-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LEknncm85DsmOsvAx9ntam84L4q/MOr+yHx8cqcfmpVNeERU63luTHNBcMUnaEv8 3ZpfvZEDTEo+nTPxUzfQrw== 0000950124-06-001189.txt : 20060314 0000950124-06-001189.hdr.sgml : 20060314 20060314171539 ACCESSION NUMBER: 0000950124-06-001189 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060314 DATE AS OF CHANGE: 20060314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MBT FINANCIAL CORP CENTRAL INDEX KEY: 0001118237 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 383516922 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-30973 FILM NUMBER: 06685794 BUSINESS ADDRESS: STREET 1: 102 EAST FRONT STREET CITY: MONROE STATE: MI ZIP: 48161 BUSINESS PHONE: 7342422893 MAIL ADDRESS: STREET 1: 102 EAST FRONT STREET CITY: MONROE STATE: MI ZIP: 48161 10-K 1 k02497e10vk.txt ANNUAL REPORT FOR FISCAL YEAR ENDED DECEMBER 31, 2005 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2005 Commission File Number: 000-30973 MBT FINANCIAL CORP. (Exact Name of Registrant as Specified in its Charter) MICHIGAN 38-3516922 (State of Incorporation) (I.R.S. Employer Identification No.)
102 E. FRONT ST. MONROE, MICHIGAN 48161 (Address of Principal Executive Offices) (Zip Code)
(734) 241-3431 (Registrant's Telephone Number, Including Area Code) NONE (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, No Par Value Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [ ] NO [X] Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES [ ] NO [X] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-K or any of the amendments of this Form 10-K. [X] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one). Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] As of June 30, 2005, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $332.8 million based on the closing sale price as reported on the National Association of Securities Dealers Automated Quotation System National Market System. As of March 9, 2006, there were 17,074,470 shares of the registrant's common stock, no par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2006 Annual Meeting of Shareholders of MBT Financial Corp. to be held on May 4, 2006 are incorporated by reference in this Form 10-K in response to Part III, Items 10, 11, 12, 13, and 14. ================================================================================ PART I ITEM 1. BUSINESS GENERAL MBT Financial Corp. (the "Corporation") operates as a bank holding company headquartered in Monroe, Michigan. The Corporation was incorporated under the laws of the State of Michigan in January 2000, at the direction of the management of Monroe Bank & Trust (the "Bank"), for the purpose of becoming a bank holding company by acquiring all the outstanding shares of Monroe Bank & Trust. At the April 6, 2000 Annual Meeting of Shareholders of Monroe Bank & Trust, shareholders approved a proposal that resulted in the Bank merging with Monroe Interim Bank, a state chartered bank, which was a subsidiary of the Corporation. On July 1, 2000, the merger of Monroe Bank & Trust and Monroe Interim Bank was completed, with Monroe Bank & Trust becoming the wholly owned subsidiary of MBT Financial Corp. Monroe Bank & Trust was incorporated and chartered as Monroe State Savings Bank under the laws of the State of Michigan in 1905. In 1940, Monroe Bank & Trust consolidated with Dansard Bank and moved to the present address of its main office. Monroe Bank & Trust operated as a unit bank until 1950 when it opened its first branch office in Ida, Michigan. It then continued its expansion to its present total of 25 branch offices, including its main office. Monroe Bank & Trust changed its name from "Monroe State Savings Bank" to "Monroe Bank & Trust" in 1968. Monroe Bank & Trust provides customary retail and commercial banking and trust services to its customers, including checking and savings accounts, time deposits, safe deposit facilities, commercial loans, personal loans, real estate mortgage loans, installment loans, IRAs, ATM and night depository facilities, treasury management services, telephone and internet banking, personal trust, employee benefit and investment management services. Monroe Bank & Trust's service areas are comprised of Monroe and Wayne counties in Southern Michigan. Monroe Bank & Trust's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") to applicable legal limits and Monroe Bank & Trust is supervised and regulated by the FDIC and Michigan Office of Financial and Insurance Services Division of Financial Institutions. COMPETITION MBT Financial Corp., through its subsidiary, Monroe Bank & Trust, operates in a highly competitive industry. Monroe Bank & Trust's main competition comes from other commercial banks, national or state savings and loan institutions, credit unions, securities brokers, mortgage bankers, finance companies and insurance companies. Banks generally compete with other financial institutions through the banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and personal manner in which these services are offered. Monroe Bank & Trust encounters strong competition from most of the financial institutions in Monroe Bank & Trust's extended market area. The Bank's primary market area is Monroe County, Michigan. According to the most recent market data, there are ten other deposit taking/lending institutions competing in the Bank's market. According to the most recent market data for deposits, the Bank ranks first in market share in Monroe County with 60.26% of the market. In 2001, the Bank began expanding into Wayne County, Michigan, and currently ranks fifteenth out of thirty-one institutions with a market share of 0.31%. For the combined Monroe and Wayne County market, the Bank ranks sixth of thirty-four institutions with a market share of 4.01%. SUPERVISION AND REGULATION MBT Financial Corp., as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the BHC Act), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the Federal Reserve Board). The BHC Act requires the prior 2 approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank. The BHC Act allows interstate bank acquisitions anywhere in the country and interstate branching by acquisition and consolidation in those states that have not opted out by January 1, 1997. In addition, MBT Financial Corp. is generally prohibited by the BHC Act from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of managing or controlling banks or furnishing services to its subsidiaries. MBT Financial Corp. may, however, subject to the prior approval of the Federal Reserve Board, engage in, or acquire shares of companies engaged in activities which are deemed by the Federal Reserve Board by order or by regulation to be so closely related to banking or managing and controlling a bank as to be a proper activity. On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted into law. The GLB Act made sweeping changes with respect to the permissible financial services which various types of financial institutions may now provide. The Glass-Steagall Act, which had generally prevented banks from affiliation with securities and insurance firms, was repealed. Pursuant to the GLB Act, bank holding companies may elect to become a "financial holding company," provided that all of the depository institution subsidiaries of the bank holding company are "well capitalized" and "well managed" under applicable regulatory standards. Under the GLB Act, a bank holding company that has elected to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Activities that are "financial in nature" include securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board has determined to be closely related to banking. MBT Financial Corp. has not elected to become a financial holding company. MBT Financial Corp.'s banking subsidiary is subject to limitations with respect to transactions with affiliates. A substantial portion of the MBT Financial Corp.'s cash revenues is derived from dividends paid by its subsidiary bank. These dividends are subject to various legal and regulatory restrictions. MBT Financial Corp.'s banking subsidiary, Monroe Bank & Trust (the "Bank") is subject to primary supervision, regulation and examination by the Michigan Office of Financial and Insurance Services and the Federal Deposit Insurance Corporation (FDIC). Federal regulators adopted risk-based capital guidelines and leverage standards for banks and bank holding companies. A discussion of the impact of risk-based capital guidelines and leverage standards is presented in Note 14 of the MBT Financial Corp. financial statements included in Part II, Item 8 of this Form 10-K. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of any FDIC-assisted transaction involving an affiliated insured bank or savings association. Noncompliance with laws and regulations by financial holding companies and banks can lead to monetary penalties and/or an increased level of supervision or a combination of these two items. Management is not aware of any current instances of noncompliance with laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis. Recent regulatory inspections and examinations of MBT Financial Corp. and the Bank have not disclosed any significant instances of noncompliance. The minor instances of noncompliance detected during these inspections and examinations were promptly 3 corrected by management and no action was taken by the regulators against MBT Financial Corp. or the Bank. The earnings and growth of MBT Financial Corp. are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board. Its policies influence the amount of bank loans and deposits and the interest rates charged and paid thereon, and thus have an effect on earnings. The nature of future monetary policies and the effect of such policies on the future business and earnings of MBT Financial Corp. and its subsidiary bank cannot be predicted. EMPLOYEES MBT Financial Corp. has no employees other than its three officers, each of whom is also an employee and officer of Monroe Bank & Trust and who serve in their capacity as officers of MBT Financial Corp. without compensation. As of December 31, 2005, Monroe Bank & Trust had 398 full-time employees and 23 part-time employees. Monroe Bank & Trust provides a number of benefits for its full-time employees, including health and life insurance, workers' compensation, social security, paid vacations, numerous bank services, and a 401(k) plan. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION - ---- --- -------- H. Douglas Chaffin 50 President & Chief Executive Officer Donald M. Lieto 50 Executive Vice President, Senior Administration Manager, Monroe Bank & Trust James E. Morr 59 Executive Vice President, Senior Wealth Management Officer & General Counsel, Monroe Bank & Trust Thomas G. Myers 49 Executive Vice President & Chief Lending Manager, Monroe Bank & Trust John L. Skibski 41 Executive Vice President & Chief Financial Officer, Monroe Bank & Trust; Treasurer, MBT Financial Corp.
There is no family relationship between any of the Directors or Executive Officers of the registrant and there is no arrangement or understandings between any of the Directors or Executive Officers and any other person pursuant to which he was selected a Director or Executive Officer nor with any respect to the term which each will serve in the capacities stated previously. The Executive Officers of the Bank are elected to serve for a term of one year at the Board of Directors Annual Organizational Meeting, held in May. H. Douglas Chaffin was President & Chief Executive Officer in 2005 and 2004, President & Chief Operating Officer in 2003, and Executive Vice President, Senior Lending Manager in 2002 and 2001. Donald M. Lieto was Executive Vice President, Senior Administration Manager in 2005, 2004 and 2003, and Senior Vice President, Information Services Manager in 2003, 2002, and 2001. James E. Morr was Executive Vice President, Senior Wealth Management Officer and General Counsel for each of the last five years. Thomas G. Myers was Executive Vice President & Chief Lending Manager in 2005, 2004 and 2003, Senior Vice President, Commercial Group Manager in 2003 and 2002, and Corporate Banking Group Manager, Huntington National Bank, in 2001. John L. Skibski was Executive Vice President & Chief Financial Officer in 2005 and 2004, Senior Vice President & Controller in 2003, and Vice President & Controller in 2002 and 2001. 4 AVAILABLE INFORMATION MBT Financial Corp. makes its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and all amendments to those reports available on its website as soon as reasonably practicable after they are filed with or furnished to the SEC, free of charge. The website address is www.mbandt.com. ITEM 1A. RISK FACTORS An investment in the Corporation's common stock is subject to risks inherent to the Corporation's business. The material risks and uncertainties that Management believes affect the Corporation are described below. Before making an investment decision, investors should carefully consider the risks and uncertainties described below together with all the other information included or incorporated by reference in this report. The risks and uncertainties described below are not the only ones facing the Corporation. Additional risks and uncertainties that Management is not aware of or focused on or that Management currently deems immaterial may also impair the Corporation's business operations. This report is qualified in its entirety by these risk factors. If any of the following risks actually occur, the Corporation's financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of the Corporation's common stock could decline significantly, and investors would lose all or part of their investment. RISKS RELATED TO THE CORPORATION'S BUSINESS INTEREST RATE RISK - The Corporation's earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest earned on interest earning assets such as loans and securities and interest paid on interest bearing liabilities such as deposits and borrowings. Interest rates are highly sensitive to many factors that are beyond the Corporation's control, including general economic and market conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest the Corporation receives on loans and investment securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect the Corporation's ability to originate loans and obtain deposits and the fair values of the Corporation's financial assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate or decrease at a slower rate than the interest rates received on loans and investments, the Corporation's net interest income, and therefore earnings, could be adversely affected. Although Management believes it has implemented effective asset and liability management strategies to reduce the potential effects of changes in interest rates on the Corporation's results of operations, any substantial, unexpected, or prolonged change in market interest rates or in the term structure of interest rates could have a material adverse effect on the Corporation's financial condition and results of operations. See Item 7A. Quantitative and Qualitative Disclosures about Market Risk in this report for further discussion related to the Corporation's management of interest rate risk. LENDING RISK - There are inherent risks associated with the Corporation's lending activities. These risks include, among other things, the impact of changes in interest rates and changes in economic conditions in the markets where the Corporation operates as well as those across the State of Michigan and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Corporation is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Corporation to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Corporation. As of December 31, 2005, approximately 80% of the Corporation's loan portfolio was secured by real estate. These types of loans are generally viewed as lower risk of default than commercial and industrial or consumer loans. The Corporation's loan portfolio contains a significant amount of non-performing loans. 5 The Corporation's portfolio also contains some loans with relatively large balances, and the deterioration of one or a few of these large loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for loan losses, and an increase in loan charge-offs, all of which could have a material adverse effect on the Corporation's financial condition and results of operations. The Corporation maintains an Allowance for Loan Losses, which is a reserve established through a provision for loan losses charged to expense, that represents Management's best estimate of probable loan losses that have been incurred within the existing portfolio of loans. The Allowance, in the judgment of Management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the Allowance reflects Management's continuing evaluation of loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the Allowance inherently involves a high degree of subjectivity and requires the Corporation to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans, and other factors, both within and outside of the Corporation's control, may require an increase in the Allowance. In addition, bank regulatory agencies periodically review the Corporation's Allowance and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different from those of Management. ECONOMIC RISK - The Corporation's success depends significantly on the general economic conditions of the State of Michigan. Unlike larger regional or national banks that are more geographically diversified, the Corporation provides banking and financial services to customers primarily in Southeast Michigan and Northwest Ohio. The local economic conditions in these areas have a significant impact on the demand for the Corporation's products and services as well as the ability of the Corporation's customers to repay loans, the value of the collateral securing loans, and the stability of the Corporation's deposit funding sources. A significant decline in general economic conditions caused by inflation, recession, acts of terrorism, unemployment, changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on the Corporation's financial condition and results of operations. COMPETITIVE RISK - The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. Such competitors primarily include regional and national banks within the Corporation's market. The Corporation also faces competition from many other types of financial institutions, including savings and loan institutions, credit unions, finance companies, brokerage firms, insurance companies, and other financial intermediaries. The financial services industry could become even more competitive as a result of legislative, regulatory, and technological changes and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, and insurance. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of the Corporation's competitors have fewer regulatory constraints, and may have lower cost structures. Additionally, many competitors may be able to achieve economies of scale, and as a result, may offer a broader range of products and services as well as better pricing for those products and services than the Corporation can. Increased competition could adversely affect the Corporation's growth and profitability, which, in turn, could have a material adverse effect on the Corporation's financial condition and results of operations. REGULATORY RISK - The Corporation is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors' funds, federal deposit insurance funds, and the banking system as a whole, not shareholders. These regulations affect the Corporation's lending 6 practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Corporation in substantial and unpredictable ways. Such changes could subject the Corporation to additional costs, limit the types of financial services and products the Corporation may offer and/or increase the ability of non-banks to offer competing financial products and services, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on the Corporation's business, financial condition, and results of operations. While the Corporation has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. FAILURE OR CIRCUMVENTION OF CONTROLS AND PROCEDURES - Management regularly reviews and updates the Corporation's internal controls, disclosure controls, and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Corporation's controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Corporation's business, results of operations, and financial condition. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES MBT Financial Corp. does not conduct any business other than its ownership of Monroe Bank & Trust's stock. MBT Financial Corp. operates its business from Monroe Bank & Trust's main office facility. Monroe Bank & Trust operates its business from its main office complex and 24 full service branches in the counties of Monroe and Wayne, Michigan. In addition, MBT Credit Company, Inc., a wholly owned subsidiary of Monroe Bank & Trust, operates a mortgage loan origination office in Monroe, Michigan. The Bank owns its main office complex and 22 of its branches. The remaining two branches and the MBT Credit Company, Inc. locations are leased. ITEM 3. LEGAL PROCEEDINGS MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their property the subject of any material pending legal proceedings other than ordinary routine litigation incidental to their respective businesses, nor are any such proceedings known to be contemplated by governmental authorities. MBT Financial Corp. and its subsidiaries have not been required to pay a penalty to the IRS for failing to make disclosures required with respect to certain transactions that have been identified by the IRS as abusive or that have a significant tax avoidance purpose. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to the vote of holders of MBT Financial Corp. securities during the fourth quarter of 2005. 7 Part II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED SECURITY HOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Common stock consists of 17,197,116 shares with a book value of $8.82. Dividends declared on common stock during 2005 amounted to $.66 per share. The common stock is traded on the NASDAQ National Market under the symbol MBTF. Below is a schedule of the high and low trading price for the past two years by quarter. These prices represent those known to Management, but do not necessarily represent all transactions that occurred.
