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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 June 30, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of August 11, 2003, there were 19,108,348 shares of the Corporation's Common
Stock outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CONDITION
(AMOUNTS IN THOUSANDS)
June 30, December 31,
2003 2002
----- ----
ASSETS
Cash and due from banks $ 26,013 $ 30,618
Federal funds sold 2,500 13,000
Investment securities
Held to maturity-
Obligations of U.S. Government agencies (Estimated market value
of $655 and $649) 562 588
Obligations of states and political subdivisions (Estimated market
value of $106,386 and $117,967) 100,722 113,255
Other securities (Estimated market value of $3,123
and $2,975) 2,980 2,976
Available for sale-
Obligations of U.S. Government agencies 289,560 325,131
Obligations of states and political subdivisions 22,252 14,723
Other securities 90,044 83,064
Loans 826,965 773,360
Loans held for sale 2,743 445
Allowance for loan losses (13,685) (12,400)
Bank premises and equipment, net 17,508 15,437
Other real estate owned 11,445 15,088
Bank Owned Life Insurance 32,516 16,985
Interest receivable and other assets 16,106 17,424
----------- -----------
Total assets $ 1,428,231 $ 1,409,694
=========== ===========
LIABILITIES
Non-interest bearing demand deposits $ 133,565 $ 123,596
Interest bearing demand deposits 63,517 69,756
Savings deposits 475,684 470,192
Other time deposits 350,660 347,416
----------- -----------
Total deposits 1,023,426 1,010,960
Federal funds purchased 0 0
Federal Home Loan Bank advances 225,000 225,000
Interest payable and other liabilities 6,331 6,735
----------- -----------
Total liabilities 1,254,757 1,242,695
----------- -----------
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized,
19,118,348 and 19,160,441 shares issued and outstanding) 0 0
Surplus 50,531 51,080
Undivided profits 120,882 115,395
Net unrealized gains (losses) on securities
available for sale, net of tax 2,061 524
----------- -----------
Total stockholders' equity 173,474 166,999
----------- -----------
Total liabilities and stockholders' equity $ 1,428,231 $ 1,409,694
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-2-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended June 30,
2003 2002
---- ----
INTEREST INCOME
Interest and fees on loans $14,180 $14,619
Interest on investment securities-
Obligations of U.S. Government agencies 3,238 3,710
Obligations of states and political subdivisions 1,572 1,681
Other securities 994 1,225
Interest on Federal funds sold 36 117
------- -------
Total interest income 20,020 21,352
------- -------
INTEREST EXPENSE
Interest on deposits 4,137 5,563
Interest on borrowed funds 2,981 3,212
------- -------
Total interest expense 7,118 8,775
------- -------
NET INTEREST INCOME 12,902 12,577
PROVISION FOR LOAN LOSSES 825 1,350
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 12,077 11,227
------- -------
OTHER INCOME
Income from trust services 820 693
Service charges on deposit accounts 1,304 1,098
Security gains 242 731
Other 1,150 772
------- -------
Total other income 3,516 3,294
------- -------
OTHER EXPENSES
Salaries and employee benefits 4,136 3,526
Occupancy expense 639 520
Other 2,807 2,215
------- -------
Total other expenses 7,582 6,261
------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,011 8,260
PROVISION FOR INCOME TAXES 2,230 2,244
------- -------
NET INCOME $ 5,781 $ 6,016
======= =======
COMPREHENSIVE INCOME $ 8,491 $ 9,171
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.30 $ 0.31
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.30 $ 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
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months Ended June 30,
2003 2002
----- ----
INTEREST INCOME
Interest and fees on loans $27,996 $29,774
Interest on investment securities-
Obligations of U.S. Government agencies 6,313 6,805
Obligations of states and political subdivisions 3,180 3,416
Other securities 1,999 2,808
Interest on Federal funds sold 91 275
------- -------
Total interest income 39,579 43,078
------- -------
INTEREST EXPENSE
Interest on deposits 8,500 11,461
Interest on borrowed funds 6,173 6,388
------- -------
Total interest expense 14,673 17,849
------- -------
NET INTEREST INCOME 24,906 25,229
PROVISION FOR LOAN LOSSES 1,650 4,100
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 23,256 21,129
------- -------
OTHER INCOME
Income from trust services 1,693 1,640
Service charges on deposit accounts 2,549 2,124
Security gains 414 738
Other 2,063 1,568
------- -------
Total other income 6,719 6,070
------- -------
OTHER EXPENSES
Salaries and employee benefits 8,358 7,133
Occupancy expense 1,307 1,048
Other 5,291 5,086
------- -------
Total other expenses 14,956 13,267
------- -------
INCOME BEFORE PROVISION FOR
INCOME TAXES 15,019 13,932
PROVISION FOR INCOME TAXES 4,181 3,803
------- -------
NET INCOME $10,838 $10,129
======= =======
COMPREHENSIVE INCOME $12,375 $11,544
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.57 $ 0.52
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.57 $ 0.51
======= =======
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.28 $ 0.26
======= =======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-4-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
Six Months Ended June 30,
2003 2002
---- ----
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income $ 10,838 $ 10,129
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,161 956
