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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2002
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 [X]
No [ ]
As of November 13, 2002, 19,203,841 shares of the Corporation's Common Stock, No
Par Value, were outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
September 30, December 31,
2002 2001
---- ----
ASSETS
Cash and due from banks $ 27,263,330 $ 26,137,120
Federal funds sold -- 40,000,000
Investment securities
Held to maturity-
Obligations of U.S. Government agencies (Estimated market value
of $2,686,540 and $30,197,409) 2,615,070 30,044,083
Obligations of states and political subdivisions (Estimated market
value of $118,218,361 and $131,920,520) 112,515,513 129,074,829
Other securities (Estimated market value of $2,898,147
and $2,961,534) 2,974,291 2,968,261
Available for sale-
Obligations of U.S. Government agencies 342,414,604 225,705,947
Obligations of states and political subdivisions 14,578,276 8,142,334
Other securities 87,159,163 101,565,802
Loans 766,030,481 787,825,052
Allowance for loan losses (12,285,970) (13,000,000)
Bank premises and equipment, net 15,691,345 14,501,021
Other real estate owned 15,396,259 4,326,219
Interest receivable and other assets 35,126,703 36,877,084
--------------- ---------------
Total assets $ 1,409,479,065 $ 1,394,167,752
=============== ===============
LIABILITIES
Non-interest bearing demand deposits $ 116,893,770 $ 122,866,335
Interest bearing demand deposits 63,029,352 67,936,942
Savings deposits 470,357,759 439,381,209
Other time deposits 348,665,766 368,695,291
--------------- ---------------
Total deposits 998,946,647 998,879,777
Federal funds purchased 13,300,000 --
Federal Home Loan Bank advances 225,000,000 225,000,000
Interest payable and other liabilities 7,517,363 8,557,831
--------------- ---------------
Total liabilities 1,244,764,010 1,232,437,608
--------------- ---------------
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized,
19,248,541 and 19,752,542 shares issued and outstanding) -- --
Surplus 52,275,654 58,988,726
Undivided profits 112,085,042 104,055,944
Net unrealized gains (losses) on securities
available for sale, net of tax 354,359 (1,314,526)
--------------- ---------------
Total stockholders' equity 164,715,055 161,730,144
--------------- ---------------
Total liabilities and stockholders' equity $ 1,409,479,065 $ 1,394,167,752
=============== ===============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-2-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended September 30,
2002 2001
---- ----
INTEREST INCOME
Interest and fees on loans $15,102,097 $18,291,105
Interest on investment securities-
Obligations of U.S. Government agencies 3,031,376 3,694,052
Obligations of states and political subdivisions 1,668,284 1,638,595
Other securities 1,093,133 1,786,827
Interest on Federal funds sold 267,720 81,102
----------- -----------
Total interest income 21,162,610 25,491,681
----------- -----------
INTEREST EXPENSE
Interest on deposits 5,318,308 8,895,693
Interest on borrowed funds 3,248,515 3,251,204
----------- -----------
Total interest expense 8,566,823 12,146,897
----------- -----------
NET INTEREST INCOME 12,595,787 13,344,784
PROVISION FOR LOAN LOSSES 1,400,000 1,200,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,195,787 12,144,784
----------- -----------
OTHER INCOME
Income from trust services 956,206 999,900
Service charges on deposit accounts 1,174,624 698,558
Security gains 33,630 3,102
Other 868,253 1,038,210
----------- -----------
Total other income 3,032,713 2,739,770
----------- -----------
OTHER EXPENSES
Salaries and employee benefits 3,548,103 3,342,056
Occupancy expense 534,880 512,944
Other 2,332,314 2,498,340
----------- -----------
Total other expenses 6,415,297 6,353,340
----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 7,813,203 8,531,214
PROVISION FOR INCOME TAXES 2,133,165 2,322,542
----------- -----------
NET INCOME $ 5,680,038 $ 6,208,672
=========== ===========
COMPREHENSIVE INCOME $ 5,933,980 $ 7,492,101
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.29 $ 0.31
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.29 $ 0.31
=========== ===========
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.14 $ 0.13
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-3-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended September 30,
2002 2001
---- ----
INTEREST INCOME
Interest and fees on loans $44,876,466 $55,718,749
Interest on investment securities-
Obligations of U.S. Government agencies 9,835,990 10,171,006
Obligations of states and political subdivisions 5,084,604 5,094,864
Other securities 3,901,427 6,719,268
Interest on Federal funds sold 542,240 326,176
----------- -----------
Total interest income 64,240,727 78,030,063
----------- -----------
INTEREST EXPENSE
Interest on deposits 16,779,481 29,337,814
Interest on borrowed funds 9,636,541 9,661,307
----------- -----------
Total interest expense 26,416,022 38,999,121
----------- -----------
NET INTEREST INCOME 37,824,705 39,030,942
