,100,711 1,039,117
Borrowings 304,800 300,000 291,500 286,500 270,000
Total Shareholders' Equity 127,447 136,062 151,619 155,346 143,446
----------- ----------- ----------- ----------- -----------
SELECTED FINANCIAL RATIOS
Return on Average Assets 0.50% 0.24% 1.13% 1.55% 1.33%
Return on Average Equity 5.77% 2.60% 11.57% 15.18% 11.39%
Net Interest Margin 2.99% 3.12% 3.42% 3.75% 3.67%
Dividend Payout Ratio 152.40% 313.16% 63.52% 47.88% 56.14%
Allowance for Loan Losses
to Period End Loans 2.02% 1.38% 1.38% 1.69% 1.68%
Allowance for Loan Losses
to Non Performing Loans 59.60% 61.06% 51.49% 34.57% 30.41%
Non Performing Loans
to Period End Loans 3.39% 2.26% 2.67% 4.22% 5.50%
Net Charge Offs to Average Loans 0.49% 1.62% 0.71% 0.35% 0.72%
----------- ----------- ----------- ----------- -----------
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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 $20,222,000 as of December 31, 2007 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.
RECENT ACCOUNTING PRONOUNCEMENTS - In April 2007 the Company elected early
adoption of FAS 159 as of January 1, 2007. FAS 159 allows the Company to choose
to measure eligible financial assets and liabilities at fair value. The Company
did not select any financial assets or liabilities for fair value measurement,
but elected early adoption in order to be able to apply the fair value option to
financial assets and liabilities acquired prior to the effective date of the
statement. Upon early adoption of FAS 159, the company concurrently adopted FAS
157, subject to the deferral provision provided in FSP 157-2.
RESULTS OF OPERATIONS - Net Income increased 104.4% from $3.8 million in 2006 to
$7.7 million in 2007. The improvement in earnings was due to decreases in the
provision for loan losses and in losses on sales of investment securities. The
primary source of earnings for the Bank is its net interest income, which
decreased $3.9 million, or 8.3% compared to 2006. Net interest income decreased
because the average earning assets decreased $64.9 million and the net interest
margin decreased from 3.12% to 2.99%. The flat yield curve environment that
began in 2005 persisted through most of 2007, and we continued our strategy to
control the decline in the margin by restricting asset growth. This strategy was
successful on the asset side of the balance sheet as our average earning asset
mix changed from 32% investments and 68% loans to 30% investments and 70% loans.
This contributed to the increase in the yield on earning assets from 6.42% in
2006 to 6.54% in 2007. Although we improved the yield on earning assets,
interest income decreased $2.4 million as the negative impact of the smaller
asset size was greater than the positive impact of the higher yield, as shown in
the table on page 17. The interest expense increased in 2007 because the benefit
from the smaller amount of interest bearing liabilities was exceeded by the
increase in the cost of funds. Even though market interest rates began to
decline in the second half of 2007, competitive pressure caused increases in the
cost of deposits, particularly Money Market Deposit Accounts (MMDAs) and
Certificates of Deposits (CDs). We also experienced an increase in the cost of
most of our borrowed funds. Our variable rate borrowed funds pricing is tied to
the 3 month LIBOR, which increased in the third quarter of 2007 while most other
short term rates decreased.
11
The provision for loan losses decreased 30.8% from $16.5 million to $11.4
million in 2007. The 2006 provision included $10.4 million to write down the
value of problem loans prior to their sale in the third quarter. A rapid decline
in economic conditions in southeast Michigan in 2007 caused non performing
assets to increase, and we increased our allowance for loan losses from 1.38% of
loans as of December 31, 2006 to 2.02% as of December 31, 2007.
Other income increased $6.1 million in 2007 compared to 2006. Wealth management
income improved $309,000 or 7.2% due to increases in the rates charged for trust
services. Deposit account services charges increased 1% due to increases in
insufficient funds and stop payment fees collected. The loss on the sale of
investment securities decreased $5.0 million due to the large loss recorded in
2006 as the result of an investment portfolio restructuring. Origination fees on
mortgage loans sold increased 23% compared to 2006 as the interest rate
environment made it more attractive for residential mortgage loan customers to
refinance from variable rate loans which we hold in our portfolio to fixed rate
loans, which we originate for sale. Income on our bank owned life insurance
portfolio increased 13.3% due to an improvement in the policy yields and an
increase of 7.3% in the policy value outstanding. The $433,000, or 17.9%
increase in other non interest income is mainly due to increases of $187,000 in
ATM interchange income and $132,000 in commissions on brokerage services. Both
of these increases were the result of significant increases in activity levels.
Other expenses increased $926,000, or 2.6% in 2007. Our largest expense is
salaries and benefits for our employees, which increased $1.8 million compared
to 2006 as our average number of full time equivalent employees increased from
416 to 420. Salary expense increased $0.6 million, incentive compensation
increased $1.0 million, and benefits increased $0.2 million. The $333,000
increase in occupancy expense was due to increases in depreciation and property
taxes, primarily due to our new headquarters building which was completed in the
third quarter of 2006. Professional fees decreased due to expenses from the sale
of problem assets in 2006, and losses on the sale of other real estate owned
also decreased due to the losses on the 2006 asset sale.
Income before the provision for income taxes increased $6.4 million, or 187.6%
in 2007. Our federal income tax provision in 2007 was $2.0 million, for an
effective tax rate of 21.0%. 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 increased $3.9 million, or 104.4% to $7,713,000.
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. 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 $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.
12
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.
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.
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.
Earnings for the Bank are usually highly reflective of the Net Interest Income.
In 2005, The Federal Open Market Committee (FOMC) of the Federal Reserve raised
the fed funds rate 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 as our cost of funds increased faster
than our asset yields. The FOMC continued to raise rates in 2006, bringing the
fed funds
13
rate to 5.25% in the second quarter. Longer term market rates began to drop in
2007 and the treasury yield curve inverted, which had a negative impact on the
Bank's Net Interest Margin. Loan and investment yields follow long term market
yields, and the yield on our loans increased slightly, from 6.71% in 2005 to
7.02% in 2006 and 7.12% in 2007. The yields on our investment securities also
increased slightly, from 4.75% in 2005 to 5.15% in 2006 and 5.19% in 2007.
Funding costs are more closely tied to the short term rates, and the average
cost of our deposits increased more rapidly, from 2.08% in 2005 to 2.73% in 2006
and 2.97% in 2007, and our average cost of borrowed funds also increased
quickly, from 5.05% in 2005 to 5.77% in 2006 and 6.05% in 2007. This caused our
net interest margin to decline from 3.42% in 2005 to 3.12% in 2006 and 2.99% in
2007. As a result, the net interest income decreased 8.3% in 2007. The average
cost of interest bearing deposits was 3.41%, 3.16%, and 2.42% for 2007, 2006,
and 2005, respectively. The following table shows selected financial ratios for
the same three years.
2007 2006 2005
------ ------ -----
Return on Average Assets 0.50% 0.24% 1.13%
Return on Average Equity 5.77% 2.60% 11.57%
Dividend Payout Ratio 152.40% 313.16% 63.52%
Average Equity to Average Assets 8.68% 9.05% 9.76%
BALANCE SHEET ACTIVITY - Due to the flat yield curve environment and weak
economic conditions, the Company adopted a balance sheet strategy that involved
selective asset growth and active capital management. Investment security
maturities were used to fund deposit reductions and stock repurchases. The
marketable investment securities portfolio decreased $14.1 million while
deposits decreased $6.1 million. The investment portfolio primarily consists of
mortgage backed securities and debentures issued by government agencies and debt
securities issued by states and political subdivisions. We do not invest in
auction rate securities, perpetual preferred securities, or similar investments
which have recently caused problems for investors. Our loan growth has been slow
due to the local economic conditions. With the forecast for the economic
weakness to spread throughout the country, we do not expect a significant
increase in loans in 2008. Deposits decreased slightly in 2007 as we did not
price deposits as aggressively as the regional banks that we compete with
locally. We began to offer a high yield demand deposit account product in 2007,
which led to an increase in our interest bearing deposits and a decrease in our
non interest bearing deposits. The yield curve is returning to a normal shape,
and we anticipate that we will experience some deposit growth in 2008 as our
pricing becomes more competitive.
ASSET QUALITY - The Corporation uses an internal loan classification system as a
means of tracking and reporting problem and potential problem credit assets.
Loans that are rated one to four are considered "pass" or high quality credits,
loans rated five are "watch" credits, and loans rated six and higher are
"problem assets", which includes non performing loans. Non performing assets
include all loans that are 90 days or more past due, non accrual loans, Other
Real Estate Owned (OREO), and renegotiated debt. In the third quarter of 2006,
the Corporation sold $25 million of problem assets, which reduced its problem
asset total to $62.9 million, or 4.0% of total assets. Asset quality continued
to improve through the first quarter of 2007, with total problem assets
declining to $58.7 million, or 3.8% of total assets. Throughout this time,
economic conditions in southeast Michigan remained worse than the national
average, with increasing unemployment, decreasing property values, and high
foreclosure rates. As economic conditions continued to deteriorate and the
subprime lending crisis worsened in the fourth quarter of 2007, problem assets
increased to $87.5 million, or 5.6% of total assets at December 31, 2007.
