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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2005
Commission File Number: 000-30973
MBT FINANCIAL CORP.
(Exact Name of Registrant as Specified in its Charter)
MICHIGAN 38-3516922
(State of Incorporation) (I.R.S. Employer Identification No.)
102 E. FRONT ST.
MONROE, MICHIGAN 48161
(Address of Principal Executive Offices) (Zip Code)
(734) 241-3431
(Registrant's Telephone Number, Including Area Code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: Common Stock, No Par
Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. YES [ ] NO [X]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any of the
amendments of this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
one).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
As of June 30, 2005, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $332.8 million based on the
closing sale price as reported on the National Association of Securities Dealers
Automated Quotation System National Market System.
As of March 9, 2006, there were 17,074,470 shares of the registrant's common
stock, no par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2006 Annual Meeting of Shareholders of
MBT Financial Corp. to be held on May 4, 2006 are incorporated by reference in
this Form 10-K in response to Part III, Items 10, 11, 12, 13, and 14.
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PART I
ITEM 1. BUSINESS
GENERAL
MBT Financial Corp. (the "Corporation") operates as a bank holding company
headquartered in Monroe, Michigan. The Corporation was incorporated under the
laws of the State of Michigan in January 2000, at the direction of the
management of Monroe Bank & Trust (the "Bank"), for the purpose of becoming a
bank holding company by acquiring all the outstanding shares of Monroe Bank &
Trust. At the April 6, 2000 Annual Meeting of Shareholders of Monroe Bank &
Trust, shareholders approved a proposal that resulted in the Bank merging with
Monroe Interim Bank, a state chartered bank, which was a subsidiary of the
Corporation. On July 1, 2000, the merger of Monroe Bank & Trust and Monroe
Interim Bank was completed, with Monroe Bank & Trust becoming the wholly owned
subsidiary of MBT Financial Corp.
Monroe Bank & Trust was incorporated and chartered as Monroe State Savings Bank
under the laws of the State of Michigan in 1905. In 1940, Monroe Bank & Trust
consolidated with Dansard Bank and moved to the present address of its main
office. Monroe Bank & Trust operated as a unit bank until 1950 when it opened
its first branch office in Ida, Michigan. It then continued its expansion to its
present total of 25 branch offices, including its main office. Monroe Bank &
Trust changed its name from "Monroe State Savings Bank" to "Monroe Bank & Trust"
in 1968.
Monroe Bank & Trust provides customary retail and commercial banking and trust
services to its customers, including checking and savings accounts, time
deposits, safe deposit facilities, commercial loans, personal loans, real estate
mortgage loans, installment loans, IRAs, ATM and night depository facilities,
treasury management services, telephone and internet banking, personal trust,
employee benefit and investment management services. Monroe Bank & Trust's
service areas are comprised of Monroe and Wayne counties in Southern Michigan.
Monroe Bank & Trust's deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC") to applicable legal limits and Monroe Bank & Trust is
supervised and regulated by the FDIC and Michigan Office of Financial and
Insurance Services Division of Financial Institutions.
COMPETITION
MBT Financial Corp., through its subsidiary, Monroe Bank & Trust, operates in a
highly competitive industry. Monroe Bank & Trust's main competition comes from
other commercial banks, national or state savings and loan institutions, credit
unions, securities brokers, mortgage bankers, finance companies and insurance
companies. Banks generally compete with other financial institutions through the
banking products and services offered, the pricing of services, the level of
service provided, the convenience and availability of services, and the degree
of expertise and personal manner in which these services are offered. Monroe
Bank & Trust encounters strong competition from most of the financial
institutions in Monroe Bank & Trust's extended market area.
The Bank's primary market area is Monroe County, Michigan. According to the most
recent market data, there are ten other deposit taking/lending institutions
competing in the Bank's market. According to the most recent market data for
deposits, the Bank ranks first in market share in Monroe County with 60.26% of
the market. In 2001, the Bank began expanding into Wayne County, Michigan, and
currently ranks fifteenth out of thirty-one institutions with a market share of
0.31%. For the combined Monroe and Wayne County market, the Bank ranks sixth of
thirty-four institutions with a market share of 4.01%.
SUPERVISION AND REGULATION
MBT Financial Corp., as a bank holding company, is regulated under the Bank
Holding Company Act of 1956, as amended (the BHC Act), and is subject to the
supervision and examination of the Board of Governors of the Federal Reserve
System (the Federal Reserve Board). The BHC Act requires the prior
2
approval of the Federal Reserve Board for a bank holding company to acquire or
hold more than a 5% voting interest in any bank. The BHC Act allows interstate
bank acquisitions anywhere in the country and interstate branching by
acquisition and consolidation in those states that have not opted out by January
1, 1997.
In addition, MBT Financial Corp. is generally prohibited by the BHC Act from
acquiring direct or indirect ownership or control of more than five percent of
the voting shares of any company which is not a bank or bank holding company and
from engaging directly or indirectly in activities other than those of managing
or controlling banks or furnishing services to its subsidiaries. MBT Financial
Corp. may, however, subject to the prior approval of the Federal Reserve Board,
engage in, or acquire shares of companies engaged in activities which are deemed
by the Federal Reserve Board by order or by regulation to be so closely related
to banking or managing and controlling a bank as to be a proper activity.
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted
into law. The GLB Act made sweeping changes with respect to the permissible
financial services which various types of financial institutions may now
provide. The Glass-Steagall Act, which had generally prevented banks from
affiliation with securities and insurance firms, was repealed. Pursuant to the
GLB Act, bank holding companies may elect to become a "financial holding
company," provided that all of the depository institution subsidiaries of the
bank holding company are "well capitalized" and "well managed" under applicable
regulatory standards.
Under the GLB Act, a bank holding company that has elected to become a financial
holding company may affiliate with securities firms and insurance companies and
engage in other activities that are financial in nature. Activities that are
"financial in nature" include securities underwriting, dealing and
market-making, sponsoring mutual funds and investment companies, insurance
underwriting and agency, merchant banking, and activities that the Federal
Reserve Board has determined to be closely related to banking. MBT Financial
Corp. has not elected to become a financial holding company.
MBT Financial Corp.'s banking subsidiary is subject to limitations with respect
to transactions with affiliates.
A substantial portion of the MBT Financial Corp.'s cash revenues is derived from
dividends paid by its subsidiary bank. These dividends are subject to various
legal and regulatory restrictions.
MBT Financial Corp.'s banking subsidiary, Monroe Bank & Trust (the "Bank") is
subject to primary supervision, regulation and examination by the Michigan
Office of Financial and Insurance Services and the Federal Deposit Insurance
Corporation (FDIC).
Federal regulators adopted risk-based capital guidelines and leverage standards
for banks and bank holding companies. A discussion of the impact of risk-based
capital guidelines and leverage standards is presented in Note 14 of the MBT
Financial Corp. financial statements included in Part II, Item 8 of this Form
10-K.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA)
provides that a holding company's controlled insured depository institutions are
liable for any loss incurred by the Federal Deposit Insurance Corporation in
connection with the default of any FDIC-assisted transaction involving an
affiliated insured bank or savings association.
Noncompliance with laws and regulations by financial holding companies and banks
can lead to monetary penalties and/or an increased level of supervision or a
combination of these two items. Management is not aware of any current instances
of noncompliance with laws and regulations and does not anticipate any problems
maintaining compliance on a prospective basis. Recent regulatory inspections and
examinations of MBT Financial Corp. and the Bank have not disclosed any
significant instances of noncompliance. The minor instances of noncompliance
detected during these inspections and examinations were promptly
3
corrected by management and no action was taken by the regulators against MBT
Financial Corp. or the Bank.
The earnings and growth of MBT Financial Corp. are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government and its agencies, particularly the Federal Reserve Board. Its
policies influence the amount of bank loans and deposits and the interest rates
charged and paid thereon, and thus have an effect on earnings. The nature of
future monetary policies and the effect of such policies on the future business
and earnings of MBT Financial Corp. and its subsidiary bank cannot be predicted.
EMPLOYEES
MBT Financial Corp. has no employees other than its three officers, each of whom
is also an employee and officer of Monroe Bank & Trust and who serve in their
capacity as officers of MBT Financial Corp. without compensation. As of December
31, 2005, Monroe Bank & Trust had 398 full-time employees and 23 part-time
employees. Monroe Bank & Trust provides a number of benefits for its full-time
employees, including health and life insurance, workers' compensation, social
security, paid vacations, numerous bank services, and a 401(k) plan.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
---- --- --------
H. Douglas Chaffin 50 President & Chief Executive Officer
Donald M. Lieto 50 Executive Vice President, Senior
Administration Manager, Monroe Bank & Trust
James E. Morr 59 Executive Vice President, Senior Wealth
Management Officer & General Counsel, Monroe
Bank & Trust
Thomas G. Myers 49 Executive Vice President & Chief
Lending Manager, Monroe Bank & Trust
John L. Skibski 41 Executive Vice President & Chief
Financial Officer, Monroe Bank & Trust;
Treasurer, MBT Financial Corp.
There is no family relationship between any of the Directors or Executive
Officers of the registrant and there is no arrangement or understandings between
any of the Directors or Executive Officers and any other person pursuant to
which he was selected a Director or Executive Officer nor with any respect to
the term which each will serve in the capacities stated previously.
The Executive Officers of the Bank are elected to serve for a term of one year
at the Board of Directors Annual Organizational Meeting, held in May.
H. Douglas Chaffin was President & Chief Executive Officer in 2005 and 2004,
President & Chief Operating Officer in 2003, and Executive Vice President,
Senior Lending Manager in 2002 and 2001. Donald M. Lieto was Executive Vice
President, Senior Administration Manager in 2005, 2004 and 2003, and Senior Vice
President, Information Services Manager in 2003, 2002, and 2001. James E. Morr
was Executive Vice President, Senior Wealth Management Officer and General
Counsel for each of the last five years. Thomas G. Myers was Executive Vice
President & Chief Lending Manager in 2005, 2004 and 2003, Senior Vice President,
Commercial Group Manager in 2003 and 2002, and Corporate Banking Group Manager,
Huntington National Bank, in 2001. John L. Skibski was Executive Vice President
& Chief Financial Officer in 2005 and 2004, Senior Vice President & Controller
in 2003, and Vice President & Controller in 2002 and 2001.
4
AVAILABLE INFORMATION
MBT Financial Corp. makes its annual report on Form 10-K, its quarterly reports
on Form 10-Q, its current reports on Form 8-K, and all amendments to those
reports available on its website as soon as reasonably practicable after they
are filed with or furnished to the SEC, free of charge. The website address is
www.mbandt.com.
ITEM 1A. RISK FACTORS
An investment in the Corporation's common stock is subject to risks inherent to
the Corporation's business. The material risks and uncertainties that Management
believes affect the Corporation are described below. Before making an investment
decision, investors should carefully consider the risks and uncertainties
described below together with all the other information included or incorporated
by reference in this report. The risks and uncertainties described below are not
the only ones facing the Corporation. Additional risks and uncertainties that
Management is not aware of or focused on or that Management currently deems
immaterial may also impair the Corporation's business operations. This report is
qualified in its entirety by these risk factors.
If any of the following risks actually occur, the Corporation's financial
condition and results of operations could be materially and adversely affected.
If this were to happen, the value of the Corporation's common stock could
decline significantly, and investors would lose all or part of their investment.
RISKS RELATED TO THE CORPORATION'S BUSINESS
INTEREST RATE RISK - The Corporation's earnings and cash flows are largely
dependent upon its net interest income. Net interest income is the difference
between interest earned on interest earning assets such as loans and securities
and interest paid on interest bearing liabilities such as deposits and
borrowings. Interest rates are highly sensitive to many factors that are beyond
the Corporation's control, including general economic and market conditions and
policies of various governmental and regulatory agencies and, in particular, the
Board of Governors of the Federal Reserve System. Changes in monetary policy,
including changes in interest rates, could influence not only the interest the
Corporation receives on loans and investment securities and the amount of
interest it pays on deposits and borrowings, but such changes could also affect
the Corporation's ability to originate loans and obtain deposits and the fair
values of the Corporation's financial assets and liabilities. If the interest
rates paid on deposits and other borrowings increase at a faster rate or
decrease at a slower rate than the interest rates received on loans and
investments, the Corporation's net interest income, and therefore earnings,
could be adversely affected.
Although Management believes it has implemented effective asset and liability
management strategies to reduce the potential effects of changes in interest
rates on the Corporation's results of operations, any substantial, unexpected,
or prolonged change in market interest rates or in the term structure of
interest rates could have a material adverse effect on the Corporation's
financial condition and results of operations. See Item 7A. Quantitative and
Qualitative Disclosures about Market Risk in this report for further discussion
related to the Corporation's management of interest rate risk.
LENDING RISK - There are inherent risks associated with the Corporation's
lending activities. These risks include, among other things, the impact of
changes in interest rates and changes in economic conditions in the markets
where the Corporation operates as well as those across the State of Michigan and
the United States. Increases in interest rates and/or weakening economic
conditions could adversely impact the ability of borrowers to repay outstanding
loans or the value of the collateral securing these loans. The Corporation is
also subject to various laws and regulations that affect its lending activities.
Failure to comply with applicable laws and regulations could subject the
Corporation to regulatory enforcement action that could result in the assessment
of significant civil money penalties against the Corporation.
As of December 31, 2005, approximately 80% of the Corporation's loan portfolio
was secured by real estate. These types of loans are generally viewed as lower
risk of default than commercial and industrial or consumer loans. The
Corporation's loan portfolio contains a significant amount of non-performing
loans.
5
The Corporation's portfolio also contains some loans with relatively large
balances, and the deterioration of one or a few of these large loans could cause
a significant increase in non-performing loans. An increase in non-performing
loans could result in a net loss of earnings from these loans, an increase in
the provision for loan losses, and an increase in loan charge-offs, all of which
could have a material adverse effect on the Corporation's financial condition
and results of operations.
The Corporation maintains an Allowance for Loan Losses, which is a reserve
established through a provision for loan losses charged to expense, that
represents Management's best estimate of probable loan losses that have been
incurred within the existing portfolio of loans. The Allowance, in the judgment
of Management, is necessary to reserve for estimated loan losses and risks
inherent in the loan portfolio. The level of the Allowance reflects Management's
continuing evaluation of loan loss experience, current loan portfolio quality,
present economic, political, and regulatory conditions, and unidentified losses
inherent in the current loan portfolio. The determination of the appropriate
level of the Allowance inherently involves a high degree of subjectivity and
requires the Corporation to make significant estimates of current credit risks
and future trends, all of which may undergo material changes. Changes in
economic conditions affecting borrowers, new information regarding existing
loans, identification of additional problem loans, and other factors, both
within and outside of the Corporation's control, may require an increase in the
Allowance. In addition, bank regulatory agencies periodically review the
Corporation's Allowance and may require an increase in the provision for loan
losses or the recognition of further loan charge-offs, based on judgments
different from those of Management.
ECONOMIC RISK - The Corporation's success depends significantly on the general
economic conditions of the State of Michigan. Unlike larger regional or national
banks that are more geographically diversified, the Corporation provides banking
and financial services to customers primarily in Southeast Michigan and
Northwest Ohio. The local economic conditions in these areas have a significant
impact on the demand for the Corporation's products and services as well as the
ability of the Corporation's customers to repay loans, the value of the
collateral securing loans, and the stability of the Corporation's deposit
funding sources. A significant decline in general economic conditions caused by
inflation, recession, acts of terrorism, unemployment, changes in securities
markets or other factors could impact these local economic conditions and, in
turn, have a material adverse effect on the Corporation's financial condition
and results of operations.
COMPETITIVE RISK - The Corporation faces substantial competition in all areas of
its operations from a variety of different competitors, many of which are larger
and may have more financial resources. Such competitors primarily include
regional and national banks within the Corporation's market. The Corporation
also faces competition from many other types of financial institutions,
including savings and loan institutions, credit unions, finance companies,
brokerage firms, insurance companies, and other financial intermediaries. The
financial services industry could become even more competitive as a result of
legislative, regulatory, and technological changes and continued consolidation.
Banks, securities firms, and insurance companies can merge under the umbrella of
a financial holding company, which can offer virtually any type of financial
service, including banking, securities underwriting, and insurance. Also,
technology has lowered barriers to entry and made it possible for non-banks to
offer products and services traditionally provided by banks, such as automatic
transfer and automatic payment systems. Many of the Corporation's competitors
have fewer regulatory constraints, and may have lower cost structures.
Additionally, many competitors may be able to achieve economies of scale, and as
a result, may offer a broader range of products and services as well as better
pricing for those products and services than the Corporation can. Increased
competition could adversely affect the Corporation's growth and profitability,
which, in turn, could have a material adverse effect on the Corporation's
financial condition and results of operations.