PROVISION FOR LOAN LOSSES 5,500,000 6,500,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 32,324,705 32,530,942
----------- -----------
OTHER INCOME
Income from trust services 2,595,926 2,999,700
Service charges on deposit accounts 3,298,706 2,035,372
Security gains 771,166 50,383
Other 2,436,786 3,061,722
----------- -----------
Total other income 9,102,584 8,147,177
----------- -----------
OTHER EXPENSES
Salaries and employee benefits 10,681,278 10,035,086
Occupancy expense 1,582,562 1,635,761
Other 7,418,204 7,059,068
----------- -----------
Total other expenses 19,682,044 18,729,915
----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 21,745,245 21,948,204
PROVISION FOR INCOME TAXES 5,936,580 5,971,945
----------- -----------
NET INCOME $15,808,665 $15,976,259
=========== ===========
COMPREHENSIVE INCOME $17,477,550 $21,785,537
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.81 $ 0.80
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.81 $ 0.80
=========== ===========
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.40 $ 0.37
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-4-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended September 30,
2002 2001
---- ----
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Interest and fees received $ 61,975,412 $ 77,677,235
Other income received 8,331,417 8,096,793
Miscellaneous receipts (payments) 835,471 (1,013,219)
Interest paid (26,655,461) (39,566,775)
Cash paid to employees and others (18,888,204) (17,330,367)
Income taxes paid (6,299,859) (6,960,000)
------------- -------------
Net cash provided by operating activities $ 19,298,776 $ 20,903,667
------------- -------------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions of investment securities held to maturity $ 53,419,300 $ 568,870,776
Proceeds from maturities and redemptions of investment securities available for sale 336,125,000 81,966,478
Proceeds from sales of investment securities available for sale 28,671,111 59,512,400
Net (increase) decrease in loans 2,825,775 (5,690,079)
Proceeds from sales of other real estate owned 1,465,124 909,819
Proceeds from sales of other assets 112,826 52,475
Purchase of investment securities held to maturity (6,703,786) (445,818,962)
Purchase of investment securities available for sale (470,453,853) (257,336,204)
Purchase of bank premises and equipment (2,636,110) (1,811,931)
------------- -------------
Net cash provided by (used for) investing activities $ (57,174,613) $ 654,772
------------- -------------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Net increase in demand, interest bearing demand, and savings deposits $ 20,096,395 $ 39,129,240
Net decrease in other time deposits (20,029,525) (24,444,170)
Net increase in Federal funds purchased 13,300,000 --
Repurchase of common stock (6,713,072) (1,765,370)
Dividends paid (7,651,751) (6,998,700)
------------- -------------
Net cash provided by (used for) financing activities $ (997,953) $ 5,921,000
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (38,873,790) $ 27,479,439
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 66,137,120 69,540,039
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF NINE MONTHS $ 27,263,330 $ 97,019,478
============= =============
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 15,808,665 $ 15,976,259
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,445,789 1,491,631
Provision for loan losses 5,500,000 6,500,000
Decrease in net deferred Federal income tax asset 1,154,010 2,246,917
Amortization of investment premium and discount (2,474,753) (1,094,404)
Net increase (decrease) in interest payable and other liabilities (1,040,468) 99,241
Net (increase) decrease in interest receivable and other assets 596,371 (738,862)
Net decrease in deferred loan fees (3,816) (94,581)
Other (1,687,022) (3,482,534)
------------- -------------
Net cash provided by operating activities $ 19,298,776 $ 20,903,667
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Transfer of loans to other real estate owned $ 12,758,582 $ 1,516,507
============= =============
Transfer of loans to other assets $ -- $ 80,000
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-5-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Other Total
Common Undivided Comprehensive Stockholders'
Stock Surplus Profits Income (Loss) Equity
-------------- --------------- ----------------- --------------- ---------------
BALANCE
JANUARY 1, 2002 $ 0 $ 58,988,726 $ 104,055,944 $ (1,314,526) $ 161,730,144
ADD (DEDUCT)
Net income for the year 15,808,665 15,808,665
Net unrealized gains on securities
available for sale, net of tax 1,668,885 1,668,885
Repurchase of 504,001 shares of
common stock (6,713,072) (6,713,072)
Dividends declared-
Common ($.40 per share) (7,779,567) (7,779,567)
-------------- --------------- -------------- --------------- ---------------
BALANCE
SEPTEMBER 30, 2002 $ 0 $ 52,275,654 $ 112,085,042 $ 354,359 $ 164,715,055
============== =============== ================= =============== ===============
The accompanying notes to consolidated financial statements are an integral part
of this statement.
