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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

☑  Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2017

 

Or

 

☐  Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 000-30973

 

MBT FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

 

Michigan	38-3516922
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

102 E. Front Street

Monroe, Michigan 48161

(Address of principal executive offices)

(Zip Code)

 

(734) 241-3431

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐	Smaller reporting company ☐
	Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

As of May 10, 2017, there were 22,865,333 shares of the Company’s Common Stock outstanding.

 

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Part I Financial Information

Item 1. Financial Statements

 

MBT FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

		March 31, 2017
Dollars in thousands		(Unaudited)				December 31, 2016
ASSETS
Cash and Cash Equivalents
Cash and due from banks
Non-interest bearing		$	16,277			$	18,183
Interest bearing			24,396				34,589
Total cash and cash equivalents			40,673				52,772
Interest Bearing Time Deposits in Other Banks			18,696				18,946
Securities - Held to Maturity			41,452				40,741
Securities - Available for Sale			480,209				488,067
Federal Home Loan Bank stock - at cost			4,148				4,148
Loans held for sale			525				611
Loans			662,924				652,337
Allowance for Loan Losses			(8,334	)			(8,458	)
Loans - Net			654,590				643,879
Accrued interest receivable and other assets			23,260				24,901
Other Real Estate Owned			1,360				1,634
Bank Owned Life Insurance			54,759				54,415
Premises and Equipment - Net			26,882				27,169
Total assets		$	1,346,554			$	1,357,283
LIABILITIES
Deposits:
Non-interest bearing		$	284,946			$	279,001
Interest-bearing			918,126				920,716
Total deposits			1,203,072				1,199,717
Interest payable and other liabilities			13,929				16,452
Total liabilities			1,217,001				1,216,169
STOCKHOLDERS' EQUITY
Common stock (no par value; 50,000,000 shares authorized, 22,860,794 and 22,777,882 shares issued and outstanding)			22,385				22,562
Retained earnings			112,944				126,079
Unearned compensation			(60	)			(4	)
Accumulated other comprehensive income (loss)			(5,716	)			(7,523	)
Total stockholders' equity			129,553				141,114
Total liabilities and stockholders' equity		$	1,346,554			$	1,357,283

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

MBT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - UNAUDITED

 

		Three Months Ended March 31,
Dollars in thousands, except per share data		2017				2016
Interest Income
Interest and fees on loans		$	7,364			$	7,035
Interest on investment securities-
Tax-exempt			310				305
Taxable			2,268				2,526
Interest on balances due from banks			109				117
Total interest income			10,051				9,983
Interest Expense
Interest on deposits			456				517
Interest on borrowed funds			-				176
Total interest expense			456				693
Net Interest Income			9,595				9,290
Provision For (Recovery Of) Loan Losses			(200	)			(300	)
Net Interest Income After
Provision For Loan Losses			9,795				9,590
Other Income
Income from wealth management services			1,128				1,097
Service charges and other fees			1,014				1,008
Debit card income			680				674
Net gain on sales and redemptionsof securities available for sale			10				320
Net loss on sales of Other Real Estate Owned			(34	)			(56	)
Origination fees on mortgage loans sold			59				130
Bank owned life insurance income			341				355
Other			622				586
Total other income			3,820				4,114
Other Expenses
Salaries and employee benefits			5,434				5,618
Occupancy expense			748				701
Equipment expense			697				684
Marketing expense			284				259
Professional fees			589				652
EFT/ATM Expense			248				309
Other Real Estate Owned expenses			32				64
FDIC Deposit Insurance Assessment			107				169
Bonding and other insurance expense			122				122
Telephone expense			116				126
Other			685				779
Total other expenses			9,062				9,483
Income Before Income Taxes			4,553				4,221
Income Tax Expense			1,373				1,224
Net Income		$	3,180			$	2,997
Other Comprehensive Income - Net of Tax
Unrealized gains on securities			1,787				4,327
Reclassification adjustment for gains included in net income			(7	)			(211	)
Postretirement benefit liability			27				27
Total Other Comprehensive Income (Loss) - Net of Tax			1,807				4,143
Comprehensive Income		$	4,987			$	7,140
Basic Earnings Per Common Share		$	0.14			$	0.13
Diluted Earnings Per Common Share		$	0.14			$	0.13
Dividends Declared Per Share of Common Stock		$	0.75			$	0.53

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

MBT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED

 

																		Accumulated
																		Other
		Common Stock								Retained				Unearned				Comprehensive
Dollars in thousands		Shares				Amount				Earnings				Compensation				Income (Loss)				Total
Balance - January 1, 2017			22,777,882			$	22,562			$	126,079			$	(4	)		$	(7,523	)		$	141,114
Repurchase of Common Stock			-				-				-				-				-				-
Issuance of Common Stock
SOSARs exercised, net of shares redeemed for taxes			59,743				(230	)			-				-				-				(230	)
Restricted stock awards, net of shares redeemed for taxes			6,000				65				-				(65	)			-				-
Employee Stock Purchase Plan and other stock issued			17,169				190				-				-				-				190
Tax benefit from exercise of options			-				-				812				-				-				812
Equity Compensation			-				122				-				9				-				131
Deferred Directors' Compensation			-				(324	)			-				-				-				(324	)
Dividends declared ($0.75 per share)			-				-				(17,127	)			-				.				(17,127	)
Net income			-				-				3,180				-				-				3,180
Other comprehensive income - net of tax			-				-				-				-				1,807				1,807
Balance - March 31, 2017			22,860,794			$	22,385			$	112,944			$	(60	)		$	(5,716	)		$	129,553

 

 

																		Accumulated
																		Other
		Common Stock								Retained				Unearned				Comprehensive
Dollars in thousands		Shares				Amount				Earnings				Compensation				Income (Loss)				Total
Balance - January 1, 2016			22,790,707			$	23,492			$	126,214			$	(13	)		$	(2,352	)		$	147,341
Repurchase of Common Stock			-				-				-				-				-				-
Issuance of Common Stock
SOSARs exercised, net of shares redeemed for taxes			95,856				(166	)			-				-				-				(166	)
Restricted stock awards, net of shares redeemed for taxes			-				-				-				-				-				-
Employee Stock Purchase Plan and other stock issued			15,635				124				-				-				-				124
Equity Compensation			-				111				-				3				-				114
Dividends declared ($0.53 per share)			-				-				(12,129	)			-				-				(12,129	)
Net income			-				-				2,997				-				-				2,997
Other comprehensive income - net of tax			-				-				-				-				4,143				4,143
Balance - March 31, 2016			22,902,198			$	23,561			$	117,082			$	(10	)		$	1,791			$	142,424

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

MBT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

 

		Three Months Ended March 31,
Dollars in thousands		2017				2016
Cash Flows from Operating Activities
Net Income		$	3,180			$	2,997
Adjustments to reconcile net income to net cash from operating activities
Recovery of loan losses			(200	)			(300	)
Depreciation			404				395
Deferred tax expense			-				1,224
Net amortization of investment premium and discount			614				290
Writedowns of Other Real Estate Owned			6				68
Net decrease in interest payable and other liabilities			(1,932	)			(565	)
Net (increase) decrease in interest receivable and other assets			746				(1,764	)
Writedowns of Other Assets			37				-
Equity based compensation expense			131				114
Net gain on sale/settlement of securities			(10	)			(320	)
Increase in cash surrender value of life insurance			(341	)			(355	)
Net cash provided by operating activities		$	2,635			$	1,784
Cash Flows from Investing Activities
Proceeds from maturities of interest bearing time deposits in other banks		$	750			$	250
Proceeds from maturities and redemptions of investment securities held to maturity			1,835				1,793
Proceeds from maturities and redemptions of investment securities available for sale			7,030				57,157
Proceeds from sales of investment securities available for sale			10,013				-
Net (increase) decrease in loans			(10,465	)			63
Proceeds from sales of other real estate owned			240				770
Proceeds from sales of other assets			-				149
Purchase of time deposits in other banks			(500	)			(6,946	)
Purchase of investment securities held to maturity			(2,565	)			(3,350	)
Purchase of Bank Owned Life Insurance			(3	)			-
Purchase of investment securities available for sale			(7,073	)			(24,807	)
Purchase of bank premises and equipment			(184	)			(318	)
Net cash provided by (used for) investing activities		$	(922	)		$	24,761
Cash Flows from Financing Activities
Net increase (decrease) in deposits		$	3,355			$	(2,660	)
Issuance of common stock			190				124
Stock redeemed for tax withholding - stock based compensation			(230	)			(166	)
Dividends paid			(17,127	)			(12,129	)
Net cash used for financing activities		$	(13,812	)		$	(14,831	)
Net Increase (Decrease) in Cash and Cash Equivalents		$	(12,099	)		$	11,714
Cash and Cash Equivalents at Beginning of Period			52,772				79,550
Cash and Cash Equivalents at End of Period		$	40,673			$	91,264
Supplemental Cash Flow Information
Cash paid for interest		$	458			$	687
Cash paid for federal income taxes		$	-			$	-
Supplemental Schedule of Non Cash Investing Activities
Transfer of loans to other real estate owned		$	-			$	29
Transfer of loans to other assets		$	40			$	21

 

The accompanying notes to consolidated financial statements are an integral part of these statements.

