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EX-32.2 - EXHIBIT 32.2 - MBT FINANCIAL CORP | ex_120015.htm |
EX-32.1 - EXHIBIT 32.1 - MBT FINANCIAL CORP | ex_120014.htm |
EX-31.2 - EXHIBIT 31.2 - MBT FINANCIAL CORP | ex_120013.htm |
EX-31.1 - EXHIBIT 31.1 - MBT FINANCIAL CORP | ex_120012.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2018
Or
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 000-30973
MBT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Michigan |
38-3516922 |
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
|
102 E. Front Street
Monroe, Michigan 48161
(Address of principal executive offices)
(Zip Code)
(734) 241-3431
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer ☐ Accelerated Filer ☑
Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of August 8, 2018, there were 22,983,921 shares of the Company’s Common Stock outstanding.
Part I Financial Information
Item 1. Financial Statements
MBT FINANCIAL CORP. |
CONSOLIDATED BALANCE SHEETS |
June 30, 2018 |
||||||||
Dollars in thousands |
(Unaudited) |
December 31, 2017 |
||||||
ASSETS |
||||||||
Cash and Cash Equivalents |
||||||||
Cash and due from banks |
||||||||
Non-interest bearing |
$ | 13,772 | $ | 18,233 | ||||
Interest bearing |
1,214 | 34,777 | ||||||
Total cash and cash equivalents |
14,986 | 53,010 | ||||||
Interest Bearing Time Deposits in Other Banks |
12,196 | 15,196 | ||||||
Securities - Held to Maturity |
33,148 | 37,163 | ||||||
Securities - Available for Sale |
414,266 | 442,816 | ||||||
Equity Securities |
6,194 | 4,148 | ||||||
Loans held for sale |
334 | 346 | ||||||
Loans |
740,786 | 694,979 | ||||||
Allowance for Loan Losses |
(7,958 | ) | (7,666 | ) | ||||
Loans - Net |
732,828 | 687,313 | ||||||
Accrued interest receivable and other assets |
21,773 | 20,463 | ||||||
Other Real Estate Owned |
394 | 1,412 | ||||||
Bank Owned Life Insurance |
58,855 | 58,153 | ||||||
Premises and Equipment - Net |
26,911 | 27,400 | ||||||
Total assets |
$ | 1,321,885 | $ | 1,347,420 | ||||
LIABILITIES |
||||||||
Deposits |
||||||||
Non-interest bearing |
$ | 292,534 | $ | 299,838 | ||||
Interest-bearing |
854,960 | 898,326 | ||||||
Total deposits |
1,147,494 | 1,198,164 | ||||||
Federal Home Loan Bank advances |
30,000 | - | ||||||
Federal funds purchased |
7,800 | - | ||||||
Interest payable and other liabilities |
16,237 | 16,598 | ||||||
Total liabilities |
1,201,531 | 1,214,762 | ||||||
STOCKHOLDERS' EQUITY |
||||||||
Common stock (no par value; 50,000,000 shares authorized, 22,983,255 and 22,907,844 shares issued and outstanding) |
23,231 | 22,840 | ||||||
Retained earnings |
109,668 | 117,524 | ||||||
Unearned compensation |
(39 | ) | - | |||||
Accumulated other comprehensive loss |
(12,506 | ) | (7,706 | ) | ||||
Total stockholders' equity |
120,354 | 132,658 | ||||||
Total liabilities and stockholders' equity |
$ | 1,321,885 | $ | 1,347,420 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
MBT FINANCIAL CORP. |
||||||||||||||
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME - UNAUDITED |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
Dollars in thousands, except per share data |
2018 |
2017 |
2018 |
2017 |
||||||||||||
Interest Income |
||||||||||||||||
Interest and fees on loans |
$ | 8,736 | $ | 7,709 | $ | 16,953 | $ | 15,073 | ||||||||
Interest on investment securities- |
||||||||||||||||
Tax-exempt |
443 | 306 | 847 | 616 | ||||||||||||
Taxable |
2,087 | 2,185 | 4,297 | 4,453 | ||||||||||||
Interest on balances due from banks |
58 | 101 | 183 | 210 | ||||||||||||
Total interest income |
11,324 | 10,301 | 22,280 | 20,352 | ||||||||||||
Interest Expense |
||||||||||||||||
Interest on deposits |
400 | 434 | 814 | 890 | ||||||||||||
Interest on borrowed funds |
91 | 3 | 97 | 3 | ||||||||||||
Total interest expense |
491 | 437 | 911 | 893 | ||||||||||||
Net Interest Income |
10,833 | 9,864 | 21,369 | 19,459 | ||||||||||||
Recovery Of Loan Losses |
- | - | (100 | ) | (200 | ) | ||||||||||
Net Interest Income After |
||||||||||||||||
Recovery Of Loan Losses |
10,833 | 9,864 | 21,469 | 19,659 | ||||||||||||
Other Income |
||||||||||||||||
Income from wealth management services |
1,178 | 1,547 | 2,363 | 2,675 | ||||||||||||
Service charges and other fees |
955 | 1,046 | 1,901 | 2,060 | ||||||||||||
Debit card income |
786 | 748 | 1,506 | 1,428 | ||||||||||||
