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EX-23 - MBT FINANCIAL CORP | v177312_ex23.htm |
EX-31.1 - MBT FINANCIAL CORP | v177312_ex31-1.htm |
EX-32.1 - MBT FINANCIAL CORP | v177312_ex32-1.htm |
EX-32.2 - MBT FINANCIAL CORP | v177312_ex32-2.htm |
EX-31.2 - MBT FINANCIAL CORP | v177312_ex31-2.htm |
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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,
2009
Commission
File Number: 000-30973
MBT
FINANCIAL CORP.
(Exact
Name of Registrant as Specified in its Charter)
MICHIGAN
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38-3516922
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(State
of Incorporation)
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(I.R.S.
Employer Identification No.)
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102
E. Front St.
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Monroe,
Michigan
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48161
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(Address
of Principal Executive Offices)
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(Zip
Code)
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(734)
241-3431
(Registrant’s
Telephone Number, Including Area Code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to section 12(b) of the Act: Common Stock, No Par Value,
Registered on NASDAQ Global Select Market
Securities
registered pursuant to section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES ¨ NO
þ
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
þ
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 þ NO
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405
of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). YES ¨ NO ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any of the
amendments of this Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act (Check
one).
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer ¨ Smaller
reporting company þ
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ¨ NO
þ
As of
June 30, 2009, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $37.2 million based on the
closing sale price as reported on the National Association of Securities Dealers
Automated Quotation System National Market System.
As of
March 11, 2010, there were 16,218,869 shares of the registrant’s common stock,
no par value, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2010 Annual Meeting of Shareholders of MBT
Financial Corp. to be held on May 6, 2010 are incorporated by reference in this
Form 10-K in response to Part III, Items 9, 10, 11, 12, and
13.
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Special
Note regarding Forward Looking Information
This
document, including the documents that are incorporated by reference, contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the “Securities Act”) and Section 21E of the Exchange
Act (the “Exchange Act”). You can identify forward-looking statements by words
such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,”
“intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,”
“future,” or the negative of those terms or other words of similar meaning. You
should read statements that contain these words carefully because they discuss
our future expectations or state other “forward-looking” information. We believe
that it is important to communicate our future expectations to our investors.
Such forward-looking statements may relate to our financial condition, results
of operations, plans, objectives, future performance, or business and are based
upon the beliefs and assumptions of our management and the information available
to our management at the time these disclosures are prepared. These
forward-looking statements involve risks and uncertainties that we may not be
able to accurately predict or control and our actual results may differ
materially from the expectations we describe in our forward-looking statements.
Shareholders should be aware that the occurrence of the events discussed under
the heading “Item 1.A. Risk Factors” in this document and in the
information incorporated by reference herein, could have an adverse effect on
our business, results of operations, and financial condition. These factors,
many of which are beyond our control, include the following:
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·
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operating,
legal, and regulatory risks, including risks relating to further
deteriorations in credit quality, our allowance for loan losses, potential
losses on dispositions of non-performing assets, and impairment of
goodwill;
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·
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the
use of estimates in determining fair value of certain of our assets, which
estimates may prove to be incorrect and result in significant declines in
valuation;
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·
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legislative
or regulatory changes that adversely affect our business including changes
in regulatory polices and principles, including the interpretation of
regulatory capital or other rules;
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·
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the
results of examinations of us by the Federal Reserve and our bank
subsidiary by the Federal Deposit Insurance Corporation, or other
regulatory authorities, who could require us to increase our reserve for
loan losses, write-down assets, change our regulatory capital position or
affect our ability to borrow funds or maintain or increase deposits, which
could adversely affect our liquidity and
earnings;
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·
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compliance
with regulatory enforcement actions, including the MOUs; legislative or
regulatory changes that adversely affect our business including changes in
regulatory policies and principles, or the interpretation of regulatory
capital or other rules;
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·
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the
availability of resources to address changes in laws, rules, or
regulations or to respond to regulatory actions; adverse changes in the
securities markets;
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·
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economic,
political, and competitive forces affecting our banking, securities, asset
management, insurance, and credit services
businesses;
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·
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the
impact on net interest income from changes in monetary policy and general
economic conditions; and
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·
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the
risk that our analyses of these risks and forces could be incorrect and/or
that the strategies developed to address them could be
unsuccessful.
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For a
discussion of these and other risks that may cause actual results to differ from
expectations, refer to “Item 1.A. Risk Factors” in this document. The
forward-looking statements contained or incorporated by reference in this
document relate only to circumstances as of the date on which the statements are
made. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
2
Part I
Item
1. Business
General
MBT
Financial Corp. (the “Corporation” or the “Company”) 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 Regulation.
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 FDIC Summary of
Deposits, the Bank ranks first in market share in Monroe County with 50.11% of
the market. In 2001, the Bank began expanding into Wayne County, Michigan, and
currently ranks fourteenth out of twenty-eight institutions operating in Wayne
County with a market share of 0.36%. For the combined Monroe and Wayne County
market, the Bank ranks sixth of thirty institutions with a market share of
2.97%.
3
Supervision
and Regulation
General
As a bank
holding company, we are required by federal law to file reports with, and
otherwise comply with, the rules and regulations of the Board of Governors of
the Federal Reserve System (“Federal Reserve” or “Federal Reserve Board.”) The
Bank is a Michigan state chartered commercial bank and is not a member of the
Federal Reserve, and therefore, is regulated and supervised by the Commissioner
of the Michigan Office of Financial and Insurance Regulation (“Michigan OFIR”)
and the Federal Deposit Insurance Corporation (“FDIC”). The Michigan
OFIR and the FDIC conduct periodic examinations of the Bank. The Bank
is also a member of the FHLB and subject to its regulations. The
deposits of the Bank are insured under the provisions of the Federal Deposit
Insurance Act by the FDIC to the fullest extent provided by law.
The
system of supervision and regulation applicable to the Corporation establishes a
comprehensive framework for its operations and is intended primarily for the
protection of the FDIC's Deposit Insurance Fund (“DIF”), the Bank's depositors
and the public, rather than the Corporation’s shareholders and
creditors. Changes in the regulatory framework, including changes in
statutes, regulations and the agencies that administer those laws, could have a
material adverse impact on the Corporation and its operations.
Recent
Regulatory Enforcement Actions
In May
2009, the Bank entered into an informal Memorandum Of Understanding (MOU) with
the FDIC and the Michigan OFIR, to establish, among other things, reporting
regularly to the regulators about our operations, financial condition, and
efforts to mitigate risks. In connection with the MOU, the Bank undertook
certain actions to improve the Bank’s credit administration and agreed to
formulate a plan to increase the Bank’s capital. The Bank’s target Tier 1
Leverage ratio is 8%. The capital plan focused on meeting the Bank’s target. The
plan was approved by the Bank’s board and timely submitted to the regulators.
While the MOU remains in effect, we will continue to be prohibited from paying
dividends without the prior written consent of the FDIC and the Michigan
OFIR.
At
December 31, 2009, the Bank had a regulatory capital classification of “well
capitalized” but was below the target referred to in the MOU. A failure to
achieve and maintain the Tier 1 Leverage ratio target referred to in the MOU
will likely result in further adverse regulatory actions, including the issuance
of formal enforcement action against the Bank in the form of a consent order, or
the imposition of additional restrictions under the FDIC’s Prompt Corrective
Action regulations. See Item 1.A. Risk Factors in this Form 10-K.
Recent
Regulatory Developments
Congress,
U.S. Department of the Treasury (“Treasury”), and the federal banking
regulators, including the FDIC, have taken broad action since early September
2008 to address volatility in the U.S. banking system and financial
markets. Beginning in late 2008, the U.S. and global financial
markets experienced deterioration of the worldwide credit markets, which created
significant challenges for financial institutions both in the United States and
around the world. Dramatic declines in the housing market during the past year,
marked by falling home prices and increasing levels of mortgage foreclosures,
have resulted in significant write-downs of asset values by financial
institutions, including government-sponsored entities and major commercial and
investment banks. In addition, many lenders and institutional investors have
reduced and, in some cases, ceased to provide funding to borrowers, including
other financial institutions, as a result of concern about the stability of the
financial markets and the strength of counterparties.
In
response to the financial market crisis and continuing economic uncertainty, the
United States government, specifically the Treasury, the Federal Reserve Board
and the FDIC working in cooperation with foreign governments and other central
banks, took a variety of extraordinary measures designed to restore confidence
in the financial markets and to strengthen financial institutions, including
measures available under the Emergency Economic Stabilization Act
of 2008 (“EESA”), as amended by the American Recovery and Reinvestment
Act of 2009 (“ARRA”), which included the Troubled Asset Relief Program
(“TARP”).The stated purpose of TARP is to restore confidence and stability to
the U.S. banking system and to encourage financial institutions to increase
their lending to customers and to each other. As part of TARP, Treasury
purchased debt or equity securities from participating financial institutions
through the Treasury’s Capital Purchase Plan (“CPP”). Participants in
the CPP are subject to various restrictions regarding dividends, stock
repurchases, corporate governance and executive compensation. We withdrew our
application to participate in the program before it was determined whether or
not we would be allowed to participate and, therefore, we are not subject to the
restrictions imposed on CPP participants.
4
EESA also
increased FDIC deposit insurance on most accounts from $100,000 to $250,000.
This increase is in place until the end of 2013. Following a systemic
risk determination, on October 14, 2008, the FDIC established a Temporary
Liquidity Guarantee Program (“TLGP”). Under the Transaction Account Guarantee
Program of the TLGP,
the FDIC temporarily provides a 100% guarantee of the deposits in
non-interest-bearing transaction deposit accounts in participating financial
institutions. The Bank participates in this program. Consequently, all funds
held in non-interest-bearing transaction accounts (demand deposit accounts),
Interest on Lawyers Trust Accounts (IOLTAs), and low-interest NOW accounts
(defined as NOW accounts with interest rates no higher than 0.50%) with the Bank
are covered under this program. This program has been extended through
June 30, 2010.
On
February 17, 2009, President Obama signed the Americans Recovery and
Reinvestment Act of 2009 (“ARRA”), which includes a wide variety of programs
intended to stimulate the economy and provide for extensive infrastructure,
energy, health and education needs. The ARRA also imposes new executive
compensation and corporate governance limits on current and future participants
in the TARP program in addition to those previously announced by
Treasury.
Many of
the temporary recovery programs are approaching their expiration date. However,
the U.S. government is considering numerous legislative and administrative
proposals sponsored by various members of Congress and the Presidential
Administration relating to long-term regulatory reform of the financial markets.
In some cases, the proposals include a radical overhaul of the regulation of
financial institutions or limitations on the products they offer. Many of these
proposals would impose stricter capital and prudential standards, reporting,
disclosure, and operational requirements on banks and financial institutions.
The regulations or regulatory policies that are applicable to the Corporation
and eventually adopted by the U.S. government may be disruptive to the
Corporation’s business and could have a material adverse effect on its business,
financial condition, and results of operations.
Bank
Regulation
Michigan
banks are regulated and supervised by the Commissioner of the Michigan OFIR and
as a state non-member the Bank is regulated and supervised by the
FDIC. Summarized below are some of the more important regulatory and
supervisory laws and regulations applicable to the Bank.
Business Activities. The
activities of state banks are governed by state as well as federal law and
regulations. These laws and regulations delineate the nature and extent of the
investments and activities in which state institutions may engage.
Loans to One Borrower.
Michigan law provides that a Michigan commercial bank may not provide loans or
extensions of credit to a person in excess of 15% of the capital and surplus of
the bank. The limit, however, may be increased to 25% of capital and surplus if
approval of two-thirds of the Bank’s board of directors is granted. At
December 31, 2009, the Bank’s regulatory limit on loans to one borrower was
$12.0 million or $20.0 million for loans approved by two-thirds of the Board of
Directors. If the Michigan OFIR determines that the interests of a group of more
than one person, co-partnership, association or corporation are so interrelated
that they should be considered as a unit for the purpose of extending credit,
the total loans and extensions of credit to that group are combined. At December
31, 2009, the Bank did not have any loans with one borrower that exceeded its
regulatory limit.
At
December 31, 2009, loans that had high loan to value ratios at origination
were quantified by management and represented less than 10% of total outstanding
loans as of the balance sheet date. Additionally, management quantified all
loans (mortgage, consumer and commercial) that required interest only payments
as of the balance sheet date and determined that these types of loans were less
than 10% of total loans outstanding at December 31, 2009. Based on these
facts, management concluded no concentrations of credit risk existed at
December 31, 2009.
5
Dividends. The
Corporation’s ability to pay dividends on its common stock depends on its
receipt of dividends from the Bank. The Bank is subject to restrictions and
limitations in the amount and timing of the dividends it may pay to the
Corporation. Dividends may be paid out of a Michigan commercial bank’s net
income after deducting all bad debts. A Michigan commercial bank may only pay
dividends on its common stock if the bank has a surplus amounting to not less
than 20% of its capital after the payment of the dividend. If a bank has a
surplus less than the amount of its capital, it may not declare or pay any
dividend until an amount equal to at least 10% of net income for the preceding
one-half year (in the case of quarterly or semi-annual dividends) or at least
10% of net income of the preceding two consecutive half-year periods (in the
case of annual dividends) has been transferred to surplus.
Federal
law also affects the ability of a Michigan commercial bank to pay dividends. The
FDIC’s prompt corrective action regulations prohibit an insured depository
institution from making capital distributions, including dividends, if the
institution has a regulatory capital classification of “undercapitalized,” or if
it would be undercapitalized after making the distribution. The FDIC
may also prohibit the payment of dividends if it deems any such payment to
constitute an unsafe and unsound banking practice. Under the terms of
the MOU with the FDIC and the Michigan OFIR the Bank is prohibited from paying
dividends without the consent of the FDIC and Michigan OFIR.
Michigan OFIR
Assessments. Michigan commercial banks are required to pay
supervisory fees to the Michigan OFIR to fund the operations of the Michigan
OFIR. The amount of supervisory fees paid by a bank is based upon a formula
involving the bank’s total assets, as reported to the Michigan
OFIR.
State
Enforcement. Under Michigan law, the Michigan OFIR has broad
enforcement authority over state chartered banks and, under certain
circumstances, affiliated parties, insiders, and agents. If a Michigan
commercial bank does not operate in accordance with the regulations, policies
and directives of the Michigan OFIR or is engaging, has engaged or is about to
engage in an unsafe or unsound practice in conducting the business of the bank,
the Michigan OFIR may issue and serve upon the bank a notice of charges with
respect to the practice or violation. The Michigan OFIR enforcement authority
includes: cease and desist orders, receivership, conservatorship, removal and
suspension of officers and directors, assessment of monetary penalties,
emergency closures, liquidation and the power to issue orders and declaratory
rulings.
Federal Enforcement. The FDIC
has primary federal enforcement responsibility over state non-member banks and
has the authority to bring actions against the institution and all
institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants, who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive, cease and
desist, consent order to removal of officers and/or directors of the institution
as well as receivership, conservatorship or termination of deposit insurance.
Civil penalties cover a wide range of violations and can amount to $25,000 per
day, or even $1 million per day in especially egregious cases. Federal law
also establishes criminal penalties for certain violations.
Capital Requirements. Under
FDIC regulations, federally-insured state-chartered banks that are not members
of the Federal Reserve (“state non-member banks”), such as the Bank, are
required to comply with minimum leverage capital requirements. For an
institution determined by the FDIC not to be anticipating or experiencing
significant growth and to be in general a strong banking organization, rated
composite 1 under the Uniform Financial Institutions Ranking System established
by the Federal Financial Institutions Examination Council, the minimum capital
leverage requirement is a ratio of Tier 1 capital to total assets of 3%. For all
other institutions, the minimum leverage capital ratio is not less than 4%. Tier
1 capital is principally composed of the sum of common stockholders’ equity,
noncumulative perpetual preferred stock (including any related surplus) and
minority investments in certain subsidiaries, less intangible assets (except for
certain servicing rights and credit card relationships).
6
The Bank
must also comply with the FDIC risk-based capital guidelines. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet items
to four risk-weighted categories ranging from 0% to 100%, with higher levels of
capital being required for the categories perceived as representing greater
risk. For example, under the FDIC’s risk-weighting system, cash and securities
backed by the full faith and credit of the U.S. Government are given a 0% risk
weight, loans fully secured by one-to-four family residential properties
generally have a 50% risk weight and commercial loans have a risk weight of
100%.
State
non-member banks must maintain a minimum ratio of total capital to risk-weighted
assets of at least 8%, of which at least one-half must be Tier 1 capital. Total
capital consists of Tier 1 capital plus Tier 2 or supplementary capital items,
the principal elements of which include allowances for loan losses in an amount
of up to 1.25% of risk-weighted assets, cumulative preferred stock, a portion of
the net unrealized gain on equity securities and other capital instruments such
as subordinated debt.
The FDIC
has adopted a regulation providing that it will take into account the exposure
of a bank’s capital and economic value to changes in interest rate risk in
assessing a bank’s capital adequacy. For more information about interest rate
risk, see “Managements Discussion and Analysis - Quantitative and Qualitative
Disclosures about Market Risk.”
The
Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”)
established a system of prompt corrective action to resolve the problems of
undercapitalized financial institutions. Under this system, the federal banking
regulators have established five capital categories ("well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized"), and all institutions are assigned one such
category. Federal banking regulators are required to take various mandatory
supervisory actions and are authorized to take other discretionary actions with
respect to institutions in the three undercapitalized categories. The severity
of the action depends upon the capital category in which the institution is
placed. At December 31, 2009, the Bank’s regulatory capital
classification was “well capitalized.” However, in the event the Bank is unable
to attain and maintain a Tier 1 leverage ratio of 8% or more, as referred to in
the MOU, the Bank will likely be subject to additional formal enforcement action
including the issuance of a consent order by the FDIC and the Michigan OFIR. In
the event such a formal enforcement action is taken against the Bank then during
such time as the Bank is not in compliance with a capital requirement imposed by
a formal enforcement action such as a consent order, the Bank’s capital category
will be reduced to “adequately capitalized” under applicable bank regulatory
capital guidelines, even if its nominal capital ratios are above those required
to be considered well capitalized.
For
further discussion regarding the Corporation’s regulatory capital requirements,
see Note 13 to the 2009 Consolidated Financial Statements.
FDIC
Insurance. All of the Bank’s deposits are insured under the
Federal Deposit Insurance Act by the FDIC to the fullest extent permitted by
law. As an FDIC-insured institution, the Bank is required to pay
deposit insurance premium assessments to the FDIC. The federal deposit insurance
system was overhauled in 2006 as a result of the enactment of The Federal
Deposit Insurance Reform Act of 2005 (the “Reform Act”), which was signed into
law in February of 2006. Pursuant to the Reform Act, the FDIC has modified its
risk-based assessment system for deposit insurance premiums. Under the new
system, all insured depository institutions are placed into one of four
categories and assessed insurance premiums based primarily on their level of
capital and supervisory evaluations.
7
For the
quarter beginning January 1, 2009, the FDIC raised the base annual
assessment rate for institutions in Risk Category I to between 12 and 14 basis
points while the base annual assessment rates for institutions in Risk
Categories II, III and IV were increased to 17, 35, and 50 basis points,
respectively. For the quarter beginning April 1, 2009 the FDIC set the base
annual assessment rate for institutions in Risk Category I to between 12 and 16
basis points and the base annual assessment rates for institutions in Risk
Categories II, III and IV at 22, 32, and 45 basis points, respectively. An
institution’s assessment rate could be lowered by as much as five basis points
based on the ratio of its long-term unsecured debt to deposits or, for smaller
institutions, based on the ratio of certain amounts of Tier 1 capital to
deposits. The assessment rate may be adjusted for Risk Category I institutions
that have a high level of brokered deposits and have experienced higher levels
of asset growth (other than through acquisitions) and could be increased by as
much as ten basis points for institutions in Risk Categories II, III, and IV
whose ratio of brokered deposits to deposits exceeds 10%. Reciprocal deposit
arrangements like CDARS were treated as brokered deposits for Risk Category II,
III, and IV institutions but not for institutions in Risk Category I. An
institution’s base assessment rate would also be increased if an institution’s
ratio of secured liabilities (including FHLB advances and repurchase agreements)
to deposits exceeds 25%. The maximum adjustment for secured liabilities for
institutions in Risk Categories I, II, III and IV would be 8, 11, 16, and 22.5
basis points, respectively, provided that the adjustment may not increase an
institution’s base assessment rate by more than 50%.
The FDIC
imposed a special assessment equal to five basis points of assets less Tier 1
capital as of June 30, 2009 payable on September 30, 2009 and reserved
the right to impose additional special assessments. In lieu of further special
assessments, on November 12, 2009 the FDIC approved a final rule to require
all insured depository institutions to prepay their estimated risk-based
assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012
on December 30, 2009. For purposes of estimating future assessments, an
institution would assume 5% annual growth in the assessment base and a three
basis point increase in the current assessment rate for 2011 and 2012. The
prepaid assessment would be applied against the actual assessment until
exhausted. Any funds remaining after June 30, 2013 would be returned to the
institution. If the prepayment would impair an institution’s liquidity or
otherwise create significant hardship, it could apply for an
exemption.
In
addition, all FDIC-insured institutions are required to pay assessments to the
FDIC to fund interest payments on bonds issued by the Financing Corporation
(“FICO”), an agency of the Federal government established to recapitalize the
Federal Savings and Loan Insurance Corporation. The FICO assessment rates, which
are determined quarterly, averaged .0102 % of insured deposits on an
annualized basis in fiscal year 2009. These assessments will continue until the
FICO bonds mature in 2017.
Transactions with Related
Parties. The Bank’s authority to engage in transactions with an
“affiliate” (generally, any company that controls or is under common control
with a depository institution) is limited by federal law. Federal law places
quantitative and qualitative restrictions on these transactions and imposes
specified collateral requirements for certain transactions. The purchase of low
quality assets from affiliates is generally prohibited. Transactions with
affiliates must be on terms and under circumstances that are at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies.
The
Bank’s, authority to extend credit to executive officers, directors and 10%
shareholders (“insiders”), as well as entities such persons control, is also
governed by federal law. Among other restrictions, these loans are generally
required to be made on terms substantially the same as those offered to
unaffiliated individuals and not involve more than the normal risk of failure to
make required repayment. The Sarbanes-Oxley Act of 2002 generally prohibits the
Corporation from extending or maintaining credit, arranging for the extension of
credit, or renewing an extension of credit, in the form of a personal loan to or
for any director or executive officer (or equivalent thereof), except for
extensions of credit made, maintained, arranged or renewed by the Corporation
that are subject to the federal law restrictions discussed above.
Standards for Safety and
Soundness. The federal banking agencies have adopted Interagency
Guidelines prescribing Standards for Safety and Soundness. The guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions. The
guidelines address internal controls and information systems, the internal audit
system, credit underwriting, loan documentation, interest rate risk exposure,
asset growth, asset quality, earnings and compensation, and fees and benefits.
If the appropriate federal banking agency determines that an institution fails
to meet any standard prescribed by the guidelines, the agency may require the
institution to submit an acceptable plan to achieve compliance with the
standard.
8
Investment Activities. Since
the enactment of the FDIC Improvement Act, all state-chartered FDIC insured
banks, have generally been limited to activities of the type and in the amount
authorized for national banks, notwithstanding state law. The FDIC Improvement
Act and the FDIC permit exceptions to these limitations. For example, the FDIC
is authorized to permit such institutions to engage in state authorized
activities or investments that do not meet this standard (other than direct
equity investments) for institutions that meet all applicable capital
requirements if it is determined that such activities or investments do not pose
a significant risk to the DIF.
Mergers. The Bank may engage
in mergers or consolidations with other depository institutions or their holding
companies, subject to review and approval by applicable state and federal
banking agencies. When reviewing a proposed merger, the federal banking
regulators consider numerous factors, including the effect on competition, the
financial and managerial resources and future prospects of existing and proposed
institutions, the effectiveness of FDIC-insured institutions involved in the
merger in addressing money laundering activities and the convenience and needs
of the community to be served, including performance under the Community
Reinvestment Act.
Interstate Branching.
Beginning June 1, 1997, federal law permitted the responsible federal
banking agencies to approve merger transactions between banks located in
different states, regardless of whether the merger would be prohibited under the
law of the two states. The law also permitted a state to “opt in” to the
provisions of the Interstate Banking Act before June 1, 1997, and permitted
a state to “opt out” of the provisions of the Interstate Banking Act by adopting
appropriate legislation before that date. Michigan did not “opt out” of the
provisions of the Interstate Banking Act. Accordingly, beginning June 1,
1997, a Michigan commercial bank could acquire an institution by merger in a
state other than Michigan unless the other state had opted out. The Interstate
Banking Act also authorizes de novo branching into another state if the host
state enacts a law expressly permitting out of state banks to establish such
branches within its borders.
Community Reinvestment
Act. The Community Reinvestment Act requires that, in
connection with examinations of financial institutions within their respective
jurisdictions, the Federal Reserve, the FDIC, or the OCC, shall evaluate the
record of each financial institution in meeting the credit needs of its local
community, including low and moderate-income neighborhoods. These facts are also
considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. Failure to adequately meet these criteria could impose
additional requirements and limitations on the Bank. The Bank received a
“satisfactory” rating in its most recent Community Reinvestment Act evaluation
by the FDIC. Additionally, we must publicly disclose the terms of
various Community Reinvestment Act-related agreements.
Anti-Money Laundering Initiatives
and the USA Patriot Act. A
major focus of federal governmental policy on financial institutions in recent
years has been aimed at combating money laundering and terrorist financing. The
USA Patriot Act of 2001 (the “USA Patriot Act”) substantially broadened the
scope of United States’ anti-money laundering laws and regulations by imposing
significant new compliance and due diligence obligations, creating new crimes
and penalties and expanding the extra-territorial jurisdiction of the United
States. The U.S. Department of the Treasury has issued a number of implementing
regulations which apply to various requirements of the USA Patriot Act to
financial institutions such as us. These regulations impose obligations on
financial institutions to maintain appropriate policies, procedures and controls
to detect, prevent and report money laundering and terrorist financing and to
verify the identity of their customers. Failure of a financial institution to
maintain and implement adequate programs to combat money laundering and
terrorist financing, or to comply with all of the relevant laws or regulations,
could have serious legal and reputation consequences for the institution,
including the imposition of enforcement actions and civil monetary
penalties.
9
Federal Home Loan
Bank. The Bank is a member of the Federal Home Loan Bank of
Indianapolis (“FHLBI”), one of the 12 regional Federal Home Loan Banks. The
FHLBI provides a central credit facility primarily for member institutions. The
Bank, as a member of the FHLBI, is required to acquire and hold shares of
capital stock in the FHLBI in an amount equal to at least 1.0% of the aggregate
principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLBI, whichever is greater. The Bank was in
compliance with this requirement and its investment in FHLBI stock at December
31, 2009 was $13.1 million. The FHLB Banks function as a central reserve
bank by providing credit for financial institutions throughout the United
States. Advances are generally secured by eligible assets of a member, which
include principally mortgage loans and obligations of, or guaranteed by, the
U.S. government or its agencies. Advances can be made to the Bank under several
different credit programs of the FHLBI. Each credit program has its own interest
rate, range of maturities and limitations on the amount of advances permitted
based on the financial condition of the member institution and the adequacy of
collateral pledged to secure the credit.
Federal Reserve
Board. The Federal Reserve Board regulations require banks to
maintain non-interest-earning reserves against their net transaction accounts,
nonpersonal time deposits and Eurocurrency liabilities (collectively referred to
as reservable liabilities).
Overdraft
Regulation. The Federal Reserve Board has amended Regulation E
(Electronic Fund Transfers) effective July 1, 2010 to require consumers to
opt in, or affirmatively consent, to the institution’s overdraft service for ATM
and one-time debit card transactions before overdraft fees may be assessed on
the account. Consumers will also be provided a clear disclosure of the fees and
terms associated with the institution’s overdraft service.