-6-
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 "Corporation") and its subsidiary, Monroe Bank & Trust (the
"Bank"). The Bank operates twenty-one offices in Monroe County, Michigan and two
offices in Wayne County, Michigan. 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.
At the April 6, 2000 Annual Meeting of Shareholders of Monroe Bank & Trust,
shareholders approved a proposal that resulted in the Bank reorganizing into a
one-bank holding company. The holding company formation involved merging Monroe
Bank & Trust with Monroe Interim Bank, a state chartered bank organized solely
for the purpose of this transaction. The merger of Monroe Bank & Trust and
Monroe Interim Bank, a combination of entities under common control, was treated
in a manner similar to a pooling of interests. The financial information for all
prior periods was restated in the unaudited consolidated financial statements
for MBT Financial Corp. to present the statements as if the merger had been in
effect for all periods presented.
The reorganization resulted in an exchange of the Monroe Bank & Trust common
stock for MBT Financial Corp. common stock. The exchange rate was two shares of
MBT Financial Corp. for each share of Monroe Bank & Trust. Monroe Bank & Trust
previously had 10,000,000 common shares authorized and outstanding, with a par
value of $3.125 per share. MBT Financial Corp. has 30,000,000 common shares
authorized, of which 19,248,541 are outstanding at September 30, 2002. The MBT
Financial Corp. common stock has no par value. Monroe Bank & Trust is now a
wholly owned subsidiary of MBT Financial Corp., a registered bank holding
company.
The accompanying unaudited consolidated financial statements of the Corporation
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.
Comprehensive Income is comprised of Net Income and Other Comprehensive Income,
which consists of the change in net unrealized gains (losses) on securities
available for sale, net of tax.
2. EARNINGS PER SHARE
The calculation of net income per common share for the quarters ended September
30 is as follows:
2002 2001
----------- -----------
BASIC
Net income $ 5,680,038 $ 6,208,672
----------- -----------
Net income applicable to common stock $ 5,680,038 $ 6,208,672
----------- -----------
Average common shares outstanding 19,304,661 19,937,481
----------- -----------
Earnings per common share - basic $ 0.29 $ 0.31
=========== ===========
-7-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
2002 2001
----------- -----------
DILUTED
Net income $ 5,680,038 $ 6,208,672
----------- -----------
Net income applicable to common stock $ 5,680,038 $ 6,208,672
----------- -----------
Average common shares outstanding 19,304,661 19,937,481
Stock option adjustment -- 631
----------- -----------
Average common shares outstanding - diluted 19,304,661 19,938,112
----------- -----------
Earnings per common share - diluted $ 0.29 $ 0.31
=========== ===========
The calculation of net income per common share for the nine months ended
September 30 is as follows:
2002 2001
----------- -----------
BASIC
Net income $15,808,665 $15,976,259
----------- -----------
Net income applicable to common stock $15,808,665 $15,976,259
----------- -----------
Average common shares outstanding 19,544,769 19,977,320
----------- -----------
Earnings per common share - basic $ 0.81 $ 0.80
=========== ===========
2002 2001
----------- -----------
DILUTED
Net income $15,808,665 $15,976,259
----------- -----------
Net income applicable to common stock $15,808,665 $15,976,259
----------- -----------
Average common shares outstanding 19,544,769 19,977,320
Stock option adjustment -- --
----------- -----------
Average common shares outstanding - diluted 19,544,769 19,977,320
----------- -----------
Earnings per common share - diluted $ 0.81 $ 0.80
=========== ===========
On January 2, 2002, the Corporation issued options for 183,515 shares of its
common stock to its non-employee directors and to certain key executives of the
Bank in accordance with the Long-Term Incentive Compensation Plan that was
approved by shareholders at the Annual Meeting of Shareholders on April 6, 2000.
