UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2008
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-30973
MBT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Michigan 38-3516922
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 E. FRONT STREET
MONROE, MICHIGAN 48161
(Address of principal executive offices)
(Zip Code)
(734) 241-3431
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 [ ] Accelerated filer [X]
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 May 5, 2008, there were 16,130,515 shares of the Company's Common Stock
outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008 DECEMBER 31,
Dollars in thousands (UNAUDITED) 2007
- -------------------- -------------- ------------
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 24,954 $ 25,113
---------- ----------
Total cash and cash equivalents 24,954 25,113
Securities - Held to Maturity 40,768 44,734
Securities - Available for Sale 390,114 380,238
Federal Home Loan Bank stock - at cost 13,086 13,086
Loans held for sale 206 1,431
Loans - Net 973,513 980,606
Accrued interest receivable and other assets 37,517 36,370
Bank Owned Life Insurance 42,864 42,509
Premises and Equipment - Net 32,428 32,719
---------- ----------
Total assets $1,555,450 $1,556,806
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 127,716 $ 141,115
Interest-bearing 967,889 968,865
---------- ----------
Total deposits 1,095,605 1,109,980
Federal Home Loan Bank advances 256,500 256,500
Federal funds purchased 26,900 13,300
Repurchase agreements 35,000 35,000
Interest payable and other liabilities 13,364 14,579
---------- ----------
Total liabilities 1,427,369 1,429,359
---------- ----------
STOCKHOLDERS' EQUITY
Common stock (no par value) -- --
Retained Earnings 129,780 129,917
Accumulated other comprehensive loss (1,699) (2,470)
---------- ----------
Total stockholders' equity 128,081 127,447
---------- ----------
Total liabilities and stockholders' equity $1,555,450 $1,556,806
========== ==========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-2-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
THREE MONTHS ENDED
MARCH 31,
------------------
Dollars in thousands, except per share data 2008 2007
- ------------------------------------------- ------- --------
INTEREST INCOME
Interest and fees on loans $16,428 $17,761
Interest on investment securities-
Tax-exempt 815 1,009
Taxable 4,956 4,915
Interest on federal funds sold 1 32
------- -------
Total interest income 22,200 23,717
------- -------
INTEREST EXPENSE
Interest on deposits 7,491 7,955
Interest on borrowed funds 4,256 4,579
------- -------
Total interest expense 11,747 12,534
------- -------
NET INTEREST INCOME 10,453 11,183
PROVISION FOR LOAN LOSSES 1,200 750
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,253 10,433
------- -------
OTHER INCOME
Income from wealth management services 1,127 1,067
Service charges and other fees 1,526 1,525
Net gain on sales of securities 25 --
Origination fees on mortgage loans sold 193 183
Bank owned life insurance income 355 296
Other 736 692
------- -------
Total other income 3,962 3,763
------- -------
OTHER EXPENSES
Salaries and employee benefits 5,582 5,449
Occupancy expense 995 880
Equipment expense 828 845
Marketing expense 241 252
Professional fees 469 370
Net loss on other real estate owned 35 18
Other 1,548 1,298
------- -------
Total other expenses 9,698 9,112
------- -------
INCOME BEFORE INCOME TAXES 3,517 5,084
INCOME TAX EXPENSE 870 1,381
------- -------
NET INCOME $ 2,647 $ 3,703
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.16 $ 0.22
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.16 $ 0.22
======= =======
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.18 $ 0.18
======= =======
The accompanying notes to consolidated financial statements are integral part of
these statements.