The Corporation does not engage in the type of predatory lending practices that
resulted in the subprime crisis, however, the Corporation has made residential
real estate loans to borrowers that meet the regulatory definition of subprime.
As of December 31, 2007, the amount of subprime residential mortgage loans was
$81.5 million. The percent of these loans that were 30 days or more past due on
December 31, 2007 was 10.5%, compared to 1.8% for the rest of the residential
mortgage loan portfolio. The past due percentages for both the prime and
subprime portions of our residential mortgage loan portfolio are significantly
better than the national averages. Although subprime lending has not directly
had a significant negative impact on our asset quality, the subprime crisis
14
contributed to the decrease in real estate collateral values, which has caused
us to increase our Allowance for Loan Losses and to write down the value of some
of our Other Real Estate Owned assets.
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, 2007, the Bank utilized $256.5
million of its authorized limit of $275 million with the Federal Home Loan Bank
of Indianapolis and $13.3 million of its $110 million of federal funds lines
with its correspondent banks.
Total stockholders' equity of the Corporation was $127.4 million at December 31,
2007 and $136.1 million at December 31, 2006. The ratio of equity to assets was
8.2% at December 31, 2007 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
Leverage Capital Ratio is at least 5%.
The following table summarizes the capital ratios of the Corporation:
December 31, 2007 December 31, 2006 Minimum to be Well Capitalized
----------------- ----------------- ------------------------------
Leverage Capital 8.4% 8.9% 5.0%
Tier 1 Risk Based Capital 11.8% 12.8% 6.0%
Total Risk Based Capital 13.1% 14.0% 10.0%
At December 31, 2007 and December 31, 2006, the Bank was in compliance with the
capital guidelines and is considered "well capitalized" under regulatory
standards. During 2007 the Corporation expanded its internal policy on capital
management to include a minimum level for each of the three capital ratios that
is higher than the regulatory "well capitalized" minimums. Throughout 2007 the
Corporation's capital level exceeded its policy minimums. The Corporation
expects to be able to maintain its current dividend payment and meet its capital
policy requirements for the foreseeable future. However, the Corporation's Board
of Directors reviews the capital levels and dividend payment each quarter, and
may choose to alter the dividend payment in order to maintain capital if
unanticipated events have a significant negative impact on earnings.
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.
15
The following table shows the investment portfolio for the last three years
(000s omitted).
Held to Maturity
---------------------------------------------------------------------
December 31, 2007 December 31, 2006 December 31, 2005
--------------------- --------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
U.S. Government agency and corporation
obligations $ 7 $ 8 $ 10 $ 10 $ 11 $ 12
Securities issued by states and political
subdivisions in the U.S. 44,727 45,036 64,928 65,330 76,456 77,293
Other domestic securities (debt and equity) -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Total $44,734 $45,044 $64,938 $65,340 $76,467 $77,305
======= ======= ======= ======= ======= =======
Pledged securities $ 6,650 $ 6,695 $ 4,209 $ 4,258 $13,863 $14,125
======= ======= ======= ======= ======= =======
Available for Sale
---------------------------------------------------------------------
December 31, 2007 December 31, 2006 December 31, 2005
--------------------- --------------------- ---------------------
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) $330,505 $330,178 $326,808 $322,934 $358,412 $351,074
Securities issued by states and political
subdivisions in the U.S. 27,046 27,134 23,226 23,129 26,206 26,081
Other domestic securities (debt and equity) 23,081 22,926 28,004 28,024 67,098 66,866
-------- -------- -------- -------- -------- --------
Total $380,632 $380,238 $378,038 $374,087 $451,716 $444,021
======== ======== ======== ======== ======== ========
Pledged securities $345,255 $344,975 $325,445 $321,477 $316,379 $309,552
======== ======== ======== ======== ======== ========
16
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,
-------------------------------------------------------------------------------------------
2007 2006 2005
----------------------------- ----------------------------- -----------------------------
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 $ 315,338 $16,918 5.37% $ 331,600 $16,778 5.06% $ 343,348 $15,878 4.62%
Obligations of States &
Political Subdivisions(1) 77,391 3,177 4.11% 90,032 4,356 4.84% 105,373 5,036 4.78%
Other Securities 34,137 2,067 6.06% 61,756 3,768 6.10% 75,602 3,986 5.27%
---------- ------- ---- ---------- ------- ----- ---------- ------- ----
Total Investments 426,866 22,162 5.19% 483,388 24,902 5.15% 524,323 24,900 4.75%
---------- ------- ---- ---------- ------- ----- ---------- ------- ----
Loans
Commercial 662,176 48,058 7.26% 654,945 46,987 7.17% 621,365 41,971 6.75%
Mortgage 221,594 13,405 6.05% 228,960 13,746 6.00% 213,645 12,946 6.06%
Consumer 116,569 9,782 8.39% 126,074 10,217 8.10% 127,046 9,661 7.60%
---------- ------- ---- ---------- ------- ----- ---------- ------- ----
Total Loans(2) 1,000,339 71,245 7.12% 1,009,979 70,950 7.02% 962,056 64,578 6.71%
Federal Funds Sold 2,774 144 5.19% 1,553 71 4.57% 7,687 217 2.82%
---------- ------- ---- ---------- ------- ----- ---------- ------- ----
Total Interest Earning Assets 1,429,979 93,551 6.54% 1,494,920 95,923 6.42% 1,494,066 89,695 6.00%
Cash & Due From Banks 23,171 24,421 24,839
Interest Receivable and Other Assets 86,853 81,629 71,724
---------- ---------- ----------
Total Assets $1,540,003 $1,600,970 $1,590,629
========== ========== ==========
Savings Accounts $ 95,646 $ 214 0.22% $ 106,065 $ 264 0.25% $ 119,437 $ 298 0.25%
NOW Accounts 68,637 252 0.37% 66,394 165 0.25% 66,900 169 0.25%
Money Market Deposits 286,655 9,830 3.43% 289,849 9,846 3.40% 294,070 5,561 1.89%
Certificates of Deposit 498,952 22,126 4.43% 512,780 20,574 4.01% 494,974 17,551 3.55%
Federal Funds Purchased 10,019 518 5.17% 18,913 981 5.19% 8,613 287 3.33%
Repurchase Agreements 36,959 1,644 4.45% 37,836 1,564 4.13% 32,164 1,055 3.28%
FHLB Advances 256,500 16,198 6.32% 256,500 15,894 6.20% 256,500 13,662 5.33%
---------- ------- ---- ---------- ------- ----- ---------- ------- ----
Total Interest Bearing Liabilities 1,253,368 50,782 4.05% 1,288,337 49,288 3.83% 1,272,658 38,583 3.03%
Non-interest Bearing Deposits 141,269 154,327 156,289
Other Liabilities 11,676 13,456 6,313
---------- ---------- ----------
Total Liabilities 1,406,313 1,456,120 1,435,260
Stockholders' Equity 133,690 144,850 155,369
---------- ---------- ----------
Total Liabilities & Stockholders'
Equity $1,540,003 $1,600,970 $1,590,629
========== ========== ==========
Net Interest Income $42,769 $46,635 $51,112
Interest Rate Spread 2.49% 2.59% 2.97%
Net Interest Income as a percent of
average earning assets 2.99% 3.12% 3.42%
(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.
17
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,
------------------------------------------------------------------------------
2007 versus 2006 2006 versus 2005 2005 versus 2004
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 $ 963 $ (823) $ 140 $ 1,443 $ (543) $ 900 $ 1,051 $1,737 $ 2,788
Obligations of States &
Political Subdivisions (567) (612) (1,179) 53 (733) (680) (80) (497) (577)
Other Securities (16) (1,685) (1,701) 512 (730) (218) 366 290 656
------- ------- ------- ------- ------- ------- ------- ------ -------
Total Investments 380 (3,120) (2,740) 2,008 (2,006) 2 1,337 1,530 2,867
------- ------- ------- ------- ------- ------- ------- ------ -------
Loans
Commercial 618 478 1,096 2,748 2,268 5,016 4,346 1,261 5,607
Mortgage 76 (442) (366) (128) 928 800 (503) 1,232 729
Consumer 335 (770) (435) 630 (74) 556 75 507 582
------- ------- ------- ------- ------- ------- ------- ------ -------
Total Loans 1,029 (734) 295 3,250 3,122 6,372 3,918 3,000 6,918
Federal Funds Sold 19 55 74 27 (173) (146) (87) 120 33
------- ------- ------- ------- ------- ------- ------- ------ -------
Total Interest Income 1,428 (3,799) (2,371) 5,285 943 6,228 5,168 4,650 9,818
Interest Expense
Savings Accounts (25) (26) (51) 0 (33) (33) (3) (24) (27)
NOW Accounts 81 6 87 (3) (1) (4) 3 (6) (3)
Money Market Deposits 93 (109) (16) 4,365 (80) 4,285 3,229 (280) 2,949
Certificates of Deposit 2,107 (555) 1,552 2,392 631 3,023 2,119 3,617 5,736
Federal Funds Purchased (2) (461) (463) 350 344 694 160 (363) (203)
Repurchase agreements 117 (36) 81 322 186 508 51 582 633
FHLB Advances 304 0 304 2,232 0 2,232 1,836 664 2,500
------- ------- ------- ------- ------- ------- ------- ------ -------
Total Interest Expense 2,675 (1,181) 1,494 9,658 1,047 10,705 7,395 4,190 11,585
------- ------- ------- ------- ------- ------- ------- ------ -------
Net Interest Income $(1,247) $(2,618) $(3,865) $(4,373) $ (104) $(4,477) $(2,227) $ 460 $(1,767)
======= ======= ======= ======= ======= ======= ======= ====== =======
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 89% as of December 31, 2007 and 85%
as of December 31, 2006. The percentage of securities that mature within five
years was 21% as of December 31, 2007 and December 31, 2006. 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 2007.