2005 2004 --------------- --------------- HIGH LOW HIGH LOW ------ ------ ------ ------ 1st quarter $23.80 $18.25 $17.90 $16.59 2nd quarter $20.50 $17.82 $19.01 $16.85 3rd quarter $21.95 $17.64 $20.60 $17.24 4th quarter $19.10 $16.03 $26.00 $19.25
Dividends declared during the past three years on a quarterly basis were as follows:
2005 2004 2003 ----- ----- ----- 1st quarter $0.16 $0.15 $0.14 2nd quarter $0.16 $0.15 $0.14 3rd quarter $0.17 $0.16 $0.15 4th quarter $0.17 $0.16 $0.15
As of December 31, 2005, the number of holders of record of the Corporation's common shares was 1,301. Management's present expectation is that dividends will continue to be paid in the future. The following table summarizes the repurchase activity of the Corporation's common stock during the three months ended December 31, 2005:
Total Number of Maximum Number of Shares Purchased as Shares that May Yet Part of Publicly Be Purchased Under Total Number of Average Price Announced Plans or the Plans or Shares Purchased Paid per Share Programs Programs ---------------- -------------- -------------------- ------------------- October 1, 2005 - October 31, 2005 20,000 $18.05 20,000 1,704,900 November 1, 2005 - November 30, 2005 65,320 $18.37 65,320 1,639,580 December 1, 2005 - December 31, 2005 4,000 $17.18 4,000 1,635,580 ------ ------ ------ Total 89,320 $18.25 89,320 ------ ------ ------
8 ITEM 6. SELECTED FINANCIAL DATA The selected financial data for the five years ended December 31, 2005 are derived from the audited Consolidated Financial Statements of the Corporation. The financial data set forth below contains only a portion of our financial statements and should be read in conjunction with the Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Form 10-K. SELECTED CONSOLIDATED FINANCIAL DATA
Dollar amounts are in thousands, except per share data 2005 2004 2003 2002 2001 ----------- ----------- ----------- ----------- ----------- CONSOLIDATED STATEMENTS OF INCOME Interest Income $ 89,695 $ 79,703 $ 77,774 $ 84,604 $ 101,324 Interest Expense 38,583 26,998 27,467 34,387 49,535 ----------- ----------- ----------- ----------- ----------- Net Interest Income 51,112 52,705 50,307 50,217 51,789 Provision for Loan Losses 6,906 2,491 8,005 6,101 7,400 ----------- ----------- ----------- ----------- ----------- Net Interest Income after Provision for Loan Losses 44,206 50,214 42,302 44,116 44,389 Other Income 14,449 13,776 13,803 12,791 10,651 Other Expenses 33,818 32,616 30,179 26,989 24,810 ----------- ----------- ----------- ----------- ----------- Income before Provision for Income Taxes 24,837 31,374 25,926 29,918 30,230 Provision for Income Taxes 6,858 8,775 6,611 8,114 8,307 ----------- ----------- ----------- ----------- ----------- Net Income $ 17,979 $ 22,599 $ 19,315 $ 21,804 $ 21,923 =========== =========== =========== =========== =========== Net Income available to Common Shareholders $ 17,979 $ 22,599 $ 19,315 $ 21,804 $ 21,923 =========== =========== =========== =========== =========== PER COMMON SHARE Basic Net Income $ 1.04 $ 1.30 $ 1.02 $ 1.12 $ 1.10 Diluted Net Income 1.03 1.29 1.01 1.12 1.10 Cash Dividends Declared 0.66 0.62 0.58 0.54 0.50 Book Value at Year End 8.82 8.89 8.20 8.72 8.19 Average Common Shares Outstanding 17,334,376 17,444,165 19,026,369 19,458,737 19,933,580 =========== =========== =========== =========== =========== CONSOLIDATED BALANCE SHEETS (YEAR END) Total Assets $ 1,638,356 $ 1,552,279 $ 1,457,788 $ 1,409,694 $ 1,394,168 Total Securities 533,709 505,441 508,482 539,737 497,501 Loans, Net of Deferred Loan Fees 989,311 945,881 863,850 773,805 787,825 Allowance for Loan Losses 13,625 13,800 14,500 12,400 13,000 Deposits 1,184,710 1,100,711 1,039,117 1,010,960 998,880 Borrowings 291,500 286,500 270,000 225,000 225,000 Total Shareholders' Equity 151,619 155,346 143,446 166,999 161,730 =========== =========== =========== =========== =========== SELECTED FINANCIAL RATIOS Return on Average Assets 1.13% 1.55% 1.33% 1.55% 1.56% Return on Average Equity 11.57% 15.18% 11.39% 13.29% 13.70% Net Interest Margin 3.42% 3.75% 3.67% 3.79% 3.88% Dividend Payout Ratio 63.52% 47.88% 56.14% 47.99% 45.40% Allowance for Loan Losses to Period End Loans 1.38% 1.69% 1.68% 1.60% 1.65% Allowance for Loan Losses to Non Performing Loans 51.49% 34.57% 30.41% 27.93% 46.90% Non Performing Loans to Period End Loans 2.67% 4.22% 5.50% 5.74% 3.52% Net Charge Offs to Average Loans 0.71% 0.35% 0.72% 0.87% 0.59% =========== =========== =========== =========== ===========
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained herein are not based on historical facts and are "forward-looking statements" within the meaning of Section 21A of the Securities Exchange Act of 1934. Forward-looking statements which are based on various assumptions (some of which are beyond the Corporation's control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology, such as "may," "will," "believe," "expect," "estimate," "anticipate," "continue," or similar terms or variations on those terms, or the negative of these terms. Actual results could differ materially from those set forth in forward-looking statements, due to a variety of factors, including, but not limited to, those related to the economic environment, particularly in the market areas in which the company operates, competitive products and pricing, fiscal and monetary policies of the U.S. Government, changes in government regulations affecting financial institutions, including regulatory fees and capital requirements, changes in prevailing interest rates, acquisitions and the integration of acquired businesses, credit risk management, asset/liability management, the financial and securities markets and the availability of and costs associated with sources of liquidity. CRITICAL ACCOUNTING POLICIES - The Bank's Allowance for Loan Losses is a "critical accounting estimate" because it is an estimate that is based on assumptions that are highly uncertain, and if different assumptions were used or if any of the assumptions used were to change, there could be a material impact on the presentation of the Corporation's financial condition. These assumptions include, but are not limited to, collateral values and the effect of economic conditions on the financial condition of the borrowers. To determine the Allowance for Loan Losses, the Bank estimates losses on all loans that are not classified as non-accrual or renegotiated by applying historical loss rates to those loans in accordance with SFAS 5. In addition, all loans that are nonaccrual or renegotiated are individually tested for impairment. Any amount of monetary impairment is included in the Allowance for Loan Losses in accordance with SFAS 114. Management is of the opinion that the Allowance for Loan Losses of $13,625,000 as of December 31, 2005 was adequate. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of fair value or the loan carrying amount at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by Management and the assets are carried at the lower of carrying amount or fair value less cost to sell. RESULTS OF OPERATIONS - Net Income decreased 20.4% in 2005 from $22.6 million to $18.0 million as the Bank recorded significant increases in the Provision for Loan Losses and in Other Real Estate Owned losses and expenses. The Provision for Loan Losses increased $4,415,000 as net charge offs increased $3,615,000 and losses on the sales and write downs of Other Real Estate Owned increased $845,000. Although credit related charges to earnings increased $5.3 million compared to 2004, non-performing assets decreased $13.5 million during 2005. The Fed continued to raise managed interest rates in 2005 and the yield curve flattened, contributing to the decrease of 3.0% in the Net Interest Income. Although the Bank manages its assets and liabilities to minimize risk to earnings caused by changes in interest rates, the change in the shape of the yield curve had a negative impact on earnings. The pricing of assets such as investment securities and fixed rate loans is influenced by the long end of the yield curve while the pricing of liabilities such as Money Market Deposits, Certificates of Deposit, and variable rate borrowings is influenced by the short end of the yield curve. During 2005, the yield on earning assets increased from 5.68% to 6.00% and interest income increased $9,992,000, or 12.5%. The cost of earning assets increased from 1.93% to 2.58% and interest expense increased $11,585,000, or 42.9%. The result was a decrease in the Net Interest Margin from 3.75% to 3.42% and a decrease of $1,593,000 in Net Interest Income. Non interest income increased 4.9%, or $673,000 in 2005 due to improvements in Wealth Management income and Other Deposit Account Related Fees, which includes fees assessed for overdrawn checking accounts. Non interest expenses increased only 3.7%, from $32.6 million in 2004 to $33.8 million in 2005. Salaries and benefits increased only 0.8%, or $139,000 due to a reduction of $611,000 in the bonus 10 compensation. The profit goal was not accomplished in 2005 and bonuses were not paid to the executive officers. The tables below show the details for the non interest income and expenses for the years ended December 31, 2005, 2004, and 2003 (000s omitted):
Years Ended December 31, --------------------------- Non Interest Income 2005 2004 2003 - ------------------- ------- ------- ------- Wealth Management Income $ 4,244 $ 3,746 $ 3,316 Deposit Account Service Charges 1,187 1,515 1,573 Other Deposit Account Related Fees 4,646 3,961 3,736 Origination Fees/Gains on Loans Sold 666 579 1,068 Gains (Losses) on Securities Transactions 295 567 1,041 BOLI Earnings 1,100 1,371 1,305 Other Income 2,311 2,037 1,764 ------- ------- ------- Total Non Interest Income $14,449 $13,776 $13,803 ======= ======= =======
Years Ended December 31, --------------------------- Non Interest Expenses 2005 2004 2003 - --------------------- ------- ------- ------- Salaries and Employee Benefits $18,248 $18,109 $16,122 Occupancy 3,320 3,029 2,696 Equipment and Software 3,011 2,950 2,753 Marketing 1,213 1,205 1,104 Legal, Accounting and Other Professional fees 1,445 1,971 1,833 OREO Losses and Expenses 1,780 882 1,133 Other Expenses 4,801 4,470 4,538 ------- ------- ------- Total Non Interest Expenses $33,818 $32,616 $30,179 ======= ======= =======
Income Before the Provision for Income taxes decreased $6.5 million, or 20.8% in 2005. The effective tax rate decreased from 28.0% in 2004 to 27.6% in 2005. The decrease in Income Before Taxes and the decrease in the effective tax rate resulted in a decrease of $1.9 million or 21.8% in the Provision for Income Taxes. Net Income decreased $4.6 million, or 20.4% to $18.0 million. Net Income increased 17.0% in 2004 to $22.6 million as the economy continued to gain strength and the Fed began to raise managed interest rates. Net Interest Income increased $2.4 million as the average earning assets increased $37.6 million and the net interest margin increased from 3.67% to 3.75%. During 2004, Net Loans increased $83.4 million, or 9.8%, and Deposits increased $61.6 million, or 5.9%. The Bank also increased its longer term Federal Home Loan Bank borrowings and Repurchase Agreements while reducing its overnight federal funds borrowed. The most significant improvement in the earnings was due to the decrease of $5.5 million, or 68.9%, in the Provision for Loan Losses. This decrease was due to the exceptionally large provision recorded in 2003. Non Interest Income decreased slightly in 2004 as securities gains and mortgage origination fees both declined as rates began to rise. Excluding these two items, non interest income increased $937,000, or 8%, compared to 2003. Non Interest Expenses increased $2.4 million, or 8.1%, primarily due to increases in compensation and occupancy expenses related to the Bank's expansion efforts into the Downriver area of southern Wayne County. As a result of the above, Income Before the Provision for Income Taxes increased $5.4 million, or 21.0% in 2004. The percentage of the Bank's income that is generated by tax exempt securities and Bank Owned Life Insurance decreased in 2004, causing the effective tax rate to increase from 25.5% in 2003 to 28.0%. The increase in Income Before Taxes and the increase in the effective tax rate resulted in an increase of $2.2 million or 32.7%, in the Provision for Income Taxes. Net Income increased $3.3 million, or 17%, to $22.6 million. In 2003, the deterioration of some large credit relationships led to a $5.5 million addition to the Allowance for Loan Losses. This caused Net Income to decrease $2.5 million, or 11%, compared to 2002. Although average earning assets increased $44.2 million, the net interest margin decreased ten basis points. As a result, the net interest income increased only $90,000. Equity markets began to recover late in 2003, but the low market values for most of the year caused our income from trust services to decline $181,000, or 5%. We were able to increase our deposit account service charges in 2003. While remaining one of the lowest cost providers of deposit services in our market, our fee income increased by $787,000, or 17%. In 2003, we increased our investment in Bank Owned Life Insurance resulting in an increase of $508,000, or 11 64% in the earnings on these policies. Total non interest income increased $1,012,000, or 8%. Non-interest expenses increased as we continued our expansion into the southern Wayne County market. During 2003 we opened two full service branches and we increased our total staffing from 375 to 389. These changes contributed to the increase of $3.2 million, or 12% in our non interest expenses. Income before Provision for Income Taxes decreased $4.0 million, or 13%, compared to 2002. The lower amount of income resulted in a decrease of $1.5 million, or 19%, in our Provision for Income Taxes. The effective tax rate decreased from 27.1% in 2002 to 25.5% in 2003. Earnings for the Bank are usually highly reflective of the Net Interest Income. The Federal Open Market Committee (FOMC) of the Federal Reserve raised the fed funds target rate at each of their eight meetings in 2005, from 2.25% to 4.25%. At the same time, the yield on the ten-year U. S. Treasury Note only increased from 4.22% to 4.39%. This flattening of the yield curve had a negative impact on the Bank's Net Interest Margin, which declined from 3.75% in 2004 to 3.42% in 2005. Loan and investment yields more closely follow long term market yields, and the yield on our loans increased from 6.30% in 2004 to 6.71% in 2005. The yields on our investment securities increased from 4.51% in 2004 to 4.72% in 2005. Funding costs are more closely tied to the short term rates, and the average cost of our deposits increased from 1.42% in 2004 to 2.08% in 2005 and our average cost of borrowed funds increased from 4.19% in 2004 to 5.05% in 2005. As a result, the net interest income decreased 3.0% in 2005. In 2004, the FOMC raised the fed funds rate for the first time since 2000 as the economic recovery continued. During the year, the fed funds target rate was increased five times, from 1.00% to 2.25%. In spite of these increases, rates on new and renewing loans were still below the average rates in the loan portfolio. As a result, the average yield on loans decreased from 6.73% to 6.30%. Investment yields did improve slightly and the cost of funds decreased, resulting in an increase in the net interest margin and net interest income. In 2003, rates remained low, with the Fed lowering the managed rates 25 basis points in June. This caused refinance activity to continue, and the Bank's yield on loans declined from 7.70% to 6.73%. Market rates also were low, and the investment yield dropped from 4.74% to 4.18% in 2003. During the year, the Bank restructured its portfolio of Federal Home Loan Bank advances, converting $95 million, or 42% of its portfolio, from fixed rate to floating rate. This lowered the cost of these borrowings from 5.72% in 2002 to 5.05% in 2003. The average cost of interest bearing deposits was 3.03%, 2.42%, and 1.65% for 2005, 2004, and 2003, respectively. The table below shows selected financial ratios for the same three years.
2005 2004 2003 ------ ----- ----- Return on Average Assets 1.13% 1.55% 1.33% Return on Average Equity 11.57% 15.18% 11.39% Dividend Payout Ratio 63.52% 47.88% 56.14% Average Equity to Average Assets 9.76% 10.02% 11.71%
LIQUIDITY AND CAPITAL - The Corporation has maintained sufficient liquidity to fund its loan growth and allow for fluctuations in deposit levels. Internal sources of liquidity are provided by the maturities of loans and securities as well as holdings of securities Available for Sale. External sources of liquidity include a line of credit with the Federal Home Loan Bank of Indianapolis, the Federal funds lines that have been established with correspondent banks, and Repurchase Agreements with money center banks that allow us to pledge securities as collateral for borrowings. As of December 31, 2005, the Bank utilized $256.5 million of its authorized limit of $275 million with the Federal Home Loan Bank of Indianapolis and none of its $110 million of federal funds lines with its correspondent banks. Total stockholders' equity of the Corporation was $151.6 million at December 31, 2005 and $155.3 million at December 31, 2004. The ratio of equity to assets was 9.3% at December 31, 2005 and 10.0% at December 31, 2004. Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least 8% to be adequately capitalized. The regulatory agencies consider a bank to be well capitalized if its Total Risk Based Capital is 12 at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, and Leverage Capital Ratio is at least 5%. The following table summarizes the capital ratios of the Corporation:
Minimum to be Well December 31, 2005 December 31, 2004 Capitalized ----------------- ----------------- ------------------ Leverage Capital 9.6% 10.0% 5.0% Tier 1 Risk Based Capital 13.7% 14.3% 6.0% Total Risk Based Capital 15.0% 15.6% 10.0%
At December 31, 2005 and December 31, 2004, the Bank was in compliance with the capital guidelines and is considered "well-capitalized" under regulatory standards. Market risk for the Bank, as is typical for most banks, consists mainly of interest rate risk and market price risk. The Bank's earnings and the economic value of its equity are exposed to interest rate risk and market price risk, and monitoring this risk is the responsibility of the Asset/Liability Management Committee (ALCO) of the Bank. The Bank's market risk is monitored monthly by the ALCO. The following table shows the investment portfolio for the last three years (000s omitted).