 

 

MBT FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The unaudited consolidated financial statements include the accounts of MBT Financial Corp. (the “Company”) and its subsidiary, Monroe Bank & Trust (the “Bank”). The Bank includes the accounts of its wholly owned subsidiary, MB&T Financial Services, Inc. The Bank operates fourteen branches in Monroe County, Michigan, six branches in Wayne County, Michigan, and one loan and wealth management office in Wayne County. The Bank’s primary source of revenue is from providing loans to customers, who are predominantly small and middle-market businesses and middle-income individuals. The Company’s sole business segment is community banking.

 

The accounting and reporting policies of the Bank conform to practice within the banking industry and are in accordance with accounting principles generally accepted in the United States. Preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are the determination of the allowance for loan losses, the valuation of other real estate owned, and the fair value of investment securities.

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of Management, necessary for fair statement of results for the interim periods.

 

The significant accounting policies are as follows:

 

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its subsidiary. All material intercompany transactions and balances have been eliminated.

 

COMPREHENSIVE INCOME

Accounting principles generally require that revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on securities available for sale and amounts recognized related to postretirement benefit plans (gains and losses, prior service costs, and transition assets or obligations), are reported as a direct adjustment to the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income.

 

BUSINESS SEGMENTS

While the Company's chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a company wide basis. Accordingly, all of the Company’s operations are considered by management to be aggregated in one reportable segment.

 

FAIR VALUE

The Company 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 Company uses various valuation techniques and assumptions when estimating fair value.

 

 

When determining the fair value measurements for assets and liabilities required or permitted to be recorded at and/or marked to fair value, the Company 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 Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets or liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets and the Company must use alternative valuation techniques to derive a fair value measurement.

 

ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 does not apply to financial instruments. ASU 2014-09 is effective for public entities for reporting periods beginning after December 15, 2017 (therefore, for the year ending December 31, 2018 for the Corporation). Early implementation is not allowed for public companies. Management does not expect the standard will have a significant effect on the Corporation’s consolidated financial statements, however the exact effect is still being determined.

 

In January 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU covers various changes to the accounting, measurement, and disclosures related to certain financial instruments, including requiring equity investments to be accounted for at fair value with changes recorded through earnings, the use of the exit price when measuring fair value, and disaggregation of financial assets and liabilities by category for disclosure purposes. The new guidance will be effective for the Company's year ending December 31, 2018. Early adoption is permitted as early as periods ending after December 31, 2017 with some additional options for early application. The Company does not believe adopting the provisions of ASU No. 2016-01 in the future will have a material impact on the consolidated financial statements. The Company has not yet quantified the impact of the change.

 

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Company’s loans and available-for-sale and held-to-maturity debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. The new credit loss guidance will be effective for the Company's year ending December 31, 2020. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard will have a significant effect on the Company's consolidated financial statements as credit losses will be accelerated with the elimination of the probable threshold for initial recognition.

 

 

2. EARNINGS PER SHARE

 

The calculations of earnings per common share are as follows:

 

		For the three months ended March 31,
		2017				2016
Basic
Net income		$	3,180,000			$	2,997,000
Average common shares outstanding			22,821,273				22,854,556
Earnings per common share - basic		$	0.14			$	0.13
Diluted
Net income		$	3,180,000			$	2,997,000
Average common shares outstanding			22,821,273				22,854,556
Equity compensation			140,152				160,401
Average common shares outstanding - diluted			22,961,425				23,014,957
Earnings per common share - diluted		$	0.14			$	0.13

 

3. STOCK BASED COMPENSATION

Stock Only Stock Appreciation Rights (SOSARs) - On February 23, 2017, 94,500 Stock Only Stock Appreciation Rights (SOSARs) were awarded to certain officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The SOSARs have a term of ten years and vest in three equal annual installments beginning on December 31, 2017. The fair value of $3.37 for the SOSARs was estimated at the date of the grant, using the Black-Scholes option pricing model, with the following assumptions: expected option lives of 7 years, expected volatility of 33.54%, a risk free interest rate of 2.20% and dividend yield of 1.83%. The fair value of the Company’s common stock was $10.90 on the grant date.

 

SOSARs granted under the plan are structured as fixed grants with the base price equal to the market value of the underlying stock on the date of the grant.

 

The following table summarizes the SOSARs that have been granted:

 

						Weighted Average
		SOSARs				Base Price
SOSARs Outstanding, January 1, 2017			467,118			$	5.38
Granted			94,500				10.90
Exercised			(144,562	)			5.17
Forfeited			(3,337	)			6.93
Expired			-				-
SOSARs Outstanding, March 31, 2017			413,719			$	6.70
SOSARs Exercisable, March 31, 2017			213,680			$	4.60

 

The exercise of a SOSAR results in the issuance of a number of shares of common stock of the Company based on the appreciation of the market price of the stock over the base price of the SOSAR. The market value of the Company’s common stock on March 31, 2017 was $11.35. The value of the exercisable SOSARs that are in-the-money as of March 31, 2017 was $1,400,000, and exercise of those SOSARs on that date would have resulted in the issuance of 127,078 shares of common stock. The plan allows participants to elect to withhold shares from the exercise of SOSARs to cover their tax liability. This may affect the number of shares issued and the value of the common stock account on the balance sheet and the statement of changes in equity.

 

 

Restricted Stock Unit Awards – On February 23, 2017, 24,000 performance restricted stock units were awarded to certain key executive officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. Each Restricted Stock Unit (RSU) is equivalent to one share of MBT Financial Corp. common stock. Stock will be issued to the participants following a two year performance period that ends on December 31, 2018 if the defined performance targets are achieved. The grant date fair value of the stock was $10.90 per share. Earned RSUs vest on December 15, 2019 and as of March 31, 2017 none of the RSUs were vested.

 

Restricted Stock Awards – On February 23, 2017, 6,000 restricted shares were awarded to certain non-executive members of the board of directors in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The restricted shares vest on December 31, 2017. The expense for the restricted stock is based on the grant date value of $10.90 and is recognized over the vesting period. The unrecognized cost related to the non-vested restricted stock awards was $59,000 as of March 31, 2017.

 

The total expense for equity based compensation was $131,000 in the first quarter of 2017 and $114,000 in the first quarter of 2016. The unrecognized compensation expense for all equity based compensation plans is $1,050,000 as of March 31, 2017. The expense is expected to be recognized over a weighted average period of 1.88 years.

 

4. LOANS

The Bank makes commercial, consumer, and mortgage loans primarily to customers in Monroe County, Michigan, southern and western Wayne County, Michigan, Lenawee County, Michigan, and surrounding areas. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the automotive, manufacturing, and real estate development economic sectors.

 

 

Loans consist of the following (000s omitted):

 

		March 31,				December 31,
		2017				2016
Residential real estate loans		$	218,975			$	216,436
Commercial and Construction real estate loans			272,322				271,623
Agriculture and agricultural real estate loans			21,023				21,518
Commercial and industrial loans			107,831				96,761
Loans to individuals for household, family, and other personal expenditures			42,773				45,999
Total loans, gross		$	662,924			$	652,337
Less: Allowance for loan losses			8,334				8,458
Net Loans		$	654,590			$	643,879

 

Loans are placed in a nonaccrual status when, in the opinion of Management, the collection of additional interest is doubtful. All loan relationships over $250,000 that are classified by Management as nonperforming as well as selected performing accounts and all renegotiated loans are reviewed for impairment each quarter. Allowances for loans determined to be impaired are included in the allowance for loan losses. All cash received on nonaccrual loans is applied to the principal balance. Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due, restructured loans, nonaccrual investment securities, other real estate owned, and other repossessed assets. Other real estate owned includes real estate that has been acquired in full or partial satisfaction of loan obligations or upon foreclosure.