The options were granted at the price of $13.85, which was the fair market value
of the Corporation's common stock on the date the options were granted. On
January 2, 2001, the Corporation issued options for 13,834 shares of its common
stock to its non-employee directors in accordance with the Long-Term Incentive
Compensation Plan. The options were granted at a price of $13.94, which was the
fair market value of the Corporation's common stock on the date the options were
granted. On July 1, 2000, the Corporation issued options for 126,600 shares of
its common stock to certain key executives of the Bank in accordance with the
Long-Term Incentive Compensation Plan. The options were granted at the price of
$18.125, which was the fair market value of the Corporation's common stock on
the date the options were granted. The average market value of the common stock
during the first nine months of 2002 was $13.80. The average market value of the
common stock for the third quarter of 2002 was $13.74. All of the options that
were outstanding on September 30, 2002 have an anti-dilutive effect on the
calculations of earnings per share, and therefore have not been included.
-8-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. LOANS
The Bank grants commercial, consumer, and mortgage loans primarily to customers
in Monroe 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):
September 30, December 31,
2002 2001
----------------------------------
Real estate loans $ 594,652 $ 595,255
Loans to finance agricultural production and
other loans to farmers 2,952 2,856
Commercial and industrial loans 92,832 99,979
Loans to individuals for household, family,
and other personal expenditures 76,794 90,675
All other loans (including overdrafts) 433 696
----------------------------------
Total loans, gross 767,663 789,461
Less: Deferred loan fees 1,633 1,636
----------------------------------
Total loans, net of deferred loan fees 766,030 787,825
Less: Allowance for loan losses 12,286 13,000
----------------------------------
$ 753,744 $ 774,825
==================================
Loans are placed in a nonaccrual status when, in the opinion of Management, the
collection of additional interest is doubtful. All loans internally classified
by Management as substandard or doubtful are reviewed for impairment. 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 consists of nonaccrual loans, loans 90 days or
more past due, restructured loans, real estate that has been acquired in full or
partial satisfaction of loan obligations or upon foreclosure, and investments
securities that are 90 days or more past due on the interest or principal
payments. The following table summarizes nonperforming assets (000's omitted):
September 30, December 31,
2002 2001
------------------------------------
Nonaccrual loans $ 10,344 $ 22,712
Loans 90 days past due 148 450
Restructured loans 296 -
------------------------------------
Total nonperforming loans $ 10,788 $ 23,162
Other real estate owned 15,396 4,326
Nonperforming investment securities 102 232
------------------------------------
Total nonperforming assets $ 26,286 $ 27,720
====================================
Nonperforming assets to total assets 1.86% 1.99%
Allowance for loan losses to
nonperforming assets 46.74% 46.90%
-9-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000's omitted):
September 30, December 31,
2002 2001
------------------------------------
Balance beginning of year $ 13,000 $ 10,600
Provision for loan losses 5,500 7,400
Loans charged off (7,188) (6,164)
Recoveries 974 1,164
------------------------------------
Balance end of period $ 12,286 $ 13,000
====================================
For each period, the provision for loan losses in the income statement results
from the combination of an estimate by Management of loan losses that occurred
during the current period and the ongoing adjustment of prior estimates of
losses occurring in prior periods.