Provision for loan losses 1,650 4,100
Decrease in net deferred Federal income tax asset 424 725
Amortization of investment premium and discount 224 (28)
Net decrease in interest payable and other liabilities (404) (1,063)
Net decrease in interest receivable and other assets 893 2,071
Net increase in deferred loan fees 83 53
Other (3,938) (1,423)
--------- ---------
Net cash provided by operating activities $ 10,931 $ 15,520
--------- ---------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions of investment securities held to maturity $ 15,918 $ 32,469
Proceeds from maturities and redemptions of investment securities available for sale 306,800 246,130
Proceeds from sales of investment securities available for sale 123,789 27,704
Net (increase) decrease in loans (55,388) 10,185
Proceeds from sales of other real estate owned 4,849 636
Proceeds from sales of other assets 4 96
Purchase of investment securities held to maturity (2,902) (4,794)
Purchase of investment securities available for sale (407,432) (239,358)
Purchase of bank premises and equipment (3,231) (1,914)
Purchase of bank owned life insurance (15,000) 0
--------- ---------
Net cash provided by (used for) investing activities $ (32,593) $ 71,154
--------- ---------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Net increase in deposits $ 12,466 $ 14,746
Proceeds from issuance of common stock 110 0
Repurchase of common stock (659) (5,139)
Dividends paid (5,360) (5,135)
--------- ---------
Net cash provided by financing activities $ 6,557 $ 4,472
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (15,105) $ 91,146
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,618 66,137
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF SIX MONTHS $ 28,513 $ 157,283
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-5-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Other Total
Common Undivided Comprehensive Stockholders'
Stock Surplus Profits Income (Loss) Equity
-------- ------- ------- ------------- -----------
BALANCE
JANUARY 1, 2003 $ 0 $ 51,080 $115,395 $ 524 $166,999
ADD (DEDUCT)
Net income for the year 10,838 10,838
Net unrealized losses on securities
available for sale, net of tax 1,537 1,537
Repurchase of 50,000 shares of
common stock (659) (659)
Issuance of common stock under
stock option plans 110 110
Dividends declared-
Common ($.28 per share) (5,351) (5,351)
-------- -------- -------- -------- --------
BALANCE
JUNE 30, 2003 $ 0 $ 50,531 $120,882 $ 2,061 $173,474
======== ======== ======== ======== ========
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 includes the accounts of its wholly owned subsidiaries, MBT
Credit Company, Inc. and MB&T Financial Services, Inc. The Bank operates
twenty-one offices in Monroe County, Michigan and two offices in Wayne County,
Michigan. MBT Credit Company, Inc. operates a mortgage loan office in Monroe
County and a loan and trust 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 Corporation's sole
business segment is community banking.
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 19,118,348 are outstanding at June 30, 2003. 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.
Business Segments - While the Corporation'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 Corporation's operations are considered by management to be aggregated in
one reportable segment.
-7-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
2. EARNINGS PER SHARE
The calculation of net income per common share for the quarters ended June 30 is
as follows:
2003 2002
----------- -----------
BASIC
Net income $ 5,781,000 $ 6,016,000
----------- -----------
Net income applicable to common stock $ 5,781,000 $ 6,016,000
----------- -----------
Average common shares outstanding 19,111,172 19,584,951
----------- -----------
Earnings per common share - basic $ 0.30 $ 0.31
=========== ===========
2003 2002
----------- -----------
DILUTED
Net income $ 5,781,000 $ 6,016,000
----------- -----------
Net income applicable to common stock $ 5,781,000 $ 6,016,000
----------- -----------
Average common shares outstanding 19,111,172 19,584,951
Stock option adjustment 32,439 2,694
----------- -----------
Average common shares outstanding - diluted 19,143,611 19,587,645
----------- -----------
Earnings per common share - diluted $ 0.30 $ 0.31
=========== ===========
The calculation of net income per common share for the six months ended June 30
is as follows:
2003 2002
----------- -----------
BASIC
Net income $10,838,000 $10,129,000
----------- -----------
Net income applicable to common stock $10,838,000 $10,129,000
----------- -----------
Average common shares outstanding 19,122,742 19,667,013
----------- -----------
Earnings per common share - basic $ 0.57 $ 0.52
=========== ===========
2003 2002
----------- -----------
DILUTED
Net income $10,838,000 $10,129,000
----------- -----------
Net income applicable to common stock $10,838,000 $10,129,000
----------- -----------
Average common shares outstanding 19,122,742 19,667,013
Stock option adjustment 14,254 1,441
----------- -----------
Average common shares outstanding - diluted 19,136,996 19,668,454
----------- -----------
Earnings per common share - diluted $ 0.57 $ 0.51
=========== ===========
The following table summarizes the options that have been granted to
non-employee directors and certain key executives in accordance with the
Long-Term Incentive Compensation Plan that was approved by shareholders at the
Annual Meeting of Shareholders on April 6, 2000.