 

 

The following table summarizes nonperforming assets (000s omitted):

 

		March 31,				December 31,
		2017				2016
Nonaccrual loans		$	5,001			$	4,656
Loans 90 days past due and accruing			9				10
Restructured loans			10,318				14,161
Total nonperforming loans		$	15,328			$	18,827
Other real estate owned			1,360				1,634
Other assets			40				-
Total nonperforming assets		$	16,728			$	20,461
Nonperforming assets to total assets			1.24	%			1.51	%
Allowance for loan losses to nonperforming loans			54.37	%			44.92	%

 

5. ALLOWANCE FOR LOAN LOSSES

 

The Company separates its loan portfolio into segments to perform the calculation and analysis of the allowance for loan losses. The six segments analyzed are Agriculture and Agricultural Real Estate, Commercial, Commercial Real Estate, Construction Real Estate, Residential Real Estate, and Consumer and Other. The Agriculture and Agricultural Real Estate segment includes all loans to finance agricultural production and all loans secured by agricultural real estate. This segment does not include loans to finance agriculture that are secured by residential real estate, which are included in the Residential Real Estate segment. The Commercial segment includes loans to finance commercial and industrial businesses that are not secured by real estate. The Commercial Real Estate segment includes loans secured by non-farm, non-residential real estate. The Construction Real Estate segment includes loans to finance construction and land development. This includes residential and commercial construction and land development. The Residential Real Estate segment includes all loans, other than construction loans, that are secured by single family and multi family residential real estate properties. The Consumer and Other segment includes all loans not included in any other segment. These are primarily loans to consumers for household, family, and other personal expenditures. The majority of this segment is student loans, and it also includes loans for autos, boats, and recreational vehicles.

 

 

Activity in the allowance for loan losses during the three months ended March 31, 2017 was as follows (000s omitted):

 

		Agriculture and Agricultural Real Estate				Commercial				Commercial Real Estate				Construction Real Estate				Residential Real Estate				Consumer and Other				Total
Allowance for loan losses: For the three months ended March 31, 2017
Beginning Balance		$	201			$	1,632			$	3,336			$	525			$	1,599			$	1,165			$	8,458
Charge-offs			-				-				(25	)			-				(50	)			(37	)			(112	)
Recoveries			3				56				37				13				54				25				188
Provision			(4	)			(109	)			90				(4	)			(33	)			(140	)			(200	)
Ending balance		$	200			$	1,579			$	3,438			$	534			$	1,570			$	1,013			$	8,334
Allowance for loan losses as of March 31, 2017
Ending balance individually evaluated for impairment		$	5			$	181			$	234			$	381			$	230			$	182			$	1,213
Ending balance collectively evaluated for impairment			195				1,398				3,204				153				1,340				831				7,121
Ending balance		$	200			$	1,579			$	3,438			$	534			$	1,570			$	1,013			$	8,334
Loans as of March 31, 2017
Ending balance individually evaluated for impairment		$	1,213			$	327			$	3,458			$	1,705			$	6,502			$	459			$	13,664
Ending balance collectively evaluated for impairment			19,810				107,504				247,335				19,824				212,473				42,314				649,260
Ending balance		$	21,023			$	107,831			$	250,793			$	21,529			$	218,975			$	42,773			$	662,924

 

Activity in the allowance for loan losses during the three months ended March 31, 2016 was as follows (000s omitted):

 

		Agriculture and Agricultural Real Estate				Commercial				Commercial Real Estate				Construction Real Estate				Residential Real Estate				Consumer and Other				Total
Allowance for loan losses: For the three months ended March 31, 2017
Beginning Balance		$	389			$	2,279			$	4,350			$	420			$	2,235			$	1,223			$	10,896
Charge-offs			-				-				(56	)			-				(91	)			(62	)			(209	)
Recoveries			-				33				23				13				58				23				150
Provision			98				(715	)			701				42				(282	)			(144	)			(300	)
Ending balance		$	487			$	1,597			$	5,018			$	475			$	1,920			$	1,040			$	10,537
Allowance for loan losses as of March 31, 2016
Ending balance individually evaluated for impairment		$	241			$	525			$	763			$	269			$	387			$	209			$	2,394
Ending balance collectively evaluated for impairment			246				1,072				4,255				206				1,533				831				8,143
Ending balance		$	487			$	1,597			$	5,018			$	475			$	1,920			$	1,040			$	10,537
Loans as of March 31, 2016
Ending balance individually evaluated for impairment		$	695			$	895			$	11,898			$	1,796			$	7,510			$	450			$	23,244
Ending balance collectively evaluated for impairment			18,649				81,986				230,917				14,538				210,795				37,838				594,723
Ending balance		$	19,344			$	82,881			$	242,815			$	16,334			$	218,305			$	38,288			$	617,967

 

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.

 

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.

 

 

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.

 

The Company utilizes an internal loan grading system to assign a risk grade to all commercial loans, all renegotiated loans, and each commercial credit relationship. Grades 10 through 45 are considered “pass” credits and grades 50 through 60 are considered “watch” credits and are subject to greater scrutiny. Loans with grades 70 through 90 and considered “doubtful” or “loss” and have generally been charged off. A description of the general characteristics of each grade is as follows:

•

Grade 10– Excellent – Loans secured by marketable collateral, with adequate margin, or supported by strong financial statements, including substantial levels of tangible net worth. Probability of serious financial deterioration is unlikely. Possess a sound repayment source and a secondary source. This classification will also include individual loans backed by liquid personal assets, established history and unquestionable character. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans.

•

Grade 20– Above Average – Loans that exhibit less than average risk and clearly demonstrate debt service coverage that is consistently above average as well as a strong capital base. These loans may have some deficiency or vulnerability, but with offsetting features and are considered to be fully collectable.

•

Grade 30– Satisfactory – Loans that have an acceptable amount of risk but may exhibit vulnerability to deterioration if adverse circumstances are encountered. These loans should demonstrate adequate debt service coverage and adequate levels of capital support but warrant periodic monitoring to ensure that weaknesses do not materialize or advance.

•

Grades 40 and 45 – Pass – Loans that are considered “pass credits” and typically demonstrate adequate debt service coverage. The level of risk is considered acceptable but these loans warrant ongoing monitoring to ensure that adverse trends or other credit deficiencies have not materialized or advanced. The level of risk is considered acceptable so long as the loan is given adequate and ongoing management supervision.

•	Grades 50 and 55 – Watch – Loans that possess some credit deficiency or potential weakness that deserves close attention. The primary source of loan repayment is sufficient but may be considered inadequate by the Bank’s standards.

•

Grade 60– Substandard – Loans that exhibit one or more of the following characteristics: (1) a defined credit weakness, financial deterioration is underway, and uncertainty about the likelihood that the loan will be paid from the primary source of repayment; (2) inadequately protected by the current net worth and paying capacity of the obligor; (3) reliance on secondary source of repayment such as collateral liquidation or guarantees; (4) distinct possibility the Bank will sustain loss if deficiencies are not corrected; (5) unusual courses of action are needed to maintain a high probability of repayment; (6) insufficient cash flow to repay principal but continuing to pay interest; (7) the Bank is subordinated or unsecured due to flaws in documentation; (8) loans are restructured or are on nonaccrual status due to concessions to the borrower when compared to normal loan terms; (9) the Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan; or (10) there is deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

•

Grade 70– Doubtful – Loans that exhibit one or more of the following characteristics: (1) loans with all the weaknesses of Substandard loans and collection or liquidation is not probable to result in payment in full; (2) the primary source of repayment is gone and there is considerable doubt as to the quality of the secondary source of repayment; or (3) the possibility of loss is high, but certain important pending factors may strengthen the loan and loss classification is deferred.

•	Grades 80 and 90 - Loss – Loans are considered uncollectible and of such little value that continuing to carry them on the Bank’s financial statements is not feasible.

 

 

The assessment of compensating factors may result in a rating plus or minus one grade from those listed above. These factors include, but are not limited to collateral, guarantors, environmental conditions, history, plan/projection reasonableness, quality of information, and payment delinquency.