Other
Regulations. Interest and other charges collected or
contracted for by the Bank are subject to state usury laws and federal laws
concerning interest rates. The Bank's loan operations are also subject to
federal laws applicable to credit transactions, such as:
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•
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the
federal "Truth-In-Lending Act," governing disclosures of credit terms to
consumer borrowers;
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•
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the
"Home Mortgage Disclosure Act of 1975," requiring financial institutions
to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it
serves;
|
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•
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the
"Equal Credit Opportunity Act," prohibiting discrimination on the basis of
race, creed or other prohibited factors in extending
credit;
|
|
•
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the
"Fair Credit Reporting Act of 1978," governing the use and provision of
information to credit reporting
agencies;
|
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•
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the
"Fair Debt Collection Act," governing the manner in which consumer debts
may be collected by collection agencies;
and
|
|
•
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the
rules and regulations of the various federal agencies charged with the
responsibility of implementing these federal
laws.
|
The
deposit operations of the Bank are subject to:
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•
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the
"Right to Financial Privacy Act," which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records;
and
|
|
•
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the
"Electronic Funds Transfer Act" and Regulation E issued by the
Federal Reserve to implement that act, which govern automatic deposits to
and withdrawals from deposit accounts and customers' rights and
liabilities arising from the use of automated teller machines and other
electronic banking services.
|
Holding Corporation
Regulation
General. The Corporation, as
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended, is subject to regulation, supervision, and examination by the Board of
Governors of the Federal Reserve System. The Corporation is also required to
file annually a report of its operations with the Federal Reserve Board. This
regulation and oversight is generally intended to ensure that the Corporation
limits its activities to those allowed by law and that it operates in a safe and
sound manner without endangering the financial health of the
Bank.
10
Under the
Bank Holding Company Act, the Corporation must obtain the prior approval of the
Federal Reserve Board before it may acquire control of another bank or bank
holding company, merge or consolidate with another bank holding company, acquire
all or substantially all of the assets of another bank or bank holding company,
or acquire direct or indirect ownership or control of any voting shares of any
bank or bank holding company if, after such acquisition, the Corporation would
directly or indirectly own or control more than 5% of such shares.
Federal
statutes impose restrictions on the ability of a bank holding company and its
nonbank subsidiaries to obtain extensions of credit from its subsidiary bank, on
the subsidiary bank’s investments in the stock or securities of the holding
company, and on the subsidiary bank’s taking of the holding company’s stock or
securities as collateral for loans to any borrower. A bank holding company and
its subsidiaries are also prevented from engaging in certain tie-in arrangements
in connection with any extension of credit, lease or sale of property, or
furnishing of services by the subsidiary bank.
A bank
holding company is required to serve as a source of financial and managerial
strength to its subsidiary banks and may not conduct its operations in an unsafe
or unsound manner. In addition, it is the Federal Reserve Board policy that a
bank holding company should stand ready to use available resources to provide
adequate capital to its subsidiary banks during periods of financial stress or
adversity and should maintain the financial flexibility and capital-raising
capacity to obtain additional resources for assisting its subsidiary banks. A
bank holding company’s failure to meet its obligations to serve as a source of
strength to its subsidiary banks will generally be considered by the Federal
Reserve Board to be an unsafe and unsound banking practice or a violation of the
Federal Reserve Board regulations, or both.
Non-Banking Activities. The
business activities of the Corporation, as a bank holding company, are
restricted by the Bank Holding Company Act. Under the Bank Holding Company Act
and the Federal Reserve Board’s bank holding company regulations, the
Corporation may only engage in, acquire, or control voting securities or assets
of a company engaged in, (1) banking or managing or controlling banks and
other subsidiaries authorized under the Bank Holding Company Act and
(2) any non-banking activity the Federal Reserve Board has determined to be
so closely related to banking or managing or controlling banks to be a proper
incident thereto. These include any incidental activities necessary to carry on
those activities as well as a lengthy list of activities that the Federal
Reserve Board has determined to be so closely related to the business of banking
as to be a proper incident thereto.
Financial Modernization. The
Gramm-Leach-Bliley Act, which became effective in March 2000, permits greater
affiliation among banks, securities firms, insurance companies, and other
companies under a new type of financial services company known as a “financial
holding company.” A financial holding company essentially is a bank holding
company with significantly expanded powers. Financial holding companies are
authorized by statute to engage in a number of financial activities previously
impermissible for bank holding companies, including securities underwriting,
dealing and market making; sponsoring mutual funds and investment companies;
insurance underwriting and agency; and merchant banking activities. The Act also
permits the Federal Reserve Board and the Treasury Department to authorize
additional activities for financial holding companies if they are “financial in
nature” or “incidental” to financial activities. A bank holding company may
become a financial holding company if each of its subsidiary banks is well
capitalized, well managed, and has at least a “satisfactory” CRA rating. A
financial holding company must provide notice to the Federal Reserve Board
within 30 days after commencing activities previously determined by statute or
by the Federal Reserve Board and Department of the Treasury to be permissible.
The Corporation has not submitted notice to the Federal Reserve Board of our
intent to be deemed a financial holding company.
Regulatory Capital
Requirements. The Federal Reserve Board has adopted capital adequacy
guidelines under which it assesses the adequacy of capital in examining and
supervising a bank holding company and in analyzing applications to it under the
Bank Holding Company Act. The Federal Reserve Board’s capital adequacy
guidelines are similar to those imposed on the Bank by the
FDIC.
11
Restrictions on Dividends.
The Corporation relies on dividends from the Bank to pay dividends to
shareholders. The Michigan Banking Code of 1999 states, in part, that
bank dividends may be declared and paid only out of accumulated net earnings and
may not be declared or paid unless surplus (retained earnings) is at least equal
to contributed capital. The Bank has not declared or paid any dividends that
have caused its retained earnings to be reduced below the amount required.
Finally, dividends may not be declared or paid if the Bank is in default in
payment of any assessment due the Federal Deposit Insurance
Corporation.
The
Federal Reserve Board has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board’s
view that a bank holding company should pay cash dividends only to the extent
that the holding company’s net income for the past year is sufficient to cover
both the cash dividends and a rate of earnings retention that is consistent with
the holding company’s capital needs, asset quality and overall financial
condition. The Federal Reserve Board also indicated that it would be
inappropriate for a company experiencing serious financial problems to borrow
funds to pay dividends. Furthermore, under the federal prompt corrective action
regulations, the Federal Reserve Board may prohibit a bank holding company from
paying any dividends if the holding company’s bank subsidiary is classified as
“undercapitalized.”
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, 2009, Monroe Bank & Trust had 354 full-time
employees and 16 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
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AGE
|
POSITION
|
||
H.
Douglas Chaffin
|
54
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President
& Chief Executive Officer
|
||
Scott
E. McKelvey
|
50
|
Executive
Vice President, Senior Wealth Management Officer, Monroe Bank &
Trust
|
||
James
E. Morr
|
63
|
Executive
Vice President, General Counsel, and Chief Risk Officer, Monroe Bank &
Trust; Secretary, MBT Financial Corp.
|
||
Thomas
G. Myers
|
53
|
Executive
Vice President & Chief Lending Manager, Monroe Bank &
Trust
|
||
John
L. Skibski
|
45
|
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 each of the last
five years. Scott E. McKelvey was Executive Vice President, Senior Wealth
Management Officer in 2009, 2008, and 2007, and Senior Vice President –
Downriver Community President in 2007, 2006, and 2005. James E. Morr was
Executive Vice President, General Counsel and Chief Risk Officer in 2009, 2008,
and 2007 and Executive Vice President, Senior Wealth Management Officer and
General Counsel in 2007, 2006, and 2005. Thomas G. Myers was Executive Vice
President & Chief Lending Manager in each of the last five years. John L.
Skibski was Executive Vice President & Chief Financial Officer in each of
the last five years.
12
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
This
section highlights some of the specific risks that could affect us. Although
this section attempts to highlight some of the key factors, please be aware that
these risks are not the only risks we face; other risks may prove to be
important in the future. New risks may emerge at any time, and we cannot predict
such risks or estimate the extent to which they may affect our business,
financial condition, results of operations or the trading price of our
securities. The current and further deterioration in the residential
construction and commercial development real estate markets may lead to
increased non-performing assets in our loan portfolio and increased provision
expense for losses on loans, which could have a material adverse effect on our
capital, financial condition and results of operations.
Risks Related to the
Corporation’s Business
The
Corporation’s Business may be Adversely Affected by Conditions in the Financial
Markets and Economic Conditions Generally
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 Bank 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 Bank’s products and services as well as the ability
of the Bank’s customers to repay loans, the value of the collateral securing
loans, and the stability of the Bank’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 Bank’s and the Corporation’s financial condition
and results of operations. In particular, the current environment impacts the
ability of borrowers to pay interest on and repay principal of outstanding loans
and the value of collateral securing those loans. A favorable business
environment is generally characterized by economic growth, efficient capital
markets, low inflation, high business and investor confidence, strong business
earnings, and other factors. Unfavorable or uncertain economic and market
conditions can be caused by declines in economic growth, business activity, or
investor or business confidence; limitations on the availability or increases in
the cost of credit and capital; increases in inflation or interest rates;
natural disasters; or a combination of these or other factors.
Southeast
Michigan and the United States as a whole have gone through a prolonged downward
economic cycle from 2007 through 2009. Significant weakness in market conditions
adversely impacted all aspects of the economy including the Corporation’s
business. In particular, dramatic declines in the housing market, with
decreasing home prices and increasing delinquencies and foreclosures, negatively
impacted the credit performance of construction loans, which resulted in
significant write-downs of assets by many financial institutions. Business
activity across a wide range of industries and regions was greatly reduced, and
local governments and many businesses experienced serious difficulty due to the
lack of consumer spending and the lack of liquidity in the credit markets. In
addition, unemployment increased significantly during that period. The business
environment was adverse for many households and businesses in the Southeast
Michigan market, United States, and worldwide.
13
Overall,
during the past two years, the general business environment has had an adverse
effect on the Corporation’s business, and there can be no assurance that the
environment will improve in the near term. Unemployment levels remain elevated,
housing prices remain depressed, and demand for housing remains weak due to
distressed sales and tightened lending standards. Consequently, particularly in
the Michigan economy which has been one of the most adversely impacted states in
the United States by the current recession, there can be no assurance that the
economic conditions will improve in the near term. Furthermore, a worsening of
economic conditions would likely exacerbate the adverse effects of these
difficult market conditions on the Corporation and others in the financial
institutions industry. Continued market stress could have a material adverse
effect on the credit quality of the Corporation’s loans, and therefore, its
financial condition and results of operations.
The Bank is operating under a
Memorandum of Understanding with its governmental regulators and may be subject
to further regulatory enforcement actions.
In May,
2009, the Bank agreed to an informal memorandum of understanding (the “MOU”)
with the FDIC and the Michigan OFIR to establish, among other things, reporting
regularly to federal and state regulators about our operations, financial
condition, and efforts to mitigate risks. As a part of this informal
program the Bank undertook certain actions to improve the Bank’s credit
administration and also developed a written plan to attain a minimum Tier 1
Leverage Capital ratio of 8%. The Bank’s tier 1
leverage ratio is calculated by dividing its tier 1 capital (the numerator of
the ratio) by its average total consolidated assets (the denominator of the
ratio). Tier I capital of the Bank is the Bank’s core capital
(qualifying stockholders’ equity and retained earnings). The
Corporation’s plan to improve its tier I leverage ratio and otherwise enhance
its overall financial health was approved by the Corporation's Board of
Directors and timely submitted to the FDIC and the Michigan OFIR. As
of December 31, 2009, the Bank’s Tier I Leverage Capital ratio was 6.21% and
therefore the Bank has not yet achieved the target Tier 1 Leverage ratio adopted
in connection with the MOU. As a result of this, the FDIC and/or the
Michigan OFIR may take formal regulatory action against the Bank, including the
issuance of a formal agreement or consent order.
Our
Business is Subject to Credit Risk and the Impact of Nonperforming
Loans
We face
the risk that loan losses, including unanticipated loan losses due to changes in
loan portfolios, fraud and economic factors, could require additional increases
in the allowance for loan losses. Additions to the allowance for loan losses
would cause our net income to decline and could have a material adverse impact
on our financial condition and results of operations.
Making
loans is an essential element of our business, and there is a risk that customer
loans will not be repaid. The risk of nonpayment is affected by a number of
factors, including:
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·
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The
duration of the loan;
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·
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Credit
risks of a particular borrower;
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·
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Changes
in unemployment, economic and industry conditions;
and
|
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·
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in
the case of a collateralized loan, the potential inadequacy of the value
of the collateral in the event of default, such as has resulted from the
deterioration in commercial and residential real estate
values.
|
We
attempt to maintain an appropriate allowance for loan losses to provide for
potential losses in our loan portfolio. We periodically determine the amount of
the allowance based on consideration of several factors including, among others,
the ongoing review and grading of the loan portfolio, consideration of our past
loan loss experience as well as that of the banking industry, trends in past due
and nonperforming loans, risk characteristics of the various classifications of
loans, existing economic conditions, the fair value of underlying collateral,
the size and diversity of individual credits, and other qualitative and
quantitative factors which could affect probable credit losses. We determine the
amount of the allowance for loan losses by considering these factors and by
using estimates related to the amount and timing of expected future cash flows
on impaired loans, estimated losses on pools of homogeneous loans based on our
historical loss experience with additional qualitative factors for various
issues, and allocation of specific reserves for special situations that are
unique to the measurement period with consideration of current economic trends
and conditions, all of which are susceptible to significant change. As an
integral part of their examination process, various federal and state regulatory
agencies also review the allowance for loan losses. These agencies may require
that certain loan balances be classified differently or charged off when their
credit evaluations differ from those of management, based on their judgments
about information available to them at the time of their
examination. Although we believe the level of the allowance for loan
losses is appropriate as recorded in the consolidated financial statements,
because current economic conditions could continue to deteriorate and future
events are inherently difficult to predict, the anticipated amount of estimated
loan losses, and therefore the adequacy of the allowance, could change
significantly. At December 31, 2009 our allowance for loan losses was $24.1
million, or 2.83% of total loans and 27.94% of non-performing loans, an increase
of $5.6 million over our allowance for loan losses of $18.5 million, or 1.97% of
total loans and 34.45% of nonperforming loans as of December 31,
2008.
14
A
substantial portion of our loan portfolio is sensitive to real estate values,
and declining real estate prices in our markets have resulted in increases in
delinquencies and losses on certain segments of our portfolio. As of
December 31, 2009, more than 85% of the Bank’s loan portfolio was secured
by real estate. Taken together with the general economic downturn in
our key markets, the effects of ongoing mortgage market turbulence, combined
with the ongoing correction in residential real estate market prices and reduced
levels of home sales, could result in further reductions in real estate values,
which may adversely affect the value of collateral securing mortgage loans that
we hold, mortgage loan originations, and profits on sale of mortgage loans.
Continued declines in real estate values and home sales volumes and financial
stress on borrowers resulting from job losses, interest rate resets on
adjustable rate mortgage loans or other factors could have further adverse
effects on borrowers and their ability to repay loans from us. A continued
sustained economic downturn could adversely affect other portions of our loan
portfolio.
At
December 31, 2009, $93.8 million or 11.1% of our loans were categorized as
commercial loans. These loans are generally unsecured business lines
of credit, equipment loans and other business related extensions of
credit. These loans are subject to business risks associated with the
specific risks of the borrower as well as the southeast Michigan
economy. Repayment of these loans relies substantially on the
profitability and cash flow capacity of the borrower. Consumer loans
totaling $22.1 million, or 2.6% of our total loans at December 31, 2009, are
comprised principally of secured and unsecured personal loans such as vehicle
loans and unsecured personal lines of credit. These loans are
principally dependent upon the personal income of the borrower as the source of
repayment. Risk of default and nonpayment of these loans rises
substantially when there is a general downturn in the economy and borrowers lose
their jobs.
There is
no precise method of predicting loan losses, and therefore we always face the
risk that charge-offs in future periods will exceed our allowance for loan
losses or that additional increases in the allowance for loan losses will
otherwise be required. Additions to the allowance for loan losses would cause
net income to decline in the period(s) in which such additions occur and could
also have a material adverse impact on our capital and financial
position.
In
addition to the risk of loss of principal associated with our loan portfolio,
our profitability is adversely affected by non-performing
loans. Non-performing loans include loans past due 90 days or more,
restructured loans, and non-accrual loans.
The
Bank has a Current Need for Additional Equity
We lost
$34.2 million during the year ended December 31, 2009. While we
believe we will be able to generate profits during 2010, we cannot be certain
that we will return to profitability. Given our recent losses, asset
quality issues, and overall financial condition, we must raise additional
capital to provide the Corporation and the Bank sufficient capital resources to
meet their commitments and business needs. In addition, the Bank is
party to an MOU that it entered into with the FDIC and the Michigan OFIR in May,
2009. In connection with the MOU a target Tier 1 leverage ratio of 8% was
established for the Bank. This is the same target that the Bank had established
for itself in 2007. At December 31, 2009, the Bank’s Tier 1 leverage ratio was
6.21%, its Tier 1 risk-based ratio was 8.87% and its total risk-based capital
ratio was 10.14%. In order to achieve the target Tier 1 Leverage
ratio of 8%, the Bank would have needed approximately $25.3 million in
additional Tier 1 equity capital as of December 31, 2009. While
the Corporation, on behalf of the Bank, is attempting to raise the required
additional capital, we may not be able to raise the necessary capital on
favorable terms, or at all. An inability to raise additional capital on
acceptable terms could have a materially adverse effect on our business,
financial condition and results of operations. It also could result
in the FDIC and/or the Michigan OFIR taking formal regulatory enforcement action
against the Bank, including the issuance of a consent order.
15
The Corporation is Subject to
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 6A. Quantitative and Qualitative Disclosures
about Market Risk in this report for further discussion related to the
Corporation’s management of interest rate risk.
Our
Allowance for Loan Losses may not be adequate
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.
Real
Estate Market Volatility and Future Changes in Disposition Strategies Could
Result in Net Proceeds that Differ Significantly from Other Real Estate Owned
(“OREO”) Fair Value Appraisals
The
Corporation’s OREO portfolio consists of properties that it obtained through
foreclosure in satisfaction of loans. OREO properties are recorded at the lower
of the recorded investment in the loans for which the properties served as
collateral or estimated fair value, less estimated selling costs. Generally, in
determining fair value an orderly disposition of the property is assumed, except
where a different disposition strategy is expected. Significant judgment is
required in estimating the fair value of OREO property, and the period of time
within which such estimates can be considered current is significantly shortened
during periods of market volatility, as experienced during 2008 and
2009.
16
In
response to market conditions and other economic factors, the Corporation may
utilize alternative sale strategies other than orderly dispositions as part of
its OREO disposition strategy, such as immediate liquidation sales. In this
event, as a result of the significant judgments required in estimating fair
value and the variables involved in different methods of disposition, the net
proceeds realized from such sales transactions could differ significantly from
estimates used to determine the fair value of the Corporation’s OREO
properties.
Turmoil
in the Financial Markets Could Result in Lower Fair Values for the Corporation’s
Investment Securities
Major
disruptions in the capital markets experienced in the past year have adversely
affected investor demand for all classes of securities and resulted in
volatility in the fair values of the Corporation’s investment securities.
Significant prolonged reduced investor demand could manifest itself in lower
fair values for these securities and may result in recognition of an
other-than-temporary impairment. Such impairment could have a material adverse
effect on the Corporation’s financial condition and results of
operations.
The
Corporation Is Subject To Environmental Liability Risk Associated With Lending
Activities
A
significant portion of the Corporation’s loan portfolio is secured by real
property. During the ordinary course of business, the Corporation may foreclose
on and take title to properties securing certain loans. In doing so, there is a
risk that hazardous or toxic substances could be found on these properties. If
hazardous or toxic substances are found, the Corporation may be liable for
remediation costs, as well as for personal injury and property damage.
Environmental laws may require the Corporation to incur substantial expenses and
could materially reduce the affected property’s value or limit the Corporation’s
ability to use or sell the affected property. In addition, future laws or more
stringent interpretations or enforcement policies with respect to existing laws
may increase the Corporation’s exposure to environmental liability. Although the
Corporation has policies and procedures to perform an environmental review
before initiating any foreclosure action on real property, these reviews may not
be sufficient to detect all potential environmental hazards. The remediation
costs and any other financial liabilities associated with an environmental
hazard could have a material adverse effect on the Corporation’s financial
condition and results of operations.
The
Corporation May Be Adversely Affected by the Soundness of Other Financial
Institutions
Financial
services institutions are interrelated as a result of trading, clearing,
counterparty, or other relationships. The Corporation has exposure to many
different industries and counterparties and routinely executes transactions with
counterparties in the financial services industry, including commercial banks,
brokers and dealers, investment banks, and other institutional clients. Many of
these transactions expose the Corporation to credit risk in the event of a
default by a counterparty or client. Any such losses could have a material
adverse effect on the Corporation’s financial condition and results of
operations.
The
Corporation Operates in a Highly Competitive Industry
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.
17
The
Corporation is Subject to Extensive Government Regulation and
Supervision
The
Corporation is subject to extensive federal and state regulation and
supervision. Banking regulations are primarily intended to protect depositors’
funds, federal deposit insurance funds, and the banking system as a whole, not
shareholders. These regulations affect the Corporation’s lending practices,
capital structure, investment practices, dividend policy, and growth, among
other things. Congress and federal regulatory agencies continually review
banking laws, regulations, and policies for possible changes. Changes to
statutes, regulations, or regulatory policies, including changes in
interpretation or implementation of statutes, regulations, or policies, could
affect the Corporation in substantial and unpredictable ways. Such changes could
subject the Corporation to additional costs, limit the types of financial
services and products the Corporation may offer and/or increase the ability of
non-banks to offer competing financial products and services, among other
things. Failure to comply with laws, regulations, or policies could result in
sanctions by regulatory agencies, civil money penalties, and/or reputation
damage, which could have a material adverse effect on the Corporation’s
business, financial condition, and results of operations. While the Corporation
has policies and procedures designed to prevent any such violations, there can
be no assurance that such violations will not occur.
Recent
events in the U.S. and global financial markets, including the deterioration of
the worldwide credit markets, have created significant challenges for financial
institutions both in the United States and around the world. Dramatic declines
in the housing market during the past year, marked by falling home prices and
increasing levels of mortgage foreclosures, have resulted in significant
write-downs of asset values by financial institutions, including
government-sponsored entities and major commercial and investment banks. In
light of these current economic conditions, regulatory authorities have been
taking actions with respect to the banking industry as a whole, and individual
financial institutions in particular, including institutions that are considered
well capitalized under applicable regulatory standards. These actions are
intended to stabilize and improve the financial condition, risk profile, and
capital adequacy of the industry and such financial institutions. Such actions
may take the form of an informal understanding or a formal written agreement
between the regulatory authority and a financial institution that imposes
various requirements on the financial institution. These requirements could
include the development of goals, strategies, and plans for improving lending
procedures, lowering risk profiles, maintaining specific capital levels, raising
capital, and restrictions on dividends, transactions with affiliates, redemption
of equity securities, and incurring or refinancing debt.
Under
applicable laws, the Federal Reserve Board, the FDIC and the Michigan OFIR have
the ability to impose substantial sanctions, restrictions, and requirements on
the Bank or the Corporation, if they determine, during an examination or
otherwise, that the Bank or the Corporation violated laws or has weaknesses with
respect to general standards of safety and soundness. Applicable law prohibits
disclosure of specific examination findings by the institution, although formal
enforcement actions are routinely disclosed by the regulatory authorities. In
May 2009, the Bank agreed to an informal memorandum of understanding with its
regulators to establish, among other things, reporting regularly to the
regulators about our operations, financial condition, and efforts to mitigate
risks. In light of that informal agreement, and due to increased problem assets
and decreased capital ratios and earnings, it is likely that formal regulatory
action will be imposed in the form of a consent order. The FDIC may require
certain corrective steps, impose limits on activities, prescribe lending
parameters, and require additional capital to be raised. Failure to adhere to
the requirements could result in more severe restrictions. Generally these
enforcement actions can be lifted only after subsequent examinations
substantiate complete correction of the underlying issues.
The US
Government has instituted a number of programs designed to increase credit
availability, provide liquidity during the crisis and stabilize the banking
system, and there may be additional sweeping governmental reform legislation
enacted to provide even greater supervision and regulation of the banking and
financial service industry over the coming years. It is impossible to
predict how these possible reforms may affect our ability to implement our
business plans.
18
Overdraft
Regulation Could Have an Adverse Effect on the Corporation
The
Federal Reserve Board has amended Regulation E (Electronic Fund Transfers)
effective July 1, 2010 to require consumers to opt in, or affirmatively
consent, to the institution’s overdraft service for ATM and one-time debit card
transactions, before overdraft fees may be assessed on the account. Consumers
will also be provided a clear disclosure of the fees and terms associated with
the institution’s overdraft service. Such change could adversely affect the
level of the Corporation’s overdraft fees.
The
Short-Term and Long-Term Impact of the New Basel II Capital Standards and the
Forthcoming New Capital Rules to be Proposed for Non-Basel II U.S. Banks is
Uncertain
Basel II
refers to the results/pronouncements issued by an international committee formed
to create an international standard that banking regulators can use when
creating regulations about how much capital banks need to put aside to guard
against financial and operational risks. The name comes from Basel, Switzerland,
the city in which the main international organization, The Bank for
International Settlements, is located. Basel II was issued in 2004 and is an
update of an earlier accord, Basel I. The concept is to address minimum capital
requirements, supervisory review, and market discipline.
As a
result of the recent deterioration in the global credit markets and the
potential impact of increased liquidity risk and interest rate risk, it is
unclear what the short-term impact of the implementation of Basel II may be or
what impact a pending alternative approach for non-Basel II U.S. banks may have
on the cost and availability of different types of credit and the potential
compliance costs of implementing the new capital standards.
The
Level of the Commercial Real Estate Loan Portfolio May Subject the Corporation
to Additional Regulatory Scrutiny
The FDIC,
the Federal Reserve Board, and the Office of the Comptroller of the Currency
have promulgated joint guidance on sound risk management practices for financial
institutions with concentrations in commercial real estate lending. Under the
guidance, a financial institution that is actively involved in commercial real
estate lending should perform a risk assessment to identify concentrations. A
financial institution may have a concentration in commercial real estate lending
if, among other factors, (i) total reported loans for construction, land
development, and other land represent 100% or more of total capital or
(ii) total reported loans secured by multifamily and non-farm
non-residential properties, loans for construction, land development, and other
land loans otherwise sensitive to the general commercial real estate market,
including loans to commercial real estate related entities, represent 300% or
more of total capital and increased by 50% or more during the prior 36 months.
The joint guidance requires heightened risk management practices including board
and management oversight and strategic planning, development of underwriting
standards, risk assessment, and monitoring through market analysis and stress
testing. As of December 31, 2009, the Bank did not meet the level of
concentration in commercial real estate lending activity that would indicate a
need under the regulatory guidance for increased risk assessment.
The
Corporation’s Information Systems May Experience an Interruption or Breach in
Security
The
Corporation relies heavily on communications and information systems to conduct
its business. Any failure, interruption, or breach in security of these systems
could result in failures or disruptions in the Corporation’s customer
relationship management, general ledger, deposit, loan, or other systems. The
Corporation has policies and procedures expressly designed to prevent or limit
the effect of a failure, interruption, or security breach of its systems.
However, there can be no assurance that any such failures, interruptions, or
security breaches will not occur or, if they do occur, that the impact will not
be substantial. The occurrence of any failures, interruptions, or security
breaches of the Corporation’s systems could damage the Corporation’s reputation,
result in a loss of customer business, subject the Corporation to additional
regulatory scrutiny, or expose the Corporation to civil litigation and possible
financial liability, any of which could have a material adverse effect on the
Corporation’s financial condition and results of operations.
19
The
Corporation Is Dependent Upon Outside Third Parties for Processing and Handling
of Corporation Records and Data
The
Corporation relies on software developed by third party vendors to process
various Corporation transactions. In some cases, the Corporation has contracted
with third parties to run its proprietary software on behalf of the Corporation.
