UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

 For the quarterly period ended March 31, 2019

 

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 every Interactive Data File required to be submitted 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 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 ☑

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes ☐  No ☐

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock MBTF NASDAQ-Global

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of May 9, 2019, there were 23,036,758 shares of the Company’s Common Stock outstanding .

 



 

 

 

 

 

Part I Financial Information

Item 1. Financial Statements

 

MBT FINANCIAL CORP.

CONSOLIDATED BALANCE SHEETS

 

   

March 31, 2019

         

Dollars in thousands

 

(Unaudited)

   

December 31, 2018

 
                 

ASSETS

               

Cash and Cash Equivalents

               

Cash and due from banks

               

Non-interest bearing

  $ 18,426     $ 17,058  

Interest bearing

    414,381       34,784  

Total cash and cash equivalents

    432,807       51,842  
                 

Interest Bearing Time Deposits in Other Banks

    600       10,796  

Securities - Available for Sale

    30,133       401,613  

Equity Securities

    7,450       7,415  
                 

Loans held for sale

    -       488  
                 

Loans

    766,877       768,660  

Allowance for Loan Losses

    (7,503 )     (7,771 )

Loans - Net

    759,374       760,889  
                 

Accrued interest receivable and other assets

    16,662       16,743  

Other Real Estate Owned

    58       692  

Bank Owned Life Insurance

    59,901       59,563  

Premises and Equipment - Net

    26,480       26,850  

Total assets

  $ 1,333,465     $ 1,336,891  
                 

LIABILITIES

               

Deposits

               

Non-interest bearing

  $ 290,929     $ 297,704  

Interest-bearing

    892,220       885,206  

Total deposits

    1,183,149       1,182,910  
                 

Federal Home Loan Bank advances

    10,000       10,000  

Interest payable and other liabilities

    10,028       16,314  

Total liabilities

    1,203,177       1,209,224  
                 

STOCKHOLDERS' EQUITY

               

Common stock (no par value; 50,000,000 shares authorized, 23,036,758 and 23,033,715 shares issued and outstanding)

    23,565       23,453  

Retained earnings

    106,477       113,921  

Accumulated other comprehensive income (loss)

    246       (9,707 )

Total stockholders' equity

    130,288       127,667  

Total liabilities and stockholders' equity

  $ 1,333,465     $ 1,336,891  

 

 

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 March 31,

 

Dollars in thousands, except per share data

 

2019

   

2018

 
                 

Interest Income

               

Interest and fees on loans

  $ 9,571     $ 8,217  

Interest on investment securities-

               

Tax-exempt

    296       404  

Taxable

    1,174       2,210  

Interest on balances due from banks

    1,209       125  

Total interest income

    12,250       10,956  
                 

Interest Expense

               

Interest on deposits

    568       414  

Interest on borrowed funds

    64       6  

Total interest expense

    632       420  
                 

Net Interest Income

    11,618       10,536  

Recovery Of Loan Losses

    -       (100 )
                 

Net Interest Income After

               

Recovery Of Loan Losses

    11,618       10,636  
                 

Other Income

               

Income from wealth management services

    1,161       1,185  

Service charges and other fees

    822       946  

Debit card income

    701       720  

Net loss on sales and redemptions of securities available for sale

    (11,646 )     (101 )

Net gain on sales of Other Real Estate Owned

    9       19  

Origination fees on mortgage loans sold

    69       62  

Bank owned life insurance income

    338       353  

Other

    659       600  

Total other income (loss)

    (7,887 )     3,784  
                 

Other Expenses

               

Salaries and employee benefits

    6,064       5,962  

Occupancy expense

    729       721  

Equipment expense

    913       793  

Marketing expense

    292       377  

Professional fees

    843       594  

EFT/ATM expense

    291       259  

Other Real Estate Owned expenses

    22       15  

FDIC Deposit Insurance Assessment

    89       107  

Bonding and other insurance expense

    429       132  

Telephone expense

    80       75  

Other

    558       757  

Total other expenses

    10,310       9,792  
                 

Income (Loss) Before Income Taxes

    (6,579 )     4,628  

Income Tax Expense (Benefit)

    (1,438 )     726  

Net Income (Loss)

  $ (5,141 )   $ 3,902  
                 

Other Comprehensive Income - Net of Tax

               

Unrealized gains (losses) on securities

    387       (4,204 )

Reclassification adjustment for (gains) losses included in net income

    9,200       80  

Postretirement benefit liability

    366       32  

Effect of accounting change on equity securities

    -       (49 )

Total Other Comprehensive Income (Loss) - Net of Tax

    9,953       (4,141 )
                 

Comprehensive Income (Loss)

  $ 4,812     $ (239 )
                 

Basic Earnings (Loss) Per Common Share

  $ (0.22 )   $ 0.17  
                 

Diluted Earnings (Loss) Per Common Share

  $ (0.22 )   $ 0.17  
                 

Dividends Declared Per Share of Common Stock

  $ 0.10     $ 0.66  

 

 

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, 2019

    23,033,715     $ 23,453     $ 113,921     $ -     $ (9,707 )   $ 127,667  
                                                 

Issuance of Common Stock

                                               

SOSARs exercised, net of shares redeemed for taxes

    186       (1 )     -       -       -       (1 )

Employee Stock Purchase Plan and other stock issued

    2,857       30       -       -       -       30  
                                                 

Equity Compensation

    -       93       -       -       -       93  
                                                 

Deferred Directors' Compensation

    -       (10 )     -       -       -       (10 )
                                                 

Dividends declared ($0.10 per share)

    -       -       (2,303 )     -       -       (2,303 )
                                                 

Net loss

    -       -       (5,141 )     -       -       (5,141 )

Other comprehensive income - net of tax

    -       -       -       -       9,953       9,953  
                                                 

Balance - March 31, 2019

    23,036,758     $ 23,565     $ 106,477     $ -     $ 246     $ 130,288  

 

                                   

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

    39,825       (178 )     -       -       -       (178 )

Restricted stock awards, net of shares redeemed for taxes

    7,500       78       -       (78 )     -       -  

Employee Stock Purchase Plan and other stock issued

    18,092       189       -       -       -       189  

Tax benefit from exercise of options

    -       -       -       -       -       -  
                                                 

Tax benefit from exercise of options

    -       -       -       -       -       -  
                                                 

Equity Compensation

    -       216       -       19       -       235  
                                                 

Deferred Directors' Compensation

    -       (67 )     -       -       -       (67 )
                                                 

Cumulative Effect Adjustment (ASU 2016-01)

    -       -       49       -       (49 )     -  
                                                 

Dividends declared ($0.66 per share)

    -       -       (15,145 )     -       -       (15,145 )
                                                 

Net income

    -       -       3,902       -       -       3,902  

Other comprehensive income - net of tax

    -       -       -       -       (4,092 )     (4,092 )
                                                 

Balance - March 31, 2018

    22,973,261     $ 23,078     $ 106,330     $ (59 )   $ (11,847 )   $ 117,502  

 

 

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

 

-4-

 

 

 

MBT FINANCIAL CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

 

   

Three Months Ended March 31,

 

Dollars in thousands

 

2019

   

2018

 
                 

Cash Flows from Operating Activities

               

Net Income (Loss)

  $ (5,141 )   $ 3,902  

Adjustments to reconcile net income to net cash from operating activities

               

Recovery of loan losses

    -       (100 )

Depreciation

    346       370  

Net amortization of investment premium and discount

    259       576  

Adjustment for assets carried at fair market value

    (35 )     36  

Net decrease in interest payable and other liabilities

    (5,835 )     (1,434 )