Held to Maturity --------------------------------------------------------------------- December 31, 2005 December 31, 2004 December 31, 2003 --------------------- --------------------- --------------------- Estimated Estimated Estimated Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- --------- --------- --------- --------- --------- U.S. Government agency and corporation obligations ..................................... $ 11 $ 12 $ 527 $ 578 $ 536 $ 590 Securities issued by states and political subdivisions in the U.S. ........................ 76,456 77,293 80,622 82,636 95,634 99,234 Other domestic securities (debt and equity) ........ -- -- 2,992 3,074 2,984 3,116 ------- ------- ------- ------- ------- -------- Total .............................................. $76,467 $77,305 $84,141 $86,288 $99,154 $102,940 ======= ======= ======= ======= ======= ======== Pledged securities ................................. $13,863 $14,125 $19,659 $20,373 $23,903 $ 25,175 ======= ======= ======= ======= ======= ========
Available for Sale --------------------------------------------------------------------- December 31, 2005 December 31, 2004 December 31, 2003 --------------------- --------------------- --------------------- Estimated Estimated Estimated Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- --------- --------- --------- --------- --------- U.S. Government agency and corporation obligations (excluding mortgage-backed securities) .......... $358,412 $351,074 $315,410 $314,381 $315,004 $311,944 Securities issued by states and political subdivisions in the U.S. ........................ 26,206 26,081 28,635 29,187 26,047 26,473 Other domestic securities (debt and equity) ........ 67,098 66,866 64,472 64,785 57,876 59,225 -------- -------- -------- -------- -------- -------- Total .............................................. $451,716 $444,021 $408,517 $408,353 $398,927 $397,642 ======== ======== ======== ======== ======== ======== Pledged securities ................................. $316,379 $309,552 $304,004 $303,300 $285,427 $283,103 ======== ======== ======== ======== ======== ========
The following table shows average daily balances, interest income or expense amounts, and the resulting average rates for interest earning assets and interest bearing liabilities for the last three years. Also shown are the net interest income, total interest rate spread, and the net interest margin for the same periods. 13
Years Ended December 31, ------------------------------------------------------------------------------------------- 2005 2004 2003 ----------------------------- ----------------------------- ----------------------------- Average Interest Average Interest Average Interest Daily Earned Average Daily Earned Average Daily Earned Average (Dollars in Thousands) Balance or Paid Yield Balance or Paid Yield Balance or Paid Yield ---------- -------- ------- ---------- -------- ------- ---------- -------- ------- Investments Obligations of US Government Agencies $ 343,348 $15,878 4.62% $ 303,121 $ 13,090 4.32% $ 326,442 $12,429 3.81% Obligations of States & Political Subdivisions(1) 105,373 5,036 4.78% 115,590 5,614 4.86% 123,489 6,206 5.03% Other Securities 75,602 3,986 5.27% 69,538 3,330 4.79% 84,725 3,737 4.41% ---------- ------- ---- ---------- -------- ------- ---------- ------- ---- Total Investments 524,323 24,900 4.75% 488,249 22,034 4.51% 534,656 22,372 4.18% ---------- ------- ---- ---------- -------- ------- ---------- ------- ---- Loans Commercial 621,365 41,971 6.75% 600,551 36,364 6.06% 549,558 34,671 6.31% Mortgage 213,645 12,946 6.06% 194,072 12,217 6.30% 166,665 11,829 7.10% Consumer 127,046 9,661 7.60% 120,327 9,079 7.55% 104,971 8,754 8.34% ---------- ------- ---- ---------- -------- ------- ---------- ------- ---- Total Loans(2) 962,056 64,578 6.71% 914,950 57,660 6.30% 821,194 55,254 6.73% Federal Funds Sold 7,687 217 2.82% 538 9 1.67% 13,894 148 1.07% ---------- ------- ---- ---------- -------- ------- ---------- ------- ---- Total Interest Earning Assets 1,494,066 89,695 6.00% 1,403,737 79,703 5.68% 1,369,744 77,774 5.68% Cash & Due From Banks 24,839 25,230 25,277 Interest Receivable and Other Assets 71,724 64,256 60,631 ---------- ---------- ---------- Total Assets $1,590,629 $1,493,223 $1,455,652 ========== ========== ========== Savings Accounts $ 119,437 $ 298 0.25% $ 129,075 $ 325 0.25% $ 132,780 $ 560 0.42% NOW Accounts 66,900 169 0.25% 69,072 172 0.25% 67,290 281 0.42% Money Market Deposits 294,070 5,561 1.89% 329,480 2,611 0.79% 372,177 4,219 1.13% Certificates of Deposit 494,974 17,551 3.55% 378,959 11,815 3.12% 348,847 10,932 3.13% Federal Funds Purchased 8,613 287 3.33% 32,894 491 1.49% 9,136 120 1.31% Repurchase Agreements 32,164 1,055 3.28% 13,525 422 3.12% 0 FHLB Advances 256,500 13,662 5.33% 242,104 11,162 4.61% 225,000 11,355 5.05% ---------- ------- ---- ---------- -------- ------- ---------- ------- ---- Total Interest Bearing Liabilities 1,272,658 38,583 3.03% 1,195,109 26,998 2.26% 1,155,230 27,467 2.38% Non-interest Bearing Deposits 156,289 143,759 126,874 Other Liabilities 6,313 5,438 3,971 ---------- ---------- ---------- Total Liabilities 1,435,260 1,344,306 1,286,075 Stockholders' Equity 155,369 148,917 169,577 ---------- ---------- ---------- Total Liabilities & Stockholders' Equity $1,590,629 $1,493,223 $1,455,652 ========== ========== ========== Net Interest Income $51,112 $ 52,705 $50,307 Interest Rate Spread 2.97% 3.42% 3.30% Net Interest Income as a percent of average earning assets 3.42% 3.75% 3.67%
- ---------- (1) Interest income on Obligations of States and Political Subdivisions is not on a taxable equivalent basis. (2) Total Loans excludes Overdraft Loans, which are non-interest earning. These loans are included in Other Assets. Total Loans includes nonaccrual loans. When a loan is placed in nonaccrual status, all accrued and unpaid interest is charged against interest income. Loans on nonaccrual status do not earn any interest. The following table summarizes the changes in interest income and interest expense attributable to changes in interest rates and changes in the volume of interest earning assets and interest bearing liabilities for the period indicated: 14
Years Ended December 31, --------------------------------------------------------------------------------------- 2005 versus 2004 2004 versus 2003 2003 versus 2002 Changes due to Changes due to Changes due to increased (decreased) increased (decreased) increased (decreased) -------------------------- --------------------------- ---------------------------- (Dollars in Thousands) Rate Volume Net Rate Volume Net Rate Volume Net ------- ------ ------- ------- ------- ------- -------- ------- ------- Interest Income Investments Obligations of US Government Agencies $ 1,051 $1,737 $ 2,788 $ 1,549 $ (888) $ 661 $ (2,403) $ 1,727 $ (676) Obligations of States & Political Subdivisions (81) (497) (578) (195) (397) (592) (195) (340) (535) Other Securities 366 290 656 262 (670) (408) (287) (1,004) (1,291) ------- ------ ------- ------- ------- ------- -------- ------- ------- Total Investments 1,336 1,530 2,866 1,616 (1,955) (339) (2,885) 383 (2,502) ------- ------ ------- ------- ------- ------- -------- ------- ------- Loans Commercial 4,346 1,261 5,607 (1,525) 3,217 1,692 (4,715) 4,304 (411) Mortgage (503) 1,232 729 (1,556) 1,945 389 (1,993) 489 (1,504) Consumer 75 507 582 (955) 1,280 325 (822) (1,191) (2,013) ------- ------ ------- ------- ------- ------- -------- ------- ------- Total Loans 3,918 3,000 6,918 (4,036) 6,442 2,406 (7,530) 3,602 (3,928) Federal Funds Sold 88 120 208 3 (142) (139) (84) (318) (402) ------- ------ ------- ------- ------- ------- -------- ------- ------- Total Interest Income 5,342 4,650 9,992 (2,417) 4,345 1,928 (10,499) 3,667 (6,832) Interest Expense Savings Accounts (3) (24) (27) (219) (16) (235) (1,021) 59 (962) NOW Accounts 3 (6) (3) (116) 7 (109) (479) 7 (472) Money Market Deposits 3,230 (280) 2,950 (1,124) (484) (1,608) (2,045) 603 (1,442) Certificates of Deposit 2,119 3,617 5,736 (61) 944 883 (2,226) (377) (2,603) Federal Funds Purchased 159 (363) (204) 57 313 370 (48) 130 82 Repurchase agreements 51 582 633 422 0 422 0 0 0 FHLB Advances 1,836 664 2,500 (1,056) 863 (193) (1,525) 0 (1,525) ------- ------ ------- ------- ------- ------- -------- ------- ------- Total Interest Expense 7,395 4,190 11,585 (2,097) 1,627 (470) (7,344) 422 (6,922) ------- ------ ------- ------- ------- ------- -------- ------- ------- Net Interest Income $(2,053) $ 460 $(1,593) $ (320) $ 2,718 $ 2,398 $ (3,155) $ 3,245 $ 90 ======= ====== ======= ======= ======= ======= ======== ======= =======
Due to a variety of reasons, including volatile interest rates in the past and successful bidding in securing local municipal deposits, we have attempted, for the last several years, to maintain a liquid investment position. The percentage of securities held as Available for Sale increased from 83% as of December 31, 2004 to 85% as of December 31, 2005. As reflected in Note 3 to the consolidated financial statements, the percentage of securities that mature within five years was 17% as of December 31, 2005 and 12% as of December 31, 2004. The table below presents the scheduled maturities for each of the investment categories, and the average yield on the amounts maturing. The yields presented for the Obligations of States and Political Subdivisions are not tax equivalent yields. The interest income on these securities is exempt from federal income tax. The Corporation's statutory federal income tax rate is thirty-five percent.
Maturing --------------------------------------------------------------------------------- Within 1 year 1 - 5 years 5 - 10 Years Over 10 Years Total -------------- -------------- --------------- --------------- --------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ------- ----- ------- ----- -------- ----- -------- ----- -------- ----- (Dollars in Thousands) Obligations of US Government Agencies $ -- 0.00% $35,803 4.22% $206,783 4.59% $108,498 5.12% $351,084 4.72% Obligations of States & Political Subdivisions 11,372 4.46% 38,017 5.07% 39,880 4.48% 13,270 4.58% 102,539 4.71% Other Securities -- 0.00% 2,863 7.05% 2,499 7.10% 61,503 5.99% 66,865 6.08% ------- ---- ------- ---- -------- ---- -------- ---- -------- ---- Total $11,372 4.46% $76,683 4.75% $249,162 4.60% $183,271 5.37% $520,488 4.89% ======= ==== ======= ==== ======== ==== ======== ==== ======== ====
15 Our loan policies also reflect our awareness of the need for liquidity. We have shortened the average terms for most of our loan portfolios, in particular real estate mortgages, the majority of which are normally written for five years or less. The following table shows the maturities or repricing opportunities (whichever is earlier) for the Bank's interest earning assets and interest bearing liabilities at December 31, 2005. The repricing assumptions shown are consistent with those established by the Bank's Asset and Liability Management Committee (ALCO). Savings accounts and interest bearing demand deposit accounts are non-maturing, variable rate deposits, which may reprice as often as daily, but are not included in the zero to six month category because in actual practice, these deposits are only repriced if there is a large change in market interest rates. The effect of including these accounts in the zero to six-month category is depicted in a subsequent table. Money Market deposits are also non-maturing, variable rate deposits, however, these accounts are included in the zero to six-month category because they may get repriced following smaller changes in market rates.
Assets/Liabilities at December 31, 2005, Maturing or Repricing in: ------------------------------------------------------------------ 0-6 6-12 1-2 2-5 Over 5 Total (Dollars in Thousands) Months Months Years Years Years Amount --------- ------- --------- -------- -------- ---------- Interest Earning Assets US Treas Secs & Obligations of US Gov't Agencies $277,180 $ 7,742 $ 17,871 $ 35,161 $ 20,557 $ 358,511 Obligations of States & Political Subdivisions 23,650 14,643 10,268 25,673 28,021 102,255 Other Securities 40,000 -- 3,000 14,000 7,423 64,423 Commercial Loans 246,186 24,321 67,958 280,785 3,833 623,083 Mortgage Loans 6,165 7,650 27,535 141,674 37,484 220,508 Consumer Loans 29,621 10,496 19,570 39,842 22,107 121,636 Federal Funds Sold 5,000 -- -- -- -- 5,000 -------- ------- --------- -------- -------- ---------- Total Interest Earning Assets $627,802 $64,852 $ 146,202 $537,135 $119,425 $1,495,416 ======== ======= ========= ======== ======== ========== Interest Bearing Liabilities Savings Deposits $278,957 $ -- $ -- $ -- $ -- $ 278,957 Other Time Deposits 184,107 36,592 183,140 109,141 7,233 520,213 FHLB Advances 123,000 -- -- 130,000 3,500 256,500 Repurchase Agreements 20,000 -- 5,000 10,000 -- 35,000 -------- ------- --------- -------- -------- ---------- Total Interest Bearing Liabilities $606,064 $36,592 $ 188,140 $249,141 $ 10,733 $1,090,670 ======== ======= ========= ======== ======== ========== Gap $ 21,738 $28,260 $ (41,938) $287,994 $108,692 $ 404,746 Cumulative Gap $ 21,738 $49,998 $ 8,060 $296,054 $404,746 $ 404,746 Sensitivity Ratio 1.04 1.77 0.78 2.16 11.13 1.37 Cumulative Sensitivity Ratio 1.04 1.08 1.01 1.27 1.37 1.37
If savings and interest bearing demand deposit accounts were included in the zero to six months category, the Bank's gap would be as shown in the following table:
Assets/Liabilities at December 31, 2005, Maturing or Repricing in: -------------------------------------------------------------------- 0-6 6-12 1-2 2-5 Over 5 Months Months Years Years Years Total --------- --------- --------- -------- -------- ---------- Total Interest Earning Assets $ 627,802 $ 64,852 $ 146,202 $537,135 $119,425 $1,495,416 Total Interest Bearing Liabilities $ 783,608 $ 36,592 $ 188,140 $249,141 $ 10,733 $1,268,214 --------- --------- --------- -------- -------- ---------- Gap $(155,806) $ 28,260 $ (41,938) $287,994 $108,692 $ 227,202 Cumulative Gap $(155,806) $(127,546) $(169,484) $118,510 $227,202 $ 227,202 Sensitivity Ratio 0.80 1.77 0.78 2.16 11.13 1.18 Cumulative Sensitivity Ratio 0.80 0.84 0.83 1.09 1.18 1.18
16 The amount of loans due after one year with floating interest rates is $245,938,000. The following table shows the remaining maturity for Certificates of Deposit with balances of $100,000 or more as of December 31, 2005 (000s omitted):
Years Ended December 31, ------------------------------ (Dollars in Thousands) 2005 2004 2003 -------- -------- -------- Maturing Within 3 Months $107,782 $ 72,125 $ 67,574 3 - 6 Months 29,286 9,481 6,933 6 - 12 Months 9,312 17,262 5,007 Over 12 Months 56,781 85,789 36,140 -------- -------- -------- Total $203,161 $184,657 $115,654 ======== ======== ========
For 2006, we expect the FOMC to continue to increase short term managed rates through the first half of the year as the economic growth and potential for inflation will allow the Fed to complete the process of moving the fed funds rate from an accommodative level to a neutral level. Since the fed began removing accommodation in the second half of 2004, longer term market rates have decreased, and we are now experiencing an inversion of the yield curve. This shape of the yield curve historically has preceded a decline in economic conditions and interest rates; however, due to the increased impact of global events on our economy, we cannot assume that we are headed for a downturn in economic conditions and a change to more accommodative monetary policy. Rather than trying to predict when positive slope will return to the yield curve, and whether it will occur as the long end increases or the short end decreases, we will continue to manage our balance sheet to control overall interest rate risk and to minimize the negative effect the prolonged flat or inverted yield curve has on our net interest margin. In the near term, our focus will be on controlling the decline in our net interest margin by trying to slow the rate of increase in our interest expense. We will also attempt to increase the percent of our assets that are invested in loans by growing our loan portfolio in the northern and southern parts of our market area. We plan to limit our growth in total assets, funding the loan growth through maturities and sales of investment securities. Although the automotive industry continues to struggle, we are experiencing some localized economic growth in southeast Michigan. The housing market remains active, but is showing some signs of slowing down as the rate of increase in property values is slowing. We expect total loans to increase between five and ten percent in 2006. We opened a new full service branch in Taylor, Michigan in 2005. This is our fifth branch in southern Wayne County, a market which is expected to contribute to our projected increases in loans and deposits in 2006. We have also increased our lending staff in southern Monroe County to enable us to increase our market share for loans in northwest Ohio. Although we do not expect significant asset growth, we anticipate that we will be able to improve our net interest income slightly in 2006. In 2005 we increased our Provision for Loan Losses in order to charge off some non-performing assets and to increase the general allocation portion of our Allowance for Loan Losses due to our concerns about regional economic conditions and slower growth in real estate values. We believe that our Allowance for Loan Losses provides adequate coverage for the losses in our portfolio, and we expect that we will be able to maintain the adequacy of the allowance while reducing our Provision for Loan Losses more than 50% from the level recorded in 2005. We believe that we will be able to decrease the Provision for Loan Losses because we do not anticipate a significant decline in economic conditions or real estate values in our market area. We anticipate that slower mortgage refinance activity and less gains on the sales of investment securities will result in a small increase in non interest income. We plan to move into our new headquarters building in downtown Monroe in the third quarter of 2006. Expenses related to our additional offices and staffing increases will cause non-interest expenses to increase. Primarily due to the anticipated decrease in the Provision for Loan Losses, we expect Net Income to increase significantly in 2006. 17 The following table shows the loan portfolio for the last five years (000s omitted).
Book Value at December 31, ---------------------------------------------------- 2005 (a) 2004 (a) 2003 (a) 2002 (a) 2001 (a) -------- -------- -------- -------- -------- Loans secured by real estate: Construction and land development $150,179 $155,703 $ 86,221 $ 56,780 $ 47,025 Secured by farmland (including farm residential and other improvements) 9,891 8,499 7,438 7,925 6,172 Secured by 1-4 family residential properties 309,061 300,821 286,220 258,157 275,489 Secured by multifamily (5 or more) residential properties 6,718 6,429 8,022 6,810 6,714 Secured by nonfarm nonresidential properties 337,408 301,802 305,755 280,136 258,879 Loans to finance agricultural production and other loans to farmers 3,519 2,333 2,263 2,182 2,856 Commercial and industrial loans to U.S. addresses (domicile) 99,220 87,068 92,313 90,838 99,186 Loans to individuals for household, family, and other personal expenditures (includes purchased paper): Credit cards and related plans 393 390 442 1,471 3,353 Other 70,853 80,761 72,542 68,942 87,322 Nonrated industrial development obligations (other than securities) of states and political subdivisions in the U.S. -- -- -- 67 133 Other loans: Loans for purchasing or carrying securities (secured and unsecured) -- -- -- -- -- All other loans 1,635 1,297 1,228 497 696 Less: Any unearned income on loans -- -- -- -- -- -------- -------- -------- -------- -------- Total loans and leases, net of unearned income $988,877 $945,103 $862,444 $773,805 $787,825 ======== ======== ======== ======== ======== Nonaccrual loans $ 16,212 $ 29,896 $ 34,248 $ 22,332 $ 22,712 Loans 90 days or more past due $ 101 $ 230 $ 100 $ 81 $ 450 Troubled debt restructurings $ 1,813 $ 3,715 $ 4,755 $ 6,807 $ --
(a) Loan categories are presented net of deferred loan fees. The presentation in Note 4 to the consolidated financial statements differs from this schedule's presentation by presenting the loan categories, gross, before deferred loan fees have been subtracted. The following is an analysis of the transactions in the allowance for loan losses:
Year Ended December 31, ----------------------------------------------- (Dollars in Thousands) 2005 2004 2003 2002 2001 ------- ------- ------- ------- ------- Balance Beginning of Period $13,800 $14,500 $12,400 $13,000 $10,600 Loans Charged Off (Domestic) Commercial, Financial, and Agricultural 313 2,045 1,838 4,383 3,399 Secured by Real Estate 6,800 468 3,389 2,859 1,242 Loans to Individuals 2,227 1,935 1,456 1,455 1,523 Recoveries (Domestic) Commercial, Financial, and Agricultural 1,358 335 206 1,351 619 Secured by Real Estate 211 57 33 135 111 Loans to Individuals 965 865 539 510 434 ------- ------- ------- ------- ------- Net Loans Charged Off 6,806 3,191 5,905 6,701 5,000 Transfer to establish reserve for unfunded loan commitments 275 -- -- -- -- Provision Charged to Operations 6,906 2,491 8,005 6,101 7,400 ------- ------- ------- ------- ------- Balance End of Period $13,625 $13,800 $14,500 $12,400 $13,000 ======= ======= ======= ======= ======= Ratio of Net Loans Charged Off to Average Total Loans Outstanding 0.69% 0.34% 0.69% 0.87% 0.59% ======= ======= ======= ======= =======
18 The following analysis shows the allocation of the allowance for loan losses:
Years Ended December 31, ----------------------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ------------------- ------------------- ------------------- ------------------- ----------------- % of % of loans % of loans % of loans % of loans loans $ to total $ to total $ to total $ to total $ to total (Dollars in Thousands) Amount loans Amount loans Amount loans Amount loans Amount loans ---------------------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- -------- Balance at end of period applicable to: Domestic Commercial, Financial, and Agricultural $ 2,209 11.4% $ 1,421 10.3% $ 1,582 11.7% $ 2,933 13.1% $ 4,119 13.8% Real Estate - Construction 1,959 15.2% 2,277 16.5% 367 9.9% 94 7.3% 260 6.0% Real Estate - Mortgage 8,504 66.0% 8,901 64.5% 11,506 69.7% 8,108 70.4% 8,038 68.6% Loans to Individuals 953 7.4% 1,201 8.7% 1,045 8.7% 1,265 9.2% 583 11.6% Foreign -- 0.0% -- 0.0% -- 0.0% -- 0.0% -- 0.0% ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total $13,625 100.0% $13,800 100.0% $14,500 100.0% $12,400 100.0% $13,000 100.0% ======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Each period the provision for loan losses in the income statement results from the combination of an estimate by Management of loan losses that occurred during the current period and the ongoing adjustment of prior estimates of losses. To serve as a basis for making this provision, the Bank maintains an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Bank's customers, the payment performance of individual loans and pools of homogeneous loans, portfolio seasoning, changes in collateral values, and detailed reviews of specific loan relationships. For loans deemed to be impaired due to an expectation that all contractual payments will probably not be received, impairment is measured by comparing the Bank's recorded investment in the loan to the present value of expected cash flows discounted at the loan's effective interest rate, the fair value of the collateral, or the loan's observable market price. Year-end nonperforming assets, which include nonaccrual loans, loans ninety days or more past due, renegotiated debt, nonaccrual securities, and other real estate owned, decreased $13.5 million, or 34%, from 2004 to 2005. Nonperforming assets as a percent of total assets at year-end decreased from 2.6% in 2004 to 1.6% in 2005. The Allowance for Loan Losses as a percent of nonperforming assets at year-end increased from 34.6% in 2004 to 51.5% in 2005. The provision for loan losses increases the allowance for loan losses, a valuation account which appears on the consolidated statements of condition. As the specific customer and amount of a loan loss is confirmed by gathering additional information, taking collateral in full or partial settlement of the loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the allowance for loan losses. If, subsequent to a charge off, the Bank is able to collect additional amounts from the customer or sell collateral worth more than earlier estimated, a recovery is recorded. CONTRACTUAL OBLIGATIONS - The following table shows the Corporation's contractual obligations.