REGULATORY RISK - The Corporation is subject to extensive federal and state
regulation and supervision. Banking regulations are primarily intended to
protect depositors' funds, federal deposit insurance funds, and the banking
system as a whole, not shareholders. These regulations affect the Corporation's
lending
6
practices, capital structure, investment practices, dividend policy, and growth,
among other things. Congress and federal regulatory agencies continually review
banking laws, regulations, and policies for possible changes. Changes to
statutes, regulations, or regulatory policies, including changes in
interpretation or implementation of statutes, regulations, or policies, could
affect the Corporation in substantial and unpredictable ways. Such changes could
subject the Corporation to additional costs, limit the types of financial
services and products the Corporation may offer and/or increase the ability of
non-banks to offer competing financial products and services, among other
things. Failure to comply with laws, regulations, or policies could result in
sanctions by regulatory agencies, civil money penalties, and/or reputation
damage, which could have a material adverse effect on the Corporation's
business, financial condition, and results of operations. While the Corporation
has policies and procedures designed to prevent any such violations, there can
be no assurance that such violations will not occur.
FAILURE OR CIRCUMVENTION OF CONTROLS AND PROCEDURES - Management regularly
reviews and updates the Corporation's internal controls, disclosure controls,
and procedures, and corporate governance policies and procedures. Any system of
controls, however well designed and operated, is based in part on certain
assumptions and can provide only reasonable, not absolute, assurances that the
objectives of the system are met. Any failure or circumvention of the
Corporation's controls and procedures or failure to comply with regulations
related to controls and procedures could have a material adverse effect on the
Corporation's business, results of operations, and financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
MBT Financial Corp. does not conduct any business other than its ownership of
Monroe Bank & Trust's stock. MBT Financial Corp. operates its business from
Monroe Bank & Trust's main office facility. Monroe Bank & Trust operates its
business from its main office complex and 24 full service branches in the
counties of Monroe and Wayne, Michigan. In addition, MBT Credit Company, Inc., a
wholly owned subsidiary of Monroe Bank & Trust, operates a mortgage loan
origination office in Monroe, Michigan. The Bank owns its main office complex
and 22 of its branches. The remaining two branches and the MBT Credit Company,
Inc. locations are leased.
ITEM 3. LEGAL PROCEEDINGS
MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their
property the subject of any material pending legal proceedings other than
ordinary routine litigation incidental to their respective businesses, nor are
any such proceedings known to be contemplated by governmental authorities.
MBT Financial Corp. and its subsidiaries have not been required to pay a penalty
to the IRS for failing to make disclosures required with respect to certain
transactions that have been identified by the IRS as abusive or that have a
significant tax avoidance purpose.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to the vote of holders of MBT Financial Corp. securities
during the fourth quarter of 2005.
7
Part II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SECURITY HOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Common stock consists of 17,197,116 shares with a book value of $8.82. Dividends
declared on common stock during 2005 amounted to $.66 per share. The common
stock is traded on the NASDAQ National Market under the symbol MBTF. Below is a
schedule of the high and low trading price for the past two years by quarter.
These prices represent those known to Management, but do not necessarily
represent all transactions that occurred.
2005 2004
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
1st quarter $23.80 $18.25 $17.90 $16.59
2nd quarter $20.50 $17.82 $19.01 $16.85
3rd quarter $21.95 $17.64 $20.60 $17.24
4th quarter $19.10 $16.03 $26.00 $19.25
Dividends declared during the past three years on a quarterly basis were as
follows:
2005 2004 2003
----- ----- -----
1st quarter $0.16 $0.15 $0.14
2nd quarter $0.16 $0.15 $0.14
3rd quarter $0.17 $0.16 $0.15
4th quarter $0.17 $0.16 $0.15
As of December 31, 2005, the number of holders of record of the Corporation's
common shares was 1,301. Management's present expectation is that dividends will
continue to be paid in the future.
The following table summarizes the repurchase activity of the Corporation's
common stock during the three months ended December 31, 2005:
Total Number of Maximum Number of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Total Number of Average Price Announced Plans or the Plans or
Shares Purchased Paid per Share Programs Programs
---------------- -------------- -------------------- -------------------
October 1, 2005 - October 31, 2005 20,000 $18.05 20,000 1,704,900
November 1, 2005 - November 30, 2005 65,320 $18.37 65,320 1,639,580
December 1, 2005 - December 31, 2005 4,000 $17.18 4,000 1,635,580
------ ------ ------
Total 89,320 $18.25 89,320
------ ------ ------
8
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 2005 are
derived from the audited Consolidated Financial Statements of the Corporation.
The financial data set forth below contains only a portion of our financial
statements and should be read in conjunction with the Consolidated Financial
Statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in this Form 10-K.
SELECTED CONSOLIDATED FINANCIAL DATA
Dollar amounts are in thousands,
except per share data 2005 2004 2003 2002 2001
----------- ----------- ----------- ----------- -----------
CONSOLIDATED STATEMENTS OF INCOME
Interest Income $ 89,695 $ 79,703 $ 77,774 $ 84,604 $ 101,324
Interest Expense 38,583 26,998 27,467 34,387 49,535
----------- ----------- ----------- ----------- -----------
Net Interest Income 51,112 52,705 50,307 50,217 51,789
Provision for Loan Losses 6,906 2,491 8,005 6,101 7,400
----------- ----------- ----------- ----------- -----------
Net Interest Income after
Provision for Loan Losses 44,206 50,214 42,302 44,116 44,389
Other Income 14,449 13,776 13,803 12,791 10,651
Other Expenses 33,818 32,616 30,179 26,989 24,810
----------- ----------- ----------- ----------- -----------
Income before Provision
for Income Taxes 24,837 31,374 25,926 29,918 30,230
Provision for
Income Taxes 6,858 8,775 6,611 8,114 8,307
----------- ----------- ----------- ----------- -----------
Net Income $ 17,979 $ 22,599 $ 19,315 $ 21,804 $ 21,923
=========== =========== =========== =========== ===========
Net Income available to
Common Shareholders $ 17,979 $ 22,599 $ 19,315 $ 21,804 $ 21,923
=========== =========== =========== =========== ===========
PER COMMON SHARE
Basic Net Income $ 1.04 $ 1.30 $ 1.02 $ 1.12 $ 1.10
Diluted Net Income 1.03 1.29 1.01 1.12 1.10
Cash Dividends Declared 0.66 0.62 0.58 0.54 0.50
Book Value at Year End 8.82 8.89 8.20 8.72 8.19
Average Common Shares
Outstanding 17,334,376 17,444,165 19,026,369 19,458,737 19,933,580
=========== =========== =========== =========== ===========
CONSOLIDATED BALANCE SHEETS (YEAR END)
Total Assets $ 1,638,356 $ 1,552,279 $ 1,457,788 $ 1,409,694 $ 1,394,168
Total Securities 533,709 505,441 508,482 539,737 497,501
Loans, Net of Deferred Loan Fees 989,311 945,881 863,850 773,805 787,825
Allowance for Loan Losses 13,625 13,800 14,500 12,400 13,000
Deposits 1,184,710 1,100,711 1,039,117 1,010,960 998,880
Borrowings 291,500 286,500 270,000 225,000 225,000
Total Shareholders' Equity 151,619 155,346 143,446 166,999 161,730
=========== =========== =========== =========== ===========
SELECTED FINANCIAL RATIOS
Return on Average Assets 1.13% 1.55% 1.33% 1.55% 1.56%
Return on Average Equity 11.57% 15.18% 11.39% 13.29% 13.70%
Net Interest Margin 3.42% 3.75% 3.67% 3.79% 3.88%
Dividend Payout Ratio 63.52% 47.88% 56.14% 47.99% 45.40%
Allowance for Loan Losses
to Period End Loans 1.38% 1.69% 1.68% 1.60% 1.65%
Allowance for Loan Losses
to Non Performing Loans 51.49% 34.57% 30.41% 27.93% 46.90%
Non Performing Loans
to Period End Loans 2.67% 4.22% 5.50% 5.74% 3.52%
Net Charge Offs to Average Loans 0.71% 0.35% 0.72% 0.87% 0.59%
=========== =========== =========== =========== ===========
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Corporation's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of these terms. Actual results could differ materially
from those set forth in forward-looking statements, due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
CRITICAL ACCOUNTING POLICIES - The Bank's Allowance for Loan Losses is a
"critical accounting estimate" because it is an estimate that is based on
assumptions that are highly uncertain, and if different assumptions were used or
if any of the assumptions used were to change, there could be a material impact
on the presentation of the Corporation's financial condition. These assumptions
include, but are not limited to, collateral values and the effect of economic
conditions on the financial condition of the borrowers. To determine the
Allowance for Loan Losses, the Bank estimates losses on all loans that are not
classified as non-accrual or renegotiated by applying historical loss rates to
those loans in accordance with SFAS 5. In addition, all loans that are
nonaccrual or renegotiated are individually tested for impairment. Any amount of
monetary impairment is included in the Allowance for Loan Losses in accordance
with SFAS 114. Management is of the opinion that the Allowance for Loan Losses
of $13,625,000 as of December 31, 2005 was adequate.
Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at the lower of fair value or the loan carrying amount at
the date of foreclosure. Subsequent to foreclosure, valuations are periodically
performed by Management and the assets are carried at the lower of carrying
amount or fair value less cost to sell.
RESULTS OF OPERATIONS - Net Income decreased 20.4% in 2005 from $22.6 million to
$18.0 million as the Bank recorded significant increases in the Provision for
Loan Losses and in Other Real Estate Owned losses and expenses. The Provision
for Loan Losses increased $4,415,000 as net charge offs increased $3,615,000 and
losses on the sales and write downs of Other Real Estate Owned increased
$845,000. Although credit related charges to earnings increased $5.3 million
compared to 2004, non-performing assets decreased $13.5 million during 2005.
The Fed continued to raise managed interest rates in 2005 and the yield curve
flattened, contributing to the decrease of 3.0% in the Net Interest Income.
Although the Bank manages its assets and liabilities to minimize risk to
earnings caused by changes in interest rates, the change in the shape of the
yield curve had a negative impact on earnings. The pricing of assets such as
investment securities and fixed rate loans is influenced by the long end of the
yield curve while the pricing of liabilities such as Money Market Deposits,
Certificates of Deposit, and variable rate borrowings is influenced by the short
end of the yield curve. During 2005, the yield on earning assets increased from
5.68% to 6.00% and interest income increased $9,992,000, or 12.5%. The cost of
earning assets increased from 1.93% to 2.58% and interest expense increased
$11,585,000, or 42.9%. The result was a decrease in the Net Interest Margin from
3.75% to 3.42% and a decrease of $1,593,000 in Net Interest Income.
Non interest income increased 4.9%, or $673,000 in 2005 due to improvements in
Wealth Management income and Other Deposit Account Related Fees, which includes
fees assessed for overdrawn checking accounts. Non interest expenses increased
only 3.7%, from $32.6 million in 2004 to $33.8 million in 2005. Salaries and
benefits increased only 0.8%, or $139,000 due to a reduction of $611,000 in the
bonus
10
compensation. The profit goal was not accomplished in 2005 and bonuses were not
paid to the executive officers. The tables below show the details for the non
interest income and expenses for the years ended December 31, 2005, 2004, and
2003 (000s omitted):
Years Ended December 31,
---------------------------
Non Interest Income 2005 2004 2003
------------------- ------- ------- -------
Wealth Management Income $ 4,244 $ 3,746 $ 3,316
Deposit Account Service Charges 1,187 1,515 1,573
Other Deposit Account Related Fees 4,646 3,961 3,736
Origination Fees/Gains on Loans Sold 666 579 1,068
Gains (Losses) on Securities Transactions 295 567 1,041
BOLI Earnings 1,100 1,371 1,305
Other Income 2,311 2,037 1,764
------- ------- -------
Total Non Interest Income $14,449 $13,776 $13,803
======= ======= =======
Years Ended December 31,
---------------------------
Non Interest Expenses 2005 2004 2003
--------------------- ------- ------- -------
Salaries and Employee Benefits $18,248 $18,109 $16,122
Occupancy 3,320 3,029 2,696
Equipment and Software 3,011 2,950 2,753
Marketing 1,213 1,205 1,104
Legal, Accounting and Other Professional
fees 1,445 1,971 1,833
OREO Losses and Expenses 1,780 882 1,133
Other Expenses 4,801 4,470 4,538
------- ------- -------
Total Non Interest Expenses $33,818 $32,616 $30,179
======= ======= =======
Income Before the Provision for Income taxes decreased $6.5 million, or 20.8% in
2005. The effective tax rate decreased from 28.0% in 2004 to 27.6% in 2005. The
decrease in Income Before Taxes and the decrease in the effective tax rate
resulted in a decrease of $1.9 million or 21.8% in the Provision for Income
Taxes. Net Income decreased $4.6 million, or 20.4% to $18.0 million.
Net Income increased 17.0% in 2004 to $22.6 million as the economy continued to
gain strength and the Fed began to raise managed interest rates. Net Interest
Income increased $2.4 million as the average earning assets increased $37.6
million and the net interest margin increased from 3.67% to 3.75%. During 2004,
Net Loans increased $83.4 million, or 9.8%, and Deposits increased $61.6
million, or 5.9%. The Bank also increased its longer term Federal Home Loan Bank
borrowings and Repurchase Agreements while reducing its overnight federal funds
borrowed. The most significant improvement in the earnings was due to the
decrease of $5.5 million, or 68.9%, in the Provision for Loan Losses. This
decrease was due to the exceptionally large provision recorded in 2003. Non
Interest Income decreased slightly in 2004 as securities gains and mortgage
origination fees both declined as rates began to rise. Excluding these two
items, non interest income increased $937,000, or 8%, compared to 2003. Non
Interest Expenses increased $2.4 million, or 8.1%, primarily due to increases in
compensation and occupancy expenses related to the Bank's expansion efforts into
the Downriver area of southern Wayne County. As a result of the above, Income
Before the Provision for Income Taxes increased $5.4 million, or 21.0% in 2004.
The percentage of the Bank's income that is generated by tax exempt securities
and Bank Owned Life Insurance decreased in 2004, causing the effective tax rate
to increase from 25.5% in 2003 to 28.0%. The increase in Income Before Taxes and
the increase in the effective tax rate resulted in an increase of $2.2 million
or 32.7%, in the Provision for Income Taxes. Net Income increased $3.3 million,
or 17%, to $22.6 million.
In 2003, the deterioration of some large credit relationships led to a $5.5
million addition to the Allowance for Loan Losses. This caused Net Income to
decrease $2.5 million, or 11%, compared to 2002. Although average earning assets
increased $44.2 million, the net interest margin decreased ten basis points. As
a result, the net interest income increased only $90,000. Equity markets began
to recover late in 2003, but the low market values for most of the year caused
our income from trust services to decline $181,000, or 5%. We were able to
increase our deposit account service charges in 2003. While remaining one of the
lowest cost providers of deposit services in our market, our fee income
increased by $787,000, or 17%. In 2003, we increased our investment in Bank
Owned Life Insurance resulting in an increase of $508,000, or
11
64% in the earnings on these policies. Total non interest income increased
$1,012,000, or 8%. Non-interest expenses increased as we continued our expansion
into the southern Wayne County market. During 2003 we opened two full service
branches and we increased our total staffing from 375 to 389. These changes
contributed to the increase of $3.2 million, or 12% in our non interest
expenses. Income before Provision for Income Taxes decreased $4.0 million, or
13%, compared to 2002. The lower amount of income resulted in a decrease of $1.5
million, or 19%, in our Provision for Income Taxes. The effective tax rate
decreased from 27.1% in 2002 to 25.5% in 2003.
Earnings for the Bank are usually highly reflective of the Net Interest Income.
The Federal Open Market Committee (FOMC) of the Federal Reserve raised the fed
funds target rate at each of their eight meetings in 2005, from 2.25% to 4.25%.
At the same time, the yield on the ten-year U. S. Treasury Note only increased
from 4.22% to 4.39%. This flattening of the yield curve had a negative impact on
the Bank's Net Interest Margin, which declined from 3.75% in 2004 to 3.42% in
2005. Loan and investment yields more closely follow long term market yields,
and the yield on our loans increased from 6.30% in 2004 to 6.71% in 2005. The
yields on our investment securities increased from 4.51% in 2004 to 4.72% in
2005. Funding costs are more closely tied to the short term rates, and the
average cost of our deposits increased from 1.42% in 2004 to 2.08% in 2005 and
our average cost of borrowed funds increased from 4.19% in 2004 to 5.05% in
2005. As a result, the net interest income decreased 3.0% in 2005. In 2004, the
FOMC raised the fed funds rate for the first time since 2000 as the economic
recovery continued. During the year, the fed funds target rate was increased
five times, from 1.00% to 2.25%. In spite of these increases, rates on new and
renewing loans were still below the average rates in the loan portfolio. As a
result, the average yield on loans decreased from 6.73% to 6.30%. Investment
yields did improve slightly and the cost of funds decreased, resulting in an
increase in the net interest margin and net interest income. In 2003, rates
remained low, with the Fed lowering the managed rates 25 basis points in June.