Net decrease (increase) in interest receivable and other assets

    (2,550 )     2,555  

Equity based compensation expense

    93       235  

Net loss on sale/settlement of securities

    11,646       101  

Increase in cash surrender value of life insurance

    (338 )     (352 )

Net cash provided by (used for) operating activities

  $ (1,555 )   $ 5,889  
                 

Cash Flows from Investing Activities

               

Proceeds from maturities of interest bearing time deposits in other banks

  $ 750     $ 1,000  

Proceeds from maturities and redemptions of investment securities held to maturity

    -       241  

Proceeds from maturities and redemptions of investment securities available for sale

    5,278       12,666  

Proceeds from sales of investment securities available for sale

    367,161       19,181  

Proceeds from sales of interest bearing time deposits in other banks

    9,446       -  

Net (increase) decrease in loans

    2,003       (27,140 )

Proceeds from sales of other real estate owned

    643       347  

Proceeds from sales of other assets

    -       40  

Purchase of investment securities available for sale

    (728 )     (30,799 )

Purchase of bank premises and equipment

    -       (32 )

Net cash provided by (used for) investing activities

  $ 384,553     $ (24,496 )
                 

Cash Flows from Financing Activities

               

Net increase (decrease) in deposits

  $ 239     $ (4,801 )

Issuance of common stock

    30       189  

Stock redeemed for tax withholding - stock based compensation

    1       (178 )

Dividends paid

    (2,303 )     (15,145 )

Net cash used for financing activities

  $ (2,033 )   $ (19,935 )
                 

Net Increase (Decrease) in Cash and Cash Equivalents

  $ 380,965     $ (38,542 )
                 

Cash and Cash Equivalents at Beginning of Period

    51,842       53,010  

Cash and Cash Equivalents at End of Period

  $ 432,807     $ 14,468  
                 

Supplemental Cash Flow Information

               

Cash paid for interest

  $ 619     $ 420  

Cash paid for federal income taxes

  $ -     $ -  
                 

Supplemental Schedule of Non Cash Investing Activities

               

Transfer of loans to other real estate owned

  $ -     $ 144  

 

 

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.

 

On October 9, 2018, the Company and First Merchants Corporation (“First Merchants”) signed an Agreement and Plan of Reorganization and Merger (the “Merger Agreement”), pursuant to which the Company will merge with and into First Merchants. Subject to the terms and conditions of the Merger Agreement, each share of the Company will be converted into 0.275 shares of First Merchants common stock. The merger was approved at a special meeting of the Company’s shareholders on February 14, 2019 and the transaction is expected to be completed in the second quarter of 2019.

 

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.

 

-6-

 

 

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

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. Our bank's merger with First Merchants Bank will be completed prior to the effective date, and First Merchants will complete the implementation.

 

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.  Adoption of the standard did not have a material effect on the Company’s financial statements.

 

-7-

 

 

 

2. EARNINGS PER SHARE

 

The calculations of earnings per common share are as follows:

 

   

For the three months ended March 31,

 
   

2019

   

2018

 

Basic

               

Net income (loss)

  $ (5,141,000 )   $ 3,902,000  

Average common shares outstanding

    23,035,369       22,943,736  

Earnings (Loss) per common share - basic

  $ (0.22 )   $ 0.17  
                 

Diluted

               

Net income (loss)

  $ (5,141,000 )   $ 3,902,000  

Average common shares outstanding

    23,035,369       22,943,736  

Equity compensation

    -       119,464  

Average common shares outstanding - diluted

    23,035,369       23,063,200  

Earnings per common share - diluted

  $ (0.22 )   $ 0.17  

 

 

 

3. STOCK BASED COMPENSATION

 

Stock Only Stock Appreciation Rights (SOSARs) – 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, 2019

    347,379     $ 8.78  

Granted

    -       -  

Exercised

    (2,166 )     9.44  

Forfeited

    -       -  

Expired

    -       -  

SOSARs Outstanding, March 31, 2019

    345,213     $ 8.78  

SOSARs Exercisable, March 31, 2019

    152,879     $ 6.41  

 

 

The exercise of a SOSAR results in the issuance of a number of shares of common stock of the Company based on the appreciation of the market price of the stock over the base price of the SOSAR. The market value of the Company’s common stock on March 31, 2019 was $10.02. The value of the exercisable SOSARs that are in-the-money as of March 31, 2019 was $552,000, and exercise of those SOSARs on that date would have resulted in the issuance of 55,079 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.

 

The total expense for equity based compensation was $93,000 in the first quarter of 2019 and $236,000 in the first quarter of 2018. The unrecognized compensation expense for all equity based compensation plans is $413,000 as of March 31, 2019. The expense is expected to be recognized over a weighted average period of 1.40 years.

 

-8-

 

 

 

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):

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Residential real estate loans

  $ 231,074     $ 230,008  

Commercial and Construction real estate loans

    306,593       306,694  

Agriculture and agricultural real estate loans

    22,087       22,486  

Commercial and industrial loans

    162,446       162,026  

Loans to individuals for household, family, and other personal expenditures

    44,677       47,446  

Total loans, gross

  $ 766,877     $ 768,660  

Less: Allowance for loan losses

    7,503       7,771  

Net Loans

  $ 759,374     $ 760,889  

 

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

 

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

 

   

March 31,

   

December 31,

 
   

2019

   

2018

 

Nonaccrual loans

  $ 7,134     $ 5,566  

Loans 90 days past due and accruing

    61       -  

Restructured loans

    3,418       4,495  

Total nonperforming loans

  $ 10,613     $ 10,061  
                 

Other real estate owned

    58       692  

Other assets

    -       -  

Total nonperforming assets

  $ 10,671     $ 10,753  
                 

Nonperforming assets to total assets

    0.80 %     0.80 %

Allowance for loan losses to nonperforming loans

    70.70 %     77.24 %

 

-9-

 

 

 

5. ALLOWANCE FOR LOAN LOSSES

 

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

 

Activity in the allowance for loan losses during the three months ended March 31, 2019 was as follows (000s omitted):

 

   

Agriculture

and

Agricultural

Real Estate

   

Commercial

   

Commercial

Real Estate

   

Construction

Real Estate

   

Residential

Real Estate

   

Consumer

and Other

   

Total

 
                                                         

Allowance for loan losses: For the three months ended March 31, 2019

                                         

Beginning Balance

  $ 205     $ 1,266     $ 3,012     $ 184     $ 1,218     $ 1,886     $ 7,771  

Charge-offs

    -       (252 )     (151 )     -       -       (8 )     (411 )

Recoveries

    -       27       24       12       75       5       143  

Provision

    35       720       153       (158 )     (82 )     (668 )     -  

Ending balance

  $ 240     $ 1,761     $ 3,038     $ 38     $ 1,211     $ 1,215     $ 7,503  
                                                         

Allowance for loan losses as of March 31, 2019

                                                 

Ending balance individually evaluated for impairment

  $ -     $ 138     $ 118     $ -     $ 83     $ 127     $ 466  

Ending balance collectively evaluated for impairment

    240       1,623       2,920       38       1,128       1,088       7,037  

Ending balance

  $ 240     $ 1,761     $ 3,038     $ 38     $ 1,211     $ 1,215     $ 7,503  
                                                         
                                                         

Loans as of March 31, 2019

                                                       

Ending balance individually evaluated for impairment

  $ 2,556     $ 287     $ 3,503     $ 32     $ 3,051     $ 401     $ 9,830  

Ending balance collectively evaluated for impairment

    19,531       162,159       275,149       27,909       228,023       44,276       757,047  

Ending balance

  $ 22,087     $ 162,446     $ 278,652     $ 27,941     $ 231,074     $ 44,677     $ 766,877  