These systems include, but are not limited to, general ledger, payroll, employee
benefits, trust record keeping, loan and deposit processing, merchant
processing, and securities portfolio management. While the Corporation performs
a review of controls instituted by the vendor over these programs in accordance
with industry standards and performs its own testing of user controls, the
Corporation must rely on the continued maintenance of these controls by the
outside party, including safeguards over the security of customer data. In
addition, the Corporation maintains backups of key processing output daily in
the event of a failure on the part of any of these systems. Nonetheless, the
Corporation may incur a temporary disruption in its ability to conduct its
business or process its transactions, or incur damage to its reputation if the
third party vendor fails to adequately maintain internal controls or institute
necessary changes to systems. Such disruption or breach of security may have a
material adverse effect on the Corporation’s financial condition and results of
operations.
The
Corporation Continually Encounters Technological Change
The
banking and financial services industry continually undergoes technological
changes, with frequent introductions of new technology-driven products and
services. In addition to serving customers better, the effective use of
technology increases efficiency and enables financial institutions to reduce
costs. The Corporation’s future success will depend, in part, on its ability to
address the needs of its customers by using technology to provide products and
services that enhance customer convenience and that create additional
efficiencies in the Corporation’s operations. Many of the Corporation’s
competitors have greater resources to invest in technological improvements, and
the Corporation may not effectively implement new technology-driven products and
services or do so as quickly, which could reduce its ability to effectively
compete. Failure to successfully keep pace with technological change affecting
the financial services industry could have a material adverse effect on the
Corporation’s business and, in turn, its financial condition and results of
operations.
The
Corporation Is Subject To Claims and Litigation Pertaining to Fiduciary
Responsibility and other Legal Risks
From time
to time, customers and others make claims and take legal action pertaining to
our performance of fiduciary responsibilities. If such claims and legal actions
are not resolved in our favor, they may result in significant financial
liability and/or adversely affect the market perception of us and our products
and services as well as customer demand for those products and services. Any
financial liability or reputation damage could have a material adverse effect on
our business, which, in turn, could have a material adverse effect on our
financial condition and results of operations.
Consumers
and Businesses May Decide Not to Use Banks to Complete Their Financial
Transactions
Technology
and other changes are allowing parties to complete financial transactions that
historically have involved banks at one or both ends of the transaction. For
example, consumers can now pay bills and transfer funds directly without banks.
This could result in the loss of fee income as well as the loss of customer
deposits and income generated from those deposits and could have a material
adverse effect on the Corporation’s financial condition and results of
operations.
The
Corporation’s Controls and Procedures May Fail or Be Circumvented
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.
20
Financial
Services Companies Depend Upon the Accuracy and Completeness of Information
about Customers and Counterparties
In
deciding whether to extend credit or enter into other transactions, the
Corporation may rely on information furnished by or on behalf of customers and
counterparties, including financial statements, credit reports and other
financial information. The Corporation may also rely on representations of those
customers, counterparties or other third parties, such as independent auditors,
as to the accuracy and completeness of that information. Reliance on inaccurate
or misleading financial statements, credit reports or other financial
information could have a material adverse effect on the Corporation’s business
and, in turn, the Corporation’s financial condition and results of
operations.
The
Corporation and Its Subsidiaries May Not Be Able To Realize the Benefit of
Deferred Tax Assets
The
Corporation records deferred tax assets and liabilities for the 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 enacted tax rates
expected to apply to taxable income in years in which those temporary
differences are expected to be recovered or settled. The deferred tax assets can
be recognized in future periods dependent upon a number of factors, including
the ability to realize the asset through carry back or carry forward to taxable
income in prior or future years, the future reversal of existing taxable
temporary differences, future taxable income, and the possible application of
future tax planning strategies. If the Corporation is not able to recognize
deferred tax assets in future periods, it could have a material adverse effect
on the Corporation’s financial condition and results of operations.
The
Corporation and Its Subsidiaries Are Subject To Changes in Federal and State Tax
Laws and Changes in Interpretation of Existing Laws
The
Corporation’s financial performance is impacted by federal and state tax laws.
Given the current economic and political environment, and ongoing state
budgetary pressures, the enactment of new federal or state tax legislation may
occur. The enactment of such legislation, or changes in the interpretation of
existing law, including provisions impacting tax rates, apportionment,
consolidation or combination, income, expenses, and credits, may have a material
adverse effect on the Corporation’s financial condition and results of
operations.
The
Corporation and Its Subsidiaries Are Subject To Changes in Accounting
Principles, Policies, or Guidelines
The
Corporation’s financial performance is impacted by accounting principles,
policies, and guidelines. Changes in these are continuously occurring, and given
the current economic environment, more drastic changes may occur. The
implementation of such changes could have a material adverse effect on the
Corporation’s financial condition and results of operations.
The
Corporation May Not Be Able to Attract and Retain Skilled People
The
successful operation of the Corporation and the Bank will be greatly influenced
by the Corporation’s and the Bank’s ability to retain the services of their
existing senior management and, to attract and retain qualified additional
senior and middle management. The unexpected loss of the services of
any of the key management personnel, or the inability to recruit and retain
qualified personnel in the future, could have an adverse effect on the
Corporation’s and the Bank’s business and financial results.
The
Corporation Is a Bank Holding Corporation and Its Sources of Funds Are
Limited
The
Corporation is a bank holding company, and its operations are primarily
conducted by the Bank, which is subject to significant federal and state
regulation. Cash available to pay dividends to stockholders of the Corporation
is derived primarily from dividends received from the Bank. The Corporation’s
ability to receive dividends or loans from its subsidiaries is restricted.
Dividend payments by the Bank to the Corporation in the future will require
generation of future earnings by the Bank and could require regulatory approval
if the proposed dividend is in excess of prescribed guidelines. Further, the
Corporation’s right to participate in the assets of the Bank upon its
liquidation, reorganization, or otherwise will be subject to the claims of the
Bank’s creditors, including depositors, which will take priority. Under the
terms of the Bank’s MOU with the FDIC and the Michigan OFIR the Bank is
presently prohibited from the payment of dividends without the consent of the
FDIC and the Michigan OFIR.
21
The
Corporation Could Experience an Unexpected Inability to Obtain Needed
Liquidity
The
Corporation and the Bank may be unable to continue to obtain adequate sources of
funding and liquidity at current rates, which would adversely affect the spread
between interest earned on assets and interest paid on
liabilities. The Bank’s profitability depends in large part upon the
amount of the spread between interest earned on assets and interest paid on
liabilities, including deposits. A decrease in this spread will
result in a decrease in profitability and, eventually, losses. A
decrease in the Bank’s profitability likely would impair the ability of the Bank
to pay dividends to the Corporation. The unavailability of adequate
funding sources harms the Corporation and the Bank in other ways as
well. The Corporation and the Bank must maintain adequate funding
sources in the normal course of business to support their operations and to fund
outstanding liabilities. The Bank derives liquidity through, among
other things, deposit growth and maturity and sale of investment securities and
loans. If these funding sources are not sufficient, the Corporation
and the Bank may have to acquire funds through higher-cost sources or may not be
able to access funding at all.
Severe
Weather, Natural Disasters, Acts of War or Terrorism and Other External Events
Could Significantly Impact the Corporation’s Business
Severe
weather, natural disasters, acts of war or terrorism and other adverse external
events could have a significant impact on the Corporation’s ability to conduct
business. Such events could affect the stability of the Corporation’s deposit
base, impair the ability of borrowers to repay outstanding loans, reduce the
value of collateral securing loans, cause significant property damage, result in
loss of revenue and/or cause the Corporation to incur additional expenses.
Although management has established disaster recovery policies and procedures,
the occurrence of any such event could have a material adverse effect on the
Corporation’s business, which, in turn, could have a material adverse effect on
its financial condition and results of operations.
Managing
Reputational Risk Is Important To Attracting and Maintaining Customers,
Investors, and Employees
Threats
to the Corporation’s reputation can come from many sources, including adverse
sentiment about financial institutions generally, unethical practices, employee
misconduct, failure to deliver minimum standards of service or quality,
compliance deficiencies, and questionable or fraudulent activities of our
customers. The Corporation has policies and procedures in place that seek to
protect our reputation and promote ethical conduct. Nonetheless, negative
publicity may arise regarding the Corporation’s business, employees, or
customers, with or without merit, and could result in the loss of customers,
investors, and employees; costly litigation; a decline in revenues; and
increased governmental regulation.
Risks Associated With the
Corporation’s Common Stock
The
Corporation’s Stock Price Can Be Volatile
Stock
price volatility may make it more difficult for you to resell your common stock
when you want and at prices you find attractive. The Corporation’s stock price
can fluctuate significantly in response to a variety of factors
including:
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·
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Actual
or anticipated variations in quarterly results of
operations;
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·
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Recommendations
by securities analysts;
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·
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Operating
and stock price performance of other companies that investors deem
comparable to the Corporation;
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·
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News
reports relating to trends, concerns, and other issues in the financial
services industry;
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·
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Perceptions
in the marketplace regarding the Corporation and/or its
competitors;
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·
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New
technology used or services offered by
competitors;
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·
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Significant
acquisitions or business combinations, strategic partnerships, joint
venture, or capital commitments by or involving the Corporation or its
competitors;
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Failure
to integrate acquisitions or realize anticipated benefits from
acquisitions;
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Changes
in government regulations; and
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22
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·
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Geopolitical
conditions such as acts or threats of terrorism or military
conflicts.
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General
market fluctuations, industry factors, and general economic and political
conditions and events, such as economic slowdowns or recessions, interest rate
changes, or credit loss trends, could also cause the Corporation’s stock price
to decrease regardless of operating results.
The
Trading Volume In the Corporation’s Common Stock Is Less Than That Of Other
Larger Financial Services Institutions
Although
the Corporation’s common stock is listed for trading on the Nasdaq Global Select
stock market, the trading volume in its common stock is less than that of other,
larger financial services companies. A public trading market having the desired
characteristics of depth, liquidity, and orderliness depends on the presence in
the marketplace of willing buyers and sellers of the Corporation’s common stock
at any given time. This presence depends on the individual decisions of
investors and general economic and market conditions over which the Corporation
has no control. Given the low trading volume of the Corporation’s common stock,
significant sales of the Corporation’s common stock, or the expectation of these
sales could cause the Corporation’s common stock price to fall.
An
Investment In the Corporation’s Common Stock Is Not An Insured
Deposit
The
Corporation’s common stock is not a bank deposit and, therefore, is not insured
against loss by the FDIC, any other deposit insurance fund, or by any other
public or private entity. Investment in the Corporation’s common stock is
inherently risky for the reasons described in this “Risk Factors” section and
elsewhere in this report and is subject to the same market forces that affect
the price of common stock in any company. As a result, if you acquire the
Corporation’s common stock, you could lose some or all of your
investment.
The
Corporation’s Articles of Incorporation, By-Laws, As Well As Certain Banking
Laws May Have an Anti-Takeover Effect
Provisions
of the Corporation’s Articles of Incorporation and By-laws, and federal banking
laws, including regulatory approval requirements ,could make it more difficult
for a third party to acquire the Corporation, even if doing so would be
perceived to be beneficial by the Corporation’s stockholders. The combination of
these provisions may inhibit a non-negotiated merger or other business
combination, which, in turn, could adversely affect the market price of the
Corporation’s common stock.
The
Corporation May Issue Additional Securities, Which Could Dilute the Ownership
Percentage of Holders of the Corporation’s Common Stock
The
Corporation may issue additional securities to raise additional capital or
finance acquisitions or upon the exercise or conversion of outstanding options,
and, if it does, the ownership percentage of holders of the Corporation’s common
stock could be diluted.
The
Corporation Cannot Assure You of Its Ability to Pay Dividends in the
Future
The
Corporation suspended the payment of dividends on August 27,
2009. The Corporation does not have any plans to reintroduce its
quarterly dividend in the near future. The Corporation relies on
dividends from the Bank to pay dividends to shareholders and the Bank is
presently prohibited under the terms of its MOU with the FDIC and the Michigan
OFIR from paying any dividends without regulatory permission.
In
addition, the Federal Reserve has issued Federal Reserve Supervision and
Regulation Letter SR-09-4, which requires bank holding companies to inform and
consult with Federal Reserve supervisory staff prior to declaring and paying a
dividend that exceeds earnings for the period for which the dividend is being
paid. Under this regulation, if the Corporation experiences losses in a series
of consecutive quarters, it may be required to inform and consult with the
Federal Reserve supervisory staff prior to declaring or paying any dividends. In
this event, there can be no assurance that the Corporation’s regulators will
approve the payment of such dividends.
23
Any
Corporation Debt Obligations and any Senior Equity Securities will have Priority
over the Corporation’s Common Stock with Respect to Payment in the Event of
Liquidation, Dissolution, or Winding-Up and with Respect to the Payment of
Dividends
In any
liquidation, dissolution, or winding up of the Corporation, the Corporation’s
common stock would rank below all debt claims against the Corporation and claims
of any other senior equity securities. As a result, holders of the Corporation’s
common stock will not be entitled to receive any payment or other distribution
of assets upon the liquidation, dissolution, or winding-up of the Corporation
until after all of the Corporation’s obligations to the Corporation’s debt
holders have been satisfied and holders of senior equity securities have
received any payment or distribution due to them.
Offerings
of Debt, Which Would be Senior to the Corporation’s Common Stock upon
Liquidation, and/or Preferred Equity Securities, Which may be Senior to the
Corporation’s Common Stock for Purposes of Dividend Distributions or upon
Liquidation, may Adversely Affect the Market Price of the Corporation’s Common
Stock
The
Corporation may attempt to increase the Corporation’s capital, or the Bank could
be forced to raise additional capital by making additional offerings of debt or
preferred equity securities, including trust preferred securities, senior or
subordinated notes, and preferred stock. The Corporation may also decide to
raise additional capital by issuing debt or preferred equity securities for
other reasons. Upon liquidation, holders of the Corporation’s debt securities
and shares of preferred stock and lenders with respect to other borrowings will
receive distributions of the Corporation’s available assets prior to the holders
of the Corporation’s common stock. Additional equity offerings may dilute the
holdings of the Corporation’s existing stockholders or reduce the market price
of the Corporation’s common stock, or both. Holders of the Corporation’s common
stock are not entitled to preemptive rights or other protections against
dilution.
Item
1B. Unresolved Staff Comments
None.
Item
2. Properties
MBT
Financial Corp. does not conduct any business other than its ownership of Monroe
Bank & Trust’s stock. MBT Financial Corp. operates its business from Monroe
Bank & Trust’s headquarters facility. Monroe Bank & Trust operates its
business from its main office complex and 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 23 of its branches. The MBT Credit Company, Inc. location and one of the
Bank’s branches 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.
24
Part II
Item
4. Market for the Registrant’s Common Equity, Related Security Holder Matters,
and Issuer Purchases of Equity Securities
Common
stock consists of 16,210,110 shares with a book value of $5.04. Dividends
declared on common stock during 2009 amounted to $.02 per share. The
common stock is traded on the NASDAQ Global Select Market under the symbol
MBTF. Below is a schedule of the high and low trading price for the
past two years by quarter. These prices represent those known to Management, but
do not necessarily represent all transactions that occurred.
2009
|
2008
|
|||||||||||||||
High
|
Low
|
High
|
Low
|
|||||||||||||
1st
quarter
|
$ | 3.15 | $ | 1.32 | $ | 9.87 | $ | 7.93 | ||||||||
2nd
quarter
|
$ | 3.05 | $ | 1.83 | $ | 9.49 | $ | 5.36 | ||||||||
3rd
quarter
|
$ | 2.40 | $ | 2.00 | $ | 6.00 | $ | 4.27 | ||||||||
4th
quarter
|
$ | 2.11 | $ | 1.25 | $ | 4.83 | $ | 2.40 |
Dividends
declared during the past three years on a quarterly basis were as
follows:
2009
|
2008
|
2007
|
||||||||||
1st
quarter
|
$ | 0.01 | $ | 0.18 | $ | 0.18 | ||||||
2nd
quarter
|
$ | 0.01 | $ | 0.18 | $ | 0.18 | ||||||
3rd
quarter
|
$ | - | $ | 0.09 | $ | 0.18 | ||||||
4th
quarter
|
$ | - | $ | 0.09 | $ | 0.18 |
As of
December 31, 2009, the number of holders of record of the Corporation’s common
shares was 1,245. The payment of future cash dividends is at the
discretion of the Board of Directors and is subject to a number of factors,
including results of operations, general business conditions, growth, financial
condition, and other factors deemed relevant. Further, the Corporation’s ability
to pay future cash dividends is subject to certain regulatory requirements and
restrictions discussed in the sections captioned “Recent Regulatory Enforcement
Actions” and “Bank Regulation-Dividends” in Item 1 above. Given the
Corporation’s operating results and need to raise additional capital,
Management’s expectation is that the payment of dividends will continue to be
suspended for the foreseeable future.
The
following graph shows a comparison of cumulative total shareholder returns for
the Corporation, the Nasdaq Composite Index, and the Nasdaq Bank Index for the
five year period ended December 31, 2009. The total shareholder return assumes a
$100 investment in the common stock of the Corporation, and each index on
December 31, 2004 and that all dividends were reinvested.
25
Period Ending
|
||||||||||||||||||||||||
Index
|
12/31/04
|
12/31/05
|
12/31/06
|
12/31/07
|
12/31/08
|
12/31/09
|
||||||||||||||||||
MBT
Financial Corp.
|
100.00 | 72.18 | 71.32 | 43.59 | 16.58 | 8.26 | ||||||||||||||||||
NASDAQ
Composite
|
100.00 | 101.37 | 111.03 | 121.92 | 72.49 | 104.31 | ||||||||||||||||||
NASDAQ
Bank
|
100.00 | 95.67 | 106.20 | 82.76 | 62.96 | 51.31 | ||||||||||||||||||
MBT
Financial 2009 Peer Group*
|
100.00 | 85.85 | 91.73 | 50.22 | 21.53 | 12.84 |
*MBT
Financial 2009 Peer Group consists of Capitol Bancorp Ltd., Chemical Financial
Corporation, Citizens First Bancorp, Inc., Dearborn Bancorp, Inc., Citizens
Republic Bancorp, Inc., Fentura Financial, Inc., Flagstar Bancorp, Inc.,
Firstbank Corporation, Macatawa Bank Corporation & Mercantile Bank
Corporation.
26
Item
5. Selected Financial Data
The
selected financial data for the five years ended December 31, 2009 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
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Consolidated
Statements of Income
|
||||||||||||||||||||
Interest
Income
|
$ | 71,004 | $ | 84,903 | $ | 93,551 | $ | 95,923 | $ | 89,695 | ||||||||||
Interest
Expense
|
29,989 | 42,514 | 50,782 | 49,288 | 38,583 | |||||||||||||||
Net
Interest Income
|
41,015 | 42,389 | 42,769 | 46,635 | 51,112 | |||||||||||||||
Provision
for Loan Losses
|
36,000 | 18,000 | 11,407 | 16,475 | 6,906 | |||||||||||||||
Net
Interest Income after Provision for Loan Losses
|
5,015 | 24,389 | 31,362 | 30,160 | 44,206 | |||||||||||||||
Other
Income
|
10,480 | 15,985 | 15,634 | 9,542 | 14,449 | |||||||||||||||
Other
Expenses
|
49,774 | 39,999 | 37,234 | 36,308 | 33,818 | |||||||||||||||
Income
before Provision for Income Taxes
|
(34,279 | ) | 375 | 9,762 | 3,394 | 24,837 | ||||||||||||||
Provision
for Income Taxes
|
(102 | ) | (1,317 | ) | 2,049 | (379 | ) | 6,858 | ||||||||||||
Net
Income
|
$ | (34,177 | ) | $ | 1,692 | $ | 7,713 | $ | 3,773 | $ | 17,979 | |||||||||
Net
Income available to Common Shareholders
|
$ | (34,177 | ) | $ | 1,692 | $ | 7,713 | $ | 3,773 | $ | 17,979 | |||||||||
Per
Common Share
|
||||||||||||||||||||
Basic
Net Income
|
$ | (2.11 | ) | $ | 0.10 | $ | 0.47 | $ | 0.22 | $ | 1.04 | |||||||||
Diluted
Net Income
|
(2.11 | ) | 0.10 | 0.47 | 0.22 | 1.03 | ||||||||||||||
Cash
Dividends Declared
|
0.02 | 0.54 | 0.72 | 0.70 | 0.66 | |||||||||||||||
Book
Value at Year End
|
5.04 | 7.49 | 7.90 | 8.14 | 8.82 | |||||||||||||||
Average
Common Shares Outstanding
|
16,186,478 | 16,134,570 | 16,415,425 | 16,941,432 | 17,334,376 | |||||||||||||||
Consolidated
Balance Sheets (Year End)
|
||||||||||||||||||||
Total
Assets
|
$ | 1,383,369 | $ | 1,562,401 | $ | 1,556,806 | $ | 1,566,819 | $ | 1,638,356 | ||||||||||
Total
Securities
|
356,865 | 466,043 | 438,058 | 439,025 | 533,709 | |||||||||||||||
Loans,
Net of Deferred Loan Fees
|
849,910 | 941,732 | 1,002,259 | 998,998 | 989,311 | |||||||||||||||
Allowance
for Loan Losses
|
24,063 | 18,528 | 20,222 | 13,764 | 13,625 | |||||||||||||||
Deposits
|
1,031,791 | 1,136,078 | 1,109,980 | 1,116,057 | 1,184,710 | |||||||||||||||
Borrowings
|
258,500 | 291,500 | 304,800 | 300,000 | 291,500 | |||||||||||||||
Total
Shareholders' Equity
|
81,764 | 120,977 | 127,447 | 136,062 | 151,619 | |||||||||||||||
Selected
Financial Ratios
|
||||||||||||||||||||
Return
on Average Assets
|
-2.36 | % | 0.11 | % | 0.50 | % | 0.24 | % | 1.13 | % | ||||||||||
Return
on Average Equity
|
-29.53 | % | 1.36 | % | 5.77 | % | 2.60 | % | 11.57 | % | ||||||||||
Net
Interest Margin
|
3.06 | % | 2.96 | % | 2.99 | % | 3.12 | % | 3.42 | % | ||||||||||
Dividend
Payout Ratio
|
-0.95
|
% | 514.78 | % | 152.40 | % | 313.16 | % | 63.52 | % | ||||||||||
Allowance
for Loan Losses to Period End Loans
|
2.83 | % | 1.97 | % | 2.02 | % | 1.38 | % | 1.38 | % | ||||||||||
Allowance
for Loan Losses to Non Performing Loans
|
27.94 | % | 34.45 | % | 59.60 | % | 61.06 | % | 51.49 | % | ||||||||||
Non
Performing Loans to Period End Loans
|
10.13 | % | 5.71 | % | 3.39 | % | 2.26 | % | 2.67 | % | ||||||||||
Net
Charge Offs to Average Loans
|
3.36 | % | 2.00 | % | 0.49 | % | 1.62 | % | 0.71 | % |
27
Item
6. 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.
For a discussion of these and other risks that may cause actual results to
differ from expectations, refer to “Item 1.A. Risk Factors” in this document.
The forward-looking statements contained or incorporated by reference in this
document relate only to circumstances as of the date on which the statements are
made. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events, or
otherwise.
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 Bank’s 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, adjusted for
environmental factors, to those loans. In addition, all loans over $250,000 that
are nonaccrual and all loans that are renegotiated are individually tested for
impairment. Any amount of monetary impairment is included in the Allowance for
Loan Losses. Management is of the opinion that the Allowance for Loan Losses of
$24,063,000 as of December 31, 2009 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.
Income
tax accounting standards require companies to assess whether a valuation
allowance should be established against deferred tax assets based on the
consideration of all evidence using a “more likely than not” standard. We
reviewed our deferred tax asset, considering both positive and negative evidence
and analyzing changes in near term market conditions as well as other factors
that may impact future operating results. Significant negative evidence is our
net operating losses for 2008 and 2009, combined with a difficult economic
environment and uncertainty in the timing of a meaningful economic recovery in
southeast Michigan. Positive evidence includes our history of strong earnings
prior to 2008, our strong capital position, our improving net interest margin,
and our non interest expense control initiatives. Based on our analysis of the
evidence, we believe that was appropriate to establish a valuation allowance in
the amount of $13.8 million against our deferred tax asset of $17 million as of
December 31, 2009.
The Bank
owns four pooled Trust Preferred Collateralized Debt Obligations in its
investment securities portfolio. Due to the lack of an active market for
securities of this type, the Bank utilizes an independent third party valuation
firm to calculate fair values based on discounted projected cash flows in
accordance with the appropriate standards. This valuation analysis includes a
determination of the portion of the fair value impairment that is the result of
credit losses. The portion of the impairment that is the result of credit losses
is recognized in earnings as Other Than Temporary Impairment and the impairment
related to all other factors is recognized in Other Comprehensive
Income.
28
Recent Accounting
Pronouncements – No recent accounting pronouncements are expected to have
a significant impact on the Corporation’s financial statements.
Results
of Operations
Comparison
of 2009 to 2008 - Net Income decreased from a profit of $1.7 million in 2008 to
a loss of $34.2 million in 2009 due to significant increases in the Provision
for Loan Losses, increases in deposit insurance assessments by the FDIC, losses
on the sales and write downs of other real estate due to the overall decline in
real estate values, and other expenses related to the decline in asset quality.
In addition, the Corporation experienced Other Than Temporary Impairment charges
in its investment portfolio for the first time. The primary source of earnings
for the Bank is its net interest income, which decreased $1.4 million, or 3.2%
compared to 2008. Net interest income decreased even though the net interest
margin improved from 2.96% to 3.06% because the average earning assets decreased
$89.3 million, or 6.1%. Economic conditions remained weak throughout southeast
Michigan even though the rest of the country began to see some improvement in
2009, and loan demand decreased. As a result of the low loan demand and the low
interest rate environment, we were able to decrease the amount of the Bank’s
funding from higher cost certificates of deposit and non deposit borrowings.
This change in our funding structure enabled us to decrease our cost of funds
more than our yield on earning assets, resulting in the increase in the net
interest margin. Interest income decreased $13.9 million during 2009 as the
yield on earnings assets decreased from 5.94% to 5.30%, while the amount of
earning assets was decreased from $1.43 billion to $1.34 billion. Interest
expense decreased $12.5 million compared to 2008 as the amount of interest
bearing liabilities decreased $67.4 million and the cost of the interest bearing
liabilities decreased from 3.33% in 2008 to 2.48% in 2009. The decrease in the
average cost of funds was due to the historically low level of market interest
rates throughout the year and because most of the reduction in the outstanding
balances of interest bearing liabilities occurred in reduction in the balances
of higher cost certificates of deposit and borrowed funds.
The
provision for loan loss expense increased 100%, from $18.0 million in 2008 to
$36.0 million in 2009. The increase in the provision expense was required due to
the continued deterioration of regional and national economic conditions. Net
charge offs increased from $19.7 million in 2008 to $30.5 million in 2009. The
$5.5 million loan loss provision expense that was in excess of the net charge
offs funded an increase in the Allowance for Loan Losses that was necessitated
by the declining quality of the loan portfolio.
Other
income decreased to $10.5 million in 2009 from $16.0 million in 2008. The amount
of wealth management assets under management declined due to lower market values
of investments and a decrease in account balances. This caused the wealth
management fee income to decrease 13.1% from $4.3 million in 2008 to $3.8
million in 2009. Service charges and other fees on deposit accounts decreased
$0.6 million, or 9.2% due to a significant decrease in the amount of NSF
activity. The Bank restructured its investment portfolio in 2009, selling debt
and mortgage backed securities issued by Fannie Mae and Freddie Mac and
reinvesting most of the proceeds in mortgage backed securities issued by Ginnie
Mae. This activity reduced the regulatory risk weighting of these assets from
20% to 0%, and produced net gains on sales of $7.4 million, an increase of $7.0
million over the net gains realized in 2008. The Corporation also recorded a
charge to earnings of $11.8 million to recognize the Other Than Temporary
Impairment (OTTI) of pooled trust preferred collateralized debt obligations
(TruP CDOs) held in the Bank’s investment portfolio. Income on Bank Owned Life
Insurance policies increased $103,000, or 7.4% due to improved policy yields and
lower policy costs resulting from changing carriers on some of the policies.
Other non interest income increased $257,000, or 8.4% primarily due to higher
ATM and debit card interchange income.
