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EX-32.2 - EXHIBIT 32.2 - MBT FINANCIAL CORPex_120015.htm
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EX-31.2 - EXHIBIT 31.2 - MBT FINANCIAL CORPex_120013.htm
EX-31.1 - EXHIBIT 31.1 - MBT FINANCIAL CORPex_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.

 

-2-

 

 

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.

 

-3-

 

 

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.

 

-4-

 

 

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.

 

-5-

 

 

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.

 

-6-

 

 

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.

 

-7-

 

 

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.

 

-8-

 

 

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.

 

-9-

 

 

 

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 %

 

-10-

 

 

 

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  

 

-11-

 

 

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.

 

-12-

 

 

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.

 

-13-

 

 

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  

30