Weighted Average
Shares Exercise Price
- ----------------------------------------------------------------------------
Options Outstanding, January 1 323,949 $15.52
Granted 179,500 13.20
Exercised 7,907 13.87
Cancelled - -
- ----------------------------------------------------------------------------
Options Outstanding, June 30 495,542 $14.71
- ----------------------------------------------------------------------------
Options Exercisable, June 30 204,708 $16.50
- ----------------------------------------------------------------------------
-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):
June 30, December 31,
2003 2002
-----------------------------------
Real estate loans $658,422 $610,530
Loans to finance agricultural production and
other loans to farmers 3,250 2,182
Commercial and industrial loans 102,542 91,717
Loans to individuals for household, family,
and other personal expenditures 66,530 70,404
All other loans (including overdrafts) 638 563
-----------------------------------
Total loans, gross 831,382 775,396
Less: Deferred loan fees 1,674 1,591
-----------------------------------
Total loans, net of deferred loan fees 829,708 773,805
Less: Allowance for loan losses 13,685 12,400
-----------------------------------
$816,023 $761,405
===================================
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 investment
securities that are 90 days or more past due on the interest or principal
payments. The following table summarizes nonperforming assets (000's omitted):
June 30, December 31,
2003 2002
------------------------------------
Nonaccrual loans $ 24,962 $ 22,332
Loans 90 days past due 174 81
Restructured loans 5,904 6,807
------------------------------------
Total nonperforming loans $ 31,040 $ 29,220
Other real estate owned 11,445 15,088
Nonperforming investment securities 79 88
------------------------------------
Total nonperforming assets $ 42,564 $ 44,396
====================================
Nonperforming assets to total assets 2.98% 3.15%
Allowance for loan losses to
nonperforming assets 32.15% 27.93%
-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):
June 30, December 31,
2003 2002
--------------------------------------
Balance beginning of year $ 12,400 $ 13,000
Provision for loan losses 1,650 6,101
Loans charged off (812) (8,697)
Recoveries 447 1,996
--------------------------------------
Balance end of period $ 13,685 $ 12,400
======================================
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 loans and pools of homogeneous loans, portfolio seasoning, changes in
collateral values, and detailed reviews of specific loan relationships. For
loans deemed to be impaired due to an expectation that all contractual payments
will probably not be received, impairment is measured by comparing the Bank's
recorded investment in the loan to the present value of expected cash flows
discounted at the loan's effective interest rate, or 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
June 30, 2003 and December 31, 2002 (000's omitted):
June 30, 2003 December 31, 2002
------------- -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------------------------ -----------------------------
Held to Maturity
Obligations of U.S. Government Agencies $ 562 $ 655 $ 588 $ 649
Obligations of States and Political
Subdivisions 100,722 106,386 113,255 117,967
Other Securities 2,980 3,123 2,976 2,975
------------------------------ -----------------------------
$ 104,264 $ 110,164 $ 116,819 $ 121,591
============================== =============================
-10-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
June 30, 2003 December 31, 2002
------------- -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------------------------ -----------------------------
Available for Sale
Obligations of U.S. Government Agencies $ 286,901 $ 289,560 $ 322,878 $ 325,131
Obligations of States and Political
Subdivisions 21,435 22,252 14,680 14,723
Other Securities 90,348 90,044 84,554 83,064
------------------------------ -----------------------------
$ 398,684 $ 401,856 $ 422,112 $ 422,918
============================== =============================
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
---------------------------------------
June 30, December 31,
2003 2002
---------------------------------------
Commitments to extend credit:
Unused portion of commercial lines of credit $ 93,525 $ 97,402
Unused portion of credit card lines of credit 9,761 10,018
Unused portion of home equity lines of credit 17,019 16,953
Standby letters of credit and financial guarantees written 19,381 17,320
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, generally have fixed expiration dates or other termination clauses,
and require payment of a fee. Since the lines of credit may expire without being
drawn upon, the total committed amounts do not necessarily represent future cash
requirements. Credit card lines of credit have various established expiration
dates, but are fundable on demand. Home equity lines of credit are secured by
real estate mortgages, a majority of which have ten year expiration dates, but
are fundable on demand. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of the collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on Management's credit evaluation
of the counterparty.