Other
expenses increased $9.8 million, or 24.4% compared to 2008 as the weak economic
environment and declining real estate values resulted in a substantial increase
in problem assets and therefore a corresponding increase in expenses associated
with the monitoring, management, collection, and disposition of those problem
assets. Salaries and benefits increased $126,000 or 0.6% even though the average
number of full time equivalent employees decreased from 378 in 2008 to 369 in
2009. The cost savings from the staff reduction was offset by lower loan
origination expense deferral and higher benefit costs. Occupancy expense
decreased $331,000, or 9.2% due to branch closings and a reduction in rent
expense. Marketing expense decreased $219,000, or 17.5% due to reductions in
advertising, customer calling, and sponsorship programs. Professional fees and
Collection expense, combined, increased $77,000 as a significant reduction in
accounting and consulting fees was offset by higher legal and other credit
related collection expenses. Losses on Other Real Estate Owned (OREO) increased
from $2.7 million in 2008 to $10.5 million in 2009 as the Bank wrote down the
values of several foreclosed properties and realized losses by selling a large
number of properties at auctions in 2009. FDIC deposit insurance assessments
increased $2.3 million, or 364.6% due to a special assessment of $663,000 to
help replenish the insurance fund, an increase in our assessment rate, and
because we utilized previously earned assessment credits in 2008.
29
The
Corporation’s net loss for 2009, before the provision for income taxes was $34.3
million, a decrease of $34.7 million from the reported net income of $375,000 in
2008. Due to our Allowance for Loan Losses, our write downs of OREO, and our
OTTI charges, our Deferred Tax Asset (DTA) was $17 million at the end of 2009.
We reviewed our deferred tax asset, considering both positive and negative
evidence and analyzing changes in near term market conditions as well as other
factors that may impact future operating results. Significant negative evidence
is our net operating losses for 2008 and 2009, combined with a difficult
economic environment and uncertainty in the timing of a meaningful economic
recovery in southeast Michigan. Positive evidence includes our history of strong
earnings prior to 2008, our strong capital position, our improving net interest
margin, and our non interest expense control initiatives. Based on our analysis
of the evidence, we established a $13.8 million valuation allowance for this
DTA. As a result, we recorded a total tax benefit of $102,000 in 2009, compared
to our tax benefit of $1.3 million in 2008. The Corporation’s net loss for 2009
was $34.2 million, compared to a net income of $1.7 million in
2008.
Comparison
of 2008 to 2007 - Net income decreased from $7.7 million in 2007 to $1.7 million
in 2008 due to significant increases in the provision for loan losses expense
and other expenses related to the decline in asset quality. Net interest income
decreased $380,000, or 0.9% compared to 2007 because the average earning assets
were unchanged and the net interest margin decreased from 2.99% to 2.96%.
Economic conditions continued to deteriorate throughout southeast Michigan and
the rest of the country in 2008, and loan demand decreased. As a result, earning
assets shifted from loans to investments. This shift to lower yielding assets
and the decrease in market interest rates were the main factors in the reduction
in the net interest margin. Interest income decreased $8.6 million during 2008
as the yield on earnings assets decreased from 6.54% to 5.94%, while the amount
of earning assets was unchanged at $1.43 billion. Interest expense decreased
$8.3 million compared to 2007 even though the amount of interest bearing
liabilities increased $22 million because the cost of the interest bearing
liabilities decreased from 4.05% in 2007 to 3.33% in 2008. The decrease in the
average cost of funds was primarily due to the decrease in market interest rates
throughout the year, especially in the fourth quarter.
The
provision for loan losses increased 57.8%, from $11.4 million in 2007 to $18.0
million in 2008. The increase in the provision was required due to the continued
deterioration of regional and national economic conditions. Net charge offs
increased from $4.9 million in 2007 to $19.7 million in 2008.
Other
income increased slightly to $16.0 million in 2008 from $15.6 million in 2007.
Although we were successful in attracting new wealth management business in
2008, the declining market values of assets under management caused the fee
income to decrease 5.4% from $4.6 million to $4.3 million. Origination fees on
mortgage loans sold decreased 38.3% from $690,000 in 2007 to $426,000 in 2008.
Housing sales decreased in 2008, and even though mortgage rates remained low,
refinance activity was slowed by the decrease in housing values in our market
area. Gains on securities transactions increased $502,000 in 2008 due to gains
on investments that were sold for liquidity needs in the third quarter. Income
on Bank Owned Life Insurance policies increased $96,000, or 7.4% due to improved
policy yields and lower policy costs resulting from changing carriers on some of
the policies. Other non interest income increased due to higher ATM and debit
card interchange income.
Other
expenses increased $2.8 million, or 7.4% compared to 2007. Salaries and benefits
decreased $753,000 or 3.5% as the average number of full time equivalent
employees decreased from 420 in 2007 to 378 in 2008. The largest increases in
non interest expenses were caused by asset quality issues. Losses on OREO
increased from $0.8 million in 2007 to $2.7 million in 2008 as the Bank wrote
down the values of several foreclosed properties due to the decline in real
estate values. Professional fees increased 8.4% compared to 2007 as legal and
collection costs increased due to the increase in loan delinquencies. Also the
costs of carrying OREO properties increased from $0.5 million in 2007 to $1.4
million in 2008 as the amount of OREO properties increased. These expenses
include insurance, property taxes, utilities, and maintenance.
30
Income
before income taxes decreased $9.4 million, or 96.2% in 2008. Due to our tax
exempt income on municipal securities, we recorded a tax benefit of $1.3 million
on taxable income of $375,000 in 2008. Our federal income tax provision in 2007
was $2.0 million on taxable income of $9.8 million, for an effective tax rate of
21.0%. Net income decreased $6.0 million, or 78.1% from that reported in 2007 to
$1,692,000 in 2008.
Comparison
of 2007 to 2006 - Net income increased 104.4% from $3.8 million in 2006 to $7.7
million in 2007. The improvement in earnings was due to decreases in the
provision for loan losses expense and in losses on sales of investment
securities. The Bank’s net interest income decreased $3.9 million, or 8.3%
compared to 2006 because the average earning assets decreased $64.9 million and
the Bank’s net interest margin decreased from 3.12% to 2.99%. The flat yield
curve environment that began in 2005 persisted through most of 2007, and we
continued our strategy to control the decline in the margin by restricting asset
growth. This strategy was successful on the asset side of the balance sheet as
our average earning asset mix changed from 32% investments and 68% loans to 30%
investments and 70% loans. This contributed to the increase in the yield on
earning assets from 6.42% in 2006 to 6.54% in 2007. Although we improved the
yield on earning assets, interest income decreased $2.4 million as the negative
impact of the smaller asset size was greater than the positive impact of the
higher yield. The interest expense increased in 2007 because the benefit from
the smaller amount of interest bearing liabilities was exceeded by the increase
in the cost of funds. Even though market interest rates began to decline in the
second half of 2007, competitive pressure caused increases in the cost of
deposits, particularly Money Market Deposit Accounts and Certificates of
Deposits. We also experienced an increase in the cost of most of our borrowed
funds. Our variable rate borrowed funds pricing is tied to the 3 month LIBOR,
which increased in the third quarter of 2007 while most other short term rates
decreased.
The
provision for loan losses expense decreased 30.8% from $16.5 million to $11.4
million in 2007. The 2006 provision for loan losses expense included $10.4
million to write down the value of a group of problem loans prior to their block
sale in the third quarter. A rapid decline in economic conditions in southeast
Michigan in 2007 caused non performing assets to increase, and we increased our
allowance for loan losses from 1.38% of loans as of December 31, 2006 to 2.02%
as of December 31, 2007.
Other
income increased $6.1 million in 2007 compared to 2006. Wealth management income
improved $309,000 or 7.2% due to increases in the rates charged for trust
services. Deposit account services charges increased 1% due to increases in
insufficient funds and stop payment fees collected. The loss on the sale of
investment securities decreased $5.0 million due to the large loss recorded in
2006 as the result of an investment portfolio restructuring. Origination fees on
mortgage loans sold increased 23% compared to 2006 as the interest rate
environment made it more attractive for residential mortgage loan customers to
refinance from variable rate loans which we hold in our portfolio to fixed rate
loans, which we originate for sale. Income on our bank owned life insurance
portfolio increased 13.3% due to an improvement in the policy yields and an
increase of 7.3% in the policy value outstanding. The $433,000, or 17.9%
increase in other non interest income is mainly due to increases of $187,000 in
ATM interchange income and $132,000 in commissions on brokerage services. Both
of these increases were the result of significant increases in activity
levels.
Other
expenses increased $926,000, or 2.6% in 2007. Our largest expense is salaries
and benefits for our employees, which increased $1.8 million compared to 2006 as
our average number of full time equivalent employees increased from 416 to 420.
Salary expense increased $0.6 million, incentive compensation increased $1.0
million, and benefits increased $0.2 million. The $333,000 increase in occupancy
expense was due to increases in depreciation and property taxes, primarily due
to our new headquarters building which was completed in the third quarter of
2006. Professional fees decreased due to expenses from the sale of problem
assets in 2006, and losses on the sale of other real estate owned also decreased
due to the losses on the 2006 asset sale.
Income
before the provision for income taxes increased $6.4 million, or 187.6% in 2007.
Our federal income tax provision in 2007 was $2.0 million, for an effective tax
rate of 21.0%. Due to our tax exempt income on municipal securities, we recorded
a tax benefit of $379,000 on taxable income of $3,394,000 in 2006. Net Income
increased $3.9 million, or 104.4% to $7,713,000.
31
Earnings
for the Bank are usually highly reflective of the Net Interest Income. The
Federal Open Market Committee (FOMC) of the Federal Reserve began to lower rates
in 2007, bringing the fed funds rate down from 5.25% to 4.25% by the end of the
year. Economic conditions deteriorated significantly in 2008, and the FOMC
lowered the fed funds rate seven times, bringing it to 0-0.25%, where it
remained throughout 2009. This caused the yield curve shape to move from
severely inverted in 2007 to a very steep, positive slope in 2009. Loan and
investment yields follow long term market yields, and the yield on our loans
decreased from 7.12% in 2007, to 6.35% in 2008, and 5.84% in 2009. The yields on
our investment securities also decreased each year, from 5.19% in 2007 to 5.07%
in 2008 and 4.16% in 2009. The investment portfolio restructuring in 2009, which
reduced the risk weighting of our assets and prevented an increase in extension
risk, also contributed to the decline in investment yields in 2009. Funding
costs are more closely tied to the short term rates, and the average cost of our
deposits decreased from 2.97% in 2007 to 2.43%% in 2008, and then to 1.70% in
2009. Borrowed funds costs are primarily based on the 3 month LIBOR, which also
decreased sharply over the last two years, lagging behind the fed funds rates.
As a result our average cost of borrowed funds decreased from 6.05% in 2007 to
5.08% in 2008 and 4.30% in 2009. This caused our net interest margin to decline
slightly from 2.99% in 2007 to 2.96% in 2008 before increasing to 3.06% in 2009.
The average cost of interest bearing deposits was 1.94%, 2.78%, and 3.41%, for
2009, 2008, and 2007, respectively. The following table shows selected financial
ratios for the same three years.
2009
|
2008
|
2007
|
||||||||||
Return
on Average Assets
|
-2.36 | % | 0.11 | % | 0.50 | % | ||||||
Return
on Average Equity
|
-29.53 | % | 1.36 | % | 5.77 | % | ||||||
Dividend
Payout Ratio
|
-0.95 | % | 514.78 | % | 152.40 | % | ||||||
Average
Equity to Average Assets
|
8.00 | % | 8.07 | % | 8.68 | % |
Balance Sheet Activity – Due
to the quarterly losses recorded for every quarter since the fourth quarter of
2008 and the continued weakening of asset quality, the Bank has been facing
increased regulatory scrutiny. In 2009, the Corporation focused its balance
sheet strategy on restricting asset growth and actively managing capital. During
the year, assets decreased $179.0 million, or 11.5% as the Bank used loan and
investment maturities to fund decreases in deposits and borrowings. Typically
excess funds are invested overnight in federal funds sold through our
correspondent banks, but the current effective yield on those transactions is
below the FOMC target of 0.25%, and the Federal Reserve is paying the target
rate on deposits; therefore we increased our deposit balances with the Federal
Reserve Bank, which is reflected in the increase in the Bank’s balances in
interest bearing accounts due from banks of $25.0 million, or 94.9%. The
investment portfolio primarily consists of mortgage backed securities and
debentures issued by government agencies and debt securities issued by states
and political subdivisions. During 2009 we sold all of our holdings of FNMA and
FHLMC mortgage backed and debt securities and reinvested most of the proceeds
into GNMA mortgage backed securities, which have a lower risk weighting for
regulatory capital purposes. We also hold some corporate debt issued by some
regional banking companies and some pooled trust preferred securities issued by
banks and insurance companies. The value of the corporate debt issued by
regional banking companies has been below our amortized cost value of these
assets for more than twelve months, although the market values improved
considerably during 2009. The Bank has the ability and intent to hold these
securities until they recover, which could be maturity and therefore we believe
that we do not have any Other Than Temporary Impairment (OTTI) associated with
these bonds. Due to the lack of an active market for pooled trust preferred
collateralized debt obligations, we utilize an independent third party to value
that portion of our investment portfolio. Based on these third party valuations,
the values of these securities are significantly below our cost, and in 2009 we
recognized OTTI on three of the four bonds we own. Our loan portfolio decreased
$97.5 million as the poor economic conditions hampered local loan demand. We
expect the loan portfolio to continue to decrease in the first half of 2010
before stabilizing. Deposits decreased $104.3 million, or 9.2% in 2009. In the
fourth quarter of 2008 we acquired the deposits from the former Main Street
Bank, which was closed by its regulators. Those deposits included $44.4 million
in brokered certificates of deposit. Due to the low loan demand in 2009 and the
strategic reduction in the size of the balance sheet, we reduced our total
brokered CDs from $106.2 million at December 31, 2008 to $63.2 million at
December 31, 2009. We also did not replace our maturing FHLB advances, bringing
the total amount of this funding down from $261.5 million at December 31, 2008
to $228.5 million at December 31, 2009. This change in the funding structure,
along with the decrease in interest rates, contributed to the decrease in
interest expense in 2009.
32
Asset Quality - The
Corporation uses an internal loan classification system as a means of tracking
and reporting problem and potential problem credit assets. Loans that are rated
one to four are considered “pass” or high quality credits, loans rated five are
“watch” credits, and loans rated six and higher are “problem assets”, which
includes non performing loans. Non performing assets include all loans that are
90 days or more past due, non accrual loans, Other Real Estate Owned (OREO), and
renegotiated debt. Asset quality began to weaken in 2007 and problem assets
increased from $87.5 million, or 5.6% of total assets at December 31, 2007 to
$136.9 million, or 8.8% of total assets at December 31, 2008. Throughout 2009,
economic conditions in southeast Michigan remained worse than the national
average, with above average unemployment, rapidly decreasing property values,
and high foreclosure rates. As a result problem assets increased to $156.8
million, or 11.3% of total assets at December 31, 2009.
The
Corporation monitors the Allowance for Loan and Lease Losses (ALLL) and the
values of the OREO each quarter, making adjustments when necessary. We believe
that the ALLL adequately provides for the losses in the portfolio and that the
reported OREO value is accurate as of December 31, 2009. We expect the recovery
of the local economic environment to lag any recovery experienced by the rest of
the country in 2010. This may result in continued high unemployment and low
property values in our market area. This is expected to result in a slow
improvement in problem assets, and a still high, but lower than 2009, provision
for loan losses.
Liquidity and Capital - The
Corporation has maintained sufficient liquidity to 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, a Federal funds line that has been established with a
correspondent bank, Repurchase Agreements with money center banks that allow us
to pledge securities as collateral for borrowings, and the Federal Reserve Bank
discount window, which also allows us to pledge securities and loans as
collateral for borrowings. As of December 31, 2009, the Bank utilized $228.5
million of its authorized limit of $275 million with the Federal Home Loan Bank
of Indianapolis and none of its $25 million federal funds line with its
correspondent bank.
Total
stockholders’ equity of the Corporation was $81.8 million at December 31, 2009
and $121.0 million at December 31, 2008. The ratio of equity to assets decreased
from 7.7% at December 31, 2008 to 5.9% at December 31, 2009. Federal bank
regulatory agencies have set capital adequacy standards for Total Risk Based
Capital, Tier 1 Risk Based Capital, and Leverage Capital. These regulatory
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 Corporation:
December 31, 2009
|
December 31, 2008
|
Minimum to be Well
Capitalized
|
||||||||||
Tier
1 Leverage Ratio
|
6.3 | % | 7.8 | % | 5.0 | % | ||||||
Tier
1 Risk based Capital
|
8.9 | % | 11.5 | % | 6.0 | % | ||||||
Total
Risk Based Capital
|
10.2 | % | 12.7 | % | 10.0 | % |
33
At
December 31, 2009 and December 31, 2008, the Bank was in compliance with
traditional regulatory capital guidelines and was considered “well capitalized”
under those regulatory standards. In May, 2009 the Bank agreed to an informal
memorandum of understanding with its regulators to establish, among other
things, reporting regularly to the regulators about our operations, financial
condition, and efforts to mitigate risks. As a part of this informal
agreement, the Bank agreed to take certain actions to improve the Bank's credit
administration and developed a written plan to target a minimum Tier 1 Leverage
Capital ratio of 8%. That plan was approved by the Corporation's Board of
Directors and timely submitted to its regulatory agencies. The Bank’s Tier 1
Leverage Capital ratio decreased from 7.73% at December 31, 2008 to 6.21% at
December 31, 2009. The decrease in this ratio in 2009 was due to the Net Loss of
$34.2 million during the year. Since 2007, the Bank has targeted an 8% Tier 1
Leverage Ratio. In response to the ongoing challenges in the national economy in
general and in southeast Michigan in particular, in late 2008 and early 2009,
the Corporation developed a plan for risk mitigation, profitability, and capital
management that it believed would allow the Bank to achieve this target by the
end of 2009. Following the results of 2009, which included the above mentioned
credit related losses in the loan and investment portfolios and the previously
mentioned valuation allowance against the deferred tax assets, the Corporation
does not expect to attain the 8% Tier 1 Leverage Ratio target set forth in our
internal policy and in the plan submitted in connection with the MOU during 2010
without additional new capital. If the Bank continues to remain below the
capital target of the MOU, it is likely that the FDIC and the Michigan OFIR will
take additional regulatory enforcement action against the Bank, including formal
enforcement action in the form of a consent order, and subject the Bank to
additional regulatory oversight and restrictions on its operations.
The
following table shows the investment portfolio for the last three years (000s
omitted).
Held to Maturity
|
||||||||||||||||||||||||
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
||||||||||||||||||||||
Estimated
|
Estimated
|
Estimated
|
||||||||||||||||||||||
Amortized
|
Market
|
Amortized
|
Market
|
Amortized
|
Market
|
|||||||||||||||||||
Cost
|
Value
|
Cost
|
Value
|
Cost
|
Value
|
|||||||||||||||||||
U.S.
Government agency and corporation
|
||||||||||||||||||||||||
obligations
|
$ | 6 | $ | 6 | $ | 7 | $ | 7 | $ | 7 | $ | 8 | ||||||||||||
Securities
issued by states and political
|
||||||||||||||||||||||||
subdivisions
in the U.S.
|
36,427 | 36,411 | 46,833 | 46,036 | 44,727 | 45,036 | ||||||||||||||||||
Total
|
$ | 36,433 | $ | 36,417 | $ | 46,840 | $ | 46,043 | $ | 44,734 | $ | 45,044 | ||||||||||||
Pledged
securities
|
$ | 5,089 | $ | 5,129 | $ | 6,406 | $ | 6,405 | $ | 6,650 | $ | 6,695 |
Available for Sale
|
||||||||||||||||||||||||
December 31, 2009
|
December 31, 2008
|
December 31, 2007
|
||||||||||||||||||||||
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)
|
$ | 256,483 | $ | 254,628 | $ | 322,767 | $ | 329,671 | $ | 330,505 | $ | 330,178 | ||||||||||||
Securities
issued by states and political
|
||||||||||||||||||||||||
subdivisions
in the U.S.
|
35,117 | 35,637 | 40,999 | 41,114 | 27,046 | 27,134 | ||||||||||||||||||
Trust
Preferred CDO Securities
|
13,485 | 7,215 | 25,132 | 19,371 | 20,044 | 19,865 | ||||||||||||||||||
Corporate
Debt Securities
|
8,383 | 7,509 | 15,170 | 13,516 | 1,024 | 1,026 | ||||||||||||||||||
Other
domestic securities (debt and equity)
|
2,553 | 2,357 | 2,386 | 2,445 | 2,013 | 2,035 | ||||||||||||||||||
Total
|
$ | 316,021 | $ | 307,346 | $ | 406,454 | $ | 406,117 | $ | 380,632 | $ | 380,238 | ||||||||||||
Pledged
securities
|
$ | 232,220 | $ | 231,182 | $ | 251,525 | $ | 257,054 | $ | 345,255 | $ | 344,975 |
34
The
following table shows average daily balances, interest income or expense
amounts, and the resulting average rates for interest earning assets and
interest bearing liabilities for the last three years. Also shown are the net
interest income, total interest rate spread, and the net interest margin for the
same periods.
Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
||||||||||||||||||||||||||||||||||
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
|
||||||||||||||||||||||||||||||||||||
Interest
Bearing Balances
|
||||||||||||||||||||||||||||||||||||
Due
From Banks
|
$ | 30,161 | $ | 89 | 0.30 | % | $ | 3,368 | $ | 29 | 0.86 | % | $ | 182 | $ | 9 | 4.95 | % | ||||||||||||||||||
Obligations
of US
|
||||||||||||||||||||||||||||||||||||
Government
Agencies
|
283,030 | 12,572 | 4.44 | % | 313,283 | 16,073 | 5.13 | % | 315,338 | 16,918 | 5.37 | % | ||||||||||||||||||||||||
Obligations
of States &
|
||||||||||||||||||||||||||||||||||||
Political
Subdivisions1
|
82,523 | 3,358 | 4.07 | % | 76,862 | 3,390 | 4.41 | % | 77,391 | 3,177 | 4.11 | % | ||||||||||||||||||||||||
Other
Securities
|
39,549 | 2,076 | 5.25 | % | 48,459 | 2,903 | 5.99 | % | 33,955 | 2,058 | 6.06 | % | ||||||||||||||||||||||||
Total
Investments
|
435,263 | 18,095 | 4.16 | % | 441,972 | 22,395 | 5.07 | % | 426,866 | 22,162 | 5.19 | % | ||||||||||||||||||||||||
Loans
|
||||||||||||||||||||||||||||||||||||
Commercial
|
619,198 | 35,217 | 5.69 | % | 670,473 | 41,757 | 6.23 | % | 662,176 | 48,058 | 7.26 | % | ||||||||||||||||||||||||
Mortgage
|
192,881 | 10,944 | 5.67 | % | 210,427 | 12,679 | 6.03 | % | 221,594 | 13,405 | 6.05 | % | ||||||||||||||||||||||||
Consumer
|
93,274 | 6,748 | 7.23 | % | 102,682 | 8,036 | 7.83 | % | 116,569 | 9,782 | 8.39 | % | ||||||||||||||||||||||||
Total Loans2
|
905,353 | 52,909 | 5.84 | % | 983,582 | 62,472 | 6.35 | % | 1,000,339 | 71,245 | 7.12 | % | ||||||||||||||||||||||||
Federal
Funds Sold
|
0 | 0 | n/a | 4,333 | 36 | 0.83 | % | 2,774 | 144 | 5.19 | % | |||||||||||||||||||||||||
Total
Interest Earning Assets
|
1,340,616 | 71,004 | 5.30 | % | 1,429,887 | 84,903 | 5.94 | % | 1,429,979 | 93,551 | 6.54 | % | ||||||||||||||||||||||||
Cash
& Non Interest Bearing
|
17,748 | 20,420 | 23,171 | |||||||||||||||||||||||||||||||||
Due
From Banks
|
||||||||||||||||||||||||||||||||||||
Interest
Receivable and Other Assets
|
105,067 | 97,412 | 86,853 | |||||||||||||||||||||||||||||||||
Total
Assets
|
$ | 1,463,431 | $ | 1,547,719 | $ | 1,540,003 | ||||||||||||||||||||||||||||||
Savings
Accounts
|
$ | 106,446 | $ | 343 | 0.32 | % | $ | 95,546 | $ | 183 | 0.19 | % | $ | 95,646 | $ | 214 | 0.22 | % | ||||||||||||||||||
NOW
Accounts
|
92,544 | 637 | 0.69 | % | 82,031 | 668 | 0.81 | % | 68,637 | 252 | 0.37 | % | ||||||||||||||||||||||||
Money
Market Deposits
|
279,329 | 1,962 | 0.70 | % | 293,797 | 6,115 | 2.08 | % | 286,655 | 9,830 | 3.43 | % | ||||||||||||||||||||||||
Certificates
of Deposit
|
450,056 | 15,044 | 3.34 | % | 494,962 | 19,870 | 4.01 | % | 498,952 | 22,126 | 4.43 | % | ||||||||||||||||||||||||
Federal
Funds Purchased
|
381 | 1 | 0.26 | % | 18,364 | 466 | 2.54 | % | 10,019 | 518 | 5.17 | % | ||||||||||||||||||||||||
Repurchase
Agreements
|
30,000 | 1,388 | 4.63 | % | 32,008 | 1,474 | 4.61 | % | 36,959 | 1,644 | 4.45 | % | ||||||||||||||||||||||||
FHLB
Advances
|
248,837 | 10,614 | 4.27 | % | 258,303 | 13,738 | 5.32 | % | 256,500 | 16,198 | 6.32 | % | ||||||||||||||||||||||||
Total
Interest Bearing Liabilities
|
1,207,593 | 29,989 | 2.48 | % | 1,275,011 | 42,514 | 3.33 | % | 1,253,368 | 50,782 | 4.05 | % | ||||||||||||||||||||||||
Non-interest
Bearing Deposits
|
129,789 | 136,918 | 141,269 | |||||||||||||||||||||||||||||||||
Other
Liabilities
|
11,490 | 10,921 | 11,676 | |||||||||||||||||||||||||||||||||
Total
Liabilities
|
1,348,872 | 1,422,850 | 1,406,313 | |||||||||||||||||||||||||||||||||
Stockholders'
Equity
|
114,559 | 124,869 | 133,690 | |||||||||||||||||||||||||||||||||
Total
Liabilities & Stockholders' Equity
|
$ | 1,463,431 | $ | 1,547,719 | $ | 1,540,003 | ||||||||||||||||||||||||||||||
Net
Interest Income
|
$ | 41,015 | $ | 42,389 | $ | 42,769 | ||||||||||||||||||||||||||||||
Interest
Rate Spread
|
2.82 | % | 2.61 | % | 2.49 | % | ||||||||||||||||||||||||||||||
Net
Interest Income as a percent of
|
||||||||||||||||||||||||||||||||||||
average
earning assets
|
3.06 | % | 2.96 | % | 2.99 | % |
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.
|
35
The
following table summarizes the changes in interest income and interest expense
attributable to changes in interest rates and changes in the volume of interest
earning assets and interest bearing liabilities for the period
indicated:
Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||
2009 versus 2008
|
2008 versus 2007
|
2007 versus 2006
|
||||||||||||||||||||||||||||||||||
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
|
||||||||||||||||||||||||||||||||||||
Interest
Bearing Balances
|
||||||||||||||||||||||||||||||||||||
Due
From Banks
|
$ | (169 | ) | $ | 229 | $ | 60 | $ | (141 | ) | $ | 161 | $ | 20 | $ | - | $ | 4 | $ | 4 | ||||||||||||||||
Obligations
of US
|
||||||||||||||||||||||||||||||||||||
Government
Agencies
|
(1,949 | ) | (1,552 | ) | (3,501 | ) | (735 | ) | (110 | ) | (845 | ) | 963 | (823 | ) | 140 | ||||||||||||||||||||
Obligations
of States &
|
||||||||||||||||||||||||||||||||||||
Political
Subdivisions
|
(282 | ) | 250 | (32 | ) | 235 | (22 | ) | 213 | (567 | ) | (612 | ) | (1,179 | ) | |||||||||||||||||||||
Other
Securities
|
(293 | ) | (534 | ) | (827 | ) | (34 | ) | 879 | 845 | (24 | ) | (1,681 | ) | (1,705 | ) | ||||||||||||||||||||
Total
Investments
|
(2,693 | ) | (1,607 | ) | (4,300 | ) | (675 | ) | 908 | 233 | 372 | (3,112 | ) | (2,740 | ) | |||||||||||||||||||||
Loans
|
||||||||||||||||||||||||||||||||||||
Commercial
|
(3,355 | ) | (3,185 | ) | (6,540 | ) | (6,928 | ) | 602 | (6,326 | ) | 618 | 478 | 1,096 | ||||||||||||||||||||||
Mortgage
|
(678 | ) | (1,057 | ) | (1,735 | ) | (27 | ) | (674 | ) | (701 | ) | 76 | (442 | ) | (366 | ) | |||||||||||||||||||
Consumer
|
(552 | ) | (736 | ) | (1,288 | ) | (580 | ) | (1,166 | ) | (1,746 | ) | 335 | (770 | ) | (435 | ) | |||||||||||||||||||
Total
Loans
|
(4,585 | ) | (4,978 | ) | (9,563 | ) | (7,535 | ) | (1,238 | ) | (8,773 | ) | 1,029 | (734 | ) | 295 | ||||||||||||||||||||
Federal
Funds Sold
|
0 | (36 | ) | (36 | ) | (189 | ) | 81 | (108 | ) | 19 | 54 | 73 | |||||||||||||||||||||||
Total
Interest Income
|
(7,278 | ) | (6,621 | ) | (13,899 | ) | (8,399 | ) | (249 | ) | (8,648 | ) | 1,420 | (3,792 | ) | (2,372 | ) | |||||||||||||||||||
Interest
Expense
|
||||||||||||||||||||||||||||||||||||
Savings
Accounts
|
139 | 21 | 160 | (30 | ) | 0 | (30 | ) | (25 | ) | (26 | ) | (51 | ) | ||||||||||||||||||||||
NOW
Accounts
|
(117 | ) | 86 | (31 | ) | 366 | 49 | 415 | 81 | 6 | 87 | |||||||||||||||||||||||||
Money
Market Deposits
|
(3,852 | ) | (301 | ) | (4,153 | ) | (3,960 | ) | 245 | (3,715 | ) | 93 | (109 | ) | (16 | ) | ||||||||||||||||||||
Certificates
of Deposit
|
(3,023 | ) | (1,803 | ) | (4,826 | ) | (2,080 | ) | (177 | ) | (2,257 | ) | 2,107 | (555 | ) | 1,552 | ||||||||||||||||||||
Federal
Funds Purchased
|
(8 | ) | (457 | ) | (465 | ) | (483 | ) | 431 | (52 | ) | (2 | ) | (461 | ) | (463 | ) | |||||||||||||||||||
Repurchase
agreements
|
6 | (92 | ) | (86 | ) | 50 | (220 | ) | (170 | ) | 117 | (36 | ) | 81 | ||||||||||||||||||||||
FHLB
Advances
|
(2,621 | ) | (503 | ) | (3,124 | ) | (2,573 | ) | 114 | (2,459 | ) | 304 | 0 | 304 | ||||||||||||||||||||||
Total
Interest Expense
|
(9,476 | ) | (3,049 | ) | (12,525 | ) | (8,710 | ) | 442 | (8,268 | ) | 2,675 | (1,181 | ) | 1,494 | |||||||||||||||||||||
Net
Interest Income
|
$ | 2,198 | $ | (3,572 | ) | $ | (1,374 | ) | $ | 311 | $ | (691 | ) | $ | (380 | ) | $ | (1,255 | ) | $ | (2,611 | ) | $ | (3,866 | ) |
For a
variety of reasons, including volatile economic conditions, fluctuating interest
rates, and large amounts of local municipal deposits, we have attempted, for the
last several years, to maintain a liquid investment position. The percentage of
securities held as Available for Sale was 89.4% as of December 31, 2009 and
89.7% as of December 31, 2008. The percentage of securities that mature within
five years was 16.0% as of December 31, 2009 and 26.0% as of December 31, 2008.