-3-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
THREE MONTHS ENDED
MARCH 31,
--------------------
Dollars in thousands 2008 2007
- -------------------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,647 $ 3,703
Adjustments to reconcile net income to net cash from
operating activities
Provision for loan losses 1,200 750
Depreciation 718 681
Increase in net deferred Federal income tax asset -- (228)
Net (accretion) amortization of investment premium
and discount 14 (87)
Net increase (decrease) in interest payable and
other liabilities (1,175) 1,293
Net (increase) decrease in interest receivable and
other assets (2,053) 3,311
Equity based compensation expense 90 170
Net (gain) loss on sale/settlement of securities (25) --
Increase in cash surrender value of life insurance (355) (296)
--------- --------
Net cash provided by operating activities $ 1,061 $ 9,297
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment
securities held to maturity $ 3,967 $ 12,433
Proceeds from maturities and redemptions of investment
securities available for sale 114,997 4,271
Proceeds from sales of investment securities available
for sale 2,989 --
Net increase in loans 7,118 9,231
Proceeds from sales of other real estate owned 403 663
Proceeds from sales of other assets 89 26
Purchase of investment securities held to maturity -- (700)
Purchase of investment securities available for sale (126,707) (12,517)
Purchase of bank premises and equipment (427) (388)
--------- --------
Net cash provided by investing activities $ 2,429 $ 13,019
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits $ (14,375) $(19,847)
Net increase (decrease) in short term borrowings 13,600 (1,000)
Proceeds from issuance of common stock 29 28
Repurchase of common stock -- (968)
Dividends paid (2,903) (3,007)
--------- --------
Net cash used for financing activities $ (3,649) $(24,794)
--------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (159) $ (2,478)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,113 27,903
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,954 $ 25,425
========= ========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-4-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL
- -------------------- ---------- -------- ------------- --------
BALANCE - JANUARY 1, 2008 $ -- $129,917 $(2,470) $127,447
Repurchase of Common Stock -- -- -- --
Issuance of Common Stock (3,324 shares) -- 29 -- 29
Equity Compensation -- 90 -- 90
Dividends declared ($0.18 per share) -- (2,903) -- (2,903)
Comprehensive income:
Net income -- 2,647 -- 2,647
Change in net unrealized loss on securities
available for sale - Net of tax effect of $(409) -- -- 760 760
Reclassification adjustment for gains included
in net income - Net of tax effect of $9 -- -- (15) (15)
Change in postretirement benefit obligation
Net of tax effect of ($14) -- -- 26 26
------ -------- ------- --------
Total Comprehensive Income 3,418
------ -------- ------- --------
BALANCE - MARCH 31, 2008 $ -- $129,780 $(1,699) $128,081
====== ======== ======= ========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-5-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of MBT
Financial Corp. (the "Company") and its subsidiary, Monroe Bank & Trust (the
"Bank"). The Bank includes the accounts of its wholly owned subsidiaries, MBT
Credit Company, Inc. and MB&T Financial Services, Inc. The Bank operates
twenty-one branches in Monroe County, Michigan and five branches in Wayne
County, Michigan. MBT Credit Company, Inc. operates a mortgage loan office in
Monroe County. The Bank's primary source of revenue is from providing loans to
customers, who are predominantly small and middle-market businesses and
middle-income individuals. The Company's sole business segment is community
banking.
The accounting and reporting policies of the Bank conform to practice within the
banking industry and are in accordance with accounting principles generally
accepted in the United States. Preparation of financial statements in conformity
with generally accepted accounting principles requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes in
the near term are the determination of the allowance for loan losses and the
valuation of other real estate owned.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting of normal recurring
adjustments), which are, in the opinion of Management, necessary for fair
statement of results for the interim periods.
The significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary. All material intercompany transactions and balances have been
eliminated.
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.
BUSINESS SEGMENTS
While the Company's chief decision makers monitor the revenue streams of various
products and services, operations are managed and financial performance is
evaluated on a company wide basis. Accordingly, all of the Company's operations
are considered by management to be aggregated in one reportable segment.
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS 123(R), "Accounting for Stock Based
Compensation" for all share based payments to employees, including grants of
stock options and restricted stock units. The amount of compensation is measured
at the fair value of the options
-6-
when granted, and this cost is expensed over the required service period, which
is normally the vesting period of the options.
SFAS 123(R) applies to awards granted or modified after January 1, 2006.
Compensation cost is also recorded for prior option grants that vest after the
date of adoption. The compensation expense recorded under FAS 123(R) in the
three months ended March 31, 2008 and March 31, 2007 was $90,000 and $170,000,
respectively.
The weighted average fair value of options granted was $2.76 in 2007. The fair
value of each option grant is estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions: expected
option lives of seven years, expected volatility of 20.3%, and a risk-free
interest rate of 4.7%.
FAIR VALUE
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. Upon early
adoption of FAS 159, the Corporation concurrently adopted the provisions of FAS
157, effective January 1, 2007.
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.
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.