To serve as a basis for making this provision, the Bank maintains an extensive
credit risk monitoring process that considers several factors including: current
economic conditions affecting the Bank's customers, the payment performance of
individual large loans and pools of homogeneous small loans, portfolio
seasoning, changes in collateral values, and detailed reviews of specific large
loan relationships. For large loans deemed to be impaired due to an expectation
that all contractual payments will probably not be received, impairment is
measured by comparing the Bank's recorded investment in the loan to the present
value of expected cash flows discounted at the loan's effective interest rate,
the fair value of the collateral, or the loan's observable market price.
The provision for loan losses increases the allowance for loan losses, a
valuation account which is netted against loans on the consolidated statements
of condition. As the specific customer and amount of a loan loss is confirmed by
gathering additional information, taking collateral in full or partial
settlement of the loan, bankruptcy of the borrower, etc., the loan is charged
off, reducing the allowance for loan losses. If, subsequent to a charge off, the
Bank is able to collect additional amounts from the customer or sell collateral
worth more than earlier estimated, a recovery is recorded.
5. INVESTMENT SECURITIES
The following is a summary of the Bank's investment securities portfolio as of
September 30, 2002 and December 31, 2001 (000's omitted):
September 30, 2002 December 31, 2001
------------------ -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------------------------ -----------------------------
Held to Maturity
Obligations of U.S. Government Agencies $ 2,615 $ 2,687 $ 30,044 $ 30,197
Obligations of States and Political
Subdivisions 112,516 118,218 129,075 131,921
Other Securities 2,974 2,898 2,968 2,961
------------------------------ -----------------------------
$ 118,105 $ 123,803 $ 162,087 $ 165,079
============================== =============================
-10-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
September 30, 2002 December 31, 2001
------------------ -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------------------------ -----------------------------
Available for Sale
Obligations of U.S. Government Agencies $ 341,392 $ 342,415 $ 226,027 $ 225,706
Obligations of States and Political
Subdivisions 14,155 14,578 8,646 8,142
Other Securities 88,060 87,159 102,763 101,566
------------------------------ -----------------------------
$ 443,607 $ 444,152 $ 337,436 $ 335,414
============================== =============================
6. 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
---------------------------------------
September 30, December 31,
2002 2001
---------------------------------------
Commitments to extend credit:
Unused portion of commercial lines of credit $ 87,947 $ 83,400
Unused portion of credit card lines of credit 10,006 9,394
Unused portion of home equity lines of credit 16,652 14,967
Standby letters of credit and financial guarantees written 17,177 17,968
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, generally have fixed expiration dates or other termination clauses,
and require payment of a fee. Since the lines of credit may expire without being
drawn upon, the total committed amounts do not necessarily represent future cash
requirements. Credit card lines of credit have no established expiration dates,
but are fundable on demand. Home equity lines of credit are secured by real
estate mortgages, have no established 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.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Corporation's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of these terms. Actual results could differ materially
from those set forth in forward-looking statements, due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
The Corporation 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.
The Corporation's total deposits were unchanged since the beginning of the year
at $998.9 million. Demand Deposits decreased $10.9 million and Other Time
Deposits decreased $20.0 million while Savings Deposits increased $31.0 million
as many customers have moved their money to Savings deposits due to the low
interest rates on Time Deposits. Local loan demand has been slow, and mortgage
loan refinance activity has continued, causing Loans to decrease $21.8 million
since the beginning of the year. Federal funds sold decreased $40.0 million as
we have invested our excess funds in higher yielding investment securities. The
lack of loan growth and the decrease in Federal funds sold resulted in an
increase of $64.8 million in investment securities.
THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
A comparison of the income statements for the three months ended September 30,
2002 and 2001 shows a 5.6% decrease in Net Interest Income. The largest interest
income dollar change was in interest and fees on loans, decreasing $3.2 million,
or 17.4%. This was the result of a decrease of $94.1 million in average loans
outstanding and a decrease in the average yield on those loans from 8.08% to
7.45%. The decrease in loans outstanding was due to slow local loan demand, the
sales of portions of the bankcard and commercial lease loan portfolios in 2001,
and a decrease in residential mortgage loans. Residential mortgage loans
decreased as the low interest rates enticed many of the Bank's customers to
refinance their adjustable rate loans with fixed rate loans, most of which are
not held in the Bank's portfolio. Although the average investment portfolio
increased $26.4 million, the yield on those investments decreased from 6.73% to
5.35%. As a result, interest income on investment securities decreased
$1,327,000. The decrease in market interest rates has caused new loan rates to
drop and refinance activity to increase. This also has led to an increase in
calls in our portfolio of Obligations of U.S. Government Agencies. We expect the
decline in asset yields to continue through the fourth quarter, as the uncertain
economic environment and heightened geopolitical risks increase the prospects of
further rate cuts by the Federal Reserve. Even if the economic recovery
continues, we do not expect increases in interest rates in the near future.