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% $25,661 4.99% $108,044 5.05% $196,480 5.42% $330,185 5.27%
Obligations of States & Political
Subdivisions 7,372 4.95% 30,815 4.68% 24,103 4.32% 9,571 4.66% 71,861 4.58%
Other Securities -- 0.00% 1,026 7.41% -- 0.00% 21,900 7.75% 22,926 7.73%
------ ---- ------- ---- -------- ---- -------- ---- -------- ----
Total $7,372 4.95% $57,502 4.87% $132,147 4.92% $227,951 5.61% $424,972 5.28%
====== ==== ======= ==== ======== ==== ======== ==== ======== ====
18
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, 2007. 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, 2007, 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 $ 159,731 $ 16,197 $ 26,672 $ 26,542 $101,888 $ 331,030
Obligations of States & Political
Subdivisions 16,833 10,576 6,081 20,162 17,880 71,532
Other Securities 33,074 1,000 1,000 -- -- 35,074
Commercial Loans 230,374 59,267 89,734 270,485 2,900 652,760
Mortgage Loans 17,232 34,466 44,550 80,912 37,797 214,957
Consumer Loans 30,358 8,429 13,961 41,590 12,583 106,921
--------- --------- --------- -------- -------- ----------
Total Interest Earning Assets $ 487,602 $ 129,935 $ 181,998 $439,691 $173,048 $1,412,274
--------- --------- --------- -------- -------- ----------
Interest Bearing Liabilities
Savings Deposits $ 311,365 $ -- $ -- $ -- $ -- $ 311,365
Other Time Deposits 218,658 65,266 156,409 67,979 272 508,584
FHLB Advances 123,000 -- 15,000 118,500 -- 256,500
Repurchase Agreements 5,000 -- -- 15,000 15,000 35,000
Federal Funds Borrowed 13,300 -- -- -- -- 13,300
--------- --------- --------- -------- -------- ----------
Total Interest Bearing Liabilities $ 671,323 $ 65,266 $ 171,409 $201,479 $ 15,272 $1,124,749
--------- --------- --------- -------- -------- ----------
Gap $(183,721) $ 64,669 $ 10,589 $238,212 $157,776 $ 287,525
Cumulative Gap $(183,721) $(119,052) $(108,463) $129,749 $287,525 $ 287,525
Sensitivity Ratio 0.73 1.99 1.06 2.18 11.33 1.26
Cumulative Sensitivity Ratio 0.73 0.84 0.88 1.12 1.26 1.26
19
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, 2007, Maturing or Repricing in:
--------------------------------------------------------------------
0-6 6-12 1-2 2-5 Over 5
Months Months Years Years Years Total
--------- --------- --------- -------- -------- ----------
Total Interest Earning Assets $ 487,602 $ 129,935 $ 181,998 $439,691 $173,048 $1,412,274
Total Interest Bearing Liabilities $ 835,703 $ 65,266 $ 171,409 $201,479 $ 15,272 $1,289,129
--------- --------- --------- -------- -------- ----------
Gap $(348,101) $ 64,669 $ 10,589 $238,212 $157,776 $ 123,145
Cumulative Gap $(348,101) $(283,432) $(272,843) $(34,631) $123,145 $ 123,145
Sensitivity Ratio 0.58 1.99 1.06 2.18 11.33 1.10
Cumulative Sensitivity Ratio 0.58 0.69 0.75 0.97 1.10 1.10
The amount of loans due after one year with floating interest rates is
$227,256,000.
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) 2007 2006 2005
- ---------------------- -------- -------- --------
Maturing Within
3 Months $ 62,901 $ 80,897 $107,782
3 - 6 Months 35,370 25,343 29,286
6 - 12 Months 18,218 23,107 9,312
Over 12 Months 38,830 27,393 56,781
-------- -------- --------
Total $155,319 $156,740 $203,161
======== ======== ========
For 2008, we expect the FOMC to lower short term managed rates as the slow
economic activity and increasing unemployment will present a greater risk to
economic stability than inflation. The fed changed to a more accommodative
stance in the third quarter of 2007 lowering the fed funds rate from 5.25% to
4.25% by the end of the year. They followed this with an unprecedented 125 basis
points of cuts in less than two weeks in January 2008. From January 2, 2007 to
February 27, 2008, the spread between the two year Treasury yield and the ten
year treasury yield went from a negative 12 basis points to a positive 184 basis
points. The positive sloped shape of the yield curve provides a much better
opportunity for banks to grow their balance sheets and improve their net
interest income. However, other factors in the local economic environment, such
as increasing unemployment, decreasing real estate values, and the ongoing
weakness in the domestic automotive industry, will restrict the opportunities
for us to increase our lending activity significantly in 2008. In the near term,
our focus will be on controlling our asset quality, improving our non interest
income, and controlling the increase in our non interest expenses. We will also
continue to manage our capital cautiously during this period of economic
uncertainty. Our policy requires us to maintain a higher level of capital than
the federal banking regulators require in order to meet their "well capitalized"
classification. Based on our earnings expectations and our current capital
levels, we expect to be able to maintain our current dividend level for the near
future. We expect a small amount of asset growth in 2008, funded by a similar
amount of deposit growth. Due to the small amount of growth in assets and the
slow improvement in the interest rate environment, we do not expect a
significant change in our net interest income in 2008.
In the fourth quarter of 2007 we recorded a large Provision for Loan Losses due
to the increase in nonperforming assets and to increase the general allocation
portion of our Allowance for Loan Losses due to our 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 60% from the level recorded
20
in 2007. We believe that we will be able to decrease the Provision for Loan
Losses because we do not expect economic conditions or real estate values in our
market area to continue to decline as rapidly as they did in 2007.
We anticipate that non interest income will increase due to improvements in
service charges and other fees and increases in debit card interchange income.
We expect non-interest expenses to increase less than five per cent as savings
from staff reductions and other cost control initiatives will offset most of the
increases in other expenses, such as increased FDIC insurance costs and Michigan
business taxes. We anticipate that our FDIC expense will increase $500,000 in
2008. We also expect that the Financial Institutions Tax component of the new
Michigan Business Tax will result in an increase of $250,000 in non interest
expense. Primarily due to the anticipated decrease in the Provision for Loan
Losses, we expect Net Income to increase significantly in 2008.
The following table shows the loan portfolio for the last five years (000s
omitted).
Book Value at December 31,
------------------------------------------------------
2007 (a) 2006 (a) 2005 (a) 2004 (a) 2003 (a)
---------- -------- -------- -------- --------
Loans secured by real estate:
Construction and land development $ 149,271 $160,566 $150,179 $155,703 $ 86,221
Secured by farmland (including farm residential and other
improvements) 9,792 10,057 9,891 8,499 7,438
Secured by 1-4 family residential properties 317,327 331,775 309,061 301,620 287,638
Secured by multifamily (5 or more) residential properties 11,953 10,124 6,718 6,429 8,022
Secured by nonfarm nonresidential properties 357,622 328,145 337,408 301,802 305,755
Loans to finance agricultural production and other loans to
farmers 5,981 3,738 3,519 2,333 2,263
Commercial and industrial loans to U.S. addresses (domicile) 107,156 97,512 99,220 87,068 92,313
Loans to individuals for household, family, and other
personal expenditures (includes purchased paper):
Credit cards and related plans 374 377 393 390 442
Other 40,620 55,510 70,853 80,761 72,542
Nonrated industrial development obligations (other than
securities) of states and political subdivisions in the
U.S. -- -- -- -- --
Other loans:
Loans for purchasing or carrying securities (secured and
unsecured) 25 -- 73 38 --
All other loans 707 473 1,562 1,259 1,228
Less: Any unearned income on loans -- -- -- -- --
---------- -------- -------- -------- --------
Total loans and leases, net of unearned income $1,000,828 $998,277 $988,877 $945,902 $863,862
========== ======== ======== ======== ========
Nonaccrual loans $ 30,459 $ 19,152 $ 16,212 $ 29,896 $ 34,248
Loans 90 days or more past due and accruing $ 102 $ 69 $ 101 $ 230 $ 100
Troubled debt restructurings $ 3,367 $ 888 $ 1,813 $ 3,715 $ 4,755
(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.