-7-
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 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.
2. EARNINGS PER SHARE
The calculation of net income per common share for the three months ended March
31 is as follows:
2008 2007
----------- -----------
BASIC
Net income $ 2,647,000 $ 3,703,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 2,647,000 $ 3,703,000
----------- -----------
Average common shares outstanding 16,127,047 16,686,983
----------- -----------
Earnings per common share - basic $ 0.16 $ 0.22
=========== ===========
2008 2007
----------- -----------
DILUTED
Net income $ 2,647,000 $ 3,703,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 2,647,000 $ 3,703,000
----------- -----------
Average common shares outstanding 16,127,047 16,686,983
Stock option adjustment 12,026 29,702
----------- -----------
Average common shares outstanding - diluted 16,139,073 16,716,685
----------- -----------
Earnings per common share - diluted $ 0.16 $ 0.22
=========== ===========
3. STOCK BASED COMPENSATION
The following table summarizes the options that have been granted to
non-employee directors and certain key executives in accordance with the
Long-Term Incentive Compensation Plan that was approved by shareholders at the
Annual Meeting of Shareholders on April 6, 2000.
-8-
Weighted Average
Shares Exercise Price
------- ----------------
Options Outstanding, January 1, 2008 602,143 $ 17.36
Granted -- --
Exercised -- --
Forfeited 58,334 16.90
------- -------
Options Outstanding, March 31, 2008 543,809 $ 17.41
------- -------
Options Exercisable, March 31, 2008 457,987 $ 17.75
------- -------
The total expense for equity based compensation was $90,000 in the first three
months of 2008 and $170,000 in the first three months of 2007.
4. LOANS
The Bank grants commercial, consumer, and mortgage loans primarily to customers
in Monroe County, Michigan, southern Wayne County, Michigan, and surrounding
areas. Although the Bank has a diversified loan portfolio, a substantial portion
of its debtors' ability to honor their contracts is dependent on the automotive,
manufacturing, and real estate development economic sectors.
Loans consist of the following (000s omitted):
March 31, December 31,
2008 2007
--------- ------------
Residential real estate loans $481,005 $ 489,038
Non-residential real estate loans 340,574 357,622
Loans to finance agricultural production and
other loans to farmers 11,853 5,981
Commercial and industrial loans 121,118 107,375
Loans to individuals for household, family,
and other personal expenditures 36,922 40,705
All other loans (including overdrafts) 321 731
-------- ----------
Total loans, gross 991,793 1,001,452
Less: Deferred loan fees 597 624
-------- ----------
Total loans, net of deferred loan fees 991,196 1,000,828
Less: Allowance for loan losses 17,683 20,222
-------- ----------
$973,513 $ 980,606
======== ==========
Loans are placed in a nonaccrual status when, in the opinion of Management, the
collection of additional interest is doubtful. All loan relationships over
$250,000 that are classified by Management as nonperforming as well as selected
performing accounts are reviewed for impairment. Allowances for loans determined
to be impaired are included in the allowance for loan losses. All cash received
on nonaccrual loans is applied to the principal balance. Nonperforming assets
consist of nonaccrual loans, loans 90 days or more past due, restructured loans,
and other real estate owned. Other real estate owned includes real estate that
has been acquired in full or partial satisfaction of loan obligations or upon
foreclosure and real estate that the bank has purchased but no longer intends to
use for bank premises.
The following table summarizes nonperforming assets (000's omitted):
-9-
March 31, December 31,
2008 2007
--------- ------------
Nonaccrual loans $37,814 $30,459
Loans 90 days past due 94 102
Restructured loans 1,679 3,367
------- -------
Total nonperforming loans $39,587 $33,928
Other real estate owned 13,884 10,626
Other assets 1,935 1,939
------- -------
Total nonperforming assets $55,406 $46,493
======= =======
Nonperforming assets to total assets 3.56% 2.99%
Allowance for loan losses to
nonperforming loans 44.67% 59.60%
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000's omitted):
Three months ended Twelve months ended
March 31, 2008 December 31, 2007
------------------ -------------------
Balance beginning of year $20,222 $13,764
Provision for loan losses 1,200 11,407
Loans charged off (3,955) (6,386)
Recoveries 216 1,437
------- -------
Balance end of period $17,683 $20,222
======= =======
For each period, the provision for loan losses in the income statement is based
on Management's estimate of the amount required to maintain an adequate
Allowance for Loan Losses.