Average interest bearing deposits decreased from $898 million to $894 million,
while at the same time the average cost of these deposits decreased from 3.93%
to 2.36%. The result was a large decrease in Interest on Deposits of $3.6
million, or 40.2%. Average borrowed funds decreased
-12-
from $225.5 million to $225.4 million while the average cost of these borrowings
was unchanged at 5.64%. The borrowings primarily consist of Federal Home Loan
Bank advances, which were utilized to fund increased investment in earning
assets. The rapid decline in interest rates over the past year allowed us an
opportunity to lower the cost of our deposit sources of funds. We expect to
continue to lower the average cost of our deposit and non deposit sources of
funds slightly through the fourth quarter.
The Provision for Loan Losses increased $200,000, or 16.7% as the Corporation
continued to aggressively address credit quality concerns. Trust Income
decreased $44,000, or 4.4%, mainly due to the declining market values of trust
assets. Service Charges on Deposit Accounts increased $476,000, or 68.2%,
primarily due to increases in overdraft activity. Other income decreased
$170,000, or 16.4%. This was primarily due to the sale of a portion of our
commercial lease loan portfolio in 2001 for a gain of $271,000.
Salaries and Employee Benefits increased $206,000, Occupancy Expense increased
$22,000, and Other Expenses decreased $166,000, compared to the third quarter of
2001. These results were consistent with our expectations for the quarter.
As a result of the above activity, Income Before Provision for Income Taxes
showed a small decrease of $718,000, or 8.4%. The Provision for Income Taxes
decreased $189,000, or 8.2%, and reflects our anticipated annual effective tax
rate of 27.3%. Net Income decreased $529,000, or 8.5%.
The Corporation has maintained sufficient liquidity to fund its loan growth and
allow for fluctuations in deposit levels. Internal sources of liquidity are
provided by the maturities of loans and securities as well as holdings of
securities Available for Sale. External sources of liquidity include a line of
credit with the Federal Home Loan Bank of Indianapolis, and the Federal funds
lines that have been established with correspondent banks.
Total stockholders' equity of the Corporation was $164.7 million at September
30, 2002 and $161.7 million at December 31, 2001. The ratio of equity to assets
was 11.7% at September 30, 2002 and 11.6% at December 31, 2001. Federal bank
regulatory agencies have set capital adequacy standards for Total Risk Based
Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards
require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total
Capital ratio of at least 8% to be adequately capitalized. The regulatory
agencies consider a bank to be well capitalized if its Total Risk Based Capital
is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk
Weighted Assets, and Leverage Capital Ratio is at least 5%.
The following table summarizes the capital ratios of the Bank:
September 30, 2002 December 31, 2001
-------------------------- -------------------------
Leverage Capital 11.6% 11.6%
Tier 1 Risk Based Capital 17.5% 17.2%
Total Risk Based Capital 18.8% 18.4%
At September 30, 2002 and December 31, 2001, the Bank was in compliance with the
capital guidelines and is considered "well-capitalized" under regulatory
standards.
Market risk for the Bank, as is typical for most banks, consists mainly of
interest rate risk and market price risk. The Bank's earnings and the economic
value of its equity are exposed to interest rate risk and market price risk, and
monitoring this risk is the responsibility of the Asset/Liability Management
Committee (ALCO) of the Bank. The Bank's market risk is monitored monthly and it
has not changed significantly since year-end 2001.
