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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 August 5, 2008, there were 16,136,327 shares of the Company's Common Stock
outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2008 DECEMBER 31,
Dollars in thousands (UNAUDITED) 2007
------------- ------------
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 21,986 $25,113
----------- ----------
Total cash and cash equivalents 21,986 25,113
Securities - Held to Maturity 38,005 44,734
Securities - Available for Sale 380,723 380,238
Federal Home Loan Bank stock - at cost 13,086 13,086
Loans held for sale 408 1,431
Loans - Net 971,338 980,606
Accrued interest receivable and other assets 41,830 36,370
Bank Owned Life Insurance 43,139 42,509
Premises and Equipment - Net 32,232 32,719
----------- ----------
Total assets $1,542,747 $1,556,806
=========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 139,052 $ 141,115
Interest-bearing 926,718 968,865
----------- ----------
Total deposits 1,065,770 1,109,980
Federal Home Loan Bank advances 256,500 256,500
Federal funds purchased 54,500 13,300
Repurchase agreements 30,000 35,000
Interest payable and other liabilities 14,629 14,579
----------- ----------
Total liabilities 1,421,399 1,429,359
----------- ----------
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized,
16,132,513 and 16,124,997 shares issued and
outstanding) -- --
Retained Earnings 128,674 129,917
Accumulated other comprehensive loss (7,326) (2,470)
----------- ----------
Total stockholders' equity 121,348 127,447
----------- ----------
Total liabilities and stockholders' equity $ 1,542,747 $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 JUNE 30,
--------------------
Dollars in thousands, except per share data 2008 2007
--------- --------
INTEREST INCOME
Interest and fees on loans $15,771 $17,751
Interest on investment securities-
Tax-exempt 818 871
Taxable 4,798 4,582
Interest on federal funds sold -- 84
------- -------
Total interest income 21,387 23,288
------- -------
INTEREST EXPENSE
Interest on deposits 6,368 7,981
Interest on borrowed funds 3,892 4,520
------- -------
Total interest expense 10,260 12,501
------- -------
NET INTEREST INCOME 11,127 10,787
PROVISION FOR LOAN LOSSES 2,700 750
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,427 10,037
------- -------
OTHER INCOME
Income from wealth management services 1,119 1,151
Service charges and other fees 1,586 1,574
Net gain on sales of securities 23 92
Origination fees on mortgage loans sold 91 210
Bank owned life insurance income 275 334
Other 764 758
------- -------
Total other income 3,858 4,119
------- -------
OTHER EXPENSES
Salaries and employee benefits 5,441 5,599
Occupancy expense 916 844
Equipment expense 848 850
Marketing expense 356 369
Professional fees 455 406
Net loss (gain) on other real estate owned 354 (8)
Other 1,793 1,219
------- -------
Total other expenses 10,163 9,279
------- -------
INCOME BEFORE INCOME TAXES 2,122 4,877
INCOME TAX EXPENSE 404 1,342
------- -------
NET INCOME $ 1,718 $ 3,535
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.11 $ 0.21
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.11 $ 0.21
======= =======
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 INCOME - UNAUDITED
SIX MONTHS
ENDED JUNE 30,
-----------------
Dollars in thousands, except per share data 2008 2007
------- -------
INTEREST INCOME
Interest and fees on loans $32,199 $35,512
Interest on investment securities-
Tax-exempt 1,633 1,880
Taxable 9,754 9,497
Interest on federal funds sold 1 116
------- -------
Total interest income 43,587 47,005
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INTEREST EXPENSE
Interest on deposits 13,859 15,936
Interest on borrowed funds 8,148 9,099
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Total interest expense 22,007 25,035
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NET INTEREST INCOME 21,580 21,970
PROVISION FOR LOAN LOSSES 3,900 1,500
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NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 17,680 20,470
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OTHER INCOME
Income from trust services 2,246 2,218
Service charges and other fees 3,112 3,099
Net gain on sales of securities 48 92
Origination fees on mortgage loans sold 284 393
Bank Owned Life Insurance income 630 630
Other 1,500 1,450
------- -------
Total other income 7,820 7,882
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OTHER EXPENSES
Salaries and employee benefits 11,023 11,048
Occupancy expense 1,911 1,724
Equipment expense 1,676 1,695
Marketing expense 597 621
Professional fees 924 776
Net loss on other real estate 389 10
Other 3,341 2,517
------- -------
Total other expenses 19,861 18,391
------- -------
INCOME BEFORE INCOME TAXES 5,639 9,961
INCOME TAX EXPENSE 1,274 2,723
------- -------
NET INCOME $ 4,365 $ 7,238
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.27 $ 0.43
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.27 $ 0.43
======= =======
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.36 $ 0.36
======= =======
The accompanying notes to consolidated financial statements are integral part of
these statements.