To serve as a basis for making this provision, the Bank maintains an extensive
credit risk monitoring process that considers several factors including: current
economic conditions affecting the Bank's customers, the payment performance of
individual loans and pools of homogeneous loans, portfolio seasoning, changes in
collateral values, and detailed reviews of specific loan relationships. For
loans deemed to be impaired due to an expectation that all contractual payments
will probably not be received, impairment is measured by comparing the Bank's
recorded investment in the loan to the present value of expected cash flows
discounted at the loan's effective interest rate, or the fair value of the
collateral, or the loan's observable market price.
The provision for loan losses increases the Allowance for Loan Losses, a
valuation account which is netted against loans on the consolidated statements
of condition. When it is determined that a customer will not repay a loan, the
loan is charged off, reducing the Allowance for Loan Losses. If, subsequent to a
charge off, the Bank is able to collect additional amounts from the customer or
sell collateral worth more than earlier estimated, a recovery is recorded.
6. INVESTMENT SECURITIES
The following is a summary of the Bank's investment securities portfolio as of
March 31, 2008 and December 31, 2007 (000's omitted):
-10-
March 31, 2008 December 31, 2007
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Held to Maturity
Obligations of U.S. Government Agencies $ 7 $ 8 $ 7 $ 8
Obligations of States and Political
Subdivisions 40,761 41,106 44,727 45,036
------- ------- ------- -------
$40,768 $41,114 $44,734 $45,044
======= ======= ======= =======
March 31, 2008 December 31, 2007
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Available for Sale
Obligations of U.S. Government Agencies $316,964 $319,249 $330,505 $330,178
Obligations of States and Political
Subdivisions 32,972 33,428 27,046 27,134
Other Securities 39,428 37,437 23,081 22,926
-------- -------- -------- --------
$389,364 $390,114 $380,632 $380,238
======== ======== ======== ========
The unrealized losses on investment securities are primarily the result of
increases in market interest rates and not the result of credit quality of the
issuers of the securities. The Company has the ability and intent to hold most
of these securities until recovery, which may be until maturity. For securities
in which the Company no longer has the intent to hold until recovery, the
securities are treated as other than temporarily impaired and the amount of
impairment is charged to earnings.
7. FAIR VALUE MEASUREMENTS
The following tables present information about the Company's assets measured at
fair value on a recurring basis at March 31, 2008, and the valuation techniques
used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets that the Company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable,
either directly or indirectly. These Level 2 inputs include quoted prices for
similar assets in active markets, and other inputs such as interest rates and
yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset.
In instances where inputs used to measure fair value fall into different levels
in the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company's assessment of the significance of particular inputs to
these fair value measurements requires judgment and considers factors specific
to each asset.
Assets measured at fair value on a recurring basis are as follows (000's
omitted):
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Quoted Prices in
Active Markets for Significant Other Significant Balance at
Identical Assets Observable Inputs Unobservable March 31,
(Level 1) (Level 2) Inputs (Level 3) 2008
------------------ ----------------- ---------------- ----------
Investment Securities - Available for Sale $330,133 $59,385 $596 $390,114
The changes in Level 3 assets measured at fair value on a recurring basis were
(000's omitted):
Investment
Securities -
Available
for Sale
------------
BALANCE AT DECEMBER 31, 2007 $585
Total realized and unrealized gains (losses) included in income --
Total unrealized gains (losses) included in other comprehensive income 11
Net purchases, sales, calls and maturities --
Net transfers in/out of Level 3 --
----
BALANCE AT MARCH 31, 2008 $596
Of the Level 3 assets that were still held by the Company at March 31, 2008, the
unrealized gain for the three months ended March 31, 2008 was $6,000, which is
recognized in other comprehensive income in the consolidated statements of
financial condition. The Company did not have purchases or sales of Level 3
available for sale securities during the period.
Both observable and unobservable inputs may be used to determine the fair value
of positions classified as Level 3 assets. As a result, the unrealized gains and
losses for these assets presented in the tables above may include changes in
fair value that were attributable to both observable and unobservable inputs.