-13-
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
A comparison of the income statements for the nine months ended September 30,
2002 and 2001 shows a 3.1% decrease in Net Interest Income. The largest interest
income dollar change was in interest and fees on loans, decreasing $10.8
million, or 19.5%. This was the result of a decrease of $86.6 million in average
loans outstanding and a decrease in the average yield on those loans from 8.37%
to 7.43%. The decrease in loans outstanding was due to slow local loan demand,
the sales of portions of the bankcard and lease loan portfolios in 2001, and a
decrease in residential mortgage loans. Residential mortgage loans decreased as
the low interest rates enticed many of the Bank's customers to refinance their
adjustable rate loans with fixed rate loans, most of which are not held in the
Bank's portfolio. Although the average investment portfolio increased $43.2
million, the yield on those investments decreased from 7.02% to 5.61%. As a
result, interest income on investment securities decreased $3.2 million. The
decrease in market interest rates has caused new loan rates to drop and
refinance activity to increase. This also has led to an increase in calls in our
portfolio of Obligations of U.S. Government Agencies. We expect the decline in
asset yields to continue through the fourth quarter, as the uncertain economic
environment and heightened geopolitical risks increase the prospects of further
rate cuts by the Federal Reserve. Even if the economic recovery continues, we do
not expect increases in interest rates in the near future.
Average interest bearing deposits decreased from $900 million to $894 million,
while at the same time the average cost of these deposits decreased from 4.36%
to 2.52%. The result was a large decrease in Interest on Deposits of $12.6
million, or 42.8%. Average borrowed funds decreased from $225.7 million to
$225.2 million while the average cost of these borrowings increased from 5.64%
to 5.65%. The borrowings primarily consist of Federal Home Loan Bank advances,
which were utilized to fund increased investment in earning assets. The rapid
decline in interest rates over the past year allowed us an opportunity to lower
the cost of our deposit sources of funds. We expect to continue to lower the
average cost of our deposit and non deposit sources of funds slightly through
the fourth quarter.
The Provision for Loan Losses decreased $1.0 million, or 15.4%. The Provision
for Loan Losses was higher in 2001 as weakening economic conditions and
increasing nonperforming assets necessitated an increase in the Allowance for
Loan Losses. Trust Income decreased $404,000, or 13.5%, mainly due to the
declining market values of trust assets. Service Charges on Deposit Accounts
increased $1,263,000, or 62.1%, primarily due to increases in overdraft
activity. In 2002 we sold some securities to fund seasonal deposit fluctuations.
These sales contributed to the security gains of $771,000, an increase of
$721,000 compared to 2001. Other income decreased $625,000, or 20.4%. This was
the result of the sales of portions of our credit card and commercial lease loan
portfolios in 2001 for a gain of $679,000.
Salaries and Employee Benefits increased $646,000, Occupancy Expense decreased
$53,000, and Other Expenses increased $359,000, compared to the first nine
months of 2001. These results were consistent with our expectations.
As a result of the above activity, Income Before Provision for Income Taxes
showed a slight decrease of $203,000, or 0.9%. The Provision for Income Taxes
decreased $35,000, or 0.6%, and reflects our anticipated annual effective tax
rate of 27.3%. Net Income decreased $168,000, or 1.0%.
-14-
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 month, the Asset and Liability Committee (ALCO), which includes the senior
management of the Bank, estimates the effect of interest rate changes on the
projected net interest income of the Bank. The sensitivity of the Bank's net
interest income to changes in interest rates is measured by using a computer
based simulation model to estimate the impact on earnings of a gradual increase
or decrease of 100 basis points in the prime rate. The net interest income
projections are compared to a base case projection, which assumes no changes in
interest rates. The table below summarizes the net interest income sensitivity
as of September 30, 2002 compared to December 31, 2001.
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ------------ ----------- ------------
September 30, 2002 12 Month Projection
Interest Income 81,397 85,823 78,919
Interest Expense 31,907 35,275 29,990
------------ ----------- ------------
Net Interest Income 49,490 50,548 48,929
Percent Change From Base Projection 2.1% -1.1%
ALCO Policy Limit (+/-) 5.0% 5.0%
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ------------ ----------- ------------
December 31, 2001 12 Month Projection
Interest Income 88,287 92,410 84,510
Interest Expense 37,013 40,229 34,783
------------ ----------- ------------
Net Interest Income 51,274 52,181 49,727
Percent Change From Base Projection 1.8% -3.0%
ALCO Policy Limit (+/-) 5.0% 5.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in the Bank's projected net interest income, in
its policy. Throughout the first nine months of 2002, the estimated variability
of the net interest income was within the Bank's established policy limits.