21
The following is an analysis of the transactions in the allowance for loan
losses:
Years Ended December 31,
-----------------------------------------------
(Dollars in Thousands) 2007 2006 2005 2004 2003
---------------------- ------- ------- ------- ------- -------
Balance Beginning of Period $13,764 $13,625 $13,800 $14,500 $12,400
Loans Charged Off (Domestic)
Commercial, Financial, and Agricultural 1,052 1,600 313 2,045 1,838
Secured by Real Estate 4,284 14,910 6,800 468 3,389
Loans to Individuals 1,050 1,867 2,227 1,935 1,456
Recoveries (Domestic)
Commercial, Financial, and Agricultural 730 815 1,358 335 206
Secured by Real Estate 48 421 211 57 33
Loans to Individuals 659 805 965 865 539
------- ------- ------- ------- -------
Net Loans Charged Off 4,949 16,336 6,806 3,191 5,905
Transfer to establish reserve for unfunded
loan commitments -- -- 275 -- --
Provision Charged to Operations 11,407 16,475 6,906 2,491 8,005
------- ------- ------- ------- -------
Balance End of Period $20,222 $13,764 $13,625 $13,800 $14,500
======= ======= ======= ======= =======
Ratio of Net Loans Charged Off to
Average Total Loans Outstanding 0.49% 1.62% 0.69% 0.34% 0.69%
======= ======= ======= ======= =======
The following analysis shows the allocation of the allowance for loan losses:
Years Ended December 31,
---------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
--------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of
loans loans loans loans loans
to to to to to
$ total $ total $ total $ total $ total
(Dollars in Thousands) Amount loans Amount loans Amount loans Amount loans Amount loans
---------------------- ------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Balance at end of period applicable to:
Domestic
Commercial, Financial, and
Agricultural $ 2,436 12.3% $ 1,524 11.1% $ 2,209 11.4% $ 1,421 10.3% $ 1,582 11.7%
Real Estate - Construction 3,610 14.9% 2,181 16.1% 1,959 15.2% 2,277 16.5% 367 9.9%
Real Estate - Mortgage 13,618 68.7% 9,056 67.1% 8,504 66.0% 8,901 64.5% 11,506 69.7%
Loans to Individuals 558 4.1% 1,003 5.7% 953 7.4% 1,201 8.7% 1,045 8.7%
Foreign -- 0.0% -- 0.0% -- 0.0% -- 0.0% -- 0.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $20,222 100.0% $13,764 100.0% $13,625 100.0% $13,800 100.0% $14,500 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
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, increased
$24.0 million, or 106%, from 2006 to 2007. Nonperforming assets as a percent of
total assets at year-end decreased from 1.4% in 2006 to 2.0% in 2007. The
Allowance for Loan Losses as a percent of nonperforming loans at year-end
decreased from 68.5% in 2006 to 59.6% in 2007.
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
22
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 $291,500 $5,000 $143,000 $21,500 $122,000
Operating Lease Obligations 883 300 346 227 10
Salary Continuation Obligation 580 -- 116 116 348
-------- ------ -------- ------- --------
Total Contractual Obligations $292,963 $5,300 $143,462 $21,843 $122,358
-------- ------ -------- ------- --------
OFF-BALANCE SHEET ARRANGEMENTS -Please see Note 17 to the audited financial
statements provided under Item 8 to this Annual Report for information regarding
the Corporation's off-balance sheet arrangements.
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, 2007 and 2006.
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
- ---------------------- ---------- ------- --------
Year-End 2007 12 Month Projection
Interest Income $92,090 $94,629 $89,936
Interest Expense 48,951 52,081 46,728
------- ------- -------
Net Interest Income $43,139 $42,548 $43,208
Percent Change From Base Projection -1.4% 0.2%
ALCO Policy Limit (+/-) 5.0% 5.0%
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%
23
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 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 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, 2007
--------------------------------------------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
- ---------------------- ---------- ---------- ---------- ---------- ----------
Assets $1,553,141 $1,528,002 $1,499,515 $1,572,120 $1,588,140
Liabilities 1,398,240 1,380,076 1,362,338 1,416,845 1,435,904
---------- ---------- ---------- ---------- ----------
Stockholders' Equity $ 154,901 $ 147,926 $ 137,177 $ 155,275 $ 152,236
Change in Equity -4.5% -11.4% 0.2% -1.7%
ALCO Policy Limit (+/-) 10.0% 20.0% 10.0% 20.0%
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%
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 2007, 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 25 - 49.
24
(PLANTE MORAN 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 sheets of MBT Financial
Corp. and Subsidiaries as of December 31, 2007 and December 31, 2006 and the
related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2007. We have also audited the company's internal
control over financial reporting as of December 31, 2007, 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 these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
financial statements. Our responsibility is to express an opinion on these
financial statements and an opinion on the company's internal control over
financial reporting based on our audits.
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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
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 its 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
25
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, 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, 2007 and 2006, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, MBT Financial
Corp. and Subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal Control - Integrated Framework issued by the committee
of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Plante & Moran, PLLC
- --------------------------------------
Auburn Hills, Michigan
March 12, 2008
26
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
Dollars in thousands 2007 2006
- -------------------- ---------- ----------
ASSETS
Cash and Cash Equivalents (Note 2)
Cash and due from banks $ 25,113 $ 27,903
---------- ----------
Total cash and cash equivalents 25,113 27,903
Securities - Held to Maturity (Note 3) 44,734 64,938
Securities - Available for Sale (Note 3) 380,238 374,087
Federal Home Loan Bank stock - at cost 13,086 13,086
Loans held for sale 1,431 721
Loans - Net (Notes 4 and 5) 980,606 984,513
Accrued interest receivable and other assets (Note 12) 36,370 27,961
Bank Owned Life Insurance (Note 9) 42,509 39,631
Premises and Equipment - Net (Note 6) 32,719 33,979
---------- ----------
Total assets $1,556,806 $1,566,819
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 141,115 $ 158,688
Interest-bearing (Note 7) 968,865 957,369
---------- ----------
Total deposits 1,109,980 1,116,057
Federal Home Loan Bank advances (Note 8) 256,500 256,500
Federal funds purchased 13,300 3,500
Securities sold under repurchase agreements (Note 8) 35,000 40,000
Interest payable and other liabilities (Note 9) 14,579 14,700
---------- ----------
Total liabilities 1,429,359 1,430,757
========== ==========
STOCKHOLDERS' EQUITY (Notes 10, 13 and 15)
Common stock (no par value; 30,000,000 shares authorized,
16,124,997 and 16,713,960 shares issued and outstanding) -- --
Additional paid-in capital -- 6,979
Retained Earnings 129,917 134,162
Accumulated other comprehensive loss (2,470) (5,079)
---------- ----------
Total stockholders' equity 127,447 136,062
---------- ----------
Total liabilities and stockholders' equity $1,556,806 $1,566,819
========== ==========
The accompanying notes are an integral part of these statements.
27
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------
Dollars in thousands 2007 2006 2005
- -------------------- ------- ------- -------
INTEREST INCOME
Interest and fees on loans $71,245 $70,950 $64,578
Interest on investment securities-
Tax-exempt 3,177 4,356 5,036
Taxable 18,985 20,546 19,864
Interest on federal funds sold 144 71 217
------- ------- -------
Total interest income 93,551 95,923 89,695
------- ------- -------
INTEREST EXPENSE
Interest on deposits 32,422 30,849 23,578
Interest on borrowed funds 18,360 18,439 15,005
------- ------- -------
Total interest expense 50,782 49,288 38,583
------- ------- -------
NET INTEREST INCOME 42,769 46,635 51,112
PROVISION FOR LOAN LOSSES (Note 5) 11,407 16,475 6,906
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 31,362 30,160 44,206
------- ------- -------
OTHER INCOME
Wealth management income 4,577 4,268 4,244
Service charges and other fees 6,301 6,210 5,833
Net gain (loss) on sales of securities (80) (5,057) 295
Origination fees on mortgage loans sold 690 560 666
Bank owned life insurance income 1,294 1,142 1,100
Other 2,852 2,419 2,311
------- ------- -------
Total other income 15,634 9,542 14,449
------- ------- -------
OTHER EXPENSES
Salaries and employee benefits (Notes 9 and 15) 21,367 19,572 18,248
Occupancy expense (Note 6) 3,466 3,113 3,320
Equipment expense 3,261 3,096 3,011
Marketing expense 1,455 1,623 1,213
Professional fees 1,508 1,835 1,445
Net loss on other real estate owned 822 1,755 1,198
Other 5,355 5,314 5,383
------- ------- -------
Total other expenses 37,234 36,308 33,818
------- ------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES 9,762 3,394 24,837
PROVISION FOR INCOME TAXES (Note 12) 2,049 (379) 6,858
------- ------- -------
NET INCOME $ 7,713 $ 3,773 $17,979
======= ======= =======
BASIC EARNINGS PER COMMON SHARE (NOTE 14) $ 0.47 $ 0.22 $ 1.04
======= ======= =======
DILUTED EARNINGS PER COMMON SHARE (NOTE 14) $ 0.47 $ 0.22 $ 1.03
======= ======= =======
The accompanying notes are an integral part of these statements.
28
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, 2005 $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 gains 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
Dividends declared ($0.70 per share) 440 (11,816) -- (11,376)
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
------- --------
Total Comprehensive Income 6,207
Adjustment to initially apply FAS 158,
Net of tax effect of $1,353 (2,510) (2,510)
======= ========
BALANCE - DECEMBER 31, 2006 $ 6,979 $134,162 $(5,079) $136,062
Repurchase of Common Stock (599,362 shares)
(Note 10) (7,487) (222) -- (7,709)
Issuance of Common Stock (10,399 shares) 108 19 127
Equity compensation 400 -- -- 400
Dividends declared ($0.72 per share) -- (11,755) -- (11,755)
Comprehensive income:
Net income -- 7,713 -- 7,713
Change in net unrealized loss on securities
available for sale - Net of tax effect of
$(1,217) -- -- 2,260 2,260
Reclassification adjustment for losses included
in net income - Net of tax effect of $(28) -- -- 52 52
Change in postretirement liability - Net of tax
effect of $(160) -- -- 297 297
------- -------- ------- --------
Total Comprehensive Income 10,322
--------
BALANCE - DECEMBER 31, 2007 $ -- $129,917 $(2,470) $127,447
======= ======== ======= ========
The accompanying notes are an integral part of these statements.