Net gain (loss) on sales and redemptions of securities available for sale |
(1 | ) | 67 | (102 | ) | 77 | ||||||||||
Net gain (loss) on sales of Other Real Estate Owned |
517 | (62 | ) | 536 | (96 | ) | ||||||||||
Origination fees on mortgage loans sold |
92 | 115 | 154 | 174 | ||||||||||||
Bank owned life insurance income |
349 | 412 | 702 | 753 | ||||||||||||
Other |
527 | 497 | 1,127 | 1,119 | ||||||||||||
Total other income |
4,403 | 4,370 | 8,187 | 8,190 | ||||||||||||
Other Expenses |
||||||||||||||||
Salaries and employee benefits |
5,371 | 5,273 | 11,333 | 10,707 | ||||||||||||
Occupancy expense |
620 | 682 | 1,341 | 1,430 | ||||||||||||
Equipment expense |
874 | 791 | 1,667 | 1,488 | ||||||||||||
Marketing expense |
467 | 302 | 844 | 586 | ||||||||||||
Professional fees |
592 | 620 | 1,186 | 1,209 | ||||||||||||
EFT/ATM expense |
288 | 259 | 547 | 507 | ||||||||||||
Other Real Estate Owned expenses |
21 | 30 | 36 | 62 | ||||||||||||
FDIC Deposit Insurance Assessment |
92 | 107 | 199 | 214 | ||||||||||||
Bonding and other insurance expense |
137 | 125 | 269 | 247 | ||||||||||||
Telephone expense |
74 | 103 | 149 | 219 | ||||||||||||
Other |
650 | 716 | 1,407 | 1,401 | ||||||||||||
Total other expenses |
9,186 | 9,008 | 18,978 | 18,070 | ||||||||||||
Income Before Income Taxes |
6,050 | 5,226 | 10,678 | 9,779 | ||||||||||||
Income Tax Expense |
1,105 | 1,586 | 1,831 | 2,959 | ||||||||||||
Net Income |
$ | 4,945 | $ | 3,640 | $ | 8,847 | $ | 6,820 | ||||||||
Other Comprehensive Income - Net of Tax |
||||||||||||||||
Unrealized gains (losses) on securities |
(643 | ) | 1,983 | (4,896 | ) | 3,770 | ||||||||||
Reclassification adjustment for (gains) losses included in net income |
1 | (44 | ) | 81 | (51 | ) | ||||||||||
Postretirement benefit liability |
32 | 26 | 64 | 53 | ||||||||||||
Total Other Comprehensive Income (Loss) - Net of Tax |
(610 | ) | 1,965 | (4,751 | ) | 3,772 | ||||||||||
Comprehensive Income |
$ | 4,335 | $ | 5,605 | $ | 4,096 | $ | 10,592 | ||||||||
Basic Earnings Per Common Share |
$ | 0.22 | $ | 0.16 | $ | 0.39 | $ | 0.30 | ||||||||
Diluted Earnings Per Common Share |
$ | 0.21 | $ | 0.16 | $ | 0.38 | $ | 0.30 | ||||||||
Dividends Declared Per Share of Common Stock |
$ | 0.07 | $ | 0.05 | $ | 0.73 | $ | 0.80 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
MBT FINANCIAL CORP. |
|||||||||||||||
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED |
Accumulated |
||||||||||||||||||||||||
Other |
||||||||||||||||||||||||
Common Stock |
Retained |
Unearned |
Comprehensive |
|||||||||||||||||||||
Dollars in thousands |
Shares |
Amount |
Earnings |
Compensation |
Income (Loss) |
Total |
||||||||||||||||||
Balance - January 1, 2018 |
22,907,844 | $ | 22,840 | $ | 117,524 | $ | - | $ | (7,706 | ) | $ | 132,658 | ||||||||||||
Issuance of Common Stock |
||||||||||||||||||||||||
SOSARs exercised, net of shares redeemed for taxes |
44,397 | (202 | ) | - | - | - | (202 | ) | ||||||||||||||||
Restricted stock awards, net of shares redeemed for taxes |
7,500 | 78 | - | (78 | ) | - | - | |||||||||||||||||
Employee Stock Purchase Plan and other stock issued |
23,514 | 246 | - | - | - | 246 | ||||||||||||||||||
Tax benefit from exercise of options |
- | - | - | - | - | - | ||||||||||||||||||
Equity Compensation |
- | 353 | - | 39 | - | 392 | ||||||||||||||||||
Deferred Directors' Compensation |
- | (84 | ) | - | - | - | (84 | ) | ||||||||||||||||
Cumulative Effect Adjustment (ASU 2016-01) |
- | - | 49 | - | (49 | ) | - | |||||||||||||||||
Dividends declared ($0.73 per share) |
- | - | (16,752 | ) | - | - | (16,752 | ) | ||||||||||||||||
Net income |
- | - | 8,847 | - | - | 8,847 | ||||||||||||||||||
Other comprehensive income - net of tax |
- | - | - | - | (4,751 | ) | (4,751 | ) | ||||||||||||||||
Balance - June 30, 2018 |
22,983,255 | $ | 23,231 | $ | 109,668 | $ | (39 | ) | $ | (12,506 | ) | $ | 120,354 |
Accumulated |
||||||||||||||||||||||||
Other |
||||||||||||||||||||||||
Common Stock |
Retained |
Unearned |
Comprehensive |
|||||||||||||||||||||
Dollars in thousands |
Shares |
Amount |
Earnings |
Compensation |
Income (Loss) |
Total |
||||||||||||||||||
Balance - January 1, 2017 |
22,777,882 | $ | 22,562 | $ | 126,079 | $ | (4 | ) | $ | (7,523 | ) | $ | 141,114 | |||||||||||
Issuance of Common Stock |
||||||||||||||||||||||||
SOSARs exercised, net of shares redeemed for taxes |
63,677 | (250 | ) | - | - | - | (250 | ) | ||||||||||||||||