The following table presents the scheduled maturities for each of the investment
categories, and the average yield on the amounts maturing. The yields presented
for the Obligations of States and Political Subdivisions are not tax equivalent
yields. The interest income on these securities is exempt from federal income
tax. The Corporation’s statutory federal income tax rate was thirty-four percent
in 2009.
36
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 | % | $ | 15,016 | 2.27 | % | $ | 82,882 | 3.62 | % | $ | 156,743 | 4.27 | % | $ | 254,641 | 3.94 | % | ||||||||||||||||||||
Obligations
of States & Political
|
||||||||||||||||||||||||||||||||||||||||
Subdivisions
|
9,955 | 3.67 | % | 26,443 | 4.12 | % | 20,568 | 4.01 | % | 15,091 | 3.94 | % | 72,057 | 3.99 | % | |||||||||||||||||||||||||
Trust
Preferred CDO Securities
|
- | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 7,215 | 2.48 | % | 7,215 | 2.48 | % | |||||||||||||||||||||||||
Corporate
Debt Securities
|
- | 0.00 | % | - | 0.00 | % | 7,509 | 6.24 | % | - | 0.00 | % | 7,509 | 6.24 | % | |||||||||||||||||||||||||
Other
Securities
|
- | 0.00 | % | - | 0.00 | % | - | 0.00 | % | 2,357 | 3.17 | % | 2,357 | 3.17 | % | |||||||||||||||||||||||||
Total
|
$ | 9,955 | 3.67 | % | $ | 41,459 | 3.45 | % | $ | 110,959 | 3.87 | % | $ | 181,406 | 4.16 | % | $ | 343,779 | 3.96 | % |
Our loan
policies also reflect our awareness of the need for liquidity. We
have short average terms for most of our loan portfolios, in particular real
estate mortgages, the majority of which are normally written for five years or
less. The following table shows the maturities or repricing opportunities
(whichever is earlier) for the Bank’s interest earning assets and interest
bearing liabilities at December 31, 2009. 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, 2009, 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
|
$ | 36,835 | $ | 15,391 | $ | 19,417 | $ | 63,196 | $ | 114,120 | $ | 248,959 | ||||||||||||
Obligations
of States & Political
|
||||||||||||||||||||||||
Subdivisions
|
15,808 | 8,620 | 5,451 | 26,704 | 16,729 | 73,312 | ||||||||||||||||||
Other
Securities
|
20,500 | - | - | 5,066 | 8,900 | 34,466 | ||||||||||||||||||
Commercial
Loans
|
189,229 | 32,701 | 78,650 | 233,381 | 1,295 | 535,256 | ||||||||||||||||||
Mortgage
Loans
|
24,844 | 37,647 | 26,434 | 56,254 | 29,446 | 174,625 | ||||||||||||||||||
Consumer
Loans
|
35,435 | 5,509 | 13,830 | 26,865 | 3,252 | 84,891 | ||||||||||||||||||
Intereset
Bearing DFB
|
51,398 | - | - | - | - | 51,398 | ||||||||||||||||||
Total
Interest Earning Assets
|
$ | 374,049 | $ | 99,868 | $ | 143,782 | $ | 411,466 | $ | 173,742 | $ | 1,202,907 | ||||||||||||
Interest
Bearing Liabilities
|
||||||||||||||||||||||||
Savings
Deposits
|
$ | 284,438 | $ | - | $ | - | $ | - | $ | - | $ | 284,438 | ||||||||||||
Other
Time Deposits
|
114,908 | 49,757 | 137,442 | 94,253 | 5,366 | 401,726 | ||||||||||||||||||
FHLB
Advances
|
110,000 | 115,000 | 3,500 | - | - | 228,500 | ||||||||||||||||||
Repurchase
Agreements
|
- | - | 10,000 | 5,000 | 15,000 | 30,000 | ||||||||||||||||||
Total
Interest Bearing Liabilities
|
$ | 509,346 | $ | 164,757 | $ | 150,942 | $ | 99,253 | $ | 20,366 | $ | 944,664 | ||||||||||||
Gap
|
$ | (135,297 | ) | $ | (64,889 | ) | $ | (7,160 | ) | $ | 312,213 | $ | 153,376 | $ | 258,243 | |||||||||
Cumulative
Gap
|
$ | (135,297 | ) | $ | (200,186 | ) | $ | (207,346 | ) | $ | 104,867 | $ | 258,243 | $ | 258,243 | |||||||||
Sensitivity
Ratio
|
0.73 | 0.61 | 0.95 | 4.15 | 8.53 | 1.27 | ||||||||||||||||||
Cumulative
Sensitivity Ratio
|
0.73 | 0.70 | 0.75 | 1.11 | 1.27 | 1.27 |
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, 2008, Maturing or Repricing in:
|
||||||||||||||||||||||||
0-6
|
6-12
|
1-2
|
2-5
|
Over 5
|
||||||||||||||||||||
Months
|
Months
|
Years
|
Years
|
Years
|
Total
|
|||||||||||||||||||
Total
Interest Earning Assets
|
$ | 374,049 | $ | 99,868 | $ | 143,782 | $ | 411,466 | $ | 173,742 | $ | 1,202,907 | ||||||||||||
Total
Interest Bearing Liabilities
|
$ | 719,935 | $ | 164,757 | $ | 150,942 | $ | 99,253 | $ | 20,366 | $ | 1,155,253 | ||||||||||||
Gap
|
$ | (345,886 | ) | $ | (64,889 | ) | $ | (7,160 | ) | $ | 312,213 | $ | 153,376 | $ | 47,654 | |||||||||
Cumulative
Gap
|
$ | (345,886 | ) | $ | (410,775 | ) | $ | (417,935 | ) | $ | (105,722 | ) | $ | 47,654 | $ | 47,654 | ||||||||
Sensitivity
Ratio
|
0.52 | 0.61 | 0.95 | 4.15 | 8.53 | 1.04 | ||||||||||||||||||
Cumulative
Sensitivity Ratio
|
0.52 | 0.54 | 0.60 | 0.91 | 1.04 | 1.04 |
The
amount of loans due after one year with floating interest rates is
$239,757,000.
The
following table shows the remaining maturity for Certificates of Deposit with
balances of $100,000 or more as of December 31 (000s omitted):
Years Ended December 31,
|
||||||||||||
(Dollars in Thousands)
|
2009
|
2008
|
2007
|
|||||||||
Maturing
Within
|
||||||||||||
3
Months
|
$ | 31,376 | $ | 50,991 | $ | 62,901 | ||||||
3 -
6 Months
|
12,039 | 18,888 | 35,370 | |||||||||
6 -
12 Months
|
13,637 | 24,775 | 18,218 | |||||||||
Over
12 Months
|
60,507 | 38,595 | 38,830 | |||||||||
Total
|
$ | 117,559 | $ | 133,249 | $ | 155,319 |
For 2010,
we expect the FOMC to keep the fed funds target rate between zero and
one-quarter percent until at least the third quarter. Other factors in the
economic environment, such as high unemployment and low real estate values, will
restrict the opportunities for lending activity significantly in 2010. In the
near term, our focus will be on controlling our asset quality, improving our
capital position, and maintaining a high level of liquidity while the economic
recovery develops. Both the MOU entered into by the Bank with the FDIC and the
Michigan OFIR in May, 2009 and the Bank’s internal capital policy require
maintaining higher levels of capital than the federal banking regulators require
in order to have a regulatory capital classification of “well
capitalized.” Based on our earnings expectations and our current
capital levels, we will need to raise capital from external sources in order to
reach our desired level of capital. We expect assets to continue to shrink in
2010, but at a lower rate than in 2009, and we plan to continue to reduce our
use of non core funding as brokered CDs and FHLB borrowings mature. Due to the
decrease in assets and the stable interest rate environment, we expect a small
decrease in our net interest income in 2010.
In the
fourth quarter of 2009 we recorded a large provision for loan losses expense due
to the increase in nonperforming assets and to increase the general allocation
portion of our Allowance for Loan Losses due to our increase in loan charge offs
and an adjustment to our methodology. Prior to the fourth quarter of 2009, our
general allocation was based on the average loss history for the last five
years, weighted more heavily on the most recent two years, and with an
environmental factor added to adjust for current conditions. In the fourth
quarter of 2009 we changed the general allocation method to use the last eight
quarters of loss history plus an environmental factor. We believe that our
Allowance for Loan Losses provides adequate coverage for the losses in our
portfolio, and because we expect asset quality to begin to stabilize in 2010, we
expect that we will be able to maintain the adequacy of the allowance while
significantly decreasing our provision for loan losses expense in
2010.
38
We
anticipate that non interest income will improve significantly due to a
reduction in the OTTI charges on our investment portfolio. We also expect a
small increase in wealth management income due to improvement in the market
values of investments. We expect non-interest expenses to decrease due to lower
losses on OREO sales and write downs, and savings from staff reductions and
other cost control initiatives. These reductions are expected to exceed the
increases in other expenses, such as increased Directors’ and Officers’
liability insurance costs and credit related expenses.
The
following table shows the loan portfolio for the last five years (000s
omitted).
Book Value at December 31,
|
||||||||||||||||||||
2009 (a)
|
2008 (a)
|
2007 (a)
|
2006 (a)
|
2005 (a)
|
||||||||||||||||
Loans
secured by real estate:
|
||||||||||||||||||||
Construction
and land development
|
$ | 64,520 | $ | 98,104 | $ | 149,271 | $ | 160,566 | $ | 150,179 | ||||||||||
Secured
by farmland (including farm residential
|
||||||||||||||||||||
and
other improvements)
|
10,349 | 10,459 | 9,792 | 10,057 | 9,891 | |||||||||||||||
Secured
by 1-4 family residential properties
|
275,557 | 304,834 | 317,327 | 331,775 | 309,061 | |||||||||||||||
Secured
by multifamily (5 or more) residential properties
|
23,730 | 25,002 | 11,953 | 10,124 | 6,718 | |||||||||||||||
Secured
by nonfarm nonresidential properties
|
351,027 | 352,934 | 357,622 | 328,145 | 337,408 | |||||||||||||||
Loans
to finance agricultural production and other loans to
farmers
|
7,121 | 9,763 | 5,981 | 3,738 | 3,519 | |||||||||||||||
Commercial
and industrial loans to U.S. addresses (domicile)
|
93,865 | 109,337 | 107,156 | 97,512 | 99,220 | |||||||||||||||
Loans
to individuals for household, family, and other
|
||||||||||||||||||||
personal
expenditures (includes purchased paper):
|
||||||||||||||||||||
Credit
cards and related plans
|
362 | 403 | 374 | 377 | 393 | |||||||||||||||
Other
|
21,873 | 29,728 | 40,620 | 55,510 | 70,853 | |||||||||||||||
Nonrated
industrial development obligations (other than
|
||||||||||||||||||||
securities)
of states and political subdivisions in the U.S.
|
- | - | - | - | - | |||||||||||||||
Other
loans:
|
||||||||||||||||||||
Loans
for purchasing or carrying securities (secured and
unsecured)
|
- | - | 25 | - | 73 | |||||||||||||||
All
other loans
|
575 | 384 | 707 | 473 | 1,562 | |||||||||||||||
Less:
Any unearned income on loans
|
- | - | - | - | - | |||||||||||||||
Total
loans and leases, net of unearned income
|
$ | 848,979 | $ | 940,948 | $ | 1,000,828 | $ | 998,277 | $ | 988,877 | ||||||||||
Nonaccrual
loans
|
$ | 56,992 | $ | 47,872 | $ | 30,459 | $ | 19,152 | $ | 16,212 | ||||||||||
Loans
90 days or more past due and accruing
|
$ | 20 | $ | 93 | $ | 102 | $ | 69 | $ | 101 | ||||||||||
Troubled
debt restructurings
|
$ | 29,102 | $ | 5,811 | $ | 3,367 | $ | 888 | $ | 1,813 |
(a)
|
Loan
categories are presented net of deferred loan fees. The presentation in
Note 4 to the consolidated financial statements differs from this
schedule’s presentation by presenting the loan categories, gross, before
deferred loan fees have been
subtracted.
|
The
accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well secured and in the process of collection.
In all cases, loans are placed on nonaccrual or charged off at an earlier date
if principal or interest is considered doubtful.
39
The
following is an analysis of the transactions in the allowance for loan
losses:
Years Ended December 31,
|
||||||||||||||||||||
(Dollars in Thousands)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
Balance
Beginning of Period
|
$ | 18,528 | $ | 20,222 | $ | 13,764 | $ | 13,625 | $ | 13,800 | ||||||||||
Loans
Charged Off (Domestic)
|
||||||||||||||||||||
Commercial,
Financial, and Agricultural
|
7,093 | 7,591 | 1,052 | 1,600 | 313 | |||||||||||||||
Secured
by Real Estate
|
24,266 | 12,036 | 4,284 | 14,910 | 6,800 | |||||||||||||||
Loans
to Individuals
|
635 | 1,021 | 1,050 | 1,867 | 2,227 | |||||||||||||||
Recoveries
(Domestic)
|
||||||||||||||||||||
Commercial,
Financial, and Agricultural
|
607 | 201 | 730 | 815 | 1,358 | |||||||||||||||
Secured
by Real Estate
|
594 | 250 | 48 | 421 | 211 | |||||||||||||||
Loans
to Individuals
|
328 | 503 | 659 | 805 | 965 | |||||||||||||||
Net
Loans Charged Off
|
30,465 | 19,694 | 4,949 | 16,336 | 6,806 | |||||||||||||||
Transfer
to establish reserve for unfunded loan commitments
|
- | - | - | - | 275 | |||||||||||||||
Provision
Charged to Operations
|
36,000 | 18,000 | 11,407 | 16,475 | 6,906 | |||||||||||||||
Balance
End of Period
|
$ | 24,063 | $ | 18,528 | $ | 20,222 | $ | 13,764 | $ | 13,625 | ||||||||||
Ratio
of Net Loans Charged Off to
|
||||||||||||||||||||
Average
Total Loans Outstanding
|
3.36 | % | 2.00 | % | 0.49 | % | 1.62 | % | 0.69 | % |
The
following analysis shows the allocation of the allowance for loan
losses:
Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||||||
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||||
$
|
% of loans
|
$
|
% of loans
|
$
|
% of loans
|
$
|
% of loans
|
$
|
% of loans
|
|||||||||||||||||||||||||||||||
(Dollars in Thousands)
|
Amount
|
to total loans
|
Amount
|
to total loans
|
Amount
|
to total loans
|
Amount
|
to total loans
|
Amount
|
to total loans
|
||||||||||||||||||||||||||||||
Balance
at end of period applicable to:
|
||||||||||||||||||||||||||||||||||||||||
Domestic
|
||||||||||||||||||||||||||||||||||||||||
Commercial,
Financial, and Agricultural
|
$ | 6,502 | 13.1 | % | $ | 3,586 | 13.8 | % | $ | 2,436 | 12.3 | % | $ | 1,524 | 11.1 | % | $ | 2,209 | 11.4 | % | ||||||||||||||||||||
Real
Estate - Construction
|
2,351 | 7.6 | % | 2,915 | 10.4 | % | 3,610 | 14.9 | % | 2,181 | 16.1 | % | 1,959 | 15.2 | % | |||||||||||||||||||||||||
Real
Estate - Mortgage
|
14,888 | 76.6 | % | 11,673 | 72.6 | % | 13,618 | 68.7 | % | 9,056 | 67.1 | % | 8,504 | 66.0 | % | |||||||||||||||||||||||||
Loans
to Individuals
|
322 | 2.7 | % | 354 | 3.2 | % | 558 | 4.1 | % | 1,003 | 5.7 | % | 953 | 7.4 | % | |||||||||||||||||||||||||
Foreign
|
- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
Total
|
$ | 24,063 | 100.0 | % | $ | 18,528 | 100.0 | % | $ | 20,222 | 100.0 | % | $ | 13,764 | 100.0 | % | $ | 13,625 | 100.0 | % |
Each
period the provision for loan losses in the income statement results from the
combination of an estimate by Management of loan losses that occurred during the
current period and the ongoing adjustment of prior estimates of
losses.
To serve
as a basis for making this provision, the Bank maintains an extensive credit
risk monitoring process that considers several factors including: current
economic conditions affecting the Bank’s customers, the payment performance of
individual loans and pools of homogeneous loans, portfolio seasoning, changes in
collateral values, and detailed reviews of specific loan relationships. For
loans deemed to be impaired due to an expectation that all contractual payments
will probably not be received, impairment is measured by comparing the Bank’s
recorded investment in the loan to the present value of expected cash flows
discounted at the loan’s effective interest rate, the fair value of the
collateral, or the loan’s observable market price. Year-end nonperforming
assets, which include nonaccrual loans, loans ninety days or more past due,
renegotiated debt, nonaccrual securities, and other real estate owned, increased
$37.5 million, or 51.4%, from 2008 to 2009. Nonperforming assets as a percent of
total assets at year-end increased from 4.7% in 2008 to 8.0% in 2009. The
Allowance for Loan Losses as a percent of nonperforming loans at year-end
decreased from 34.5% in 2008 to 27.9% in 2009.
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.
40
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
|
$ | 258,500 | $ | 115,000 | $ | 21,500 | $ | 107,000 | $ | 15,000 | ||||||||||
Operating
Lease Obligations
|
706 | 266 | 331 | 91 | 18 | |||||||||||||||
Salary
Continuation Obligations
|
1,045 | 58 | 116 | 116 | 755 | |||||||||||||||
Total
Contractual Obligations
|
$ | 260,251 | $ | 115,324 | $ | 21,947 | $ | 107,207 | $ | 15,773 |
Off-Balance Sheet Arrangements
–Please see Note 17 to the audited financial statements provided under
Item 7 to this Annual Report for information regarding the Corporation’s
off-balance sheet arrangements.
Item
6A. Quantitative and Qualitative Disclosures about Market Risk
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, which committee monitors such risk on a monthly
basis.
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 6), 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, 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 table
below summarizes the net interest income sensitivity as of December 31, 2009 and
2008.
Base
|
Rates
|
Rates
|
Rates
|
Rates
|
Rates
|
Rates
|
||||||||||||||||||||||
(Dollars in Thousands)
|
Projection
|
Up 1%
|
Up 2%
|
Up 3%
|
Down 1%
|
Down 2%
|
Down 3%
|
|||||||||||||||||||||
Year-End
2009 12 Month Projection
|
||||||||||||||||||||||||||||
Interest
Income
|
$ | 63,190 | $ | 64,713 | $ | 66,324 | $ | 68,025 | $ | 62,290 | $ | 60,970 | $ | 59,610 | ||||||||||||||
Interest
Expense
|
23,254 | 23,998 | 24,749 | 25,494 | 23,027 | 22,970 | 22,939 | |||||||||||||||||||||
Net
Interest Income
|
$ | 39,936 | $ | 40,715 | $ | 41,575 | $ | 42,531 | $ | 39,263 | $ | 38,000 | $ | 36,671 | ||||||||||||||
Percent
Change From Base Projection
|
2.0 | % | 4.1 | % | 6.5 | % | -1.7 | % | -4.8 | % | -8.2 | % | ||||||||||||||||
ALCO
Policy Limit (+/-)
|
5.0 | % | 7.5 | % | 10.0 | % | 5.0 | % | 7.5 | % | 10.0 | % |
41
Base
|
Rates
|
Rates
|
Rates
|
Rates
|
Rates
|
Rates
|
||||||||||||||||||||||
(Dollars in Thousands)
|
Projection
|
Up 1%
|
Up 2%
|
Up 3%
|
Down 1%
|
Down 2%
|
Down 3%
|
|||||||||||||||||||||
Year-End
2008 12 Month Projection
|
||||||||||||||||||||||||||||
Interest
Income
|
$ | 72,293 | $ | 74,504 | $ | 76,370 | $ | 78,165 | $ | 69,766 | $ | 67,637 | $ | 65,852 | ||||||||||||||
Interest
Expense
|
33,558 | 34,686 | 35,815 | 36,937 | 32,647 | 32,053 | 31,831 | |||||||||||||||||||||
Net
Interest Income
|
$ | 38,735 | $ | 39,818 | $ | 40,555 | $ | 41,228 | $ | 37,119 | $ | 35,584 | $ | 34,021 | ||||||||||||||
Percent
Change From Base Projection
|
2.8 | % | 4.7 | % | 6.4 | % | -4.2 | % | -8.1 | % | -12.2 | % | ||||||||||||||||
ALCO
Policy Limit (+/-)
|
5.0 | % | 7.5 | % | 10.0 | % | 5.0 | % | 7.5 | % | 10.0 | % |
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. At December 31, 2009, the estimated variability of the net interest
income under all rate scenarios was within the policy guidelines. At various
times during 2009, the estimated variability of the net interest income exceeded
the Bank’s established policy limits in the minus 300 basis point rate scenario.
Because current interest rates are at historically low levels, it is not
probable that rates would decrease that much, and the ALCO determined that no
corrective action was required.
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 Fair Value Measurement. 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, 200, and 300 basis points
in the prime lending rate. The discount rates used to determine the present
values of the loans and deposits, as well as the prepayment rates for the loans,
are based on Management’s expectations of the effect of the rate shock on the
market for loans and deposits. The table below summarizes the amount of interest
rate risk to the fair value of the Bank’s assets and liabilities and to the
economic value of the Bank’s equity.
Fair Value at December 31,
2009
|
||||||||||||||||||||||||||||
Rates
|
||||||||||||||||||||||||||||
(Dollars
in Thousands)
|
Base
|
Up
1%
|
Up
2%
|
Up
3%
|
Down
1%
|
Down
2%
|
Down
3%
|
|||||||||||||||||||||
Assets
|
$ | 1,421,690 | $ | 1,388,363 | $ | 1,353,971 | $ | 1,320,578 | $ | 1,438,463 | $ | 1,452,525 | $ | 1,468,502 | ||||||||||||||
Liabilities
|
1,278,267 | 1,253,907 | 1,230,323 | 1,207,479 | 1,300,295 | 1,319,326 | 1,328,814 | |||||||||||||||||||||
Stockholders'
Equity
|
$ | 143,423 | $ | 134,456 | $ | 123,648 | $ | 113,099 | $ | 138,168 | $ | 133,199 | $ | 139,688 | ||||||||||||||
Change
in Equity
|
-6.3 | % | -13.8 | % | -21.1 | % | -3.7 | % | -7.1 | % | -2.6 | % | ||||||||||||||||
ALCO
Policy Limit (+/-)
|
10.0 | % | 20.0 | % | 30.0 | % | 10.0 | % | 20.0 | % | 30.0 | % |
|
Fair Value at December 31,
2008
|
|||||||||||||||||||||||||||
Rates
|
||||||||||||||||||||||||||||
(Dollars
in Thousands)
|
Base
|
Up
1%
|
Up
2%
|
Up
3%
|
Down
1%
|
Down
2%
|
Down
3%
|
|||||||||||||||||||||
Assets
|
$ | 1,648,577 | $ | 1,622,272 | $ | 1,583,495 | $ | 1,542,477 | $ | 1,665,144 | $ | 1,682,319 | $ | 1,686,270 | ||||||||||||||
Liabilities
|
1,462,001 | 1,433,144 | 1,405,320 | 1,378,475 | 1,490,965 | 1,509,692 | 1,510,395 | |||||||||||||||||||||
Stockholders'
Equity
|
$ | 186,576 | $ | 189,128 | $ | 178,175 | $ | 164,002 | $ | 174,179 | $ | 172,627 | $ | 175,875 | ||||||||||||||
Change
in Equity
|
1.4 | % | -4.5 | % | -12.1 | % | -6.6 | % | -7.5 | % | -5.7 | % | ||||||||||||||||
ALCO
Policy Limit (+/-)
|
10.0 | % | 20.0 | % | 30.0 | % | 10.0 | % | 20.0 | % | 30.0 | % |
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. Throughout 2009, the estimated variability of the economic value of
equity was within the Bank’s established policy limits.
42
Item
7. Financial Statements and Supplementary Data
Financial
Statements and Supplementary Data
See Pages
44 – 68.