-4-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
SIX MONTHS ENDED JUNE 30,
-------------------------
Dollars in thousands 2008 2007
--------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,365 $ 7,238
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses 3,900 1,500
Depreciation 1,454 1,379
(Increase) decrease in net deferred Federal income tax asset 239 (351)
Net (accretion) amortization of investment premium and discount 15 (160)
Net increase in interest payable and other liabilities 175 562
Net (increase) decrease in interest receivable and other assets (4,728) 2,430
Equity based compensation expense 135 340
Net gain on sale/settlement of securities (48) (92)
Increase in cash surrender value of life insurance (630) (630)
--------- --------
Net cash provided by operating activities $ 4,877 $ 12,216
========= ========
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment securities held to maturity $ 6,879 $ 16,595
Proceeds from maturities and redemptions of investment securities available for sale 153,865 6,489
Proceeds from sales of investment securities available for sale 2,989 47,733
Net (increase) decrease in loans 6,391 (4,434)
Proceeds from sales of other real estate owned 1,548 1,104
Proceeds from sales of other assets 96 26
Purchase of investment securities held to maturity (150) (1,411)
Purchase of Bank Owned Life Insurance -- (1,584)
Purchase of investment securities available for sale (164,903) (15,317)
Purchase of bank premises and equipment (967) (852)
--------- --------
Net cash provided by investing activities $ 5,748 $ 48,349
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CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits $ (44,210) $(37,626)
Net increase (decrease) in short term borrowings 41,200 (3,500)
Net decrease in securities sold under agreements to repurchase (5,000) (5,000)
Proceeds from issuance of common stock 64 57
Repurchase of common stock -- (4,556)
Dividends paid (5,806) (6,006)
--------- --------
Net cash used for financing activities $ (13,752) $(56,631)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (3,127) $ 3,934
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,113 27,903
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,986 $ 31,837
========= ========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-5-
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
Issuance of Common Stock (7,516 shares) -- 64 -- 64
Equity Compensation -- 135 -- 135
Dividends declared ($0.36 per share) -- (5,807) -- (5,807)
Comprehensive income:
Net income -- 4,365 -- 4,365
Change in net unrealized loss on securities
available for sale - Net of tax effect of $2,642 -- -- (4,907) (4,907)
Reclassification adjustment for gains included
in net income - Net of tax effect of $17 -- -- (30) (30)
Change in postretirement benefit obligation
Net of tax effect of ($44) -- -- 81 81
--------
Total Comprehensive Income (491)
--- -------- ------- --------
BALANCE - JUNE 30, 2008 $-- $128,674 $(7,326) $121,348
=== ======== ======= ========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-6-
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
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.
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 instrument basis
to fair value certain financial assets and
-7-
financial liabilities with changes in fair value recognized in earnings as they
occur. The election to fair value is generally irrevocable. 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. 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.
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.
-8-
2. EARNINGS PER SHARE
The calculation of net income per common share for the three months ended June
30 is as follows:
2008 2007
----------- ------------
BASIC
Net income $ 1,718,000 $ 3,535,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 1,718,000 $ 3,535,000
----------- -----------
Average common shares outstanding 16,130,806 16,558,137
----------- -----------
Earnings per common share - basic $ 0.11 $ 0.21
=========== ===========
2008 2007
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DILUTED
Net income $ 1,718,000 $ 3,535,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 1,718,000 $ 3,535,000
----------- -----------
Average common shares outstanding 16,130,806 16,558,137
Stock option adjustment 31,375 27,583
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Average common shares outstanding - diluted 16,162,181 16,585,720
----------- -----------
Earnings per common share - diluted $ 0.11 $ 0.21
=========== ===========
The calculation of net income per common share for the six months ended June 30
is as follows:
2008 2007
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BASIC
Net income $ 4,365,000 $ 7,238,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 4,365,000 $ 7,238,000
----------- -----------
Average common shares outstanding 16,128,926 16,622,204
----------- -----------
Earnings per common share - basic $ 0.27 $ 0.43
=========== ===========
2008 2007
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DILUTED
Net income $ 4,365,000 $ 7,238,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 4,365,000 $ 7,238,000
----------- -----------
Average common shares outstanding 16,128,926 16,622,204
Stock option adjustment 31,375 28,969
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Average common shares outstanding - diluted 16,160,301 16,651,173
----------- -----------
Earnings per common share - diluted $ 0.27 $ 0.43
=========== ===========
3. STOCK BASED COMPENSATION
The following table summarizes the options that have been granted to
non-employee directors and certain key executives in accordance with the
Long-Term Incentive Compensation Plan that was approved by shareholders at the
Annual Meeting of Shareholders on April 6, 2000.