Restricted stock awards, net of shares redeemed for taxes |
6,000 | 65 | - | (65 | ) | - | - | |||||||||||||||||
Employee Stock Purchase Plan and other stock issued |
22,523 | 243 | - | - | - | 243 | ||||||||||||||||||
Tax benefit from exercise of options |
- | - | 824 | - | - | 824 | ||||||||||||||||||
Equity Compensation |
- | 263 | - | 30 | - | 293 | ||||||||||||||||||
Deferred Directors' Compensation |
- | (324 | ) | - | - | (324 | ) | |||||||||||||||||
Dividends declared ($0.80 per share) |
- | - | (18,270 | ) | - | - | (18,270 | ) | ||||||||||||||||
Net income |
- | - | 6,820 | - | - | 6,820 | ||||||||||||||||||
Other comprehensive income - net of tax |
- | - | - | - | 3,772 | 3,772 | ||||||||||||||||||
Balance - June 30, 2017 |
22,870,082 | $ | 22,559 | $ | 115,453 | $ | (39 | ) | $ | (3,751 | ) | $ | 134,222 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
MBT FINANCIAL CORP. |
||||||||
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED |
Six Months Ended June 30, |
||||||||
Dollars in thousands |
2018 |
2017 |
||||||
Cash Flows from Operating Activities |
||||||||
Net Income |
$ | 8,847 | $ | 6,820 | ||||
Adjustments to reconcile net income to net cash from operating activities |
||||||||
Recovery of loan losses |
(100 | ) | (200 | ) | ||||
Depreciation |
737 | 806 | ||||||
Net amortization of investment premium and discount |
1,166 | 1,165 | ||||||
Adjustment for assets carried at fair market value |
47 | - | ||||||
Writedowns of Other Real Estate Owned |
42 | 56 | ||||||
Net decrease in interest payable and other liabilities |
(364 | ) | (720 | ) | ||||
Net decrease (increase) in interest receivable and other assets |
(652 | ) | 96 | |||||
Writedowns of Other Assets |
- | 37 | ||||||
Equity based compensation expense |
392 | 293 | ||||||
Net (gain) loss on sale/settlement of securities |
102 | (77 | ) | |||||
Increase in cash surrender value of life insurance |
(702 | ) | (754 | ) | ||||
Net cash provided by operating activities |
$ | 9,515 | $ | 7,522 | ||||
Cash Flows from Investing Activities |
||||||||
Proceeds from maturities of interest bearing time deposits in other banks |
$ | 3,000 | $ | 1,750 | ||||
Proceeds from maturities and redemptions of investment securities held to maturity |
3,987 | 6,542 | ||||||
Proceeds from maturities and redemptions of investment securities available for sale |
31,904 | 18,964 | ||||||
Proceeds from sales of investment securities available for sale |
19,393 | 73,918 | ||||||
Net increase in loans |
(45,547 | ) | (31,193 | ) | ||||
Proceeds from sales of other real estate owned |
1,698 | 367 | ||||||
Proceeds from sales of other assets |
40 | 230 | ||||||
Purchase of time deposits in other banks |
- | (500 | ) | |||||
Purchase of investment securities held to maturity |
- | (4,455 | ) | |||||
Purchase of Bank Owned Life Insurance |
- | (4,357 | ) | |||||
Proceeds from surrender of Bank Owned Life Insurance |
- | 309 | ||||||
Purchase of investment securities available for sale |
(32,187 | ) | (39,842 | ) | ||||
Purchase of bank premises and equipment |
(248 | ) | (494 | ) | ||||
Net cash (used for) provided by investing activities |
$ | (17,960 | ) | $ | 21,239 | |||
Cash Flows from Financing Activities |
||||||||
Net decrease in deposits |
$ | (50,670 | ) | $ | (22,648 | ) | ||
Net increase in short term borrowings |
7,800 | - | ||||||
Proceeds from Federal Home Loan Bank borrowings |
30,000 | - | ||||||
Issuance of common stock |
246 | 243 | ||||||
Stock redeemed for tax withholding - stock based compensation |
(203 | ) | (251 | ) | ||||
Dividends paid |
(16,752 | ) | (18,270 | ) | ||||
Net cash used for financing activities |
$ | (29,579 | ) | $ | (40,926 | ) | ||
Net Decrease in Cash and Cash Equivalents |
$ | (38,024 | ) | $ | (12,165 | ) | ||
Cash and Cash Equivalents at Beginning of Period |
53,010 | 52,772 | ||||||
Cash and Cash Equivalents at End of Period |
$ | 14,986 | $ | 40,607 | ||||
Supplemental Cash Flow Information |
||||||||
Cash paid for interest |
$ | 892 | $ | 899 | ||||
Cash paid for federal income taxes |
$ | 1,419 | $ | 2,106 | ||||
Supplemental Schedule of Non Cash Investing Activities |
||||||||
Transfer of loans to other real estate owned |
$ | 144 | $ | 332 | ||||
Transfer of loans to other assets |
$ | - | $ | 40 |
The accompanying notes to consolidated financial statements are an integral part of these statements.
