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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the quarterly period ended September 30, 2008
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-30973
MBT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
MICHIGAN 38-3516922
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 E. FRONT STREET
MONROE, MICHIGAN 48161
(Address of principal executive offices)
(Zip Code)
(734) 241-3431
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X]
Non-accelerated filer [ ] Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 7, 2008, there were 16,142,652 shares of the Company's Common
Stock outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2008 DECEMBER 31,
Dollars in thousands (UNAUDITED) 2007
-------------------- ------------------ ------------
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 22,527 $ 25,113
Fed Funds Sold 5,300 --
---------- ----------
Total cash and cash equivalents 27,827 25,113
Securities - Held to Maturity 38,248 44,734
Securities - Available for Sale 345,387 380,238
Federal Home Loan Bank stock - at cost 13,086 13,086
Loans held for sale 267 1,431
Loans - Net 962,363 980,606
Accrued interest receivable and other assets 41,658 36,370
Bank Owned Life Insurance 45,083 42,509
Premises and Equipment - Net 31,790 32,719
---------- ----------
Total assets $1,505,709 $1,556,806
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 136,989 $ 141,115
Interest-bearing 943,205 968,865
---------- ----------
Total deposits 1,080,194 1,109,980
Federal Home Loan Bank advances 261,500 256,500
Federal funds purchased -- 13,300
Repurchase agreements 30,000 35,000
Interest payable and other liabilities 13,602 14,579
---------- ----------
Total liabilities 1,385,296 1,429,359
---------- ----------
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized,
16,139,538 and 16,148,863 shares issued and outstanding) -- --
Retained Earnings 127,621 129,917
Accumulated other comprehensive loss (7,208) (2,470)
---------- ----------
Total stockholders' equity 120,413 127,447
---------- ----------
Total liabilities and stockholders' equity $1,505,709 $1,556,806
========== ==========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-2-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
THREE MONTHS
ENDED
SEPTEMBER 30,
-----------------
Dollars in thousands, except per share data 2008 2007
------------------------------------------- ------- -------
INTEREST INCOME
Interest and fees on loans $15,689 $18,116
Interest on investment securities-
Tax-exempt 844 875
Taxable 4,558 4,541
Interest on federal funds sold 22 25
------- -------
Total interest income 21,113 23,557
------- -------
INTEREST EXPENSE
Interest on deposits 6,263 8,277
Interest on borrowed funds 3,764 4,612
------- -------
Total interest expense 10,027 12,889
======= =======
NET INTEREST INCOME 11,086 10,668
PROVISION FOR LOAN LOSSES 4,100 1,000
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 6,986 9,668
------- -------
OTHER INCOME
Income from wealth management services 1,087 1,171
Service charges and other fees 1,683 1,599
Net gain on sales of securities 323 4
Origination fees on mortgage loans sold 73 169
Bank owned life insurance income 355 329
Other 744 656
------- -------
Total other income 4,265 3,928
------- -------
OTHER EXPENSES
Salaries and employee benefits 5,090 5,363
Occupancy expense 801 845
Equipment expense 804 780
Marketing expense 297 426
Professional fees 401 369
Net loss on other real estate owned 2,215 12
Other 1,757 1,447
------- -------
Total other expenses 11,365 9,242
------- -------
INCOME (LOSS) BEFORE INCOME TAXES (114) 4,354
INCOME TAX EXPENSE (BENEFIT) (438) 1,173
------- -------
NET INCOME $ 324 $ 3,181
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.02 $ 0.20
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.02 $ 0.20
======= =======
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.09 $ 0.18
======= =======
The accompanying notes to consolidated financial statements are integral part of
these statements.
-3-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
Dollars in thousands, except per share data 2008 2007
------------------------------------------- ------- -------
INTEREST INCOME
Interest and fees on loans $47,888 $53,628
Interest on investment securities-
Tax-exempt 2,477 2,755
Taxable 14,312 14,038
Interest on federal funds sold 23 141
------- -------
Total interest income 64,700 70,562
------- -------
INTEREST EXPENSE
Interest on deposits 20,122 24,213
Interest on borrowed funds 11,912 13,711
------- -------
Total interest expense 32,034 37,924
======= =======
NET INTEREST INCOME 32,666 32,638
PROVISION FOR LOAN LOSSES 8,000 2,500
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 24,666 30,138
------- -------
OTHER INCOME
Income from trust services 3,333 3,389
Service charges and other fees 4,795 4,698
Net gain on sales of securities 371 96
Origination fees on mortgage loans sold 357 562
Bank Owned Life Insurance income 985 959
Other 2,244 2,106
------- -------
Total other income 12,085 11,810
------- -------
OTHER EXPENSES
Salaries and employee benefits 16,113 16,411
Occupancy expense 2,712 2,569
Equipment expense 2,480 2,475
Marketing expense 894 1,047
Professional fees 1,325 1,145
Net loss on other real estate 2,604 22
Other 5,098 3,964
------- -------
Total other expenses 31,226 27,633
------- -------
INCOME BEFORE INCOME TAXES 5,525 14,315
INCOME TAX EXPENSE 836 3,896
------- -------
NET INCOME $ 4,689 $10,419
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.29 $ 0.63
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.29 $ 0.63
======= =======
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.45 $ 0.54
======= =======
The accompanying notes to consolidated financial statements are integral part of
these statements.