 

-10-

 

 

Activity in the allowance for loan losses during the three months ended March 31, 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 March 31, 2018

                                         

Beginning Balance

  $ 195     $ 1,443     $ 3,297     $ 491     $ 1,279     $ 961     $ 7,666  

Charge-offs

    -       -       (3 )     -       (7 )     (2 )     (12 )

Recoveries

    2       15       240       20       42       12       331  

Provision

    13       (61 )     (446 )     (50 )     (225 )     669       (100 )

Ending balance

  $ 210     $ 1,397     $ 3,088     $ 461     $ 1,089     $ 1,640     $ 7,885  
                                                         

Allowance for loan losses as of March 31, 2018

                                                 

Ending balance individually evaluated for impairment

  $ 1     $ 146     $ 315     $ 354     $ 131     $ 199     $ 1,146  

Ending balance collectively evaluated for impairment

    209       1,251       2,773       107       958       1,441       6,739  

Ending balance

  $ 210     $ 1,397     $ 3,088     $ 461     $ 1,089     $ 1,640     $ 7,885  
                                                         
                                                         

Loans as of March 31, 2018

                                                       

Ending balance individually evaluated for impairment

  $ 1,139     $ 260     $ 3,720     $ 1,574     $ 4,566     $ 424     $ 11,683  

Ending balance collectively evaluated for impairment

    21,180       131,642       266,608       18,354       218,752       54,421       710,957  

Ending balance

  $ 22,319     $ 131,902     $ 270,328     $ 19,928     $ 223,318     $ 54,845     $ 722,640  

 

 

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.

 

-11-

 

 

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.

 

-12-

 

 

The portfolio segments in each credit risk grade as of March 31, 2019 are as follows (000s omitted):

 

Credit Quality Indicators as of March 31, 2019

 

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

    $ -     $ 1,731     $ 44     $ 11,948     $ 147,437     $ 39,747     $ 200,907  
10       -       3,998       -       -       -       -       3,998  
20       64       116       185       -       -       -       365  
30       267       46,455       24,609       -       1,363       3,424       76,118  
40       13,977       103,187       219,492       13,051       73,934       1,495       425,136  
45       1,589       1,909       19,787       1,360       2,719       -       27,364  
50       3,755       4,582       6,866       245       2,590       -       18,038  
55       72       255       2,363       -       693       -       3,383  
60       2,363       213       5,306       1,337       2,338       11       11,568  
70       -       -       -       -       -       -       -  
80       -       -       -       -       -       -       -  
90       -       -       -       -       -       -       -  

Total

    $ 22,087     $ 162,446     $ 278,652     $ 27,941     $ 231,074     $ 44,677     $ 766,877  
                                                           

Performing

    $ 19,490     $ 162,181     $ 275,374     $ 27,909     $ 227,091     $ 44,219     $ 756,264  

Nonperforming

      2,597       265       3,278       32       3,983       458       10,613  

Total

    $ 22,087     $ 162,446     $ 278,652     $ 27,941     $ 231,074     $ 44,677     $ 766,877  

 

The portfolio segments in each credit risk grade as of December 31, 2018 are as follows (000s omitted):

 

Credit Quality Indicators as of December 31, 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

    $ -     $ 3,652     $ 60     $ 12,878     $ 147,167     $ 42,259     $ 206,016  
10       -       6,877       -       -       -       -       6,877  
20       64       117       196       -       -       -       377  
30       481       47,263       24,899       -       1,268       3,556       77,467  
40       16,038       97,598       219,079       11,555       74,141       1,618       420,029  
45       1,472       2,024       19,462       1,381       2,623       -       26,962  
50       1,852       3,851       9,084       249       1,896       -       16,932  
55       -       305       2,132       -       713       -       3,150  
60       2,579       339       4,380       1,337       2,200       13       10,848  
70       -       -       -       -       -       -       -  
80       -       -       2       -       -       -       2  
90       -       -       -       -       -       -       -  

Total

    $ 22,486     $ 162,026     $ 279,294     $ 27,400     $ 230,008     $ 47,446     $ 768,660  
                                                           

Performing

    $ 20,305     $ 161,749     $ 276,021     $ 27,368     $ 226,119     $ 47,037     $ 758,599  

Nonperforming

      2,181       277       3,273       32       3,889       409       10,061  

Total

    $ 22,486     $ 162,026     $ 279,294     $ 27,400     $ 230,008     $ 47,446     $ 768,660  

 

-13-

 

 

Loans are considered past due when contractually required payment of interest or principal has not been received. The amount classified as past due is the entire principal balance outstanding of the loan, not just the amount of payments that are past due. The following is a summary of past due loans as of March 31, 2019 and December 31, 2018 (000s omitted):

 

March 31, 2019

 

30-59 Days

Past Due

   

60-89 Days

Past Due

   

>90 Days

Past Due

   

Total Past

Due

   

Current

   

Total Loans

   

Recorded

Investment >90

Days Past Due

and Accruing

 
                                                         

Agriculture and Agricultural Real Estate

  $ 264     $ 16     $ 1,719     $ 1,999     $ 20,088     $ 22,087     $ -  

Commercial

    149       21       46     $ 216       162,230       162,446       15  

Commercial Real Estate

    914       936       636       2,486       276,166       278,652       -  

Construction Real Estate

    -       -       32       32       27,909       27,941       -  

Residential Real Estate

    1,810       81       387       2,278       228,796       231,074       -  

Consumer and Other

    153       50       47       250       44,427       44,677       46  

Total

  $ 3,290     $ 1,104     $ 2,867     $ 7,261     $ 759,616     $ 766,877     $ 61  

 

 

December 31, 2018

 

30-59 Days

Past Due

   

60-89 Days

Past Due

   

>90 Days

Past Due

   

Total Past

Due

   

Current

   

Total Loans

   

Recorded

Investment >90

Days Past Due

and Accruing

 
                                                         

Agriculture and Agricultural Real Estate

  $ 632     $ 1,235     $ -     $ 1,867     $ 20,619     $ 22,486     $ -  

Commercial

    186       110       31       327       161,699       162,026       -  

Commercial Real Estate

    804       -       1,849       2,653       276,641       279,294       -  

Construction Real Estate

    -       -       -       -       27,400       27,400       -  

Residential Real Estate

    1,217       340       376       1,933       228,075       230,008       -  

Consumer and Other

    79       13       -       92       47,354       47,446       -  

Total

  $ 2,918     $ 1,698     $ 2,256     $ 6,872     $ 761,788     $ 768,660     $ -  

 

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

 

The following is a summary of non-accrual loans as of March 31, 2019 and December 31, 2018 (000s omitted):

 

   

March 31, 2019

   

December 31, 2018

 

Agriculture and Agricultural Real Estate

  $ 2,363     $ 1,624  

Commercial

    85       106  

Commercial Real Estate

    3,277       2,907  

Construction Real Estate

    32       5  

Residential Real Estate

    1,366       912  

Consumer and Other

    11       12  

Total

  $ 7,134     $ 5,566  

 

For loans deemed to be impaired due to an expectation that all contractual payments will probably not be received, impairment is measured by comparing the Bank’s recorded investment in the loan to the present value of expected cash flows discounted at the loan’s effective interest rate, the fair value of the collateral, or the loan’s observable market price.