This caused refinance activity to continue, and the Bank's yield on loans
declined from 7.70% to 6.73%. Market rates also were low, and the investment
yield dropped from 4.74% to 4.18% in 2003. During the year, the Bank
restructured its portfolio of Federal Home Loan Bank advances, converting $95
million, or 42% of its portfolio, from fixed rate to floating rate. This lowered
the cost of these borrowings from 5.72% in 2002 to 5.05% in 2003. The average
cost of interest bearing deposits was 3.03%, 2.42%, and 1.65% for 2005, 2004,
and 2003, respectively. The table below shows selected financial ratios for the
same three years.
2005 2004 2003
------ ----- -----
Return on Average Assets 1.13% 1.55% 1.33%
Return on Average Equity 11.57% 15.18% 11.39%
Dividend Payout Ratio 63.52% 47.88% 56.14%
Average Equity to Average Assets 9.76% 10.02% 11.71%
LIQUIDITY AND CAPITAL - The Corporation has maintained sufficient liquidity to
fund its loan growth and allow for fluctuations in deposit levels. Internal
sources of liquidity are provided by the maturities of loans and securities as
well as holdings of securities Available for Sale. External sources of liquidity
include a line of credit with the Federal Home Loan Bank of Indianapolis, the
Federal funds lines that have been established with correspondent banks, and
Repurchase Agreements with money center banks that allow us to pledge securities
as collateral for borrowings. As of December 31, 2005, the Bank utilized $256.5
million of its authorized limit of $275 million with the Federal Home Loan Bank
of Indianapolis and none of its $110 million of federal funds lines with its
correspondent banks.
Total stockholders' equity of the Corporation was $151.6 million at December 31,
2005 and $155.3 million at December 31, 2004. The ratio of equity to assets was
9.3% at December 31, 2005 and 10.0% at December 31, 2004. 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
12
at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk
Weighted Assets, and Leverage Capital Ratio is at least 5%.
The following table summarizes the capital ratios of the Corporation:
Minimum to be Well
December 31, 2005 December 31, 2004 Capitalized
----------------- ----------------- ------------------
Leverage Capital 9.6% 10.0% 5.0%
Tier 1 Risk Based Capital 13.7% 14.3% 6.0%
Total Risk Based Capital 15.0% 15.6% 10.0%
At December 31, 2005 and December 31, 2004, the Bank was in compliance with the
capital guidelines and is considered "well-capitalized" under regulatory
standards.
Market risk for the Bank, as is typical for most banks, consists mainly of
interest rate risk and market price risk. The Bank's earnings and the economic
value of its equity are exposed to interest rate risk and market price risk, and
monitoring this risk is the responsibility of the Asset/Liability Management
Committee (ALCO) of the Bank. The Bank's market risk is monitored monthly by the
ALCO.
The following table shows the investment portfolio for the last three years
(000s omitted).
Held to Maturity
---------------------------------------------------------------------
December 31, 2005 December 31, 2004 December 31, 2003
--------------------- --------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
U.S. Government agency and corporation
obligations ..................................... $ 11 $ 12 $ 527 $ 578 $ 536 $ 590
Securities issued by states and political
subdivisions in the U.S. ........................ 76,456 77,293 80,622 82,636 95,634 99,234
Other domestic securities (debt and equity) ........ -- -- 2,992 3,074 2,984 3,116
------- ------- ------- ------- ------- --------
Total .............................................. $76,467 $77,305 $84,141 $86,288 $99,154 $102,940
======= ======= ======= ======= ======= ========
Pledged securities ................................. $13,863 $14,125 $19,659 $20,373 $23,903 $ 25,175
======= ======= ======= ======= ======= ========
Available for Sale
---------------------------------------------------------------------
December 31, 2005 December 31, 2004 December 31, 2003
--------------------- --------------------- ---------------------
Estimated Estimated Estimated
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- --------- --------- --------- --------- ---------
U.S. Government agency and corporation obligations
(excluding mortgage-backed securities) .......... $358,412 $351,074 $315,410 $314,381 $315,004 $311,944
Securities issued by states and political
subdivisions in the U.S. ........................ 26,206 26,081 28,635 29,187 26,047 26,473
Other domestic securities (debt and equity) ........ 67,098 66,866 64,472 64,785 57,876 59,225
-------- -------- -------- -------- -------- --------
Total .............................................. $451,716 $444,021 $408,517 $408,353 $398,927 $397,642
======== ======== ======== ======== ======== ========
Pledged securities ................................. $316,379 $309,552 $304,004 $303,300 $285,427 $283,103
======== ======== ======== ======== ======== ========
The following table shows average daily balances, interest income or expense
amounts, and the resulting average rates for interest earning assets and
interest bearing liabilities for the last three years. Also shown are the net
interest income, total interest rate spread, and the net interest margin for the
same periods.
13
Years Ended December 31,
-------------------------------------------------------------------------------------------
2005 2004 2003
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
Daily Earned Average Daily Earned Average Daily Earned Average
(Dollars in Thousands) Balance or Paid Yield Balance or Paid Yield Balance or Paid Yield
---------- -------- ------- ---------- -------- ------- ---------- -------- -------
Investments
Obligations of US
Government Agencies $ 343,348 $15,878 4.62% $ 303,121 $ 13,090 4.32% $ 326,442 $12,429 3.81%
Obligations of States &
Political Subdivisions(1) 105,373 5,036 4.78% 115,590 5,614 4.86% 123,489 6,206 5.03%
Other Securities 75,602 3,986 5.27% 69,538 3,330 4.79% 84,725 3,737 4.41%
---------- ------- ---- ---------- -------- ------- ---------- ------- ----
Total Investments 524,323 24,900 4.75% 488,249 22,034 4.51% 534,656 22,372 4.18%
---------- ------- ---- ---------- -------- ------- ---------- ------- ----
Loans
Commercial 621,365 41,971 6.75% 600,551 36,364 6.06% 549,558 34,671 6.31%
Mortgage 213,645 12,946 6.06% 194,072 12,217 6.30% 166,665 11,829 7.10%
Consumer 127,046 9,661 7.60% 120,327 9,079 7.55% 104,971 8,754 8.34%
---------- ------- ---- ---------- -------- ------- ---------- ------- ----
Total Loans(2) 962,056 64,578 6.71% 914,950 57,660 6.30% 821,194 55,254 6.73%
Federal Funds Sold 7,687 217 2.82% 538 9 1.67% 13,894 148 1.07%
---------- ------- ---- ---------- -------- ------- ---------- ------- ----
Total Interest Earning Assets 1,494,066 89,695 6.00% 1,403,737 79,703 5.68% 1,369,744 77,774 5.68%
Cash & Due From Banks 24,839 25,230 25,277
Interest Receivable and Other Assets 71,724 64,256 60,631
---------- ---------- ----------
Total Assets $1,590,629 $1,493,223 $1,455,652
========== ========== ==========
Savings Accounts $ 119,437 $ 298 0.25% $ 129,075 $ 325 0.25% $ 132,780 $ 560 0.42%
NOW Accounts 66,900 169 0.25% 69,072 172 0.25% 67,290 281 0.42%
Money Market Deposits 294,070 5,561 1.89% 329,480 2,611 0.79% 372,177 4,219 1.13%
Certificates of Deposit 494,974 17,551 3.55% 378,959 11,815 3.12% 348,847 10,932 3.13%
Federal Funds Purchased 8,613 287 3.33% 32,894 491 1.49% 9,136 120 1.31%
Repurchase Agreements 32,164 1,055 3.28% 13,525 422 3.12% 0
FHLB Advances 256,500 13,662 5.33% 242,104 11,162 4.61% 225,000 11,355 5.05%
---------- ------- ---- ---------- -------- ------- ---------- ------- ----
Total Interest Bearing Liabilities 1,272,658 38,583 3.03% 1,195,109 26,998 2.26% 1,155,230 27,467 2.38%
Non-interest Bearing Deposits 156,289 143,759 126,874
Other Liabilities 6,313 5,438 3,971
---------- ---------- ----------
Total Liabilities 1,435,260 1,344,306 1,286,075
Stockholders' Equity 155,369 148,917 169,577
---------- ---------- ----------
Total Liabilities & Stockholders'
Equity $1,590,629 $1,493,223 $1,455,652
========== ========== ==========
Net Interest Income $51,112 $ 52,705 $50,307
Interest Rate Spread 2.97% 3.42% 3.30%
Net Interest Income as a percent of
average earning assets 3.42% 3.75% 3.67%
----------
(1) Interest income on Obligations of States and Political Subdivisions is not
on a taxable equivalent basis.
(2) Total Loans excludes Overdraft Loans, which are non-interest earning. These
loans are included in Other Assets. Total Loans includes nonaccrual loans.
When a loan is placed in nonaccrual status, all accrued and unpaid interest
is charged against interest income. Loans on nonaccrual status do not earn
any interest.
The following table summarizes the changes in interest income and interest
expense attributable to changes in interest rates and changes in the volume of
interest earning assets and interest bearing liabilities for the period
indicated:
14
Years Ended December 31,
---------------------------------------------------------------------------------------
2005 versus 2004 2004 versus 2003 2003 versus 2002
Changes due to Changes due to Changes due to
increased (decreased) increased (decreased) increased (decreased)
-------------------------- --------------------------- ----------------------------
(Dollars in Thousands) Rate Volume Net Rate Volume Net Rate Volume Net
------- ------ ------- ------- ------- ------- -------- ------- -------
Interest Income
Investments
Obligations of US
Government Agencies $ 1,051 $1,737 $ 2,788 $ 1,549 $ (888) $ 661 $ (2,403) $ 1,727 $ (676)
Obligations of States &
Political Subdivisions (81) (497) (578) (195) (397) (592) (195) (340) (535)
Other Securities 366 290 656 262 (670) (408) (287) (1,004) (1,291)
------- ------ ------- ------- ------- ------- -------- ------- -------
Total Investments 1,336 1,530 2,866 1,616 (1,955) (339) (2,885) 383 (2,502)
------- ------ ------- ------- ------- ------- -------- ------- -------
Loans
Commercial 4,346 1,261 5,607 (1,525) 3,217 1,692 (4,715) 4,304 (411)
Mortgage (503) 1,232 729 (1,556) 1,945 389 (1,993) 489 (1,504)
Consumer 75 507 582 (955) 1,280 325 (822) (1,191) (2,013)
------- ------ ------- ------- ------- ------- -------- ------- -------
Total Loans 3,918 3,000 6,918 (4,036) 6,442 2,406 (7,530) 3,602 (3,928)
Federal Funds Sold 88 120 208 3 (142) (139) (84) (318) (402)
------- ------ ------- ------- ------- ------- -------- ------- -------
Total Interest Income 5,342 4,650 9,992 (2,417) 4,345 1,928 (10,499) 3,667 (6,832)
Interest Expense
Savings Accounts (3) (24) (27) (219) (16) (235) (1,021) 59 (962)
NOW Accounts 3 (6) (3) (116) 7 (109) (479) 7 (472)
Money Market Deposits 3,230 (280) 2,950 (1,124) (484) (1,608) (2,045) 603 (1,442)
Certificates of Deposit 2,119 3,617 5,736 (61) 944 883 (2,226) (377) (2,603)
Federal Funds Purchased 159 (363) (204) 57 313 370 (48) 130 82
Repurchase agreements 51 582 633 422 0 422 0 0 0
FHLB Advances 1,836 664 2,500 (1,056) 863 (193) (1,525) 0 (1,525)
------- ------ ------- ------- ------- ------- -------- ------- -------
Total Interest Expense 7,395 4,190 11,585 (2,097) 1,627 (470) (7,344) 422 (6,922)
------- ------ ------- ------- ------- ------- -------- ------- -------
Net Interest Income $(2,053) $ 460 $(1,593) $ (320) $ 2,718 $ 2,398 $ (3,155) $ 3,245 $ 90
======= ====== ======= ======= ======= ======= ======== ======= =======
Due to a variety of reasons, including volatile interest rates in the past and
successful bidding in securing local municipal deposits, we have attempted, for
the last several years, to maintain a liquid investment position. The percentage
of securities held as Available for Sale increased from 83% as of December 31,
2004 to 85% as of December 31, 2005. As reflected in Note 3 to the consolidated
financial statements, the percentage of securities that mature within five years
was 17% as of December 31, 2005 and 12% as of December 31, 2004. The table below
presents the scheduled maturities for each of the investment categories, and the
average yield on the amounts maturing. The yields presented for the Obligations
of States and Political Subdivisions are not tax equivalent yields. The interest
income on these securities is exempt from federal income tax. The Corporation's
statutory federal income tax rate is thirty-five percent.
Maturing
---------------------------------------------------------------------------------
Within 1 year 1 - 5 years 5 - 10 Years Over 10 Years Total
-------------- -------------- --------------- --------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- ------- ----- -------- ----- -------- ----- -------- -----
(Dollars in Thousands)
Obligations of US
Government Agencies $ -- 0.00% $35,803 4.22% $206,783 4.59% $108,498 5.12% $351,084 4.72%
Obligations of States & Political
Subdivisions 11,372 4.46% 38,017 5.07% 39,880 4.48% 13,270 4.58% 102,539 4.71%
Other Securities -- 0.00% 2,863 7.05% 2,499 7.10% 61,503 5.99% 66,865 6.08%
------- ---- ------- ---- -------- ---- -------- ---- -------- ----
Total $11,372 4.46% $76,683 4.75% $249,162 4.60% $183,271 5.37% $520,488 4.89%
======= ==== ======= ==== ======== ==== ======== ==== ======== ====
15
Our loan policies also reflect our awareness of the need for liquidity. We have
shortened the average terms for most of our loan portfolios, in particular real
estate mortgages, the majority of which are normally written for five years or
less. The following table shows the maturities or repricing opportunities
(whichever is earlier) for the Bank's interest earning assets and interest
bearing liabilities at December 31, 2005. The repricing assumptions shown are
consistent with those established by the Bank's Asset and Liability Management
Committee (ALCO). Savings accounts and interest bearing demand deposit accounts
are non-maturing, variable rate deposits, which may reprice as often as daily,
but are not included in the zero to six month category because in actual
practice, these deposits are only repriced if there is a large change in market
interest rates. The effect of including these accounts in the zero to six-month
category is depicted in a subsequent table. Money Market deposits are also
non-maturing, variable rate deposits, however, these accounts are included in
the zero to six-month category because they may get repriced following smaller
changes in market rates.
Assets/Liabilities at December 31, 2005, Maturing or Repricing in:
------------------------------------------------------------------
0-6 6-12 1-2 2-5 Over 5 Total
(Dollars in Thousands) Months Months Years Years Years Amount
--------- ------- --------- -------- -------- ----------
Interest Earning Assets
US Treas Secs & Obligations of
US Gov't Agencies $277,180 $ 7,742 $ 17,871 $ 35,161 $ 20,557 $ 358,511
Obligations of States & Political
Subdivisions 23,650 14,643 10,268 25,673 28,021 102,255
Other Securities 40,000 -- 3,000 14,000 7,423 64,423
Commercial Loans 246,186 24,321 67,958 280,785 3,833 623,083
Mortgage Loans 6,165 7,650 27,535 141,674 37,484 220,508
Consumer Loans 29,621 10,496 19,570 39,842 22,107 121,636
Federal Funds Sold 5,000 -- -- -- -- 5,000
-------- ------- --------- -------- -------- ----------
Total Interest Earning Assets $627,802 $64,852 $ 146,202 $537,135 $119,425 $1,495,416
======== ======= ========= ======== ======== ==========
Interest Bearing Liabilities
Savings Deposits $278,957 $ -- $ -- $ -- $ -- $ 278,957
Other Time Deposits 184,107 36,592 183,140 109,141 7,233 520,213
FHLB Advances 123,000 -- -- 130,000 3,500 256,500
Repurchase Agreements 20,000 -- 5,000 10,000 -- 35,000
-------- ------- --------- -------- -------- ----------
Total Interest Bearing Liabilities $606,064 $36,592 $ 188,140 $249,141 $ 10,733 $1,090,670
======== ======= ========= ======== ======== ==========
Gap $ 21,738 $28,260 $ (41,938) $287,994 $108,692 $ 404,746
Cumulative Gap $ 21,738 $49,998 $ 8,060 $296,054 $404,746 $ 404,746
Sensitivity Ratio 1.04 1.77 0.78 2.16 11.13 1.37
Cumulative Sensitivity Ratio 1.04 1.08 1.01 1.27 1.37 1.37
If savings and interest bearing demand deposit accounts were included in the
zero to six months category, the Bank's gap would be as shown in the following
table:
Assets/Liabilities at December 31, 2005, Maturing or Repricing in:
--------------------------------------------------------------------
0-6 6-12 1-2 2-5 Over 5
Months Months Years Years Years Total
--------- --------- --------- -------- -------- ----------
Total Interest Earning Assets $ 627,802 $ 64,852 $ 146,202 $537,135 $119,425 $1,495,416
Total Interest Bearing Liabilities $ 783,608 $ 36,592 $ 188,140 $249,141 $ 10,733 $1,268,214
--------- --------- --------- -------- -------- ----------
Gap $(155,806) $ 28,260 $ (41,938) $287,994 $108,692 $ 227,202
Cumulative Gap $(155,806) $(127,546) $(169,484) $118,510 $227,202 $ 227,202
Sensitivity Ratio 0.80 1.77 0.78 2.16 11.13 1.18
Cumulative Sensitivity Ratio 0.80 0.84 0.83 1.09 1.18 1.18
16
The amount of loans due after one year with floating interest rates is
$245,938,000.