29
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
--------------------------------
Dollars in thousands 2007 2006 2005
- -------------------- --------- -------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 7,713 $ 3,773 $ 17,979
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses 11,407 16,475 6,906
Depreciation 2,686 2,353 2,781
(Increase) decrease in net deferred federal income tax asset (1,836) (1,059) 215
Net (accretion) amortization of investment premium and discount (418) (84) 190
Net increase (decrease) in interest payable and other liabilities 336 316 1,005
Net (increase) decrease in interest receivable and other assets (10,864) (5,563) (10,049)
Equity based compensation expense 400 440 --
Net (gain) loss on sales of securities 80 5,057 (295)
Increase in cash surrender value of life insurance (1,294) (1,142) (1,100)
--------- -------- ---------
Net cash provided by operating activities $ 8,210 $ 20,566 $ 17,632
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment securities held to maturity $ 25,790 $ 24,058 $ 19,826
Proceeds from maturities and redemptions of investment securities available for sale 64,635 17,887 50,222
Proceeds from sales of investment securities held to maturity -- -- 3,021
Proceeds from sales of investment securities available for sale 77,691 144,718 75,446
Net increase in loans (8,210) (26,023) (50,511)
Proceeds from sales of other real estate owned 2,988 8,283 6,732
Proceeds from sales of other assets 94 83 101
Purchase of investment securities held to maturity (5,607) (12,524) (15,682)
Purchase of bank owned life insurance (1,584) (2,238) --
Purchase of investment securities available for sale (144,561) (93,769) (168,528)
Purchase of bank premises and equipment (1,516) (10,701) (7,587)
--------- -------- ---------
Net cash provided by (used for) investing activities $ 9,720 $ 49,774 $ (86,960)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (6,077) $(68,653) $ 83,999
Net increase in short term borrowings 9,800 3,500 --
Net increase (decrease) in securities sold under repurchase agreements (5,000) 5,000 5,000
Issuance of common stock 127 258 1,395
Repurchase of common stock (7,709) (8,141) (6,984)
Dividends paid (11,861) (11,731) (11,292)
--------- -------- ---------
Net cash provided by (used for) financing activities $ (20,720) $(79,767) $ 72,118
--------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (2,790) $ (9,427) $ 2,790
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (Note 1) 27,903 37,330 34,540
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 1) $ 25,113 $ 27,903 $ 37,330
========= ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 50,964 $ 49,259 $ 37,975
Cash paid for federal income taxes $ 5,600 $ 4,474 $ 5,957
========= ======== =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES
Transfer of loans to other real estate owned $ 11,919 $ 4,072 $ 9,881
Transfer of loans to other assets $ 1,939 $ 150 $ 202
========= ======== =========
The accompanying notes are an integral part of these statements.
30
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.
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.
31
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 $29,536,000 in 2007 and $27,552,000 in 2006. 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 $2,686,000 in 2007, $2,353,000 in 2006, and $2,781,000
in 2005.
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.
BANK OWNED LIFE INSURANCE
Bank owned life insurance policies are stated at the current cash surrender
value of the policy, or the policy death proceeds less any obligation to
provide a death benefit to an insured's beneficiaries if that value is less
than the cash surrender value. Increases in the asset value are recorded as
earnings in Other Income.
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:
32
Dollars in thousands 2007 2006 2005
- -------------------- ------- ------- -------
Unrealized gains (losses) on securities available for sale $ (474) $(9,008) $(7,401)
Reclassification adjustment for losses (gains) realized in income 80 5,057 (295)
------- ------- -------
Net unrealized gains (losses) $ (394) $(3,951) $(7,696)
Post retirement benefit obligations (3,405) (3,863) --
Tax effect 1,329 2,735 2,693
------- ------- -------
Accumulated other comprehensive income (loss) $(2,470) $(5,079) $(5,003)
======= ======= =======
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 weighted average fair value of options granted was $2.76, $3.61, and
$5.10, in 2007, 2006, and 2005, 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
2007, 2006, and 2005: expected option lives of seven years for all three;
expected volatility of 20.3%, 22.9%, and 24.3%; risk-free interest rates of
4.7%, 4.5%, and 3.8%; and dividend yields of 3.7%, 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.
FAIR VALUE
The Corporation measures or monitors many of its assets and liabilities on
a fair value basis. Fair value is used on a recurring basis for assets and
liabilities that are elected to be accounted for under FAS 159 as well as
for certain assets and liabilities in which fair value is the primary basis
of accounting. Examples of these include derivative instruments and
available for sale securities. Additionally, fair value is used on a
non-recurring basis to evaluate assets or liabilities for impairment or for
disclosure purposes. Examples of these non-recurring uses of fair value
include certain loans held for sale accounted for on a lower of cost or
market basis. Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Depending on the
nature of the asset or liability, the Corporation uses various valuation
techniques and assumptions when estimating fair value, which are in
accordance with FAS 157.
In accordance with FAS 157, the Corporation applied the following fair
value hierarchy:
Level 1 - inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.
The Corporation's U.S. government agency securities, government
sponsored mortgage backed securities, and mutual fund investments
where quoted prices are available in an active market generally are
classified within Level 1 of the fair value hierarchy.
Level 2 - Inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets and inputs that
are observable for the asset or liability, either directly or
indirectly, for substantially the full term of the financial
instrument. The Corporation's borrowed funds and investments in
obligations of states and political subdivisions and trust preferred
securities are generally classified in Level 2 of the fair value
hierarchy. Fair values for these instruments are estimated using
pricing models, quoted prices of securities with similar
characteristics, or discounted cash flows.
33
Level 3 - Inputs to the valuation methodology are unobservable and
significant to the fair value measurement. Private equity investments
are classified within Level 3 of the fair value hierarchy. Fair values
are initially valued based on transaction price and are adjusted to
reflect exit values.
When determining the fair value measurements for assets and liabilities
required or permitted to be recorded at and/or marked to fair value, the
Corporation considers the principal or most advantageous market in which it
would transact and considers assumptions that market participants would use
when pricing the asset or liability. When possible, the Corporation looks
to active and observable markets to price identical assets or liabilities.
When identical assets and liabilities are not traded in active markets, the
Corporation looks to market observable data for similar assets or
liabilities. Nevertheless, certain assets and liabilities are not actively
traded in observable markets and the Corporation must use alternative
valuation techniques to derive a fair value measurement.
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 permits companies to elect on an instrument
by instruments basis to fair value certain financial assets and financial
liabilities with changes in fair value recognized in earnings as they
occur. The election to fair value is generally irrevocable. FAS 159 is
effective January 1, 2008 for calendar year companies with the option to
early adopt as of January 1, 2007. In April 2007, the Corporation elected
early adoption of FAS 159 as of January 1, 2007. The Corporation 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 early adoption of FAS 159, the Corporation
concurrently adopted the provisions of FAS 157, effective January 1, 2007.
On February 12, 2008, the FASB issued FASB Staff Position 157-2, Effective
Date of FASB Statement No. 157 (FSP 157-2). This FSP delays the effective
date of FAS 157 for certain non financial assets and non financial
liabilities to January 1, 2009. The delay is intended to allow the FASB
additional time to consider the effect of various implementation issues
that have arisen, or that may arise, from the application of FAS 157. The
Corporation adopted FAS 157 subject to the deferral provisions provided in
FSP 157-2.
(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 $3,475,000
and $2,514,000 at December 31, 2007 and 2006, 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, 2007 and 2006 (000s omitted):
HELD TO MATURITY DECEMBER 31, 2007
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government
Agencies $ 7 $ 1 $ -- $ 8
Obligations of States and Political
Subdivisions 44,727 334 (25) 45,036
------- ---- ---- -------
$44,734 $335 $(25) $45,044
======= ==== ==== =======
AVAILABLE FOR SALE DECEMBER 31, 2007
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government
Agencies $330,505 $ 968 $(1,295) $330,178
Obligations of States and Political
Subdivisions 27,046 207 (119) 27,134
Other Securities 23,081 24 (179) 22,926
-------- ------ ------- --------
$380,632 $1,199 $(1,593) $380,238
======== ====== ======= ========
34
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
======== ====== ======= ========
The amortized cost and estimated market value of securities at December 31,
2007, 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 $ 7,307 $ 7,321 $ 65 $ 65
1 to 5 years 19,374 19,526 38,000 38,128
5 to 10 years 11,322 11,451 121,211 120,825
Over 10 years 6,731 6,746 219,343 219,185
Securities with no stated maturity -- -- 2,013 2,035
------- -------- -------- --------
$44,734 $ 45,044 $380,632 $380,238
======= ======== ======== ========
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, 2007 and
December 31, 2006 are as follows (000s omitted):
DECEMBER 31, 2007
-------------------------------------------------
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 $63,520 $234 $64,720 $1,061 $128,240 $1,295
Obligations of States and
Political Subdivisions 1,304 6 9,711 138 $ 11,015 $ 144
Other Securities 16,865 164 2,000 15 $ 18,865 $ 179
------- ---- ------- ------ -------- ------
$81,689 $404 $76,431 $1,214 $158,120 $1,618
======= ==== ======= ====== ======== ======
35
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
======= ==== ======== ====== ======== ======
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 $351,625,000 and $325,686,000 were pledged
or set aside to secure borrowings, public and trust deposits, and for other
purposes required by law at December 31, 2007 and December 31, 2006,
respectively.