-4-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
Dollars in thousands 2008 2007
-------------------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,689 $ 10,419
Adjustments to reconcile net income to net cash from
operating activities
Provision for loan losses 8,000 2,500
Depreciation 2,003 2,030
Increase in net deferred Federal income tax asset (743) (475)
Net (accretion) amortization of investment premium
and discount (25) (253)
Writedowns of Other Real Estate Owned 2,449 --
Net increase (decrease) in interest payable and other
liabilities (768) 949
Net increase in interest receivable and other assets (5,398) (2,184)
Equity based compensation expense 175 502
Net gain on sale/settlement of securities (371) (96)
Increase in cash surrender value of life insurance (985) (959)
--------- --------
Net cash provided by operating activities $ 9,026 $ 12,433
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment
securities held to maturity $ 8,673 $ 19,818
Proceeds from maturities and redemptions of investment
securities available for sale 182,320 23,290
Proceeds from sales of investment securities available
for sale 23,943 47,737
Net (increase) decrease in loans 11,407 (11,818)
Proceeds from sales of other real estate owned 2,225 1,482
Proceeds from sales of other assets 187 219
Purchase of investment securities held to maturity (2,185) (4,757)
Purchase of Bank Owned Life Insurance (1,589) (1,584)
Purchase of investment securities available for sale (178,518) (63,137)
Purchase of bank premises and equipment (1,079) (1,344)
--------- --------
Net cash provided by investing activities $ 45,384 $ 9,906
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits $ (29,786) $ (5,983)
Net increase (decrease) in short term borrowings (13,300) 8,200
Proceeds from Federal Home Loan Bank borrowings 5,000 --
Net decrease in securities sold under agreements to
repurchase (5,000) (5,000)
Proceeds from issuance of common stock 99 87
Repurchase of common stock -- (7,427)
Dividends paid (8,709) (8,954)
--------- --------
Net cash used for financing activities $ (51,696) $(19,077)
========= ========
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 2,714 $ 3,262
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,113 27,903
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,827 $ 31,165
========= ========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-5-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL
-------------------- ---------- -------- ------------- --------
BALANCE - JANUARY 1, 2008 $ -- $129,917 $(2,470) $127,447
Issuance of Common Stock (14,541 shares) -- 99 -- 99
Equity Compensation -- 175 -- 175
Dividends declared ($0.45 per share) -- (7,259) -- (7,259)
Comprehensive income:
Net income -- 4,689 -- 4,689
Change in net unrealized loss on securities
available for sale - Net of tax effect of $2,495 -- -- (4,633) (4,633)
Reclassification adjustment for gains included
in net income - Net of tax effect of $130 -- -- (241) (241)
Change in postretirement benefit obligation
Net of tax effect of ($73) -- -- 136 136
---- -------- ------- --------
Total Comprehensive Income (49)
========
BALANCE - SEPTEMBER 30, 2008 $ -- $127,621 $(7,208) $120,413
==== ======== ======= ========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-6-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of MBT
Financial Corp. (the "Company") and its subsidiary, Monroe Bank & Trust (the
"Bank"). The Bank includes the accounts of its wholly owned subsidiaries, MBT
Credit Company, Inc. and MB&T Financial Services, Inc. The Bank operates twenty
branches in Monroe County, Michigan and five branches in Wayne County, Michigan.
MBT Credit Company, Inc. operates a mortgage loan office in Monroe County. The
Bank's primary source of revenue is from providing loans to customers, who are
predominantly small and middle-market businesses and middle-income individuals.
The Company's sole business segment is community banking.
The accounting and reporting policies of the Bank conform to practice within the
banking industry and are in accordance with accounting principles generally
accepted in the United States. Preparation of financial statements in conformity
with generally accepted accounting principles requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes in
the near term are the determination of the allowance for loan losses and the
valuation of other real estate owned.
The accompanying unaudited consolidated financial statements of the Company have
been prepared in accordance with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. However, such
information reflects all adjustments (consisting of normal recurring
adjustments), which are, in the opinion of Management, necessary for fair
statement of results for the interim periods.
The significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiary. All material intercompany transactions and balances have been
eliminated.
COMPREHENSIVE INCOME
Accounting principles generally require that revenue, expenses, gains, and
losses be included in net income. Certain changes in assets and liabilities,
however, such as unrealized gains and losses on securities available for sale
and amounts recognized related to postretirement benefit plans (gains and
losses, prior service costs, and transition assets or obligations), are reported
as a direct adjustment to the equity section of the balance sheet. Such items,
along with net income, are components of comprehensive income.
BUSINESS SEGMENTS
While the Company's chief decision makers monitor the revenue streams of various
products and services, operations are managed and financial performance is
evaluated on a company wide basis. Accordingly, all of the Company's operations
are considered by management to be aggregated in one reportable segment.
FAIR VALUE
In February 2007, the Financial Accounting Standards Board "FASB" issued FAS No.
159, The Fair Value Option for Financial Assets and Financial Liabilities (FAS
159). FAS 159 permits companies to elect on an instrument by instrument basis to
fair value certain financial assets and
-7-
financial liabilities with changes in fair value recognized in earnings as they
occur. The election to fair value is generally irrevocable. In April 2007, the
Corporation elected early adoption of FAS 159 as of January 1, 2007. The
Corporation did not select any financial assets or financial liabilities for
fair value measurement, but elected early adoption in order to be able to apply
the fair value option to financial assets and financial liabilities that may be
acquired prior to the effective date of the statements. Upon early adoption of
FAS 159, the Corporation concurrently adopted the provisions of FAS 157,
effective January 1, 2007.
The Corporation measures or monitors many of its assets and liabilities on a
fair value basis. Fair value is used on a recurring basis for assets and
liabilities that are elected to be accounted for under FAS 159 as well as for
certain assets and liabilities in which fair value is the primary basis of
accounting. Examples of these include derivative instruments and available for
sale securities. Additionally, fair value is used on a non-recurring basis to
evaluate assets or liabilities for impairment or for disclosure purposes.
Examples of these non-recurring uses of fair value include certain loans held
for sale accounted for on a lower of cost or market basis. Fair value is defined
as the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the
measurement date. Depending on the nature of the asset or liability, the
Corporation uses various valuation techniques and assumptions when estimating
fair value, which are in accordance with FAS 157.
In accordance with FAS 157, the Corporation applied the following fair value
hierarchy:
Level 1 -- inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets. The
Corporation's U.S. government agency securities, government sponsored mortgage
backed securities, and mutual fund investments where quoted prices are available
in an active market generally are classified within Level 1 of the fair value
hierarchy.
Level 2 -- Inputs to the valuation methodology include quoted prices for
similar assets and liabilities in active markets and inputs that are observable
for the asset or liability, either directly or indirectly, for substantially the
full term of the financial instrument. The Corporation's borrowed funds and
investments in obligations of states and political subdivisions and trust
preferred securities are generally classified in Level 2 of the fair value
hierarchy. Fair values for these instruments are estimated using pricing models,
quoted prices of securities with similar characteristics, or discounted cash
flows.
Level 3 -- Inputs to the valuation methodology are unobservable and
significant to the fair value measurement. Private equity investments are
classified within Level 3 of the fair value hierarchy. Fair values are initially
valued based on transaction price and are adjusted to reflect exit values.
When determining the fair value measurements for assets and liabilities required
or permitted to be recorded at and/or marked to fair value, the Corporation
considers the principal or most advantageous market in which it would transact
and considers assumptions that market participants would use when pricing the
asset or liability. When possible, the Corporation looks to active and
observable markets to price identical assets or liabilities. When identical
assets and liabilities are not traded in active markets, the Corporation looks
to market observable data for similar assets or liabilities. Nevertheless,
certain assets and liabilities are not actively traded in observable markets and
the Corporation must use alternative valuation techniques to derive a fair value
measurement.