Weighted Average
Shares Exercise Price
------- ----------------
Options Outstanding, January 1, 2008 602,143 $17.36
Granted -- --
Exercised -- --
Forfeited 58,334 16.90
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Options Outstanding, June 30, 2008 543,809 $17.41
------- ------
Options Exercisable, June 30, 2008 457,987 $17.75
------- ------
On June 4, 2008, performance restricted stock units were awarded to certain key
executives in accordance with the MBT 2008 Stock Incentive Plan that was
approved by shareholders on
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May 1, 2008. Each restricted stock unit (RSU) is equivalent to one share of MBT
Financial Corp. common stock. Stock will be issued to the participants following
a three year performance period that ends on December 31, 2010 based on the
cumulative earnings per share during that three year period. The RSUs vest on
December 31, 2010. There were 22,300 RSUs granted, and none will be considered
vested and earned for payment if the Company's three year cumulative earnings
per share are less than $2.16. The expense recorded for the RSUs in accordance
with FAS 123(R) was $25,000 in the first six months of 2008. The amount of RSUs
that will vest on December 31, 2010 is based on the three year cumulative
earnings per share achieved by the company during the vesting period as shown in
the following schedule:
Three Year Cumulative Fully Diluted EPS for the Percent PSUs
Performance Period Ending December 31, 2010 Vested
- ----------------------------------------------------------- ------------
$2.40 100%
$2.34 90%
$2.28 80%
$2.24 70%
$2.21 60%
$2.16 50%
On June 4, 2008, Stock Only Stock Appreciation Rights (SOSARs) were awarded to
certain key executives in accordance with the MBT 2008 Stock Incentive Plan that
was approved by shareholders on May 1, 2008. The SOSARs have a term of ten years
and vest in three equal annual installments beginning December 31, 2008. SOSARs
granted under the plan are structured as fixed grants with the exercise price
equal to the market value of the underlying stock on the date of the grant.
The fair value of $1.39 for the SOSARs was estimated at the date of the grant,
using the Black-Scholes option pricing model, with the following assumptions:
expected option lives of 7 years, expected volatility of 25.9%, a risk free rate
of 3.61% and dividend yield of 4.87%. The expense recorded for the SOSARs in
accordance with FAS 123(R) was $24,000 in the first six months of 2008. The
following table summarizes the SOSARs that have been granted:
Weighted Average
Shares Exercise Price
------- ----------------
SOSARs Outstanding, January 1, 2008 -- $0.00
Granted 90,500 8.53
Exercised -- --
Forfeited -- --
------- ------
SOSARs Outstanding, June 30, 2008 90,500 $8.53
------- ------
SOSARs Exercisable, June 30, 2008 -- $0.00
------- ------
The total expense for equity based compensation was $135,000 in the first six
months of 2008 and $340,000 in the first six 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.