43
Report of
Independent Registered Public Accounting Firm
To the
Board of Directors and Stockholders
MBT
Financial Corp. and Subsidiaries
Monroe,
Michigan
We have
audited the accompanying consolidated balance sheets of MBT Financial Corp. and
Subsidiaries as of December 31, 2009 and December 31, 2008 and the related
consolidated statements of income, stockholders’ equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2009. We have also audited the company’s internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Management is responsible for
these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying financial
statements. Our responsibility is to express an opinion on these financial
statements and an opinion on the company’s internal control over financial
reporting based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
44
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of MBT Financial Corp.
and Subsidiaries as of December 31, 2009 and 2008, and the results of its
operations and its cash flows for each of the years in the three-year period
ended December 31, 2009, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, MBT Financial
Corp. and Subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal Control - Integrated Framework issued by the committee
of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Plante & Moran,
PLLC
Auburn
Hills, Michigan
March 15,
2010
45
Consolidated
Balance Sheets
December
31,
|
||||||||
Dollars
in thousands
|
2009
|
2008
|
||||||
Assets
|
||||||||
Cash
and Cash Equivalents (Note 2)
|
||||||||
Cash
and due from banks
|
||||||||
Non-interest
bearing
|
$ | 18,448 | $ | 24,463 | ||||
Interest
bearing
|
51,298 | 26,323 | ||||||
Total
cash and cash equivalents
|
69,746 | 50,786 | ||||||
Securities
- Held to Maturity (Note 3)
|
36,433 | 46,840 | ||||||
Securities
- Available for Sale (Note 3)
|
307,346 | 406,117 | ||||||
Federal
Home Loan Bank stock - at cost
|
13,086 | 13,086 | ||||||
Loans
held for sale
|
931 | 784 | ||||||
Loans
- Net (Notes 4 and 5)
|
824,916 | 922,420 | ||||||
Accrued
interest receivable and other assets (Note 12)
|
50,580 | 43,973 | ||||||
Bank
Owned Life Insurance (Note 9)
|
47,953 | 45,488 | ||||||
Premises
and Equipment - Net (Note 6)
|
32,378 | 32,907 | ||||||
Total
assets
|
$ | 1,383,369 | $ | 1,562,401 | ||||
Liabilities
|
||||||||
Deposits:
|
||||||||
Non-interest
bearing
|
$ | 135,038 | $ | 144,585 | ||||
Interest-bearing
(Note 7)
|
896,753 | 991,493 | ||||||
Total
deposits
|
1,031,791 | 1,136,078 | ||||||
Federal
Home Loan Bank advances (Note 8)
|
228,500 | 261,500 | ||||||
Securities
sold under repurchase agreements (Note 8)
|
30,000 | 30,000 | ||||||
Interest
payable and other liabilities (Note 9)
|
11,314 | 13,846 | ||||||
Total
liabilities
|
1,301,605 | 1,441,424 | ||||||
Stockholders' Equity
(Notes 10, 13 and 15)
|
||||||||
Common
stock (no par value; 30,000,000 shares authorized,
|
||||||||
16,210,110
and 16,148,482 shares issued and outstanding)
|
593 | 321 | ||||||
Retained
Earnings
|
88,396 | 122,896 | ||||||
Accumulated
other comprehensive loss
|
(7,225 | ) | (2,240 | ) | ||||
Total
stockholders' equity
|
81,764 | 120,977 | ||||||
Total
liabilities and stockholders' equity
|
$ | 1,383,369 | $ | 1,562,401 |
The
accompanying notes are an integral part of these statements.
46
Consolidated
Statements of Income
Years Ended December 31,
|
||||||||||||
Dollars in thousands
|
2009
|
2008
|
2007
|
|||||||||
Interest
Income
|
||||||||||||
Interest
and fees on loans
|
$ | 52,909 | $ | 62,472 | $ | 71,245 | ||||||
Interest
on investment securities-
|
||||||||||||
Tax-exempt
|
3,358 | 3,390 | 3,177 | |||||||||
Taxable
|
14,648 | 18,976 | 18,976 | |||||||||
Interest
on balances due from banks
|
89 | 29 | 9 | |||||||||
Interest
on federal funds sold
|
- | 36 | 144 | |||||||||
Total
interest income
|
71,004 | 84,903 | 93,551 | |||||||||
Interest
Expense
|
||||||||||||
Interest
on deposits (Note 7)
|
17,986 | 26,835 | 32,422 | |||||||||
Interest
on borrowed funds
|
12,003 | 15,679 | 18,360 | |||||||||
Total
interest expense
|
29,989 | 42,514 | 50,782 | |||||||||
Net
Interest Income
|
41,015 | 42,389 | 42,769 | |||||||||
Provision For Loan
Losses (Note
5)
|
36,000 | 18,000 | 11,407 | |||||||||
Net
Interest Income After
|
||||||||||||
Provision
For Loan Losses
|
5,015 | 24,389 | 31,362 | |||||||||
Other
Income
|
||||||||||||
Wealth
management income
|
3,762 | 4,329 | 4,577 | |||||||||
Service
charges and other fees
|
5,788 | 6,371 | 6,301 | |||||||||
Net
gain (loss) on sales of securities
|
7,421 | 422 | (80 | ) | ||||||||
Other
Than Temporary Impairment losses on securities
|
(14,952 | ) | - | - | ||||||||
Non
credit related losses on securities not expected to be sold
(recognized
|
||||||||||||
in
other comprehensive income)
|
3,191 | - | - | |||||||||
Net
impairment losses
|
(11,761 | ) | - | - | ||||||||
Origination
fees on mortgage loans sold
|
473 | 426 | 690 | |||||||||
Bank
owned life insurance income
|
1,493 | 1,390 | 1,294 | |||||||||
Other
|
3,304 | 3,047 | 2,852 | |||||||||
Total
other income
|
10,480 | 15,985 | 15,634 | |||||||||
Other
Expenses
|
||||||||||||
Salaries
and employee benefits (Notes 9 and 15)
|
20,740 | 20,614 | 21,367 | |||||||||
Occupancy
expense (Note 6)
|
3,260 | 3,591 | 3,466 | |||||||||
Equipment
expense
|
3,069 | 3,290 | 3,261 | |||||||||
Marketing
expense
|
1,034 | 1,253 | 1,455 | |||||||||
Professional
fees
|
1,563 | 1,635 | 1,508 | |||||||||
Collection
expense
|
750 | 601 | 234 | |||||||||
Net
loss on other real estate owned
|
10,533 | 2,737 | 822 | |||||||||
Other
real estate owned expense
|
1,437 | 1,380 | 459 | |||||||||
FDIC
deposit insurance assessment
|
2,876 | 619 | 130 | |||||||||
Other
|
4,512 | 4,279 | 4,532 | |||||||||
Total
other expenses
|
49,774 | 39,999 | 37,234 | |||||||||
Income
(Loss) Before Provision For Income Taxes
|
(34,279 | ) | 375 | 9,762 | ||||||||
Provision For (Benefit From)
Income Taxes (Note 12)
|
(102 | ) | (1,317 | ) | 2,049 | |||||||
Net
Income (Loss)
|
$ | (34,177 | ) | $ | 1,692 | $ | 7,713 | |||||
Basic
Earnings (Loss) Per Common Share (Note 14)
|
$ | (2.11 | ) | $ | 0.10 | $ | 0.47 | |||||
Diluted
Earnings (Loss) Per Common Share (Note 14)
|
$ | (2.11 | ) | $ | 0.10 | $ | 0.47 |
The
accompanying notes are an integral part of these statements.
47
Consolidated
Statements of Changes in Stockholders’ Equity
Accumulated
|
||||||||||||||||
Other
|
||||||||||||||||
Common
|
Retained
|
Comprehensive
|
||||||||||||||
Dollars in thousands
|
Stock
|
Earnings
|
Income (Loss)
|
Total
|
||||||||||||
Balance
- January 1, 2007
|
$ | 6,979 | $ | 134,162 | $ | (5,079 | ) | $ | 136,062 | |||||||
Repurchase
of Common Stock (599,362 shares)
|
||||||||||||||||
(Note
10)
|
(7,506 | ) | (203 | ) | - | (7,709 | ) | |||||||||
Issuance
of Common Stock (10,399 shares)
|
127 | - | - | 127 | ||||||||||||
Equity
Compensation
|
400 | - | - | 400 | ||||||||||||
Dividends
declared ($0.72 per share)
|
- | (11,755 | ) | - | (11,755 | ) | ||||||||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
- | 7,713 | - | 7,713 | ||||||||||||
Change
in net unrealized loss on securities
|
||||||||||||||||
available
for sale - Net of tax effect of $(1,217)
|
- | - | 2,260 | 2,260 | ||||||||||||
Reclassification
adjustment for gains included
|
||||||||||||||||
in
net income - Net of tax effect of $(28)
|
- | - | 52 | 52 | ||||||||||||
Change
in postretirement liability - Net of tax
|
||||||||||||||||
effect
of $(160)
|
- | - | 297 | 297 | ||||||||||||
Total
Comprehensive Income
|
10,322 | |||||||||||||||
Balance
- December 31, 2007
|
$ | - | $ | 129,917 | $ | (2,470 | ) | $ | 127,447 | |||||||
Issuance
of Common Stock (23,485 shares)
|
131 | - | - | 131 | ||||||||||||
Equity
Compensation
|
190 | - | - | 190 | ||||||||||||
Dividends
declared ($0.54 per share)
|
- | (8,713 | ) | - | (8,713 | ) | ||||||||||
Comprehensive
income:
|
||||||||||||||||
Net
income
|
- | 1,692 | - | 1,692 | ||||||||||||
Change
in net unrealized loss on securities
|
||||||||||||||||
available
for sale - Net of tax effect of $(168)
|
- | - | 312 | 312 | ||||||||||||
Reclassification
adjustment for losses included
|
||||||||||||||||
in
net income - Net of tax effect of $148
|
- | - | (274 | ) | (274 | ) | ||||||||||
Change
in postretirement liability - Net of tax
|
||||||||||||||||
effect
of $(103)
|
- | - | 192 | 192 | ||||||||||||
Total
Comprehensive Income
|
1,922 | |||||||||||||||
Balance
- December 31, 2008
|
$ | 321 | $ | 122,896 | $ | (2,240 | ) | $ | 120,977 | |||||||
Issuance
of Common Stock (61,628 shares)
|
||||||||||||||||
Restricted
stock awards (15,000 shares)
|
45 | - | - | 45 | ||||||||||||
Other
stock issued (46,628 shares)
|
102 | - | - | 102 | ||||||||||||
Equity
compensation
|
125 | - | - | 125 | ||||||||||||
Dividends
declared ($0.02 per share)
|
- | (323 | ) | - | (323 | ) | ||||||||||
Comprehensive
income:
|
||||||||||||||||
Net
loss
|
- | (34,177 | ) | - | (34,177 | ) | ||||||||||
Change
in net unrealized loss on securities
|
||||||||||||||||
available
for sale - Net of tax effect of $4,437
|
- | - | (8,240 | ) | (8,240 | ) | ||||||||||
Reclassification
adjustment for losses included
|
||||||||||||||||
in
net income - Net of tax effect of $(1,519)
|
- | - | 2,821 | 2,821 | ||||||||||||
Change
in postretirement liability - Net of tax
|
||||||||||||||||
effect
of $(234)
|
- | - | 434 | 434 | ||||||||||||
Total
Comprehensive Income
|
(39,162 | ) | ||||||||||||||
Balance
- December 31, 2009
|
$ | 593 | $ | 88,396 | $ | (7,225 | ) | $ | 81,764 |
The
accompanying notes are an integral part of these statements.
48
Consolidated
Statements of Cash Flows
Years Ended December 31,
|
||||||||||||
Dollars in thousands
|
2009
|
2008
|
2007
|
|||||||||
Cash
Flows from Operating Activities
|
||||||||||||
Net
Income (Loss)
|
$ | (34,177 | ) | $ | 1,692 | $ | 7,713 | |||||
Adjustments
to reconcile net income (loss) to net cash from operating
activities
|
||||||||||||
Provision
for loan losses
|
36,000 | 18,000 | 11,407 | |||||||||
Depreciation
|
2,228 | 2,586 | 2,686 | |||||||||
(Increase)
decrease in net deferred federal income tax asset
|
7,087 | (1,394 | ) | (1,836 | ) | |||||||
Net
(accretion) amortization of investment premium and
discount
|
555 | (94 | ) | (418 | ) | |||||||
Writedowns
on other real estate owned
|
7,917 | 2,545 | 643 | |||||||||
Net
increase (decrease) in interest payable and other
liabilities
|
(1,863 | ) | (439 | ) | 336 | |||||||
Net
increase in interest receivable and other assets
|
(26,101 | ) | (11,742 | ) | (11,507 | ) | ||||||
Equity
based compensation expense
|
125 | 190 | 400 | |||||||||
Net
(gain) loss on sales of securities
|
(7,421 | ) | (422 | ) | 80 | |||||||
Other
Than Temporary Impairment of investment securities
|
11,761 | - | - | |||||||||
Increase
in cash surrender value of life insurance
|
(1,593 | ) | (1,390 | ) | (1,294 | ) | ||||||
Net
cash provided by (used for) operating activities
|
$ | (5,482 | ) | $ | 9,532 | $ | 8,210 | |||||
Cash
Flows from Investing Activities
|
||||||||||||
Proceeds
from maturities and redemptions of investment securities held to
maturity
|
$ | 31,583 | $ | 12,613 | $ | 25,790 | ||||||
Proceeds
from maturities and redemptions of investment securities available for
sale
|
150,050 | 207,676 | 64,635 | |||||||||
Proceeds
from sales of investment securities available for sale
|
289,274 | 65,762 | 77,691 | |||||||||
Net
(increase) decrease in loans
|
61,357 | 40,833 | (8,210 | ) | ||||||||
Proceeds
from sales of other real estate owned
|
8,211 | 4,133 | 2,988 | |||||||||
Proceeds
from sales of other assets
|
215 | 187 | 94 | |||||||||
Purchase
of investment securities held to maturity
|
(21,170 | ) | (14,715 | ) | (5,607 | ) | ||||||
Purchase
of bank owned life insurance
|
(1,439 | ) | (1,589 | ) | (1,584 | ) | ||||||
Proceeds
from surrender of bank owned life insurance
|
568 | - | - | |||||||||
Purchase
of investment securities available for sale
|
(353,471 | ) | (298,747 | ) | (144,561 | ) | ||||||
Purchase
of bank premises and equipment
|
(1,819 | ) | (2,779 | ) | (1,516 | ) | ||||||
Net
cash provided by investing activities
|
$ | 163,359 | $ | 13,374 | $ | 9,720 | ||||||
Cash
Flows from Financing Activities
|
||||||||||||
Net
increase (decrease) in deposits
|
$ | (104,287 | ) | $ | 26,098 | $ | (6,077 | ) | ||||
Net
increase (decrease) in short term borrowings
|
- | (13,300 | ) | 9,800 | ||||||||
Net
increase in Federal Home Loan Bank borrowings
|
- | 5,000 | - | |||||||||
Net
decrease in Federal Home Loan Bank borrowings
|
(33,000 | ) | - | - | ||||||||
Net
decrease in securities sold under repurchase agreements
|
- | (5,000 | ) | (5,000 | ) | |||||||
Issuance
of common stock
|
147 | 131 | 127 | |||||||||
Repurchase
of common stock
|
- | - | (7,709 | ) | ||||||||
Dividends
paid
|
(1,777 | ) | (10,162 | ) | (11,861 | ) | ||||||
Net
cash provided by (used for) financing activities
|
$ | (138,917 | ) | $ | 2,767 | $ | (20,720 | ) | ||||
Net
Increase (Decrease) in Cash and Cash Equivalents
|
$ | 18,960 | $ | 25,673 | $ | (2,790 | ) | |||||
Cash and Cash Equivalents at
Beginning of Year (Note 1)
|
50,786 | 25,113 | 27,903 | |||||||||
Cash and Cash Equivalents at
End of Year (Note 1)
|
$ | 69,746 | $ | 50,786 | $ | 25,113 | ||||||
Supplemental
Cash Flow Information
|
||||||||||||
Cash
paid for interest
|
$ | 30,829 | $ | 42,336 | $ | 50,964 | ||||||
Cash
paid for federal income taxes
|
$ | 240 | $ | 1,459 | $ | 5,600 | ||||||
Supplemental
Schedule of Non Cash Investing Activities
|
||||||||||||
Transfer
of loans to other real estate owned
|
$ | 18,296 | $ | 13,306 | $ | 11,919 | ||||||
Transfer
of loans to other assets
|
$ | 264 | $ | 393 | $ | 1,939 |
The
accompanying notes are an integral part of these statements.
49
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
eighteen offices in Monroe County, Michigan and seven offices in Wayne County,
Michigan. MBT Credit Company, Inc. operates a mortgage loan office in Monroe
County. The Bank’s primary source of revenue is from providing loans to
customers, who are predominantly small and middle-market businesses and
middle-income individuals. The Corporation’s sole business segment is community
banking.
The
accounting and reporting policies of the Bank conform to practice within the
banking industry and are in accordance with accounting principles generally
accepted in the United States. Preparation of financial statements in conformity
with generally accepted accounting principles requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Material estimates that are particularly susceptible to significant
changes in the near term are the determination of the allowance for loan losses,
the fair value of investment securities, and the valuation of other real estate
owned.
The
significant accounting policies are as follows:
PRINCIPLES
OF CONSOLIDATION
The
consolidated financial statements include the accounts of the Corporation and
its subsidiary. All material intercompany transactions and balances have been
eliminated.
SIGNIFICANT
GROUP CONCENTRATIONS OF CREDIT RISK
Most of
the Corporation's activities are with customers located within southeast
Michigan. Notes 3 and 4 discuss the types of securities and lending
that the Corporation engages in. The Corporation does not have any
significant concentrations in any one industry or to any one
customer.
INVESTMENT
SECURITIES
Investment
securities that are “held to maturity” are stated at cost, and adjusted for
accumulated amortization of premium and accretion of discount. The
Bank has the intention and, in Management’s opinion, the ability to hold these
investment securities until maturity. Investment securities that are
“available for sale” are stated at estimated market value, with the related
unrealized gains and losses reported as an amount, net of taxes, as a component
of stockholders’ equity. The market value of securities is based on quoted
market prices. For securities that do not have readily available market values,
estimated market values are calculated based on the market values of comparable
securities. Gains and losses on the sale of securities are determined using the
specific identification method. Premiums and discounts are recognized in
interest income using the interest method over the term of the
security.
LOANS
The Bank
grants mortgage, commercial, and consumer loans to customers. Loans are reported
at their outstanding unpaid principal balances, adjusted for charge offs, the
allowance for loan losses, and any deferred fees or costs on originated loans.
Interest income is accrued on the unpaid principal balance. Loan origination
fees and certain direct origination costs, are deferred and recognized as an
adjustment of the related loan yield using the interest method.
The
accrual of interest on loans is discontinued at the time the loan is 90 days
delinquent unless the credit is well secured and in the process of collection.
In all cases, loans are placed on nonaccrual or charged off at an earlier date
if principal or interest is considered doubtful.
All
interest accrued but not collected for loans that are placed on nonaccrual or
charged off is reversed against interest income. The interest on these loans is
accounted for on the cash basis or cost recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current and future payments
are reasonably assured.
LOANS
HELD FOR SALE
Loans
held for sale consist of fixed rate residential mortgage loans with maturities
of 15 to 30 years. Such loans are recorded at the lower of aggregate cost or
estimated fair value.
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.
50
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
$33,336,000 in 2009 and $32,040,000 in 2008. 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 $2,228,000 in 2009, $2,586,000 in 2008, and $2,687,000 in 2007.
The cost
of assets retired and the related accumulated depreciation are eliminated from
the accounts and the resulting gains or losses are reflected in operations in
the year the assets are retired.
BANK
OWNED LIFE INSURANCE
Bank
owned life insurance policies are stated at the current cash surrender value of
the policy, or the policy death proceeds less any obligation to provide a death
benefit to an insured’s beneficiaries if that value is less than the cash
surrender value. Increases in the asset value are recorded as earnings in Other
Income.
COMPREHENSIVE
INCOME
Accounting
principles generally require that revenue, expenses, gains, and losses be
included in net income. Certain changes in assets and liabilities, however, such
as unrealized gains and losses on securities available for sale, and amounts
recognized related to postretirement benefit plans (gains and losses, prior
service costs, and transition assets or obligations), are reported as a direct
adjustment to the equity section of the balance sheet. Such items, along with
net income, are components of comprehensive income.
51
The
components of accumulated other comprehensive income (loss) and related tax
effects are as follows:
Dollars in thousands
|
2009
|
2008
|
2007
|
|||||||||
Unrealized
gains (losses) on securities available for sale
|
$ | (13,014 | ) | $ | 85 | $ | (474 | ) | ||||
Reclassification
adjustment for losses (gains) realized in income
|
4,340 | (422 | ) | 80 | ||||||||
Net
unrealized gains (losses)
|
$ | (8,674 | ) | $ | (337 | ) | $ | (394 | ) | |||
Post
retirement benefit obligations
|
(2,441 | ) | (3,109 | ) | (3,405 | ) | ||||||
Tax
effect
|
3,890 | 1,206 | 1,329 | |||||||||
Accumulated
other comprehensive income (loss)
|
$ | (7,225 | ) | $ | (2,240 | ) | $ | (2,470 | ) |
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
amount of compensation is measured at the fair value of the awards when granted,
and this cost is expensed over the required service period, which is normally
the vesting period of the options. Compensation cost is recorded for awards that
were granted after January 1, 2006 and prior option grants that vest after
January 1, 2006.
The
weighted average fair value of options granted was $0.52, $1.39, and $2.76, in
2009, 2008, and 2007, 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 2009, 2008, and 2007: expected
option lives of seven years for all three; expected volatility of 25.80%,
25.90%, and 20.30%; risk-free interest rates of 3.38%, 3.61%, and 4.70%; and
dividend yields of 4.87%, 4.87%, and 3.71%, respectively.
OFF
BALANCE SHEET INSTRUMENTS
In the
ordinary course of business, the Corporation has entered into commitments to
extend credit, including commitments under credit card arrangements, commercial
letters of credit and standby letters of credit. Such financial instruments are
recorded when they are funded.
FAIR
VALUE
The
Corporation measures or monitors many of its assets and liabilities on a fair
value basis. Fair value is used on a recurring basis for assets and liabilities
that are elected to be accounted for under the Fair Value Option 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.
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 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 and
trust preferred collateralized debt obligations 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.
|
52
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.
(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 $4,054,000 and $4,695,000 at December 31,
2009 and 2008, respectively. Cash and due from banks includes deposits held at
correspondent banks which are fully insured by the FDIC.
(3)
|
Investment
Securities
|
The
following is a summary of the Bank’s investment securities portfolio as of
December 31, 2009 and 2008 (000s omitted):
Held to Maturity
|
||||||||||||||||
December 31, 2009
|
||||||||||||||||
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Obligations
of U.S. Government
|
||||||||||||||||
Agencies
|
$ | 6 | $ | - | $ | - | $ | 6 | ||||||||
Obligations
of States and Political
|
||||||||||||||||
Subdivisions
|
36,427 | 336 | (352 | ) | 36,411 | |||||||||||
|
$ | 36,433 | $ | 336 | $ | (352 | ) | $ | 36,417 |
Available for Sale
|
||||||||||||||||
December 31, 2009
|
||||||||||||||||
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
Obligations
of U.S. Government
|
||||||||||||||||
Agencies
|
$ | 256,483 | $ | 602 | $ | (2,457 | ) | $ | 254,628 | |||||||
Obligations
of States and Political
|
||||||||||||||||
Subdivisions
|
35,117 | 667 | (147 | ) | 35,637 | |||||||||||
Trust
Preferred CDO Securities
|
13,485 | - | (6,270 | ) | 7,215 | |||||||||||
Corporate
Debt Securities
|
8,383 | - | (874 | ) | 7,509 | |||||||||||
Other
Securities
|
2,553 | 74 | (270 | ) | 2,357 | |||||||||||
|
$ | 316,021 | $ | 1,343 | $ | (10,018 | ) | $ | 307,346 |
Held to Maturity
|
||||||||||||||||
December 31, 2008
|
||||||||||||||||
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
Obligations
of U.S. Government
|
||||||||||||||||
Agencies
|
$ | 7 | $ | - | $ | - | $ | 7 | ||||||||
Obligations
of States and Political
|
||||||||||||||||
Subdivisions
|
46,833 | 214 | (1,011 | ) | 46,036 | |||||||||||
|
$ | 46,840 | $ | 214 | $ | (1,011 | ) | $ | 46,043 |
Available for Sale
|
||||||||||||||||
December 31, 2008
|
||||||||||||||||
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||
Obligations
of U.S. Government
|
||||||||||||||||
Agencies
|
$ | 322,767 | $ | 6,915 | $ | (11 | ) | $ | 329,671 | |||||||
Obligations
of States and Political
|
||||||||||||||||
Subdivisions
|
40,999 | 541 | (426 | ) | 41,114 | |||||||||||
Trust
Preferred CDO Securities
|
25,132 | - | (5,761 | ) | 19,371 | |||||||||||
Corporate
Debt Securities
|
15,170 | - | (1,654 | ) | 13,516 | |||||||||||
Other
Securities
|
2,386 | 59 | - | 2,445 | ||||||||||||
|
$ | 406,454 | $ | 7,515 | $ | (7,852 | ) | $ | 406,117 |
The
amortized cost, estimated market value, and weighted average yield of securities
at December 31, 2009, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties
(000s omitted).
53
Held
to Maturity
|
Available
for Sale
|
|||||||||||||||||||||||
Estimated
|
Weighted
|
Estimated
|
Weighted
|
|||||||||||||||||||||
Amortized
|
Market
|
Average
|
Amortized
|
Market
|
Average
|
|||||||||||||||||||
Cost
|
Value
|
Yield
|
Cost
|
Value
|
Yield
|
|||||||||||||||||||
Maturing
within
|
||||||||||||||||||||||||
1
year
|
$ | 9,313 | $ | 9,337 | 3.68 | % | $ | 637 | $ | 642 | 3.64 | % | ||||||||||||
1
to 5 years
|
13,201 | 13,428 | 4.57 | % | 27,897 | 28,258 | 2.90 | % | ||||||||||||||||
5
to 10 years
|
8,289 | 8,185 | 4.31 | % | 104,793 | 102,670 | 3.85 | % | ||||||||||||||||
Over
10 years
|
5,630 | 5,467 | 4.85 | % | 180,141 | 173,419 | 4.09 | % | ||||||||||||||||
Securities
with no stated maturity
|
- | - | 0.00 | % | 2,553 | 2,357 | 0.00 | % | ||||||||||||||||
$ | 36,433 | $ | 36,417 | 4.33 | % | $ | 316,021 | $ | 307,346 | 3.87 | % |
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 or the lack of an active market,
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, 2009 and December 31, 2008
are as follows (000s omitted):
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||||||||
Obligations
of United States Government Agencies
|
$ | 170,584 | $ | 2,457 | $ | - | $ | - | $ | 170,584 | $ | 2,457 | ||||||||||||
Obligations
of States and Political Subdivisions
|
14,616 | 299 | 5,058 | 200 | 19,674 | 499 | ||||||||||||||||||
Trust
Preferred CDO Securities
|
- | - | 1,662 | 3,078 | 1,662 | 3,078 | ||||||||||||||||||
Corporate
Debt Securities
|
- | - | 7,509 | 874 | 7,509 | 874 | ||||||||||||||||||
Equity
Securities
|
270 | 270 | - | - | 270 | 270 | ||||||||||||||||||
$ | 185,470 | $ | 3,026 | $ | 14,229 | $ | 4,152 | $ | 199,699 | $ | 7,178 |
December
31, 2008
|
||||||||||||||||||||||||
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
Aggregate
Fair
Value
|
Gross
Unrealized
Losses
|
|||||||||||||||||||
Obligations
of United States Government Agencies
|
$ | 8,791 | $ | 4 | $ | 1,500 | $ | 7 | $ | 10,291 | $ | 11 | ||||||||||||
Obligations
of States and Political Subdivisions
|
20,707 | 1,211 | 3,878 | 226 | 24,585 | 1,437 | ||||||||||||||||||
Trust
Preferred CDO Securities
|
6,605 | 2,474 | 12,766 | 3,287 | 19,371 | 5,761 | ||||||||||||||||||
Corporate
Debt Securities
|
12,516 | 1,654 | - | - | 12,516 | 1,654 | ||||||||||||||||||
|
$ | 48,619 | $ | 5,343 | $ | 18,144 | $ | 3,520 | $ | 66,763 | $ | 8,863 |
The
amount of investment securities issued by government agencies, states, and
political subdivisions with unrealized losses and the amount of unrealized
losses on those investment securities are primarily the result of market
interest rates and not the result of the credit quality of the issuers of the
securities. The company has the ability and intent to hold these securities
until recovery, which may be until maturity.