 

The portfolio segments in each credit risk grade as of March 31, 2017 are as follows (000s omitted):

 

Credit Quality Indicators as of March 31, 2017

Credit Risk by Internally Assigned Grade

 

		Agriculture and Agricultural Real Estate				Commercial				Commercial Real Estate				Construction Real Estate				Residential Real Estate				Consumer and Other				Total
Not Rated		$	1			$	3,125			$	203			$	11,085			$	132,686			$	36,102			$	183,202
10			-				5,890				-				-				-				-				5,890
20			344				286				423				-				-				145				1,198
30			634				25,346				7,742				-				213				4,128				38,063
40			15,417				64,819				199,243				5,160				71,752				2,282				358,673
45			1,503				3,327				13,367				2,959				5,226				-				26,382
50			1,649				3,273				19,990				436				3,409				11				28,768
55			169				1,135				2,882				1,564				969				-				6,719
60			1,306				630				6,943				325				4,720				105				14,029
70			-				-				-				-				-				-				-
80			-				-				-				-				-				-				-
90			-				-				-				-				-				-				-
Total		$	21,023			$	107,831			$	250,793			$	21,529			$	218,975			$	42,773			$	662,924
Performing		$	20,246			$	107,339			$	246,871			$	19,772			$	211,154			$	42,214			$	647,596
Nonperforming			777				492				3,922				1,757				7,821				559				15,328
Total		$	21,023			$	107,831			$	250,793			$	21,529			$	218,975			$	42,773			$	662,924

 

 

The portfolio segments in each credit risk grade as of December 31, 2016 are as follows (000s omitted):

 

Credit Quality Indicators as of December 31, 2016

Credit Risk by Internally Assigned Grade

 

		Agriculture and Agricultural Real Estate				Commercial				Commercial Real Estate				Construction Real Estate				Residential Real Estate				Consumer and Other				Total
Not Rated		$	2			$	1,768			$	214			$	9,960			$	132,144			$	39,114			$	183,202
10			-				5,787				-				-				-				-				5,787
20			293				348				447				-				-				145				1,233
30			645				17,373				8,128				-				218				-				26,364
40			15,827				63,687				198,416				4,211				70,275				6,626				359,042
45			1,507				2,142				16,227				2,974				4,513				-				27,363
50			1,769				4,090				16,828				448				3,393				12				26,540
55			263				927				4,081				1,574				989				-				7,834
60			1,212				639				7,828				287				4,904				102				14,972
70			-				-				-				-				-				-				-
80			-				-				-				-				-				-				-
90			-				-				-				-				-				-				-
Total		$	21,518			$	96,761			$	252,169			$	19,454			$	216,436			$	45,999			$	652,337
Performing		$	20,834			$	96,240			$	244,816			$	17,734			$	208,458			$	45,428			$	633,510
Nonperforming			684				521				7,353				1,720				7,978				571				18,827
Total		$	21,518			$	96,761			$	252,169			$	19,454			$	216,436			$	45,999			$	652,337

 

 

Loans are considered past due when contractually required payment of interest or principal has not been received. The amount classified as past due is the entire principal balance outstanding of the loan, not just the amount of payments that are past due. The following is a summary of past due loans as of March 31, 2017 and December 31, 2016 (000s omitted):

 

 

March 31, 2017		30-59 Days Past Due				60-89 Days Past Due				>90 Days Past Due				Total Past Due				Current				Total Loans				Recorded Investment >90 Days Past Due and Accruing
Agriculture and Agricultural Real Estate		$	36			$	-			$	206			$	242			$	20,781			$	21,023			$	-
Commercial			228				-				15				243				107,588				107,831				8
Commercial Real Estate			1,302				657				538				2,497				248,296				250,793				-
Construction Real Estate			-				-				53				53				21,476				21,529				-
Residential Real Estate			1,008				168				1,355				2,531				216,444				218,975				-
Consumer and Other			115				7				1				123				42,650				42,773				1
Total		$	2,689			$	832			$	2,168			$	5,689			$	657,235			$	662,924			$	9

 

 

 

December 31, 2016		30-59 Days Past Due				60-89 Days Past Due				>90 Days Past Due				Total Past Due				Current				Total Loans				Recorded Investment >90 Days Past Due and Accruing
Agriculture and Agricultural Real Estate		$	93			$	-			$	113			$	206			$	21,312			$	21,518			$	-
Commercial			77				46				23				146				96,615				96,761				10
Commercial Real Estate			708				363				828				1,899				250,270				252,169				-
Construction Real Estate			-				-				-				-				19,454				19,454				-
Residential Real Estate			1,523				192				1,558				3,273				213,163				216,436				-
Consumer and Other			149				46				-				195				45,804				45,999				-
Total		$	2,550			$	647			$	2,522			$	5,719			$	646,618			$	652,337			$	10

 

 

Loans are placed on non-accrual status when, in the opinion of Management, the collection of additional interest is doubtful. Loans are automatically placed on non-accrual status upon becoming ninety days past due, however, loans may be placed on non-accrual status regardless of whether or not they are past due. All cash received on non-accrual loans is applied to the principal balance. Loans are considered for return to accrual status on an individual basis when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

 

The following is a summary of non-accrual loans as of March 31, 2017 and December 31, 2016 (000s omitted):

 

		March 31, 2017				December 31, 2016
Agriculture and Agricultural Real Estate		$	206			$	113
Commercial			156				169
Commercial Real Estate			1,839				1,625
Construction Real Estate			79				31
Residential Real Estate			2,623				2,623
Consumer and Other			98				95
Total		$	5,001			$	4,656

 

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 following is a summary of impaired loans as of March 31, 2017 and March 31, and December 31, 2016 (000s omitted):

 

March 31, 2017		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment for the Three Months Ended				Interest Income Recognized in the Three Months Ended
With no related allowance recorded:
Agriculture and Agricultural Real Estate		$	969			$	1,163			$	-			$	973			$	10
Commercial			63				63				-				65				1
Commercial Real Estate			642				846				-				661				7
Construction Real Estate			62				95				-				81				1
Residential Real Estate			4,266				4,453				-				4,479				57
Consumer and Other			29				29				-				31				1
With an allowance recorded:
Agriculture and Agricultural Real Estate			244				244				5				245				3
Commercial			264				268				181				293				3
Commercial Real Estate			2,816				2,895				234				2,914				34
Construction Real Estate			1,643				1,642				381				1,647				19
Residential Real Estate			2,236				2,298				230				2,277				24
Consumer and Other			430				431				182				434				5
Total:
Agriculture and Agricultural Real Estate		$	1,213			$	1,407			$	5			$	1,218			$	13
Commercial			327				331				181				358				4
Commercial Real Estate			3,458				3,741				234				3,575				41
Construction Real Estate			1,705				1,737				381				1,728				20
Residential Real Estate			6,502				6,751				230				6,756				81
Consumer and Other			459				460				182				465				6

 

 

		Recorded Investment as of December 31, 2016				Unpaid Principal Balance as of December 31, 2016				Related Allowance as of December 31, 2016				Average Recorded Investment for the Three Months Ended March 31, 2016				Interest Income Recognized in the Three Months Ended March 31, 2016
With no related allowance recorded:
Agriculture and Agricultural Real Estate		$	966			$	1,164			$	-			$	-			$	-
Commercial			88				140				-				163				3
Commercial Real Estate			4,295				4,502				-				7,017				66
Construction Real Estate			144				177				-				214				3
Residential Real Estate			4,916				5,157				-				4,447				55
Consumer and Other			11				11				-				17				-
With an allowance recorded:
Agriculture and Agricultural Real Estate			246				246				5				825				4
Commercial			267				274				199				789				8
Commercial Real Estate			2,558				2,610				129				5,410				53
Construction Real Estate			1,573				1,573				388				1,605				18
Residential Real Estate			2,182				2,224				236				3,392				34
Consumer and Other			465				465				184				438				5
Total:
Agriculture and Agricultural Real Estate		$	1,212			$	1,410			$	5			$	825			$	4
Commercial			355				414				199				952				11
Commercial Real Estate			6,853				7,112				129				12,427				119
Construction Real Estate			1,717				1,750				388				1,819				21
Residential Real Estate			7,098				7,381				236				7,839				89
Consumer and Other			476				476				184				455				5

 

The Bank may agree to modify the terms of a loan in order to improve the Bank’s ability to collect amounts due. These modifications may include reduction of the interest rate, extension of the loan term, or in some cases, reduction of the principal balance. Modifications that are performed due to the debtor’s financial difficulties are considered Troubled Debt Restructurings (“TDRs”).