The ALCO also monitors interest rate risk by estimating the effect of changes in
interest rates on the economic value of the Bank's equity each month. The actual
economic value of the Bank's equity is first determined by subtracting the fair
value of the Bank's liabilities from the fair value of the Bank's assets. The
fair values are determined in accordance with Statement of Financial Accounting
Standards Number 107, Disclosures about Fair Value of Financial Instruments. The
Bank estimates the interest rate risk by calculating the effect of market
interest rate shocks on the economic value of its equity. For this analysis, the
Bank assumes immediate increases or decreases of 100 and 200 basis points in the
prime lending rate. The discount rates used to determine the present values of
the loans and deposits, as well as the prepayment rates for the loans, are based
on Management's expectations of the effect of the rate shock on the market for
loans and deposits. The table below summarizes the amount of interest rate risk
to the fair value of the Bank's assets and liabilities and to the economic value
of the Bank's equity.
-15-
Fair Value at September 30, 2002
--------------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- ------------------------------------------------------------------
Assets 1,427,116 1,406,139 1,384,929 1,447,918 1,468,709
Liabilities 1,256,658 1,220,630 1,186,971 1,295,339 1,332,226
------------------------------------------------------------------
Stockholders' Equity 170,458 185,509 197,958 152,579 136,483
Change in Equity 8.8% 16.1% -10.5% -19.9%
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
Fair Value at December 31, 2001
-------------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- ------------------------------------------------------------------
Assets 1,443,434 1,413,138 1,386,039 1,468,405 1,491,722
Liabilities 1,234,305 1,201,405 1,170,838 1,269,827 1,304,571
------------------------------------------------------------------
Stockholders' Equity 209,129 211,733 215,201 198,578 187,151
Change in Equity 1.2% 2.9% -5.0% -10.5%
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. Throughout the first nine months of 2002, the estimated variability of
the economic value of equity was within the Bank's established policy limits.
-16-
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE OF EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, 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 pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
There were no significant changes made in the Company's internal controls or in
other factors that could significantly affect these internal controls subsequent
to the date of the evaluation performed by the Company's Chief Executive Officer
and Chief Financial Officer.
-17-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation may from time to time be involved in legal proceedings
occurring in the ordinary course of business which in the aggregate involve
amounts which are believed by management to be immaterial to the financial
condition of the Corporation. The Corporation is not currently involved in any
legal proceedings which management believes are of a material nature.
-18-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as a part of this report:
99.1 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.
99.2 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.
-19-
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 hereunto duly authorized.
MBT Financial Corp.
---------------------------------
(Registrant)
November 14, 2002 /s/ Ronald D. LaBeau
- --------------------------- ---------------------------------
Date Ronald D. LaBeau
President and Chief Executive
Officer
November 14, 2002 /s/ Eugene D. Greutman
- ------------------ ---------------------------------
Date Eugene D. Greutman
Treasurer and Chief Financial
Officer
-20-
CERTIFICATIONS
I, Ronald D. LaBeau, President and Chief Executive Officer of MBT Financial
Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MBT
Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. Designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries, is
made known to us by others within those entities,
particularly during the period in which this quarterly
report is being prepared;
b. Evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c. Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies in the design or operation
of internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in
internal controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 14, 2002 /s/ Ronald D. LaBeau
- --------------------------- ---------------------------------
Date Ronald D. LaBeau
President &
Chief Executive Officer
-21-
I, Eugene D. Greutman, Treasurer and Chief Financial Officer of MBT Financial
Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MBT
Financial Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during
the period in which this quarterly report is being
prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c. Presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation
Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b. Any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
November 14, 2002 /s/ Eugene D. Greutman
- ------------------ --------------------------
Date Eugene D. Greutman
Treasurer &
Chief Financial Officer
-22-
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
99.1 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.
99.2 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.