The following table shows the remaining maturity for Certificates of Deposit
with balances of $100,000 or more as of December 31, 2005 (000s omitted):
Years Ended December 31,
------------------------------
(Dollars in Thousands) 2005 2004 2003
-------- -------- --------
Maturing Within
3 Months $107,782 $ 72,125 $ 67,574
3 - 6 Months 29,286 9,481 6,933
6 - 12 Months 9,312 17,262 5,007
Over 12 Months 56,781 85,789 36,140
-------- -------- --------
Total $203,161 $184,657 $115,654
======== ======== ========
For 2006, we expect the FOMC to continue to increase short term managed rates
through the first half of the year as the economic growth and potential for
inflation will allow the Fed to complete the process of moving the fed funds
rate from an accommodative level to a neutral level. Since the fed began
removing accommodation in the second half of 2004, longer term market rates have
decreased, and we are now experiencing an inversion of the yield curve. This
shape of the yield curve historically has preceded a decline in economic
conditions and interest rates; however, due to the increased impact of global
events on our economy, we cannot assume that we are headed for a downturn in
economic conditions and a change to more accommodative monetary policy. Rather
than trying to predict when positive slope will return to the yield curve, and
whether it will occur as the long end increases or the short end decreases, we
will continue to manage our balance sheet to control overall interest rate risk
and to minimize the negative effect the prolonged flat or inverted yield curve
has on our net interest margin. In the near term, our focus will be on
controlling the decline in our net interest margin by trying to slow the rate of
increase in our interest expense. We will also attempt to increase the percent
of our assets that are invested in loans by growing our loan portfolio in the
northern and southern parts of our market area. We plan to limit our growth in
total assets, funding the loan growth through maturities and sales of investment
securities.
Although the automotive industry continues to struggle, we are experiencing some
localized economic growth in southeast Michigan. The housing market remains
active, but is showing some signs of slowing down as the rate of increase in
property values is slowing. We expect total loans to increase between five and
ten percent in 2006. We opened a new full service branch in Taylor, Michigan in
2005. This is our fifth branch in southern Wayne County, a market which is
expected to contribute to our projected increases in loans and deposits in 2006.
We have also increased our lending staff in southern Monroe County to enable us
to increase our market share for loans in northwest Ohio. Although we do not
expect significant asset growth, we anticipate that we will be able to improve
our net interest income slightly in 2006.
In 2005 we increased our Provision for Loan Losses in order to charge off some
non-performing assets and to increase the general allocation portion of our
Allowance for Loan Losses due to our concerns about regional economic conditions
and slower growth in real estate values. We believe that our Allowance for Loan
Losses provides adequate coverage for the losses in our portfolio, and we expect
that we will be able to maintain the adequacy of the allowance while reducing
our Provision for Loan Losses more than 50% from the level recorded in 2005. We
believe that we will be able to decrease the Provision for Loan Losses because
we do not anticipate a significant decline in economic conditions or real estate
values in our market area.
We anticipate that slower mortgage refinance activity and less gains on the
sales of investment securities will result in a small increase in non interest
income. We plan to move into our new headquarters building in downtown Monroe in
the third quarter of 2006. Expenses related to our additional offices and
staffing increases will cause non-interest expenses to increase. Primarily due
to the anticipated decrease in the Provision for Loan Losses, we expect Net
Income to increase significantly in 2006.
17
The following table shows the loan portfolio for the last five years (000s
omitted).
Book Value at December 31,
----------------------------------------------------
2005 (a) 2004 (a) 2003 (a) 2002 (a) 2001 (a)
-------- -------- -------- -------- --------
Loans secured by real estate:
Construction and land development $150,179 $155,703 $ 86,221 $ 56,780 $ 47,025
Secured by farmland (including farm residential
and other improvements) 9,891 8,499 7,438 7,925 6,172
Secured by 1-4 family residential properties 309,061 300,821 286,220 258,157 275,489
Secured by multifamily (5 or more) residential properties 6,718 6,429 8,022 6,810 6,714
Secured by nonfarm nonresidential properties 337,408 301,802 305,755 280,136 258,879
Loans to finance agricultural production and other loans to farmers 3,519 2,333 2,263 2,182 2,856
Commercial and industrial loans to U.S. addresses (domicile) 99,220 87,068 92,313 90,838 99,186
Loans to individuals for household, family, and other
personal expenditures (includes purchased paper):
Credit cards and related plans 393 390 442 1,471 3,353
Other 70,853 80,761 72,542 68,942 87,322
Nonrated industrial development obligations (other than securities)
of states and political subdivisions in the U.S. -- -- -- 67 133
Other loans:
Loans for purchasing or carrying securities (secured and unsecured) -- -- -- -- --
All other loans 1,635 1,297 1,228 497 696
Less: Any unearned income on loans -- -- -- -- --
-------- -------- -------- -------- --------
Total loans and leases, net of unearned income $988,877 $945,103 $862,444 $773,805 $787,825
======== ======== ======== ======== ========
Nonaccrual loans $ 16,212 $ 29,896 $ 34,248 $ 22,332 $ 22,712
Loans 90 days or more past due $ 101 $ 230 $ 100 $ 81 $ 450
Troubled debt restructurings $ 1,813 $ 3,715 $ 4,755 $ 6,807 $ --
(a) Loan categories are presented net of deferred loan fees. The presentation
in Note 4 to the consolidated financial statements differs from this
schedule's presentation by presenting the loan categories, gross, before
deferred loan fees have been subtracted.
The following is an analysis of the transactions in the allowance for loan
losses:
Year Ended December 31,
-----------------------------------------------
(Dollars in Thousands) 2005 2004 2003 2002 2001
------- ------- ------- ------- -------
Balance Beginning of Period $13,800 $14,500 $12,400 $13,000 $10,600
Loans Charged Off (Domestic)
Commercial, Financial, and Agricultural 313 2,045 1,838 4,383 3,399
Secured by Real Estate 6,800 468 3,389 2,859 1,242
Loans to Individuals 2,227 1,935 1,456 1,455 1,523
Recoveries (Domestic)
Commercial, Financial, and Agricultural 1,358 335 206 1,351 619
Secured by Real Estate 211 57 33 135 111
Loans to Individuals 965 865 539 510 434
------- ------- ------- ------- -------
Net Loans Charged Off 6,806 3,191 5,905 6,701 5,000
Transfer to establish reserve for unfunded
loan commitments 275 -- -- -- --
Provision Charged to Operations 6,906 2,491 8,005 6,101 7,400
------- ------- ------- ------- -------
Balance End of Period $13,625 $13,800 $14,500 $12,400 $13,000
======= ======= ======= ======= =======
Ratio of Net Loans Charged Off to
Average Total Loans Outstanding 0.69% 0.34% 0.69% 0.87% 0.59%
======= ======= ======= ======= =======
18
The following analysis shows the allocation of the allowance for loan losses:
Years Ended December 31,
-----------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
------------------- ------------------- ------------------- ------------------- -----------------
% of
% of loans % of loans % of loans % of loans loans
$ to total $ to total $ to total $ to total $ to total
(Dollars in Thousands) Amount loans Amount loans Amount loans Amount loans Amount loans
---------------------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- --------
Balance at end of period
applicable to:
Domestic
Commercial, Financial,
and Agricultural $ 2,209 11.4% $ 1,421 10.3% $ 1,582 11.7% $ 2,933 13.1% $ 4,119 13.8%
Real Estate - Construction 1,959 15.2% 2,277 16.5% 367 9.9% 94 7.3% 260 6.0%
Real Estate - Mortgage 8,504 66.0% 8,901 64.5% 11,506 69.7% 8,108 70.4% 8,038 68.6%
Loans to Individuals 953 7.4% 1,201 8.7% 1,045 8.7% 1,265 9.2% 583 11.6%
Foreign -- 0.0% -- 0.0% -- 0.0% -- 0.0% -- 0.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total $13,625 100.0% $13,800 100.0% $14,500 100.0% $12,400 100.0% $13,000 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Each period the provision for loan losses in the income statement results from
the combination of an estimate by Management of loan losses that occurred during
the current period and the ongoing adjustment of prior estimates of losses.
To serve as a basis for making this provision, the Bank maintains an extensive
credit risk monitoring process that considers several factors including: current
economic conditions affecting the Bank's customers, the payment performance of
individual loans and pools of homogeneous loans, portfolio seasoning, changes in
collateral values, and detailed reviews of specific loan relationships. For
loans deemed to be impaired due to an expectation that all contractual payments
will probably not be received, impairment is measured by comparing the Bank's
recorded investment in the loan to the present value of expected cash flows
discounted at the loan's effective interest rate, the fair value of the
collateral, or the loan's observable market price. Year-end nonperforming
assets, which include nonaccrual loans, loans ninety days or more past due,
renegotiated debt, nonaccrual securities, and other real estate owned, decreased
$13.5 million, or 34%, from 2004 to 2005. Nonperforming assets as a percent of
total assets at year-end decreased from 2.6% in 2004 to 1.6% in 2005. The
Allowance for Loan Losses as a percent of nonperforming assets at year-end
increased from 34.6% in 2004 to 51.5% in 2005.
The provision for loan losses increases the allowance for loan losses, a
valuation account which appears on the consolidated statements of condition. As
the specific customer and amount of a loan loss is confirmed by gathering
additional information, taking collateral in full or partial settlement of the
loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the
allowance for loan losses. If, subsequent to a charge off, the Bank is able to
collect additional amounts from the customer or sell collateral worth more than
earlier estimated, a recovery is recorded.
CONTRACTUAL OBLIGATIONS - The following table shows the Corporation's
contractual obligations.
Payment Due by Period
----------------------------------------------------
Less than 1 - 3 3 - 5 Over 5
(Dollars in Thousands) Total 1 year Years Years Years
---------------------- -------- --------- ------- -------- --------
Long Term Debt Obligations $291,500 $20,000 $10,000 $143,000 $118,500
Operating Lease Obligations 914 206 402 159 147
Salary Continuation Obligation 580 -- -- 116 464
Headquarters Construction Contract 6,138 6,138 -- -- --
-------- ------- ------- -------- --------
Total Contractual Obligations $299,132 $26,344 $10,402 $143,275 $119,111
======== ======= ======= ======== ========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank faces market risk to the extent that the fair values of its financial
instruments are affected by changes in interest rates. The Bank does not face
market risk due to changes in foreign currency exchange rates, commodity prices,
or equity prices. The asset and liability management process of the Bank seeks
to monitor and manage the amount of interest rate risk. This is accomplished by
analyzing the differences in repricing opportunities for assets and liabilities
(gap analysis, as shown in Item 7), by
19
simulating operating results under varying interest rate scenarios, and by
estimating the change in the net present value of the Bank's assets and
liabilities due to interest rate changes.
Each month, the Asset and Liability Committee (ALCO), which includes the senior
management of the Bank, estimates the effect of interest rate changes on the
projected net interest income of the Bank. The sensitivity of the Bank's net
interest income to changes in interest rates is measured by using a computer
based simulation model to estimate the impact on earnings of a gradual increase
or decrease of 100 basis points in the prime rate. The net interest income
projections are compared to a base case projection, which assumes no changes in
interest rates. The table below summarizes the net interest income sensitivity
as of December 31, 2005 and 2004.
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ---------- ------- -------
Year-End 2005 12 Month Projection
Interest Income $97,353 $99,475 $95,344
Interest Expense 43,750 46,501 41,615
------- ------- -------
Net Interest Income $53,603 $52,974 $53,729
Percent Change From Base Projection -1.2% 0.2%
ALCO Policy Limit (+/-) 5.0% 5.0%
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ---------- ------- -------
Year-End 2004 12 Month Projection
Interest Income $86,596 $89,810 $83,098
Interest Expense 33,813 36,269 31,589
------- ------- -------
Net Interest Income $52,783 $53,541 $51,509
Percent Change From Base Projection 1.4% -2.4%
ALCO Policy Limit (+/-) 5.0% 5.0%
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 2005, the estimated variability of the net interest
income was within the Bank's established policy limits.
The ALCO also monitors interest rate risk by estimating the effect of changes in
interest rates on the economic value of the Bank's equity each month. The actual
economic value of the Bank's equity is first determined by subtracting the fair
value of the Bank's liabilities from the fair value of the Bank's assets. The
fair values are determined in accordance with Statement of Financial Accounting
Standards Number 107, Disclosures about Fair Value of Financial Instruments. The
Bank estimates the interest rate risk by calculating the effect of market
interest rate shocks on the economic value of its equity. For this analysis, the
Bank assumes immediate increases or decreases of 100 and 200 basis points in the
prime lending rate. The discount rates used to determine the present values of
the loans and deposits, as well as the prepayment rates for the loans, are based
on Management's expectations of the effect of the rate shock on the market for
loans and deposits. The table below summarizes the amount of interest rate risk
to the fair value of the Bank's assets and liabilities and to the economic value
of the Bank's equity.
20
Fair Value at December 31, 2005
Rates
--------------------------------------------------------------
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- ---------- ---------- ---------- ---------- ----------
Assets $1,612,025 $1,580,635 $1,550,016 $1,642,850 $1,671,653
Liabilities 1,447,518 1,422,535 1,398,378 1,473,363 1,500,118
---------- ---------- ---------- ---------- ----------
Stockholders' Equity $ 164,507 $ 158,100 $ 151,638 $ 169,487 $ 171,535
Change in Equity -3.9% -7.8% 3.0% 4.3%
ALCO Policy Limit (+/-) 10.0% 20.0% 10.0% 20.0%
Fair Value at December 31, 2004
Rates
--------------------------------------------------------------
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- ---------- ---------- ---------- ---------- ----------
Assets $1,543,108 $1,513,190 $1,483,923 $1,572,426 $1,600,092
Liabilities 1,387,831 1,358,581 1,330,434 1,418,237 1,449,845
---------- ---------- ---------- ---------- ----------
Stockholders' Equity $ 155,277 $ 154,609 $ 153,489 $ 154,189 $ 150,247
Change in Equity -0.4% -1.2% -0.7% -3.2%
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. The Bank has reduced its average equity as a percent of assets each year
since 2003. During 2005, the Bank revised its policy limits to reduce the limits
on changes in the economic value of equity from 25% to 20% in the 200 basis
point rate shift and from 15% to 10% in the 100 basis point rate shift.
Throughout 2005, the estimated variability of the economic value of equity was
within the Bank's established policy limits.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements and Supplementary Data
See Pages 23 - 42.
21
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
MBT Financial Corp. and Subsidiaries
Monroe, Michigan
We have audited the accompanying consolidated balance sheet of MBT Financial
Corp. and Subsidiaries as of December 31, 2005 and December 31, 2004 and the
related consolidated statements of income, stockholders' equity, and cash flows
for each year in the three year period ended December 31, 2005. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of MBT Financial
Corp. and Subsidiaries as of December 31, 2005 and December 31, 2004 and the
consolidated results of its operations and its cash flows for each year in the
three year period ended December 31, 2005, in conformity with U.S. generally
accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of MBT Financial
Corp. and Subsidiaries' internal control over financial reporting as of December
31, 2005, based on criteria established in Internal
Control-Integrated Framework issued by the committee of Sponsoring Organizations
of the Treadway Commission and our report dated February 28, 2006, expressed an
unqualified opinion thereon.