-8-
2. EARNINGS PER SHARE
The calculation of net income per common share for the three months ended
September 30 is as follows:
2008 2007
----------- -----------
BASIC
Net income $ 324,000 $ 3,181,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 324,000 $ 3,181,000
----------- -----------
Average common shares outstanding 16,136,402 16,288,696
----------- -----------
Earnings per common share - basic $ 0.02 $ 0.20
----------- -----------
2008 2007
----------- -----------
DILUTED
Net income $ 324,000 $ 3,181,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 324,000 $ 3,181,000
----------- -----------
Average common shares outstanding 16,136,402 16,288,696
Stock option adjustment 27,461 21,583
----------- -----------
Average common shares outstanding -
diluted 16,163,863 16,310,279
----------- -----------
Earnings per common share - diluted $ 0.02 $ 0.20
----------- -----------
The calculation of net income per common share for the nine months ended
September 30 is as follows:
2008 2007
----------- -----------
BASIC
Net income $ 4,689,000 $10,419,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 4,689,000 $10,419,000
----------- -----------
Average common shares outstanding 16,131,436 16,509,813
----------- -----------
Earnings per common share - basic $ 0.29 $ 0.63
----------- -----------
2008 2007
----------- -----------
DILUTED
Net income $ 4,689,000 $10,419,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 4,689,000 $10,419,000
----------- -----------
Average common shares outstanding 16,131,436 16,509,813
Stock option adjustment 27,461 21,583
----------- -----------
Average common shares outstanding -
diluted 16,158,897 16,531,396
----------- -----------
Earnings per common share - diluted $ 0.29 $ 0.63
----------- -----------
3. STOCK BASED COMPENSATION
The following table summarizes the options that have been granted to
non-employee directors and certain key executives in accordance with the
Long-Term Incentive Compensation Plan that was approved by shareholders at the
Annual Meeting of Shareholders on April 6, 2000.
Weighted Average
Shares Exercise Price
------- ----------------
Options Outstanding, January 1, 2008 602,143 $17.36
Granted -- --
Exercised -- --
Forfeited 58,334 16.90
------- ------
Options Outstanding, September 30, 2008 543,809 $17.41
------- ------
Options Exercisable, September 30, 2008 457,987 $17.75
------- ------
-9-
On June 4, 2008, performance restricted stock units were awarded to certain key
executives in accordance with the MBT 2008 Stock Incentive Plan that was
approved by shareholders on May 1, 2008. Each restricted stock unit (RSU) is
equivalent to one share of MBT Financial Corp. common stock. Stock will be
issued to the participants following a three year performance period that ends
on December 31, 2010 based on the cumulative earnings per share during that
three year period. The RSUs vest on December 31, 2010. There were 21,500 RSUs
granted, and none will be considered vested and earned for payment if the
Company's three year cumulative earnings per share are less than $2.16. The
expense recorded for the RSUs in accordance with FAS 123(R) was $20,000 in the
first nine months of 2008. The amount of RSUs that will vest on December 31,
2010 is based on the three year cumulative earnings per share achieved by the
company during the vesting period as shown in the following schedule:
Three Year Cumulative Fully Diluted EPS for the Percent PSUs
Performance Period Ending December 31, 2010 Vested
----------------------------------------------- ------------
$2.40 100%
$2.34 90%
$2.28 80%
$2.24 70%
$2.21 60%
$2.16 50%
On June 4, 2008, Stock Only Stock Appreciation Rights (SOSARs) were awarded to
certain key executives in accordance with the MBT 2008 Stock Incentive Plan that
was approved by shareholders on May 1, 2008. The SOSARs have a term of ten years
and vest in three equal annual installments beginning December 31, 2008. SOSARs
granted under the plan are structured as fixed grants with the exercise price
equal to the market value of the underlying stock on the date of the grant.
The fair value of $1.39 for the SOSARs was estimated at the date of the grant,
using the Black-Scholes option pricing model, with the following assumptions:
expected option lives of 7 years, expected volatility of 25.9%, a risk free rate
of 3.61% and dividend yield of 4.87%. The expense recorded for the SOSARs in
accordance with FAS 123(R) was $33,000 in the first nine months of 2008. The
following table summarizes the SOSARs that have been granted:
Weighted Average
Shares Exercise Price
------ ----------------
SOSARs Outstanding, January 1, 2008 -- $0.00
Granted 99,500 8.53
Exercised -- --
Forfeited -- --
------ -----
SOSARs Outstanding, September 30, 2008 99,500 $8.53
------ -----
SOSARs Exercisable, September 30, 2008 -- $0.00
------ -----
The total expense for equity based compensation was $40,000 in the third quarter
of 2008 and $162,000 in the third quarter of 2007. The total expense for equity
based compensation was $175,000 in the first nine months of 2008 and $502,000 in
the first nine months of 2007.
4. LOANS
The Bank grants commercial, consumer, and mortgage loans primarily to customers
in Monroe County, Michigan, southern Wayne County, Michigan, and surrounding
areas. Although the Bank has a diversified loan portfolio, a substantial portion
of its debtors' ability to honor their contracts is dependent on the automotive,
manufacturing, and real estate development economic sectors.
-10-
Loans consist of the following (000s omitted):
September 30, December 31,
2008 2007
------------- ------------
Residential real estate loans $458,675 $ 489,038
Non-farm, non-residential real estate loans 342,802 357,622
Loans to finance agricultural production and
other loans to farmers 12,455 5,981
Commercial and industrial loans 135,020 107,375
Loans to individuals for household, family,
and other personal expenditures 32,064 40,705
All other loans (including overdrafts) 433 731
-------- ----------
Total loans, gross 981,449 1,001,452
Less: Deferred loan fees 678 624
-------- ----------
Total loans, net of deferred loan fees 980,771 1,000,828
Less: Allowance for loan losses 18,408 20,222
-------- ----------
$962,363 $ 980,606
======== ==========
Loans are placed in a nonaccrual status when, in the opinion of Management, the
collection of additional interest is doubtful. All loan relationships over
$250,000 that are classified by Management as nonperforming as well as selected
performing accounts are reviewed for impairment. Allowances for loans determined
to be impaired are included in the allowance for loan losses. All cash received
on nonaccrual loans is applied to the principal balance. Nonperforming assets
consist of nonaccrual loans, loans 90 days or more past due, restructured loans,
and other real estate owned. Other real estate owned includes real estate that
has been acquired in full or partial satisfaction of loan obligations or upon
foreclosure and real estate that the bank has purchased but no longer intends to
use for bank premises.