The Trust
Preferred Securities are issued by companies in the financial services industry,
including banks, thrifts, and insurance companies. Each of the four securities
owned by the Company is in an unrealized loss position. The main reasons for the
impairment are the overall decline in market values for financial industry
securities and the lack of an active market for these types of securities in
particular. In determining that the impairment is not other-than-temporary, the
Company analyzed each security’s expected cash flows. The assumptions used in
the cash flow analysis were developed following a review of the financial
condition of the banks in the pools. The analysis concluded that disruption of
our cash flows due to defaults by issuers was currently not expected to occur in
one of the four securities owned. Because the Company does not intend to sell
this investment and it is not more likely than not that the Company will be
required to sell this investment before recovery of its amortized cost basis,
which may be maturity, the Company does not consider this investment to be other
than temporarily impaired at December 31, 2009. As a result of uncertainties in
the market place affecting companies in the financial services industry, it is
at least reasonably possible that a change in the estimate will occur in the
near term.
54
The Other
Than Temporary Impairment (OTTI) analysis of three of the four Trust Preferred
CDO securities indicated that their impairment most likely is not temporary.
Accounting regulations require entities to split OTTI charges between credit
losses, which are charged to earnings, and other impairment, which is charged to
Other Comprehensive Income (OCI). The CDOs that have OTTI have an amortized cost
of $20.505 million and a fair value of $5.553 million. The impairment of $14.952
million includes credit losses of $11.76 million that were charged to earnings,
and other impairment of $3.192 million, which was charged to OCI.
The
Corporate Debt Securities consist of senior unsecured debt issued by regional
banks and bank holding companies. The market values for these securities have
declined over the last several months due to larger credit spreads on financial
sector debt. The Company owns three bonds with maturities ranging from January,
2017 to February, 2019. The Company monitors the financial condition of each
issuer by reviewing financial statements and industry analyst reports, and
believes that the each of the issuers will be able to fulfill the obligations of
these securities. The Company has the ability and intent to hold these
securities until they recover, which could be at their maturity
dates.
Investment securities
carried at $236,271,000 and $263,460,000 were pledged or set aside to secure
borrowings, public and trust deposits, and for other purposes required by law at
December 31, 2009 and December 31, 2008, respectively.
At
December 31, 2009, Obligations of U. S. Government Agencies included securities
issued by the Federal Home Loan Bank with an estimated market value of
$69,973,000. At December 31, 2008, Obligations of U. S. Government Agencies
included securities issued by the Federal Home Loan Bank with an estimated
market value of $75,999,000.
For the
years ended December 31, 2009, 2008, and 2007, proceeds from sales of securities
amounted to $289,274,000, $65,762,000, and $77,691,000, respectively. Gross
realized gains amounted to $8,529,000, $630,000, and $361,000, respectively.
Gross realized losses amounted to $1,108,000, $208,000, and $441,000,
respectively. The tax provision applicable to these net realized gains and
losses amounted to $2,597,000, $148,000, and ($28,000),
respectively.
(3)
|
Loans
|
Loan
balances outstanding as of December 31 consist of the following (000s
omitted):
2009
|
2008
|
|||||||
Residential
real estate loans
|
$ | 374,970 | $ | 439,133 | ||||
Non
residential real estate loans
|
351,256 | 352,935 | ||||||
Loans
to finance agricultural production and other loans to
farmers
|
7,113 | 9,763 | ||||||
Commercial
and industrial loans
|
93,786 | 109,495 | ||||||
Loans
to individuals for household, family, and other personal
expenditures
|
22,071 | 29,901 | ||||||
All
other loans (including overdrafts)
|
574 | 384 | ||||||
Total
loans, gross
|
$ | 849,770 | $ | 941,611 | ||||
Less: Deferred loan fees and
costs
|
791 | 663 | ||||||
Total
loans, net of deferred loan fees and costs
|
$ | 848,979 | $ | 940,948 | ||||
Less: Allowance for loan
losses
|
24,063 | 18,528 | ||||||
$ | 824,916 | $ | 922,420 |
The
following is a summary of impaired loans (000s omitted):
2009
|
2008
|
2007
|
||||||||||
Year-end
impaired loans with no allowance for loan losses allocated
|
$ | 28,810 | $ | 16,974 | $ | 2,603 | ||||||
Year-end
impaired loans with allowance for loan losses allocated
|
48,154 | 39,272 | 27,102 | |||||||||
Year-end
allowance for loan losses allocated to impaired loans
|
6,881 | 6,135 | 5,108 | |||||||||
Average
investment in impaired loans
|
67,112 | 39,086 | 23,486 | |||||||||
Interest
income recognized on impaired loans
|
739 | 1,183 | 1,254 | |||||||||
Cash basis interest income recognized on impaired
loans during the year
|
756 | 1,183 | 1,254 |
Non-accrual
loans totaled $56,992,000 as of December 31, 2009 and $47,872,000 as of December
31, 2008. Loans ninety days or more past due and still accruing interest were
$20,000 as of December 31, 2009 and $93,000 as of December 31,
2008.
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 $21,922,000 and $20,683,000 at December 31, 2009 and 2008,
respectively. In 2009, new loans and other additions amounted to $39,030,000,
and repayments and other reductions amounted to $37,791,000. In 2008, new loans
and other additions amounted to $42,519,000, and repayments and other reductions
amounted to $43,307,000. 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.
55
Loans
carried at $136,720,000 and $192,709,000 at December 31, 2009 and 2008,
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):
2009
|
2008
|
2007
|
||||||||||
Balance
beginning of year
|
$ | 18,528 | $ | 20,222 | $ | 13,764 | ||||||
Provision
for loan losses
|
36,000 | 18,000 | 11,407 | |||||||||
Loans
charged off
|
(31,994 | ) | (20,648 | ) | (6,386 | ) | ||||||
Recoveries
|
1,529 | 954 | 1,437 | |||||||||
Balance end of year
|
$ | 24,063 | $ | 18,528 | $ | 20,222 |
Each
period the provision for loan losses in the income statement results from the
combination of an estimate by Management of loan losses that occurred during the
current period and the ongoing adjustment of prior estimates of losses occurring
in prior periods.
To serve
as a basis for making this provision, the Bank maintains an extensive credit
risk monitoring process that considers several factors including: current
economic conditions affecting the Bank’s customers, the payment performance of
individual loans and pools of homogeneous loans, portfolio seasoning, changes in
collateral values, and detailed reviews of specific loan relationships. For
loans deemed to be impaired due to an expectation that all contractual payments
will probably not be received, impairment is measured by comparing the Bank’s
recorded investment in the loan to the present value of expected cash flows
discounted at the loan’s effective interest rate, the fair value of the
collateral, or the loan’s observable market price.
The
provision for loan losses increases the allowance for loan losses, a valuation
account which appears on the consolidated balance sheets. As the specific
customer and amount of a loan loss is confirmed by gathering additional
information, taking collateral in full or partial settlement of the loan,
bankruptcy of the borrower, etc., the loan is charged off, reducing the
allowance for loan losses. If, subsequent to a charge off, the Bank is able to
collect additional amounts from the customer or sell collateral worth more than
earlier estimated, a recovery is recorded.
(6)
|
Bank
Premises and Equipment
|
Bank
premises and equipment as of year end are as follows (000s
omitted):
2009
|
2008
|
|||||||
Land,
buildings and improvements
|
$ | 43,839 | $ | 43,859 | ||||
Equipment, furniture and
fixtures
|
21,875 | 21,088 | ||||||
Total
Bank premises and equipment
|
$ | 65,714 | $ | 64,947 | ||||
Less accumulated
depreciation
|
33,336 | 32,040 | ||||||
Bank premises and equipment,
net
|
$ | 32,378 | $ | 32,907 |
Bank
Premises and Equipment includes Construction in Progress of $48,000 as of
December 31, 2009 and $1,647,000 as of December 31, 2008.
The
Company has entered into lease commitments for office locations. Rental expense
charged to operations was $296,000, $352,000, and $256,000 for the years ended
December 31, 2009, 2008, and 2007, respectively. The future minimum lease
payments are as follows:
Year
|
Minimum
Payment
|
|||
2010
|
$ | 135,000 | ||
2011
|
138,000 | |||
2012
|
73,000 | |||
2013
|
57,000 | |||
2014
|
0 |
56
(7)
|
Deposits
|
Interest
expense on time certificates of deposit of $100,000 or more in the year 2009
amounted to $3,771,000, as compared with $5,779,000 in 2008, and $7,748,000 in
2007. At December 31, 2009, the balance of time certificates of deposit of
$100,000 or more was $117,559,000, as compared with $133,249,000 at December 31,
2008. The amount of time deposits with a remaining term of more than 1 year was
$240,391,000 at December 31, 2009 and $201,003,000 at December 31, 2008. The
following table shows the scheduled maturities of Certificates of Deposit as of
December 31, 2009:
Under $100,000
|
$100,000 and
over
|
|||||||
2010
|
$ | 104,283,000 | $ | 57,052,000 | ||||
2011
|
106,661,000 | 35,652,000 | ||||||
2012
|
28,472,000 | 8,009,000 | ||||||
2013
|
21,164,000 | 5,077,000 | ||||||
2014
|
14,843,000 | 11,668,000 | ||||||
Thereafter
|
8,744,000 | 101,000 | ||||||
Total
|
$ | 284,167,000 | $ | 117,559,000 |
Time
certificates of deposit under $100,000 include $62,827,000 of brokered
certificates of deposit as of December 31, 2009, and $105,764,000 as of December
31, 2008.
(8)
|
Federal
Home Loan Bank Advances and Repurchase
Agreements
|
The
following is a summary of the Bank’s borrowings from the Federal Home Loan Bank
of Indianapolis as of December 31, 2009 and 2008 (000s omitted):
December
31, 2009
|
||||||||||||||||
Floating
Rate
|
Fixed
Rate
|
|||||||||||||||
Maturing in
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||
2010
|
$ | - | - | $ | 115,000 | 5.40 | % | |||||||||
2011
|
3,000 | 0.40 | % | 3,500 | 5.08 | % | ||||||||||
2013
|
95,000 | 2.54 | % | - | - | |||||||||||
2014
|
12,000 | 0.41 | % | - | - | |||||||||||
$ | 110,000 | 2.25 | % | $ | 118,500 | 5.39 | % |
December
31, 2008
|
||||||||||||||||
Floating
Rate
|
Fixed
Rate
|
|||||||||||||||
Maturing in
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||
2009
|
$ | 13,000 | 2.46 | % | $ | 20,000 | 4.91 | % | ||||||||
2010
|
- | - | 115,000 | 5.40 | % | |||||||||||
2011
|
3,000 | 2.02 | % | 3,500 | 5.08 | % | ||||||||||
2013
|
95,000 | 4.94 | % | - | - | |||||||||||
2014
|
12,000 | 2.03 | % | - | - | |||||||||||
$ | 123,000 | 4.32 | % | $ | 138,500 | 5.32 | % |
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, 2009 and 2008 (000s omitted):
Securities
Sold Under Agreements to Repurchase
|
||||||||||||||||
December
31, 2009 and 2008
|
||||||||||||||||
Floating
Rate
|
Fixed
Rate
|
|||||||||||||||
Maturing in
|
Amount
|
Rate
|
Amount
|
Rate
|
||||||||||||
2011
|
$ | - | - | $ | 10,000 | 4.65 | % | |||||||||
2012
|
- | - | 5,000 | 4.12 | % | |||||||||||
2016
|
- | - | 15,000 | 4.65 | % | |||||||||||
$ | - | - | $ | 30,000 | 4.56 | % |
57
(9)
|
Retirement
Plans and Postretirement Benefit
Plans
|
In 2000,
the Bank implemented a retirement plan that included both a money purchase
pension plan, as well as a voluntary profit sharing 401(k) plan for all
employees who meet certain age and length of service eligibility requirements.
In 2002, the Bank amended its retirement plan to freeze the money purchase plan
and retain the 401(k) plan. To ensure that the plan meets the Safe Harbor
provisions of the applicable sections of the Internal Revenue Code, the Bank
contributes an amount equal to four percent of the employee’s base salary to the
401(k) plan for all eligible employees. In addition, an employee may contribute
from 1 to 75 percent of his or her base salary, up to a maximum of $22,000 in
2009. The Bank matched the employee’s elective contribution up to the first six
percent of the employee’s annual base salary in the first six months of 2009. In
the second six months of 2009, the Bank’s matching contribution was reduced to
25% of the first eight percent contributed by the employee. Depending on the
Bank’s profitability, an additional profit sharing contribution may be made by
the Bank to the 401(k) plan. There were no profit sharing contributions in 2009,
2008, and 2007. The total retirement plan expense was $1,025,000, for the year
ended December 31, 2009, $1,270,000 for the year ended December 31, 2008, and
$1,258,000 for the year ended December 31, 2007.
The Bank
has a postretirement benefit plan that generally provides for the continuation
of medical benefits for all employees hired before January 1, 2007 who retire
from the Bank at age 55 or older, upon meeting certain length of service
eligibility requirements. The Bank does not fund its postretirement
benefit obligation. Rather, payments are made as costs are incurred by covered
retirees. The amount of benefits paid under the postretirement benefit plan was
$247,000 in 2009, $239,000 in 2008, and $227,000 in 2007. 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):
2009
|
2008
|
|||||||
APBO
|
$ | 2,078 | $ | 2,000 | ||||
Unrecognized
net transition obligation
|
(161 | ) | (214 | ) | ||||
Unrecognized
prior service costs
|
(17 | ) | (21 | ) | ||||
Unrecognized net gain
|
373 | 356 | ||||||
Accrued benefit cost at fiscal year
end
|
$ | 2,273 | $ | 2,121 |
The
changes recorded in the accumulated postretirement benefit obligation were as
follows (000s omitted):
2009
|
2008
|
|||||||
APBO
at beginning of year
|
$ | 2,000 | $ | 1,985 | ||||
Service
cost
|
101 | 102 | ||||||
Interest
cost
|
112 | 116 | ||||||
Actuarial
loss (gain)
|
(27 | ) | (98 | ) | ||||
Plan
participants' contributions
|
139 | 134 | ||||||
Benefits paid during year
|
(247 | ) | (239 | ) | ||||
APBO at end of year
|
$ | 2,078 | $ | 2,000 |
Components
of the Bank’s postretirement benefit expense were as follows:
2009
|
2008
|
2007
|
||||||||||
Service
cost
|
$ | 101 | $ | 102 | $ | 100 | ||||||
Interest
cost
|
112 | 116 | 110 | |||||||||
Amortization
of transition obligation
|
53 | 54 | 54 | |||||||||
Prior
service costs
|
4 | 4 | 4 | |||||||||
Amortization of gains
|
(10 | ) | (4 | ) | (4 | ) | ||||||
Net postretirement benefit
expense
|
$ | 260 | $ | 272 | $ | 264 |
The APBO
as of December 31, 2009 and 2008 was calculated using an assumed discount rate
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.
The Bank
Owned Life Insurance policies fund a Death Benefit Only (DBO) obligation that
the Bank has with 10 of its active directors, 4 retired directors, 15 active
executives, and 8 retired executives. The DBO plan, which replaced previous
split dollar agreements, provides a taxable death benefit. The benefit for
directors is grossed up to provide a net benefit to each director’s
beneficiaries based on that director’s length of service on the board. The
directors’ net death benefits are $500,000 for director service of less than 3
years, $600,000 for service up to 5 years, $750,000 for service up to 10 years,
and $1,000,000 for director service of 10 years or more. The executives’
beneficiaries will receive a grossed up benefit that will provide a net benefit
equal to two times the executive’s base salary if death occurs during employment
and a postretirement benefit equal to the executive’s final annual salary rate
at the time of retirement if death occurs after retirement.
58
Information
for the postretirement death benefits and health care benefits is as follows as
of the December 31 measurement date (000s):
Postretirement Death Benefit
Obligations
|
Postretirement Health Care
Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Change
in benefit obligation
|
||||||||||||||||
Benefit
obligation at beginning of year
|
$ | 4,414 | 3,996 | $ | 2,000 | $ | 1,985 | |||||||||
Service
cost
|
60 | 56 | 101 | 102 | ||||||||||||
Interest
cost
|
243 | 234 | 112 | 116 | ||||||||||||
Plan
participants' contributions
|
- | - | 139 | 134 | ||||||||||||
Actuarial
loss (gain)
|
(280 | ) | 128 | (27 | ) | (98 | ) | |||||||||
Benefits paid
|
- | - | (247 | ) | (239 | ) | ||||||||||
Benefit obligation at end of
year
|
$ | 4,437 | $ | 4,414 | $ | 2,078 | $ | 2,000 | ||||||||
Change
in accrued benefit cost
|
||||||||||||||||
Accrued
benefit cost at beginning of year
|
$ | 1,184 | $ | 579 | $ | 2,121 | $ | 1,954 | ||||||||
Service
cost
|
60 | 56 | 101 | 102 | ||||||||||||
Interest
cost
|
243 | 235 | 112 | 116 | ||||||||||||
Amortization
|
314 | 314 | 47 | 54 | ||||||||||||
Employer
contributions
|
- | - | (108 | ) | (105 | ) | ||||||||||
Net
gain
|
- | - | - | - | ||||||||||||
Accrued benefit cost at end of
year
|
$ | 1,801 | $ | 1,184 | $ | 2,273 | $ | 2,121 | ||||||||
Change
in plan assets
|
||||||||||||||||
Fair
value of plan assets at beginning of year
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Employer
contributions
|
- | - | 108 | 105 | ||||||||||||
Plan
participants' contributions
|
- | - | 139 | 134 | ||||||||||||
Benefits paid during year
|
- | - | (247 | ) | (239 | ) | ||||||||||
Fair value of plan assets at end of
year
|
$ | - | $ | - | $ | - | $ | - | ||||||||
Funded status at end of
year
|
$ | (2,636 | ) | $ | (3,230 | ) | $ | 195 | $ | 121 |
Amounts
recognized in other liabilities as of December 31 consist of
(000s):
Postretirement Death Benefit
Obligations
|
Postretirement Health Care
Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Assets
|
$ | - | - | $ | - | $ | - | |||||||||
Liabilities
|
4,437 | 4,414 | 2,078 | 2,000 | ||||||||||||
Total
|
$ | 4,437 | $ | 4,414 | $ | 2,078 | $ | 2,000 |
Amounts
recognized in accumulated other comprehensive income as of December 31 consist
of (000s):
Postretirement Death Benefit
Obligations
|
Postretirement Health Care
Benefits
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Net
loss (gain)
|
$ | (291 | ) | (11 | ) | $ | (373 | ) | $ | (356 | ) | |||||
Transition
obligation (asset)
|
- | - | 161 | 214 | ||||||||||||
Prior
service cost (credit)
|
2,927 | 3,241 | 17 | 21 | ||||||||||||
$ | 2,636 | $ | 3,230 | $ | (195 | ) | $ | (121 | ) |
(10)
|
Stockholders’
Equity
|
On
December 21, 2006, the Corporation’s Board of Directors authorized the
repurchase of up to 1 million shares of MBT Financial Corp. common stock during
2007. On December 20, 2007, the Corporation’s Board of Directors authorized the
repurchase of up to 1 million shares during 2008. On December 18, 2008, the
Corporation’s Board of Directors authorized the repurchase of up to 1 million
shares during 2009. Shares purchased during the last three years are as
follows:
59
Shares
Repurchased
|
Cost
|
|||||||
2007
|
599,362 | 7,709,000 | ||||||
2008
|
- | 0 | ||||||
2009
|
- | 0 | ||||||
Total
|
599,362 | $ | 7,709,000 |
Corporation’s
Board of Directors currently has not authorized the repurchase of shares of MBT
Financial Corp. common stock.
(11)
Disclosures about Fair Value of Financial Instruments
Certain
of the Bank’s assets and liabilities are financial instruments that have fair
values that differ from their carrying values in the accompanying consolidated
balance sheets. These fair values, along with the methods and
assumptions used to estimate such fair values, are discussed
below. The fair values of all financial instruments not discussed
below (Cash and cash equivalents, Federal funds sold, Federal Home Loan Bank
stock, Accrued interest receivable and other assets, Bank Owned Life Insurance,
Federal funds purchased, and Interest payable and other liabilities) are
estimated to be equal to their carrying amounts as of December 31, 2009 and
2008.
INVESTMENT
SECURITIES
Fair
value for the Bank’s investment securities was determined using the market value
in active markets, where available. When not available, fair values are
estimated using the fair value hierarchy. In the fair value hierarchy, Level 2
fair values are determined using observable inputs other than Level 1 market
prices, such as quoted prices for similar assets. Level 3 values are determined
using unobservable inputs, such as discounted cash flow projections. These
Estimated Market Values are disclosed in Note 3 and the required fair value
disclosures are in Note 19.
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.
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.
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 the fixed and variable rate Federal Home Loan Bank
advances and Securities Sold under Repurchase Agreements is estimated by
discounting the related cash flows using the rates currently available for
similarly structured borrowings with similar maturities.
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.
FAIR
VALUES
The
carrying amounts and approximate fair values as of December 31, 2009 and
December 31, 2008 are as follows (000s omitted):
60
December 31, 2009
|
December 31, 2008
|
|||||||||||||||
Carrying
|
Estimated
|
Carrying
|
Estimated
|
|||||||||||||
Value
|
Fair Value
|
Value
|
Fair Value
|
|||||||||||||
Financial
Assets:
|
||||||||||||||||
Cash
and due from banks
|
$ | 69,746 | $ | 69,746 | $ | 50,786 | $ | 50,786 | ||||||||
Securities
|
343,779 | 343,763 | 452,957 | 452,160 | ||||||||||||
Federal
Home Loan Bank Stock
|
13,086 | 13,086 | 13,086 | 13,086 | ||||||||||||
Loans,
net
|
824,916 | 838,965 | 922,420 | 953,267 | ||||||||||||
Financial
Liabilities:
|
||||||||||||||||
Demand,
NOW, savings and money market savings deposits
|
630,065 | 630,065 | 621,762 | 621,762 | ||||||||||||
Other
time deposits
|
401,726 | 408,516 | 514,316 | 521,272 | ||||||||||||
Borrowed
funds
|
||||||||||||||||
Variable
Rate FHLB Advances
|
110,000 | 116,938 | 123,000 | 131,491 | ||||||||||||
Fixed
Rate FHLB Advances
|
3,500 | 3,688 | 8,500 | 8,800 | ||||||||||||
Putable
FHLB Advances
|
115,000 | 119,700 | 130,000 | 138,870 | ||||||||||||
Repurchase
Agreements
|
30,000 | 34,896 | 30,000 | 33,840 |
(12)
|
Federal
Income Taxes
|
Deferred
tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be reversed. The Corporation and the Bank file a consolidated
Federal income tax return.
The
provision for Federal income taxes consists of the following (000s
omitted):
2009
|
2008
|
2007
|
||||||||||
Federal
income taxes currently payable (refundable)
|
$ | (7,189 | ) | $ | 77 | $ | 3,885 | |||||
Provision
(credit) for deferred taxes on:
|
||||||||||||
Book
(over) under tax loan loss provision
|
(1,937 | ) | 584 | (2,260 | ) | |||||||
Accretion
of bond discount
|
(46 | ) | 18 | (61 | ) | |||||||
Net
deferred loan origination fees
|
(14 | ) | (21 | ) | 216 | |||||||
Accrued
postretirement benefits
|
(293 | ) | (303 | ) | (100 | ) | ||||||
Tax
over (under) book depreciation
|
197 | 14 | 51 | |||||||||
Alternative
minimum tax
|
(264 | ) | (440 | ) | 680 | |||||||
Non-accrual
loan interest
|
294 | (352 | ) | (12 | ) | |||||||
Write
down of other real estate owned
|
(411 | ) | (799 | ) | (188 | ) | ||||||
Other
than temporary impairment AFS securities
|
(4,116 | ) | - | - | ||||||||
Other,
net
|
(173 | ) | (95 | ) | (162 | ) | ||||||
Total
deferred provision (credit)
|
(6,763 | ) | (1,394 | ) | (1,836 | ) | ||||||
Valuation allowance deferred tax
assets
|
13,850 | - | - | |||||||||
Net deferred provision
|
7,087 | (1,394 | ) | (1,836 | ) | |||||||
Tax expense
|
$ | (102 | ) | $ | (1,317 | ) | $ | 2,049 |
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:
2009
|
2008
|
2007
|
||||||||||
Statutory
rate
|
(34.0 | ) % | 34.0 | % | 34.0 | % | ||||||
Municipal
interest income
|
(3.0 | ) | (266.7 | ) | (9.0 | ) | ||||||
Other,
net
|
(3.7 | ) | (118.5 | ) | (4.0 | ) | ||||||
Valuation allowance
|
40.4 | - | - | |||||||||
Effective tax rate
|
(0.3 | ) % | (351.2 | ) % | 21.0 | % |
61
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):
2009
|
2008
|
|||||||
Deferred
Federal income tax assets:
|
||||||||
Allowance
for loan losses
|
$ | 8,527 | $ | 6,590 | ||||
Net
deferred loan origination fees
|
246 | 232 | ||||||
Tax
versus book depreciation differences
|
79 | 276 | ||||||
Net
unrealized losses on securities available for sale
|
3,036 | 118 | ||||||
Accrued
postretirement benefits
|
2,587 | 2,530 | ||||||
Alternative
minimum tax
|
704 | 440 | ||||||
Non-accrual
loan interest
|
122 | 416 | ||||||
Write
down of other real estate owned
|
1,471 | 1,060 | ||||||
Other
than temporary impairment AFS securities
|
4,116 | - | ||||||
Other,
net
|
607 | 397 | ||||||
Gross
deferred tax asset
|
21,495 | 12,059 | ||||||
Valuation allowance
|
(13,850 | ) | - | |||||
Total Federal deferred tax
asset
|
$ | 7,645 | $ | 12,059 | ||||
Deferred
Federal income tax liabilities:
|
||||||||
Accretion
of bond discount
|
$ | (98 | ) | $ | (144 | ) | ||
Other
|
(474 | ) | (437 | ) | ||||
$ | (572 | ) | $ | (581 | ) | |||
Net deferred Federal income tax
asset
|
$ | 7,073 | $ | 11,478 |
(13)
Regulatory Capital Requirements
The
Corporation and the Bank are subject to various regulatory capital requirements
administered by the Federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that, if undertaken, could have a direct
material effect on the Corporation’s consolidated financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Bank must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative
measures established by regulation to ensure capital adequacy require the
Corporation and the Bank to maintain minimum amounts and ratios (set forth in
the accompanying tables) of Total and Tier 1 capital to risk weighted assets and
of Tier 1 capital to average assets.
As of
December 31, 2009, 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 1 risk based, and Tier
1 leverage ratios as set forth in the tables, as well as meeting other
requirements specified by the federal banking regulators. There are no
conditions or events since December 31, 2009 that Management believes have
changed the Corporation’s category. Management believes, as of December 31,
2009, that the Corporation meets all capital adequacy requirements to which it
is subject.
The
Corporation’s and Bank’s actual capital amounts and ratios are also presented in
the table (000s omitted in dollar amounts).