At December 31, 2007, Obligations of U. S. Government Agencies included
securities issued by the Federal Home Loan Bank with an estimated market
value of $124,511,000. 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.
For the years ended December 31, 2007, 2006, and 2005, proceeds from sales
of securities amounted to $77,691,000, $144,718,000, and $78,467,000,
respectively. Gross realized gains amounted to $361,000, $423,000, and
$690,000, respectively. Gross realized losses amounted to $441,000,
$5,480,000, and $395,000, respectively. The tax provision applicable to
these net realized gains and losses amounted to ($28,000), ($1,770,000),
and $103,000, respectively.
(4) LOANS
Loan balances outstanding as of December 31 consist of the following (000s
omitted):
2007 2006
---------- --------
Residential real estate loans $ 489,038 $513,289
Non residential real estate loans 357,622 328,145
Loans to finance agricultural production and
other loans to farmers 5,981 3,739
Commercial and industrial loans 107,375 97,959
Loans to individuals for household, family,
and other personal expenditures 40,705 55,443
All other loans (including overdrafts) 731 473
---------- --------
Total loans, gross $1,001,452 $999,048
Less: Deferred loan fees and costs 624 771
---------- --------
Total loans, net of deferred loan fees and costs $1,000,828 $998,277
Less: Allowance for loan losses 20,222 13,764
---------- --------
$ 980,606 $984,513
========== ========
The following is a summary of impaired loans (000s omitted):
2007 2006 2005
------- ------- -------
Year-end impaired loans with no allowance for loan losses allocated $ 2,603 $ 3,089 $ 1,601
Year-end impaired loans with allowance for loan losses allocated 27,102 19,258 14,713
Year-end allowance for loan losses allocated to impaired loans 5,108 3,712 2,156
Average investment in impaired loans 23,486 29,354 23,375
Interest income recognized on impaired loans 1,254 1,288 438
Cash basis interest income recognized on impaired loans during the year 1,254 1,288 438
======= ======= =======
Non-accrual loans totaled $30,459,000 as of December 31, 2007 and
$19,152,000 as of December 31, 2006. Loans ninety days or more past due and
still accruing interest were $102,000 as of December 31, 2007 and $69,000
as of December 31, 2006.
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 $28,320,000 and $25,690,000 at
December 31, 2007 and 2006, respectively. In 2007, new loans and other
additions amounted to $42,810,000, and repayments and other reductions
amounted to $40,180,000. In 2006, new loans and other additions amounted to
$31,194,000, and repayments and other reductions amounted to $31,766,000.
In Management's judgment, these loans were made on substantially the
36
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 $188,015,000 and $194,276,000 at December 31, 2007 and
2006, respectively, were pledged to secure Federal Home Loan Bank advances.
(5) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000s omitted):
2007 2006 2005
-------- -------- --------
Balance beginning of year $ 13,764 $ 13,625 $ 13,800
Provision for loan losses 11,407 16,475 6,906
Loans charged off (6,386) (18,376) (9,340)
Transfer to establish reserve for
unfunded loan commitments -- -- (275)
Recoveries 1,437 2,040 2,534
-------- -------- --------
Balance end of year $ 20,222 $ 13,764 $ 13,625
======== ======== ========
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):
2007 2006
------- -------
Land, buildings and improvements $41,900 $41,483
Equipment, furniture and fixtures 20,355 20,048
------- -------
Total Bank premises and equipment $62,255 $61,531
Less accumulated depreciation 29,536 27,552
------- -------
Bank premises and equipment, net $32,719 $33,979
======= =======
Bank Premises and Equipment includes Construction in Progress of $551,000
as of December 31, 2007 and $581,000 as of December 31, 2006.
The Company has entered into lease commitments for office locations. Rental
expense charged to operations was $256,000, $256,000, and $314,000 for the
years ended December 31, 2007, 2006, and 2005, respectively. The future
minimum lease payments are as follows:
Year Minimum Payment
- ---- ---------------
2008 $194,000
2009 78,000
2010 81,000
2011 83,000
2012 64,000
Thereafter 0
37
(7) DEPOSITS
Interest expense on time certificates of deposit of $100,000 or more in the
year 2007 amounted to $7,748,000, as compared with $7,974,000 in 2006, and
$6,217,000 in 2005. At December 31, 2007, the balance of time certificates
of deposit of $100,000 or more was $155,319,000, as compared with
$156,740,000 at December 31, 2006. The amount of time deposits with a
remaining term of more than 1 year was $228,335,000 at December 31, 2007
and $170,674,000 at December 31, 2006. The following table shows the
scheduled maturities of Certificates of Deposit as of December 31, 2007:
$100,000 and
Under $100,000 over
-------------- ------------
2008 $148,556,000 $116,489,000
2009 131,635,000 28,446,000
2010 27,089,000 4,176,000
2011 20,778,000 2,424,000
2012 9,731,000 3,784,000
Thereafter 272,000 0
------------ ------------
Total $338,061,000 $155,319,000
============ ============
Time certificates of deposit under $100,000 include $80,984,000 of brokered
certificates of deposit as of December 31, 2007, and $71,830,000 as of
December 31, 2006.
(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, 2007 and 2006 (000s omitted):
DECEMBER 31, 2007
---------------------------------
FLOATING RATE FIXED RATE
--------------- ---------------
MATURING IN AMOUNT RATE AMOUNT RATE
- ----------- -------- ---- -------- ----
2009 $ 13,000 5.06% $ 15,000 5.52%
2010 -- -- 115,000 5.40%
2011 3,000 5.14% 3,500 5.08%
2013 95,000 7.28% -- --
2014 12,000 5.15% -- --
-------- ---- -------- ----
$123,000 6.78% $133,500 5.41%
======== ==== ======== ====
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%
======== ==== ======== ====
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, 2007 and 2006 (000s omitted):
DECEMBER 31, 2007
---------------------------------
FLOATING RATE FIXED RATE
--------------- ---------------
MATURING IN AMOUNT RATE AMOUNT RATE
- ----------- -------- ---- -------- ----
2008 $-- -- $ 5,000 4.05%
2011 -- -- 10,000 4.65%
2012 -- -- 5,000 4.12%
2016 -- -- 15,000 4.65%
--- --- ------- ----
$-- -- $35,000 4.49%
=== === ======= ====
38
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%
======= ==== ======= ====
(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 2007. 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 $1,258,000 for the year
ended December 31, 2007, $1,188,000 for the year ended December 31, 2006,
and $1,184,000 for the year ended December 31, 2005. This included a profit
sharing contribution of one percent in 2005. There were no profit sharing
contributions in 2007 and 2006.
The Bank has a postretirement benefit plan that generally provides for the
continuation of medical benefits for all employees hired before January 1,
2007 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 $227,000 in 2007, $221,000 in 2006, and
$107,000 in 2005. 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):
2007 2006
------ ------
APBO $1,985 $1,890
Unrecognized net transition obligation (268) (321)
Unrecognized prior service costs (24) (29)
Unrecognized net gain 261 261
------ ------
Accrued benefit cost at fiscal year end $1,954 $1,801
====== ======
The changes recorded in the accumulated postretirement benefit obligation
were as follows (000s omitted):
2007 2006
------ ------
APBO at beginning of year $1,890 $1,988
Service cost 100 104
Interest cost 110 106
Actuarial loss (gain) (4) (199)
Plan participants' contributions 116 112
Benefits paid during year (227) (221)
------ ------
APBO at end of year $1,985 $1,890
====== ======
Components of the Bank's postretirement benefit expense were as follows:
2007 2006 2005
---- ---- ----
Service cost $100 $104 $ 86
Interest cost 110 106 101
Amortization of transition obligation 54 54 54
Prior service costs 4 4 4
Amortization of gains (4) -- --
---- ---- ----
Net postretirement benefit expense $264 $268 $245
==== ==== ====
The APBO as of December 31, 2007 and 2006 was calculated using an assumed
discount rate of 6.00% in both years. Based on the provisions of the plan,
the Bank's expense is capped at 200% of the 1992 expense, with all expenses
above
39
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 4 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' net 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.