The following table summarizes nonperforming assets (000's omitted):
September 30, December 31,
2008 2007
------------- ------------
Nonaccrual loans $34,892 $30,459
Loans 90 days past due 119 102
Restructured loans 6,685 3,367
------- -------
Total nonperforming loans $41,696 $33,928
Other real estate owned 15,968 10,626
Other assets 1,925 1,939
------- -------
Total nonperforming assets $59,589 $46,493
======= =======
Nonperforming assets to total assets 3.96% 2.99%
Allowance for loan losses to
nonperforming loans 44.15% 59.60%
-11-
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000's omitted):
September 30, 2008 September 30, 2007
------------------ ------------------
Balance beginning of year $ 20,222 $13,764
Provision for loan losses 8,000 2,500
Loans charged off (10,516) (3,183)
Recoveries 702 1,242
-------- -------
Balance end of period $ 18,408 $14,323
======== =======
For each period, the provision for loan losses in the income statement is based
on Management's estimate of the amount required to maintain an adequate
Allowance for Loan Losses.
To serve as a basis for making this provision, the Bank maintains an extensive
credit risk monitoring process that considers several factors including: current
economic conditions affecting the Bank's customers, the payment performance of
individual loans and pools of homogeneous loans, portfolio seasoning, changes in
collateral values, and detailed reviews of specific loan relationships. For
loans deemed to be impaired due to an expectation that all contractual payments
will probably not be received, impairment is measured by comparing the Bank's
recorded investment in the loan to the present value of expected cash flows
discounted at the loan's effective interest rate, or the fair value of the
collateral, or the loan's observable market price.
The provision for loan losses increases the Allowance for Loan Losses, a
valuation account which is netted against loans on the consolidated statements
of condition. When it is determined that a customer will not repay a loan, the
loan is charged off, reducing the Allowance for Loan Losses. If, subsequent to a
charge off, the Bank is able to collect additional amounts from the customer or
sell collateral worth more than earlier estimated, a recovery is recorded.
6. INVESTMENT SECURITIES
The following is a summary of the Bank's investment securities portfolio as of
September 30, 2008 and December 31, 2007 (000's omitted):
September 30, 2008 December 31, 2007
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Held to Maturity
Obligations of U.S. Government Agencies $ 7 $ 7 $ 7 $ 8
Obligations of States and Political
Subdivisions 38,241 37,924 44,727 45,036
------- ------- ------- -------
$38,248 $37,931 $44,734 $45,044
======= ======= ======= =======
September 30, 2008 December 31, 2007
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Available for Sale
Obligations of U.S. Government Agencies $271,204 $270,984 $330,505 $330,178
Obligations of States and Political
Subdivisions 39,406 38,524 27,046 27,134
Other Securities 42,672 35,879 23,081 22,926
-------- -------- -------- --------
$353,282 $345,387 $380,632 $380,238
======== ======== ======== ========
The unrealized losses on investment securities are primarily the result of
increases in market interest rates and not the result of credit quality of the
issuers of the securities. The Company has the ability and intent to hold most
of these securities until recovery, which may be until maturity. For securities
in which the Company no longer has the intent to hold until recovery, the
securities are treated as other than temporarily impaired and the amount of
impairment is charged to earnings.
-12-
7. FAIR VALUE MEASUREMENTS
The following tables present information about the Company's assets measured at
fair value on a recurring basis at September 30, 2008, and the valuation
techniques used by the Company to determine those fair values.
In general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical assets that the Company has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable,
either directly or indirectly. These Level 2 inputs include quoted prices for
similar assets in active markets, and other inputs such as interest rates and
yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related asset.
In instances where inputs used to measure fair value fall into different levels
in the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company's assessment of the significance of particular inputs to
these fair value measurements requires judgment and considers factors specific
to each asset.
Assets measured at fair value on a recurring basis are as follows (000's
omitted):
Quoted Prices in
Active Markets for Significant Other Significant Balance at
Identical Assets Observable Inputs Unobservable September 30,
(Level 1) (Level 2) Inputs (Level 3) 2008
------------------ ----------------- ---------------- -------------
Investment Securities - Available for Sale $273,630 $50,503 $21,254 $345,387
The changes in Level 3 assets measured at fair value on a recurring basis were
(000's omitted):
Investment
Securities -
Available for Sale
------------------
BALANCE AT DECEMBER 31, 2007 $ 585
Total realized and unrealized gains (losses)
included in income --
Total unrealized gains (losses) included in other
comprehensive income (4,268)
Net purchases, sales, calls and maturities --
Net transfers in/out of Level 3 24,937
-------
BALANCE AT SEPTEMBER 30, 2008 $21,254
Of the Level 3 assets that were held by the Company at September 30, 2008, the
unrealized loss for the nine months ended September 30, 2008 was $4,439,000,
which is recognized in other comprehensive income in the consolidated statements
of financial condition. The Company did not have any sales or purchases of Level
3 available for sale securities during the period.
Both observable and unobservable inputs may be used to determine the fair value
of positions classified as Level 3 assets. As a result, the unrealized gains and
losses for these assets presented in the tables above may include changes in
fair value that were attributable to both observable and unobservable inputs.
-13-
The Level 3 fair values disclosed for December 31, 2007 through the first two
quarters of 2008 included $585,000 of available for sale investment securities
issued by local municipalities. Previously the Company estimated the fair value
of these bonds based on the present value of expected future cash flows using
management's best estimate of key assumptions, including forecasted interest
yield and payment rates, credit quality, and a discount rate commensurate with
the current market and other risks involved. During the third quarter of 2008,
the Company began using a yield curve pricing matrix to calculate the fair
value, and these securities were transferred out of Level 3 and into Level 2.
The Company owns pooled Trust Preferred Securities ("TRUPs) with a fair value of
$21,254,000 as of September 30, 2008. The Company reported the TRUPS as Level 2
assets as of June 30, 2008 using broker indications for fair values. As of
September 30, 2008, trading of these types of securities was only conducted on a
distress sale or forced liquidation basis. As a result, the Company is now
measuring the fair values of these assets using Level 3 inputs, specifically
discounted cash flow projections.
The Company also has assets that under certain conditions are subject to
measurement at fair value on a non-recurring basis. These assets include held to
maturity investments and loans. The Company estimated the fair values of these
assets using Level 3 inputs, specifically discounted cash flow projections.