Payment Due by Period ---------------------------------------------------- Less than 1 - 3 3 - 5 Over 5 (Dollars in Thousands) Total 1 year Years Years Years ---------------------- -------- --------- ------- -------- -------- Long Term Debt Obligations $291,500 $20,000 $10,000 $143,000 $118,500 Operating Lease Obligations 914 206 402 159 147 Salary Continuation Obligation 580 -- -- 116 464 Headquarters Construction Contract 6,138 6,138 -- -- -- -------- ------- ------- -------- -------- Total Contractual Obligations $299,132 $26,344 $10,402 $143,275 $119,111 ======== ======= ======= ======== ========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Bank faces market risk to the extent that the fair values of its financial instruments are affected by changes in interest rates. The Bank does not face market risk due to changes in foreign currency exchange rates, commodity prices, or equity prices. The asset and liability management process of the Bank seeks to monitor and manage the amount of interest rate risk. This is accomplished by analyzing the differences in repricing opportunities for assets and liabilities (gap analysis, as shown in Item 7), by 19 simulating operating results under varying interest rate scenarios, and by estimating the change in the net present value of the Bank's assets and liabilities due to interest rate changes. Each month, the Asset and Liability Committee (ALCO), which includes the senior management of the Bank, estimates the effect of interest rate changes on the projected net interest income of the Bank. The sensitivity of the Bank's net interest income to changes in interest rates is measured by using a computer based simulation model to estimate the impact on earnings of a gradual increase or decrease of 100 basis points in the prime rate. The net interest income projections are compared to a base case projection, which assumes no changes in interest rates. The table below summarizes the net interest income sensitivity as of December 31, 2005 and 2004.
Base Rates Rates (Dollars in Thousands) Projection Up 1% Down 1% ---------------------- ---------- ------- ------- Year-End 2005 12 Month Projection Interest Income $97,353 $99,475 $95,344 Interest Expense 43,750 46,501 41,615 ------- ------- ------- Net Interest Income $53,603 $52,974 $53,729 Percent Change From Base Projection -1.2% 0.2% ALCO Policy Limit (+/-) 5.0% 5.0%
Base Rates Rates (Dollars in Thousands) Projection Up 1% Down 1% ---------------------- ---------- ------- ------- Year-End 2004 12 Month Projection Interest Income $86,596 $89,810 $83,098 Interest Expense 33,813 36,269 31,589 ------- ------- ------- Net Interest Income $52,783 $53,541 $51,509 Percent Change From Base Projection 1.4% -2.4% ALCO Policy Limit (+/-) 5.0% 5.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate risk, as measured by the change in the Bank's projected net interest income, in its policy. Throughout 2005, the estimated variability of the net interest income was within the Bank's established policy limits. The ALCO also monitors interest rate risk by estimating the effect of changes in interest rates on the economic value of the Bank's equity each month. The actual economic value of the Bank's equity is first determined by subtracting the fair value of the Bank's liabilities from the fair value of the Bank's assets. The fair values are determined in accordance with Statement of Financial Accounting Standards Number 107, Disclosures about Fair Value of Financial Instruments. The Bank estimates the interest rate risk by calculating the effect of market interest rate shocks on the economic value of its equity. For this analysis, the Bank assumes immediate increases or decreases of 100 and 200 basis points in the prime lending rate. The discount rates used to determine the present values of the loans and deposits, as well as the prepayment rates for the loans, are based on Management's expectations of the effect of the rate shock on the market for loans and deposits. The table below summarizes the amount of interest rate risk to the fair value of the Bank's assets and liabilities and to the economic value of the Bank's equity. 20
Fair Value at December 31, 2005 Rates -------------------------------------------------------------- (Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2% ---------------------- ---------- ---------- ---------- ---------- ---------- Assets $1,612,025 $1,580,635 $1,550,016 $1,642,850 $1,671,653 Liabilities 1,447,518 1,422,535 1,398,378 1,473,363 1,500,118 ---------- ---------- ---------- ---------- ---------- Stockholders' Equity $ 164,507 $ 158,100 $ 151,638 $ 169,487 $ 171,535 Change in Equity -3.9% -7.8% 3.0% 4.3% ALCO Policy Limit (+/-) 10.0% 20.0% 10.0% 20.0%
Fair Value at December 31, 2004 Rates -------------------------------------------------------------- (Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2% ---------------------- ---------- ---------- ---------- ---------- ---------- Assets $1,543,108 $1,513,190 $1,483,923 $1,572,426 $1,600,092 Liabilities 1,387,831 1,358,581 1,330,434 1,418,237 1,449,845 ---------- ---------- ---------- ---------- ---------- Stockholders' Equity $ 155,277 $ 154,609 $ 153,489 $ 154,189 $ 150,247 Change in Equity -0.4% -1.2% -0.7% -3.2% ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate risk, as measured by the change in economic value of the Bank's equity, in its policy. The Bank has reduced its average equity as a percent of assets each year since 2003. During 2005, the Bank revised its policy limits to reduce the limits on changes in the economic value of equity from 25% to 20% in the 200 basis point rate shift and from 15% to 10% in the 100 basis point rate shift. Throughout 2005, the estimated variability of the economic value of equity was within the Bank's established policy limits. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements and Supplementary Data See Pages 23 - 42. 21 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders MBT Financial Corp. and Subsidiaries Monroe, Michigan We have audited the accompanying consolidated balance sheet of MBT Financial Corp. and Subsidiaries as of December 31, 2005 and December 31, 2004 and the related consolidated statements of income, stockholders' equity, and cash flows for each year in the three year period ended December 31, 2005. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBT Financial Corp. and Subsidiaries as of December 31, 2005 and December 31, 2004 and the consolidated results of its operations and its cash flows for each year in the three year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of MBT Financial Corp. and Subsidiaries' internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2006, expressed an unqualified opinion thereon. /s/ Plante & Moran, PLLC Auburn Hills, Michigan February 28, 2006 22 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ----------------------- Dollars in thousands 2005 2004 ---------- ---------- ASSETS Cash and Cash Equivalents (Note 2) Cash and due from banks $ 32,330 $ 20,540 Federal funds sold 5,000 14,000 ---------- ---------- Total cash and cash equivalents 37,330 34,540 Securities - Held to Maturity (Notes 3 and 12) 76,467 84,141 Securities - Available for Sale (Notes 3 and 12) 444,021 408,353 Federal Home Loan Bank stock - at cost 13,221 12,947 Loans held for sale 434 778 Loans - Net (Notes 4, 5, and 12) 975,252 931,303 Accrued interest receivable and other assets (Notes 7 and 13) 65,000 58,047 Premises and Equipment - Net (Note 6) 26,631 22,170 ---------- ---------- Total assets $1,638,356 $1,552,279 ========== ========== LIABILITIES Deposits: Non-interest bearing $ 178,116 $ 149,469 Interest-bearing (Note 8) 1,006,594 951,242 ---------- ---------- Total deposits 1,184,710 1,100,711 Federal Home Loan Bank advances (Notes 9 and 12) 256,500 256,500 Securities sold under repurchase agreements 35,000 30,000 Interest payable and other liabilities (Note 10) 10,527 9,722 ---------- ---------- Total liabilities 1,486,737 1,396,933 ========== ========== STOCKHOLDERS' EQUITY Common stock (no par value; 30,000,000 shares authorized, 17,197,116 and 17,465,839 shares issued and outstanding) (Note 11) -- -- Additional paid-in capital 14,417 19,806 Retained Earnings 142,205 135,647 Accumulated other comprehensive loss (5,003) (107) ---------- ---------- Total stockholders' equity 151,619 155,346 ---------- ---------- Total liabilities and stockholders' equity $1,638,356 $1,552,279 ========== ==========
The accompanying notes are an integral part of these statements. 23 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, --------------------------- Dollars in thousands 2005 2004 2003 ------- ------- ------- INTEREST INCOME Interest and fees on loans $64,578 $57,660 $55,253 Interest on investment securities- Tax-exempt 5,036 5,613 6,206 Taxable 19,864 16,420 16,166 Interest on federal funds sold 217 10 149 ------- ------- ------- Total interest income 89,695 79,703 77,774 ------- ------- ------- INTEREST EXPENSE Interest on deposits 23,578 14,923 15,991 Interest on borrowed funds 15,005 12,075 11,476 ------- ------- ------- Total interest expense 38,583 26,998 27,467 ------- ------- ------- NET INTEREST INCOME 51,112 52,705 50,307 PROVISION FOR LOAN LOSSES (Note 5) 6,906 2,491 8,005 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 44,206 50,214 42,302 ------- ------- ------- OTHER INCOME Income from trust services 4,244 3,746 3,316 Service charges and other fees 5,833 5,476 5,309 Net gain on sales of securities 295 567 1,041 Other 4,077 3,987 4,137 ------- ------- ------- Total other income 14,449 13,776 13,803 ------- ------- ------- OTHER EXPENSES Salaries and employee benefits (Notes 10 and 16) 18,248 18,109 16,122 Occupancy expense 3,320 3,029 2,696 Other 12,250 11,478 11,361 ------- ------- ------- Total other expenses 33,818 32,616 30,179 ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES 24,837 31,374 25,926 PROVISION FOR INCOME TAXES (Note 13) 6,858 8,775 6,611 ------- ------- ------- NET INCOME $17,979 $22,599 $19,315 ======= ======= ======= BASIC EARNINGS PER COMMON SHARE $ 1.04 $ 1.30 $ 1.02 ======= ======= ======= DILUTED EARNINGS PER COMMON SHARE (Note 15) $ 1.03 $ 1.29 $ 1.01 ======= ======= =======
The accompanying notes are an integral part of these statements. 24 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED ADDITIONAL OTHER PAID-IN RETAINED COMPREHENSIVE Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL ---------- -------- ------------- -------- BALANCE - JANUARY 1, 2003 $ 51,080 $115,395 $ 524 $166,999 Repurchase of Common Stock (1,692,475 shares) (Note 11) (31,008) -- -- (31,008) Issuance of Common Stock (23,818 shares) Stock options exercised (19,647 shares) 272 -- -- 272 Other stock issued (4,171 shares) 70 -- -- 70 Dividends declared ($0.58 per share) -- (10,843) -- (10,843) Comprehensive income: Net income -- 19,315 -- 19,315 Change in net unrealized loss on securities available for sale - Net of tax effect of $732 and reclassifications of $685 -- -- (1,359) (1,359) -------- -------- ------- -------- Total Comprehensive Income -- 19,315 (1,359) 17,956 -------- -------- ------- -------- BALANCE - DECEMBER 31, 2003 $ 20,414 $123,867 $ (835) $143,446 Repurchase of Common Stock (220,000 shares) (Note 11) (3,873) -- -- (3,873) Issuance of Common Stock (194,055 shares) Stock options exercised (183,915 shares) 2,753 -- -- 2,753 Other stock issued (10,140 shares) 187 -- -- 187 Tax benefit from exercise of options 325 -- -- 325 Dividends declared ($0.62 per share) -- (10,819) -- (10,819) Comprehensive income: Net income -- 22,599 -- 22,599 Change in net unrealized loss on securities available for sale - Net of tax effect of $(392) -- -- 728 728 -------- -------- ------- -------- Total Comprehensive Income -- 22,599 728 23,327 -------- -------- ------- -------- BALANCE - DECEMBER 31, 2004 $ 19,806 $135,647 $ (107) $155,346 Repurchase of Common Stock (364,420 shares) (Note 11) (6,984) -- -- (6,984) Issuance of Common Stock (95,697 shares) Stock options exercised (88,162 shares) 1,248 -- -- 1,248 Other stock issued (7,535 shares) 147 -- -- 147 Tax benefit from exercise of options 200 -- -- 200 Dividends declared ($0.66 per share) -- (11,421) -- (11,421) Comprehensive income: Net income -- 17,979 -- 17,979 Change in net unrealized loss on securities available for sale - Net of tax effect of $2,636 -- -- (4,896) (4,896) -------- -------- ------- -------- Total Comprehensive Income -- 17,979 (4,896) 13,083 -------- -------- ------- -------- BALANCE - DECEMBER 31, 2005 $ 14,417 $142,205 $(5,003) $151,619 ======== ======== ======= ========
The accompanying notes are an integral part of these statements. 25 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------------- Dollars in thousands 2005 2004 2003 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 17,979 $ 22,599 $ 19,315 Adjustments to reconcile net income to net cash from operating activities Provision for deferred taxes (76) 195 (737) Provision for loan losses 6,906 2,491 8,005 Depreciation 2,781 2,817 2,471 Net (Accretion) Amortization on investment securities 190 496 2,981 Net gain on sales of securities (295) (567) (1,041) Increase in cash surrender value of life insurance (1,100) (1,371) (1,305) Change in assets and liabilities (Increase) decrease in accrued interest receivable and other assets (9,758) (4,261) (3,666) Increase (decrease) in accrued interest payable and other liabilities 1,005 4,822 (1,510) --------- --------- --------- Net cash provided by operating activities $ 17,632 $ 27,221 $ 24,513 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities held to maturity $ 19,826 $ 25,610 $ 27,956 Proceeds from maturities of investment securities available for sale 50,222 66,369 355,635 Proceeds from sales of investment securities held to maturity 3,021 -- -- Proceeds from sales of investment securities available for sale 75,446 73,520 176,905 Net (increase) decrease in loans (50,511) (85,222) (95,950) Proceeds from sales of other real estate owned 6,732 6,235 12,068 Proceeds from sales of other assets 101 71 13 Purchase of investment securities held to maturity (15,682) (10,565) (10,300) Purchase of bank owned life insurance -- -- (15,490) Purchase of investment securities available for sale (168,528) (150,701) (522,972) Purchase of bank premises and equipment (7,587) (7,035) (5,058) --------- --------- --------- Net cash used for investing activities $ (86,960) $ (81,718) $ (77,193) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 83,999 $ 61,594 $ 28,157 Net increase (decrease) in short term borrowings -- (45,000) 45,000 Net increase in Federal Home Loan Bank borrowings -- 31,500 -- Net increase in securities sold under repurchase agreements 5,000 30,000 -- Repurchase of common stock (6,984) (3,873) (31,008) Issuance of common stock 1,395 2,940 342 Dividends paid (11,292) (10,649) (10,904) --------- --------- --------- Net cash provided by financing activities $ 72,118 $ 66,512 $ 31,587 --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 2,790 $ 12,015 $ (21,093) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (Note 1) 34,540 22,525 43,618 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 1) $ 37,330 $ 34,540 $ 22,525 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 37,975 $ 26,835 $ 27,646 Cash paid for federal income taxes $ 6,293 $ 7,135 $ 7,120 ========= ========= ========= SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES Transfer of loans to other real estate owned $ 9,881 $ 5,461 $ 6,169 Transfer of loans to other assets $ 202 $ 55 $ 44 ========= ========= =========
The accompanying notes are an integral part of these statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of MBT Financial Corp. (the "Corporation") and its wholly owned subsidiary, Monroe Bank & Trust (the "Bank"). The Bank includes the accounts of its wholly owned subsidiaries, MBT Credit Company, Inc. and MB&T Financial Services, Inc. The Bank operates twenty-one offices in Monroe County, Michigan and four offices in Wayne County, Michigan. MBT Credit Company, Inc. operates a mortgage loan office in Monroe County. The Bank's primary source of revenue is from providing loans to customers, who are predominantly small and middle-market businesses and middle-income individuals. The Corporation's sole business segment is community banking. The accounting and reporting policies of the Bank conform to practice within the banking industry and are in accordance with accounting principles generally accepted in the United States. Preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are the determination of the allowance for loan losses, the fair value of investment securities, and the valuation of other real estate owned. The significant accounting policies are as follows: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Corporation and its subsidiary. All material intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Corporation's activities are with customers located within southeast Michigan. Notes 3 and 4 discuss the types of securities and lending that the Corporation engages in. The Corporation does not have any significant concentrations in any one industry or to any one customer. INVESTMENT SECURITIES Investment securities that are "held to maturity" are stated at cost, and adjusted for accumulated amortization of premium and accretion of discount. The Bank has the intention and, in Management's opinion, the ability to hold these investment securities until maturity. Investment securities that are "available for sale" are stated at estimated market value, with the related unrealized gains and losses reported as an amount, net of taxes, as a separate component of stockholders' equity. The market value of securities is based on quoted market prices. For securities that do not have readily available market values, estimated market values are calculated based on the market values of comparable securities. Gains and losses on the sale of securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the term of the security. LOANS The Bank grants mortgage, commercial, and consumer loans to customers. Loans are reported at their outstanding unpaid principal balances, adjusted for charge offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. LOANS HELD FOR SALE Loans held for sale consist of fixed rate residential mortgage loans with maturities of 15 to 30 years. Such loans are recorded at the lower of aggregate cost or estimated fair value. 27 ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are classified as non-accrual or renegotiated. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience, adjusted for qualitative factors.. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures. FORECLOSED ASSETS (INCLUDES OTHER REAL ESTATE OWNED) Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of fair value or the loan carrying amount at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by Management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost, less accumulated depreciation of $27,826,000 in 2005 and $25,427,000 in 2004. The Bank uses the straight-line method to provide for depreciation, which is charged to operations over the estimated useful lives of the assets. Depreciation expense amounted to $2,781,000 in 2005, $2,817,000 in 2004, and $2,471,000 in 2003. The cost of assets retired and the related accumulated depreciation are eliminated from the accounts and the resulting gains or losses are reflected in operations in the year the assets are retired. COMPREHENSIVE INCOME Accounting principles generally require that revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on securities available for sale, are reported as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. The components of accumulated other comprehensive income (loss) and related tax effects are as follows:
Dollars in thousands 2005 2004 2003 ------- ----- ------- Unrealized gains (losses) on securities available for sale $(7,401) $ 403 $ (244) Reclassification adjustment for losses (gains) realized in income (295) (567) (1,041) ------- ----- ------- Net unrealized gains (losses) $(7,696) $(164) $(1,285) Tax effect 2,693 57 450 ------- ----- ------- Accumulated other comprehensive income (loss) $(5,003) $(107) $ (835) ------- ----- -------
28 CASH AND CASH EQUIVALENTS Cash and Cash Equivalents include cash and due from banks and Federal funds sold. Generally, cash equivalents have daily maturities. INCOME TAXES Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. STOCK-BASED COMPENSATION The Company applies the provisions of APB Opinion No. 25, "Accounting for Stock-Based Compensation," for all employee stock option grants and has elected to disclose pro forma net income and earnings per share amounts as if the fair-value based method has been applied in measuring compensation costs. The Company's as reported and pro forma information for the years ended December 31:
Dollars in thousands, except per share data 2005 2004 2003 ------- ------- ------- Net Income as Reported $17,979 $22,599 $19,315 Pro Forma Adjustment Due to Stock Options (338) (225) (102) ------- ------- ------- Pro Forma Net Income $17,641 $22,374 $19,213 ======= ======= ======= Earnings per Share as Reported Basic $ 1.04 $ 1.30 $ 1.02 Diluted $ 1.03 $ 1.29 $ 1.01 Pro Forma Earnings per Share Basic $ 1.02 $ 1.28 $ 1.01 Diluted $ 1.01 $ 1.28 $ 1.01
Compensation expense in the pro forma disclosures is not indicative of future amounts, as options vest over several years and additional grants are generally made each year. The weighted average fair value of options granted was $5.10, $3.52, and $2.63 in 2005, 2004, and 2003, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 2005, 2004, and 2003: expected option lives of seven years for all three; expected volatility of 24.3%, 25.3%, and 21.5%, risk-free interest rates of 3.8%, 3.8%, and 3.9%, and dividend yield of 3.5%, 3.5%, and 3.5%, respectively. OFF BALANCE SHEET INSTRUMENTS In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. Such financial instruments are recorded when they are funded. ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123(R), Accounting for Stock-Based Compensation ("SFAS 123R"). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized as expense in the income statement based on their fair values. Prior to SFAS 123R, only certain pro forma disclosures of fair value were required. The amount of compensation is measured at the fair value of the options when granted, and this cost is expensed over the required service period, which is normally the vesting period of the options. SFAS 123R will apply to awards granted or modified after January 1, 2006. Compensation cost will also be recorded for prior option grants that vest after the date of adoption. The future effect of the adoption of the new accounting principle on results of operations will depend on the level of future option grants, the vesting period for those grants, and the fair value of the options granted at such future date. Existing options that are scheduled to vest after the adoption date are expected to result in additional compensation expense of approximately $550,000 in 2006, $350,000 in 2007, and $150,000 in 2008. (2) CASH AND DUE FROM BANKS The Bank is required by regulatory agencies to maintain legal reserve requirements based on the level of balances in deposit categories. Cash balances restricted from usage due to these requirements were $2,205,000 and $1,954,000 at December 31, 2005 and 2004, respectively. Cash and due from banks includes deposits held at correspondent banks in excess of FDIC insurance limits. 29 (3) INVESTMENT SECURITIES The following is a summary of the Bank's investment securities portfolio as of December 31, 2005 and 2004 (000's omitted):
HELD TO MATURITY DECEMBER 31, 2005 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Obligations of U.S. Government Agencies $ 11 $ 1 $ -- $ 12 Obligations of States and Political Subdivisions 76,456 902 (65) 77,293 ------- ---- ---- ------- $76,467 $903 $(65) $77,305 ======= ==== ==== =======
AVAILABLE FOR SALE DECEMBER 31, 2005 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Obligations of U.S. Government Agencies $358,412 $158 $(7,496) $351,074 Obligations of States and Political Subdivisions 26,206 197 (322) 26,081 Other Securities 67,098 506 (738) 66,866 -------- ---- ------- -------- $451,716 $861 $(8,556) $444,021 ======== ==== ======= ========
HELD TO MATURITY DECEMBER 31, 2004 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Obligations of U.S. Government Agencies $ 527 $ 51 $ -- $ 578 Obligations of States and Political Subdivisions 80,622 2,161 (147) 82,636 Other Securities 2,992 82 -- 3,074 ------- ------ ----- ------- $84,141 $2,294 $(147) $86,288 ======= ====== ===== =======
AVAILABLE FOR SALE DECEMBER 31, 2004 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- Obligations of U.S. Government Agencies $315,410 $1,123 $(2,152) $314,381 Obligations of States and Political Subdivisions 28,635 812 (260) 29,187 Other Securities 64,472 397 (84) 64,785 -------- ------ ------- -------- $408,517 $2,332 $(2,496) $408,353 ======== ====== ======= ========
The amortized cost and estimated market value of securities at December 31, 2005, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties (000's omitted).
HELD TO MATURITY AVAILABLE FOR SALE --------------------- --------------------- ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE --------- --------- --------- --------- Maturing within 1 year $11,372 $11,410 $ -- $ -- 1 to 5 years 35,411 35,895 42,234 41,272 5 to 10 years 20,823 21,138 233,193 228,339 Over 10 years 8,861 8,862 174,276 172,364 Securities with no stated maturity -- -- 2,016 2,046 ------- ------- -------- -------- $76,467 $77,305 $451,719 $444,021 ======= ======= ======== ========
30 The investment securities portfolio is evaluated for impairment throughout the year. Impairment is recorded against individual securities, unless the decrease in fair value is attributable to interest rates and management determines that the Company has the intent and ability to hold the investment for a period of time sufficient to allow for an anticipated recovery in the market value. The fair values of investments with an amortized cost in excess of their fair values at December 31, 2005 and December 31, 2004 are as follows:
DECEMBER 31, 2005 ------------------------------------------------- LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL ----------------------- ----------------------- ----------------------- GROSS GROSS GROSS AGGREGATE UNREALIZED AGGREGATE UNREALIZED AGGREGATE UNREALIZED FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES ---------- ---------- ---------- ---------- ---------- ---------- Obligations of United States Government Agencies $198,750 $3,147 $132,167 $4,350 $330,917 $7,497 Obligations of States and Political Subdivisions 16,237 179 3,929 206 $ 20,166 $ 385 Other Securities 14,726 238 2,499 501 $ 17,225 $ 739 -------- ------ -------- ------ -------- ------ $229,713 $3,564 $138,595 $5,057 $368,308 $8,621 ======== ====== ======== ====== ======== ======
DECEMBER 31, 2004 ------------------------------------------------- LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL ----------------------- ----------------------- ----------------------- GROSS GROSS GROSS AGGREGATE UNREALIZED AGGREGATE UNREALIZED AGGREGATE UNREALIZED FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES ---------- ---------- ---------- ---------- ---------- ---------- Obligations of United States Government Agencies $144,904 $1,703 $18,551 $449 $163,455 $2,152 Obligations of States and Political Subdivisions 6,423 58 2,692 349 $ 9,115 $ 407 Other Securities 12,795 84 -- -- $ 12,795 $ 84 -------- ------ ------- ---- -------- ------ $164,122 $1,845 $21,243 $798 $185,365 $2,643 ======== ====== ======= ==== ======== ======
The increase in investment securities with unrealized losses and the increase in unrealized losses on investment securities are primarily the result of increases in market interest rates and not the result of credit quality of the issuers of the securities. The company has the ability and intent to hold these securities until recovery, which may be until maturity. Investment securities carried at $323,415,000 and $322,959,000 were pledged or set aside to secure borrowings, public and trust deposits, and for other purposes required by law at December 31, 2005 and December 31, 2004, respectively. At December 31, 2005, Obligations of U. S. Government Agencies included securities issued by the Federal Home Loan Bank with an estimated market value of $216,643,000. At December 31, 2004, Obligations of U. S. Government Agencies included securities issued by the Federal Home Loan Bank with an estimated market value of $160,741,000. For the years ended December 31, 2005, 2004, and 2003, proceeds from sales of securities amounted to $78,467,000, $73,520,000, and $176,905,000, respectively. Gross realized gains amounted to $690,000, $1,174,000, and $1,046,000, respectively. Gross realized losses amounted to $395,000, $607,000, and $5,000, respectively. The tax provision applicable to these net realized gains and losses amounted to $103,000, $179,000, and $364,000, respectively. During 2005, sales of securities classified as Held to Maturity totaled $3,021,000. This transaction consisted of a single fixed rate debt security issued by Ford Motor Credit Company. The credit rating of the issuer declined below investment grade and Management decided to sell the bond. The Bank has no more corporate securities classified as Held to Maturity. 31 (4) LOANS Loan balances outstanding as of December 31 consist of the following (000s omitted):
2005 2004 -------- -------- Real estate loans $813,953 $773,892 Loans to finance agricultural production and other loans to farmers 3,519 2,333 Commercial and industrial loans 100,289 88,035 Loans to individuals for household, family, and other personal expenditures 71,244 81,119 All other loans (including overdrafts) 1,635 1,297 -------- -------- Total loans, gross $990,640 $946,676 Less: Deferred loan fees 1,763 1,573 -------- -------- Total loans, net of deferred loan fees $988,877 $945,103 Less: Allowance for loan losses 13,625 13,800 -------- -------- $975,252 $931,303 ======== ========
The following is a summary of impaired loans (000s omitted):
2005 2004 2003 ------- ------- ------- Year-end impaired loans with no allowance for loan losses allocated $ 1,601 $ 3,809 $11,212 Year-end impaired loans with allowance for loan losses allocated 14,713 30,136 32,379 Year-end allowance for loan losses allocated to impaired loans 2,156 6,014 6,873 Average investment in impaired loans 23,375 33,410 30,112 Interest income recognized on impaired loans 438 1,120 1,506 Cash basis interest income recognized on impaired loans during the year 438 1,120 1,506
Non-accrual loans totaled $16,212,000 as of December 31, 2005 and $29,896,000 as of December 31, 2004. Loans ninety days or more past due and still accruing interest were $101,000 as of December 31, 2005 and $230,000 as of December 31, 2004. Included in Loans are loans to certain officers, directors, and companies in which such officers and directors have 10 percent or more beneficial ownership in the aggregate amount of $26,262,000 and $19,295,000 at December 31, 2005 and 2004, respectively. In 2005, new loans and other additions amounted to $32,477,000, and repayments and other reductions amounted to $25,510,000. In Management's judgment, these loans were made on substantially the same terms and conditions as those made to other borrowers, and do not represent more than the normal risk of collectibility or present other unfavorable features. Loans carried at $195,357,000 and $181,412,000 at December 31, 2005 and 2004, respectively, were pledged to secure Federal Home Loan Bank advances. (5) ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses was as follows (000s omitted):
2005 2004 2003 ------- ------- ------- Balance beginning of year $13,800 $14,500 $12,400 Provision for loan losses 6,906 2,491 8,005 Loans charged off (9,340) (4,447) (6,683) Transfer to establish reserve for unfunded loan commitments (275) -- -- Recoveries 2,534 1,256 778 ------- ------- ------- Balance end of year $13,625 $13,800 $14,500 ======= ======= =======
Each period the provision for loan losses in the income statement results from the combination of an estimate by Management of loan losses that occurred during the current period and the ongoing adjustment of prior estimates of losses occurring in prior periods. To serve as a basis for making this provision, the Bank maintains an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Bank's customers, the payment performance of individual loans and pools of homogeneous loans, portfolio seasoning, changes in collateral values, and detailed reviews of specific loan relationships. For loans deemed to be impaired due to an expectation that all contractual payments will probably not be received, impairment is measured by comparing the Bank's 32 recorded investment in the loan to the present value of expected cash flows discounted at the loan's effective interest rate, the fair value of the collateral, or the loan's observable market price. The provision for loan losses increases the allowance for loan losses, a valuation account which appears on the consolidated balance sheets. As the specific customer and amount of a loan loss is confirmed by gathering additional information, taking collateral in full or partial settlement of the loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the allowance for loan losses. If, subsequent to a charge off, the Bank is able to collect additional amounts from the customer or sell collateral worth more than earlier estimated, a recovery is recorded. (6) BANK PREMISES AND EQUIPMENT Bank premises and equipment as of year end are as follows (000s omitted):
2005 2004 ------- ------- Land, buildings and improvements $33,478 $27,909 Equipment, furniture and fixtures 20,979 19,688 ------- ------- Total Bank premises and equipment $54,457 $47,597 Less accumulated depreciation 27,826 25,427 ------- ------- Bank premises and equipment, net $26,631 $22,170 ======= =======
Bank Premises and Equipment includes Construction in Progress of $5,578,000 as of December 31, 2005 and $1,833,000 as of December 31, 2004. In May, 2005 the Company began construction of a new headquarters building in downtown Monroe, Michigan. The remaining commitment under the construction contract is $6,138,000 as of December 31, 2005. The Company has entered into lease commitments for office locations. Rental expense charged to operations was $314,000, $377,000 and $311,000 for the years ended December 31, 2005, 2004, and 2003, respectively. The future minimum lease payments are as follows:
Minimum Year Payment - ---- -------- 2006 $206,000 2007 208,000 2008 194,000 2009 78,000 2010 81,000 Thereafter 147,000
(7) INTEREST RECEIVABLE AND OTHER ASSETS The Bank includes the cash surrender value of Bank Owned Life Insurance (BOLI) in Interest Receivable and Other Assets on the accompanying consolidated balance sheets. The cash surrender value of the BOLI was $36,252,000 at December 31, 2005 and $35,152,000 at December 31, 2004. The following is a description of the components of the BOLI: DIRECTOR SPLIT-DOLLAR LIFE INSURANCE On December 21, 2000, the Bank entered into director split-dollar life insurance agreements with each of its ten then directors. Under the split-dollar agreement, the policy's interests are divided between the Bank and the director. The Bank owns the cash surrender value, including the accumulated policy earnings, with each director's beneficiaries receiving a fixed amount that is based on his or her years of director service and the Bank receiving the remainder of the death benefits. The directors' death benefits are $500,000 for director service of less than 3 years, $600,000 for service up to 5 years, $750,000 for service up to 10 years, and $1,000,000 for director service of 10 years or more. In 2000, the Bank fully paid the premiums for these ten policies with one lump sum premium payment in the amount of $4,937,000. In 2003, the Bank paid additional premiums of $3,661,000 to increase the coverage for each director to an amount sufficient to provide the maximum split-dollar benefit that could be attained. The increase in cash surrender value is recorded as other non-interest income. The Bank expects to recover in full the cash value from the Bank's portion of the policies' death benefits. SALARY CONTINUATION AGREEMENT AND LIFE INSURANCE POLICY The Bank entered into a Salary Continuation Agreement with Ronald D. LaBeau, then Chairman and Chief Executive Officer of the Bank on December 27, 2000. This agreement provides that the Bank will pay an annual salary continuation benefit of $139,600 to Mr. LaBeau or his designated beneficiaries for 10 years after his 33 retirement on or after reaching the normal retirement age of 65. On April 2, 2004, Mr. LaBeau retired prior to reaching normal retirement age of 65. In accordance with the agreement, he is eligible for an annual salary continuation benefit of $57,996 each year for ten years, commencing in 2009. At the same time it entered into the Salary Continuation Agreement with Mr. LaBeau, the Bank purchased an insurance policy on Mr. LaBeau's life, with a single premium payment of $5,880,000. While Mr. LaBeau's beneficiaries will receive any payments to which he is entitled under the Salary Continuation Agreement, they are not eligible for any of the life insurance proceeds of this policy. The life insurance policy is in addition to the split-dollar insurance policy purchased by the Bank on Mr. LaBeau's life for his service as a director, discussed previously, and the split-dollar insurance policy discussed in "Executive Group Term Carve Out Split-Dollar Life Insurance Agreements" below. The Bank entered into a Salary Continuation Agreement with H. Douglas Chaffin, President and Chief Executive Officer of the Bank on July 1, 2003. This agreement provides that the Bank will pay an annual salary continuation benefit of 65% of his final annual salary, reduced by 50% of his Social Security benefit, his normal pension benefit, and benefits payable attributable to the portion of the Bank's Section 401(k) plan arising from employer contributions, to Mr. Chaffin or his designated beneficiaries for 10 years after his retirement on or after reaching the normal retirement age of 65. EXECUTIVE GROUP TERM CARVE OUT SPLIT-DOLLAR LIFE INSURANCE AGREEMENTS In addition to insurance policies on the lives of the directors of the Bank, the Bank owns life insurance on the lives of several executives, for which the Bank made premium payments of $16,242,000 in the aggregate. The Bank and the executives share rights to death benefits payable under the policies. An executive's beneficiaries are entitled to an amount equal to two times the executive's current annual salary, less $50,000 if he or she dies before retirement, or equal to his or her annual salary at the time of termination of employment if he or she dies after retirement. The Bank will receive the remainder of the death benefits. The Bank expects to recover in full the premium paid by it from the Bank's portion of the policy's death benefits or upon the cancellation or purchase of the policies by the executives. The executives also have life insurance under the Bank's group term life insurance program for all employees, which pays benefits up to $50,000 to the executive's beneficiaries if he or she dies while employed by the Bank. (8) DEPOSITS Interest expense on time certificates of deposit of $100,000 or more in the year 2005 amounted to $6,217,000, as compared with $3,358,000 in 2004, and $3,066,000 in 2003. At December 31, 2005, the balance of time certificates of deposit of $100,000 or more was $203,161,000, as compared with $145,846,000 at December 31, 2004. The amount of time deposits with a remaining term of more than 1 year was $306,630,000 at December 31, 2005 and $246,802,000 at December 31, 2004. The following table shows the scheduled maturities of Certificates of Deposit as of December 31, 2005:
Under $100,000 $100,000 and over -------------- ----------------- 2006 $ 97,122,000 $146,380,000 2007 154,432,000 35,983,000 2008 46,649,000 10,896,000 2009 30,016,000 8,734,000 2010 11,618,000 1,168,000 Thereafter 7,134,000 0 ------------ ------------ Total $346,971,000 $203,161,000 ============ ============
Time certificates of deposit under $100,000 include $69,359,000 of brokered certificates of deposit as of December 31, 2005, and $38,811,000 of brokered certificates of deposit as of December 31, 2004. 34 (9) FEDERAL HOME LOAN BANK ADVANCES AND REPURCHASE AGREEMENTS The following is a summary of the Bank's borrowings from the Federal Home Loan Bank of Indianapolis as of December 31, 2005 and 2004 (000s omitted): DECEMBER 31, 2005
FLOATING RATE FIXED RATE --------------- --------------- MATURING IN AMOUNT RATE AMOUNT RATE - ----------- -------- ---- -------- ---- 2009 $ 13,000 4.50% $ 15,000 5.52% 2010 -- -- 115,000 5.40% 2011 3,000 4.65% 3,500 5.08% 2013 95,000 6.61% -- -- 2014 12,000 4.66% -- -- -------- ---- -------- ---- $123,000 6.15% $133,500 5.41% ======== ==== ======== ====
DECEMBER 31, 2004
FLOATING RATE FIXED RATE --------------- --------------- MATURING IN AMOUNT RATE AMOUNT RATE - ----------- -------- ---- -------- ---- 2009 $ 13,000 2.44% $ 15,000 5.52% 2010 -- -- 115,000 5.40% 2011 3,000 2.65% 3,500 5.08% 2013 95,000 4.56% -- -- 2014 12,000 2.66% -- -- -------- ---- -------- ---- $123,000 4.10% $133,500 5.41% ======== ==== ======== ====
The interest rates on the floating rate advances reset quarterly based on the three month LIBOR rate plus a spread ranging from 15 to 260 basis points. The fixed rate advances have a put option that allows the Federal Home Loan Bank to require repayment of the advance or conversion of the advance to floating rate at the three month LIBOR rate plus a spread ranging from 0 to 2 basis points. The following is a summary of the Bank's borrowings under repurchase agreements as of December 31, 2005 and 2004 (000s omitted): DECEMBER 31, 2005
FLOATING RATE FIXED RATE --------------- --------------- MATURING IN AMOUNT RATE AMOUNT RATE - ----------- -------- ---- -------- ---- 2006 $10,000 3.45% $10,000 3.38% 2007 -- -- 5,000 3.61% 2008 -- -- 5,000 4.05% 2012 -- -- 5,000 4.12% ------- ---- ------- ---- $10,000 3.45% $25,000 3.71% ======= ==== ======= ====
DECEMBER 31, 2004
FLOATING RATE FIXED RATE -------------- --------------- MATURING IN AMOUNT RATE AMOUNT RATE - ----------- ------- ---- ------- ---- 2005 $ -- -- $ 5,000 2.14% 2006 -- -- 5,000 3.00% 2007 -- -- 5,000 3.61% 2008 -- -- 5,000 4.05% 2011 10,000 2.57% -- -- ------- ---- ------- ---- $10,000 2.57% $20,000 2.67% ======= ==== ======= ====
(10) RETIREMENT PLANS In 2000, the Bank implemented a retirement plan that included both a money purchase pension plan, as well as a voluntary profit sharing 401(k) plan for all employees who meet certain age and length of service eligibility requirements. In 2002, the Bank amended its retirement plan to freeze the money purchase plan and retain the 401(k) plan. To ensure that the plan meets the Safe Harbor provisions of the applicable sections of the Internal Revenue Code, the Bank contributes an amount equal to four percent of the employee's base salary to the 401(k) 35 plan for all eligible employees. In addition, an employee may contribute from 1 to 75 percent of his or her base salary, up to a maximum of $14,000 in 2005. This annual contribution limit increases by $1,000 each year until it reaches $15,000 in 2006. The Bank matches the employee's elective contribution up to the first six percent of the employee's annual base salary. Depending on the Bank's profitability, an additional profit sharing contribution may be made by the Bank to the 401(k) plan. The total retirement plan expense was $1,184,000 for the year ended December 31, 2005, $1,257,000 for the year ended December 31, 2004, and $1,012,000 for the year ended December 31, 2003. This included profit sharing contributions of one percent in 2005, three percent in 2004, and two percent in 2003. The Bank has a postretirement benefit plan that generally provides for the continuation of medical benefits for all employees who retire from the Bank at age 55 or older, upon meeting certain length of service eligibility requirements. The Bank does not fund its postretirement benefit obligation. Rather, payments are made as costs are incurred by covered retirees. The amount of benefits paid under the postretirement benefit plan was $107,000 in 2005, $101,000 in 2004, and $95,000 in 2003. The amount of insurance premium paid by the Bank for retirees is capped at 200% of the cost of the premium as of December 31, 1992. A reconciliation of the accumulated postretirement benefit obligation ("APBO") to the amounts recorded in the consolidated balance sheets in Interest Payable and Other Liabilities at December 31 is as follows (000s omitted):
2005 2004 ------ ------ APBO $1,988 $1,811 Unrecognized net transition obligation (375) (429) Unrecognized prior service costs (32) (36) Unrecognized net gain 62 159 ------ ------ Liability recorded in the consolidated statements of condition $1,643 $1,505 ====== ======
The changes recorded in the accumulated postretirement benefit obligation were as follows (000s omitted):
2005 2004 ------ ------ APBO at beginning of year $1,811 $2,033 Service cost 86 79 Interest cost 101 123 Actuarial loss 97 (323) Benefits paid during year (107) (101) ------ ------ APBO at end of year $1,988 $1,811 ====== ======
Components of the Bank's postretirement benefit expense were as follows:
2005 2004 2003 ---- ---- ---- Service cost $ 86 $ 79 $ 69 Interest cost 101 123 114 Amortization of transition obligation 54 54 54 Prior service costs 4 4 4 Amortization of gains -- -- -- ---- ---- ---- Net postretirement benefit expense $245 $260 $241 ==== ==== ====
The APBO as of December 31, 2005 and 2004 was calculated using assumed discount rates of 5.50% and 5.75%, respectively. Based on the provisions of the plan, the Bank's expense is capped at 200% of the 1992 expense, with all expenses above the cap incurred by the retiree. The expense reached the cap in 2004, and accordingly the impact of an increase in health care costs on the APBO was not calculated. (11) STOCKHOLDERS' EQUITY On December 11, 2003, the Corporation repurchased 1,632,475 shares of its stock at $18.50 per share in a self tender offer. On December 21, 2000, the Corporation's Board of Directors authorized the repurchase of up to 2 million shares of MBT Financial Corp. common stock during the two-year period beginning January 2, 2001. On December 19, 2002, the Board of Directors extended the repurchase program until December 31, 2004. On December 23, 2004, the Board of Directors issued a new authorization to repurchase up to 2 million shares during 2005. Shares purchased are as follows: 36
Shares Repurchased Cost ----------- ----------- 2003 60,000 808,000 2004 220,000 3,874,000 2005 364,420 6,984,000 ------- ----------- Total 644,420 $11,666,000 ======= ===========
On December 22, 2005, the Corporation's Board of Directors authorized the repurchase of up to 2 million shares of MBT Financial Corp. common stock during the 12 month period ending December 31, 2006. (12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Certain of the Bank's assets and liabilities are financial instruments that have fair values that differ from their carrying values in the accompanying consolidated balance sheets. These fair values, along with the methods and assumptions used to estimate such fair values, are discussed below. The fair values of all financial instruments not discussed below are estimated to be equal to their carrying values as of December 31, 2005 and 2004. INVESTMENT SECURITIES Fair value for the Bank's investment securities was determined using the market value at December 31, 2005 and 2004. These Estimated Market Values are disclosed in Note 3. LOANS, NET The fair value of all loans is estimated by discounting the future cash flows associated with the loans, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated fair value of loans at December 31, 2005, net of the allowance for loan losses, is $977,042,000, compared to the carrying value of $975,252,000. The estimated fair value of loans at December 31, 2004, net of the allowance for loan losses, was $946,389,000, compared to the carrying value of $931,303,000. OTHER TIME DEPOSITS The fair value of other time deposits, consisting of fixed maturity certificates of deposit, is estimated by discounting the related cash flows using the rates currently offered for deposits of similar remaining maturities. The estimated fair value of other time deposits at December 31, 2005 is $551,648,000, compared to the carrying value of $547,544,000. The estimated fair value of other time deposits at December 31, 2004 was $443,265,000, compared to the carrying value of $435,614,000. FHLB ADVANCES AND SECURITIES SOLD UNDER REPURCHASE AGREEMENTS A portion of the Federal Home Loan Bank advances in the accompanying consolidated balance sheets were written with a put option that allows the Federal Home Loan Bank to require repayment or conversion to a variable rate advance. The fair value of these putable Federal Home Loan Bank advances is estimated using the binomial lattice option pricing method. The estimated fair value of putable Federal Home Loan Bank advances at December 31, 2005 is $134,065,000, compared to the carrying value of $130,000,000. The fair value and carrying value of the variable rate advances at December 31, 2005 is $123,000,000. The estimated fair value of the fixed rate Federal Home Loan Bank advance at December 31, 2005 is $3,517,000, compared to the carrying value of $3,500,000. The estimated fair value of putable Federal Home Loan Bank advances at December 31, 2004 was $140,160,000, compared to the carrying value of $130,000,000. The fair value and carrying value of the variable rate advances at December 31, 2004 was $123,000,000. The estimated fair value of the Securities Sold under Repurchase Agreements at December 31, 2005 was $35,307,000, compared to the carrying value of $35,000,000. The estimated fair value of the Securities Sold under Repurchase Agreements at December 31, 2004 was $29,943,000, compared to the carrying value of $30,000,000. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The fair values of commitments to extend credit and standby letters of credit and financial guarantees written are estimated using the fees currently charged to engage into similar agreements. The fair values of these instruments are not significant. (13) FEDERAL INCOME TAXES Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. The Corporation and the Bank file a consolidated Federal income tax return. 37 The provision for Federal income taxes consists of the following (000s omitted):
2005 2004 2003 ------ ------ ------ Federal income taxes currently payable (refundable) $6,643 $8,580 $7,348 Provision (credit) for deferred taxes on: Book (over) under tax loan loss provision 71 245 (639) Accretion of bond discount (72) (43) (245) Net deferred loan origination fees 265 56 (43) Accrued postretirement benefits (219) (81) 5 Tax over (under) book depreciation 178 (258) 441 Other, net (8) 276 (256) ------ ------ ------ 215 195 (737) ------ ------ ------ Total deferred provision (credit) $6,858 $8,775 $6,611 ====== ====== ======
The effective tax rate differs from the statutory rate applicable to corporations as a result of permanent differences between accounting and taxable income as follows:
2005 2004 2003 ---- ---- ---- Statutory rate 35.0% 35.0% 35.0% Municipal interest income (8.0) (6.3) (7.7) Other, net 0.8 (0.7) (1.8) ---- ---- ---- Effective tax rate 27.8% 28.0% 25.5% ==== ==== ====
The components of the net deferred Federal income tax asset (included in Interest Receivable and Other Assets on the accompanying consolidated balance sheets) at December 31 are as follows (000s omitted):
2005 2004 ------ ------ Deferred Federal income tax assets: Allowance for loan losses $4,663 $4,734 Net deferred loan origination fees 280 545 Tax versus book depreciation differences 296 474 Net unrealized losses on securities available for sale 2,694 58 Accrued postretirement benefits 771 552 Other, net 199 191 ------ ------ $8,903 $6,554 Deferred Federal income tax liabilities: Accretion of bond discount $ (227) $ (299) ------ ------ $ (227) $ (299) ------ ------ Net deferred Federal income tax asset $8,676 $6,255 ====== ======
(14) REGULATORY CAPITAL REQUIREMENTS The Corporation and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the accompanying tables) of Total and Tier I capital to risk weighted assets and of Tier I capital to average assets. As of December 31, 2005, the Corporation's capital ratios exceeded the required minimums to be considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Corporation must maintain minimum Total risk based, Tier I risk based, and Tier I leverage ratios as set forth in the tables. There are no conditions or events since December 31, 2005 that Management believes have changed the Corporation's category. Management believes, as of December 31, 2005, that the Corporation meets all capital adequacy requirements to which it is subject. The Corporation's and Bank's actual capital amounts and ratios are also presented in the table (000's omitted in dollar amounts). 38
Minimum to Qualify as Actual Well Capitalized ---------------- ---------------- Amount Ratio Amount Ratio -------- ----- -------- ----- AS OF DECEMBER 31, 2005: Total Capital to Risk-Weighted Assets Consolidated $170,347 15.0% $113,895 10.0% Monroe Bank & Trust 169,434 14.9% 113,892 10.0% Tier 1 Capital to Risk-Weighted Assets Consolidated 156,432 13.7% 68,337 6.0% Monroe Bank & Trust 155,519 13.7% 68,335 6.0% Tier 1 Capital to Average Assets Consolidated 156,432 9.6% 81,161 5.0% Monroe Bank & Trust 155,519 9.6% 81,159 5.0%
Minimum to Qualify as Actual Well Capitalized ---------------- ---------------- Amount Ratio Amount Ratio -------- ----- -------- ----- AS OF DECEMBER 31, 2004: Total Capital to Risk-Weighted Assets Consolidated $168,796 15.6% $108,483 10.0% Monroe Bank & Trust 166,976 15.4% 108,483 10.0% Tier 1 Capital to Risk-Weighted Assets Consolidated 155,207 14.3% 65,090 6.0% Monroe Bank & Trust 153,387 14.1% 65,090 6.0% Tier 1 Capital to Average Assets Consolidated 155,207 10.0% 77,275 5.0% Monroe Bank & Trust 153,387 9.9% 77,275 5.0%
(15) EARNINGS PER SHARE The calculation of earnings per common share for the years ended December 31 is as follows:
2005 2004 2003 ----------- ----------- ----------- Basic Net income $17,979,000 $22,599,000 $19,315,000 Less preferred dividends -- -- -- Net income applicable to common stock $17,979,000 $22,599,000 $19,315,000 Average common shares outstanding 17,344,376 17,444,165 19,026,369 Earnings per common share - basic $ 1.04 $ 1.30 $ 1.02
2005 2004 2003 ----------- ----------- ----------- Diluted Net income $17,979,000 $22,599,000 $19,315,000 Less preferred dividends -- -- -- Net income applicable to common stock $17,979,000 $22,599,000 $19,315,000 Average common shares outstanding 17,344,376 17,444,165 19,026,369 Stock option adjustment 73,991 83,500 46,260 Average common shares outstanding - diluted 17,418,367 17,527,665 19,072,629 Earnings per common share - diluted $ 1.03 $ 1.29 $ 1.01
(16) STOCK-BASED COMPENSATION PLAN The Long-Term Incentive Compensation Plan approved by shareholders at the April 6, 2000 Annual Meeting of Shareholders of Monroe Bank & Trust authorized the Board of Directors to grant nonqualified stock options to key employees and non-employee directors. Such grants may be made until January 2, 2010 for up to 1,000,000 shares of the Corporation's common stock. The amount that may be awarded to any one individual is limited to 100,000 shares in any one calendar year. As of December 31, 2005, the number of shares available under the plan is 267,729. This includes 76,083 shares that were previously awarded that have been forfeited. Stock options granted under the plan have exercise prices equal to the fair market value at the date of grant. Options granted under the plan may be exercised for a period of no more than ten years from the date of grant. One-third of the options granted to key employees in 2005 and 2004 vest annually, beginning December 31, 2005, and December 31, 2004, respectively. The options granted to key employees in 2003, 2002 and 2000 are vested as of December 31, 2005, December 31, 2004 and December 31, 2002, respectively. The options granted to non-employee directors in 2002 and 2001 vested on December 31, 2002 and December 31, 2001, respectively. 39 A summary of the status of stock options under the plan is presented in the table below.