 

-14-

 

 

The following is a summary of impaired loans as of March 31, 2019 and March 31, and December 31, 2018 (000s omitted):

 

March 31, 2019

 

Recorded

Investment

   

Unpaid

Principal

Balance

   

Related

Allowance

   

Average

Recorded

Investment for the

Three Months

Ended

   

Interest Income

Recognized in the

Three Months

Ended

 
                                         

With no related allowance recorded:

                                       

Agriculture and Agricultural Real Estate

  $ 2,556     $ 2,555     $ -     $ 2,595     $ (14 )

Commercial

    67       67       -       91       1  

Commercial Real Estate

    1,899       2,116       -       2,076       61  

Construction Real Estate

    32       67       -       52       -  

Residential Real Estate

    2,660       2,822       -       2,842       39  

Consumer and Other

    134       135       -       137       2  
                                         

With an allowance recorded:

                                       

Agriculture and Agricultural Real Estate

    -       -       -       -       -  

Commercial

    220       229       138       231       2  

Commercial Real Estate

    1,604       1,697       118       1,698       5  

Construction Real Estate

    -       -       -       -       -  

Residential Real Estate

    391       403       83       405       5  

Consumer and Other

    267       267       127       270       3  
                                         

Total:

                                       

Agriculture and Agricultural Real Estate

  $ 2,556     $ 2,555     $ -     $ 2,595     $ (14 )

Commercial

    287       296       138       322       3  

Commercial Real Estate

    3,503       3,813       118       3,774       66  

Construction Real Estate

    32       67       -       52       -  

Residential Real Estate

    3,051       3,225       83       3,247       44  

Consumer and Other

    401       402       127       407       5  
                                         

Total

  $ 9,830     $ 10,358     $ 466     $ 10,397     $ 104  

 

 

   

Recorded

Investment as

of December

31, 2018

   

Unpaid

Principal

Balance as of

December 31,

2018

   

Related

Allowance as

of December

31, 2018

   

Average

Recorded

Investment for the

Three Months

Ended March 31,

2018

   

Interest Income

Recognized in the

Three Months

Ended March 31,

2018

 
                                         

With no related allowance recorded:

                                       

Agriculture and Agricultural Real Estate

  $ 2,388     $ 2,384     $ -     $ 820     $ 11  

Commercial

    -       -       -       -       -  

Commercial Real Estate

    1,863       1,871       -       1,706       21  

Construction Real Estate

    -       -       -       -       -  

Residential Real Estate

    3,015       3,174       -       4,129       52  

Consumer and Other

    58       59       -       84       1  
                                         

With an allowance recorded:

                                       

Agriculture and Agricultural Real Estate

    234       234       -       240       3  

Commercial

    226       234       142       266       3  

Commercial Real Estate

    1,299       1,380       146       2,064       32  

Construction Real Estate

    32       67       4       1,597       19  

Residential Real Estate

    306       316       94       660       7  

Consumer and Other

    339       339       143       345       4  
                                         

Total:

                                       

Agriculture and Agricultural Real Estate

  $ 2,622     $ 2,618     $ -     $ 1,060     $ 14  

Commercial

    226       234       142       266       3  

Commercial Real Estate

    3,162       3,251       146       3,770       53  

Construction Real Estate

    32       67       4       1,597       19  

Residential Real Estate

    3,321       3,490       94       4,789       59  

Consumer and Other

    397       398       143       429       5  
                                         

Total

  $ 9,760     $ 10,058     $ 529     $ 11,911     $ 153  

 

-15-

 

 

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

 

Loans that have been classified as TDRs during the three month periods ended March 31, 2019 and March 31, 2018 are as follows (000s omitted from dollar amounts):

 

   

Three months ended

   

Three months ended

 
   

March 31, 2019

   

March 31, 2018

 
   

Number of

Contracts

   

Pre-

Modification

Recorded

Principal

Balance

   

Post-

Modification

Recorded

Principal

Balance

   

Number of

Contracts

   

Pre-

Modification

Recorded

Principal

Balance

   

Post-

Modification

Recorded

Principal

Balance

 

Agriculture and Agricultural Real Estate

    2     $ 77     $ 16       -     $ -     $ -  

Commercial

    -       -       -       -       -       -  

Commercial Real Estate

    1       39       36       1       283       283  

Construction Real Estate

    -       -       -       -       -       -  

Residential Real Estate

    -       -       -       1       150       150  

Consumer and Other

    1       15       14       -       -       -  

Total

    4     $ 131     $ 66       2     $ 433     $ 433  

 

The Bank considers TDRs that become past due under the modified terms as defaulted. The following table shows the loans that became TDRs during the three month periods ended March 31, 2019 and March 31, 2018 that subsequently defaulted during the three month periods ended March 31, 2019 and March 31, 2018, respectively.

 

   

Three months ended

   

Three months ended

 
   

March 31, 2019

   

March 31, 2018

 
   

Number of

Contracts

       

Post-

Modification

Recorded

Principal

Balance

   

Number of

Contracts

       

Post-

Modification

Recorded

Principal

Balance

 

Agriculture and Agricultural Real Estate

    -         $ -       -         $ -  

Commercial

    -           -       -           -  

Commercial Real Estate

    -           -       1           283  

Construction Real Estate

    -           -       -           -  

Residential Real Estate

    -           -       -           -  

Consumer and Other

    -           -       -           -  

Total

    -         $ -       1         $ 283  

 

The Company has allocated $417,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings at March 31, 2019. In addition, there were no commitments to lend additional amounts to borrowers that are classified as troubled debt restructurings as of March 31, 2019 and March 31, 2018.

 

-16-

 

 

 

6. INVESTMENT SECURITIES 

 

The following is a summary of the Bank’s investment securities portfolio as of March 31, 2019 and December 31, 2018 (000s omitted):

 

   

Available for Sale

 
   

March 31, 2019

 
           

Gross

   

Gross

   

Estimated

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 

Obligations of States and Political Subdivisions

    29,127       626       (116 )     29,637  

Corporate Debt Securities

    500       -       (4 )     496  
    $ 29,627     $ 626     $ (120 )   $ 30,133  

 

 

   

Available for Sale

 
   

December 31, 2018

 
           

Gross

   

Gross

   

Estimated

 
   

Amortized

   

Unrealized

   

Unrealized

   

Market

 
   

Cost

   

Gains

   

Losses

   

Value

 

Obligations of U.S. Government Agencies

  $ 134,160     $ 1     $ (5,926 )   $ 128,235  

Mortgage Backed Securities issued by U.S. Government Agencies

    196,224       32       (5,702 )     190,554  

Obligations of States and Political Subdivisions

    69,309       604       (804 )     69,109  

Corporate Debt Securities

    13,552       173       (10 )     13,715  
    $ 413,245     $ 810     $ (12,442 )   $ 401,613  

 

The amortized cost and estimated market values of securities by contractual maturity as of March 31, 2019 are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   

Available for Sale

 
           

Estimated

 
   

Amortized

   

Market

 
   

Cost

   

Value

 

Contractual maturity in

               

1 year or less

  $ 8,462     $ 8,503  

After 1 year through five years

    15,112       15,310  

After 5 years through 10 years

    5,387       5,661  

After 10 years

    666       659  

Total

  $ 29,627     $ 30,133  

 

-17-

 

 

The investment securities portfolio is evaluated for impairment throughout the year. Impairment is recorded against individual securities, unless the decrease in fair value is attributable to interest rates or the lack of an active market, and Management determines that the Company does not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments before a recovery of their amortized costs bases, which may be maturity. The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses (in thousands), aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2019 and December 31, 2018.