Assets measured at fair value on a nonrecurring basis are as follows (000's
omitted):
Quoted
Prices Total Losses
in Active Significant for the Total Losses
Markets for Other Significant three months for the nine
Balance at Identical Observable Unobservable ended months ended
September 30, Assets Inputs Inputs September 30, September 30,
2008 (Level 1) (Level 2) (Level 3) 2008 2008
------------- ----------- ----------- ------------ ------------- -------------
Investment Securities - Held to Maturity $38,248 $ 7 $33,388 $ 4,853 $ -- $ --
Impaired loans accounted for under FAS 114 $44,567 $-- $ -- $44,567 $1,003 $5,225
Loan held for sale $ 267 $-- $ -- $ 267 $ -- $ --
Other Real Estate Owned $17,893 $-- $17,893 $ -- $2,215 $2,604
Held to maturity investment securities categorized as Level 3 assets primarily
consist of debt issued by local municipalities. The Company estimates the fair
value of these bonds based on the present value of expected future cash flows
using management's best estimate of key assumptions, including forecasted
interest yield and prepayment rates, credit quality and a discount rate
commensurate with the current market and other risks involved.
Impaired loans accounted for under FAS 114 categorized as Level 3 assets consist
of non-homogenous loans that are considered impaired. The Company estimates the
fair value of the loans based on the present value of expected future cash flows
using management's best estimate of key assumptions. These assumptions include
future payment ability, timing of payment streams, and estimated realizable
values of available collateral (typically based on outside appraisals).
8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for its other lending activities.
-14-
Financial instruments whose contractual amounts represent off-balance sheet
credit risk were as follows (000s omitted):
Contractual Amount
----------------------------
September 30, December 31,
2008 2007
------------- ------------
Commitments to extend credit:
Unused portion of commercial lines of credit $64,680 $92,774
Unused portion of credit card lines of credit 5,854 5,988
Unused portion of home equity lines of credit 21,257 20,047
Standby letters of credit and financial guarantees written 7,780 9,994
All other off-balance sheet assets 4,819 3,555
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, and generally have fixed expiration dates or other termination
clauses. Since the lines of credit may expire without being drawn upon, the
total committed amounts do not necessarily represent future cash requirements.
Credit card lines of credit have various established expiration dates, but are
fundable on demand. Home equity lines of credit are secured by real estate
mortgages, a majority of which have ten year expiration dates, but are fundable
on demand. The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of the collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on Management's credit evaluation of the
counterparty.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements and
other business transactions.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Introduction
MBT Financial Corp. (the "Company) is a bank holding company with one
subsidiary, Monroe Bank & Trust ("the Bank"). The Bank is a commercial bank with
two wholly owned subsidiaries, MBT Credit Company, Inc. and MB&T Financial
Services. MBT Credit Company, Inc. conducts lending operations for the Bank and
MB&T Financial Services is an insurance agency which sells insurance policies to
the Bank. The Bank operates 20 branch offices in Monroe County, Michigan and 5
offices in Wayne County, Michigan. The Bank's primary source of income is
interest income on its loans and investments and its primary expense is interest
expense on its deposits and borrowings.
The ongoing challenges in the southeast Michigan economy, with increasing
unemployment and decreasing real estate values, continue to have a negative
impact on our performance. We monitor the quality of our loan portfolios
closely, and we decided that the decrease in real estate values necessitated
write downs of some of our Other Real Estate Owned this quarter. The decrease in
the value of real estate collateral also required an increase in the allowance
for loan losses. Our Allowance for Loan Losses is now $18.4 million, or 1.88% of
loans. Non performing assets (NPAs) decreased from $62.3 million to $59.6
million during the quarter, largely due to the OREO write downs and loan charge
off activity.
-15-
Net Interest Income increased $418,000 compared to the third quarter of 2007 due
to the improvement in the net interest margin. We are encouraged by the third
consecutive quarterly improvement in the margin, and we are beginning to see the
benefits of our cost reduction initiatives. Non interest income, excluding
securities transactions, was flat compared to last year as Wealth Management
fees decreased due to lower market values for investments and origination fees
on mortgage loans sold decreased due to a significant decline in real estate
lending activity. Credit quality issues also affected our non interest expenses,
which increased 23% compared to last year. We expect credit related expenses to
remain high, but we will see meaningful expense improvement in most other areas.
Our capital levels remain strong, and well above regulatory minimums required to
be considered a well-capitalized institution. As of September 30, 2008 our total
tangible capital was $120,413,000. We have ample liquidity to meet the needs of
our qualified loan customers, and continue to maintain a financially sound and
solvent balance sheet. Due to the low level of earnings this year, our board of
directors decided to reduce the quarterly dividend by $0.09, or 50% during the
third quarter. This preserved $1.4 million of capital this quarter, and our
board will continue to evaluate all options concerning the payment of our
dividend each quarter.
Critical Accounting Policies
The Company's Allowance for Loan Losses is a "critical accounting estimate"
because it is an estimate that is based on assumptions that are highly
uncertain, and if different assumptions were used or if any of the assumptions
used were to change, there could be a material impact on the presentation of the
Company's financial condition. These assumptions include, but are not limited
to, collateral values and the effect of economic conditions on the financial
condition of the borrowers. To determine the Allowance for Loan Losses, the
Company estimates losses on all loans that are not classified as non accrual or
renegotiated by applying historical loss rates, adjusted for current conditions,
to those loans in accordance with SFAS 5. In addition, all loans that are non
accrual or renegotiated are individually tested for impairment. Any amount of
monetary impairment is included in the Allowance for Loan Losses in accordance
with SFAS 114.
In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. FSP 157-3 provides
clarification of the application of FASB 157 in an inactive market. FSP 157-3 is
effective for the Company's interim financial statements as of September 30,
2008. See Note 7, Fair Value Measurements, for additional discussion regarding
changes in how the Company changed methods for determining fair values..
Financial Condition
The economic conditions in southeast Michigan remained weak throughout the first
nine months of 2008. Rising unemployment and decreasing property values resulted
in decreases in loans and deposits, and an increase in nonperforming assets
since the end of 2007. Although steepening of the yield curve helped the net
interest margin improve, these balance sheet changes resulted in flat net
interest income, a larger provision for loan losses, and higher credit related
non interest expenses. While some lending opportunities exist, the economy is
expected to remain weak well into 2009. On October 10, 2008, the Company
purchased the deposits of Main Street Bank in Northville, Michigan after it was
closed by regulators. This will add approximately $80 million in deposits in the
fourth quarter. Other than the Main Street acquisition, the Company does not
expect significant deposit or asset growth and intends to continue to focus
efforts on credit quality and capital management.