Available for sale investment securities categorized as Level 3 assets consist
of bonds issued by local municipalities. The Company estimates the fair value of
these bonds based on the present value of expected future cash flows using
management's best estimate of key assumptions, including forecasted interest
yield and payment rates, credit quality, and a discount rate commensurate with
the current market and other risks involved.
The Company also has assets that under certain conditions are subject to
measurement at fair value on a non-recurring basis. These assets include held to
maturity investments and loans. The Company estimated the fair values of these
assets using Level 3 inputs, specifically discounted cash flow projections. In
the quarter ended March 31, 2008, the Company recognized a non-cash impairment
charge of $2,460,000 to adjust these assets to their fair values.
Assets measured at fair value on a nonrecurring basis are as follows (000's
omitted):
Quoted Total
Prices in Losses
Active Significant for the
Markets for Other Significant period
Balance at Identical Observable Unobservable ended
March 31, Assets Inputs Inputs March 31,
2007 (Level 1) (Level 2) (Level 3) 2008
---------- ----------- ----------- ------------ ---------
Investment Securities - Held to Maturity $41,114 $ 8 $20,681 $20,425 $ --
Impaired loans accounted for under FAS 114 $37,039 $-- $ -- $37,039 $2,460
Loans held for sale $ 206 $-- $ -- $ 206 $ --
Held to maturity investment securities categorized as Level 3 assets primarily
consist of bonds issued by local municipalities. The Company estimates the fair
value of these bonds based on the present value of expected future cash flows
using management's best estimate of key assumptions, including forecasted
interest yield and prepayment rates, credit quality and a discount rate
commensurate with the current market and other risks involved.
Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist
of non-homogenous loans that are considered impaired. The Company estimates the
fair value of the loans based on the present value of expected future cash flows
using management's best estimate of key assumptions. These assumptions include
future payment ability, timing of
-12-
payment streams, and estimated realizable values of available collateral
(typically based on outside appraisals).
Other assets, including bank owned life insurance, intangible assets, and other
assets acquired in business combinations, are also subject to periodic
impairment assessments under other accounting principles generally accepted in
the United States of America. These assets are not considered financial
instruments. Effective February 12, 2008, the FASB issued a staff position, FSP
FAS 157-2, which delayed the applicability of FAS 157 to non financial
instruments. Accordingly, these assets have been omitted from the above
disclosures.
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for its other lending activities.
Financial instruments whose contractual amounts represent off-balance sheet
credit risk were as follows (000s omitted):
Contractual Amount
------------------------
March 31, December 31,
2008 2007
--------- ------------
Commitments to extend credit:
Unused portion of commercial lines of credit $79,458 $92,774
Unused portion of credit card lines of credit 6,171 5,988
Unused portion of home equity lines of credit 21,387 20,047
Standby letters of credit and financial guarantees written 10,008 9,994
All other off-balance sheet assets 4,019 3,555
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, and generally have fixed expiration dates or other termination
clauses. Since the lines of credit may expire without being drawn upon, the
total committed amounts do not necessarily represent future cash requirements.
Credit card lines of credit have various established expiration dates, but are
fundable on demand. Home equity lines of credit are secured by real estate
mortgages, a majority of which have ten year expiration dates, but are fundable
on demand. The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of the collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on Management's credit evaluation of the
counterparty.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements and
other business transactions.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
MBT Financial Corp. (the "Company) is a bank holding company with one
subsidiary, Monroe Bank & Trust ("the Bank"). The Bank is a commercial bank with
two wholly owned subsidiaries, MBT Credit Company, Inc. and MB&T Financial
Services. MBT Credit Company, Inc. conducts lending operations for the Bank and
MB&T Financial Services is an insurance agency which sells insurance policies to
the Bank. The Bank operates 21 branch offices in Monroe County, Michigan and 5
offices in Wayne County, Michigan. The Bank's primary source of income is
interest income on its loans and investments and its primary expense is interest
expense on its deposits and borrowings.