2005 2004 2003 ------------------ ------------------ ------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------- -------- ------- -------- ------- -------- Options Outstanding, January 1 433,787 $15.21 480,802 $14.73 323,949 $15.52 Granted 136,000 23.40 161,000 16.69 179,500 13.20 Exercised 88,162 14.16 183,915 14.97 19,647 13.86 Forfeited/Expired 48,983 15.34 24,100 17.33 -- -- Cancelled -- -- -- -- 3,000 13.85 ------- ------ ------- ------ ------- ------ Options Outstanding, December 31 432,642 $17.99 433,787 $15.21 480,802 $14.73 ------- ------ ------- ------ ------- ------ Options Exercisable, December 31 303,321 $16.54 266,637 $15.08 306,445 $15.49 ------- ------ ------- ------ ------- ------ Weighted Average Fair Value of Options Granted During Year $ 5.10 $ 3.52 $ 2.63
The options outstanding as of December 31, 2005 are exercisable at prices ranging from $13.20 to $23.40. The options exercisable as of December 31, 2005 are exercisable at prices ranging from $13.20 to $23.40. The number of options and remaining life of options at each exercise price are as follows:
Outstanding Options Exercisable Options ------------------------ ------------------------ Remaining Life Remaining Life Exercise Price Shares (in years) Shares (in years) - -------------- ------- -------------- ------- -------------- $ 13.20 87,669 7.01 87,669 7.01 $ 13.85 37,671 6.01 37,671 6.01 $ 13.94 4,402 5.01 4,402 5.01 $ 16.69 114,500 8.01 75,839 8.01 $18.125 52,400 4.50 52,400 4.50 $ 23.40 136,000 9.01 45,340 9.01 ------- ------- 432,642 303,321
(17) PARENT COMPANY Condensed parent company financial statements, which include transactions with the subsidiary, are as follows (000s omitted): BALANCE SHEETS
DECEMBER 31, ------------------- 2005 2004 -------- -------- Assets Cash and due from banks $ 2,962 $ 3,994 Investment in subsidiary bank 150,706 153,524 Other assets 32 -- -------- -------- Total assets $153,700 $157,518 ======== ======== LIABILITIES Dividends payable and other liabilities $ 2,081 $ 2,172 -------- -------- Total liabilities 2,081 2,172 ======== ======== STOCKHOLDERS' EQUITY Total stockholders' equity 151,619 155,346 -------- -------- Total liabilities and stockholders' equity $153,700 $157,518 ======== ========
40 STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, ---------------------------- 2005 2004 2003 ------- ------- -------- Income Dividends from subsidiary bank $15,871 $12,829 $ 42,061 ------- ------- -------- Total income 15,871 12,829 42,061 ------- ------- -------- EXPENSE Interest on other borrowed funds -- -- -- Other expense 150 176 399 ------- ------- -------- Total expense 150 176 399 ------- ------- -------- Income before tax and equity in undistributed net income of subsidiary bank 15,721 12,653 41,662 Income tax benefit (52) (51) (102) ------- ------- -------- Income before equity in undistributed net income of subsidiary bank 15,773 12,704 41,764 Equity in undistributed net income (loss) of subsidiary bank 2,206 9,895 (22,449) ------- ------- -------- NET INCOME $17,979 $22,599 $ 19,315 ======= ======= ========
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------ 2005 2004 2002 -------- -------- -------- CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Net income $ 17,979 $ 22,599 $ 19,315 Equity in undistributed net income (loss) of subsidiary bank (2,206) (9,895) 22,449 Net increase (decrease) in other liabilities (125) (197) (164) Net decrease in other assets 200 325 -- -------- -------- -------- Net cash provided by operating activities $ 15,848 $ 12,832 $ 41,600 -------- -------- -------- CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES: Issuance of common stock $ 1,396 $ 2,940 $ 342 Repurchase of common stock (6,984) (3,874) (31,008) Dividends paid (11,292) (10,649) (10,904) -------- -------- -------- Net cash used for financing activities $(16,880) $(11,583) $(41,570) -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS $ (1,032) $ 1,249 $ 30 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,994 2,745 2,715 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,962 $ 3,994 $ 2,745 -------- -------- --------
Under current regulations, the Bank is limited in the amount it may loan to the Corporation. Loans to the Corporation may not exceed ten percent of the Bank's capital stock, surplus, and undivided profits plus the allowance for loan losses. Loans from the Bank to the Corporation are required to be collateralized. Accordingly, at December 31, 2005, Bank funds available for loans to the Corporation amounted to $16,907,000. The Bank has not made any loans to the Corporation. Federal and state banking laws and regulations place certain restrictions on the amount of dividends a bank may make to its parent company. Michigan law limits that amount of dividends the Bank can pay to the Corporation without regulatory approval to the sum of its current year net income and its undivided profits for the two previous years. Accordingly, the Bank can pay dividends of $27,914,000 in 2006, in addition to its 2006 net income, without regulatory approval. (18) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for its other lending activities. 41 Financial instruments whose contractual amounts represent off-balance sheet credit risk at December 31 were as follows (000s omitted):
CONTRACTUAL AMOUNT ------------------- 2005 2004 -------- -------- Commitments to extend credit: Unused portion of commercial lines of credit $130,496 $123,739 Unused portion of credit card lines of credit 7,529 7,265 Unused portion of home equity lines of credit 20,258 23,709 Standby letters of credit and financial guarantees written 12,736 16,449
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Most commercial lines of credit are secured by real estate mortgages or other collateral, generally have fixed expiration dates or other termination clauses, and require payment of a fee. Since the lines of credit may expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. Credit card lines of credit have various established expiration dates, but are fundable on demand. Home equity lines of credit are secured by real estate mortgages, a majority of which have ten year expiration dates, but are fundable on demand. The Bank evaluates each customer's creditworthiness on a case by case basis. The amount of the collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on Management's credit evaluation of the counter party. Standby letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and other business transactions. Approximately $8,917,000 of the letters of credit expires in 2006 and $3,819,000 extends for two to five years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. (19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (000S OMITTED):
2005 FIRST SECOND THIRD FOURTH - ---- ------- ------- ------- ------- Total Interest Income $20,919 $21,919 $23,177 $23,680 Total Interest Expense 8,297 9,228 10,064 10,994 ------- ------- ------- ------- Net Interest Income 12,622 12,691 13,113 12,686 Provision for Loan Losses 600 600 4,100 1,606 Other Income 3,446 3,664 3,683 3,656 Other Expenses 8,729 8,210 9,023 7,856 ------- ------- ------- ------- Income Before Provision For Income Taxes 6,739 7,545 3,673 6,880 Provision For Income Taxes 1,860 2,176 1,102 1,720 ------- ------- ------- ------- Net Income $ 4,879 $ 5,369 $ 2,571 $ 5,160 ======= ======= ======= ======= Basic Earnings Per Common Share $ 0.28 $ 0.31 $ 0.15 $ 0.30 Diluted Earnings Per Common Share $ 0.28 $ 0.31 $ 0.15 $ 0.29 Dividends Declared Per Share $ 0.16 $ 0.16 $ 0.17 $ 0.17
2004 FIRST SECOND THIRD FOURTH - ---- ------- ------- ------- ------- Total Interest Income $18,560 $19,250 $20,744 $21,149 Total Interest Expense 5,920 6,266 7,117 7,695 ------- ------- ------- ------- Net Interest Income 12,640 12,984 13,627 13,454 Provision for Loan Losses 600 600 600 691 Other Income 3,226 3,361 3,396 3,793 Other Expenses 7,889 7,995 8,025 8,707 ------- ------- ------- ------- Income Before Provision For Income Taxes 7,377 7,750 8,398 7,849 Provision For Income Taxes 1,977 2,102 2,289 2,407 ------- ------- ------- ------- Net Income $ 5,400 $ 5,648 $ 6,109 $ 5,442 ======= ======= ======= ======= Basic Earnings Per Common Share $ 0.31 $ 0.32 $ 0.35 $ 0.32 Diluted Earnings Per Common Share $ 0.31 $ 0.32 $ 0.35 $ 0.31 Dividends Declared Per Share $ 0.15 $ 0.15 $ 0.16 $ 0.16
42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 9A. CONTROLS AND PROCEDURES CONCLUSION REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES MBT Financial Corp. carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures as of December 31, 2005, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Corporation's disclosure controls and procedures were effective as of December 31, 2005, in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be in the Corporation's periodic SEC filings. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING The management of MBT Financial Corp. is responsible for establishing and maintaining adequate internal control over financial reporting. MBT Financial Corp.'s internal control over financial reporting is a process designed under the supervision of the Corporation's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Corporation's financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. MBT Financial Corp.'s management assessed the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2005 based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control-Integrated Framework." Based on that assessment, management determined that, as of December 31, 2005, the Corporation's internal control over financial reporting is effective, based on those criteria. Management's assessment of the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2005 has been audited by Plante & Moran, PLLC, an independent registered public accounting firm, as stated in their report appearing on page 44. ITEM 9B. OTHER INFORMATION None. 43 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors MBT Financial Corp. and Subsidiaries Monroe, Michigan We have audited management's assessment included in the accompanying Report of Management on MBT Financial Corp. and Subsidiaries Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audits included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that MBT Financial Corp. and Subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on COSO criteria. Also in our opinion, MBT Financial Corp. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005 based on the COSO criteria. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Balance Sheets of MBT Financial Corp. and Subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of earnings, shareholders equity and cash flow for each of the three years in the period ended December 31, 2005 and our report dated February 28, 2006, expressed an unqualified opinion thereon. /s/ Plante & Moran, PLLC - ------------------------------------- February 28, 2006 Auburn Hills, Michigan 44 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (A) EXECUTIVE OFFICERS - See "Executive Officers" in part I, Item 1 hereof. (B) DIRECTORS AND EXECUTIVE OFFICERS - information required by this item is incorporated by reference from the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities Exchange Commission. (C) AUDIT COMMITTEE FINANCIAL EXPERT - The Board of Directors has determined that Peter H. Carlton, member of the Audit Committee, is an "audit committee financial expert" and "independent" as defined under applicable SEC and Nasdaq rules. (D) MBT Financial Corp. has adopted its CODE OF ETHICS, a code of ethics that applies to all its directors, officers, and employees, including its Chief Executive Officer, Chief Financial Officer, and internal auditor. A copy of the Code of Ethics is posted on our website at http://www.mbandt.com. In the event we make any amendment to, or grant any waiver of, a provision of the Code of Ethics that applies to the principal executive officers, principal financial officer, principal accounting officer, or controller, or persons performing similar functions that require disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the reasons for it, and the nature of any waiver, the name of the person to whom it was granted, and the date, on our internet website. ITEM 11. EXECUTIVE COMPENSATION Information required by this item is incorporated by reference from the sections entitled "Executive Compensation and Other Information" and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities and Exchange Commission. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information required by this item is incorporated by reference from the section entitled "Ownership of Voting Shares" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities and Exchange Commission. Securities authorized for issuance under equity compensation plans as of December 31, 2005 were as follows:
Number of securities remaining Number of securities to be Weighted average available for future issuance under issued upon exercise of exercise price of equity compensation plans outstanding options, warrants, outstanding options, (excluding securities reflected in and rights warrants, and rights the first column) ------------------------------ -------------------- ----------------------------------- Equity Compensation plans approved by security holders 433,787 $15.22 331,045 Equity Compensation plans not approved by security holders 0 0 0 ------- ------ ------- Total 433,787 $15.22 331,045 ======= ====== =======
45 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by this item is incorporated by reference from the section entitled "Certain Transactions" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities and Exchange Commission. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information required by this item is incorporated by reference from the section entitled "Principal Accounting Firm Fees" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities and Exchange Commission. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Contents Financial Statements Reports of Independent Registered Public Accounting Firm - Page 22 Consolidated Balance Sheets as of December 31, 2005 and 2004 - Page 23 Consolidated Statements of Income for the Years Ended December 31, 2005, 2004, and 2003 - Page 24 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2005, 2004, and 2003 - Page 25 Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004, and 2003- Page 26 Notes to Consolidated Financial Statements - Pages 27 - 42 Exhibits The following exhibits are filed as a part of this report: 3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as Exhibit 3.2 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2004. 10.1 MBT Financial Corp. Long-Term Incentive Compensation Plan. Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.2 Monroe Bank & Trust Salary Continuation Agreement with Ronald D. LaBeau. Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.3 Monroe Bank & Trust Split Dollar Life Insurance Agreement with Directors. Previously filed as Exhibit 10.3 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.4 Monroe Bank & Trust Group Term Carve Out Plan Providing Life Insurance Benefits to Executive Officers. Previously filed as Exhibit 10.4 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.5 MBT Financial Corp. Amended and Restated Change in Control Agreement with H. Douglas Chaffin. 10.6 Monroe Bank & Trust Group Term Carve Out Plan Providing Life Insurance Benefits to Executive Officers. Previously filed as Exhibit 10.6 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2001.
46 10.7 Monroe Bank & Trust Supplemental Executive Retirement Agreement with H. Douglas Chaffin. Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 10.8 Monroe Bank & Trust Split Dollar Agreement with H. Douglas Chaffin. Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 10.9 MBT Financial Corp. Severance Agreements with Donald M. Lieto, James E. Morr, Thomas G. Myers, and John L. Skibski. Previously filed as Exhibit 10 on Form 8-K filed by MBT Financial Corp. on January 26, 2006. 21 Subsidiaries of the Registrant. Previously filed as Exhibit 21 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 23 Consent of Independent Auditors 31.1 Certification by Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14. 31.2 Certification by Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14. 32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
47 ================================================================================ Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 10, 2006 MBT FINANCIAL CORP. By: /s/ John L. Skibski ------------------------------------ John L. Skibski Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Dated: March 10, 2006 By: /s/ H. Douglas Chaffin By: /s/ John L. Skibski --------------------------------- ------------------------------------ H. Douglas Chaffin John L. Skibski President, Chief Executive Chief Financial Officer Officer & Director By: /s/ William D. McIntyre, Jr. By: /s/ Peter H. Carlton --------------------------------- ------------------------------------ William D. McIntyre, Jr. Peter H. Carlton Chairman Director By: /s/ Joseph S. Daly By: /s/ Thomas M. Huner --------------------------------- ------------------------------------ Joseph S. Daly Thomas M. Huner Director Director By: /s/ Philip P. Swy By: /s/ Michael J. Miller --------------------------------- ------------------------------------ Philip P. Swy Michael J. Miller Director Director By: /s/ Karen M. Wilson - ------------------------------------ Karen M. Wilson Director 48 EXHIBIT INDEX
Exhibit Number Description of Exhibits - -------------- ----------------------- 3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as Exhibit 3.2 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2004. 10.1 MBT Financial Corp. Long-Term Incentive Compensation Plan. Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.2 Monroe Bank & Trust Salary Continuation Agreement. Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.3 Monroe Bank & Trust Split Dollar Life Insurance Agreement. Previously filed as Exhibit 10.3 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.4 Monroe Bank & Trust Group Term Carve Out Plan. Previously filed as Exhibit 10.4 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.5 MBT Financial Corp. Amended and Restated Change in Control Agreement with H. Douglas Chaffin. 10.6 Monroe Bank & Trust Group Term Carve Out Plan. Previously filed as Exhibit 10.6 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2001. 10.7 Monroe Bank & Trust Supplemental Executive Retirement Agreement. Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 10.8 Monroe Bank & Trust Split Dollar Agreement. Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 10.9 MBT Financial Corp. Severance Agreement with Donald M. Lieto, James E. Morr, Thomas G. Myers, and John L. Skibski. Previously filed as Exhibit 10 on Form 8-K filed by MBT Financial Corp. on January 26, 2006. 21 Subsidiaries of the Registrant. Previously filed as Exhibit 21 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 23 Consent of Independent Auditors 31.1 Certification by Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14. 31.2 Certification by Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14. 32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
49 EX-10.5 2 k02497exv10w5.txt AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT WITH H. DOUGLAS CHAFFIN EXHIBIT 10.5 AMENDED AND RESTATED CHANGE IN CONTROL AGREEMENT JANUARY 3, 2006 This is an amended and restated agreement (the "Agreement") of that certain agreement by and between MBT Financial Corp., a Michigan Corporation ("MBT") and H. Douglas Chaffin ("Executive") dated July 30, 2001. RECITALS WHEREAS, MBT is a bank holding company whose principal subsidiary is engaged in the business of banking and businesses incidental thereto. WHEREAS, Executive possesses unique skills, knowledge and experience relating to the business of MBT. WHEREAS, MBT desires to retain the future services of Executive, and, in that connection, Executive desires to be assured that, in the event of a change in the control of MBT, Executive will be provided with an adequate severance payment for termination without cause or as compensation for Executive's severance because of a material change in his duties and functions. WHEREAS, MBT desires to be assured of the objectivity of Executive in evaluating a potential change of control and advising whether or not a potential change of control is in the best interest of MBT and its shareholders. WHEREAS, MBT desires to induce Executive to remain in the employ of the Company following a change of control to provide for continuity of management. NOW, THEREFORE, in consideration of the premises and of their mutual covenants expressed in this Agreement, the parties hereto make the following agreement, intending to be legally bound thereby: SECTION 1 - DEFINITIONS. A. Board - "Board" shall mean the Board of Directors of MBT. B. MBT -"MBT" means MBT Financial Corp., a Michigan corporation and the parent corporation of Monroe Bank & Trust. C. Cause - "Cause" shall mean and be limited to Executive's (a) criminal dishonesty, (b) refusal to perform his duties on an exclusive and substantially full-time basis, (c) refusal to act in accordance with any specific substantive instructions given by Company with respect to Executive's performance of duties normally associated with his position prior to the Change in Control, or (d) engaging in conduct which could be materially damaging to Company without a reasonable good faith belief that such conduct was in the best interest of Company. D. Change in Control - "Change in Control" shall have the meaning set forth on Exhibit A. E. Code - "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. F. Company - "Company" means MBT, Monroe Bank & Trust and all other members of MBT's Affiliated Group, over which Executive has managerial control, as the term "Affiliated Group" is defined in Section 1504 of the Code, and shall include any predecessor or successor corporations of the Company and its Affiliated Group. G. Compensation - "Compensation" shall mean Executive's then current annual base salary plus any cash bonuses for the last whole calendar year preceding Executive's termination of employment. Compensation shall not include any amount, other than base salary and cash bonuses, included in Executive's taxable compensation for federal income tax purposes and reported to Executive and Internal Revenue Service ("IRS") such as the reporting of previously deferred compensation or gain realized upon exercise of any non qualified stock options. H. Exchange Act - "Exchange Act" means the Securities Exchange Act of 1934. SECTION 2 - TERM OF AGREEMENT. This Agreement shall terminate on the date which is the latest of: (i) Company's payment of any amounts due under Section's 4 and 6, (ii) the performance of Executive's obligations under Section 9 hereof, and (iii) the earliest of: 1. The date this Agreement is mutually rescinded; 2. The date which is two (2) years after the date of a Change in Control. 