 

Loans that have been classified as TDRs during the three month period ended March 31, 2017 and March 31, 2016 are as follows (000s omitted from dollar amounts):

 

		Three months ended March 31, 2017												Three months ended March 31, 2016
		Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance				Number of Contracts				Pre- Modification Recorded Principal Balance				Post- Modification Recorded Principal Balance
Agriculture and Agricultural Real Estate			-			$	-			$	-				-			$	-			$	-
Commercial			2				29				29				-				-				-
Commercial Real Estate			2				74				54				-				-				-
Construction Real Estate			-				-				-				-				-				-
Residential Real Estate			3				212				180				1				200				199
Consumer and Other			1				1				1				-				-				-
Total			8			$	316			$	264				1			$	200			$	199

 

 

 

The Bank considers TDRs that become past due under the modified terms as defaulted. There were no loans that became TDRs during the three month periods ended March 31, 2017 and March 31, 2016 that subsequently defaulted during the three month periods ended March 31, 2017 and March 31, 2016, respectively.

 

The Company has allocated $1,013,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at March 31, 2017. In addition, there were no commitments to lend additional amounts to borrowers that are classified as troubled debt restructurings as of March 31, 2017 and March 31, 2016.

 

 

6. INVESTMENT SECURITIES 

 

The following is a summary of the Bank’s investment securities portfolio as of March 31, 2017 and December 31, 2016 (000s omitted):

 

 

		Held to Maturity
		March 31, 2017
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Obligations of States and Political Subdivisions		$	40,952			$	800			$	(266	)		$	41,486
Corporate Debt Securities			500				2				-				502
		$	41,452			$	802			$	(266	)		$	41,988

 

 

		Available for Sale
		March 31, 2017
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Obligations of U.S. Government Agencies		$	282,789			$	511			$	(5,935	)		$	277,365
Mortgage Backed Securities issued by U.S. Government Agencies			137,701				80				(2,138	)			135,643
Obligations of States and Political Subdivisions			30,791				108				(236	)			30,663
Other Debt Securities			34,328				295				(176	)			34,447
Equity Securities			2,044				47				-				2,091
		$	487,653			$	1,041			$	(8,485	)		$	480,209

 

 

		Held to Maturity
		December 31, 2016
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Obligations of States and Political Subdivisions		$	40,241			$	701			$	(288	)		$	40,654
Corporate Debt Securities			500				2				-				502
		$	40,741			$	703			$	(288	)		$	41,156

 

 

		Available for Sale
		December 31, 2016
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Obligations of U.S. Government Agencies		$	282,130			$	389			$	(7,519	)		$	275,000
Mortgage Backed Securities issued by U.S. Government Agencies			148,764				118				(2,673	)			146,209
Obligations of States and Political Subdivisions			30,909				109				(409	)			30,609
Corporate Debt Securities			34,363				135				(338	)			34,160
Equity Securities			2,044				45				-				2,089
		$	498,210			$	796			$	(10,939	)		$	488,067

 

The amortized cost and estimated market values of securities by contractual maturity as of March 31, 2017 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.

 

		Held to Maturity								Available for Sale
						Estimated								Estimated
		Amortized				Market				Amortized				Market
		Cost				Value				Cost				Value
Contractual maturity in
1 year or less		$	10,168			$	10,180			$	4,470			$	4,470
After 1 year through five years			20,780				20,982				151,899				150,945
After 5 years through 10 years			9,167				9,472				182,228				177,848
After 10 years			1,337				1,354				9,311				9,212
Total			41,452				41,988				347,908				342,475
Mortgage Backed Securities			-				-				137,701				135,643
Securities with no stated maturity			-				-				2,044				2,091
Total		$	41,452			$	41,988			$	487,653			$	480,209

 

 

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 does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before a recovery of their amortized costs bases, which may be maturity. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses (in thousands), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2017 and December 31, 2016.

 

		March 31, 2017
		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		$	220,131			$	5,935			$	-			$	-			$	220,131			$	5,935
Mortgage Backed Securities issued by U.S. Government Agencies			102,936				1,731				20,934				407				123,870				2,138
Obligations of States and Political Subdivisions			32,530				495				2,260				7				34,790				502
Corporate Debt Securities			15,582				176				-				-				15,582				176
		$	371,179			$	8,337			$	23,194			$	414			$	394,373			$	8,751

 

 

 

		December 31, 2016
		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		$	242,212			$	7,519			$	-			$	-			$	242,212			$	7,519
Mortgage Backed Securities issued by U.S. Government Agencies			112,995				2,144				22,857				529				135,852				2,673
Obligations of States and Political Subdivisions			40,524				682				2,976				15				43,500				697
Corporate Debt Securities			24,025				338				-				-				24,025				338
		$	419,756			$	10,683			$	25,833			$	544			$	445,589			$	11,227

 

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. Because the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other than temporarily impaired at March 31, 2017. As of March 31, 2017 and December 31, 2016, there were 195 and 230 securities in an unrealized loss position, respectively.

 

 

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

Fair value, as defined in ASC Topic 820, is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for market activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

 

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value is used on a recurring basis for 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. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value.

 

 

The Company 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 Company’s equity 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 Company’s borrowed funds and investments in U.S. government agency securities, government sponsored mortgage backed securities, corporate debt securities, bank certificates of deposit, and 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. Certain municipal debt obligations and certificates of deposit 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.

 

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016, and the valuation techniques used by the Company to determine those fair values.

 

																		Total
		Carrying																Estimated
March 31, 2017		Value				Level 1				Level 2				Level 3				Fair Value
Financial Assets:
Cash and due from banks		$	40,673			$	40,673			$	-			$	-			$	40,673
Time Deposits in Other Banks			18,696				-				17,904				750				18,654
Securities - Held to Maturity
Obligations of States and Political Subdivisions			40,952				-				3,152				38,334				41,486
Corporate Debt Securities			500				-				502				-				502
Securities - Available for Sale
Obligations of U.S. Government Agencies			277,365				-				277,365				-				277,365
MBS issued by U.S. Government Agencies			135,643				-				135,643				-				135,643
Obligations of States and Political Subdivisions			30,663				-				30,663				-				30,663
Other Debt Securities			34,447				-				34,447				-				34,447
Equity Securities			2,091				2,091				-				-				2,091
Federal Home Loan Bank Stock			4,148				-				4,148				-				4,148
Loans Held for Sale			525				-				-				534				534
Loans, net			654,590				-				-				649,681				649,681
Accrued Interest Receivable			4,738				-				-				4,738				4,738
Financial Liabilities:
Noninterest Bearing Deposits			284,946				284,946				-				-				284,946
Interest Bearings Deposits			918,126				-				919,222				-				919,222
Accrued Interest Payable			55				-				-				55				55

 

 

																		Total
		Carrying																Estimated
December 31, 2016		Value				Level 1				Level 2				Level 3				Fair Value
Financial Assets:
Cash and due from banks		$	52,772			$	52,772			$	-			$	-			$	52,772
Time Deposits in Other Banks			18,946				-				18,940				-				18,940
Securities - Held to Maturity
Obligations of States and Political Subdivisions			40,241				-				3,153				37,501				40,654
Corporate Debt Securities			500				-				502				-				502
Securities - Available for Sale
Obligations of U.S. Government Agencies			275,000				-				275,000				-				275,000
MBS issued by U.S. Government Agencies			146,209				-				146,209				-				146,209
Obligations of States and Political Subdivisions			30,609				-				30,609				-				30,609
Corporate Debt Securities			34,160				-				34,160				-				34,160
Equity Securities			2,089				2,089				-				-				2,089
Federal Home Loan Bank Stock			4,148				-				4,148				-				4,148
Loans Held for Sale			611				-				-				623				623
Loans, net			643,879				-				-				642,908				642,908
Accrued Interest Receivable			4,335				-				-				4,335				4,335
Financial Liabilities:
Noninterest Bearing Deposits			279,001				279,001				-				-				279,001
Interest Bearings Deposits			920,716				-				922,187				-				922,187
Repurchase Agreements			-				-				-				-				-
Accrued Interest Payable			57				-				-				57				57

 

 

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.