/s/ Plante & Moran, PLLC
Auburn Hills, Michigan
February 28, 2006
22
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-----------------------
Dollars in thousands 2005 2004
---------- ----------
ASSETS
Cash and Cash Equivalents (Note 2)
Cash and due from banks $ 32,330 $ 20,540
Federal funds sold 5,000 14,000
---------- ----------
Total cash and cash equivalents 37,330 34,540
Securities - Held to Maturity (Notes 3 and 12) 76,467 84,141
Securities - Available for Sale (Notes 3 and 12) 444,021 408,353
Federal Home Loan Bank stock - at cost 13,221 12,947
Loans held for sale 434 778
Loans - Net (Notes 4, 5, and 12) 975,252 931,303
Accrued interest receivable and other assets (Notes 7 and 13) 65,000 58,047
Premises and Equipment - Net (Note 6) 26,631 22,170
---------- ----------
Total assets $1,638,356 $1,552,279
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 178,116 $ 149,469
Interest-bearing (Note 8) 1,006,594 951,242
---------- ----------
Total deposits 1,184,710 1,100,711
Federal Home Loan Bank advances (Notes 9 and 12) 256,500 256,500
Securities sold under repurchase agreements 35,000 30,000
Interest payable and other liabilities (Note 10) 10,527 9,722
---------- ----------
Total liabilities 1,486,737 1,396,933
========== ==========
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized, 17,197,116
and 17,465,839 shares issued and outstanding) (Note 11) -- --
Additional paid-in capital 14,417 19,806
Retained Earnings 142,205 135,647
Accumulated other comprehensive loss (5,003) (107)
---------- ----------
Total stockholders' equity 151,619 155,346
---------- ----------
Total liabilities and stockholders' equity $1,638,356 $1,552,279
========== ==========
The accompanying notes are an integral part of these statements.
23
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
---------------------------
Dollars in thousands 2005 2004 2003
------- ------- -------
INTEREST INCOME
Interest and fees on loans $64,578 $57,660 $55,253
Interest on investment securities-
Tax-exempt 5,036 5,613 6,206
Taxable 19,864 16,420 16,166
Interest on federal funds sold 217 10 149
------- ------- -------
Total interest income 89,695 79,703 77,774
------- ------- -------
INTEREST EXPENSE
Interest on deposits 23,578 14,923 15,991
Interest on borrowed funds 15,005 12,075 11,476
------- ------- -------
Total interest expense 38,583 26,998 27,467
------- ------- -------
NET INTEREST INCOME 51,112 52,705 50,307
PROVISION FOR LOAN LOSSES (Note 5) 6,906 2,491 8,005
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 44,206 50,214 42,302
------- ------- -------
OTHER INCOME
Income from trust services 4,244 3,746 3,316
Service charges and other fees 5,833 5,476 5,309
Net gain on sales of securities 295 567 1,041
Other 4,077 3,987 4,137
------- ------- -------
Total other income 14,449 13,776 13,803
------- ------- -------
OTHER EXPENSES
Salaries and employee benefits (Notes 10 and 16) 18,248 18,109 16,122
Occupancy expense 3,320 3,029 2,696
Other 12,250 11,478 11,361
------- ------- -------
Total other expenses 33,818 32,616 30,179
------- ------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES 24,837 31,374 25,926
PROVISION FOR INCOME TAXES (Note 13) 6,858 8,775 6,611
------- ------- -------
NET INCOME $17,979 $22,599 $19,315
======= ======= =======
BASIC EARNINGS PER COMMON SHARE $ 1.04 $ 1.30 $ 1.02
======= ======= =======
DILUTED EARNINGS PER COMMON SHARE (Note 15) $ 1.03 $ 1.29 $ 1.01
======= ======= =======
The accompanying notes are an integral part of these statements.
24
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL
---------- -------- ------------- --------
BALANCE - JANUARY 1, 2003 $ 51,080 $115,395 $ 524 $166,999
Repurchase of Common Stock (1,692,475 shares)
(Note 11) (31,008) -- -- (31,008)
Issuance of Common Stock (23,818 shares)
Stock options exercised (19,647 shares) 272 -- -- 272
Other stock issued (4,171 shares) 70 -- -- 70
Dividends declared ($0.58 per share) -- (10,843) -- (10,843)
Comprehensive income:
Net income -- 19,315 -- 19,315
Change in net unrealized loss on securities
available for sale - Net of tax effect of
$732 and reclassifications of $685 -- -- (1,359) (1,359)
-------- -------- ------- --------
Total Comprehensive Income -- 19,315 (1,359) 17,956
-------- -------- ------- --------
BALANCE - DECEMBER 31, 2003 $ 20,414 $123,867 $ (835) $143,446
Repurchase of Common Stock (220,000 shares)
(Note 11) (3,873) -- -- (3,873)
Issuance of Common Stock (194,055 shares)
Stock options exercised (183,915 shares) 2,753 -- -- 2,753
Other stock issued (10,140 shares) 187 -- -- 187
Tax benefit from exercise of options 325 -- -- 325
Dividends declared ($0.62 per share) -- (10,819) -- (10,819)
Comprehensive income:
Net income -- 22,599 -- 22,599
Change in net unrealized loss on securities
available for sale - Net of tax effect of $(392) -- -- 728 728
-------- -------- ------- --------
Total Comprehensive Income -- 22,599 728 23,327
-------- -------- ------- --------
BALANCE - DECEMBER 31, 2004 $ 19,806 $135,647 $ (107) $155,346
Repurchase of Common Stock (364,420 shares)
(Note 11) (6,984) -- -- (6,984)
Issuance of Common Stock (95,697 shares)
Stock options exercised (88,162 shares) 1,248 -- -- 1,248
Other stock issued (7,535 shares) 147 -- -- 147
Tax benefit from exercise of options 200 -- -- 200
Dividends declared ($0.66 per share) -- (11,421) -- (11,421)
Comprehensive income:
Net income -- 17,979 -- 17,979
Change in net unrealized loss on securities
available for sale - Net of tax effect of $2,636 -- -- (4,896) (4,896)
-------- -------- ------- --------
Total Comprehensive Income -- 17,979 (4,896) 13,083
-------- -------- ------- --------
BALANCE - DECEMBER 31, 2005 $ 14,417 $142,205 $(5,003) $151,619
======== ======== ======= ========
The accompanying notes are an integral part of these statements.
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
---------------------------------
Dollars in thousands 2005 2004 2003
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 17,979 $ 22,599 $ 19,315
Adjustments to reconcile net income to net cash from operating activities
Provision for deferred taxes (76) 195 (737)
Provision for loan losses 6,906 2,491 8,005
Depreciation 2,781 2,817 2,471
Net (Accretion) Amortization on investment securities 190 496 2,981
Net gain on sales of securities (295) (567) (1,041)
Increase in cash surrender value of life insurance (1,100) (1,371) (1,305)
Change in assets and liabilities
(Increase) decrease in accrued interest receivable and other assets (9,758) (4,261) (3,666)
Increase (decrease) in accrued interest payable and other liabilities 1,005 4,822 (1,510)
--------- --------- ---------
Net cash provided by operating activities $ 17,632 $ 27,221 $ 24,513
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of investment securities held to maturity $ 19,826 $ 25,610 $ 27,956
Proceeds from maturities of investment securities available for sale 50,222 66,369 355,635
Proceeds from sales of investment securities held to maturity 3,021 -- --
Proceeds from sales of investment securities available for sale 75,446 73,520 176,905
Net (increase) decrease in loans (50,511) (85,222) (95,950)
Proceeds from sales of other real estate owned 6,732 6,235 12,068
Proceeds from sales of other assets 101 71 13
Purchase of investment securities held to maturity (15,682) (10,565) (10,300)
Purchase of bank owned life insurance -- -- (15,490)
Purchase of investment securities available for sale (168,528) (150,701) (522,972)
Purchase of bank premises and equipment (7,587) (7,035) (5,058)
--------- --------- ---------
Net cash used for investing activities $ (86,960) $ (81,718) $ (77,193)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits $ 83,999 $ 61,594 $ 28,157
Net increase (decrease) in short term borrowings -- (45,000) 45,000
Net increase in Federal Home Loan Bank borrowings -- 31,500 --
Net increase in securities sold under repurchase agreements 5,000 30,000 --
Repurchase of common stock (6,984) (3,873) (31,008)
Issuance of common stock 1,395 2,940 342
Dividends paid (11,292) (10,649) (10,904)
--------- --------- ---------
Net cash provided by financing activities $ 72,118 $ 66,512 $ 31,587
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 2,790 $ 12,015 $ (21,093)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (Note 1) 34,540 22,525 43,618
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 1) $ 37,330 $ 34,540 $ 22,525
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 37,975 $ 26,835 $ 27,646
Cash paid for federal income taxes $ 6,293 $ 7,135 $ 7,120
========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES
Transfer of loans to other real estate owned $ 9,881 $ 5,461 $ 6,169
Transfer of loans to other assets $ 202 $ 55 $ 44
========= ========= =========
The accompanying notes are an integral part of these statements.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of MBT Financial
Corp. (the "Corporation") and its wholly owned subsidiary, Monroe Bank &
Trust (the "Bank"). The Bank includes the accounts of its wholly owned
subsidiaries, MBT Credit Company, Inc. and MB&T Financial Services, Inc.
The Bank operates twenty-one offices in Monroe County, Michigan and four
offices in Wayne County, Michigan. MBT Credit Company, Inc. operates a
mortgage loan office in Monroe County. The Bank's primary source of revenue
is from providing loans to customers, who are predominantly small and
middle-market businesses and middle-income individuals. The Corporation's
sole business segment is community banking.
The accounting and reporting policies of the Bank conform to practice
within the banking industry and are in accordance with accounting
principles generally accepted in the United States. Preparation of
financial statements in conformity with generally accepted accounting
principles requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant changes in the
near term are the determination of the allowance for loan losses, the fair
value of investment securities, and the valuation of other real estate
owned.
The significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Corporation and its subsidiary. All material intercompany transactions and
balances have been eliminated. Certain prior year amounts have been
reclassified to conform to the current year presentation.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK
Most of the Corporation's activities are with customers located within
southeast Michigan. Notes 3 and 4 discuss the types of securities and
lending that the Corporation engages in. The Corporation does not have any
significant concentrations in any one industry or to any one customer.
INVESTMENT SECURITIES
Investment securities that are "held to maturity" are stated at cost, and
adjusted for accumulated amortization of premium and accretion of discount.
The Bank has the intention and, in Management's opinion, the ability to
hold these investment securities until maturity. Investment securities that
are "available for sale" are stated at estimated market value, with the
related unrealized gains and losses reported as an amount, net of taxes, as
a separate component of stockholders' equity. The market value of
securities is based on quoted market prices. For securities that do not
have readily available market values, estimated market values are
calculated based on the market values of comparable securities. Gains and
losses on the sale of securities are determined using the specific
identification method. Premiums and discounts are recognized in interest
income using the interest method over the term of the security.
LOANS
The Bank grants mortgage, commercial, and consumer loans to customers.
Loans are reported at their outstanding unpaid principal balances, adjusted
for charge offs, the allowance for loan losses, and any deferred fees or
costs on originated loans. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan
yield using the interest method.
The accrual of interest on loans is discontinued at the time the loan is 90
days delinquent unless the credit is well secured and in the process of
collection. In all cases, loans are placed on nonaccrual or charged off at
an earlier date if principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest
on these loans is accounted for on the cash basis or cost recovery method,
until qualifying for return to accrual. Loans are returned to accrual
status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
LOANS HELD FOR SALE
Loans held for sale consist of fixed rate residential mortgage loans with
maturities of 15 to 30 years. Such loans are recorded at the lower of
aggregate cost or estimated fair value.
27
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
The allowance consists of specific and general components. The specific
component relates to loans that are classified as non-accrual or
renegotiated. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral
value or observable market price) of the impaired loan is lower than the
carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience, adjusted for qualitative
factors..
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
loan and the borrower, including length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the shortfall
in relation to the principal and interest owed. Impairment is measured on a
loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair
value of the collateral if the loan is collateral dependent.
Large groups of homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
FORECLOSED ASSETS (INCLUDES OTHER REAL ESTATE OWNED)
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at the lower of fair value or the loan carrying
amount at the date of the foreclosure, establishing a new cost basis.
Subsequent to foreclosure, valuations are periodically performed by
Management and the assets are carried at the lower of carrying amount or
fair value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in net expenses from
foreclosed assets.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated
depreciation of $27,826,000 in 2005 and $25,427,000 in 2004. The Bank uses
the straight-line method to provide for depreciation, which is charged to
operations over the estimated useful lives of the assets. Depreciation
expense amounted to $2,781,000 in 2005, $2,817,000 in 2004, and $2,471,000
in 2003.
The cost of assets retired and the related accumulated depreciation are
eliminated from the accounts and the resulting gains or losses are
reflected in operations in the year the assets are retired.
COMPREHENSIVE INCOME
Accounting principles generally require that revenue, expenses, gains, and
losses be included in net income. Certain changes in assets and
liabilities, however, such as unrealized gains and losses on securities
available for sale, are reported as a separate component of the equity
section of the balance sheet. Such items, along with net income, are
components of comprehensive income.
The components of accumulated other comprehensive income (loss) and related
tax effects are as follows:
Dollars in thousands 2005 2004 2003
------- ----- -------
Unrealized gains (losses) on securities available for sale $(7,401) $ 403 $ (244)
Reclassification adjustment for losses (gains) realized in income (295) (567) (1,041)
------- ----- -------
Net unrealized gains (losses) $(7,696) $(164) $(1,285)
Tax effect 2,693 57 450
------- ----- -------
Accumulated other comprehensive income (loss) $(5,003) $(107) $ (835)
------- ----- -------
28
CASH AND CASH EQUIVALENTS
Cash and Cash Equivalents include cash and due from banks and Federal funds
sold. Generally, cash equivalents have daily maturities.
INCOME TAXES
Deferred income tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred
tax asset or liability is determined based on the tax effects of the
various temporary differences between the book and tax bases of the various
balance sheet assets and liabilities and gives current recognition to
changes in tax rates and laws.
STOCK-BASED COMPENSATION
The Company applies the provisions of APB Opinion No. 25, "Accounting for
Stock-Based Compensation," for all employee stock option grants and has
elected to disclose pro forma net income and earnings per share amounts as
if the fair-value based method has been applied in measuring compensation
costs.
The Company's as reported and pro forma information for the years ended
December 31:
Dollars in thousands, except per share data 2005 2004 2003
------- ------- -------
Net Income as Reported $17,979 $22,599 $19,315
Pro Forma Adjustment Due to Stock Options (338) (225) (102)
------- ------- -------
Pro Forma Net Income $17,641 $22,374 $19,213
======= ======= =======
Earnings per Share as Reported
Basic $ 1.04 $ 1.30 $ 1.02
Diluted $ 1.03 $ 1.29 $ 1.01
Pro Forma Earnings per Share
Basic $ 1.02 $ 1.28 $ 1.01
Diluted $ 1.01 $ 1.28 $ 1.01
Compensation expense in the pro forma disclosures is not indicative of
future amounts, as options vest over several years and additional grants
are generally made each year.
The weighted average fair value of options granted was $5.10, $3.52, and
$2.63 in 2005, 2004, and 2003, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions used for grants in
2005, 2004, and 2003: expected option lives of seven years for all three;
expected volatility of 24.3%, 25.3%, and 21.5%, risk-free interest rates of
3.8%, 3.8%, and 3.9%, and dividend yield of 3.5%, 3.5%, and 3.5%,
respectively.
OFF BALANCE SHEET INSTRUMENTS
In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, commercial letters of credit and standby letters of credit.
Such financial instruments are recorded when they are funded.
ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123(R), Accounting for Stock-Based Compensation ("SFAS 123R").
SFAS 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized as expense in the income
statement based on their fair values. Prior to SFAS 123R, only certain pro
forma disclosures of fair value were required. The amount of compensation
is measured at the fair value of the options when granted, and this cost is
expensed over the required service period, which is normally the vesting
period of the options. SFAS 123R will apply to awards granted or modified
after January 1, 2006. Compensation cost will also be recorded for prior
option grants that vest after the date of adoption. The future effect of
the adoption of the new accounting principle on results of operations will
depend on the level of future option grants, the vesting period for those
grants, and the fair value of the options granted at such future date.
Existing options that are scheduled to vest after the adoption date are
expected to result in additional compensation expense of approximately
$550,000 in 2006, $350,000 in 2007, and $150,000 in 2008.