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of MBT Financial Corp. (the “Company”) and its subsidiary, Monroe Bank & Trust (the “Bank”). The Bank includes the accounts of its wholly owned subsidiary, MB&T Financial Services, Inc. The Bank operates fourteen branches in Monroe County, Michigan, six branches in Wayne County, Michigan, and one loan and wealth management office in Wayne County. The Bank’s primary source of revenue is from providing loans to customers, who are predominantly small and middle-market businesses and middle-income individuals. The Company’s sole business segment is community banking.
The accounting and reporting policies of the Bank conform to practice within the banking industry and are in accordance with accounting principles generally accepted in the United States. Preparation of financial statements in conformity with generally accepted accounting principles requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near term are the determination of the allowance for loan losses and the fair value of investment securities.
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, such information reflects all adjustments (consisting of normal recurring adjustments), which are, in the opinion of Management, necessary for fair statement of results for the interim periods.
The significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its subsidiary. All material intercompany transactions and balances have been eliminated.
COMPREHENSIVE INCOME
Accounting principles generally require that revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on securities available for sale and amounts recognized related to postretirement benefit plans (gains and losses, prior service costs, and transition assets or obligations), are reported as a direct adjustment to the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income.
BUSINESS SEGMENTS
While the Company's chief decision makers monitor the revenue streams of various products and services, operations are managed and financial performance is evaluated on a company wide basis. Accordingly, all of the Company’s operations are considered by management to be aggregated in one reportable segment.
FAIR VALUE
The Company measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities that are elected to be accounted for under The Fair Value Option as well as for certain assets and liabilities in which fair value is the primary basis of accounting. Examples of these include derivative instruments and available for sale securities. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes. Examples of these non-recurring uses of fair value include certain loans held for sale accounted for on a lower of cost or market basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value.
When determining the fair value measurements for assets and liabilities required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets or liabilities. When identical assets and liabilities are not traded in active markets, the Company looks to market observable data for similar assets or liabilities. Nevertheless, certain assets and liabilities are not actively traded in observable markets and the Company must use alternative valuation techniques to derive a fair value measurement.
ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 adopts a standardized approach for revenue recognition and was a joint effort with the International Accounting Standards Board (IASB). The new revenue recognition standard is based on a core principle of recognizing revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 is effective for public entities for reporting periods beginning after December 15, 2017 (therefore, for the year ending December 31, 2018 for the Company). The ASU does not apply to financial instruments, which constitute a significant portion of our revenue. The Company adopted ASU 2014-09 on January 1, 2018 and determined that adoption of the standard did not have a significant impact on its financial statements.
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments. The ASU includes increased disclosures and various changes to the accounting and measurement of financial assets including the Company’s loans and available-for-sale and held-to-maturity debt securities. Each financial asset presented on the balance sheet would have a unique allowance for credit losses valuation account that is deducted from the amortized cost basis to present the net carrying value at the amount expected to be collected on the financial asset. The amendments in this ASU also eliminate the probable initial recognition threshold in current GAAP and instead, reflect an entity’s current estimate of all expected credit losses using reasonable and supportable forecasts. The new credit loss guidance will be effective for the Company's year ending December 31, 2020. Upon adoption, the ASU will be applied using a modified retrospective transition method to the beginning of the first reporting period in which the guidance is effective. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. Early adoption for all institutions is permitted for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The standard will likely have an effect on the Company's consolidated financial statements from a onetime adjustment to increase the ALLL upon adoption of the standard and due to increased provision expense at the time loans are originated. Management has begun the process of segmenting the portfolio and developing an implementation timeline.
In March 2017, the FASB issued ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs – Premium Amortization on Purchased Callable Debt Securities (Subtopic 310-20). This ASU was issued to shorten the amortization period for the premium to the earliest call date on debt securities. This premium will now be recorded as a reduction to net interest margin during the shorter yield to call period, as compared to prior practice of amortizing the premium as a reduction to net interest margin over the contractual life of the instrument. This ASU does not change the current method of amortizing any discount over the contractual life of the debt security, and this pronouncement is effective for fiscal years beginning after December 15, 2018, and must be adopted on a modified retrospective basis. The Company has reviewed the investment portfolio and determined that the standard will not have a material effect on its financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU was issued to improve the recognition and measurement of financial instruments by requiring equity investments to be measured at fair value with changes in fair value recognized in net income, requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, eliminating the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, and require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes to the financial statements. ASU 2016-01 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The amendments should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the year of adoption. The Company adopted ASU 2016-01 on January 1, 2018 and it did not have a material effect on the consolidated financial statements. For exit pricing on loans, the Company made a fair value adjustment based on the yield metrics of the portfolio and applied a credit mark provided by its merger and acquisition advisors.