Actual
|
Minimum to Qualify as
Well Capitalized
|
|||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
As
of December 31, 2009:
|
||||||||||||||||
Total
Capital to Risk-Weighted Assets
|
||||||||||||||||
Consolidated
|
$ | 101,158 | 10.2 | % | $ | 99,065 | 10.0 | % | ||||||||
Monroe
Bank & Trust
|
100,329 | 10.1 | % | 98,984 | 10.0 | % | ||||||||||
Tier
1 Capital to Risk-Weighted Assets
|
||||||||||||||||
Consolidated
|
88,627 | 8.9 | % | 59,439 | 6.0 | % | ||||||||||
Monroe
Bank & Trust
|
87,775 | 8.9 | % | 59,390 | 6.0 | % | ||||||||||
Tier
1 Capital to Average Assets
|
||||||||||||||||
Consolidated
|
88,627 | 6.3 | % | 70,681 | 5.0 | % | ||||||||||
Monroe
Bank & Trust
|
87,775 | 6.2 | % | 70,643 | 5.0 | % |
62
Actual
|
Minimum to Qualify as
Well Capitalized
|
|||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||
As
of December 31, 2008:
|
||||||||||||||||
Total
Capital to Risk-Weighted Assets
|
||||||||||||||||
Consolidated
|
$ | 136,286 | 12.7 | % | $ | 106,980 | 10.0 | % | ||||||||
Monroe
Bank & Trust
|
134,853 | 12.6 | % | 106,895 | 10.0 | % | ||||||||||
Tier
1 Capital to Risk-Weighted Assets
|
||||||||||||||||
Consolidated
|
122,820 | 11.5 | % | 64,188 | 6.0 | % | ||||||||||
Monroe
Bank & Trust
|
121,398 | 11.4 | % | 64,137 | 6.0 | % | ||||||||||
Tier
1 Capital to Average Assets
|
||||||||||||||||
Consolidated
|
122,820 | 7.8 | % | 78,543 | 5.0 | % | ||||||||||
Monroe
Bank & Trust
|
121,398 | 7.7 | % | 78,495 | 5.0 | % |
(14)
Earnings Per Share
The
calculation of earnings per common share for the years ended December 31 is as
follows:
2009
|
2008
|
2007
|
||||||||||
Basic
|
||||||||||||
Net
income (loss)
|
$ | (34,177,000 | ) | $ | 1,692,000 | $ | 7,713,000 | |||||
Less
preferred dividends
|
- | - | - | |||||||||
Net
income (loss) applicable to common stock
|
$ | (34,177,000 | ) | $ | 1,692,000 | $ | 7,713,000 | |||||
Average
common shares outstanding
|
16,186,478 | 16,134,570 | 16,415,425 | |||||||||
Earnings
(loss) per common share - basic
|
$ | (2.11 | ) | $ | 0.10 | $ | 0.47 | |||||
2009
|
2008
|
2007
|
||||||||||
Diluted
|
||||||||||||
Net
income (loss)
|
$ | (34,177,000 | ) | $ | 1,692,000 | $ | 7,713,000 | |||||
Less
preferred dividends
|
- | - | - | |||||||||
Net
income (loss) applicable to common stock
|
$ | (34,177,000 | ) | $ | 1,692,000 | $ | 7,713,000 | |||||
Average
common shares outstanding
|
16,186,478 | 16,134,570 | 16,415,425 | |||||||||
Stock
option adjustment
|
- | - | - | |||||||||
Average
common shares outstanding - diluted
|
16,186,478 | 16,134,570 | 16,415,425 | |||||||||
Earnings
(loss) per common share - diluted
|
$ | (2.11 | ) | $ | 0.10 | $ | 0.47 |
(15)
Stock-Based Compensation Plan
The
Long-Term Incentive Compensation Plan approved by shareholders at the April 6,
2000 Annual Meeting of Shareholders of Monroe Bank & Trust authorized the
Board of Directors to grant nonqualified stock options to key employees and
non-employee directors. Such grants could be made until January 2, 2010 for up
to 1,000,000 shares of the Corporation’s common stock. The amount that could be
awarded to any one individual was limited to 100,000 shares in any one calendar
year. The MBT Financial Corp. 2008 Stock Incentive Plan was approved by
shareholders at the May 1, 2008 Annual meeting of shareholders of MBT Financial
Corp. This plan replaced the Long-Term Incentive Compensation Plan and
authorized the Board of Directors to grant equity incentive awards to key
employees and non-employee directors. Such grants may be made until May 1, 2018
for up to 1 million 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, 2009, the number of shares available under the
plan is 718,270. This includes 41,675 shares that were previously awarded that
have been forfeited.
Stock Option Awards - Stock
options granted under the plans 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. All
options granted are fully vested at December 31, 2009.
Stock Only Stock Appreciation Rights
(SOSARs) – On January 2, 2009, Stock Only Stock Appreciation Rights
(SOSARs) were awarded to key executives in accordance with the MBT Financial
Corp. 2008 Stock Incentive Plan. The SOSARs have a term of 10 years and vest in
three equal annual installments beginning December 31, 2009. 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. Upon
exercise, the executive will generally receive common shares equal in value to
the excess of the market value of the shares over the exercise price on the
exercise date.
On
January 2, 2009, SOSARs were awarded to certain directors in exchange for a
portion of their retainer in accordance with the MBT Financial Corp. 2008 Stock
Incentive Plan. The SOSARs have a term of 10 years and vested on December 31,
2009. 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. Upon exercise, the director will generally receive common shares
equal in value to the excess of the market value of the shares over the exercise
price on the exercise date.
63
The fair
value of each option and SOSAR grant is estimated on the date of grant using the
Black-Scholes option pricing model with the assumptions disclosed in Note 1 to
the consolidated financial statements.
A summary
of the status of stock options and SOSARs under the plans is presented in the
table below.
2009
|
2008
|
2007
|
||||||||||||||||||||||
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||||||||
Options
Outstanding, January 1
|
641,476 | $ | 16.04 | 602,143 | $ | 17.36 | 510,143 | $ | 17.73 | |||||||||||||||
Granted
|
141,500 | 3.03 | 99,500 | 8.53 | 94,500 | 15.33 | ||||||||||||||||||
Exercised
|
- | - | - | - | - | - | ||||||||||||||||||
Forfeited/Expired
|
72,401 | 14.89 | 60,167 | 16.84 | 2,500 | 16.24 | ||||||||||||||||||
Options Outstanding, December
31
|
710,575 | $ | 13.57 | 641,476 | $ | 16.04 | 602,143 | $ | 17.36 | |||||||||||||||
Options Exercisable, December
31
|
613,757 | $ | 14.97 | 549,491 | $ | 16.95 | 511,322 | $ | 17.68 | |||||||||||||||
Weighted
Average Fair Value of Options Granted During Year
|
$ | 0.52 | $ | 1.39 | $ | 2.76 |
The
options outstanding as of December 31, 2009 are exercisable at prices ranging
from $3.03 to $23.40. The options exercisable as of December 31, 2009 are
exercisable at prices ranging from $3.03 to $23.40. The number of options and
remaining life of options at each exercise price are as follows:
Outstanding Options
|
Exercisable Options
|
|||||||||||||||||
Exercise
Price
|
Shares
|
Remaining Life
(in years)
|
Shares
|
Remaining Life
(in years)
|
||||||||||||||
$ | 3.03 | 133,000 | 9.01 | 65,660 | 9.01 | |||||||||||||
$ | 8.53 | 88,500 | 8.60 | 59,022 | 8.60 | |||||||||||||
$ | 13.20 | 68,335 | 3.01 | 68,335 | 3.01 | |||||||||||||
$ | 13.85 | 25,838 | 2.01 | 25,838 | 2.01 | |||||||||||||
$ | 13.94 | 4,402 | 1.01 | 4,402 | 1.01 | |||||||||||||
$ | 15.33 | 82,500 | 7.01 | 82,500 | 7.01 | |||||||||||||
$ | 16.24 | 69,500 | 6.01 | 69,500 | 6.01 | |||||||||||||
$ | 16.69 | 93,500 | 4.01 | 93,500 | 4.01 | |||||||||||||
$ | 18.125 | 35,000 | 0.50 | 35,000 | 0.50 | |||||||||||||
$ | 23.40 | 110,000 | 5.01 | 110,000 | 5.01 | |||||||||||||
710,575 | 5.86 | 613,757 | 5.38 |
A summary
of the status of the Corporation’s nonvested option shares as of December 31,
2009 and changes during the year ended December 31, 2009 is as
follows:
Nonvested Shares
|
Shares
|
Weighted Average
Grant Date Fair
Value
|
||||||
Nonvested
at January 1, 2009
|
91,985 | $ | 1.81 | |||||
Granted
|
141,500 | 0.52 | ||||||
Vested
|
(122,668 | ) | 1.23 | |||||
Forfeited
|
(13,999 | ) | 0.94 | |||||
Nonvested
at December 31, 2009
|
96,818 | $ | 0.78 |
As of
December 31, 2009, there was $76,000 of total unrecognized compensation cost
related to non vested share based compensation arrangements granted under the
Plan. The cost is expected to be recognized over a weighted average period of
1.7 years.
Restricted Stock Unit Awards
– Restricted stock units granted under the plan result in an award of
common shares to key employees based upon earnings performance during the
performance period. Key employees were granted 21,500 Restricted Stock Units
(RSUs) on June 4, 2008. The RSUs will vest on December 31, 2010 based on the
three year cumulative earnings per share achieved by the company during the
performance period as shown in the following schedule:
64
Three Year Cumulative Fully
Diluted EPS for the Three Year
Performance Period Ending
December 31, 2010
|
Percent RSUs
Vested
|
|||||
$ | 2.40 | 100 | % | |||
$ | 2.34 | 90 | % | |||
$ | 2.28 | 80 | % | |||
$ | 2.24 | 70 | % | |||
$ | 2.21 | 60 | % | |||
$ | 2.16 | 50 | % | |||
less
than $2.16
|
0 | % |
The
Corporation does not expect to meet the earnings threshold required to award any
shares under the awards granted in 2008, therefore no expense was recorded in
2009 for the RSUs.
Restricted Stock Awards – On
January 2, 2009, 15,000 restricted shares were awarded to certain key executives
in accordance with the MBT Financial Corp. 2008 Stock Incentive
Plan. The restricted shares will vest on December 31, 2011. The total expense
recorded for the restricted stock awards was $15,000 in
2009.
(16)
Parent Company
Condensed
parent company financial statements, which include transactions with the
subsidiary, are as follows (000s omitted):
Balance
Sheets
|
December
31,
|
|||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Cash
and due from banks
|
$ | 239 | $ | 2,055 | ||||
Securities
|
270 | - | ||||||
Investment
in subsidiary bank
|
80,959 | 119,555 | ||||||
Other
assets
|
296 | 840 | ||||||
Total
assets
|
$ | 81,764 | $ | 122,450 | ||||
Liabilities
|
||||||||
Dividends
payable and other liabilities
|
$ | - | $ | 1,473 | ||||
Total
liabilities
|
- | 1,473 | ||||||
Stockholders'
Equity
|
||||||||
Total
stockholders' equity
|
81,764 | 120,977 | ||||||
Total
liabilities and stockholders' equity
|
$ | 81,764 | $ | 122,450 |
Statements of
Income
Years
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Income
|
||||||||||||
Dividends
from subsidiary bank
|
$ | - | $ | 10,549 | $ | 19,106 | ||||||
Other
operating income
|
- | 5 | 21 | |||||||||
Total
income
|
- | 10,554 | 19,127 | |||||||||
Expense
|
||||||||||||
Other
expense
|
592 | 493 | 146 | |||||||||
Total
expense
|
592 | 493 | 146 | |||||||||
Income
(loss) before tax and equity in undistributed net income (loss) of
subsidiary bank
|
(592 | ) | 10,061 | 18,981 | ||||||||
Income
tax benefit
|
(202 | ) | (166 | ) | (43 | ) | ||||||
Income
(loss) before equity in undistributed net income of subsidiary
bank
|
(390 | ) | 10,227 | 19,024 | ||||||||
Equity
in undistributed net income (loss) of subsidiary bank
|
(33,787 | ) | (8,535 | ) | (11,311 | ) | ||||||
Net
Income (Loss)
|
$ | (34,177 | ) | $ | 1,692 | $ | 7,713 |
65
Statements of Cash
Flows
Years
Ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash
Flows Provided By Operating Activities:
|
||||||||||||
Net
income (loss)
|
$ | (34,177 | ) | $ | 1,692 | $ | 7,713 | |||||
Equity
in undistributed net income of subsidiary bank
|
33,787 | 8,535 | 11,311 | |||||||||
Net
increase (decrease) in other liabilities
|
(19 | ) | (1,430 | ) | (106 | ) | ||||||
Net
(increase) decrease in other assets
|
223 | 190 | 112 | |||||||||
Net
cash provided by (used for) operating activities
|
$ | (186 | ) | $ | 8,987 | $ | 19,030 | |||||
Cash
Flows Used For Financing Activities:
|
||||||||||||
Issuance
of common stock
|
$ | 147 | $ | 131 | $ | 127 | ||||||
Repurchase
of common stock
|
- | - | (7,709 | ) | ||||||||
Dividends
paid
|
(1,777 | ) | (10,162 | ) | (11,861 | ) | ||||||
Net
cash used for financing activities
|
$ | (1,630 | ) | $ | (10,031 | ) | $ | (19,443 | ) | |||
Net
Decrease In
|
||||||||||||
Cash
And Cash Equivalents
|
$ | (1,816 | ) | $ | (1,044 | ) | $ | (413 | ) | |||
Cash
And Cash Equivalents
|
||||||||||||
At
Beginning Of Year
|
2,055 | 3,099 | 3,512 | |||||||||
Cash
And Cash Equivalents At End Of Year
|
$ | 239 | $ | 2,055 | $ | 3,099 |
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, 2009, Bank funds available for
loans to the Corporation amounted to $11,207,000. The Bank has not made any
loans to the Corporation.
Federal
and state banking laws place certain restrictions on the amount of dividends a
bank may make to its parent company. Michigan law limits the amount of dividends
that the Bank can pay to the Corporation without regulatory approval to the
amount of net income then on hand. Accordingly, the Bank can pay dividends of
$8,009,000 in 2010, in addition to its 2010 net income, without regulatory
approval.
(17)
Financial Instruments with Off-Balance Sheet Risk
The Bank
is a party to financial instruments with off-balance sheet risk in the normal
course of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of
credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.
The
Bank’s exposure to credit loss in the event of nonperformance by the other party
to the financial instrument for commitments to extend credit and standby letters
of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for its other lending activities.
Financial
instruments whose contractual amounts represent off-balance sheet credit risk at
December 31 were as follows (000s omitted):
Contractual
Amount
|
||||||||
2009
|
2008
|
|||||||
Commitments
to extend credit:
|
||||||||
Unused
portion of commercial lines of credit
|
$ | 64,096 | $ | 62,537 | ||||
Unused
portion of credit card lines of credit
|
4,286 | 5,872 | ||||||
Unused
portion of home equity lines of credit
|
16,034 | 20,200 | ||||||
Standby
letters of credit and financial guarantees written
|
5,008 | 7,297 | ||||||
All
other off-balance sheet assets
|
2,986 | 3,682 |
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.
66
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 $4,121,000 of the letters of credit expires
in 2010 and $887,000 extends for two years. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.
(18)
Quarterly Financial Information (Unaudited) (000s omitted):
2009
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
Total
Interest Income
|
$ | 18,992 | $ | 17,870 | $ | 17,640 | $ | 16,502 | ||||||||
Total
Interest Expense
|
8,779 | 7,685 | 7,124 | 6,401 | ||||||||||||
Net
Interest Income
|
10,213 | 10,185 | 10,516 | 10,101 | ||||||||||||
Provision
for Loan Losses
|
4,200 | 8,000 | 6,800 | 17,000 | ||||||||||||
Other
Income
|
3,331 | 3,630 | 3,559 | (40 | ) | |||||||||||
Other
Expenses
|
11,997 | 14,589 | 11,390 | 11,798 | ||||||||||||
Income
Before Provision For Income Taxes
|
(2,653 | ) | (8,774 | ) | (4,115 | ) | (18,737 | ) | ||||||||
Provision
For Income Taxes
|
(1,286 | ) | (3,401 | ) | (1,790 | ) | 6,375 | |||||||||
Net
Income
|
$ | (1,367 | ) | $ | (5,373 | ) | $ | (2,325 | ) | $ | (25,112 | ) | ||||
Basic
Earnings Per Common Share
|
$ | (0.08 | ) | $ | (0.33 | ) | $ | (0.14 | ) | $ | (1.56 | ) | ||||
Diluted
Earnings Per Common Share
|
$ | (0.08 | ) | $ | (0.33 | ) | $ | (0.14 | ) | $ | (1.56 | ) | ||||
Dividends
Declared Per Share
|
$ | 0.01 | $ | 0.01 | $ | - | $ | - | ||||||||
2008
|
First
|
Second
|
Third
|
Fourth
|
||||||||||||
Total
Interest Income
|
$ | 22,200 | $ | 21,387 | $ | 21,113 | $ | 20,203 | ||||||||
Total
Interest Expense
|
11,747 | 10,260 | 10,027 | 10,480 | ||||||||||||
Net
Interest Income
|
10,453 | 11,127 | 11,086 | 9,723 | ||||||||||||
Provision
for Loan Losses
|
1,200 | 2,700 | 4,100 | 10,000 | ||||||||||||
Other
Income
|
3,962 | 3,858 | 4,265 | 3,900 | ||||||||||||
Other
Expenses
|
9,698 | 10,163 | 11,365 | 8,773 | ||||||||||||
Income
Before Provision For Income Taxes
|
3,517 | 2,122 | (114 | ) | (5,150 | ) | ||||||||||
Provision
For Income Taxes
|
870 | 404 | (438 | ) | (2,153 | ) | ||||||||||
Net
Income
|
$ | 2,647 | $ | 1,718 | $ | 324 | $ | (2,997 | ) | |||||||
Basic
Earnings Per Common Share
|
$ | 0.16 | $ | 0.11 | $ | 0.02 | $ | (0.19 | ) | |||||||
Diluted
Earnings Per Common Share
|
$ | 0.16 | $ | 0.11 | $ | 0.02 | $ | (0.19 | ) | |||||||
Dividends
Declared Per Share
|
$ | 0.18 | $ | 0.18 | $ | 0.09 | $ | 0.09 |
(19)
Fair Value Disclosures
The
following tables present information about the Corporation’s assets measured at
fair value on a recurring basis at December 31, 2009 and 2008, and the valuation
techniques used by the Corporation 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.
67
Assets measured
at fair value on a recurring basis are as follows (000’s omitted):
Investment Securities - Available for
Sale
|
2009
|
2008
|
||||||
Quoted
Prices in Active Markets for Identical Assets (Level 1)
|
$ | 264,224 | $ | 333,115 | ||||
Significant
Other Observable Inputs (Level 2)
|
35,907 | 53,256 | ||||||
Significant
Unobservable Inputs (Level 3)
|
7,215 | 19,746 | ||||||
Balance
at December 31
|
$ | 307,346 | $ | 406,117 |
The
changes in Level 3 assets measured at fair value on a recurring basis were
(000’s omitted):
Investment Securities - Available for
Sale
|
2009
|
2008
|
||||||
Balance
at January 1
|
$ | 19,746 | $ | 585 | ||||
Total
realized and unrealized gains (losses) included in income
|
(11,760 | ) | (17 | ) | ||||
Total
unrealized gains (losses) included in other comprehensive
income
|
(771 | ) | (5,759 | ) | ||||
Net
purchases, sales, calls and maturities
|
- | - | ||||||
Net
transfers in/out of Level 3
|
- | 24,937 | ||||||
Balance
at December 31
|
$ | 7,215 | $ | 19,746 |
Of the
Level 3 assets that were held by the Corporation at December 31, 2009, the
unrealized loss for the year was $12,531,000. That loss includes Other Than
Temporary Impairment of $11,760,000, which is recognized in other income in the
consolidated statements of income, and $771,000 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 2009. The Company did not purchase any Level 3 available for
sale securities during 2009.
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.
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):
Balance at
December 31,
2009
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total Losses for
the year ended
December 31,
2009
|
||||||||||||||||
Impaired
loans
|
$ | 70,485 | $ | - | $ | - | $ | 70,485 | $ | 30,465 | ||||||||||
Other
Real Estate Owned
|
$ | 17,502 | $ | - | $ | 17,502 | $ | - | $ | 10,533 |
Balance at
December 31,
2008
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
Significant Other
Observable Inputs
(Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total Losses for
the year ended
December 31,
2008
|
||||||||||||||||
Impaired
loans
|
$ | 50,111 | $ | - | $ | - | $ | 50,111 | $ | 3,805 | ||||||||||
Other
Real Estate Owned
|
$ | 17,156 | $ | - | $ | 17,156 | $ | - | $ | 2,545 |
Impaired
loans categorized as Level 3 assets consist of non-homogenous loans that are
considered impaired. The Corporation 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). Other Real Estate Owned
(OREO) consists of property received in full or partial satisfaction of a
receivable. The Corporation utilizes outside appraisals to estimate the fair
value of OREO properties.
68
Item
8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None
Item
8A. 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, 2009,
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, 2009, 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, 2009 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, 2009, 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, 2009
has been audited by Plante & Moran, PLLC, an independent registered public
accounting firm, as stated in their report appearing on page 44.
There was
no change in the Company's internal control over financial reporting that
occurred during the Company's fiscal quarter ended December 31, 2009, that
materially affected, or is reasonably likely to affect, the Company's internal
control over financial reporting.
Item
8B. Other Information
None.
69
Part III
Item
9. 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
10. 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
11. 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, 2009
were as follows:
Number of securities to be
issued upon exercise of
outstanding options, warrants,
and rights |
Weighted average
exercise price of
outstanding options,
warrants, and rights
|
Number of securities remaining
available for future
issuance under
equity compensation plans (excluding securities reflected
in the
first column ) |
||||||||||
Equity
Compensation plans approved by security holders
|
710,575 | $ | 13.57 | 718,270 | ||||||||
Equity
Compensation plans not approved by security holders
|
0 | 0 | 0 | |||||||||
Total
|
710,575 | $ | 13.57 | 718,270 |
70
Item
12. 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
13. 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
14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K
Contents
Financial Statements | |
Reports
of Independent Registered Public Accounting Firm – Pages
44-45
|
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008 – Page 46
|
|
Consolidated
Statements of Income for the Years Ended
|
|
December
31, 2009, 2008, and 2007 – Page 47
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the Years
Ended
|
|
December
31, 2009, 2008, and 2007 – Page 48
|
|
Consolidated
Statements of Cash Flows for the Years Ended
|
|
December
31, 2009, 2008, and 2007 – Page 49
|
|
Notes
to Consolidated Financial Statements – Pages 50 – 68
|
71
Exhibits
The
following exhibits are filed as a part of this report:
2
|
Purchase
and Assumption Agreement dated October 10, 2008. Previously filed as
Exhibit 2 to MBT Financial Corp.’s Form 8-K filed on October 16,
2008.
|
|
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. 2008 Stock Incentive Compensation Plan. Previously filed
as Exhibit 10 on Form 8-K filed by MBT Financial Corp. on June 5,
2008.
|
|
10.2
|
Monroe
Bank & Trust Salary Continuation Agreement with Ronald D. LaBeau.
Previously filed as Exhibit 10.2 to MBT Financial Corp.’s Form 10-K for
its fiscal year ended December 31, 2000.
|
|
10.3
|
MBT
Financial Corp. Amended and Restated Change in Control Agreement with H.
Douglas Chaffin. Previously filed as Exhibit 10.5 to MBT Financial Corp.’s
Form 10-K for its fiscal year ended December 31, 2005.
|
|
10.4
|
Monroe
Bank & Trust Group Director Death Benefit Only Plan. Previously filed
as Exhibit 10.4 to MBT Financial Corp.’s Form 10-K for its fiscal year
ended December 31, 2006.
|
|
10.5
|
Monroe
Bank & Trust Group Executive Death Benefit Only Plan. Previously filed
as Exhibit 10.5 to MBT Financial Corp.’s Form 10-K for its fiscal year
ended December 31, 2006.
|
|
10.6
|
Monroe
Bank & Trust Amended and Restated Supplemental Executive Retirement
Agreement with H. Douglas Chaffin. Previously filed as Exhibit 10.6 to MBT
Financial Corp.’s Form 10-K for its fiscal year ended December 31,
2007.
|
|
10.7
|
MBT
Financial Corp. Severance Agreements with Donald M. Lieto, James E. Morr,
Thomas G. Myers, and John L. Skibski. Previously filed as Exhibit 10 on
Form 8-K filed by MBT Financial Corp. on January 26,
2006.
|
|
10.8
|
MBT
Financial Corp. Severance Agreement with Scott E. McKelvey. Previously
filed as Exhibit 10.1 to MBT Financial Corp.’s Form 10-Q for its quarter
ended June 30, 2007.
|
|
10.9
|
Real
estate purchase agreement dated August 27, 2009 between Registrant’s
wholly owned commercial bank subsidiary and D-M Investments, LLC.
Previously filed as Exhibit 10 to the Form 8-K filed by MBT Financial
Corp. on September 22, 2009.
|
|
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.
|
|
32.1
|
|
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.
|
72
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 15, 2010
|
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 15, 2010
/s/ H. Douglas Chaffin
|
/s/ John L. Skibski
|
|
H.
Douglas Chaffin
|
John
L. Skibski
|
|
President,
Chief Executive
|
Chief
Financial Officer &
|
|
Officer
& Director
|
Director
|
|
/s/ William D. McIntyre,
Jr.
|
/s/ Peter H. Carlton
|
|
William
D. McIntyre, Jr.
|
Peter
H. Carlton
|
|
Chairman
|
Director
|
|
/s/ Joseph S. Daly
|
/s/ Edwin L. Harwood
|
|
Joseph
S. Daly
|
Edwin
L. Harwood
|
|
Director
|
Director
|
|
/s/ Thomas M. Huner
|
/s/ Rocque E. Lipford
|
|
Thomas
M. Huner
|
Rocque
E. Lipford
|
|
Director
|
Director
|
|
/s/ Michael J. Miller
|
/s/ Debra J. Shah
|
|
Michael
J. Miller
|
Debra
J. Shah
|
|
Director
|
Director
|
|
/s/ Philip P. Swy
|
/s/ Karen M. Wilson
|
|
Philip
P. Swy
|
Karen
M. Wilson
|
|
Director
|
Director
|
73
Exhibit
Index
Exhibit Number
|
Description of Exhibits
|
|
2
|
Purchase
and Assumption Agreement dated October 10, 2008. Previously filed as
Exhibit 2 to MBT Financial Corp.’s Form 8-K filed on October 16,
2008.
|
|
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. 2008 Stock Incentive Compensation Plan. Previously filed
as Exhibit 10 on Form 8-K filed by MBT Financial Corp. on June 5,
2008.
|
|
10.2
|
Monroe
Bank & Trust Salary Continuation Agreement with Ronald D. LaBeau.
Previously filed as Exhibit 10.2 to MBT Financial Corp.’s Form 10-K for
its fiscal year ended December 31, 2000.
|
|
10.3
|
MBT
Financial Corp. Amended and Restated Change in Control Agreement with H.
Douglas Chaffin. Previously filed as Exhibit 10.5 to MBT Financial Corp.’s
Form 10-K for its fiscal year ended December 31, 2005.
|
|
10.4
|
Monroe
Bank & Trust Group Director Death Benefit Only Plan. Previously filed
as Exhibit 10.4 to MBT Financial Corp.’s Form 10-K for its fiscal year
ended December 31, 2006.
|
|
10.5
|
Monroe
Bank & Trust Group Executive Death Benefit Only Plan. Previously filed
as Exhibit 10.5 to MBT Financial Corp.’s Form 10-K for its fiscal year
ended December 31, 2006.
|
|
10.6
|
Monroe
Bank & Trust Amended and Restated Supplemental Executive Retirement
Agreement with H. Douglas Chaffin. Previously filed as Exhibit 10.6 to MBT
Financial Corp.’s Form 10-K for its fiscal year ended December 31,
2007.
|
|
10.7
|
MBT
Financial Corp. Severance Agreements with Donald M. Lieto, James E. Morr,
Thomas G. Myers, and John L. Skibski. Previously filed as Exhibit 10 on
Form 8-K filed by MBT Financial Corp. on January 26,
2006.
|
|
10.8
|
MBT
Financial Corp. Severance Agreement with Scott E. McKelvey. Previously
filed as Exhibit 10.1 to MBT Financial Corp.’s Form 10-Q for its quarter
ended June 30, 2007.
|
|
10.9
|
Real
estate purchase agreement dated August 27, 2009 between Registrant’s
wholly owned commercial bank subsidiary and D-M Investments, LLC.
Previously filed as Exhibit 10 to the Form 8-K filed by MBT Financial
Corp. on September 22, 2009.
|
|
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.
|
|
32.1
|
|
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.
|
74