(2) CASH AND DUE FROM BANKS
The Bank is required by regulatory agencies to maintain legal reserve
requirements based on the level of balances in deposit categories. Cash
balances restricted from usage due to these requirements were $2,205,000
and $1,954,000 at December 31, 2005 and 2004, respectively. Cash and due
from banks includes deposits held at correspondent banks in excess of FDIC
insurance limits.
29
(3) INVESTMENT SECURITIES
The following is a summary of the Bank's investment securities portfolio as
of December 31, 2005 and 2004 (000's omitted):
HELD TO MATURITY
DECEMBER 31, 2005
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government Agencies $ 11 $ 1 $ -- $ 12
Obligations of States and Political Subdivisions 76,456 902 (65) 77,293
------- ---- ---- -------
$76,467 $903 $(65) $77,305
======= ==== ==== =======
AVAILABLE FOR SALE
DECEMBER 31, 2005
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government Agencies $358,412 $158 $(7,496) $351,074
Obligations of States and Political Subdivisions 26,206 197 (322) 26,081
Other Securities 67,098 506 (738) 66,866
-------- ---- ------- --------
$451,716 $861 $(8,556) $444,021
======== ==== ======= ========
HELD TO MATURITY
DECEMBER 31, 2004
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government Agencies $ 527 $ 51 $ -- $ 578
Obligations of States and Political Subdivisions 80,622 2,161 (147) 82,636
Other Securities 2,992 82 -- 3,074
------- ------ ----- -------
$84,141 $2,294 $(147) $86,288
======= ====== ===== =======
AVAILABLE FOR SALE
DECEMBER 31, 2004
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
Obligations of U.S. Government Agencies $315,410 $1,123 $(2,152) $314,381
Obligations of States and Political Subdivisions 28,635 812 (260) 29,187
Other Securities 64,472 397 (84) 64,785
-------- ------ ------- --------
$408,517 $2,332 $(2,496) $408,353
======== ====== ======= ========
The amortized cost and estimated market value of securities at December 31,
2005, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because issuers may have the right to
call or prepay obligations with or without call or prepayment penalties
(000's omitted).
HELD TO MATURITY AVAILABLE FOR SALE
--------------------- ---------------------
ESTIMATED ESTIMATED
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
Maturing within
1 year $11,372 $11,410 $ -- $ --
1 to 5 years 35,411 35,895 42,234 41,272
5 to 10 years 20,823 21,138 233,193 228,339
Over 10 years 8,861 8,862 174,276 172,364
Securities with no stated maturity -- -- 2,016 2,046
------- ------- -------- --------
$76,467 $77,305 $451,719 $444,021
======= ======= ======== ========
30
The investment securities portfolio is evaluated for impairment throughout
the year. Impairment is recorded against individual securities, unless the
decrease in fair value is attributable to interest rates and management
determines that the Company has the intent and ability to hold the
investment for a period of time sufficient to allow for an anticipated
recovery in the market value. The fair values of investments with an
amortized cost in excess of their fair values at December 31, 2005 and
December 31, 2004 are as follows:
DECEMBER 31, 2005
-------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
----------------------- ----------------------- -----------------------
GROSS GROSS GROSS
AGGREGATE UNREALIZED AGGREGATE UNREALIZED AGGREGATE UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
---------- ---------- ---------- ---------- ---------- ----------
Obligations of United States Government Agencies $198,750 $3,147 $132,167 $4,350 $330,917 $7,497
Obligations of States and Political Subdivisions 16,237 179 3,929 206 $ 20,166 $ 385
Other Securities 14,726 238 2,499 501 $ 17,225 $ 739
-------- ------ -------- ------ -------- ------
$229,713 $3,564 $138,595 $5,057 $368,308 $8,621
======== ====== ======== ====== ======== ======
DECEMBER 31, 2004
-------------------------------------------------
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
----------------------- ----------------------- -----------------------
GROSS GROSS GROSS
AGGREGATE UNREALIZED AGGREGATE UNREALIZED AGGREGATE UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
---------- ---------- ---------- ---------- ---------- ----------
Obligations of United States Government Agencies $144,904 $1,703 $18,551 $449 $163,455 $2,152
Obligations of States and Political Subdivisions 6,423 58 2,692 349 $ 9,115 $ 407
Other Securities 12,795 84 -- -- $ 12,795 $ 84
-------- ------ ------- ---- -------- ------
$164,122 $1,845 $21,243 $798 $185,365 $2,643
======== ====== ======= ==== ======== ======
The increase in investment securities with unrealized losses and the
increase in 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 these securities until recovery, which may be until
maturity.
Investment securities carried at $323,415,000 and $322,959,000 were pledged
or set aside to secure borrowings, public and trust deposits, and for other
purposes required by law at December 31, 2005 and December 31, 2004,
respectively.
At December 31, 2005, Obligations of U. S. Government Agencies included
securities issued by the Federal Home Loan Bank with an estimated market
value of $216,643,000. At December 31, 2004, Obligations of U. S.
Government Agencies included securities issued by the Federal Home Loan
Bank with an estimated market value of $160,741,000.
For the years ended December 31, 2005, 2004, and 2003, proceeds from sales
of securities amounted to $78,467,000, $73,520,000, and $176,905,000,
respectively. Gross realized gains amounted to $690,000, $1,174,000, and
$1,046,000, respectively. Gross realized losses amounted to $395,000,
$607,000, and $5,000, respectively. The tax provision applicable to these
net realized gains and losses amounted to $103,000, $179,000, and $364,000,
respectively.
During 2005, sales of securities classified as Held to Maturity totaled
$3,021,000. This transaction consisted of a single fixed rate debt security
issued by Ford Motor Credit Company. The credit rating of the issuer
declined below investment grade and Management decided to sell the bond.
The Bank has no more corporate securities classified as Held to Maturity.
31
(4) LOANS
Loan balances outstanding as of December 31 consist of the following (000s
omitted):
2005 2004
-------- --------
Real estate loans $813,953 $773,892
Loans to finance agricultural production and
other loans to farmers 3,519 2,333
Commercial and industrial loans 100,289 88,035
Loans to individuals for household, family,
and other personal expenditures 71,244 81,119
All other loans (including overdrafts) 1,635 1,297
-------- --------
Total loans, gross $990,640 $946,676
Less: Deferred loan fees 1,763 1,573
-------- --------
Total loans, net of deferred loan fees $988,877 $945,103
Less: Allowance for loan losses 13,625 13,800
-------- --------
$975,252 $931,303
======== ========
The following is a summary of impaired loans (000s omitted):
2005 2004 2003
------- ------- -------
Year-end impaired loans with no allowance for loan losses allocated $ 1,601 $ 3,809 $11,212
Year-end impaired loans with allowance for loan losses allocated 14,713 30,136 32,379
Year-end allowance for loan losses allocated to impaired loans 2,156 6,014 6,873
Average investment in impaired loans 23,375 33,410 30,112
Interest income recognized on impaired loans 438 1,120 1,506
Cash basis interest income recognized on impaired loans during the year 438 1,120 1,506
Non-accrual loans totaled $16,212,000 as of December 31, 2005 and
$29,896,000 as of December 31, 2004. Loans ninety days or more past due and
still accruing interest were $101,000 as of December 31, 2005 and $230,000
as of December 31, 2004.
Included in Loans are loans to certain officers, directors, and companies
in which such officers and directors have 10 percent or more beneficial
ownership in the aggregate amount of $26,262,000 and $19,295,000 at
December 31, 2005 and 2004, respectively. In 2005, new loans and other
additions amounted to $32,477,000, and repayments and other reductions
amounted to $25,510,000. In Management's judgment, these loans were made on
substantially the same terms and conditions as those made to other
borrowers, and do not represent more than the normal risk of collectibility
or present other unfavorable features.
Loans carried at $195,357,000 and $181,412,000 at December 31, 2005 and
2004, respectively, were pledged to secure Federal Home Loan Bank advances.
(5) ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000s omitted):
2005 2004 2003
------- ------- -------
Balance beginning of year $13,800 $14,500 $12,400
Provision for loan losses 6,906 2,491 8,005
Loans charged off (9,340) (4,447) (6,683)
Transfer to establish reserve for
unfunded loan commitments (275) -- --
Recoveries 2,534 1,256 778
------- ------- -------
Balance end of year $13,625 $13,800 $14,500
======= ======= =======
Each period the provision for loan losses in the income statement results
from the combination of an estimate by Management of loan losses that
occurred during the current period and the ongoing adjustment of prior
estimates of losses occurring in prior periods.
To serve as a basis for making this provision, the Bank maintains an
extensive credit risk monitoring process that considers several factors
including: current economic conditions affecting the Bank's customers, the
payment performance of individual loans and pools of homogeneous loans,
portfolio seasoning, changes in collateral values, and detailed reviews of
specific loan relationships. For loans deemed to be impaired due to an
expectation that all contractual payments will probably not be received,
impairment is measured by comparing the Bank's
32
recorded investment in the loan to the present value of expected cash flows
discounted at the loan's effective interest rate, the fair value of the
collateral, or the loan's observable market price.
The provision for loan losses increases the allowance for loan losses, a
valuation account which appears on the consolidated balance sheets. As the
specific customer and amount of a loan loss is confirmed by gathering
additional information, taking collateral in full or partial settlement of
the loan, bankruptcy of the borrower, etc., the loan is charged off,
reducing the allowance for loan losses. If, subsequent to a charge off, the
Bank is able to collect additional amounts from the customer or sell
collateral worth more than earlier estimated, a recovery is recorded.
(6) BANK PREMISES AND EQUIPMENT
Bank premises and equipment as of year end are as follows (000s omitted):
2005 2004
------- -------
Land, buildings and improvements $33,478 $27,909
Equipment, furniture and fixtures 20,979 19,688
------- -------
Total Bank premises and equipment $54,457 $47,597
Less accumulated depreciation 27,826 25,427
------- -------
Bank premises and equipment, net $26,631 $22,170
======= =======
Bank Premises and Equipment includes Construction in Progress of $5,578,000
as of December 31, 2005 and $1,833,000 as of December 31, 2004. In May,
2005 the Company began construction of a new headquarters building in
downtown Monroe, Michigan. The remaining commitment under the construction
contract is $6,138,000 as of December 31, 2005.
The Company has entered into lease commitments for office locations. Rental
expense charged to operations was $314,000, $377,000 and $311,000 for the
years ended December 31, 2005, 2004, and 2003, respectively. The future
minimum lease payments are as follows:
Minimum
Year Payment
---- --------
2006 $206,000
2007 208,000
2008 194,000
2009 78,000
2010 81,000
Thereafter 147,000
(7) INTEREST RECEIVABLE AND OTHER ASSETS
The Bank includes the cash surrender value of Bank Owned Life Insurance
(BOLI) in Interest Receivable and Other Assets on the accompanying
consolidated balance sheets. The cash surrender value of the BOLI was
$36,252,000 at December 31, 2005 and $35,152,000 at December 31, 2004. The
following is a description of the components of the BOLI:
DIRECTOR SPLIT-DOLLAR LIFE INSURANCE
On December 21, 2000, the Bank entered into director split-dollar life
insurance agreements with each of its ten then directors. Under the
split-dollar agreement, the policy's interests are divided between the Bank
and the director. The Bank owns the cash surrender value, including the
accumulated policy earnings, with each director's beneficiaries receiving a
fixed amount that is based on his or her years of director service and the
Bank receiving the remainder of the death benefits. The directors' death
benefits are $500,000 for director service of less than 3 years, $600,000
for service up to 5 years, $750,000 for service up to 10 years, and
$1,000,000 for director service of 10 years or more. In 2000, the Bank
fully paid the premiums for these ten policies with one lump sum premium
payment in the amount of $4,937,000. In 2003, the Bank paid additional
premiums of $3,661,000 to increase the coverage for each director to an
amount sufficient to provide the maximum split-dollar benefit that could be
attained.
The increase in cash surrender value is recorded as other non-interest
income. The Bank expects to recover in full the cash value from the Bank's
portion of the policies' death benefits.
SALARY CONTINUATION AGREEMENT AND LIFE INSURANCE POLICY
The Bank entered into a Salary Continuation Agreement with Ronald D.
LaBeau, then Chairman and Chief Executive Officer of the Bank on December
27, 2000. This agreement provides that the Bank will pay an annual salary
continuation benefit of $139,600 to Mr. LaBeau or his designated
beneficiaries for 10 years after his
33
retirement on or after reaching the normal retirement age of 65. On April
2, 2004, Mr. LaBeau retired prior to reaching normal retirement age of 65.
In accordance with the agreement, he is eligible for an annual salary
continuation benefit of $57,996 each year for ten years, commencing in
2009.
At the same time it entered into the Salary Continuation Agreement with Mr.
LaBeau, the Bank purchased an insurance policy on Mr. LaBeau's life, with a
single premium payment of $5,880,000. While Mr. LaBeau's beneficiaries will
receive any payments to which he is entitled under the Salary Continuation
Agreement, they are not eligible for any of the life insurance proceeds of
this policy.
The life insurance policy is in addition to the split-dollar insurance
policy purchased by the Bank on Mr. LaBeau's life for his service as a
director, discussed previously, and the split-dollar insurance policy
discussed in "Executive Group Term Carve Out Split-Dollar Life Insurance
Agreements" below.
The Bank entered into a Salary Continuation Agreement with H. Douglas
Chaffin, President and Chief Executive Officer of the Bank on July 1, 2003.
This agreement provides that the Bank will pay an annual salary
continuation benefit of 65% of his final annual salary, reduced by 50% of
his Social Security benefit, his normal pension benefit, and benefits
payable attributable to the portion of the Bank's Section 401(k) plan
arising from employer contributions, to Mr. Chaffin or his designated
beneficiaries for 10 years after his retirement on or after reaching the
normal retirement age of 65.
EXECUTIVE GROUP TERM CARVE OUT SPLIT-DOLLAR LIFE INSURANCE AGREEMENTS
In addition to insurance policies on the lives of the directors of the
Bank, the Bank owns life insurance on the lives of several executives, for
which the Bank made premium payments of $16,242,000 in the aggregate. The
Bank and the executives share rights to death benefits payable under the
policies. An executive's beneficiaries are entitled to an amount equal to
two times the executive's current annual salary, less $50,000 if he or she
dies before retirement, or equal to his or her annual salary at the time of
termination of employment if he or she dies after retirement. The Bank will
receive the remainder of the death benefits. The Bank expects to recover in
full the premium paid by it from the Bank's portion of the policy's death
benefits or upon the cancellation or purchase of the policies by the
executives. The executives also have life insurance under the Bank's group
term life insurance program for all employees, which pays benefits up to
$50,000 to the executive's beneficiaries if he or she dies while employed
by the Bank.
(8) DEPOSITS
Interest expense on time certificates of deposit of $100,000 or more in the
year 2005 amounted to $6,217,000, as compared with $3,358,000 in 2004, and
$3,066,000 in 2003. At December 31, 2005, the balance of time certificates
of deposit of $100,000 or more was $203,161,000, as compared with
$145,846,000 at December 31, 2004. The amount of time deposits with a
remaining term of more than 1 year was $306,630,000 at December 31, 2005
and $246,802,000 at December 31, 2004. The following table shows the
scheduled maturities of Certificates of Deposit as of December 31, 2005:
Under $100,000 $100,000 and over
-------------- -----------------
2006 $ 97,122,000 $146,380,000
2007 154,432,000 35,983,000
2008 46,649,000 10,896,000
2009 30,016,000 8,734,000
2010 11,618,000 1,168,000
Thereafter 7,134,000 0
------------ ------------
Total $346,971,000 $203,161,000
============ ============
Time certificates of deposit under $100,000 include $69,359,000 of brokered
certificates of deposit as of December 31, 2005, and $38,811,000 of
brokered certificates of deposit as of December 31, 2004.
34
(9) FEDERAL HOME LOAN BANK ADVANCES AND REPURCHASE AGREEMENTS
The following is a summary of the Bank's borrowings from the Federal Home
Loan Bank of Indianapolis as of December 31, 2005 and 2004 (000s omitted):
DECEMBER 31, 2005
FLOATING RATE FIXED RATE
--------------- ---------------
MATURING IN AMOUNT RATE AMOUNT RATE
----------- -------- ---- -------- ----
2009 $ 13,000 4.50% $ 15,000 5.52%
2010 -- -- 115,000 5.40%
2011 3,000 4.65% 3,500 5.08%
2013 95,000 6.61% -- --
2014 12,000 4.66% -- --
-------- ---- -------- ----
$123,000 6.15% $133,500 5.41%
======== ==== ======== ====
DECEMBER 31, 2004
FLOATING RATE FIXED RATE
--------------- ---------------
MATURING IN AMOUNT RATE AMOUNT RATE
----------- -------- ---- -------- ----
2009 $ 13,000 2.44% $ 15,000 5.52%
2010 -- -- 115,000 5.40%
2011 3,000 2.65% 3,500 5.08%
2013 95,000 4.56% -- --
2014 12,000 2.66% -- --
-------- ---- -------- ----
$123,000 4.10% $133,500 5.41%
======== ==== ======== ====
The interest rates on the floating rate advances reset quarterly based on
the three month LIBOR rate plus a spread ranging from 15 to 260 basis
points. The fixed rate advances have a put option that allows the Federal
Home Loan Bank to require repayment of the advance or conversion of the
advance to floating rate at the three month LIBOR rate plus a spread
ranging from 0 to 2 basis points.