2. EARNINGS PER SHARE
The calculations of earnings per common share are as follows:
For the three months ended June 30, |
For the six months ended June 30, |
|||||||||||||||
2018 |
2017 |
2018 |
2017 |
|||||||||||||
Basic |
||||||||||||||||
Net income |
$ | 4,945,000 | $ | 3,640,000 | $ | 8,847,000 | $ | 6,820,000 | ||||||||
Average common shares outstanding |
22,978,225 | 22,865,529 | 22,961,076 | 22,843,523 | ||||||||||||
Earnings per common share - basic |
$ | 0.22 | $ | 0.16 | $ | 0.39 | $ | 0.30 | ||||||||
Diluted |
||||||||||||||||
Net income |
$ | 4,945,000 | $ | 3,640,000 | $ | 8,847,000 | $ | 6,820,000 | ||||||||
Average common shares outstanding |
22,978,225 | 22,865,529 | 22,961,076 | 22,843,523 | ||||||||||||
Equity compensation |
122,810 | 141,237 | 122,077 | 144,280 | ||||||||||||
Average common shares outstanding - diluted |
23,101,035 | 23,006,766 | 23,083,153 | 22,987,803 | ||||||||||||
Earnings per common share - diluted |
$ | 0.21 | $ | 0.16 | $ | 0.38 | $ | 0.30 |
3. STOCK BASED COMPENSATION
Stock Only Stock Appreciation Rights (SOSARs) - On February 22, 2018, 105,000 Stock Only Stock Appreciation Rights (SOSARs) were awarded to certain officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The SOSARs have a term of ten years and vest in three equal annual installments beginning on December 31, 2018. The fair value of $2.36 for the SOSARs was estimated at the date of the grant, using the Black-Scholes option pricing model, with the following assumptions: expected option lives of 7 years, expected volatility of 23.64%, a risk free interest rate of 2.86% and dividend yield of 2.18%. The fair value of the Company’s common stock was $10.45 on the grant date.
SOSARs granted under the plan are structured as fixed grants with the base price equal to the market value of the underlying stock on the date of the grant.
The following table summarizes the SOSARs that have been granted:
Weighted Average |
||||||||
SOSARs |
Base Price |
|||||||
SOSARs Outstanding, January 1, 2018 |
372,585 | $ | 6.82 | |||||
Granted |
105,000 | 10.45 | ||||||
Exercised |
(103,036 | ) | 4.30 | |||||
Forfeited |
(4,336 | ) | 10.09 | |||||
Expired |
- | - | ||||||
SOSARs Outstanding, June 30, 2018 |
370,213 | $ | 8.51 | |||||
SOSARs Exercisable, June 30, 2018 |
147,863 | $ | 5.76 |
The exercise of a SOSAR results in the issuance of a number of shares of common stock of the Company based on the appreciation of the market price of the stock over the base price of the SOSAR. The market value of the Company’s common stock on June 30, 2018 was $10.65. The value of the exercisable SOSARs that are in-the-money as of June 30, 2018 was $720,000, and exercise of those SOSARs on that date would have resulted in the issuance of 67,892 shares of common stock. The plan allows participants to elect to withhold shares from the exercise of SOSARs to cover their tax liability. This may affect the number of shares issued and the value of the common stock account on the balance sheet and the statement of changes in equity.
Restricted Stock Unit Awards – On February 22, 2018, 21,500 performance restricted stock units were awarded to certain key executive officers in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. Each Restricted Stock Unit (RSU) is equivalent to one share of MBT Financial Corp. common stock. Stock will be issued to the participants following a two year performance period that ends on December 31, 2019 if the defined performance targets are achieved. The grant date fair value of the stock was $10.45 per share. Earned RSUs vest on December 15, 2020 and as of June 30, 2018 none of the RSUs were vested.
Restricted Stock Awards – On February 22, 2018, 7,500 restricted shares were awarded to certain non-executive members of the board of directors in accordance with the MBT 2008 Stock Incentive Plan that was approved by shareholders on May 1, 2008 and amended by shareholders on May 7, 2015. The restricted shares vest on December 31, 2018. The expense for the restricted stock is based on the grant date value of $10.45 and is recognized over the vesting period. The unrecognized cost related to the non-vested restricted stock awards was $39,000 as of June 30, 2018.
The total expense for equity based compensation was $156,000 in the second quarter of 2018 and $162,000 in the second quarter of 2017. The total expense for equity based compensation was $392,000 in the first six months of 2018 and $293,000 in the first six months of 2017. The unrecognized compensation expense for all equity based compensation plans is $795,000 as of June 30, 2018. The expense is expected to be recognized over a weighted average period of 1.78 years.
4. LOANS
The Bank makes commercial, consumer, and mortgage loans primarily to customers in Monroe County, Michigan, southern and western Wayne County, Michigan, and surrounding areas. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent on the automotive, manufacturing, and real estate development economic sectors.
Loans consist of the following (000s omitted):
June 30, |
December 31, |
|||||||
2018 |
2017 |
|||||||
Residential real estate loans |
$ | 229,252 | $ | 222,014 | ||||
Commercial and Construction real estate loans |
293,321 | 293,202 | ||||||
Agriculture and agricultural real estate loans |
23,124 | 21,231 | ||||||
Commercial and industrial loans |
142,913 | 122,219 | ||||||
Loans to individuals for household, family, and other personal expenditures |
52,176 | 36,313 | ||||||
Total loans, gross |
$ | 740,786 | $ | 694,979 | ||||
Less: Allowance for loan losses |
7,958 | 7,666 | ||||||
Net Loans |
$ | 732,828 | $ | 687,313 |
Loans are placed in a nonaccrual status when, in the opinion of Management, the collection of additional interest is doubtful. All loan relationships over $250,000 that are classified by Management as nonperforming as well as selected performing accounts and all renegotiated loans are reviewed for impairment each quarter. Allowances for loans determined to be impaired are included in the allowance for loan losses. All cash received on nonaccrual loans is applied to the principal balance. Nonperforming assets consist of nonaccrual loans, loans 90 days or more past due, restructured loans, nonaccrual investment securities, other real estate owned, and other repossessed assets. Other real estate owned includes real estate that has been acquired in full or partial satisfaction of loan obligations or upon foreclosure.