-11-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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.
-12-
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.
FINANCIAL CONDITION
The Corporation's total deposits increased $12.5 million, or 1.2% since the
beginning of the year. Demand Deposits increased $3.7 million, Savings Deposits
increased $5.5 million and Other Time Deposits increased $3.3 million. The
Corporation's deposit growth has been slower than expected as we have been
offering less competitive deposit rates than usual. We lowered our deposit rates
in an attempt to lower our interest expense and because the low yields on
investment securities have reduced our desire to attract more deposit funding.
Local loan demand has begun to increase, and with our expansion into the
Southern Wayne County area, Loans increased $55.9 million since the beginning of
the year. The loan growth was funded by the small increase in deposits, a
decrease of $10.5 million in Federal funds sold, and a decrease of $33.6 million
in investment securities. The Bank Owned Life Insurance (BOLI) increased $15.5
million due to an additional investment of $15.0 million in the second quarter.
The Bank owns insurance on the lives of its directors and key executives and has
entered into split dollar life insurance agreements with each of the insured
individuals whereby the Bank agrees to split the death benefits of the policies
with the individuals' designated beneficiaries.
RESULTS OF OPERATIONS
A comparison of the income statements for the three months ended June 30, 2003
and 2002 shows a 2.6% increase in Net Interest Income. Interest and fees on
loans decreased $0.4 million, or 3.0% and interest on investment securities and
fed funds sold decreased $0.9 million, or 13.3%. Although average loans
outstanding increased $54.1 million, the average yield on those loans decreased
from 7.33% to 6.53%. The average investment portfolio decreased $13.7 million
and the yield on those investments decreased from 5.10% to 4.35%. We expect the
decline in asset yields to continue through the third quarter, even if there are
no further rate cuts by the Federal Reserve, as existing assets mature and are
replaced with lower yielding assets. Even if the economic recovery continues, we
do not expect increases in interest rates in the near future.
Average deposits increased from $0.997 billion in the second quarter of 2002 to
$1.036 billion in the second quarter of 2003, while at the same time the average
cost of these deposits decreased from 2.23% to 1.61%. The result was a decrease
in Interest on Deposits of $1.4 million, or 25.6%.
-13-
Average borrowed funds increased from $225.1 million in the second quarter of
2002 to $240.1 million in the second quarter of 2003, while the average cost of
these borrowings decreased from 5.72% to 4.95%. 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 last
two years allowed us an opportunity to lower the cost of our deposit sources of
funds. We also restructured our portfolio of FHLB advances in the second quarter
of 2003. Previously, the entire portfolio of $225 million was fixed rate,
putable advances with an average cost of 5.72%. The restructuring resulted in a
portfolio of $95 million of floating rate advances at an average cost of 3 month
LIBOR plus 2.27% and $130 million of fixed rate, putable advances at an average
cost of 5.42%. Although the net interest margin for the second quarter of 2003
was lower than the net interest margin in the second quarter of 2002 (3.54% vs.
3.64%), the restructuring of the advances helped us improve the net interest
margin from the 3.36% experienced in the first quarter of 2003.
The Provision for Loan Losses decreased $0.5 million, or 38.9% as the
Corporation aggressively addressed credit quality concerns in 2002.
Nonperforming loans increased $1.8 million in the first half of 2003, but other
real estate owned decreased $3.6 million, resulting in a decrease of $1.8
million in total nonperforming assets. Management has analyzed the credits
involved and believes that the Allowance for Loan Losses is adequate as of June
30, 2003. However, if the pace of the economic recovery remains slow, there may
be further deterioration in the portfolio which would make an increase in the
provision necessary. Trust Income increased $127,000, or 18.3%, as the market
values of trust assets began to recover. Service Charges on Deposit Accounts
increased $206,000, or 18.8%, due to increases in overdraft activity and changes
in fees. Other income increased $378,000, or 49.0%. This was primarily due to
the continued low interest rate environment, which has allowed mortgage loan
origination fees to remain strong. Gains on the sale of securities decreased
$489,000, or 66.9% due to the large amount of securities sold in 2002.