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Company's control), may be identified
by reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue," or similar terms or variations on those terms, or the
negative of these terms. Actual results could differ materially from those set
forth in forward-looking statements, due to a variety of factors, including, but
not limited to, those related to the economic environment, particularly in the
market areas in which the Company operates, competitive products and pricing,
fiscal and monetary policies of the U.S. Government, changes in government
regulations affecting financial institutions, including regulatory fees and
capital requirements, changes in prevailing interest rates, acquisitions and the
integration of acquired businesses, credit risk management, asset/liability
management, changes in the financial and securities markets, including changes
with respect to the market value of our financial assets, the availability of
and costs associated with sources of liquidity, and the ability of the Company
to resolve or dispose of problem loans.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
Critical Accounting Policies
The Company's Allowance for Loan Losses is a "critical accounting estimate"
because it is an estimate that is based on assumptions that are highly
uncertain, and if different assumptions were used or if any of the assumptions
used were to change, there could be a material impact on the presentation of the
Company's financial condition. These assumptions include, but are not limited
to, collateral values and the effect of economic conditions on the financial
condition of the borrowers. To determine the Allowance for Loan Losses, the
Company estimates losses on all loans that are not classified as non accrual or
renegotiated by applying historical loss rates, adjusted for current conditions,
to those loans in accordance with SFAS 5. In addition, all loans that are non
accrual or renegotiated are individually tested for impairment. Any amount of
monetary impairment is included in the Allowance for Loan Losses in accordance
with SFAS 114.
Financial Condition
The flat yield curve environment that began in 2005 started to improve late in
the third quarter of 2007, with the curve returning to a more typical slope in
the fourth quarter of 2007 through the
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first quarter of 2008. While the flat curve condition existed, the spread
between the asset yields and funding costs was narrow, providing little
opportunity for profitable growth without increasing exposure to interest rate
risk. Throughout this period, the Company maintained a strategy of controlling
the decline in its net interest margin by restricting its growth and changing
the mix of its assets to increase the percent invested in loans. Although the
shape of the yield curve now presents opportunity to increase bank assets
profitably, the economic conditions have deteriorated and loan demand has
decreased significantly.
Since December 31, 2007, total loans decreased $9.7 million (1.0%) due to the
weak loan demand. Total cash and investments increased $5.8 million (1.2%), and
total assets decreased $1.4 million (0.1%). Consumer loans decreased $3.8
million, or 9.3% due to a reduction in lending for autos and other personal
expenditures, especially boats and recreational vehicles. Residential real
estate secured loans decreased $8.0 million (1.6%) due to the low interest rate
environment. Our residential real estate portfolio primarily consists of
adjustable rate mortgages, and we sell most fixed rate mortgages we originate.
Recently, 30 year fixed mortgage rates have been low enough that our adjustable
rate customers have elected to refinance into fixed rate products. Deposits
decreased $14.4 million, or 1.3%, due to a variety of factors, primarily
including normal seasonal activity of large municipal depositors and aggressive
certificate of deposit pricing strategies of some of the regional banks that
have offices in our market area. Total capital increased $0.6 million or 0.5%
even though dividends declared exceeded net income by $0.3 million, as
accumulated other comprehensive income increased $0.8 million, primarily due to
the increase in the value of securities available for sale. The capital to
assets ratio increased from 8.19% at December 31, 2007 to 8.23% at March 31,
2008.
The amount of nonperforming assets ("NPAs") increased $8.9 million or 19.2%
since year end. NPAs include non performing loans, which increased 16.7% from
$33.9 million to $39.6 million, and Other Real Estate Owned and Other Assets
("OREO"), which increased from $12.6 million to $15.8 million. Total problem
assets, which includes all NPAs and performing loans that are internally
classified as substandard, increased $8.4 million, or 9.6%. The Company's
Allowance for Loan and Lease Losses ("ALLL") decreased $2.5 million since
December 31, 2007, as the amount of specific allocations required by FAS 114
decreased from $9.1 million to $6.7 million, mainly due to progress made in
successfully resolving a large non performing asset. The FAS 5 portion of the
allowance was unchanged as the decrease in the loan portfolio was offset by
higher loss factors due to the weaker economic conditions and lower real estate
values. The ALLL is now 1.78% of loans, compared to 2.02% at year end. The ALLL
is 44.7% of NPLs, a decrease from 59.6% at year end. Because a significant
portion of the Bank's lending is secured by real estate, we believe that at this
level the ALLL adequately estimates the potential losses in the loan portfolio.