-10-
Loans consist of the following (000s omitted):
June 30, December 31,
2008 2007
-------- ------------
Residential real estate loans $472,700 $ 489,038
Non-farm, non-residential real estate loans 336,921 357,622
Loans to finance agricultural production and
other loans to farmers 15,390 5,981
Commercial and industrial loans 130,065 107,375
Loans to individuals for household, family,
and other personal expenditures 33,867 40,705
All other loans (including overdrafts) 1,115 731
-------- ----------
Total loans, gross 990,058 1,001,452
Less: Deferred loan fees 627 624
-------- ----------
Total loans, net of deferred loan fees 989,431 1,000,828
Less: Allowance for loan losses 18,093 20,222
-------- ----------
$971,338 $ 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):
June 30, December 31,
2008 2007
-------- ------------
Nonaccrual loans $38,115 $30,459
Loans 90 days past due 109 102
Restructured loans 6,023 3,367
------- -------
Total nonperforming loans $44,247 $33,928
Other real estate owned 16,105 10,626
Other assets 1,960 1,939
------- -------
Total nonperforming assets $62,312 $46,493
======= =======
Nonperforming assets to total assets 4.04% 2.99%
Allowance for loan losses to
nonperforming loans 40.89% 59.60%
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000's omitted):
June 30, 2008 June 30, 2007
------------- -------------
Balance beginning of year
$20,222 $13,764
Provision for loan losses 3,900 1,500
Loans charged off (6,562) (2,170)
Recoveries 533 986
------- -------
Balance end of period $18,093 $14,080
======= =======
-11-
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
June 30, 2008 and December 31, 2007 (000's omitted):
June 30, 2008 December 31, 2007
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Held to Maturity
Obligations of U.S. Government Agencies $ 7 $ 7 $ 7 $ 8
Obligations of States and Political
Subdivisions 37,998 38,184 44,727 45,036
------- ------- ------- -------
$38,005 $38,191 $44,734 $45,044
======= ======= ======= =======
June 30, 2008 December 31, 2007
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Available for Sale
Obligations of U.S. Government Agencies $307,173 $304,258 $330,505 $330,178
Obligations of States and Political
Subdivisions 39,054 38,575 27,046 27,134
Other Securities 42,488 37,890 23,081 22,926
-------- -------- -------- --------
$388,715 $380,723 $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.
-12-
7. FAIR VALUE MEASUREMENTS
The following tables present information about the Company's assets measured at
fair value on a recurring basis at June 30, 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):
Quoted Prices in Active Significant Other Significant
Markets for Identical Observable Inputs Unobservable Balance at June
Assets (Level 1) (Level 2) Inputs (Level 3) 30, 2008
----------------------- ----------------- ---------------- ---------------
Investment Securities - Available for Sale $317,651 $62,484 $588 $380,723
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 3
Net purchases, sales, calls and maturities --
Net transfers in/out of Level 3 --
----
BALANCE AT JUNE 30, 2008 $588
Of the Level 3 assets that were still held by the Company at June 30, 2008, the
unrealized loss for the six months ended June 30, 2008 was $2,000, which is
recognized in other comprehensive income in the consolidated statements of
financial condition. The Company did not have any sales or purchases 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,
-13-
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 six months ended June 30, 2008, the Company recognized a non-cash impairment
charge of $4,572,000 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 Losses
in Active for the Total
Markets Significant three Losses
for Other Significant months for the
Balance Identical Observable Unobservable ended six months
at June Assets Inputs Inputs June ended June
30, 2008 (Level 1) (Level 2) (Level 3) 30, 2008 30, 2008
-------- --------- ----------- ------------ -------- ----------
Investment Securities - Held to Maturity $38,191 $ 7 $19,676 $18,508 $ -- $ --
Impaired loans accounted for under FAS 114 $33,797 $-- $ -- $33,797 $1,762 $4,222
Loan held for sale $ 408 $-- $ -- $ 408 $ -- $ --
Other Real Estate Owned $18,065 $-- $18,065 $ -- $ 354 $ 389
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 payment streams, and estimated realizable
values of available collateral (typically based on outside appraisals).
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):
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Contractual Amount
-----------------------
June 30, December 31,
2008 2007
-------- ------------
Commitments to extend credit:
Unused portion of commercial lines of credit $71,144 $92,774
Unused portion of credit card lines of credit 6,004 5,988
Unused portion of home equity lines of credit 22,199 20,047
Standby letters of credit and financial guarantees written 9,923 9,994
All other off-balance sheet assets 4,018 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
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 20 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.
The ongoing challenges in the southeast Michigan economy, with increasing
unemployment and decreasing real estate values, continue to have a negative
impact on our performance. We monitor the quality of our loan portfolios
closely, and we decided to increase the allowance for loan losses and write down
the values of some of our Other Real Estate Owned this quarter. Our Allowance
for Loan Losses is now $18.1 million, or 1.83% of loans. Non performing assets
(NPAs) increased from $55.4 million to $62.3 million.