Information for the postretirement death benefits and health care benefits
is as follows as of the December 31 measurement date (000s):
POSTRETIREMENT DEATH POSTRETIREMENT HEALTH
BENEFIT OBLIGATIONS CARE BENEFITS
-------------------- ---------------------
2007 2006 2007 2006
------- ------- ------ ------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 4,297 -- $1,890 $1,988
Service cost 69 60 100 104
Interest cost 236 203 110 106
Plan participants' contributions -- -- 116 112
Amendments -- 4,131 -- --
Actuarial loss (gain) (56) (97) (4) (199)
Benefits paid (550) -- (227) (221)
------- ------- ------ ------
Benefit obligation at end of year $ 3,996 $ 4,297 $1,985 $1,890
------- ------- ------ ------
CHANGE IN ACCRUED BENEFIT COST
Accrued benefit cost at beginning of year $ 524 $ -- $1,801 $1,643
Service cost 69 60 100 104
Interest cost 236 203 110 106
Amortization 314 261 54 57
Employer contributions (550) -- (111) (109)
Net gain (14) -- -- --
------- ------- ------ ------
Accrued benefit cost at end of year $ 579 $ 524 $1,954 $1,801
------- ------- ------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ -- $ -- $ -- $ --
Employer contributions 550 -- 111 109
Plan participants' contributions -- -- 116 112
Benefits paid during year (550) -- (227) (221)
------- ------- ------ ------
Fair value of plan assets at end of year $ -- $ -- $ -- $ --
------- ------- ------ ------
Funded status at end of year $(3,417) $(3,773) $ (31) $ (89)
======= ======= ====== ======
Amounts recognized in other liabilities as of December 31 consist of
(000s):
POSTRETIREMENT DEATH POSTRETIREMENT HEALTH
BENEFIT OBLIGATIONS CARE BENEFITS
-------------------- ---------------------
2007 2006 2007 2006
------- ------- ------ ------
Noncurrent assets $ -- -- $ -- $ --
Current Liabilities (134) (143) 105 106
Noncurrent Liabilities (3,862) (4,154) 1,880 1,784
------- ------- ------ ------
Total $(3,996) $(4,297) $1,985 $1,890
======= ======= ====== ======
Amounts recognized in accumulated other comprehensive income as of December
31 consist of (000s):
40
POSTRETIREMENT DEATH POSTRETIREMENT HEALTH
BENEFIT OBLIGATIONS CARE BENEFITS
-------------------- ---------------------
2007 2006 2007 2006
------ ----- ----- -----
Net loss (gain) $ (138) (96) $(261) $(261)
Transition obligation (asset) -- -- 268 321
Prior service cost (credit) 3,543 3,869 (7) 29
------ ----- ----- -----
$3,405 3,773 $ -- $ 89
====== ===== ===== =====
(10) STOCKHOLDERS' EQUITY
On December 23, 2004, the Corporation's Board of Directors authorized the
repurchase of up to 2 million shares of MBT Financial Corp. common stock
during 2005. On December 22, 2005, the Board of Directors authorized the
repurchase of up to 2 million shares during 2006. On December 21, 2006, the
Board of Directors authorized the repurchase of up to 1 million shares
during 2007. Shares purchased during the last three years are as follows:
Shares
Repurchased Cost
----------- -----------
2005 364,420 $ 6,984,000
2006 499,974 8,141,000
2007 599,362 7,709,000
--------- -----------
Total 1,463,756 $22,834,000
========= ===========
On December 20, 2007, 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, 2008.
(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, 2007 and 2006.
INVESTMENT SECURITIES
Fair value for the Bank's investment securities was determined using the
market value at December 31, 2007 and 2006. 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, 2007, net of the allowance for loan losses, is $993,051,000, compared
to the carrying value of $980,606,000. The estimated fair value of loans at
December 31, 2006, net of the allowance for loan losses, was $981,379,000,
compared to the carrying value of $985,234,000.
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,
2007 is $494,276,000, compared to the carrying value of $491,943,000. The
estimated fair value of other time deposits at December 31, 2006 was
$501,105,000, compared to the carrying value of $502,137,000.
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, 2007 is $135,694,000, compared to the carrying value of $130,000,000.
The estimated fair value of putable Federal Home Loan Bank advances at
December 31, 2006 was $132,538,000, compared to the carrying value of
$130,000,000.
The estimated fair value of the variable rate advances at December 31, 2007
is $132,675,000, compared to the carrying value of $123,000,000. The
estimated fair value of the variable rate advances at December 31, 2006 was
$134,743,000, compared to the carrying value of $123,000,000.
41
The estimated fair value of the fixed rate Federal Home Loan Bank advance
at December 31, 2007 was $3,607,000, compared to the carrying value of
$3,500,000. The estimated fair value of the fixed rate Federal Home Loan
Bank advance at December 31, 2006 was $3,475,000, compared to the carrying
value of $3,500,000.
The estimated fair value of the Securities Sold under Repurchase Agreements
at December 31, 2007 was $36,783,000, compared to the carrying value of
$35,000,000. 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.
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
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):
2007 2006 2005
------- ------- ------
Federal income taxes currently payable $ 3,885 $ 680 $6,643
Provision (credit) for deferred taxes on:
Book (over) under tax loan loss provision (2,260) (251) 71
Accretion of bond discount (61) (39) (72)
Net deferred loan origination fees 216 (147) 265
Accrued postretirement benefits (100) (267) (219)
Taxover (under) book depreciation 51 (45) 178
Alternative minimum tax 680 (680) --
Other, net (362) 370 (8)
------- ------- ------
Total deferred provision (credit) (1,836) (1,059) 215
------- ------- ------
$ 2,049 $ (379) $6,858
======= ======= ======
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:
2007 2006 2005
---- ------ -----
Statutory rate 34.0% 34.0% 35.0%
Municipal interest income (9.0) (43.6) (8.0)
Other, net (4.0) (1.6) 0.8
---- ----- ----
Effective tax rate 21.0% (11.2)% 27.8%
---- ----- ----
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):
2007 2006
------- -------
Deferred Federal income tax assets:
Allowance for loan losses $ 7,174 $ 4,914
Net deferred loan origination fees 211 427
Tax versus book depreciation differences 290 341
Net unrealized losses on securities available for sale 138 1,383
Accrued postretirement benefits 2,330 2,390
Alternative minimum tax -- 680
Other, net 628 --
------- -------
$10,771 $10,135
Deferred Federal income tax liabilities:
Accretion of bond discount $ (127) $ (188)
Other (437) (171)
------- -------
$ (564) $ (359)
------- -------
Net deferred Federal income tax asset $10,207 $ 9,776
======= =======
42
(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, 2007, the Corporation's capital ratios exceeded the
required minimums to be considered well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum Total risk based, Tier I
risk based, and Tier I leverage ratios as set forth in the tables. There
are no conditions or events since December 31, 2007 that Management
believes have changed the Corporation's category. Management believes, as
of December 31, 2007, 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 Well
Actual Capitalized
---------------- ----------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
AS OF DECEMBER 31, 2007:
Total Capital to Risk-Weighted Assets
Consolidated $143,679 13.1% $109,974 10.0%
Monroe Bank & Trust 142,632 13.0% 109,889 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 129,839 11.8% 65,985 6.0%
Monroe Bank & Trust 128,803 11.7% 65,934 6.0%
Tier 1 Capital to Average Assets
Consolidated 129,839 8.4% 77,470 5.0%
Monroe Bank & Trust 128,803 8.3% 77,428 5.0%
Minimum to
Qualify as Well
Actual 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%
43
(14) EARNINGS PER SHARE
The calculation of earnings per common share for the years ended December
31 is as follows:
2007 2006 2005
----------- ----------- -----------
BASIC
Net income $ 7,713,000 $ 3,773,000 $17,979,000
Less preferred dividends -- -- --
----------- ----------- -----------
Net income applicable to common stock $ 7,713,000 $ 3,773,000 $17,979,000
----------- ----------- -----------
Average common shares outstanding 16,415,425 16,941,432 17,344,376
----------- ----------- -----------
Earnings per common share - basic $ 0.47 $ 0.22 $ 1.04
=========== =========== ===========
2007 2006 2005
----------- ----------- -----------
DILUTED
Net income $ 7,713,000 $ 3,773,000 $17,979,000
Less preferred dividends -- -- --
----------- ----------- -----------
Net income applicable to common stock $ 7,713,000 $ 3,773,000 $17,979,000
----------- ----------- -----------
Average common shares outstanding 16,415,425 16,941,432 17,344,376
Stock option adjustment 10,619 30,778 73,991
----------- ----------- -----------
Average common shares outstanding - diluted 16,426,044 16,972,210 17,418,367
----------- ----------- -----------
Earnings per common share - diluted $ 0.47 $ 0.22 $ 1.03
=========== =========== ===========
(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, 2007, the
number of shares available under the plan is 42,523. This includes 81,083
shares that were previously awarded that have been forfeited.
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
2007 and 2006 vest annually, beginning December 31, 2007, and December 31,
2006, respectively. The options granted to key employees in 2005, 2004,
2003, 2002 and 2000 are vested as of December 31, 2007, 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 assumptions disclosed in
Note 1 to the consolidated financial statements.
A summary of the status of stock options under the plan is presented in the
table below.
2007 2006 2005
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Options Outstanding, January 1 510,143 $17.73 432,642 $17.98 433,787 $15.21
Granted 94,500 15.33 86,000 16.24 136,000 23.40
Exercised -- -- 5,999 13.45 88,162 14.16
Forfeited/Expired 2,500 16.24 2,500 20.72 48,983 15.34
------- ------ ------- ------ ------- ------
Options Outstanding, December 31 602,143 $17.36 510,143 $17.73 432,642 $17.98
------- ------ ------- ------ ------- ------
Options Exercisable, December 31 511,322 $17.68 407,991 $17.32 303,321 $16.54
------- ------ ------- ------ ------- ------
Weighted Average Fair Value of
Options Granted During Year $ 2.76 $ 3.61 $ 5.10
The options outstanding as of December 31, 2007 are exercisable at prices
ranging from $13.20 to $23.40. The options exercisable as of December 31,
2007 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:
44
Outstanding Options Exercisable Options
------------------------ ------------------------
Price Remaining Life Remaining Life
Exercise Shares (in years) Shares (in years)
- -------- ------- -------------- ------- --------------
$ 13.20 84,003 5.01 84,003 5.01
$ 13.85 35,338 4.01 35,338 4.01
$ 13.94 4,402 3.01 4,402 3.01
$ 15.33 94,500 9.01 31,509 9.01
$ 16.24 83,500 8.01 55,670 8.01
$ 16.69 113,500 6.01 113,500 6.01
$18.125 52,400 2.50 52,400 2.50
$ 23.40 134,500 7.01 134,500 7.01
------- ---- ------- ----
602,143 6.40 511,322 5.99
The total intrinsic value of options exercised during the years ended
December 31, 2007, 2006, and 2005 was $0, $19,000, and $570,000,
respectively.