 

March 31, 2019

 
                                                 
   

Less than 12 months

   

12 months or longer

   

Total

 
   

Aggregate

Fair Value

   

Gross

Unrealized

Losses

   

Aggregate

Fair Value

   

Gross

Unrealized

Losses

   

Aggregate

Fair Value

   

Gross

Unrealized

Losses

 

Obligations of States and Political Subdivisions

    7,915       116       -       -       7,915       116  

Corporate Debt Securities

    496       4       -       -       496       4  
    $ 8,411     $ 120     $ -     $ -     $ 8,411     $ 120  

 

 

December 31, 2018

 
                                                 
   

Less than 12 months

   

12 months or longer

   

Total

 
   

Aggregate

Fair Value

   

Gross

Unrealized

Losses

   

Aggregate

Fair Value

   

Gross

Unrealized

Losses

   

Aggregate

Fair Value

   

Gross

Unrealized

Losses

 

Obligations of United States Government Agencies

  $ 3,946     $ 65     $ 117,750     $ 5,861     $ 121,696     $ 5,926  

Mortgage Backed Securities issued by U.S. Government Agencies

    19,945       131       165,604       5,571       185,549       5,702  

Obligations of States and Political Subdivisions

    32,260       573       5,955       231       38,215       804  

Corporate Debt Securities

    490       10       -       -       490       10  
    $ 56,641     $ 779     $ 289,309     $ 11,663     $ 345,950     $ 12,442  

 

The amount of investment securities issued by government agencies, states, and political subdivisions with unrealized losses and the amount of unrealized losses on those investment securities are primarily the result of market interest rates and not the result of the credit quality of the issuers of the securities. The Company sold most of its Available for Sale Securities in the first quarter of 2019, retaining debt securities issued by local issuers that it does not intend to sell. Because the Company does not intend to sell the remaining investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases, which may be maturity, the Company does not consider those investments to be other than temporarily impaired at March 31, 2019. As of March 31, 2019 and December 31, 2018, there were 37 and 165 securities in an unrealized loss position, respectively.

 

 

7. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

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

 

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value is used on a recurring basis for Available for Sale Securities. Additionally, fair value is used on a non-recurring basis to evaluate assets or liabilities for impairment or for disclosure purposes. Examples of these non-recurring uses of fair value include certain loans held for sale accounted for on a lower of cost or market basis. Depending on the nature of the asset or liability, the Company uses various valuation techniques and assumptions when estimating fair value.

 

-18-

 

 

The Company applied the following fair value hierarchy:

 

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. The Company’s cash, equity mutual fund investments where quoted prices are available in an active market, noninterest bearing demand deposits, and overnight federal funds generally are classified within Level 1 of the fair value hierarchy.

 

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. The Company’s borrowed funds and investments in U.S. government agency securities, government sponsored mortgage backed securities, corporate debt securities, bank certificates of deposit, and obligations of states and political subdivisions are generally classified in Level 2 of the fair value hierarchy. Fair values for these instruments are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows.

 

Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Certain municipal debt obligations and certificates of deposit are classified within Level 3 of the fair value hierarchy. Fair values are initially valued based on transaction price and are adjusted to reflect exit values.

 

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018, and the valuation techniques used by the Company to determine those fair values.

 

                                   

Total

 
   

Carrying

                           

Estimated

 

March 31, 2019

 

Value

   

Level 1

   

Level 2

   

Level 3

   

Fair Value

 

Financial Assets:

                                       

Cash and due from banks

  $ 432,807     $ 432,807     $ -     $ -     $ 432,807  

Time Deposits in Other Banks

    600       -       600       -       600  

Securities - Available for Sale

                                       

Obligations of States and Political Subdivisions

    29,637       -       29,637       -       29,637  

Corporate Debt Securities

    496       -       496       -       496  

Equity Securities

    7,450       2,077       5,373       -       7,450  

Loans, net

    759,374       -       -       747,951       747,951  

Accrued Interest Receivable

    3,135       -       -       3,135       3,135  
                                         

Financial Liabilities:

                                       

Noninterest Bearing Deposits

    290,929       290,929       -       -       290,929  

Interest Bearing Deposits

    892,220       -       892,881       -       892,881  

Borrowed funds

                                       

FHLB Advances

    10,000       -       10,212       -       10,212  

Accrued Interest Payable

    77       -       -       77       77  

 

-19-

 

 

                                  Total  
   

Carrying

                           

Estimated

 

December 31, 2018

 

Value

   

Level 1

   

Level 2

   

Level 3

   

Fair Value

 

Financial Assets:

                                       

Cash and due from banks

  $ 51,842     $ 51,842     $ -     $ -     $ 51,842  

Time Deposits in Other Banks

    10,796       -       10,548       -       10,548  

Securities - Available for Sale

                                       

Obligations of U.S. Government Agencies

    128,235       -       128,235       -       128,235  

MBS issued by U.S. Government Agencies

    190,554       -       190,554       -       190,554  

Obligations of States and Political Subdivisions

    69,109       -       69,109       -       69,109  

Corporate Debt Securities

    13,715       -       13,715       -       13,715  

Equity Securities

    7,415       2,042       5,373       -       7,415  

Loans Held for Sale

    488       -       -       502       502  

Loans, net

    760,889       -       -       750,249       750,249  

Accrued Interest Receivable

    4,413       -       -       4,413       4,413  
                                         

Financial Liabilities:

                                       

Noninterest Bearing Deposits

    297,704       297,704       -       -       297,704  

Interest Bearing Deposits

    885,206       -       885,886       -       885,886  

Federal Home Loan Bank Advances

    10,000       -       -       10,042       10,042  

Accrued Interest Payable

    65       -       -       65       65  

 

 

In instances where inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset.

 

The Company’s assets with Level 3 fair values are carried at their amortized cost values as of March 31, 2019 or December 31, 2018. The Company did not have any sales or purchases of Level 3 available for sale securities during the period.

 

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

 

The Company also has assets that under certain conditions are subject to measurement at fair value on a nonrecurring basis. These assets include loans and Other Real Estate Owned. The Company estimated the fair values of these assets using Level 3 inputs, specifically discounted cash flow projections.

 

Assets measured at fair value on a nonrecurring basis are as follows (000s omitted):

 

   

Quoted Prices in

Active Markets for

Identical Assets

(Level 1)

   

Significant Other

Observable

Inputs (Level 2)

   

Significant

Unobservable

Inputs (Level 3)

 

March 31, 2019

                       

Impaired loans

  $ -     $ -     $ 9,364  

Other Real Estate Owned

  $ -     $ -     $ 58  
                         

December 31, 2018

                       

Impaired loans

  $ -     $ -     $ 9,231  

Other Real Estate Owned

  $ -     $ -     $ 692  

 

-20-

 

 

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

 

 

 

8. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

 

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

 

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

 

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

 

   

Contractual Amount

 
   

March 31,

   

December 31,

 
   

2019

   

2018

 

Commitments to extend credit:

               

Unused portion of commercial lines of credit

  $ 119,668     $ 116,119  

Unused portion of credit card lines of credit

    7,018       6,680  

Unused portion of home equity lines of credit

    36,823       34,621  

Standby letters of credit and financial guarantees written

    1,223       1,763  

All other off-balance sheet commitments

    -       -  

 

 

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

 

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

 

-21-

 

 

 

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

 

Introduction

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

 

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

 

On October 9, 2018, the Company and First Merchants Corporation (“First Merchants”) signed an Agreement and Plan of Reorganization and Merger (the “Merger Agreement”), pursuant to which the Company will merge with and into First Merchants. Subject to the terms and conditions of the Merger Agreement, each share of the Company will be converted into 0.275 shares of First Merchants common stock. Consummation of the merger is expected to occur in the second quarter of 2019.