The following is a summary of the Bank's borrowings under repurchase
agreements as of December 31, 2005 and 2004 (000s omitted):
DECEMBER 31, 2005
FLOATING RATE FIXED RATE
--------------- ---------------
MATURING IN AMOUNT RATE AMOUNT RATE
----------- -------- ---- -------- ----
2006 $10,000 3.45% $10,000 3.38%
2007 -- -- 5,000 3.61%
2008 -- -- 5,000 4.05%
2012 -- -- 5,000 4.12%
------- ---- ------- ----
$10,000 3.45% $25,000 3.71%
======= ==== ======= ====
DECEMBER 31, 2004
FLOATING RATE FIXED RATE
-------------- ---------------
MATURING IN AMOUNT RATE AMOUNT RATE
----------- ------- ---- ------- ----
2005 $ -- -- $ 5,000 2.14%
2006 -- -- 5,000 3.00%
2007 -- -- 5,000 3.61%
2008 -- -- 5,000 4.05%
2011 10,000 2.57% -- --
------- ---- ------- ----
$10,000 2.57% $20,000 2.67%
======= ==== ======= ====
(10) RETIREMENT PLANS
In 2000, the Bank implemented a retirement plan that included both a money
purchase pension plan, as well as a voluntary profit sharing 401(k) plan
for all employees who meet certain age and length of service eligibility
requirements. In 2002, the Bank amended its retirement plan to freeze the
money purchase plan and retain the 401(k) plan. To ensure that the plan
meets the Safe Harbor provisions of the applicable sections of the Internal
Revenue Code, the Bank contributes an amount equal to four percent of the
employee's base salary to the 401(k)
35
plan for all eligible employees. In addition, an employee may contribute
from 1 to 75 percent of his or her base salary, up to a maximum of $14,000
in 2005. This annual contribution limit increases by $1,000 each year until
it reaches $15,000 in 2006. The Bank matches the employee's elective
contribution up to the first six percent of the employee's annual base
salary. Depending on the Bank's profitability, an additional profit sharing
contribution may be made by the Bank to the 401(k) plan. The total
retirement plan expense was $1,184,000 for the year ended December 31,
2005, $1,257,000 for the year ended December 31, 2004, and $1,012,000 for
the year ended December 31, 2003. This included profit sharing
contributions of one percent in 2005, three percent in 2004, and two
percent in 2003.
The Bank has a postretirement benefit plan that generally provides for the
continuation of medical benefits for all employees who retire from the Bank
at age 55 or older, upon meeting certain length of service eligibility
requirements. The Bank does not fund its postretirement benefit obligation.
Rather, payments are made as costs are incurred by covered retirees. The
amount of benefits paid under the postretirement benefit plan was $107,000
in 2005, $101,000 in 2004, and $95,000 in 2003. The amount of insurance
premium paid by the Bank for retirees is capped at 200% of the cost of the
premium as of December 31, 1992.
A reconciliation of the accumulated postretirement benefit obligation
("APBO") to the amounts recorded in the consolidated balance sheets in
Interest Payable and Other Liabilities at December 31 is as follows (000s
omitted):
2005 2004
------ ------
APBO $1,988 $1,811
Unrecognized net transition obligation (375) (429)
Unrecognized prior service costs (32) (36)
Unrecognized net gain 62 159
------ ------
Liability recorded in the consolidated statements of condition $1,643 $1,505
====== ======
The changes recorded in the accumulated postretirement benefit obligation
were as follows (000s omitted):
2005 2004
------ ------
APBO at beginning of year $1,811 $2,033
Service cost 86 79
Interest cost 101 123
Actuarial loss 97 (323)
Benefits paid during year (107) (101)
------ ------
APBO at end of year $1,988 $1,811
====== ======
Components of the Bank's postretirement benefit expense were as follows:
2005 2004 2003
---- ---- ----
Service cost $ 86 $ 79 $ 69
Interest cost 101 123 114
Amortization of transition obligation 54 54 54
Prior service costs 4 4 4
Amortization of gains -- -- --
---- ---- ----
Net postretirement benefit expense $245 $260 $241
==== ==== ====
The APBO as of December 31, 2005 and 2004 was calculated using assumed
discount rates of 5.50% and 5.75%, respectively. Based on the provisions of
the plan, the Bank's expense is capped at 200% of the 1992 expense, with
all expenses above the cap incurred by the retiree. The expense reached the
cap in 2004, and accordingly the impact of an increase in health care costs
on the APBO was not calculated.
(11) STOCKHOLDERS' EQUITY
On December 11, 2003, the Corporation repurchased 1,632,475 shares of its
stock at $18.50 per share in a self tender offer.
On December 21, 2000, the Corporation's Board of Directors authorized the
repurchase of up to 2 million shares of MBT Financial Corp. common stock
during the two-year period beginning January 2, 2001. On December 19, 2002,
the Board of Directors extended the repurchase program until December 31,
2004. On December 23, 2004, the Board of Directors issued a new
authorization to repurchase up to 2 million shares during 2005. Shares
purchased are as follows:
36
Shares
Repurchased Cost
----------- -----------
2003 60,000 808,000
2004 220,000 3,874,000
2005 364,420 6,984,000
------- -----------
Total 644,420 $11,666,000
======= ===========
On December 22, 2005, the Corporation's Board of Directors authorized the
repurchase of up to 2 million shares of MBT Financial Corp. common stock
during the 12 month period ending December 31, 2006.
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Certain of the Bank's assets and liabilities are financial instruments that
have fair values that differ from their carrying values in the accompanying
consolidated balance sheets. These fair values, along with the methods and
assumptions used to estimate such fair values, are discussed below. The
fair values of all financial instruments not discussed below are estimated
to be equal to their carrying values as of December 31, 2005 and 2004.
INVESTMENT SECURITIES
Fair value for the Bank's investment securities was determined using the
market value at December 31, 2005 and 2004. These Estimated Market Values
are disclosed in Note 3.
LOANS, NET
The fair value of all loans is estimated by discounting the future cash
flows associated with the loans, using the current rates at which similar
loans would be made to borrowers with similar credit ratings and for the
same remaining maturities. The estimated fair value of loans at December
31, 2005, net of the allowance for loan losses, is $977,042,000, compared
to the carrying value of $975,252,000. The estimated fair value of loans at
December 31, 2004, net of the allowance for loan losses, was $946,389,000,
compared to the carrying value of $931,303,000.
OTHER TIME DEPOSITS
The fair value of other time deposits, consisting of fixed maturity
certificates of deposit, is estimated by discounting the related cash flows
using the rates currently offered for deposits of similar remaining
maturities. The estimated fair value of other time deposits at December 31,
2005 is $551,648,000, compared to the carrying value of $547,544,000. The
estimated fair value of other time deposits at December 31, 2004 was
$443,265,000, compared to the carrying value of $435,614,000.
FHLB ADVANCES AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
A portion of the Federal Home Loan Bank advances in the accompanying
consolidated balance sheets were written with a put option that allows the
Federal Home Loan Bank to require repayment or conversion to a variable
rate advance. The fair value of these putable Federal Home Loan Bank
advances is estimated using the binomial lattice option pricing method. The
estimated fair value of putable Federal Home Loan Bank advances at December
31, 2005 is $134,065,000, compared to the carrying value of $130,000,000.
The fair value and carrying value of the variable rate advances at December
31, 2005 is $123,000,000. The estimated fair value of the fixed rate
Federal Home Loan Bank advance at December 31, 2005 is $3,517,000, compared
to the carrying value of $3,500,000.
The estimated fair value of putable Federal Home Loan Bank advances at
December 31, 2004 was $140,160,000, compared to the carrying value of
$130,000,000. The fair value and carrying value of the variable rate
advances at December 31, 2004 was $123,000,000.
The estimated fair value of the Securities Sold under Repurchase Agreements
at December 31, 2005 was $35,307,000, compared to the carrying value of
$35,000,000. The estimated fair value of the Securities Sold under
Repurchase Agreements at December 31, 2004 was $29,943,000, compared to the
carrying value of $30,000,000.
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The fair values of commitments to extend credit and standby letters of
credit and financial guarantees written are estimated using the fees
currently charged to engage into similar agreements. The fair values of
these instruments are not significant.
(13) FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be reversed. The Corporation
and the Bank file a consolidated Federal income tax return.
37
The provision for Federal income taxes consists of the following (000s
omitted):
2005 2004 2003
------ ------ ------
Federal income taxes currently payable (refundable) $6,643 $8,580 $7,348
Provision (credit) for deferred taxes on:
Book (over) under tax loan loss provision 71 245 (639)
Accretion of bond discount (72) (43) (245)
Net deferred loan origination fees 265 56 (43)
Accrued postretirement benefits (219) (81) 5
Tax over (under) book depreciation 178 (258) 441
Other, net (8) 276 (256)
------ ------ ------
215 195 (737)
------ ------ ------
Total deferred provision (credit) $6,858 $8,775 $6,611
====== ====== ======
The effective tax rate differs from the statutory rate applicable to
corporations as a result of permanent differences between accounting and
taxable income as follows:
2005 2004 2003
---- ---- ----
Statutory rate 35.0% 35.0% 35.0%
Municipal interest income (8.0) (6.3) (7.7)
Other, net 0.8 (0.7) (1.8)
---- ---- ----
Effective tax rate 27.8% 28.0% 25.5%
==== ==== ====
The components of the net deferred Federal income tax asset (included in
Interest Receivable and Other Assets on the accompanying consolidated
balance sheets) at December 31 are as follows (000s omitted):
2005 2004
------ ------
Deferred Federal income tax assets:
Allowance for loan losses $4,663 $4,734
Net deferred loan origination fees 280 545
Tax versus book depreciation differences 296 474
Net unrealized losses on securities available for sale 2,694 58
Accrued postretirement benefits 771 552
Other, net 199 191
------ ------
$8,903 $6,554
Deferred Federal income tax liabilities:
Accretion of bond discount $ (227) $ (299)
------ ------
$ (227) $ (299)
------ ------
Net deferred Federal income tax asset $8,676 $6,255
====== ======
(14) REGULATORY CAPITAL REQUIREMENTS
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory (and possibly
additional discretionary) actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Corporation and the Bank must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios
(set forth in the accompanying tables) of Total and Tier I capital to risk
weighted assets and of Tier I capital to average assets.
As of December 31, 2005, the Corporation's capital ratios exceeded the
required minimums to be considered well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum Total risk based, Tier I
risk based, and Tier I leverage ratios as set forth in the tables. There
are no conditions or events since December 31, 2005 that Management
believes have changed the Corporation's category. Management believes, as
of December 31, 2005, that the Corporation meets all capital adequacy
requirements to which it is subject.
The Corporation's and Bank's actual capital amounts and ratios are also
presented in the table (000's omitted in dollar amounts).
38
Minimum to
Qualify as
Actual Well Capitalized
---------------- ----------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
AS OF DECEMBER 31, 2005:
Total Capital to Risk-Weighted Assets
Consolidated $170,347 15.0% $113,895 10.0%
Monroe Bank & Trust 169,434 14.9% 113,892 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 156,432 13.7% 68,337 6.0%
Monroe Bank & Trust 155,519 13.7% 68,335 6.0%
Tier 1 Capital to Average Assets
Consolidated 156,432 9.6% 81,161 5.0%
Monroe Bank & Trust 155,519 9.6% 81,159 5.0%
Minimum to
Qualify as
Actual Well Capitalized
---------------- ----------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
AS OF DECEMBER 31, 2004:
Total Capital to Risk-Weighted Assets
Consolidated $168,796 15.6% $108,483 10.0%
Monroe Bank & Trust 166,976 15.4% 108,483 10.0%
Tier 1 Capital to Risk-Weighted Assets
Consolidated 155,207 14.3% 65,090 6.0%
Monroe Bank & Trust 153,387 14.1% 65,090 6.0%
Tier 1 Capital to Average Assets
Consolidated 155,207 10.0% 77,275 5.0%
Monroe Bank & Trust 153,387 9.9% 77,275 5.0%
(15) EARNINGS PER SHARE
The calculation of earnings per common share for the years ended December
31 is as follows:
2005 2004 2003
----------- ----------- -----------
Basic
Net income $17,979,000 $22,599,000 $19,315,000
Less preferred dividends -- -- --
Net income applicable to common stock $17,979,000 $22,599,000 $19,315,000
Average common shares outstanding 17,344,376 17,444,165 19,026,369
Earnings per common share - basic $ 1.04 $ 1.30 $ 1.02
2005 2004 2003
----------- ----------- -----------
Diluted
Net income $17,979,000 $22,599,000 $19,315,000
Less preferred dividends -- -- --
Net income applicable to common stock $17,979,000 $22,599,000 $19,315,000
Average common shares outstanding 17,344,376 17,444,165 19,026,369
Stock option adjustment 73,991 83,500 46,260
Average common shares outstanding - diluted 17,418,367 17,527,665 19,072,629
Earnings per common share - diluted $ 1.03 $ 1.29 $ 1.01
(16) STOCK-BASED COMPENSATION PLAN
The Long-Term Incentive Compensation Plan approved by shareholders at the
April 6, 2000 Annual Meeting of Shareholders of Monroe Bank & Trust
authorized the Board of Directors to grant nonqualified stock options to
key employees and non-employee directors. Such grants may be made until
January 2, 2010 for up to 1,000,000 shares of the Corporation's common
stock. The amount that may be awarded to any one individual is limited to
100,000 shares in any one calendar year. As of December 31, 2005, the
number of shares available under the plan is 267,729. This includes 76,083
shares that were previously awarded that have been forfeited.
Stock options granted under the plan have exercise prices equal to the fair
market value at the date of grant. Options granted under the plan may be
exercised for a period of no more than ten years from the date of grant.
One-third of the options granted to key employees in 2005 and 2004 vest
annually, beginning December 31, 2005, and December 31, 2004, respectively.
The options granted to key employees in 2003, 2002 and 2000 are vested as
of December 31, 2005, December 31, 2004 and December 31, 2002,
respectively. The options granted to non-employee directors in 2002 and
2001 vested on December 31, 2002 and December 31, 2001, respectively.
39
A summary of the status of stock options under the plan is presented in the
table below.