A summary of the status of the Corporation's nonvested option shares as of
December 31, 2007 and changes during the year ended December 31, 2007 is as
follows:
Weighted
Average
Grant Date
Nonvested Shares Shares Fair Value
---------------- -------- ----------
Nonvested at January 1, 2007 102,152 $4.26
Granted 94,500 2.76
Vested (103,331) 4.00
Forfeited (2,500) 3.61
Nonvested at December 31, 2007 90,821 $3.02
As of December 31, 2007, there was $274,000 of total unrecognized
compensation cost related to non vested share based compensation
arrangements granted under the Plan. The cost is expected to be recognized
over a weighted average period of 1.3 years.
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. Key employees were granted 23,800
and 21,800 Performance Stock Units (PSUs) on January 2, 2007 and January 3,
2006, respectively. PSUs granted on January 2, 2007 and January 3, 2006
will vest on December 31, 2009 and December 31, 2008, respectively. The
amount of these PSUs that will vest 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 Three Year
Performance Period Ending:
- ------------------------------------- Percent PSUs
December 31, 2008 December 31, 2009 Vested
- ----------------- ----------------- ------------
$4.38 $3.22 100%
$4.31 $3.15 80%
$4.23 $3.09 60%
$4.13 $3.03 40%
$4.06 $2.97 20%
$3.75 $2.91 0%
The Corporation does not expect to meet the earnings threshold required to
award any shares under the PSUs granted in 2006 and 2007, therefore no
expense was recorded in 2007 for the PSUs.
45
(16) PARENT COMPANY
Condensed parent company financial statements, which include transactions
with the subsidiary, are as follows (000s omitted):
BALANCE SHEETS
DECEMBER 31,
-------------------
2007 2006
-------- --------
ASSETS
Cash and due from banks $ 3,099 $ 3,512
Investment in subsidiary bank 126,411 135,007
Other assets 840 552
-------- --------
Total assets $130,350 $139,071
-------- --------
LIABILITIES
Dividends payable and other liabilities $ 2,903 $ 3,009
-------- --------
Total liabilities 2,903 3,009
-------- --------
STOCKHOLDERS' EQUITY
Total stockholders'equity 127,447 136,062
-------- --------
Total liabilities and stockholders' equity $130,350 $139,071
======== ========
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
------------------------------
2007 2006 2005
-------- -------- --------
INCOME
Dividends from subsidiary bank $ 19,106 $ 19,415 $ 15,871
Other operating income 21 -- --
-------- -------- --------
Total income 19,127 19,415 15,871
-------- -------- --------
EXPENSE
Other expense 146 158 150
-------- -------- --------
Total expense 146 158 150
-------- -------- --------
Income before tax and equity in undistributed
net income of subsidiary bank 18,981 19,257 15,721
Income tax benefit (43) (54) (52)
-------- -------- --------
Income before equity in undistributed
net income of subsidiary bank 19,024 19,311 15,773
Equity in undistributed net income
of subsidiary bank (11,311) (15,538) 2,206
-------- -------- --------
NET INCOME $ 7,713 $ 3,773 $ 17,979
======== ======== ========
46
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
2007 2006 2005
-------- -------- --------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income $ 7,713 $ 3,773 $ 17,979
Equity in undistributed net income of subsidiary bank 11,311 15,538 (2,206)
Net increase (decrease) in other liabilities (106) 928 (125)
Net (increase) decrease in other assets 112 (75) 200
-------- -------- --------
Net cash provided by operating activities $ 19,030 $ 20,164 $ 15,848
-------- -------- --------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Issuance of common stock $ 127 $ 258 $ 1,396
Repurchase of common stock (7,709) (8,141) (6,984)
Dividends paid (11,861) (11,731) (11,292)
-------- -------- --------
Net cash used for financing activities $(19,443) $(19,614) $(16,880)
-------- -------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS $ (413) $ 550 $ (1,032)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 3,512 2,962 3,994
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,099 $ 3,512 $ 2,962
======== ======== ========
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, 2007, Bank funds available for
loans to the Corporation amounted to $14,910,000. 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 $48,881,000 in 2008, in addition to its 2008
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.
Financial instruments whose contractual amounts represent off-balance sheet
credit risk at December 31 were as follows (000s omitted):
CONTRACTUAL AMOUNT
------------------
2007 2006
------- --------
Commitments to extend credit:
Unused portion of commercial lines of credit $92,774 $100,265
Unused portion of credit card lines of credit 5,988 5,802
Unused portion of home equity lines of credit 20,047 20,873
Standby letters of credit and financial guarantees written 9,994 12,234
All other off-balance sheet assets 3,555 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, generally have fixed expiration dates or other termination
clauses, and require payment of a fee. Since the lines of credit
47
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 $9,571,000 of
the letters of credit expires in 2008 and $423,000 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):
2007 FIRST SECOND THIRD FOURTH
- ---- ------- ------- ------- -------
Total Interest Income $23,717 $23,288 $23,557 $22,989
Total Interest Expense 12,534 12,501 12,889 12,858
------- ------- ------- -------
Net Interest Income 11,183 10,787 10,668 10,131
Provision for Loan Losses 750 750 1,000 8,907
Other Income 3,763 4,119 3,928 3,824
Other Expenses 9,112 9,279 9,242 9,601
------- ------- ------- -------
Income Before Provision For Income Taxes 5,084 4,877 4,354 (4,553)
Provision For Income Taxes 1,381 1,342 1,173 (1,847)
------- ------- ------- -------
Net Income $ 3,703 $ 3,535 $ 3,181 $(2,706)
======= ======= ======= =======
Basic Earnings Per Common Share $ 0.22 $ 0.21 $ 0.20 $ (0.16)
Diluted Earnings Per Common Share $ 0.22 $ 0.21 $ 0.20 $ (0.16)
Dividends Declared Per Share $ 0.18 $ 0.18 $ 0.18 $ 0.18
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
48
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, 2007,
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, 2007, 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, 2007 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, 2007, 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, 2007
has been audited by Plante & Moran, PLLC, an independent registered public
accounting firm, as stated in their report appearing on page 25.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended December 31, 2007, that
materially affected, or is reasonably likely to affect, the Company's internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
49
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, 2007 were as follows:
Number of securities
Weighted average remaining available for
Number of securities to be exercise price of future issuance under
issued upon exercise of outstanding equity compensation plans
outstanding options, warrants, options, warrants, (excluding securities reflected
and rights and rights in the first column)
------------------------------ ------------------ -------------------------------
Equity Compensation plans approved
by security holders 602,143 $17.36 58,534
Equity Compensation plans not
approved by security holders 0 0 0
------- ------ ------
Total 602,143 $17.36 58,534
------- ------ ------
50
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 - Pages 25-26
Consolidated Balance Sheets as of December 31, 2007 and 2006 - Page 27
Consolidated Statements of Income for the Years Ended
December 31, 2007, 2006, and 2005 - Page 28
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2007, 2006, and 2005 - Page 29
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2007, 2006, and 2005 - Page 30
Notes to Consolidated Financial Statements - Pages 31-48
51
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 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. Previously
filed as Exhibit 10.4 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2006.
10.5 Monroe Bank & Trust Group Executive Death Benefit Only Plan. Previously
filed as Exhibit 10.5 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2006.
10.6 Monroe Bank & Trust Amended and Restated Supplemental Executive Retirement
Agreement with H. Douglas Chaffin.
10.7 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.
10.8 MBT Financial Corp. Severance Agreement with Scott E. McKelvey. Previously
filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-Q for its quarter
ended June 30, 2007.
21 Subsidiaries of the Registrant. Previously filed as Exhibit 21 to MBT
Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000.
23 Consent of Independent Auditors
31.1 Certification by Chief Executive Officer required by Securities and
Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities and
Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
52
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 12, 2008 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 12, 2008
/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
53
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 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 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.
Previously filed as Exhibit 10.4 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2006.
10.5 Monroe Bank & Trust Group Executive Death Benefit Only Plan.
Previously filed as Exhibit 10.5 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2006.
10.6 Monroe Bank & Trust Amended and Restated Supplemental Executive
Retirement Agreement with H. Douglas Chaffin.
10.7 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.
10.8 MBT Financial Corp. Severance Agreement with Scott E. McKelvey.
Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form
10-Q for its quarter ended June 30, 2007.
21 Subsidiaries of the Registrant. Previously filed as Exhibit 21
to MBT Financial Corp.'s Form 10-K for its fiscal year ended
December 31, 2000.
23 Consent of Independent Auditors
31.1 Certification by Chief Executive Officer required by Securities
and Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities
and Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
54