-16-
Since December 31, 2007, total loans decreased $20.0 million (2.0%) due to the
weak loan demand. Total cash and investments decreased $38.6 million (8.6%), and
total assets decreased $51.1 million (3.3%). Consumer loans decreased $8.6
million, or 21.2% due to a reduction in lending for autos and other personal
expenditures, especially boats and recreational vehicles. Residential real
estate secured loans decreased $30.4 million (6.2%) due to a decrease in
residential development activity. Deposits decreased $29.8 million, or 2.7%, due
to a variety of factors, primarily including normal seasonal activity of large
municipal depositors and aggressive certificate of deposit pricing strategies of
some of the regional banks that have offices in our market area. Total capital
decreased $7.0 million or 5.5% because dividends declared exceeded net income by
$2.6 million, and accumulated other comprehensive income decreased $4.7 million,
primarily due to the decrease in the value of securities available for sale. The
capital to assets ratio decreased from 8.19% at December 31, 2007 to 8.00% at
September 30, 2008.
The amount of nonperforming assets ("NPAs") increased $13.1 million or 28.2%
since year end. NPAs include non performing loans, which increased 22.9% from
$33.9 million to $41.7 million, and Other Real Estate Owned and Other Assets
("OREO"), which increased from $12.6 million to $17.9 million. Total problem
assets, which includes all NPAs and performing loans that are internally
classified as substandard, increased $28.2 million, or 32.3%. The Company's
Allowance for Loan and Lease Losses ("ALLL") decreased $1.8 million since
December 31, 2007, as the amount of specific allocations required by FAS 114
decreased from $9.1 million to $6.9 million, due to progress made in
successfully resolving a large non performing asset and charge offs of amounts
previously recognized as impaired loans. The FAS 5 portion of the allowance
increased slightly from $11.1 million to $11.5 million because the impact of the
increase in the loss factors was greater than the impact of the decrease in the
loan portfolio. The loss factors, which include five year loss averages, and
adjustments for various current factors, such as recent delinquency and charge
off trends and national and local economic conditions, were increased due to the
weak economic conditions and declining real estate values. The ALLL is now 1.88%
of loans, compared to 2.02% at year end. The ALLL is 44.2% of NPLs, a decrease
from 59.6% at year end. We believe that at this level the ALLL adequately
estimates the potential losses in the loan portfolio.
Results of Operations -- Third Quarter 2008 vs. Third Quarter 2007
Net Interest Income - A comparison of the income statements for the three months
ended September 30, 2007 and 2008 shows an increase of $418,000, or 3.9% in Net
Interest Income. Interest income on loans decreased $2.4 million or 13.4% as the
average loans outstanding decreased $30.2 million and the average yield on loans
decreased from 7.13% to 6.37%. The interest income on investments and fed funds
sold decreased $17,000 even though the average amount of investments and fed
funds sold increased $9.7 million as the yield on investments and fed funds sold
decreased from 5.30% to 5.16%. An improvement in the term structure of interest
rates and a decrease in the overall level of interest rates allowed funding
costs to decrease faster than asset yields. The interest expense on deposits
decreased $2.0 million or 24.3% even though average deposits increased $1.4
million as the average cost of those deposits decreased from 3.03% to 2.31%. The
cost of borrowed funds decreased $848,000 even though the average amount of
borrowed funds increased $6.6 million as the average cost of the borrowings
decreased from 6.12% to 4.89%.
Provision for Loan Losses - The Provision for Loan Losses increased from $1.0
million in the third quarter of 2007 to $4.1 million in the third quarter of
2008 due to increased non performing loans and weaker economic conditions. Net
charge offs were $3.8 million during the third quarter of 2008, compared to $3.0
million in the third quarter of 2007. Each quarter, the
-17-
Company conducts a review and analysis of its ALLL to ensure its adequacy. This
analysis involves specific allocations for impaired credits and a general
allocation for losses expected based on historical experience adjusted for
current conditions.
Other Income -- Non interest income increased $337,000 in the third quarter of
2008 compared to the third quarter of 2007 as gains on securities transactions
increased $319,000. Wealth Management income decreased $84,000, or 7.2% due to
decreasing market values of assets under management, the value of which has a
direct impact on fee income. Origination fees on mortgage loans sold decreased
56.8% from $169,000 to $73,000 due to significantly slower real estate lending
activity. Other non interest income increased $88,000, or 13.4% as ATM
interchange income increased $60,000 due to higher debit card activity.
Other Expenses -- Total non interest expenses increased $2.1 million or 23.0%
compared to the third quarter of 2007 primarily due to higher credit related
expenses. Excluding OREO losses and write downs, non interest expenses decreased
$80,000. Salaries and Employee Benefits decreased $273,000, or 5.1%, as the
number of full time equivalent employees decreased from 426 to 366. Occupancy
expense decreased $44,000 or 5.2% due to lower maintenance costs. Professional
fees increased $32,000 due to credit related legal expenses. Losses on Other
Real Estate Owned (OREO) increased $2.2 million due to write downs on properties
in 2008. Other OREO expenses increased $338,000 compared to the third quarter of
2007 as the increase in OREO properties caused an increase in insurance,
maintenance, and property tax expenses.
As a result of the above activity, the Income Before Income Taxes decreased $4.5
million to a loss of $114,000. The income tax expense decreased $1.6 million
from $1.2 million to a benefit of $438,000. The Net Profit of $324,000 is a
decrease of $2.9 million from the profit of $3.2 million in the third quarter of
2007.
Results of Operations -- First Nine Months 2008 vs. 2007
Net Interest Income - A comparison of the income statements for the nine months
ended September 30, 2007 and 2008 shows an increase of $28,000, or 0.1% in Net
Interest Income. Interest income on loans decreased $5.7 million or 10.7% as the
average loans outstanding decreased $9.1 million and the average yield on loans
decreased from 7.17% to 6.46%. The interest income on investments and fed funds
sold decreased $122,000 even though the average amount of investments and fed
funds increased $5.7 million as the yield on investments and fed funds sold
decreased from 5.27% to 5.16%. An improvement in the term structure of interest
rates and a decrease in the overall level of interest rates allowed funding
costs to decrease faster than asset yields. The interest expense on deposits
decreased $4.1 million or 16.9% even though average deposits increased $206,000
as the average cost of those deposits decreased from 2.97% to 2.47%. The cost of
borrowed funds decreased $1.8 million even though the average amount of borrowed
funds increased $12.4 million as the average cost of the borrowings decreased
from 6.07% to 5.06%.
Provision for Loan Losses - The Provision for Loan Losses increased from $2.5
million in the first nine months of 2007 to $8.0 million in the first nine
months of 2008 due to increased non performing loans and weaker economic
conditions. Net charge offs were $9.8 million during the first nine months of
2008, compared to $1.9 million in the first nine months of 2007.