 

Executive Overview

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

 

The net loss of $5,141,000 for the first quarter of 2019 was caused by losses totaling $11,646,000 on the sale of investment securities as the Company liquidated a substantial portion of its investment portfolio in anticipation of its merger with First Merchants. Excluding the securities losses, net profit would have been $4,059,000, an increase of $157,000 or 4.0% compared to the first quarter of 2018. The Net Interest Income increased $1,082,000, or 10.3% due to an improvement in the Net Interest Margin from 3.49% in the first quarter of 2018 to 3.83% in the first quarter of 2019. The effect of the improved margin was mitigated by an increase of $518,000 in non-interest expenses.

 

The national economic condition is good, and the economy in southeast Michigan is continuing to recover. State and local unemployment rates are holding steady near their lowest post-recession levels, and are now comparable to the national average. Commercial and residential development property values continue to improve, with most values reaching or exceeding their pre-recession levels. Our total classified assets, which include internal watch list loans, other real estate owned, and nonperforming and watch list investment securities, had been improving steadily since 2014, and stabilized recently. Net charge offs were $268,000, or 0.14% of loans, annualized, in the first quarter of 2019, compared to net recoveries of $319,000, or 0.18% of loans in the first quarter of 2018. Due to improving loan quality metrics, we were able to reduce our Allowance for Loan and Lease Losses (ALLL) as a percent of loans from 1.01% at December 31, 2018 to 0.98% as of March 31, 2019. The ALLL decreased $268,000 during the first quarter of 2019 due to the net charge offs of $268,000, as we did not record a provision during the quarter. We assess the adequacy of our ALLL each quarter, and adjust it as necessary by debiting or crediting the provision expense. The allowance includes $466,000 of specific allocations on $9.8 million of loans evaluated for impairment and $7.0 million of general allocations on the remainder of the portfolio. The general allocation is based on the historical charge off experience of the previous 20 quarters. The improvement in the historical loss rates is slowing and loan growth is continuing, so future provisions may be necessary.

 

-22-

 

 

The $1,082,000 increase in Net Interest Income in the first quarter of 2019 compared to the first quarter of 2018 was due to the increase in the net interest margin from 3.49% to 3.83%, and the increase of $5.0 million in the amount of average earning assets. The net interest margin increased because the yield on earnings assets increased 41 basis points while the cost of interest bearing liabilities only increased 9 basis points. Non-interest income for the quarter (excluding securities losses) decreased $126,000 and non-interest expenses increased $518,000.

 

Critical Accounting Policies

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

 

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

 

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

 

Financial Condition

The regional economic conditions remained strong this quarter, with steady local unemployment rates and increasing property values. Management efforts remain focused on improving asset quality, increasing net interest income, and improving non-interest income and expenses.

 

With respect to asset quality, our nonperforming assets (“NPAs”) decreased 0.7% during the quarter, from $10.75 million to $10.67 million. Loan delinquencies increased from $6.9 million 30 days or more past due as of December 31, 2018 to $7.3 million as of March 31, 2019 and the delinquency percentage increased from 0.89% to 0.94% of the total loans. Over the last twelve months, NPAs decreased $2.3 million, or 17.7%, with nonperforming loans decreasing 9.6% from $11.7 million to $10.6 million, and Other Real Estate Owned (“OREO”) decreasing from $1.2 million to $58,000. The amount required in the Allowance for Loan and Lease Losses (“ALLL”) was decreased from $7.9 million a year ago to $7.5 million because the decreases required by the improvement in the quality of the assets and the historical loss rates exceeded the amount required by the increase in the size of the loan portfolio. The ALLL is now 0.98% of loans, down from 1.09% at March 31, 2018. The ALLL is 70.70% of nonperforming loans (“NPLs”), compared to 67.15% at March 31, 2018. In light of current economic conditions, we believe that this level of ALLL adequately estimates the potential losses in the loan portfolio.

 

Since December 31, 2018, total loans held for investment decreased $1.8 million as new loan activity was exceeded by payments received and other reductions in the period. Our pipeline of loans in process remained steady and our unfunded loan commitments increased, so we expect loans outstanding to increase in 2019.

 

-23-

 

 

Since December 31, 2018, deposits were unchanged at $1.183 billion, and borrowed funds were unchanged at $10.0 million, while other liabilities decreased $6.3 million and capital increased $2.6 million. As a result, our total assets decreased $3.4 million, or 0.3%. We will continue to price our deposit products competitively, but we have adequate liquidity on our balance sheet to fund our continued loan growth due to the investment sales. Capital increased and assets decreased, causing the capital to assets ratio to increase from 9.55% at December 31, 2018 to 9.77% at March 31, 2019.

 

Results of Operations – First Quarter 201 9 vs. First Quarter 201 8

Net Interest Income - A comparison of the income statements for the three months ended March 31, 2019 and 2018 shows an increase of $1,082,000, or 10.3%, in Net Interest Income. Interest income on loans increased $1,354,000, or 16.5% as the average loans outstanding increased $63.8 million and the average yield on loans increased from 4.72% to 5.04%. The average loans outstanding increased due to the purchases of consumer loans and syndicated commercial loans, and organic growth in our local markets. The interest income on investments, fed funds sold, and interest bearing balances due from banks decreased $60,000 even though the yield increased from 2.14% to 2.36% as the average amount of investments, fed funds sold, and interest bearing balances due from banks decreased $58.8 million. The Company continues to maintain a high level of liquidity, but some of that liquidity is being used by redeploying earning assets from low yielding short term investments and deposits in the Federal Reserve Bank into higher yielding loans. The interest expense on deposits increased $154,000, or 37.2% even though the average deposits decreased $4.0 million as the average cost of deposits increased from 0.14% to 0.19%. Due to the growth in loans and the decrease in deposit funding, average borrowed funds increased $8.5 million, and the cost of borrowed funds increased $58,000 compared to the first quarter of 2018. Average total interest bearing liabilities increased $7.9 million, and the cost of interest bearing liabilities increased from 0.19% in the first quarter of 2018 to 0.28% in the first quarter of 2019. As a result, interest expense increased $212,000, or 50.5%.

 

Provision for Loan Losses - The Company did not record a Provision for Loan Losses expense in the first quarter of 2019, which was an increase of $100,000 compared to the negative provision expense of $100,000 in the first quarter of 2018. We charged off $411,000 of principal while recovering $143,000 of previously charged off loans in the first quarter of 2019, for a net charge off total of $268,000, or 0.14% of average loans, annualized. Each quarter, the Company conducts a review and analysis of its ALLL to determine its adequacy. This analysis involves specific allocations for impaired credits and a general allocation for losses expected based on historical experience adjusted for current conditions. In the first quarter of 2019, the portfolio risk indicators improved and the amount of loans outstanding decreased slightly, resulting in the need for a decrease in the amount of ALLL required. The net charge offs of $268,000 enabled us to achieve the required ALLL without recording a negative provision expense. The allowance includes $466,000 of specific allocations and $7.0 million of general allocations. The general allocation is based on the historical charge off experience of the previous 20 quarters. The historical charge off rate is not expected to continue to improve significantly, and if loan growth continues as expected, provision expenses may be required in the future.

 

Other Income – Non interest income decreased $11,671,000, or 308.4% compared to the first quarter of 2018. Excluding securities losses in both periods, non-interest income decreased $126,000, or 3.2%. Wealth Management income, Service Charges on Deposit Accounts, Debit Card income, and Bank Owned Life Insurance income all decreased. Origination fees on mortgage loans sold and Other non-interest income increased slightly.

 

-24-

 

 

Other Expenses – Total non-interest expenses increased $518,000, or 5.3% compared to the first quarter of 2018. Salaries and Employee Benefits increased $102,000, or 1.7% mainly because workers’ compensation insurance increased due to a refund received in the first quarter of 2018. Professional fees increased $249,000, or 41.9% due to higher legal and accounting fees. Other insurance increased $297,000 primarily due to costs related to settling post retirement death benefits with former directors and officers.