 

The Company's assets with Level 3 fair values are carried at their amortized cost values as of March 31, 2017 or December 31, 2016. The Company did not have any sales or purchases of Level 3 available for sale securities during the period.

 

Both observable and unobservable inputs may be used to determine the fair value of positions classified as Level 3 assets. As a result, the unrealized gains and losses for these assets presented in the tables above may include changes in fair value that were attributable to both observable and unobservable inputs.

 

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets include loans and Other Real Estate Owned. 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 (000s omitted):

 

		Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
March 31, 2017
Impaired loans		$	-			$	-			$	12,451
Other Real Estate Owned		$	-			$	-			$	1,360
December 31, 2016
Impaired loans		$	-			$	-			$	16,570
Other Real Estate Owned		$	-			$	-			$	1,634

 

Impaired loans categorized as Level 3 assets consist of non-homogenous loans that are considered impaired. The Company estimates the fair value of the loans based on the present value of expected future cash flows using management’s best estimate of key assumptions. These assumptions include future payment ability, timing of payment streams, and estimated realizable values of available collateral (typically based on outside appraisals). Other Real Estate Owned (OREO) consists of property received in full or partial satisfaction of a receivable. The Company utilizes independent appraisals to estimate the fair value of OREO properties.

 

 

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of condition.

 

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for its other lending activities.

 

Financial instruments whose contractual amounts represent off-balance sheet credit risk were as follows (000s omitted):

 

		Contractual Amount
		March 31,				December 31,
		2017				2016
Commitments to extend credit:
Unused portion of commercial lines of credit		$	71,987			$	75,454
Unused portion of credit card lines of credit			5,305				4,983
Unused portion of home equity lines of credit			26,429				25,057
Standby letters of credit and financial guarantees written			1,431				1,582
All other off-balance sheet commitments			-				-

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Most commercial lines of credit are secured by real estate mortgages or other collateral, and generally have fixed expiration dates or other termination clauses. Since the lines of credit may expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. Credit card lines of credit have various established expiration dates, but are fundable on demand. Home equity lines of credit are secured by real estate mortgages, a majority of which have ten year expiration dates, but are fundable on demand. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of the collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on Management’s credit evaluation of the counterparty.

 

Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and other business transactions.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Introduction

MBT Financial Corp. (the “Company”) is a bank holding company with one commercial bank subsidiary, Monroe Bank & Trust (the “Bank”). The Bank operates 14 branch offices in Monroe County, Michigan and 6 branch offices in Wayne County, Michigan, and 1 loan and wealth management office in Wayne County, Michigan.

 

The Bank’s primary source of income is Net Interest Income (interest income on loans and investments less interest expense on deposits and borrowings), and its primary expense is the compensation of its employees. The discussion and analysis should be read in conjunction with the accompanying consolidated statements and footnotes.

 

Executive Overview

The Bank is operated as a community bank, primarily providing loan, deposit, and wealth management products and services to the people, businesses, and communities in its market area. In addition to our commitment to our mission of serving the needs of our local communities, we are focused on improving asset quality, increasing net interest income, and improving non-interest income and expenses.

 

The net profit of $3,180,000 for the first three months of 2017 was an increase of $183,000 or 6.1% compared to the first three months of 2016. The increase was the result of an increase of 3.3% in net interest income and a decrease of 4.4% in non-interest expenses. These exceeded the decrease in non-interest income and the increase in the provision for loan losses, resulting in increases in income before taxes and federal income tax expense.

 

The national economic recovery is continuing slowly, and so is the recovery in southeast Michigan. Local unemployment rates ticked up in the most recent quarter, with some areas in our market better than the state average but above the national average. Commercial and residential development property values continue to improve, with some values reaching or exceeding their pre-recession levels. Our total classified assets, which include internal watch list loans, other real estate owned, and nonperforming and watch list investment securities, have been improving steadily since 2014. Classified assets went down $1.2 million, or 7.1% during the first quarter of 2017, and decreased $12.9 million or 45.6% compared to a year ago. The charge offs of $112,000 for the quarter were exceeded by the recoveries of $188,000, resulting in a net recovery of $76,000, or 0.05% of loans, annualized. Due to improving loan quality metrics and net recoveries, a reduction in our Allowance for Loan and Lease Losses (ALLL) was appropriate, and we recorded a $200,000 credit to the provision expense, reflecting an increase of $100,000 when compared to the negative provision of $300,000 recorded in the first quarter of 2016. The ALLL as a percent of loans decreased from 1.30% at the end of 2016 to 1.26%. We assess the adequacy of our ALLL each quarter, and adjust it as necessary by debiting or crediting the provision expense. The allowance includes $1.2 million of specific allocations on $13.7 million of loans evaluated for impairment and $7.1 million of general allocations on the remainder of the portfolio. The general allocation is based on the historical charge off experience of the previous 16 quarters. The improvement in the historical loss rates is slowing, and if we continue to experience loan growth, further negative provisions are less likely to occur.

 

 

Net Interest Income increased $305,000, or 3.3% compared to the first quarter of 2016, even though the quarter was one day shorter, as the net interest margin increased from 3.09% to 3.21% and the average earnings assets increased $2.2 million. The net interest margin increased as the yield on earnings assets increased while the cost of interest bearing liabilities was unchanged. Non-interest income for the quarter decreased $294,000, mainly due to large securities gains from callable bonds that were owned at discounts being redeemed at par in the first quarter of 2016. Non-interest expenses decreased $421,000, as salaries, benefits, professional fees, EFT and ATM expenses, Other Real Estate expenses, FDIC deposit insurance assessments, and telephone expenses decreased. These decreases were partially offset by increases in occupancy expense, equipment expense, and marketing expense.

 

Critical Accounting Policies

The Company’s Allowance for Loan Losses and Fair Value of Investment Securities are “critical accounting estimates” because they are estimates that are based on assumptions that are highly uncertain, and if different assumptions were used or if any of the assumptions used were to change, there could be a material impact on the presentation of the Company’s financial condition. These assumptions include, but are not limited to, collateral values, the effect of economic conditions on the financial condition of the borrowers, the Company, and the issuers of investment securities, market interest rates, and projected earnings for the Company.

 

To determine the Allowance for Loan Losses, the Company estimates losses on all loans that are not classified as non accrual or renegotiated by applying historical loss rates, adjusted for current conditions, to those loans. In addition, all non accrual loan relationships over $250,000 that are classified by Management as nonperforming as well as selected performing accounts and all renegotiated loans are individually tested for impairment. Any amount of monetary impairment is included in the Allowance for Loan Losses.

 

To determine the fair value of investment securities, the Company utilizes quoted prices in active markets for identical assets, quoted prices for similar assets in active markets, or discounted cash flow calculations for investments where there is little, if any, market activity for the asset.

 

Financial Condition

The regional economic recovery continued this quarter, with stable local employment and property values steadily increasing since 2014. Management efforts are focused on improving asset quality, increasing net interest income, and improving non-interest income and expenses.

 

With respect to asset quality, our nonperforming assets (“NPAs”) decreased 18.2% during the quarter, from $20.5 million to $16.7 million, and total classified assets decreased 7.1% from $16.6 million to $15.4 million. Loan delinquencies decreased slightly from $5,719,000 30 days or more past due as of December 31, 2016 to $5,689,000 as of March 31, 2017. The loan portfolio grew during the quarter, and the delinquency percentage decreased from 0.88% to 0.86% of the total loans. Over the last twelve months, NPAs decreased $10.8 million, or 39.2%, with nonperforming loans decreasing 40.9% from $25.9 million to $15.3 million, and Other Real Estate Owned (“OREO”) decreasing 12.9% from $1.6 million to $1.4 million. Total classified assets, which include internally classified watch list loans, other real estate, and watch list investment securities, decreased $12.9 million, or 45.6%. The amount required in the Allowance for Loan and Lease Losses (“ALLL”) decreased $2.2 million over the last four quarters because of the improvement in the quality of the assets in the loan portfolio and a decrease in the historical loss rates. The Company recorded a negative provision in order to decrease the ALLL to the required level. The ALLL is now 1.26% of loans, down from 1.70% at March 31, 2016. The ALLL is 54.37% of nonperforming loans (“NPLs”), compared to 44.92% at year end and 41.65% at March 31, 2016. In light of current economic conditions, we believe that this level of ALLL adequately estimates the potential losses in the loan portfolio.