The following table summarizes nonperforming assets (000s omitted):
June 30, |
December 31, |
|||||||
2018 |
2017 |
|||||||
Nonaccrual loans |
$ | 3,360 | $ | 3,658 | ||||
Loans 90 days past due and accruing |
- | 3 | ||||||
Restructured loans |
8,211 | 9,625 | ||||||
Total nonperforming loans |
$ | 11,571 | $ | 13,286 | ||||
Other real estate owned |
394 | 1,412 | ||||||
Other assets |
- | 40 | ||||||
Total nonperforming assets |
$ | 11,965 | $ | 14,738 | ||||
Nonperforming assets to total assets |
0.91 | % | 1.09 | % | ||||
Allowance for loan losses to nonperforming loans |
68.78 | % | 57.70 | % |
5. ALLOWANCE FOR LOAN LOSSES
The Company separates its loan portfolio into segments to perform the calculation and analysis of the allowance for loan losses. The six segments analyzed are Agriculture and Agricultural Real Estate, Commercial, Commercial Real Estate, Construction Real Estate, Residential Real Estate, and Consumer and Other. The Agriculture and Agricultural Real Estate segment includes all loans to finance agricultural production and all loans secured by agricultural real estate. This segment does not include loans to finance agriculture that are secured by residential real estate, which are included in the Residential Real Estate segment. The Commercial segment includes loans to finance commercial and industrial businesses that are not secured by real estate. The Commercial Real Estate segment includes loans secured by non-farm, non-residential real estate. The Construction Real Estate segment includes loans to finance construction and land development. This includes residential and commercial construction and land development. The Residential Real Estate segment includes all loans, other than construction loans, that are secured by single family and multi-family residential real estate properties. The Consumer and Other segment includes all loans not included in any other segment. These are primarily loans to consumers for household, family, and other personal expenditures. The majority of this segment is student loans, and it also includes loans for autos, boats, and recreational vehicles.
Activity in the allowance for loan losses during the three and six months ended June 30, 2018 was as follows (000s omitted):
Agriculture and Agricultural Real Estate |
Commercial |
Commercial Real Estate |
Construction Real Estate |
Residential Real Estate |
Consumer and Other |
Total |
||||||||||||||||||||||
Allowance for loan losses: For the three months ended June 30, 2018 |
||||||||||||||||||||||||||||
Beginning Balance |
$ | 210 | $ | 1,397 | $ | 3,088 | $ | 461 | $ | 1,089 | $ | 1,640 | $ | 7,885 | ||||||||||||||
Charge-offs |
- | - | - | - | (51 | ) | - | (51 | ) | |||||||||||||||||||
Recoveries |
- | 16 | 49 | 14 | 31 | 14 | 124 | |||||||||||||||||||||
Provision |
52 | 36 | (188 | ) | (1 | ) | 73 | 28 | - | |||||||||||||||||||
Ending balance |
$ | 262 | $ | 1,449 | $ | 2,949 | $ | 474 | $ | 1,142 | $ | 1,682 | $ | 7,958 | ||||||||||||||
Allowance for loan losses: For the six months ended June 30, 2018 |
||||||||||||||||||||||||||||
Beginning Balance |
$ | 195 | $ | 1,443 | $ | 3,297 | $ | 491 | $ | 1,279 | $ | 961 | $ | 7,666 | ||||||||||||||
Charge-offs |
- | - | (3 | ) | - | (58 | ) | (2 | ) | (63 | ) | |||||||||||||||||
Recoveries |
2 | 31 | 289 | 34 | 73 | 26 | 455 | |||||||||||||||||||||
Provision |
65 | (25 | ) | (634 | ) | (51 | ) | (152 | ) | 697 | (100 | ) | ||||||||||||||||
Ending balance |
$ | 262 | $ | 1,449 | $ | 2,949 | $ | 474 | $ | 1,142 | $ | 1,682 | $ | 7,958 | ||||||||||||||
Allowance for loan losses as of June 30, 2018 |
||||||||||||||||||||||||||||
Ending balance individually evaluated for impairment |
$ | - | $ | 141 | $ | 223 | $ | 347 | $ | 128 | $ | 196 | $ | 1,035 | ||||||||||||||
Ending balance collectively evaluated for impairment |
262 | 1,308 | 2,726 | 127 | 1,014 | 1,486 | 6,923 | |||||||||||||||||||||
Ending balance |
$ | 262 | $ | 1,449 | $ | 2,949 | $ | 474 | $ | 1,142 | $ | 1,682 | $ | 7,958 | ||||||||||||||