3. Before a Change in Control, on the date which Monroe Bank & Trust, or any other member of the Company's Affiliated Group, and over which Executive has managerial control, which is a depository institution which is insured by an agency of any state or the United States Federal Government: a. becomes insolvent; or b. has appointed any conservator or receiver; or c. is determined by an appropriate federal banking agency to be in a troubled condition, as defined in the applicable law and regulations; or d. is assigned a composite rating of 4 or 5 by the appropriate federal banking agency or is informed in writing by the Federal Deposit Insurance Corporation that it is rated a 4 or 5 under the Uniform Financial Institution's Rating System of the Federal Financial Institutions Examination Council; or e. has initiated against it by the Federal Deposit Insurance Corporation a proceeding to terminate or suspend deposit insurance; or f. reasonably determines in good faith and with due care that the payments called for under this Agreement, or the obligations and promises assumed and made under this Agreement have become proscribed under applicable law or regulations. Provided, however, if such law or regulations apply prospectively only, or for some other reason do not apply to this Agreement, then this Agreement shall not be deemed by Company to be proscribed. SECTION 3 - REDUCTION IN COMPENSATION PROSCRIBED AFTER A CHANGE IN CONTROL. From the date of a Change in Control to the date of termination of this Agreement Executive shall receive as compensation, while still employed by Company, a salary at a rate no less than the highest rate in effect during the one-year period before the Change in Control, and shall, in addition, be entitled to receive a bonus equal to at least the average of the last three years bonuses paid before the Change in Control. In addition, during such period, the Company shall pay and provide for Executive at no cost to Executive, all of his then-current fringe benefits, including but not limited to health, disability, dental, life insurance and club memberships, all of which shall be at levels and amounts no less favorable than levels and amounts in effect as of the Change in Control. SECTION 4 - PAYMENTS DUE AFTER A CHANGE IN CONTROL. A. If during the term of this Agreement and after the date of a Change in Control, Executive is discharged without Cause or Executive resigns because he has: (i) been demoted, (ii) had his compensation reduced, (iii) had his principal place of employment transferred away from Monroe County, Michigan, or a county contiguous thereto, or (iv) had his job title, status or responsibility materially reduced, then the Company shall make the payments to Executive set forth in subsection D of this Section 4. B. If Executive voluntarily terminates employment not earlier than six (6) months and not later than nine (9) months following a Change in Control, then the Company shall make the payments to Executive set forth in subsection D of this Section 4. C. If Executive is discharged by Company other than for Cause and there is a Change in Control within two years following the discharge, then the Company shall make the payments to Executive set forth in subsection D of this Section 4. D. In the event of the termination of Executive's employment as described in A, B or C above, Executive shall be entitled to receive a cash payment equal to one (1) times his Compensation. The payment required shall be paid at the end of the first month commencing after the Executive's termination of employment in the case of a benefit entitlement under Subsection A, or B above. In the event of termination of employment as described in C above, payment shall be made immediately upon the Change in Control. If Executive's employment is terminated as described in Subsection A or Subsection B above, then in addition to the above cash payment, Company shall make an additional cash payment equal to twelve months of the then current cost of any club memberships provided by the Company for the benefit of Executive and continue at no cost to Executive for the term of the Benefit Period as defined below, Executive's coverage in Company's health, disability, dental, and life insurance at the same levels that had been provided immediately prior to his termination of employment. The Benefit Period shall commence on the date of termination of the Executive's employment and shall end on the last day of the 12th consecutive whole month thereafter. In the event Executive dies before collecting all amounts and benefits due under this Section, any payments owing shall be paid to the person or persons as stated in the last designation of beneficiary concerning this Agreement signed by Executive and filed with Company, and if not, then to the personal representative of Executive. The payments and benefits provided for herein are in lieu of compensation, benefits or amounts the Executive might otherwise be entitled to under the Company's severance policy or otherwise payable by the Company be reason of termination of employment. E. In the event the payments required under this Agreement, when added together with any other amounts required to be included by Executive under the provisions of the Code, result in an "Excess Parachute Payment," as that term is defined in Section 280G of the Code, then the amount of the payments provided for in this agreement shall be increased in an amount equal to 250% of any excise tax imposed under Section 4999 (or any successor thereto) of the Code and otherwise payable by the Executive. F. Any subsequent employment by Executive shall not reduce the obligation of the Company to make the full payments and provide the full benefits specified herein and Executive shall have no obligation to seek other employment or otherwise mitigate the effect of his discharge from employment. G. Notwithstanding the provisions of this agreement providing for payment of benefits, if at the time a benefit would otherwise be payable, Employee is a "specified employee" [as defined below], and the payment provided for would be deferred compensation with the meaning of the Internal Revenue Code (the "Code"), section 409A, the distribution of the Employee's benefit may not be made until six months after the date of the Employee's separation from service with the Company [as that term may be defined in Section 409A(a)(2)(A)(i) of the Code and regulations promulgated thereunder], or, if earlier the date of death of the Employee. This requirement shall remain in effect only for periods in which the stock of the Company is publicly traded on an established securities market. For purposes of this subparagraph a "specified employee" shall mean any Employee of the Company who is a "key employee" of the Company within the meaning of Code section 416(i). This shall include any Employee who is (i) a 5-percent owner of the Company's common stock, or (ii) an officer of the Company with annual compensation from the Company of $130,000.00 or more, or (iii) a 1-percent owner of Company's common stock with annual compensation from the Company of $150,000.00 or more (or such higher annual limit as may be in effect for years subsequent to 2005 pursuant to indexing section 416(i) of the Code). The provisions of this subparagraph have been adopted only in order to comply with the requirements added by Code section 409A. These provisions shall be interpreted and administered in a manner consistent with the requirements of Code section 409A, together with any regulations or other guidance which may be published by the Treasury Department or Internal Revenue Service interpreting such Code section 409A. SECTION 5 - QUALIFIED AND NON-QUALIFIED RETIREMENT PENSION PLANS. Nothing in this Agreement shall reduce any pension benefits or benefits from other qualified or non-qualified retirement plans maintained by Company to which Executive is otherwise entitled without regard to this Agreement. SECTION 6 - PROVISION FOR OUTPLACEMENT SERVICES. In the event of the termination of employment of Executive requiring the payments specified in Section 4 of this Agreement, Executive shall be entitled to six months of out-placement services following termination of employment. Such services shall include employment counseling, resume services, executive placement services and similar services generally provided to executives by professional executive out placement service providers. All costs of such out placement services shall be paid for by the Company. SECTION 7 - ARBITRATION. Subject to the Company's right to seek injunctive relief under Section 9 of this Agreement, the parties hereto agree to arbitrate any issue, misunderstanding, disagreement or dispute in connection with the terms in effect in this Agreement in accordance with the Rules of the American Arbitration Association, before one arbitrator mutually agreeable to the parties. If either party determines that the parties have been unable to agree upon one arbitrator, then such party may appoint one arbitrator and require the other party to appoint a second arbitrator. Whereupon, the two appointed arbitrators shall appoint a third neutral arbitrator. If the arbitrators selected by the parties are unable or fail to agree upon the third arbitrator, the American Arbitration Association shall select the third arbitrator. Failure by a party to either (i) accept as mutually agreeable, or (ii) appoint an arbitrator, within 30 days of receipt of notice of the appointment of an arbitrator by the other party, shall be deemed as acceptance of arbitration by such single arbitrator. The arbitration shall occur in Monroe, Michigan, or such other place as mutually agreed upon. The prevailing party shall be entitled to recover any and all costs associated with any arbitration proceeding (and any subsequent proceeding to enforce rights thereunder) including the recovery of reasonable attorneys fees. Judgement on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. SECTION 8 - RIGHT TO OTHER BENEFITS. Except as otherwise specified herein, nothing in this Agreement shall abridge, eliminate, or cause Executive to lose Executive's right or entitlement to any other Company benefit to which Executive may be entitled due to his status as an employee under any plan or policy of Company on such terms and conditions as are required of any employee under any plan or policy of Company. Further, nothing in this Agreement shall create in Executive any greater rights or entitlements, except as specified in this Agreement. The plans and policies referred to in this Section 8 include, but are not limited to, life insurance plans, dental, disability or health insurance benefits, severance policies, club memberships, and accrued vacation pay. SECTION 9 - NONCOMPETITION AND NONSOLICITATION AGREEMENT AND BUSINESS PROTECTION. Notwithstanding anything to the contrary contained elsewhere in this Agreement: A. Noncompetition Agreement and Nonsolicitation Agreement 1. In view of Executive's importance to the success of the Company, Executive and Company agree that the Company would likely suffer significant harm from Executive's competing with Company during Executive's term of employment with Company and for some period of time thereafter. Accordingly, Executive agrees that Executive shall not engage in competitive activities while employed by Company and during the Restricted Period. Executive shall be deemed to engage in competitive activities if he shall, without the prior written consent of the Company, (i) in Monroe County, Michigan and counties contiguous thereto (including the municipalities therein), render services directly or indirectly, as an employee, officer, director, consultant, advisor, partner or otherwise, for any organization or enterprise which competes directly or indirectly with the business of Company or any of its affiliates in providing financial products or services (including, without limitation, banking, insurance, or securities products or services) to consumers and businesses, or (ii) directly or indirectly acquires any financial or beneficial interest in (except as provided in the next sentence) any organization which conducts or is otherwise engaged in a business or enterprise in Monroe County, Michigan, and counties contiguous thereto (including all municipalities therein) which competes directly or indirectly with the business of Company or any of its affiliates in providing financial products or services (including, without limitation, banking, insurance or securities products or services) to consumers and businesses. Notwithstanding the preceding sentence, Executive shall not be prohibited from owning less that 1 percent of any publicly traded corporation, whether or not such corporation is in competition with Company. For purposes of this paragraph 9 the term "Restricted Period" shall equal one year, commencing as of the date of Executive's termination of employment. 2. While employed by Company and for a period of one (1) year following Executive's termination of employment with Company, Executive agrees that Executive shall not, in any manner, directly or indirectly, (i) solicit by mail, by telephone, by personal meeting, or by any other means, either directly or indirectly, any customer or prospective customer of Company to whom Executive provided services, or for whom Executive transacted business, or whose identity become known to Executive in connection with Executive's services to Company (including employment with or services to any predecessor or successor entities), to transact business with a person or an entity other than the Company or its affiliates or reduce or refrain from doing any business with the Company or its affiliates or (ii) interfere with or damage (or attempt to interfere with or damage) any relationship between Company or its affiliates and any such customer or prospective customer. The term "solicit" as used in this Agreement means any communication of any kind whatsoever, inviting, encouraging or requesting any person to take or refrain from taking any action with respect to the business of Company and its subsidiaries. 3. While employed by Company and for a period of one (1) year following Executive's termination of employment with Company, Executive agrees that Executive shall not, in any manner, directly or indirectly, solicit any person who is an employee of Company or any of its affiliates to apply for or accept employment or a business opportunity with any other person or entity. 4. The parties agree that nothing herein shall be construed to limit or negate the common law of torts or trade secrets where it provides broader protection than that provided herein. B. Confidential Information Executive has obtained and may obtain confidential information concerning the businesses, operations, financial affairs, organizational and personnel matters, policies, procedures and other non-public matters of Company and its affiliates, and those of third-parties that is not generally disclosed to persons not employed by Company or its subsidiaries. Such information (referred to herein as the "Confidential Information") may have been or may be provided in written form or orally. Executive shall not disclose to any other person the Confidential Information at any time during his employment with Company or after the termination of his employment, provided that Executive may disclose such Confidential Information only to a person who is then a director, officer, employee, partner, attorney or agent of Company who, in Executive's reasonable good faith judgment, has a need to know the Confidential Information. C. Remedies 1. Executive acknowledges that a violation on Executive's part of this Section 9 would cause immeasurable and irreparable damage to Company. Accordingly, Executive agrees that notwithstanding Section 7 hereof, Company shall be entitled to injunctive relief in any court of competent jurisdiction for any actual or threatened violation of any of the provisions of this Section 9, in addition to any other remedies it may have. 2. In addition to Company's right to seek injunctive relief as set forth in subparagraph 1 above of this Section 9.C, in the event that Executive shall violate the terms and conditions of this Section 9, Company may: (i) make a general claim for damages and (ii) terminate any payments or benefits payable by Company, if applicable, to Executive. 3. The Board shall be responsible for determining whether Executive shall have violated this Section 9, and in the absence of Executive's ability to show that the Board has acted in bad faith and without fair dealing, such decision will be final and binding. Upon the request of Executive, the Company shall provide an advance opinion as to whether a proposed activity would violate the provisions of this Agreement. SECTION 10 - NOTICE AND PAYMENTS. All payments required or permitted to be made under the provisions of this Agreement, and all notices and other communications required or permitted to be given or delivered under this Agreement to Company or to Executive, which notices or communications must be in writing, shall be deemed to have been given if delivered by hand, or mailed by first-class mail, addressed as follows: A. If to Company: MBT Financial Corp 102 E. Front Street Monroe, MI 48161 Attn: Chairman, Compensation Committee B. If to Executive: H. Douglas Chaffin c/o MBT Financial Corp 102 E. Front Street Monroe, MI 48161 Company or Executive may, by notice given to the other from time to time and at any time, designate a different address for making payments required to be made, and for the giving of notices or other communications required or permitted to be given, to the party designating such new address. SECTION 11 - PAYROLL TAXES. Any payment required or permitted to be made or given to Executive under this Agreement shall be subject to the withholding and other requirements of applicable laws, and to the deduction requirements of any benefit plan maintained by Company in which Executive is a participant, and to all reporting, filing and other requirements in respect of such payments, and Company shall use it best efforts promptly to satisfy all such requirements. SECTION 12 - GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Michigan. SECTION 13 - DUPLICATE ORIGINALS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be a duplicate original, but all of which, taken together, shall constitute a single instrument. SECTION 14 - CAPTIONS. The captions contained in this Agreement are included only for convenience of reference and do not define, limit, explain or modify this Agreement or its interpretations, construction or meaning and are in no way to be construed as a part of this Agreement. SECTION 15 - SEVERABILITY. If any provision of this Agreement or the application of any provision to any person or any circumstances shall be determined to be invalid or unenforceable, such provision or portion thereof shall nevertheless be effective and enforceable to the extent determined reasonable. Such determination shall not affect any other provision of this Agreement or the application of said provision to any other person or circumstance, all of which other provisions shall remain in full force and effect, and it is the intention of Company and Executive that if any provision of this Agreement is susceptible of two or more constructions, one of which would render the provision enforceable and the other or others of which would render the provisions unenforceable, then the provisions shall have the meaning which renders it enforceable. SECTION 16 - NUMBER AND GENDER. When used in this Agreement, the number and gender of each pronoun shall be construed to be such number and gender as the context, circumstances or its antecedent may require. SECTION 17 - SUCCESSOR AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns (including successive, as well as immediate, successors and assigns) of Company; provided, however, that Company may not assign this Agreement or any of its rights or obligations hereunder to any party other than a corporation which succeeds to substantially all of the business and assets of Company by merger, consolidation, sale of assets or otherwise. This Agreement shall inure to the benefit of and be binding upon the successor and assigns (including successive, as well as immediate, successors and assigns) of Executive; provided, however, that the right of Executive under this Agreement may be assigned only to his personal representative or trustee or by will or pursuant to applicable laws of descent and distribution. SECTION 18 -PRIOR AGREEMENT SUPERCEDED. This Agreement supersedes the previous agreement dated July 30, 2001. IN WITNESS WHEREOF, the parties hereto have caused this Amended Agreement to be executed on and to be effective on January 18, 2006. In the Presence of: EXECUTIVE /s/ H. Douglas Chaffin ---------------------------------------- /s/ Bonnie S. Snyder H. Douglas Chaffin /s/ Donald M. Lieto In the Presence of: MBT FINANCIAL CORP. /s/ William D. McIntyre, Jr. ---------------------------------------- /s/ Bonnie S. Snyder By: William D. McIntyre, Jr. /s/ Donald M. Lieto Its: Chairman Exhibit A Change in Control Definition A "Change in Control" shall mean a "Change in Ownership" as defined in (a) hereof; a "Change in Effective Control" as defined in (b), hereof; or a "Change in Ownership of a Substantial Portion of Assets" as defined in (c) hereof. (a) Change in Ownership. For purposes of this Agreement, a "change in the ownership" of the Company occurs on the date that any one person, or more than one person acting as a group (as defined in subsection (d) hereof, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of the stock of the Company. However, if any one person, or more than one person acting as a group, is considered to own more than 50 percent of the total fair market value or total voting power of the stock of the Company, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the Company (or to cause a change in the effective control of the Company (within the meaning of subsection (b) hereof. An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the Company acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of this section. (b) Change in the Effective Control. For purposes of this Agreement, a change in the effective control of the Company occurs on the date that either - (i) Any one person, or more than one person acting as a group (as determined under subsection (d) hereof, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing 35 percent or more of the total voting power of the stock of the Company; or (ii) a majority of members of the Company's board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Company's board of directors prior to the date of the appointment or election. In the absence of an event described in subsection (b)(i) or (ii) above, a change in the effective control of a Company will not have occurred. (c) Change in the Ownership of a Substantial Portion of the Company's Assets. For purposes of this Agreement, a change in the ownership of a substantial portion of the Company's assets occurs on the date that any one person, or more than one person acting as a group (as determined in subsection(d) hereof, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than 40 percent of the total gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. There is no Change in Control Event under this subsection (c) when there is a transfer to an entity that is controlled by the shareholders of the Company immediately after the transfer, as provided in this paragraph. A transfer of assets by the Company is not treated as a change in the ownership of such assets if the assets are transferred to -- (i) A shareholder of the Company (immediately before the asset transfer) in exchange for or with respect to its stock; (ii) An entity, 50 percent or more of the total value or voting power of which is owned, directly or indirectly, by the Company; (iii) A person, or more than one person acting as a group, that owns, directly or indirectly, 50 percent or more of the total value or voting power of all the outstanding stock of the Company; or (iv) An entity, at least 50 percent of the total value or voting power of which is owned, directly or indirectly, by a person described in subsection (iii) hereof. For purposes of this subsection(c) and except as otherwise provided, a person's status is determined immediately after the transfer of the assets. For example, a transfer to a corporation in which the transferor corporation has no ownership interest before the transaction, but which is a majority-owned subsidiary of the transferor corporation after the transaction is not treated as a change in the ownership of the assets of the transferor corporation. (d) Persons Acting as a Group. Persons will not be considered to be acting as a group solely because they purchase assets or purchase or own stock of the same corporation at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, purchase or acquisition of assets, or similar business transaction with the Company. If a person, including an entity shareholder, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only to the extent of the ownership in that corporation prior to the transaction giving rise to the change and not with the ownership interest in the other corporation. EX-23 3 k02497exv23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference into MBT Financial Corp.'s registration statement on Form S-8, filed with the Commission on August 16, 2001, and MBT Financial Corp.'s registration statement on Form S-8, filed with the Commission on May 30, 2003, of our report dated February 28, 2006 on our audit of management's assessment of the effectiveness of MBT Financial Corp.'s internal control over financial reporting as of December 31, 2005, including our opinion on management's assessment and our opinion on the effectiveness of MBT Financial Corp.'s internal control over financial reporting based on our audit, which report is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2005. /s/ Plante & Moran, PLLC Auburn Hills, Michigan March 13, 2006 EX-31.1 4 k02497exv31w1.txt CERTIFICATION BY CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13A-14(A) EXHIBIT 31.1 CERTIFICATIONS I, H. Douglas Chaffin, President and Chief Executive Officer of MBT Financial Corp., certify that: 1. I have reviewed this annual report on Form 10-K of MBT Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2006 /s/ H. Douglas Chaffin ------------------------------------- H. Douglas Chaffin President and Chief Executive Officer EX-31.2 5 k02497exv31w2.txt CERTIFICATION BY CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13A-14(A) EXHIBIT 31.2 CERTIFICATIONS I, John L. Skibski, Chief Financial Officer of MBT Financial Corp., certify that: 1. I have reviewed this annual report on Form 10-K of MBT Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 10, 2006 /s/ John L. Skibski ---------------------------------------- John L. Skibski Chief Financial Officer EX-32.1 6 k02497exv32w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of MBT Financial Corp. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, H. Douglas Chaffin, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ H. Douglas Chaffin - ------------------------------------ H. Douglas Chaffin Chief Executive Officer March 10, 2006 EX-32.2 7 k02497exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of MBT Financial Corp. (the "Company") on Form 10-K for the period ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John L. Skibski, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John L. Skibski - ------------------------------------ John L. Skibski Chief Financial Officer March 10, 2006 -----END PRIVACY-ENHANCED MESSAGE-----