Net Interest Income increased $340,000 compared to the second quarter of 2007
due to the improvement in the net interest margin and the slight growth in
average earning assets. We are encouraged by the second consecutive quarterly
improvement in the margin, and we are beginning to see the benefits of our cost
reduction initiatives. Non interest income, excluding securities transactions,
decreased 4.8% compared to last year as Wealth Management fees were
-15-
impacted by lower market values for investments and origination fees on mortgage
loans sold were impacted by a decline in real estate lending activity. Credit
quality issues also affected our non interest expenses, which increased 9.5%
compared to last year. We expect credit related expenses to remain high, but we
will see meaningful expense improvement in most other areas.
Our capital levels remain strong, and well above regulatory minimums required to
be considered a well-capitalized institution. As of June 30, 2008 our total
tangible capital was $121,348,000. We have ample liquidity to meet the needs of
our qualified loan customers, and continue to maintain a financially sound and
solvent balance sheet. We are increasingly concerned however that the reduced
earnings levels are not sufficient to cover our current dividend. Maintaining a
strong capital position in today's environment is critical. Therefore, our board
will be evaluating all options concerning the payment of our dividend during its
monthly meeting in August. We will make a determination of the appropriate level
of the dividend payment at that time.
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 economic conditions in southeast Michigan remained weak throughout the first
six months of 2008. Rising unemployment and decreasing property values resulted
in decreases in loans and deposits, and an increase in nonperforming assets
since the end of 2007. Although steepening of the yield curve helped the net
interest margin improve, these balance sheet changes resulted in lower net
interest income, a larger provision for loan losses, and higher credit related
non interest expenses. While some lending opportunities exist, the economy is
expected to remain weak through the rest of the year. The Company expects to
continue to restrict its asset growth and focus on credit quality and capital
management.
Since December 31, 2007, total loans decreased $12.4 million (1.2%) due to the
weak loan demand. Total cash and investments decreased $9.4 million (2.0%), and
total assets decreased $14.1 million (0.9%). Consumer loans decreased $6.8
million, or 16.8% due to a reduction in lending for autos and other personal
expenditures, especially boats and recreational vehicles. Residential real
estate secured loans decreased $16.3 million (3.3%) due to a decrease in
residential development activity. Deposits decreased $44.2 million, or 4.0%, 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
decreased $6.1 million or 4.8% because dividends declared exceeded net income by
$1.4 million, and accumulated other comprehensive income decreased $4.9 million,
primarily due to the decrease in the value of securities available for sale. The
capital to assets ratio decreased from 8.19% at December 31, 2007 to 7.87% at
June 30, 2008.
The amount of nonperforming assets ("NPAs") increased $15.8 million or 34.0%
since year end. NPAs include non performing loans, which increased 30.4% from
$33.9 million to $44.2 million,
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and Other Real Estate Owned and Other Assets ("OREO"), which increased from
$12.6 million to $18.1 million. Total problem assets, which includes all NPAs
and performing loans that are internally classified as substandard, increased
$16.0 million, or 18.3%. The Company's Allowance for Loan and Lease Losses
("ALLL") decreased $2.1 million since December 31, 2007, as the amount of
specific allocations required by FAS 114 decreased from $9.1 million to $7.2
million, due to progress made in successfully resolving a large non performing
asset and charge offs of amounts previously recognized as impaired loans. The
FAS 5 portion of the allowance decreased slightly from $11.1 million to $10.9
million because the impact of the decrease in the loan portfolio was greater
than the impact of the increase in the loss factors. The loss factors, which
include five year loss averages, and adjustments for various current factors,
such as recent delinquency and charge off trends and national and local economic
conditions, were increased due to the weak economic conditions and declining
real estate values. The ALLL is now 1.83% of loans, compared to 2.02% at year
end. The ALLL is 40.9% of NPLs, a decrease from 59.6% at year end. We believe
that at this level the ALLL adequately estimates the potential losses in the
loan portfolio.