Loans as of June 30, 2018 |
||||||||||||||||||||||||||||
Ending balance individually evaluated for impairment |
$ | 1,133 | $ | 254 | $ | 3,732 | $ | 1,562 | $ | 4,516 | $ | 416 | $ | 11,613 | ||||||||||||||
Ending balance collectively evaluated for impairment |
21,991 | 142,659 | 266,360 | 21,667 | 224,736 | 51,760 | 729,173 | |||||||||||||||||||||
Ending balance |
$ | 23,124 | $ | 142,913 | $ | 270,092 | $ | 23,229 | $ | 229,252 | $ | 52,176 | $ | 740,786 |
Activity in the allowance for loan losses during the three and six months ended June 30, 2017 was as follows (000s omitted):
Agriculture and Agricultural Real Estate |
Commercial |
Commercial Real Estate |
Construction Real Estate |
Residential Real Estate |
Consumer and Other |
Total |
||||||||||||||||||||||
Allowance for loan losses: For the three months ended June 30, 2017 |
||||||||||||||||||||||||||||
Beginning Balance |
$ | 200 | $ | 1,579 | $ | 3,438 | $ | 534 | $ | 1,570 | $ | 1,013 | $ | 8,334 | ||||||||||||||
Charge-offs |
- | - | (384 | ) | - | - | (12 | ) | (396 | ) | ||||||||||||||||||
Recoveries |
- | 42 | 37 | 13 | 92 | 15 | 199 | |||||||||||||||||||||
Provision |
120 | (125 | ) | 268 | (6 | ) | (264 | ) | 7 | - | ||||||||||||||||||
Ending balance |
$ | 320 | $ | 1,496 | $ | 3,359 | $ | 541 | $ | 1,398 | $ | 1,023 | $ | 8,137 | ||||||||||||||
Allowance for loan losses: For the six months ended June 30, 2017 |
||||||||||||||||||||||||||||
Beginning Balance |
$ | 201 | $ | 1,632 | $ | 3,336 | $ | 525 | $ | 1,599 | $ | 1,165 | $ | 8,458 | ||||||||||||||
Charge-offs |
- | - | (409 | ) | - | (50 | ) | (49 | ) | (508 | ) | |||||||||||||||||
Recoveries |
3 | 98 | 74 | 26 | 146 | 40 | 387 | |||||||||||||||||||||
Provision |
116 | (234 | ) | 358 | (10 | ) | (297 | ) | (133 | ) | (200 | ) | ||||||||||||||||
Ending balance |
$ | 320 | $ | 1,496 | $ | 3,359 | $ | 541 | $ | 1,398 | $ | 1,023 | $ | 8,137 | ||||||||||||||
Allowance for loan losses as of June 30, 2017 |
||||||||||||||||||||||||||||
Ending balance individually evaluated for impairment |
$ | - | $ | 143 | $ | 44 | $ | 374 | $ | 221 | $ | 181 | $ | 963 | ||||||||||||||
Ending balance collectively evaluated for impairment |
320 | 1,353 | 3,315 | 167 | 1,177 | 842 | 7,174 | |||||||||||||||||||||
Ending balance |
$ | 320 | $ | 1,496 | $ | 3,359 | $ | 541 | $ | 1,398 | $ | 1,023 | $ | 8,137 | ||||||||||||||
Loans as of June 30, 2017 |
||||||||||||||||||||||||||||
Ending balance individually evaluated for impairment |
$ | 1,209 | $ | 286 | $ | 3,025 | $ | 1,689 | $ | 6,101 | $ | 442 | $ | 12,752 | ||||||||||||||
Ending balance collectively evaluated for impairment |
21,480 | 119,764 | 260,365 | 21,822 | 207,547 | 39,019 | 669,997 | |||||||||||||||||||||
Ending balance |
$ | 22,689 | $ | 120,050 | $ | 263,390 | $ | 23,511 | $ | 213,648 | $ | 39,461 | $ | 682,749 |
Each period the provision for loan losses in the income statement results from the combination of an estimate by Management of loan losses that occurred during the current period and the ongoing adjustment of prior estimates of losses occurring in prior periods.
The provision for loan losses increases the allowance for loan losses, a valuation account which appears on the consolidated balance sheets. As the specific customer and amount of a loan loss is confirmed by gathering additional information, taking collateral in full or partial settlement of the loan, bankruptcy of the borrower, etc., the loan is charged off, reducing the allowance for loan losses. If, subsequent to a charge off, the Bank is able to collect additional amounts from the customer or sell collateral worth more than earlier estimated, a recovery is recorded.
To serve as a basis for making this provision, the Bank maintains an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Bank’s customers, the payment performance of individual loans and pools of homogeneous loans, portfolio seasoning, changes in collateral values, and detailed reviews of specific loan relationships.