 

As a result of the above activity, the Loss Before Income Taxes in the first quarter of 2019 was $6,579,000, a decrease of $11,207,000 compared to the pre-tax profit of $4,628,000 in the first quarter of 2018. The Company recorded a federal income tax benefit of $1,438,000 in the first quarter of 2019, reflecting an effective tax rate of 21.9%, compared to the tax expense of $726,000 in the first quarter of 2018, which reflected an effective rate of 15.7%. The Net Loss for the first quarter of 2019 was $5,141,000, a decrease of 231.8% compared to the net profit of $3,902,000 in the first quarter of 2018.

 

Cash Flows

Cash flows provided by operating activities decreased $7,444,000 compared to the first three months of 2018 mainly due to the large loss on the sale of investment securities in 2019. The cash flow from investing activities increased $409,049 compared to 2018 due to the sale of a substantial portion of the investment portfolio in the in the first three months of 2019. The securities were sold as the first part of a portfolio restructuring that is being completed in conjunction with our merger with First Merchants Bank, and the proceeds were still being held in cash as of the end of the first quarter of 2019. The amount of cash used for financing activities was $17.9 million lower in the first three months of 2019 than it was in the first three months of 2018 due to the large decrease in deposits and the special dividend paid in the first three months of 2018. In the first three months of 2019, the cash provided by investing activities greatly exceeded the cash used for operating and financing activities, and the amount of cash and cash equivalents increased by $381.0 million during the period. In the first three months of 2018, the cash used for investing and financing activities exceeded the cash provided by operating activities, resulting in a decrease of $38.5 million in cash and cash equivalents during the first three months of 2018. As we redeploy the proceeds from the investment securities sales in 2019 we expect cash flows from investing activities to exceed the cash provided by operating activities, resulting in a decrease from our current level of cash and cash equivalents.

 

Liquidity and Capital

The Company believes it has sufficient liquidity to fund its lending activity and allow for fluctuations in deposit levels. The high level of cash and cash equivalents ensures that the Company can meet its liquidity without utilizing any of its external sources of liquidity. External sources of liquidity include a Federal funds line that has been established with our correspondent bank and Repurchase Agreements with money center banks that allow us to pledge securities as collateral for borrowings. As of March 31, 2019, the Bank was utilizing $10 million of its authorized limit of $275 million with the Federal Home Loan Bank of Indianapolis, and none of its $25 million federal funds line with a correspondent bank. The Company periodically draws on its fed funds lines to ensure that funding will be available if needed.

 

The Company’s Funds Management Policy includes guidelines for desired amounts of liquidity and capital. The Funds Management Policy also includes contingency plans for liquidity and capital that specify actions to take if liquidity and capital ratios fall below the levels contained in the policy. Throughout the first three months of 2019 the Company was in compliance with its Funds Management Policy regarding liquidity and capital.

 

-25-

 

 

Total stockholders’ equity of the Company was $130.3 million at March 31, 2019 and $127.7 million at December 31, 2018. Retained earnings decreased $7.4 million due to the year to date loss of $5.1 million and the dividends paid of $2.3 million. The Accumulated Other Comprehensive Income (Loss) (“AOCI” or “AOCL”) increased because the unrealized losses on Available for Sale securities made up the largest portion of the AOCL as of December 31, 2018, and most of those losses were realized when the investment portfolio was sold. Total equity increased $2.6 million while total assets decreased $3.4 million, so the ratio of equity to assets increased from 9.55% at December 31, 2018 to 9.77% at March 31, 2019.

 

Federal bank regulatory agencies have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards require banks to maintain a Total Risk Based Capital ratio of at least 8%, a Tier 1 Risk Based Capital ratio of at least 6%, and a Tier 1 Leverage Ratio of at least 4% to be adequately capitalized. The regulatory agencies consider a bank to be well capitalized if its Total Risk Based Capital is at least 10% of Risk Weighted Assets, Tier 1 Risk Based Capital is at least 8% of Risk Weighted Assets, and the Tier 1 Leverage Capital ratio is at least 5%. Basel III implemented the new Common Equity Tier 1 Capital to Risk Weighted Assets ratio, with a minimum of 4.5% to be considered adequately capitalized and a minimum of 6.5% required to be considered well capitalized.

 

 

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

 

   

Actual

   

Minimum to Qualify as

Well Capitalized

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 

As of March 31, 2019:

                               

Total Capital to Risk-Weighted Assets

                               

Consolidated

  $ 137,880       15.80 %   $ 87,258       10.0 %

Monroe Bank & Trust

    136,149       15.63 %     87,120       10.0 %

Tier 1 Capital to Risk-Weighted Assets

                               

Consolidated

    130,042       14.90 %     69,806       8.0 %

Monroe Bank & Trust

    128,311       14.73 %     69,696       8.0 %

Common Equity Tier 1 Capital to Risk-Weighted Assets

                               

Consolidated

    130,042       14.90 %     56,718       6.5 %

Monroe Bank & Trust

    128,311       14.73 %     56,628       6.5 %

Tier 1 Capital to Average Assets

                               

Consolidated

    130,042       9.66 %     67,292       5.0 %

Monroe Bank & Trust

    128,311       9.55 %     67,211       5.0 %

 

-26-

 

 

   

Actual

   

Minimum to Qualify as

Well Capitalized

 
   

Amount

   

Ratio

   

Amount

   

Ratio

 

As of December 31, 2018:

                               

Total Capital to Risk-Weighted Assets

                               

Consolidated

  $ 145,480       15.79 %   $ 92,111       10.0 %

Monroe Bank & Trust

    143,583       15.61 %     91,976       10.0 %

Tier 1 Capital to Risk-Weighted Assets

                               

Consolidated

    137,374       14.91 %     73,689       8.0 %

Monroe Bank & Trust

    135,477       14.73 %     73,580       8.0 %

Common Equity Tier 1 Capital to Risk-Weighted Assets

                               

Consolidated

    137,374       14.91 %     59,872       6.5 %

Monroe Bank & Trust

    135,477       14.73 %     59,784       6.5 %

Tier 1 Capital to Average Assets

                               

Consolidated

    137,374       10.28 %     66,824       5.0 %

Monroe Bank & Trust

    135,477       10.15 %     66,741       5.0 %

 

Market risk for the Bank, as is typical for most banks, consists mainly of interest rate risk and market price risk. The Bank’s earnings and the economic value of its equity are exposed to interest rate risk and market price risk, and monitoring this risk is the responsibility of the Asset/Liability Management Committee (ALCO) of the Bank. The Bank’s market risk is monitored quarterly by estimating the effect of changes in interest rates on its projected net interest income and the economic value of its equity. The sale of a large portion of its investment portfolio in the first quarter of 2019 significantly changed the Bank’s interest rate risk position.

 

 

Forward-Looking Statements

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

 

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

 

-27-

 

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

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

 

Each quarter, the Asset and Liability Committee (ALCO), which includes the senior management of the Bank and a non executive member of the board of directors, estimates the effect of interest rate changes on the projected net interest income of the Bank. The sensitivity of the Bank’s net interest income to changes in interest rates is measured by using a computer based simulation model to estimate the impact on earnings of increases of 100, 200, 300, and 400 basis points and decreases of 100, 200, and 300 basis points in the interest rates. The net interest income projections are compared to a base case projection, which assumes no changes in interest rates.

 

The Bank’s ALCO has established limits in the acceptable amount of interest rate risk, as measured by the change in the Bank’s projected net interest income, in its policy. In the first quarter of 2019, the Bank’s interest rate risk exceeded its policy limits.