Results of Operations -- Second Quarter 2008 vs. Second Quarter 2007
Net Interest Income - A comparison of the income statements for the three months
ended June 30, 2007 and 2008 shows an increase of $340,000, or 3.2% in Net
Interest Income. Interest income on loans decreased $2.0 million or 11.2% as the
average loans outstanding decreased $1.5 million and the average yield on loans
decreased from 7.18% to 6.39%. The interest income on investments and fed funds
sold increased $79,000 even though the yield on investments and fed funds sold
decreased from 5.23% to 5.13%, as the average amount of investments and fed
funds sold increased $14.4 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 faster than asset yields. The interest expense on
deposits decreased $1.6 million or 20.2% even though average deposits increased
$218,000 as the average cost of those deposits decreased from 2.98% to 2.38%.
The cost of borrowed funds decreased $628,000 even though the average amount of
borrowed funds increased $31.4 million as the average cost of the borrowings
decreased from 6.09% to 4.74%.
Provision for Loan Losses - The Provision for Loan Losses increased from
$750,000 in the second quarter of 2007 to $2.7 million in the second quarter of
2008 due to increased non performing loans and weaker economic conditions. Net
charge offs were $2.3 million during the second quarter of 2008, compared to
$0.7 million in the second 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 decreased $261,000 in the second quarter of
2008 compared to the second quarter of 2007. Wealth Management income decreased
$32,000, or 2.8% due to decreasing market values of assets under management, the
value of which has a direct impact on fee income. Origination fees on mortgage
loans sold decreased 56.7% from $210,000 to $91,000 due to significantly slower
real estate lending activity. Bank Owned Life Insurance earnings decreased
$59,000 due to a larger annual cost of insurance adjustment in the second
quarter of 2008.
Other Expenses -- Total non interest expenses increased $884,000 or 9.5%
compared to the second quarter of 2007 primarily due to higher credit related
expenses. Salaries and Employee Benefits decreased $158,000, or 2.8%, as the
number of full time equivalent employees decreased from 425 to 384. Occupancy
expense increased $72,000 or 8.5% mainly due to accelerated depreciation on our
temporary branch location in Petersburg. Professional fees
-17-
increased $49,000 due to credit related legal expenses. Losses on Other Real
Estate Owned (OREO) increased $362,000 due to write downs on properties in 2008.
Other OREO expenses increased $358,000 compared to the second quarter of 2007 as
the increase in OREO properties caused an increase in insurance, maintenance,
and property tax expenses. Various other expenses increased $201,000 primarily
due to higher collection costs.
As a result of the above activity, the Income Before Income Taxes decreased $2.8
million to $2.1 million. The income tax expense decreased $938,000 from
$1,342,000 to $404,000. The percent of our income that is derived from tax
exempt sources increased, and our effective tax rate decreased from 27.5% last
year to 19.0%. The Net Profit of $1.7 million is a decrease of $1.8 million from
the profit of $3.5 million in the second quarter of 2007.
Results of Operations -- First Six Months 2008 vs. 2007
Net Interest Income - A comparison of the income statements for the six months
ended June 30, 2007 and 2008 shows a decrease of $390,000, or 1.8% in Net
Interest Income. Interest income on loans decreased $3.3 million or 9.3% even
though the average loans outstanding increased $1.5 million as the average yield
on loans decreased from 7.19% to 6.51%. The interest income on investments and
fed funds sold decreased $105,000 even though the average amount of investments
and fed funds increased $3.8 million as the yield on investments and fed funds
sold decreased from 5.26% to 5.17%. An improvement in the term structure of
interest rates and a decrease in the overall level of interest rates allowed
funding costs to decrease faster than asset yields. The interest expense on
deposits decreased $2.1 million or 13.0% even though average deposits increased
$5.0 million as the average cost of those deposits decreased from 2.95% to
2.55%. The cost of borrowed funds decreased $951,000 even though the average
amount of borrowed funds increased $15.3 million as the average cost of the
borrowings decreased from 6.04% to 5.15%.
Provision for Loan Losses - The Provision for Loan Losses increased from $1.5
million in the first six months of 2007 to $3.9 million in the first six months
of 2008 due to increased non performing loans and weaker economic conditions.
Net charge offs were $6.0 million during the first six months of 2008, compared
to $1.2 million in the first six months of 2007.
Other Income -- Non interest income decreased $62,000 in the first six months of
2008 compared to the first six months of 2007. Origination fees on mortgage
loans sold decreased 27.7% from $393,000 to $284,000 due to significantly slower
real estate lending activity.