 

 

Since December 31, 2016, total loans held for investment increased $10.6 million as new loan activity exceeded payments received and other reductions in the period. Even with the increase in loans, our pipeline of loans in process remained steady this quarter, and we expect new loan production to continue to exceed run off, resulting in an increase in loans outstanding in the second quarter of 2017.

 

Since December 31, 2016, deposits increased $3.4 million, other liabilities decreased $2.5 million, and capital decreased $11.6 million, and as a result our total assets decreased $10.7 million, or 0.8%. The Company expects minimal deposit funding growth in the second quarter of 2017, as we have adequate liquidity to fund our anticipated loan growth without needing to actively grow deposits. The composition of deposits continues to change as customers move funds from maturing interest bearing time deposit accounts to low or no cost non maturity deposit accounts due to the low interest rate environment. As of March 31, 2017, deposits consisted of $145.7 million in certificates of deposit and IRAs with an average cost of 0.64%, $230.8 million in savings deposits with an average cost of 0.02%, $260.4 million in Money Market Deposit Accounts with an average cost of 0.16%, $281.7 million in interest bearing demand deposits with an average cost of 0.14%, and $284.5 million in non-interest bearing demand deposits. We do not expect significant changes in our deposit funding, and our expected loan growth will be primarily funded by reductions in our cash and investments. The total capital decreased $11.6 million during the first quarter of 2017, mainly because dividends exceeded earnings by $13.9 million. This reduction was mitigated by an increase of $1.8 million in the Accumulated Other Comprehensive Income, which increased mainly due to the increase in the market value of securities available for sale. Capital decreased at a higher rate than assets, causing the capital to assets ratio to decrease from 10.40% at December 31, 2016 to 9.62% at March 31, 2017.

 

Results of Operations – First Quarter 2017 vs. First Quarter 2016

Net Interest Income - A comparison of the income statements for the three months ended March 31, 2017 and 2016 shows an increase of $305,000, or 3.3%, in Net Interest Income. Interest income on loans increased $329,000 or 4.7% as the average loans outstanding increased $36.5 million and the average yield on loans decreased from 4.56% to 4.55%. The average loans outstanding increased as demand increased due to improving economic conditions. The interest income on investments, fed funds sold, and interest bearing balances due from banks decreased $261,000 because the average amount of investments, fed funds sold, and interest bearing balances due from banks decreased $34.3 million and the yield decreased from 1.95% to 1.90%. The Company continues to maintain a high level of liquidity, but some of that liquidity is being used by redeploying earning assets from low yielding short term investments and deposits in the Federal Reserve Bank into higher yielding loans. The interest expense on deposits decreased $61,000 or 11.8% even though the average deposits increased $30.0 million because the average cost of deposits decreased from 0.18% to 0.15% and the quarter was one day shorter in 2017. The average cost of deposits decreased because maturing time deposits are either resetting at lower rates or customers are moving the funds to non interest bearing demand deposit accounts or low cost non maturity deposits due to the low interest rate environment. The interest expense on borrowed funds decreased $176,000 as the final remaining borrowed funds were repaid in the second quarter of 2016.

 

 

Provision for Loan Losses - The Provision for Loan Losses increased $100,000 compared to the first quarter of 2016 as a $200,000 credit to provision expense was recorded in the first quarter of 2017, compared to a $300,000 credit to provision expense recorded in the first quarter of 2016. We charged off $112,000 of principal while recovering $188,000 of previously charged off loans in the first quarter of 2017, for a net recovery total of $76,000, or 0.05% of loans, annualized. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. Due to an improvement in portfolio risk indicators and a decrease in the historical charge off percentages, the amount of ALLL required decreased from $8,458,000 at December 31, 2016 to $8,334,000 as of March 31, 2017. Along with the $76,000 net recovery, this required us to record a credit of $200,000 to the provision expense. The allowance includes $1.2 million of specific allocations and $7.1 million of general allocations. The general allocation is based on the historical charge off experience of the previous 16 quarters. For the last several quarters, we have been replacing high charge off periods with low charge off periods in the calculation of our historical charge off rate, necessitating the negative provisions. If loan growth continues, further negative provisions are less likely to occur.

 

Other Income – Non interest income decreased $294,000, or 7.1% compared to the first quarter of 2016. Gains on securities transactions decreased $310,000 due to large gains in the first quarter of 2016 that were the result of the bonds owned at discounts being called at par. Origination fees on mortgage loans sold decreased $71,000 or 54.6% due to lower origination activity. Other non-interest income increased $36,000, or 6.1%, primarily due to an incentive payment received for check printing.

 

Other Expenses – Total non-interest expenses decreased $421,000, or 4.4% compared to the first quarter of 2016. Salaries and Employee Benefits decreased $184,000, or 3.3%. Salaries decreased due to a decrease in the number of full time equivalent employees and an increase in loan originations, which caused an increase in the amount of salary expense deferred. Benefits expense decreased due to refunds received on workers’ compensation insurance and health insurance. Occupancy expense increased $47,000, or 6.7% as maintenance and repairs increased. Professional fees expense decreased $63,000 due to a decrease in legal fees. Electronic Funds Transfer and Automated Teller Machine related expenses decreased $61,000 due to higher card reissuance costs in 2016. FDIC insurance assessments decreased $62,000 due to a reduction in the FDIC assessment rate in the third quarter of 2016.

 

As a result of the above activity, the Profit Before Income Taxes in the first quarter of 2017 was $4,553,000, an increase of $332,000 compared to the pre-tax profit of $4,221,000 in the first quarter of 2016. The Company recorded a federal income tax expense of $1,373,000 in the first quarter of 2017, reflecting an effective tax rate of 30.2%, compared to the tax expense of $1,224,000 in the first quarter of 2016, which reflected an effective rate of 29.0%. The increase in the effective tax rate was the result of the decrease in the percentage of operating income that was from municipal investments and bank owned life insurance. The Net profit for the first quarter of 2017 was $3,180,000, an increase of 6.1% compared to the net profit of $2,997,000 in the first quarter of 2016.

 

Cash Flows

Cash flows provided by operating activities increased $851,000 compared to the first three months of 2016 because net income was $183,000 higher and the amount of cash provided by other assets was $2.5 million higher this year. These increases in operating cash flow were offset by a decrease of $1.2 million in the cash provided from deferred taxes and an increase of $1.4 million in the cash used to decrease other liabilities. The cash flow from investing activities decreased $25.7 million from $24.8 million provided in the first quarter of 2016 to $0.9 million used in the first quarter of 2017. This was the result of a decrease in the amount of investment securities called prior to maturity. The bank is purchasing less callable securities, and the increase in market rates has also decreased the amount of call activity. The decrease in early redemptions of investment securities also caused a decrease in the amount of investments purchased, and the bank also sold securities in the first quarter of 2017 to fund the increase in loans. The amount of cash used for financing activities was $1.0 million lower in the first three months of 2017 than it was in the first three months of 2016 because the amount provided by deposit growth was $6.0 million higher, but the amount used to pay dividends was $5.0 million higher as the per share dividend was increased from $0.53 in the first quarter of 2016 to $0.75 in the first quarter of 2017. In the first quarter of 2017, the cash used for investing and financing activities exceeded the cash provided by operating activities, and the amount of cash and cash equivalents decreased by $12.1 million during the period. In the first quarter of 2016, the cash provided by operations and investing activities exceeded the cash used for financing activities, resulting in an increase of $11.7 million in cash and cash equivalents during the three months. We expect cash flows from redemptions of callable investment securities to remain low through the remainder of 2017, and we plan to use the proceeds from maturities and sales of investment securities to fund our expected loan growth. We anticipate that we will maintain our current level of cash and cash equivalents through the end of the year.

 

 

Liquidity and Capital

The Company believes it has sufficient liquidity to fund its lending activity and allow for fluctuations in deposit levels. Internal sources of liquidity include the maturities of loans and securities in the ordinary course of business as well as our available for sale securities portfolio. External sources of liquidity include a line of credit with the Federal Home Loan Bank of Indianapolis, the Federal funds line that has been established with our correspondent bank, and Repurchase Agreements with money center banks that allow us to pledge securities as collateral for borrowings. As of March 31, 2017, the Bank was not utilizing any of its authorized limit of $255 million with the Federal Home Loan Bank of Indianapolis, or its $20 million overdraft line of credit with the Federal Home Loan Bank of Indianapolis, or its $25 million federal funds line with a correspondent bank. The Company periodically draws on its overdraft and fed funds lines to ensure that funding will be available if needed.