 

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

 

The tables below summarize the net interest income sensitivity as of March 31, 2019 and December 31, 2018:

 

   

Base

   

Rates

   

Rates

   

Rates

   

Rates

   

Rates

   

Rates

   

Rates

 

(Dollars in Thousands)

 

Projection

   

Up 1%

   

Up 2%

   

Up 3%

   

Up 4%

   

Down 1%

   

Down 2%

   

Down 3%

 

March 31, 2019 12 Month Projection

                                                         

Interest Income

  $ 50,880     $ 56,898     $ 62,893     $ 68,858     $ 74,715     $ 44,687     $ 38,300     $ 35,904  

Interest Expense

    2,788       4,510       6,232       7,954       9,676       1,464       1,111       1,107  

Net Interest Income

  $ 48,092     $ 52,388     $ 56,661     $ 60,904     $ 65,039     $ 43,223     $ 37,189     $ 34,797  
                                                                 

Percent Change From Base Projection

      8.9 %     17.8 %     26.6 %     35.2 %     -10.1 %     -22.7 %     -27.6 %

ALCO Policy Limit (+/-)

            10.0 %     15.0 %     20.0 %     25.0 %     10.0 %     15.0 %     20.0 %

 

 

   

Base

   

Rates

   

Rates

   

Rates

   

Rates

   

Rates

   

Rates

   

Rates

 

(Dollars in Thousands)

 

Projection

   

Up 1%

   

Up 2%

   

Up 3%

   

Up 4%

   

Down 1%

   

Down 2%

   

Down 3%

 

December 31, 2018 12 Month Projection

                                                         

Interest Income

  $ 52,131     $ 54,672     $ 57,191     $ 59,685     $ 62,046     $ 49,619     $ 46,524     $ 45,265  

Interest Expense

    2,755       4,444       6,133       7,822       9,511       1,488       1,134       1,121  

Net Interest Income

  $ 49,376     $ 50,228     $ 51,058     $ 51,863     $ 52,535     $ 48,131     $ 45,390     $ 44,144  
                                                                 

Percent Change From Base Projection

      1.7 %     3.4 %     5.0 %     6.4 %     -2.5 %     -8.1 %     -10.6 %

ALCO Policy Limit (+/-)

            10.0 %     15.0 %     20.0 %     30.0 %     10.0 %     15.0 %     20.0 %

 

-28-

 

 

Due to the large amount of cash held in variable rate deposits at the Federal Reserve Bank, the increase in Net Interest Income in the 2%, 3%, and 4% rising rate scenarios exceeded the Bank’s policy limits, and the decrease in Net Interest Income in the 1%, 2%, and 3% decreasing rate scenarios also exceeded the Bank’s policy limits. Management is in the process of reinvesting the cash in investment securities that will reduce the risk to acceptable levels.

 

The tables below summarize the amount of interest rate risk to the economic value of the Bank’s equity as of March 31, 2019 and December 31, 2018:

 

   

Economic Value at March 31, 2019

 
   

Rates

                         

(Dollars in Millions)

 

Base

   

Up 1%

   

Up 2%

   

Up 3%

   

Up 4%

   

Down 1%

   

Down 2%

   

Down 3%

 

Assets

  $ 1,322,924     $ 1,309,444     $ 1,296,248     $ 1,283,195     $ 1,270,260     $ 1,335,213     $ 1,346,016     $ 1,354,916  

Liabilities

    1,132,425       1,106,344       1,081,280       1,057,184       1,034,011       1,160,539       1,192,309       1,196,923  

Stockholders' Equity

  $ 190,499     $ 203,100     $ 214,968     $ 226,011     $ 236,249     $ 174,674     $ 153,707     $ 157,993  
                                                                 

Change in Equity

            6.6 %     12.8 %     18.6 %     24.0 %     -8.3 %     -19.3 %     -17.1 %

ALCO Policy Limit (+/-)

            10.0 %     20.0 %     30.0 %     40.0 %     10.0 %     20.0 %     30.0 %

 

 

   

Economic Value at December 31, 2018

 
   

Rates

                         

(Dollars in Millions)

 

Base

   

Up 1%

   

Up 2%

   

Up 3%

   

Up 4%

   

Down 1%

   

Down 2%

   

Down 3%

 

Assets

  $ 1,329,149     $ 1,298,132     $ 1,268,967     $ 1,241,032     $ 1,214,084     $ 1,357,942     $ 1,385,228     $ 1,399,592  

Liabilities

    1,129,827       1,103,978       1,079,135       1,055,251       1,032,280       1,157,675       1,189,053       1,197,122  

Stockholders' Equity

  $ 199,322     $ 194,154     $ 189,832     $ 185,781     $ 181,804     $ 200,267     $ 196,175     $ 202,470  
                                                                 

Change in Equity

            -2.6 %     -4.8 %     -6.8 %     -8.8 %     0.5 %     -1.6 %     1.6 %

ALCO Policy Limit (+/-)

            10.0 %     20.0 %     30.0 %     40.0 %     10.0 %     20.0 %     30.0 %

 

The Economic Value of Equity analysis measures market risk by estimating the changes in the economic values of the Bank’s equity caused by changes in interest rates. This analysis indicates that moving assets from long term fixed investment securities to variable rate overnight deposits changed the market risk of our balance sheet, however, the estimated variability of the economic value of equity was within the Bank’s established policy limits.

 

 

Item 4. Controls and Procedures

The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of March 31, 2019, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2019, in alerting them in a timely manner to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings.

 

There was no change in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

  

-29-

 

 

Part II Other Information

 

 

Item 1. Legal Proceedings

Except as set forth in the Company's Annual Report on Form 10-K originally filed with the SEC on March 18, 2019 (the "2018 10-K"), neither the Company nor its subsidiaries are a party to, nor is any of their property the subject of any material pending legal proceedings other than ordinary routine litigation incidental to their respective businesses, nor are any such proceedings known to be contemplated by governmental authorities. There have been no material developments with respect to any of the matters referenced in the 2018 10-K since the filing thereof.

 

Item 1A. Risk Factors

There have been no material changes in the risk factors disclosed by the Company in its Report on Form 10-K for the fiscal year ended December 31, 2018.

 

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

The Company has a stock repurchase program which it publicly announced on January 25, 2018. On that date, the Board of Directors authorized the repurchase of 2 million of the Company’s common shares, which authorization commenced on February 1, 2018 and will expire on January 31, 2020. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2019, and 2,000,000 shares remain available under the repurchase authorization.

 

Item 3 . Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

None.

 

-30-

 

 

Item 6. Exhibits

  2.1 Agreement and Plan of Reorganization and Merger between First Merchants Corporation and MBT Financial Corp. dated October 9, 2018. Previously filed as Exhibit 2.1 to MBT Financial Corp.'s Form 8-K filed with the Securities and Exchange Commission on October 10, 2018.
     
 

3.1

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

 

 

3.2

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

 

 

31.1

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

 

 

31.2

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

 

 

32.1

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

 

 

32.2

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

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

 

 

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

-31-

 

 

Signatures

 

 

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

 

 

        MBT Financial Corp.    
        (Registrant)  

 

 

 

 

 

 

 

 

 

 

 

 

May 10, 2019

 

By

/s/  H. Douglas Chaffin 

 

Date

 

 

 

 H. Douglas Chaffin  

 

       

 President &

 
       

 Chief Executive Officer

 
           
May 10, 2019   By /s/  John L. Skibski  
Date        John L. Skibski  
         Executive Vice President and  

 

 

 

 

 Chief Financial Officer  

 

 

-32-

 

 

 

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