The Company utilizes an internal loan grading system to assign a risk grade to all commercial loans, all renegotiated loans, and each commercial credit relationship. Grades 10 through 45 are considered “pass” credits, grades 50 through 55 are considered “watch” credits, and grade 60 is considered “substandard” credits. Grades 50 through 60 are subject to greater scrutiny. Loans with grades 70 through 90 and considered “doubtful” or “loss” and have generally been charged off. A description of the general characteristics of each grade is as follows:
• |
Grade 10– Excellent – Loans secured by marketable collateral, with adequate margin, or supported by strong financial statements, including substantial levels of tangible net worth. Probability of serious financial deterioration is unlikely. Possess a sound repayment source and a secondary source. This classification will also include individual loans backed by liquid personal assets, established history and unquestionable character. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans. |
• |
Grade 20– Above Average – Loans that exhibit less than average risk and clearly demonstrate debt service coverage that is consistently above average as well as a strong capital base. These loans may have some deficiency or vulnerability, but with offsetting features and are considered to be fully collectable. |
• |
Grade 30– Satisfactory – Loans that have an acceptable amount of risk but may exhibit vulnerability to deterioration if adverse circumstances are encountered. These loans should demonstrate adequate debt service coverage and adequate levels of capital support but warrant periodic monitoring to ensure that weaknesses do not materialize or advance. |
• |
Grades 40 and 45 – Pass – Loans that are considered “pass credits” and typically demonstrate adequate debt service coverage. The level of risk is considered acceptable but these loans warrant ongoing monitoring to ensure that adverse trends or other credit deficiencies have not materialized or advanced. The level of risk is considered acceptable so long as the loan is given adequate and ongoing management supervision. |
• |
Grades 50 and 55 – Watch – Loans that possess some credit deficiency or potential weakness that deserves close attention. The primary source of loan repayment is sufficient but may be considered inadequate by the Bank’s standards. |
• |
Grade 60– Substandard – Loans that exhibit one or more of the following characteristics: (1) a defined credit weakness, financial deterioration is underway, and uncertainty about the likelihood that the loan will be paid from the primary source of repayment; (2) inadequately protected by the current net worth and paying capacity of the obligor; (3) reliance on secondary source of repayment such as collateral liquidation or guarantees; (4) distinct possibility the Bank will sustain loss if deficiencies are not corrected; (5) unusual courses of action are needed to maintain a high probability of repayment; (6) insufficient cash flow to repay principal but continuing to pay interest; (7) the Bank is subordinated or unsecured due to flaws in documentation; (8) loans are restructured or are on nonaccrual status due to concessions to the borrower when compared to normal loan terms; (9) the Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan; or (10) there is deterioration in the market conditions and the borrower is highly vulnerable to these conditions. |
• |
Grade 70– Doubtful – Loans that exhibit one or more of the following characteristics: (1) loans with all the weaknesses of Substandard loans and collection or liquidation is not probable to result in payment in full; (2) the primary source of repayment is gone and there is considerable doubt as to the quality of the secondary source of repayment; or (3) the possibility of loss is high, but certain important pending factors may strengthen the loan and loss classification is deferred. |
• |
Grades 80 and 90 - Loss – Loans are considered uncollectible and of such little value that continuing to carry them on the Bank’s financial statements is not feasible. |
The assessment of compensating factors may result in a rating plus or minus one grade from those listed above. These factors include, but are not limited to collateral, guarantors, environmental conditions, history, plan/projection reasonableness, quality of information, and payment delinquency.
The portfolio segments in each credit risk grade as of June 30, 2018 are as follows (000s omitted):
Credit Quality Indicators as of June 30, 2018 |
||||||||||||||
Credit Risk by Internally Assigned Grade |
Agriculture and Agricultural Real Estate |
Commercial |
Commercial Real Estate |
Construction Real Estate |
Residential Real Estate |
Consumer and Other |
Total |
||||||||||||||||||||||
Not Rated |
$ | 441 | $ | 1,621 | $ | 267 | $ | 11,509 | $ | 142,604 | $ | 46,545 | $ | 202,987 | ||||||||||||||
10 |
- | 6,757 | - | - | - | - | 6,757 | |||||||||||||||||||||
20 |
281 | 116 | 218 | - | - | - | 615 | |||||||||||||||||||||
30 |
584 | 36,651 | 22,142 | - | 1,201 | 3,767 | 64,345 | |||||||||||||||||||||
40 |
15,883 | 89,358 | 211,981 | 7,048 | 76,395 | 1,839 | 402,504 | |||||||||||||||||||||
45 |
1,485 | 3,145 | 15,399 | 1,484 | 2,657 | - | 24,170 | |||||||||||||||||||||
50 |
1,836 | 3,654 | 13,142 | 1,626 | 2,509 | 3 | 22,770 | |||||||||||||||||||||
55 |
1,518 | 1,407 | 2,242 | 1,519 | 796 | - | 7,482 | |||||||||||||||||||||
60 |
1,096 | 204 | 4,701 | 43 | 3,090 | 22 | 9,156 | |||||||||||||||||||||
70 |
- | - | - | - | - | - | - | |||||||||||||||||||||
80 |
- | - | - | - | - | - | - | |||||||||||||||||||||
90 |
- | - | - | - | - | - | - | |||||||||||||||||||||
Total |
$ | 23,124 | $ | 142,913 | $ | 270,092 | $ | 23,229 | $ | 229,252 | $ | 52,176 | $ | 740,786 | ||||||||||||||
Performing |
$ | 22,440 | $ | 142,635 | $ | 267,084 | $ | 21,667 | $ | 223,645 | $ | 51,744 | $ | 729,215 | ||||||||||||||
Nonperforming |
684 | 278 | 3,008 | 1,562 | 5,607 | 432 | 11,571 | |||||||||||||||||||||
Total |
$ | 23,124 | $ | 142,913 | $ | 270,092 | $ | 23,229 | $ | 229,252 | $ | 52,176 | $ | 740,786 |
The portfolio segments in each credit risk grade as of December 31, 2017 are as follows (000s omitted):
Credit Quality Indicators as of December 31, 2017 |
||||||||||||||
Credit Risk by Internally Assigned Grade |
Agriculture and Agricultural Real Estate |
Commercial |
Commercial Real Estate |
Construction Real Estate |
Residential Real Estate |
Consumer and Other |
Total |
||||||||||||||||||||||
Not Rated |
$ | - | $ | 1,341 | $ | 160 | $ | 13,903 | $ | 135,311 | $ | 30,359 | $ | 181,074 | ||||||||||||||
10 |
- | 6,870 | - | - | - | - | 6,870 | |||||||||||||||||||||
20 |
281 | 293 | 353 | - | - | - | 927 | |||||||||||||||||||||