 

The Company’s Funds Management Policy includes guidelines for desired amounts of liquidity and capital. The Funds Management Policy also includes contingency plans for liquidity and capital that specify actions to take if liquidity and capital ratios fall below the levels contained in the policy. Throughout the first three months of 2017 the Company was in compliance with its Funds Management Policy regarding liquidity and capital.

 

Total stockholders’ equity of the Company was $129.6 million at March 31, 2017 and $141.1 million at December 31, 2016. Common stock decreased $0.2 million due to the issuance of stock under compensation programs and for our Employee Stock Purchase Plan. Retained earnings decreased $13.1 million as the year to date profit of $3.2 million was exceeded by the payment of $17.1 million in cash dividends on the common stock, and the Accumulated Other Comprehensive Income (AOCI) increased $1.8 million due to an increase in the value of our securities that are classified as Available For Sale. Total equity decreased $11.5 million while total assets decreased $10.7 million, so the ratio of equity to assets decreased from 10.4% at December 31, 2016 to 9.62% at March 31, 2017.

 

Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least 8% to be adequately capitalized. The regulatory agencies consider a bank to be well capitalized if its Total Risk Based Capital is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 8% of Risk Weighted Assets, and the Leverage Capital Ratio is at least 5%. The Basel III capital requirements that began to be phased in the first quarter of 2015 increased the well capitalized requirement for the Tier 1 Capital as a percent of Risk Weighted Assets from 6% to 8%. Basel III also implemented the new Common Equity Tier 1 Capital to Risk Weighted Assets ratio, with a minimum of 6.5% required to be considered well capitalized.

 

 

The following table summarizes the capital ratios of the Company and the Bank:

 

		Actual								Minimum to Qualify as Well Capitalized
		Amount				Ratio				Amount				Ratio
As of March 31, 2017:
Total Capital to Risk-Weighted Assets
Consolidated		$	140,466				16.62	%		$	84,506				10.0	%
Monroe Bank & Trust			138,625				16.40	%			84,505				10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated			131,776				15.59	%			67,605				8.0	%
Monroe Bank & Trust			129,935				15.38	%			67,604				8.0	%
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated			131,776				15.59	%			54,929				6.5	%
Monroe Bank & Trust			129,935				15.38	%			54,928				6.5	%
Tier 1 Capital to Average Assets
Consolidated			131,776				9.78	%			67,403				5.0	%
Monroe Bank & Trust			129,935				9.65	%			67,358				5.0	%

 

 

		Actual								Minimum to Qualify as Well Capitalized
		Amount				Ratio				Amount				Ratio
As of December 31, 2016:
Total Capital to Risk-Weighted Assets
Consolidated		$	153,957				18.35	%		$	83,923				10.0	%
Monroe Bank & Trust			151,936				18.12	%			83,831				10.0	%
Tier 1 Capital to Risk-Weighted Assets
Consolidated			145,144				17.30	%			67,138				8.0	%
Monroe Bank & Trust			143,123				17.07	%			67,064				8.0	%
Common Equity Tier 1 Capital to Risk-Weighted Assets
Consolidated			145,144				17.30	%			54,550				6.5	%
Monroe Bank & Trust			143,123				17.07	%			54,490				6.5	%
Tier 1 Capital to Average Assets
Consolidated			145,144				10.89	%			66,645				5.0	%
Monroe Bank & Trust			143,123				10.75	%			66,579				5.0	%

 

Market risk for the Bank, as is typical for most banks, consists mainly of interest rate risk and market price risk. The Bank’s earnings and the economic value of its equity are exposed to interest rate risk and market price risk, and monitoring this risk is the responsibility of the Asset/Liability Management Committee (ALCO) of the Bank. The Bank’s market risk is monitored quarterly and it has not changed significantly since year-end 2016.

 

Forward-Looking Statements

Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions (some of which are beyond the Company's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements, due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the Company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, changes in the financial and securities markets, including changes with respect to the market value of our financial assets, the availability of and costs associated with sources of liquidity, and the ability of the Company to resolve or dispose of problem loans.

 

The Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

The Bank faces market risk to the extent that the fair values of its financial instruments are affected by changes in interest rates. The Bank does not face market risk due to changes in foreign currency exchange rates, commodity prices, or equity prices. The asset and liability management process of the Bank seeks to monitor and manage the amount of interest rate risk. This is accomplished by analyzing the differences in repricing opportunities for assets and liabilities, by simulating operating results under varying interest rate scenarios, and by estimating the change in the net present value of the Bank’s assets and liabilities due to interest rate changes.

 

Each quarter, the Asset and Liability Committee (ALCO), which includes the senior management of the Bank and a non executive member of the board of directors, 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 increases of 100, 200, 300, and 400 basis points and decreases of 100 and 200 basis points in the interest rates. The net interest income projections are compared to a base case projection, which assumes no changes in interest rates.

 

The Bank’s ALCO has established limits in the acceptable amount of interest rate risk, as measured by the change in the Bank’s projected net interest income, in its policy. Throughout the first quarter of 2017, the Bank’s interest rate risk has remained within its policy limits.

 

The ALCO also monitors interest rate risk by estimating the effect of changes in interest rates on the economic value of the Bank’s equity each quarter. The 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 Bank estimates the interest rate risk by calculating the effect of market interest rate changes on that economic value of its equity. For this analysis, the Bank assumes immediate parallel shifts of plus 100, 200, 300, and 400 basis points and minus 100 and 200 basis points in interest rates. The discount rates used to determine the present values of the loans and deposits, as well as the prepayment rates for the loans, are based on Management’s expectations of the effect of the rate changes on the market for loans and deposits. In addition, each quarter, the Bank conducts additional analyses that utilize other rate scenarios, such as larger shifts in rates and changes in the shape of the yield curve, to assess the Bank’s exposure to interest rate risk in stress scenarios.

 

The Bank’s interest rate risk, as measured by the net interest income and economic value of equity simulations, has not changed significantly from December 31, 2016.

 

 

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2017, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2017, in alerting them in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.

 

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2017, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

Part II Other Information

 

Item 1. Legal Proceedings

MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their property the subject of any material legal proceedings other than ordinary routine litigation incidental to their respective businesses, nor are any such proceedings known to be contemplated by governmental authorities.

 

Item 1A. Risk Factors

There have been no material changes in the risk factors disclosed by the Company in its Report on Form 10-K for the fiscal year ended December 31, 2016.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company has a stock repurchase program which it publicly announced on January 28, 2016. On that date, the Board of Directors authorized the repurchase of 2 million of the Company’s common shares, which authorization commenced on February 1, 2016 and will expire on January 31, 2018. The following table summarizes the open-market and privately negotiated stock repurchase activity of the Company during the three months ended March 31, 2017:

 

 

		Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2017 - January 31, 2017			-			$	-				-				1,807,920
February 1, 2017 - Feruary 28, 2017			-			$	-				-				1,807,920
March 1, 2017 - March 31, 2017			-			$	-				-				1,807,920
Total			-			$	-				-

 

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

None.

 

 

Item 6. Exhibits

3.1

Amended and Restated Articles of Incorporation of MBT Financial Corp. Previously filed as Exhibit 3.1 to MBT Financial Corp.’s Form 10-Q for its quarter ended June 30, 2016.

 

3.2

Amended and Restated Bylaws of MBT Financial Corp. Previously filed as Exhibit 3.2 to MBT Financial Corp.’s Form 10-Q for its quarter ended March 31, 2008.

 

31.1

Certification by Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14.

 

31.2

Certification by Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14.

 

32.1

Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2

Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS      XBRL Instance Document

 

101.SCH     XBRL Taxonomy Extension Schema Document

 

101.CAL     XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF     XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB     XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE     XBRL Taxonomy Extension Presentation Linkbase Document

 

 

Signatures

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	MBT Financial Corp.
	(Registrant)
May 10, 2017	By	/s/ H. Douglas Chaffin
Date	H. Douglas Chaffin
	President & Chief Executive Officer

 

May 10, 2017	By	/s/ John L. Skibski
Date	John L. Skibski
	Executive Vice President and Chief Financial Officer

 

Exhibit Index

 

 

Exhibit Number	Description of Exhibits
31.1	Certification by Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14.
31.2	Certification by Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14.
32.1	Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

 

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