Results of Operations - First Quarter 2008 vs. First Quarter 2007
Net Interest Income - A comparison of the income statements for the three months
ended March 31, 2007 and 2008 shows a decrease of $730,000, or 6.5% in Net
Interest Income. Interest income on loans decreased $1.3 million or 7.5% even
though the average loans outstanding increased $4.6 million as the average yield
on loans decreased from 7.19% to 6.62%. The interest income on investments and
fed funds sold decreased $184,000 as the yield on investments and fed funds sold
decreased from 5.29% to 5.21%, and the average amount of investments and fed
funds sold decreased $6.6 million. An improvement in the term structure of
interest rates and a decrease in the overall level of interest rates allowed
funding costs to decrease along with asset yields. The interest expense on
deposits decreased $464,000 or 5.8% even though average deposits increased $9.8
million because the average cost of those deposits decreased from 2.91% to
2.72%. The cost of borrowed funds decreased $323,000 as the average
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amount of borrowed funds decreased $830,000 million and the average cost of the
borrowings decreased from 5.99% to 5.58%.
Provision for Loan Losses - The Provision for Loan Losses increased from
$750,000 in the first quarter of 2007 to $1.2 million in the first quarter of
2008 due to increased non performing loans and weaker economic conditions. Net
charge offs were $3.7 million during the first quarter of 2008, compared to $0.4
million in the first quarter of 2007. Each quarter, the Company conducts a
review and analysis of its ALLL to ensure its adequacy. This analysis involves
specific allocations for impaired credits and a general allocation for losses
expected based on historical experience adjusted for current conditions.
Other Income - Non interest income increased $199,000 in the first quarter of
2008 compared to the first quarter of 2007. Wealth Management income increased
$60,000, or 5.6% due to increases in rates charged. Bank Owned Life Insurance
earnings increased $59,000 due to an increase in the investment in BOLI from
$39.9 million as of March 31, 2007 to $42.9 million at March 31, 2008. Other
income increased due to increased ATM and debit card activity.
Other Expenses - Total non interest expenses increased $586,000 or 6.4% compared
to the first quarter of 2007 due to increases of $133,000 in salaries and
benefits, $115,000 in occupancy, $99,000 in professional fees, and $239,000 in
other expenses. Salaries and Employee Benefits increased $133,000, or 2.4%, even
though the number of full time equivalent employees decreased from 429 to 380
due to annual rate increases, higher benefits costs, and some one time
separation costs of $80,000. Occupancy expense increased $115,000 or 16.1%
mainly due to accelerated depreciation of $55,000 on our temporary branch
location in Petersburg, and higher snow removal expenses this year. Professional
fees increased $99,000 due to credit related legal expenses. Various other
expenses increased $239,000 primarily due to higher collection costs.
As a result of the above activity, the Income Before Income Taxes decreased $1.6
million to $3.5 million. The income tax expense decreased $511,000 from
$1,381,000 to $870,000. The percent of our income that is derived from tax
exempt sources increased, and our effective tax rate decreased from 27.2% last
year to 24.7%. The Net Profit of $2.6 million is a decrease of $1.1 million from
the profit of $3.7 million in the first quarter of 2007.
Liquidity and Capital
The Company has maintained sufficient liquidity to fund its loan growth and
allow for fluctuations in deposit levels. Internal sources of liquidity are
provided by the maturities of loans and securities as well as holdings of
securities Available for Sale. External sources of liquidity include a line of
credit with the Federal Home Loan Bank of Indianapolis, the Federal funds lines
that have been established with correspondent banks, and Repurchase Agreements
with money center banks that allow us to pledge securities as collateral for
borrowings. As of March 31, 2008, the Bank utilized $256.5 million of its
authorized limit of $275 million with the Federal Home Loan Bank of Indianapolis
and $26.9 million of its $110 million of federal funds lines with its
correspondent banks.
Total stockholders' equity of the Company was $128.1 million at March 31, 2008
and $127.4 million at December 31, 2007. The ratio of equity to assets was 8.2%
at March 31, 2008 and December 31, 2007. Federal bank regulatory agencies have
set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based
Capital, and Leverage Capital. These standards require banks to maintain
Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least
8% to be adequately capitalized. The regulatory agencies consider a bank to be
well capitalized if its Total Risk Based Capital is at least 10% of Risk
Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, and the
Leverage Capital Ratio is at least 5%.