Other Income -- Non interest income increased $275,000 in the first nine months
of 2008 compared to the first nine months of 2007. Gains on sales of investment
securities increased $275,000. Origination fees on mortgage loans sold decreased
36.5% from $562,000 to $357,000 due to significantly slower real estate lending
activity. Other income increased $138,000 as ATM interchange income increased
$191,000 due to increased debit card activity.
-18-
Other Expenses -- Total non interest expenses increased $3.6 million or 13.0%
compared to the first nine months of 2007 primarily due to higher credit related
expenses. Salaries and benefits decreased $298,000 due to the reduction in
staff. Occupancy expense increased $143,000 or 5.6% mainly due to accelerated
depreciation on our temporary branch location in Petersburg in the first half of
2008. Professional fees increased $180,000 due to credit related legal expenses.
Losses on Other Real Estate Owned (OREO) increased $2.6 million due to write
downs on properties in 2008. Other OREO expenses increased $804,000 compared to
the first nine months of 2007 as the increase in OREO properties caused an
increase in insurance, maintenance, and property tax expenses. Various other
expenses increased $182,000 primarily due to higher collection costs.
As a result of the above activity, the Income Before Income Taxes decreased $8.8
million to $5.5 million. The income tax expense decreased $3.1 million from $3.9
million to $0.8 million. The percent of our income that is derived from tax
exempt sources increased, and our effective tax rate decreased from 27.2% last
year to 15.1%. The Net Profit of $4.7 million is a decrease of $5.7 million from
the profit of $10.4 million in the first nine months of 2007.
Cash Flows
Cash flows from operating activities decreased from $12.4 million in the first
nine months of 2007 to $9.0 million in the first nine months of 2008 due to the
decrease in net income and the increase in interest receivable and other assets.
Cash flows provided by investing activities increased from $9.9 million in the
first nine months of 2007 to $45.4 million in the first nine months of 2008
primarily due to the large increase in the amount of investment securities
called or matured in the first nine months of 2008. A significant portion of the
investment activity proceeds was used to fund the reduction in deposits and to
reduce the amount of short term borrowings. The amount of cash used for
financing activities increased from $19.1 million in the first nine months of
2007 to $51.7 million in the first nine months of 2008 primarily due to a
decrease in deposits in the first nine months of 2008.
Liquidity and Capital
The Company maintains sufficient liquidity to fund its lending activity and
allow for fluctuations in deposit levels. Internal sources of liquidity are
provided by the maturities of loans and securities as well as holdings of
securities Available for Sale. External sources of liquidity include a line of
credit with the Federal Home Loan Bank of Indianapolis, the Federal funds lines
that have been established with correspondent banks, and Repurchase Agreements
with money center banks that allow us to pledge securities as collateral for
borrowings. As of September 30, 2008, the Bank utilized $261.5 million of its
authorized limit of $275 million with the Federal Home Loan Bank of Indianapolis
and none of its $50 million of federal funds lines with its correspondent banks.
The fed funds lines with correspondent banks were reduced from $110 million to
$50 million during the quarter as two of the Company's three correspondent banks
decreased their lines available to the Company. On October 10, 2008, the Company
acquired the deposits of the former Main Street Bank after it was closed by
regulators. This transaction provided a significant increase in the bank's
liquidity in the fourth quarter of 2008 as the company obtained approximately
$86 million in deposits, $11 million in investment securities, and $75 million
in cash
The Company's Funds Management Policy includes guidelines for desired amounts of
liquidity and capital. The Funds Management Policy also includes contingency
plans for liquidity and capital that specify actions to take if liquidity and
capital ratios violate the guidelines. Throughout the third quarter of 2008 the
Company was in compliance with its Funds Management Policy regarding liquidity
and capital.
-19-
Total stockholders' equity of the Company was $120.4 million at September 30,
2008 and $127.4 million at December 31, 2007. The ratio of equity to assets was
8.0% at September 30, 2008 and 8.2% at December 31, 2007. Federal bank
regulatory agencies have set capital adequacy standards for Total Risk Based
Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards
require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total
Capital ratio of at least 8% to be adequately capitalized. The regulatory
agencies consider a bank to be well capitalized if its Total Risk Based Capital
is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk
Weighted Assets, and the Leverage Capital Ratio is at least 5%.
The following table summarizes the capital ratios of the Company:
Minimum to
September December be Well
30, 2008 31, 2007 Capitalized
--------- -------- -----------
Leverage Capital 8.4% 8.4% 5.0%
Tier 1 Risk Based Capital 11.7% 11.8% 6.0%
Total Risk Based Capital 13.0% 13.1% 10.0%
At September 30, 2008 and December 31, 2007, the Bank was in compliance with the
capital guidelines and is considered "well-capitalized" under regulatory
standards.
On October 3, 2008, Congress passed the Emergency Economic Stabilization Act of
2008 ("EESA"), which provides the U. S. Secretary of the Treasury with broad
authority to implement certain actions to help restore stability and liquidity
to U. S. markets. One of the provisions resulting from the Act is the Treasury
Capital Purchase Program ("CPP"), which provides direct equity investment of
perpetual preferred stock by the Treasury in qualified financial institutions.
The program is voluntary and requires an institution to comply with a number of
restrictions and provisions, including limits on executive compensation, stock
redemptions and declaration of dividends. Applications must be submitted by
November 14, 2008, and are subject to approval by the Treasury. The CPP provides
for a minimum investment of 1% of Risk-Weighted Assets, with a maximum
investment equal to the lesser of 3% of Total Risk-Weighted Assets or $25
billion. The perpetual preferred stock investment will have a dividend rate of
5% per year, until the fifth anniversary of the Treasury investment, and a
dividend of 9%, thereafter. The CPP also requires the Treasury to receive
warrants for common stock equal to 15% of the capital invested by the Treasury.
On November 6, 2008, the Company's board of directors authorized application for
participation in the CPP at 3% of its Risk Weighted Assets. Participation in the
program is not automatic and subject to approval by the Treasury. If approved by
the Treasury, the Company will need shareholder approval to amend its Articles
of Incorporation to authorize issurance of preferred stock. While the Board
determined that an application should be filed by the current deadline of
November 14, 2008, it will continue to evaluate whether to participate in the
CPP program if it is approved. In making its determination regarding
participation, the Board will consider both the program's positive and negative
aspects, its costs and any further clarification and details which are
forthcoming regarding the effect of participation of MBT.