Other Expenses -- Total non interest expenses increased $1.5 million or 8.0%
compared to the first six months of 2007 primarily due to higher credit related
expenses. Occupancy expense increased $187,000 or 10.8% mainly due to
accelerated depreciation on our temporary branch location in Petersburg.
Professional fees increased $148,000 due to credit related legal expenses.
Losses on Other Real Estate Owned (OREO) increased $379,000 due to write downs
on properties in 2008. Other OREO expenses increased $460,000 compared to the
first six months of 2007 as the increase in OREO properties caused an increase
in insurance, maintenance, and property tax expenses. Various other expenses
increased $296,000 primarily due to higher collection costs.
As a result of the above activity, the Income Before Income Taxes decreased $4.3
million to $5.6 million. The income tax expense decreased $1.4 million from $2.7
million to $1.3 million. The percent of our income that is derived from tax
exempt sources increased, and our effective tax rate decreased from 27.3% last
year to 22.6%. The Net Profit of $4.4 million is a decrease of $2.9 million from
the profit of $7.2 million in the first six months of 2007.
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Cash Flows
Cash flows from operating activities decreased from $12.2 million in the first
six months of 2007 to $4.9 million in the first six months of 2008 due to the
decrease in net income and the increase in interest receivable and other assets.
Cash flows provided by investing activities decreased from $48.3 million in the
first six months of 2007 to $5.7 million in the first six months of 2008
primarily due to the large amount of proceeds from investment securities sold in
the first six months of 2007. The amount of cash used for financing activities
decreased from $56.6 million in the first six months of 2007 to $13.8 million in
the first six months of 2008 due to an increase of $41.2 million in short term
borrowings in the first six months of 2008. The additional borrowings were used
to replace deposits and to fund purchases of investment securities.
Liquidity and Capital
The Company maintains sufficient liquidity to fund its lending activity 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 June 30, 2008, the Bank utilized $256.5 million of its
authorized limit of $275 million with the Federal Home Loan Bank of Indianapolis
and $54.5 million of its $110 million of federal funds lines with its
correspondent banks. The Company's Funds Management Policy includes guidelines
for desired amounts of liquidity and capital. The Funds Management Policy also
includes contingency plans for liquidity and capital that specify actions to
take if liquidity and capital ratios violate the guidelines.
Total stockholders' equity of the Company was $121.3 million at June 30, 2008
and $127.4 million at December 31, 2007. The ratio of equity to assets was 7.9%
at June 30, 2008 and 8.2% at 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%.
The following table summarizes the capital ratios of the Company:
Minimum to be Well
June 30, 2008 December 31, 2007 Capitalized
------------- ----------------- ------------------
Leverage Capital 8.3% 8.4% 5.0%
Tier 1 Risk Based Capital 11.6% 11.8% 6.0%
Total Risk Based Capital 12.9% 13.1% 10.0%
At June 30, 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.
Forward-Looking Statements
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
-19-
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.
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 gradual increases
or decreases of 100, 200, and 300 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 six 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, 200, and 300 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
-20-
loans, are based on Management's expectations of the effect of the rate shock on
the market for loans and deposits.
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. Throughout the first six 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
June 30, 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 June 30, 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 June 30, 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 June 30, 2008.
On June 4, 2008, 90,500 Stock Only Stock Appreciation Rights (SOSARs) were
awarded to certain key executives in accordance with the MBT 2008 Stock
Incentive Plan that was approved by shareholders on May 1, 2008. The SOSARs have
a term of ten years and vest in three equal annual installments beginning
December 31, 2008. SOSARs granted under the plan are structured as fixed grants
with the exercise price equal to the market value of the underlying stock on the
date of the grant. Each award was granted pursuant to a Stock Only Stock
Appreciation Rights Agreement (the "SOSAR Agreement") entered into with each
award
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recipient. The SOSARS may be exercised in whole or in part during the term by
giving written notice of exercise to the Company specifying the number of shares
in respect of which the SOSAR is being exercised. Upon the exercise of a SOSAR,
subject to satisfaction of the tax withholding requirements, each holder is
entitled to receive the number of shares equal in value to the excess of the
fair market value of a share on the exercise date over the exercise price of the
SOSAR multiplied by the number of SOSARS being exercised. The above disclosure
provides only a summary of the terms of each award. The general form of the
SOSAR Agreement is provided as an exhibit to this Report.