-16-
The following table summarizes the capital ratios of the Company:
Minimum to be Well
March 31, 2008 December 31, 2007 Capitalized
-------------- ----------------- ------------------
Leverage Capital 8.3% 8.4% 5.0%
Tier 1 Risk Based Capital 11.7% 11.8% 6.0%
Total Risk Based Capital 12.9% 13.1% 10.0%
At March 31, 2008 and December 31, 2007, the Bank was in compliance with the
capital guidelines and is considered "well-capitalized" under regulatory
standards.
Market risk for the Bank, as is typical for most banks, consists mainly of
interest rate risk and market price risk. The Bank's earnings and the economic
value of its equity are exposed to interest rate risk and market price risk, and
monitoring this risk is the responsibility of the Asset/Liability Management
Committee (ALCO) of the Bank. The Bank's market risk is monitored monthly and it
has not changed significantly since year-end 2007.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank faces market risk to the extent that the fair values of its financial
instruments are affected by changes in interest rates. The Bank does not face
market risk due to changes in foreign currency exchange rates, commodity prices,
or equity prices. The asset and liability management process of the Bank seeks
to monitor and manage the amount of interest rate risk. This is accomplished by
analyzing the differences in repricing opportunities for assets and liabilities,
by simulating operating results under varying interest rate scenarios, and by
estimating the change in the net present value of the Bank's assets and
liabilities due to interest rate changes.
Each month, the Asset and Liability Committee (ALCO), which includes the senior
management of the Bank, estimates the effect of interest rate changes on the
projected net interest income of the Bank. The sensitivity of the Bank's net
interest income to changes in interest rates is measured by using a computer
based simulation model to estimate the impact on earnings of a gradual increase
or decrease of 100 basis points in the prime rate. The net interest income
projections are compared to a base case projection, which assumes no changes in
interest rates.
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in the Bank's projected net interest income, in
its policy. Throughout the first three months of 2008, the estimated variability
of the net interest income was within the Bank's established policy limits.
The ALCO also monitors interest rate risk by estimating the effect of changes in
interest rates on the economic value of the Bank's equity each month. The actual
economic value of the Bank's equity is first determined by subtracting the fair
value of the Bank's liabilities from the fair value of the Bank's assets. The
fair values are determined in accordance with Statement of Financial Accounting
Standards Number 107, Disclosures about Fair Value of Financial Instruments. The
Bank estimates the interest rate risk by calculating the effect of market
interest rate shocks on the economic value of its equity. For this analysis, the
Bank assumes immediate parallel shifts of plus or minus 100 and 200 basis points
in interest rates. The discount rates used to determine the present values of
the loans and deposits, as well as the prepayment rates for the loans, are based
on Management's expectations of the effect of the rate shock on the market for
loans and deposits.
-17-
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. Throughout the first three months of 2008, the estimated variability of
the economic value of equity was within the Bank's established policy limits.
The Bank's interest rate risk, as measured by the net interest income and
economic value of equity simulations, has not changed significantly from
December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
March 31, 2008, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of March
31, 2008, in alerting them in a timely manner to material information relating
to the Company (including its consolidated subsidiaries) required to be included
in the Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended March 31, 2008, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their
property the subject of any material legal proceedings other than ordinary
routine litigation incidental to their respective businesses, nor are any such
proceedings known to be contemplated by governmental authorities.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors disclosed by the Company
in its Report on Form 10-K for the fiscal year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The Company has a stock repurchase program which it publicly announced on
January 22, 2008. On that date, the Board of Directors authorized the repurchase
of 1 million of the Company's common shares, which authorization will expire on
December 31, 2008. The Company did not repurchase any of its stock during the
three months ended March 31, 2008.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
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No matters to be reported.
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously
filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp.
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.
-19-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBT Financial Corp.
(Registrant)
May 5, 2008 By /s/ H. Douglas Chaffin
Date -------------------------------------
H. Douglas Chaffin
President &
Chief Executive Officer
May 5, 2008 By /s/ John L. Skibski
Date -------------------------------------
John L. Skibski
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Description of Exhibits
- -------------- -----------------------
3.1 Restated Articles of Incorporation of MBT Financial Corp.
Previously filed as Exhibit 3.1 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp.
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.