Market risk for the Bank, as is typical for most banks, consists mainly of
interest rate risk and market price risk. The Bank's earnings and the economic
value of its equity are exposed to interest rate risk and market price risk, and
monitoring this risk is the responsibility of the Asset/Liability Management
Committee (ALCO) of the Bank. The Bank's market risk is monitored monthly and it
has not changed significantly since year-end 2007.
Forward-Looking Statements
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Company's control), may be identified
by reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "estimate,"
"anticipate," "continue," or similar terms or variations on those terms, or the
negative of these terms. Actual results could differ materially from those set
forth in forward-looking statements,
-20-
due to a variety of factors, including, but not limited to, those related to the
economic environment, particularly in the market areas in which the Company
operates, competitive products and pricing, fiscal and monetary policies of the
U.S. Government, changes in government regulations affecting financial
institutions, including regulatory fees and capital requirements, changes in
prevailing interest rates, acquisitions and the integration of acquired
businesses, credit risk management, asset/liability management, changes in the
financial and securities markets, including changes with respect to the market
value of our financial assets, the availability of and costs associated with
sources of liquidity, and the ability of the Company to resolve or dispose of
problem loans.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank faces market risk to the extent that the fair values of its financial
instruments are affected by changes in interest rates. The Bank does not face
market risk due to changes in foreign currency exchange rates, commodity prices,
or equity prices. The asset and liability management process of the Bank seeks
to monitor and manage the amount of interest rate risk. This is accomplished by
analyzing the differences in repricing opportunities for assets and liabilities,
by simulating operating results under varying interest rate scenarios, and by
estimating the change in the net present value of the Bank's assets and
liabilities due to interest rate changes.
Each month, the Asset and Liability Committee (ALCO), which includes the senior
management of the Bank, estimates the effect of interest rate changes on the
projected net interest income of the Bank. The sensitivity of the Bank's net
interest income to changes in interest rates is measured by using a computer
based simulation model to estimate the impact on earnings of gradual increases
or decreases of 100, 200, and 300 basis points in the prime rate. The net
interest income projections are compared to a base case projection, which
assumes no changes in interest rates.
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in the Bank's projected net interest income, in
its policy. Throughout the first nine months of 2008, the estimated variability
of the net interest income was within the Bank's established policy limits.
The ALCO also monitors interest rate risk by estimating the effect of changes in
interest rates on the economic value of the Bank's equity each month. The actual
economic value of the Bank's equity is first determined by subtracting the fair
value of the Bank's liabilities from the fair value of the Bank's assets. The
fair values are determined in accordance with Statement of Financial Accounting
Standards Number 107, Disclosures about Fair Value of Financial Instruments. The
Bank estimates the interest rate risk by calculating the effect of market
interest rate shocks on the economic value of its equity. For this analysis, the
Bank assumes immediate parallel shifts of plus or minus 100, 200, and 300 basis
points in interest rates. The discount rates used to determine the present
values of the loans and deposits, as well as the prepayment rates for the loans,
are based on Management's expectations of the effect of the rate shock on the
market for loans and deposits.
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. Throughout the first nine months of 2008, the estimated variability of
the economic value of equity was within the Bank's established policy limits.
-21-
The Bank's interest rate risk, as measured by the net interest income and
economic value of equity simulations, has not changed significantly from
December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
September 30, 2008, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of
September 30, 2008, in alerting them in a timely manner to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended September 30, 2008, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their
property the subject of any material legal proceedings other than ordinary
routine litigation incidental to their respective businesses, nor are any such
proceedings known to be contemplated by governmental authorities.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors disclosed by the Company
in its Report on Form 10-K for the fiscal year ended December 31, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The Company has a stock repurchase program which it publicly announced on
January 22, 2008. On that date, the Board of Directors authorized the repurchase
of 1 million of the Company's common shares, which authorization will expire on
December 31, 2008. The Company did not repurchase any of its stock during the
three months ended September 30, 2008.
On June 4, 2008, 90,500 Stock Only Stock Appreciation Rights (SOSARs) were
awarded to certain key executives in accordance with the MBT 2008 Stock
Incentive Plan that was approved by shareholders on May 1, 2008. The SOSARs have
a term of ten years and vest in three equal annual installments beginning
December 31, 2008. SOSARs granted under the plan are structured as fixed grants
with the exercise price equal to the market value of the underlying stock on the
date of the grant. Each award was granted pursuant to a Stock Only Stock
Appreciation Rights Agreement (the "SOSAR Agreement") entered into with each
award recipient. The SOSARS may be exercised in whole or in part during the term
by giving written notice of exercise to the Company specifying the number of
shares in respect of which the SOSAR is being exercised. Upon the exercise of a
SOSAR, subject to satisfaction of the tax withholding requirements, each holder
is entitled to receive the number of shares equal in value
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to the excess of the fair market value of a share on the exercise date over the
exercise price of the SOSAR multiplied by the number of SOSARS being exercised.
The above disclosure provides only a summary of the terms of each award. The
general form of the SOSAR Agreement is provided as an exhibit to this Report.
On June 4, 2008, 22,300 performance restricted stock units were awarded to
certain key executives in accordance with the MBT 2008 Stock Incentive Plan that
was approved by shareholders on May 1, 2008. Each restricted stock unit ("RSU")
is equivalent to one share of MBT Financial Corp. common stock. Stock will be
issued to the participants following a three year performance period that ends
on December 31, 2010 based on the cumulative earnings per share during that
three year period. The RSUs vest on December 31, 2010. No RSUs will be
considered vested and earned for payment if the Company's three year cumulative
earnings per share are less than $2.16. The above disclosure provides only a
summary of the terms of each award. Each RSU award was granted pursuant to a
Restricted Share Unit Agreement (the "RSU Agreement") entered into with each
award recipient, the general form of which is provided as an exhibit to this
Report.
These transactions were not registered under the Securities Act of 1933 (the
"Act"), but were made in reliance upon the exemption from registration contained
in Section 4(2) thereof.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
No matters to be reported.
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously
filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as
Exhibit 3.2 to MBT Financial Corp.'s Form 10-Q for its quarter ended
March 31, 2008.
31.1 Certification by Chief Executive Officer required by Securities and
Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities and
Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBT Financial Corp.
(Registrant)
November 7, 2008 By /s/ H. Douglas Chaffin
Date -------------------------------------
H. Douglas Chaffin
President &
Chief Executive Officer
November 7, 2008 By /s/ John L. Skibski
Date -------------------------------------
John L. Skibski
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit
Number Description of Exhibits
------- ----------------------------------------------------------------------
3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously
filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as
Exhibit 3.2 to MBT Financial Corp.'s Form 10-Q for its quarter ended
March 31, 2008.
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.