2005 2004 2003
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Options Outstanding, January 1 433,787 $15.21 480,802 $14.73 323,949 $15.52
Granted 136,000 23.40 161,000 16.69 179,500 13.20
Exercised 88,162 14.16 183,915 14.97 19,647 13.86
Forfeited/Expired 48,983 15.34 24,100 17.33 -- --
Cancelled -- -- -- -- 3,000 13.85
------- ------ ------- ------ ------- ------
Options Outstanding, December 31 432,642 $17.99 433,787 $15.21 480,802 $14.73
------- ------ ------- ------ ------- ------
Options Exercisable, December 31 303,321 $16.54 266,637 $15.08 306,445 $15.49
------- ------ ------- ------ ------- ------
Weighted Average Fair Value of
Options Granted During Year $ 5.10 $ 3.52 $ 2.63
The options outstanding as of December 31, 2005 are exercisable at prices
ranging from $13.20 to $23.40. The options exercisable as of December 31,
2005 are exercisable at prices ranging from $13.20 to $23.40. The number of
options and remaining life of options at each exercise price are as
follows:
Outstanding Options Exercisable Options
------------------------ ------------------------
Remaining Life Remaining Life
Exercise Price Shares (in years) Shares (in years)
-------------- ------- -------------- ------- --------------
$ 13.20 87,669 7.01 87,669 7.01
$ 13.85 37,671 6.01 37,671 6.01
$ 13.94 4,402 5.01 4,402 5.01
$ 16.69 114,500 8.01 75,839 8.01
$18.125 52,400 4.50 52,400 4.50
$ 23.40 136,000 9.01 45,340 9.01
------- -------
432,642 303,321
(17) PARENT COMPANY
Condensed parent company financial statements, which include transactions
with the subsidiary, are as follows (000s omitted):
BALANCE SHEETS
DECEMBER 31,
-------------------
2005 2004
-------- --------
Assets
Cash and due from banks $ 2,962 $ 3,994
Investment in subsidiary bank 150,706 153,524
Other assets 32 --
-------- --------
Total assets $153,700 $157,518
======== ========
LIABILITIES
Dividends payable and other liabilities $ 2,081 $ 2,172
-------- --------
Total liabilities 2,081 2,172
======== ========
STOCKHOLDERS' EQUITY
Total stockholders' equity 151,619 155,346
-------- --------
Total liabilities and stockholders' equity $153,700 $157,518
======== ========
40
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31,
----------------------------
2005 2004 2003
------- ------- --------
Income
Dividends from subsidiary bank $15,871 $12,829 $ 42,061
------- ------- --------
Total income 15,871 12,829 42,061
------- ------- --------
EXPENSE
Interest on other borrowed funds -- -- --
Other expense 150 176 399
------- ------- --------
Total expense 150 176 399
------- ------- --------
Income before tax and equity in undistributed
net income of subsidiary bank 15,721 12,653 41,662
Income tax benefit (52) (51) (102)
------- ------- --------
Income before equity in undistributed
net income of subsidiary bank 15,773 12,704 41,764
Equity in undistributed net income (loss)
of subsidiary bank 2,206 9,895 (22,449)
------- ------- --------
NET INCOME $17,979 $22,599 $ 19,315
======= ======= ========
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
------------------------------
2005 2004 2002
-------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income $ 17,979 $ 22,599 $ 19,315
Equity in undistributed net income (loss) of
subsidiary bank (2,206) (9,895) 22,449
Net increase (decrease) in other liabilities (125) (197) (164)
Net decrease in other assets 200 325 --
-------- -------- --------
Net cash provided by operating activities $ 15,848 $ 12,832 $ 41,600
-------- -------- --------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Issuance of common stock $ 1,396 $ 2,940 $ 342
Repurchase of common stock (6,984) (3,874) (31,008)
Dividends paid (11,292) (10,649) (10,904)
-------- -------- --------
Net cash used for financing activities $(16,880) $(11,583) $(41,570)
-------- -------- --------
NET INCREASE IN CASH
AND CASH EQUIVALENTS $ (1,032) $ 1,249 $ 30
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 3,994 2,745 2,715
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,962 $ 3,994 $ 2,745
-------- -------- --------
Under current regulations, the Bank is limited in the amount it may loan to
the Corporation. Loans to the Corporation may not exceed ten percent of the
Bank's capital stock, surplus, and undivided profits plus the allowance for
loan losses. Loans from the Bank to the Corporation are required to be
collateralized. Accordingly, at December 31, 2005, Bank funds available for
loans to the Corporation amounted to $16,907,000. The Bank has not made any
loans to the Corporation.
Federal and state banking laws and regulations place certain restrictions
on the amount of dividends a bank may make to its parent company. Michigan
law limits that amount of dividends the Bank can pay to the Corporation
without regulatory approval to the sum of its current year net income and
its undivided profits for the two previous years. Accordingly, the Bank can
pay dividends of $27,914,000 in 2006, in addition to its 2006 net income,
without regulatory approval.
(18) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the amount
recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit
and standby letters of credit is represented by the contractual amount of
those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for its other lending
activities.
41
Financial instruments whose contractual amounts represent off-balance sheet
credit risk at December 31 were as follows (000s omitted):
CONTRACTUAL AMOUNT
-------------------
2005 2004
-------- --------
Commitments to extend credit:
Unused portion of commercial lines of credit $130,496 $123,739
Unused portion of credit card lines of credit 7,529 7,265
Unused portion of home equity lines of credit 20,258 23,709
Standby letters of credit and financial guarantees written 12,736 16,449
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, generally have fixed expiration dates or other termination clauses,
and require payment of a fee. Since the lines of credit may expire without being
drawn upon, the total committed amounts do not necessarily represent future cash
requirements. Credit card lines of credit have various established expiration
dates, but are fundable on demand. Home equity lines of credit are secured by
real estate mortgages, a majority of which have ten year expiration dates, but
are fundable on demand. The Bank evaluates each customer's creditworthiness on a
case by case basis. The amount of the collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on Management's credit evaluation
of the counter party.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements and
other business transactions. Approximately $8,917,000 of the letters of credit
expires in 2006 and $3,819,000 extends for two to five years. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (000S OMITTED):
2005 FIRST SECOND THIRD FOURTH
---- ------- ------- ------- -------
Total Interest Income $20,919 $21,919 $23,177 $23,680
Total Interest Expense 8,297 9,228 10,064 10,994
------- ------- ------- -------
Net Interest Income 12,622 12,691 13,113 12,686
Provision for Loan Losses 600 600 4,100 1,606
Other Income 3,446 3,664 3,683 3,656
Other Expenses 8,729 8,210 9,023 7,856
------- ------- ------- -------
Income Before Provision For Income Taxes 6,739 7,545 3,673 6,880
Provision For Income Taxes 1,860 2,176 1,102 1,720
------- ------- ------- -------
Net Income $ 4,879 $ 5,369 $ 2,571 $ 5,160
======= ======= ======= =======
Basic Earnings Per Common Share $ 0.28 $ 0.31 $ 0.15 $ 0.30
Diluted Earnings Per Common Share $ 0.28 $ 0.31 $ 0.15 $ 0.29
Dividends Declared Per Share $ 0.16 $ 0.16 $ 0.17 $ 0.17
2004 FIRST SECOND THIRD FOURTH
---- ------- ------- ------- -------
Total Interest Income $18,560 $19,250 $20,744 $21,149
Total Interest Expense 5,920 6,266 7,117 7,695
------- ------- ------- -------
Net Interest Income 12,640 12,984 13,627 13,454
Provision for Loan Losses 600 600 600 691
Other Income 3,226 3,361 3,396 3,793
Other Expenses 7,889 7,995 8,025 8,707
------- ------- ------- -------
Income Before Provision For Income Taxes 7,377 7,750 8,398 7,849
Provision For Income Taxes 1,977 2,102 2,289 2,407
------- ------- ------- -------
Net Income $ 5,400 $ 5,648 $ 6,109 $ 5,442
======= ======= ======= =======
Basic Earnings Per Common Share $ 0.31 $ 0.32 $ 0.35 $ 0.32
Diluted Earnings Per Common Share $ 0.31 $ 0.32 $ 0.35 $ 0.31
Dividends Declared Per Share $ 0.15 $ 0.15 $ 0.16 $ 0.16
42
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS AND PROCEDURES
CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
MBT Financial Corp. carried out an evaluation, under the supervision and with
the participation of its management, including its Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures as of December 31, 2005,
pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Corporation's
disclosure controls and procedures were effective as of December 31, 2005, in
timely alerting them to material information relating to the Corporation
(including its consolidated subsidiaries) required to be in the Corporation's
periodic SEC filings.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of MBT Financial Corp. is responsible for establishing and
maintaining adequate internal control over financial reporting. MBT Financial
Corp.'s internal control over financial reporting is a process designed under
the supervision of the Corporation's Chief Executive Officer and Chief Financial
Officer to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of the Corporation's financial statements for
external reporting purposes in accordance with U.S. generally accepted
accounting principles.
MBT Financial Corp.'s management assessed the effectiveness of the Corporation's
internal control over financial reporting as of December 31, 2005 based on
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in "Internal Control-Integrated Framework." Based on that
assessment, management determined that, as of December 31, 2005, the
Corporation's internal control over financial reporting is effective, based on
those criteria. Management's assessment of the effectiveness of the
Corporation's internal control over financial reporting as of December 31, 2005
has been audited by Plante & Moran, PLLC, an independent registered public
accounting firm, as stated in their report appearing on page 44.
ITEM 9B. OTHER INFORMATION
None.
43
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
MBT Financial Corp. and Subsidiaries
Monroe, Michigan
We have audited management's assessment included in the accompanying Report of
Management on MBT Financial Corp. and Subsidiaries Internal Control Over
Financial Reporting, that the Company maintained effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audits included obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that MBT Financial Corp. and
Subsidiaries maintained effective internal control over financial reporting as
of December 31, 2005, is fairly stated, in all material respects, based on COSO
criteria. Also in our opinion, MBT Financial Corp. and Subsidiaries maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2005 based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Consolidated Balance Sheets of
MBT Financial Corp. and Subsidiaries as of December 31, 2005 and 2004 and the
related consolidated statements of earnings, shareholders equity and cash flow
for each of the three years in the period ended December 31, 2005 and our report
dated February 28, 2006, expressed an unqualified opinion thereon.
/s/ Plante & Moran, PLLC
-------------------------------------
February 28, 2006
Auburn Hills, Michigan
44
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(A) EXECUTIVE OFFICERS - See "Executive Officers" in part I, Item 1 hereof.
(B) DIRECTORS AND EXECUTIVE OFFICERS - information required by this item is
incorporated by reference from the sections entitled "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
the Proxy Statement for the Annual Meeting of Shareholders that is to be
filed with the Securities Exchange Commission.
(C) AUDIT COMMITTEE FINANCIAL EXPERT - The Board of Directors has determined
that Peter H. Carlton, member of the Audit Committee, is an "audit
committee financial expert" and "independent" as defined under applicable
SEC and Nasdaq rules.
(D) MBT Financial Corp. has adopted its CODE OF ETHICS, a code of ethics that
applies to all its directors, officers, and employees, including its Chief
Executive Officer, Chief Financial Officer, and internal auditor. A copy of
the Code of Ethics is posted on our website at http://www.mbandt.com. In
the event we make any amendment to, or grant any waiver of, a provision of
the Code of Ethics that applies to the principal executive officers,
principal financial officer, principal accounting officer, or controller,
or persons performing similar functions that require disclosure under
applicable SEC rules, we intend to disclose such amendment or waiver, the
reasons for it, and the nature of any waiver, the name of the person to
whom it was granted, and the date, on our internet website.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference from the sections
entitled "Executive Compensation and Other Information" and "Compensation
Committee Interlocks and Insider Participation in Compensation Decisions" in the
Proxy Statement for the Annual Meeting of Shareholders that is to be filed with
the Securities and Exchange Commission.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information required by this item is incorporated by reference from the section
entitled "Ownership of Voting Shares" in the Proxy Statement for the Annual
Meeting of Shareholders that is to be filed with the Securities and Exchange
Commission.
Securities authorized for issuance under equity compensation plans as of
December 31, 2005 were as follows:
Number of securities remaining
Number of securities to be Weighted average available for future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, warrants, outstanding options, (excluding securities reflected in
and rights warrants, and rights the first column)
------------------------------ -------------------- -----------------------------------
Equity Compensation plans approved
by security holders 433,787 $15.22 331,045
Equity Compensation plans not
approved by security holders 0 0 0
------- ------ -------
Total 433,787 $15.22 331,045
======= ====== =======
45
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference from the section
entitled "Certain Transactions" in the Proxy Statement for the Annual Meeting of
Shareholders that is to be filed with the Securities and Exchange Commission.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated by reference from the section
entitled "Principal Accounting Firm Fees" in the Proxy Statement for the Annual
Meeting of Shareholders that is to be filed with the Securities and Exchange
Commission.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Contents
Financial Statements
Reports of Independent Registered Public Accounting Firm - Page 22
Consolidated Balance Sheets as of December 31, 2005 and 2004 - Page 23
Consolidated Statements of Income for the Years Ended
December 31, 2005, 2004, and 2003 - Page 24
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 2005, 2004, and 2003 - Page 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004, and 2003- Page 26
Notes to Consolidated Financial Statements - Pages 27 - 42
Exhibits
The following exhibits are filed as a part of this report:
3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously
filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as
Exhibit 3.2 to MBT Financial Corp.'s Form 10-K for its fiscal year ended
December 31, 2004.
10.1 MBT Financial Corp. Long-Term Incentive Compensation Plan. Previously
filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2000.
10.2 Monroe Bank & Trust Salary Continuation Agreement with Ronald D. LaBeau.
Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-K for
its fiscal year ended December 31, 2000.
10.3 Monroe Bank & Trust Split Dollar Life Insurance Agreement with Directors.
Previously filed as Exhibit 10.3 to MBT Financial Corp.'s Form 10-K for
its fiscal year ended December 31, 2000.
10.4 Monroe Bank & Trust Group Term Carve Out Plan Providing Life Insurance
Benefits to Executive Officers. Previously filed as Exhibit 10.4 to MBT
Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000.
10.5 MBT Financial Corp. Amended and Restated Change in Control Agreement with
H. Douglas Chaffin.
10.6 Monroe Bank & Trust Group Term Carve Out Plan Providing Life Insurance
Benefits to Executive Officers. Previously filed as Exhibit 10.6 to MBT
Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2001.
46
10.7 Monroe Bank & Trust Supplemental Executive Retirement Agreement with H.
Douglas Chaffin. Previously filed as Exhibit 10.1 to MBT Financial
Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003.
10.8 Monroe Bank & Trust Split Dollar Agreement with H. Douglas Chaffin.
Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-Q for
its fiscal quarter ended September 30, 2003.
10.9 MBT Financial Corp. Severance Agreements with Donald M. Lieto, James E.
Morr, Thomas G. Myers, and John L. Skibski. Previously filed as Exhibit
10 on Form 8-K filed by MBT Financial Corp. on January 26, 2006.
21 Subsidiaries of the Registrant. Previously filed as Exhibit 21 to MBT
Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000.
23 Consent of Independent Auditors
31.1 Certification by Chief Executive Officer required by Securities and
Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities and
Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32 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.
47
================================================================================
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Dated: March 10, 2006 MBT FINANCIAL CORP.
By: /s/ John L. Skibski
------------------------------------
John L. Skibski
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
Dated: March 10, 2006
By: /s/ H. Douglas Chaffin By: /s/ John L. Skibski
--------------------------------- ------------------------------------
H. Douglas Chaffin John L. Skibski
President, Chief Executive Chief Financial Officer
Officer & Director
By: /s/ William D. McIntyre, Jr. By: /s/ Peter H. Carlton
--------------------------------- ------------------------------------
William D. McIntyre, Jr. Peter H. Carlton
Chairman Director
By: /s/ Joseph S. Daly By: /s/ Thomas M. Huner
--------------------------------- ------------------------------------
Joseph S. Daly Thomas M. Huner
Director Director
By: /s/ Philip P. Swy By: /s/ Michael J. Miller
--------------------------------- ------------------------------------
Philip P. Swy Michael J. Miller
Director Director
By: /s/ Karen M. Wilson
------------------------------------
Karen M. Wilson
Director
48
EXHIBIT INDEX
Exhibit Number Description of Exhibits
-------------- -----------------------
3.1 Restated Articles of Incorporation of MBT Financial Corp.
Previously filed as Exhibit 3.1 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously
filed as Exhibit 3.2 to MBT Financial Corp.'s Form 10-K for its
fiscal year ended December 31, 2004.
10.1 MBT Financial Corp. Long-Term Incentive Compensation Plan.
Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
10.2 Monroe Bank & Trust Salary Continuation Agreement. Previously
filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-K for
its fiscal year ended December 31, 2000.
10.3 Monroe Bank & Trust Split Dollar Life Insurance Agreement.
Previously filed as Exhibit 10.3 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
10.4 Monroe Bank & Trust Group Term Carve Out Plan. Previously filed
as Exhibit 10.4 to MBT Financial Corp.'s Form 10-K for its
fiscal year ended December 31, 2000.
10.5 MBT Financial Corp. Amended and Restated Change in Control
Agreement with H. Douglas Chaffin.
10.6 Monroe Bank & Trust Group Term Carve Out Plan. Previously filed
as Exhibit 10.6 to MBT Financial Corp.'s Form 10-K for its
fiscal year ended December 31, 2001.
10.7 Monroe Bank & Trust Supplemental Executive Retirement
Agreement. Previously filed as Exhibit 10.1 to MBT Financial
Corp.'s Form 10-Q for its fiscal quarter ended September 30,
2003.
10.8 Monroe Bank & Trust Split Dollar Agreement. Previously filed as
Exhibit 10.2 to MBT Financial Corp.'s Form 10-Q for its fiscal
quarter ended September 30, 2003.
10.9 MBT Financial Corp. Severance Agreement with Donald M. Lieto,
James E. Morr, Thomas G. Myers, and John L. Skibski. Previously
filed as Exhibit 10 on Form 8-K filed by MBT Financial Corp. on
January 26, 2006.
21 Subsidiaries of the Registrant. Previously filed as Exhibit 21
to MBT Financial Corp.'s Form 10-K for its fiscal year ended
December 31, 2000.
23 Consent of Independent Auditors
31.1 Certification by Chief Executive Officer required by Securities
and Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities
and Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 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.
49