On June 4, 2008, 22,300 performance restricted stock units were awarded to
certain key executives in accordance with the MBT 2008 Stock Incentive Plan that
was approved by shareholders on May 1, 2008. Each restricted stock unit ("RSU")
is equivalent to one share of MBT Financial Corp. common stock. Stock will be
issued to the participants following a three year performance period that ends
on December 31, 2010 based on the cumulative earnings per share during that
three year period. The RSUs vest on December 31, 2010. No RSUs will be
considered vested and earned for payment if the Company's three year cumulative
earnings per share are less than $2.16. The above disclosure provides only a
summary of the terms of each award. Each RSU award was granted pursuant to a
Restricted Share Unit Agreement (the "RSU Agreement") entered into with each
award recipient, the general form of which is provided as an exhibit to this
Report.
These transactions were not registered under the Securities Act of 1933 (the
"Act"), but were made in reliance upon the exemption from registration contained
in Section 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of MBT Financial Corp. was held on May 1,
2008. The following directors were elected to a new term of office:
Peter H. Carlton
H. Douglas Chaffin
Joseph S. Daly
Thomas M. Huner
Rocque E. Lipford
William D. McIntyre, Jr.
Michael J. Miller
Debra J. Shah
John L. Skibski
Philip P. Swy
Karen M. Wilson
The Annual Meeting of Shareholders of MBT Financial Corp. was held for the
following purposes:
1. To elect a Board of Directors for the ensuing year;
2. To consider and act upon a new incentive compensation plan, the MBT
Financial Corp. 2008 Stock Incentive Plan;
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3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The results of the voting are as follows:
Proposal 1, Election of Directors:
Withhold
For Authority
---------- ---------
Peter H. Carlton 10,925,114 2,987,751
H. Douglas Chaffin 10,444,793 3,468,072
Joseph S. Daly 10,440,356 3,472,509
Thomas M. Huner 12,275,859 1,637,006
Rocque E. Lipford 8,669,230 5,243,635
William D. McIntyre, Jr. 10,380,988 3,531,877
Michael J. Miller 12,348,233 1,564,632
Debra J. Shah 10,293,580 3,619,285
John L. Skibski 12,020,106 1,892,759
Philip P. Swy 12,355,598 1,557,267
Karen M. Wilson 10,303,365 3,609,500
Proposal 2, the 2008 MBT Financial Corp. Stock Incentive Plan:
For 6,661,816 57.7%
Against 4,797,095 41.6%
Abstain 76,891 0.7%
---------- -----
Total 11,535,802 100.0%
Proposal 2 received the affirmative vote of a majority of the votes cast on the
proposal required for approval.
ITEM 5. OTHER INFORMATION
No matters to be reported.
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ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously filed
as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal year ended
December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as
Exhibit 3.2 to MBT Financial Corp.'s Form 10-Q for its quarter ended March
31, 2008.
10.1 MBT Financial Corp. 2008 Stock Incentive Plan. Previously filed as Exhibit
10 to MBT Financial Corp.'s Form 8-K filed on June 5, 2008.
10.2 Form of Stock Only Stock Appreciation Rights Agreement under the MBT
Financial Corp. 2008 Stock Incentive Plan.
10.3 Form of Restricted Share Unit Agreement under the MBT Financial Corp. 2008
Stock Incentive Plan.
31.1 Certification by Chief Executive Officer required by Securities and
Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities and
Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBT Financial Corp.
(Registrant)
August 6, 2008 By /s/ H. Douglas Chaffin
Date -------------------------------------
H. Douglas Chaffin
President & Chief Executive Officer
August 6, 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. Previously
filed as Exhibit 3.2 to MBT Financial Corp.'s Form 10-Q for its
quarter ended March 31, 2008.
10.1 MBT Financial Corp. 2008 Stock Incentive Plan. Previously filed
as Exhibit 10 to MBT Financial Corp.'s Form 8-K filed on June
5, 2008.
10.2 Form of Stock Only Stock Appreciation Rights Agreement under
the MBT Financial Corp. 2008 Stock Incentive Plan.
10.3 Form of Restricted Share Unit Agreement under the MBT Financial
Corp. 2008 Stock Incentive Plan.
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.