Salaries and Employee Benefits increased $610,000, and Occupancy Expense
increased $119,000, largely due to the Bank's expansion into the southern Wayne
County area. Other Expenses increased $592,000 due to losses on ORE, legal and
other professional fees, and membership dues related to our listing on the
NASDAQ National Market in 2003. These results were consistent with our
expectations for the quarter.
As a result of the above activity, Income Before Provision for Income Taxes
decreased $249,000, or 3.0%. The Provision for Income Taxes decreased $14,000,
or 0.6%, and reflects our anticipated annual effective tax rate of 27.8%. Net
Income decreased $235,000, or 3.9%.
For the six months ended June 30, 2003 versus 2002, Net Interest Income
decreased $323,000, or 1.3%. Interest and fees on loans decreased $1.8 million,
or 6.0% and interest on investment securities and fed funds sold decreased $1.7
million, or 12.9%. Although average loans outstanding increased $31.9 million,
the average yield on those loans decreased from 7.42% to 6.63%. The average
investment portfolio decreased $14.8 million and the yield on investments
decreased from 5.03% to 4.28%. This decline was consistent with our
expectations, and we anticipate that it will continue, at a slower pace, through
the second half of this year. Even if the economic recovery continues, we do not
expect increases in interest rates in the near future.
Average deposits increased from $1.008 billion in the first six months of 2002
to $1.034 billion in the first six months of 2003, while at the same time the
average cost of deposits decreased from 2.29% to 1.66%. The result was a
decrease in Interest on Deposits of $3.0 million, or 25.8%. Average borrowed
funds increased from $225.1 million in the first six months of 2002 to $234.7
million in the first six months of 2003 while the average cost of these
borrowings decreased from 5.72% to 5.30%. The average borrowings consist of
$225.0 million Federal Home Loan Bank advances, and $8.7 million in fed funds
borrowed. The rapid decline in interest rates over the last two years allowed us
an opportunity to lower the cost of our deposit sources of funds. We also
restructured our portfolio of FHLB advances in the second quarter of 2003. The
net interest
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margin for the six months ended June 30, 2003 was 3.45%, compared to 3.62% for
the six months ended June 30, 2002. While the net interest margin has declined
compared to 2002, it began to improve in the second quarter of 2003, and we
believe that it will continue to improve in the second half of this year.
The Provision for Loan Losses decreased $2.5 million, or 59.8% as the
Corporation aggressively addressed credit quality concerns in 2002. Management
has analyzed the Allowance for Loan Losses and believes it is adequate as of
June 30, 2003. However, if the pace of the economic recovery remains slow, there
may be further deterioration in the portfolio which would make an increase in
the provision necessary. Service Charges on Deposit Accounts increased $425,000,
or 20.0%, due to increases in overdraft activity and changes in fees. Other
income increased $495,000, or 31.6%. This was primarily due to the continued low
interest rate environment, which has allowed mortgage loan origination fees to
remain strong. Gains on the sale of securities decreased $324,000, or 43.9% due
to the large amount of securities sold in 2002.
Salaries and Employee Benefits increased $1.2 million, and Occupancy Expense
increased $259,000, largely due to the Bank's expansion into the southern Wayne
County area. These results were consistent with our expectations for the first
half of the year, and we do not anticipate significant increases from these
levels in the second half of the year.
As a result of the above activity, Income Before Provision for Income Taxes
increased $1.1 million, or 7.8%. The Provision for Income Taxes increased
$378,000, or 9.9%, and reflects our anticipated annual effective tax rate of
27.8%. Net Income for the six months increased $709,000, or 7.0% compared to
last year.
LIQUIDITY AND CAPITAL
The Corporation has maintained sufficient liquidity to fund its loan growth and
allow for fluctuations in deposit levels. Internal sources of liquidity are
provided by the maturities of loans and securities as well as holdings of
securities Available for Sale. External sources of liquidity include a line of
credit with the Federal Home Loan Bank of Indianapolis, and the Federal funds
lines that have been established with correspondent banks.
Total stockholders' equity of the Corporation was $173.5 million at June 30,
2003 and $167.0 million at December 31, 2002. The ratio of equity to assets was
12.1% at June 30, 2003 and 11.8% at December 31, 2002. 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:
June 30, 2003 December 31, 2002
---------------------- -----------------------
Leverage Capital 11.8% 11.8%
Tier 1 Risk Based Capital 17.3% 17.8%
Total Risk Based Capital 18.5% 19.0%
At June 30, 2003 and December 31, 2002, 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 2002.
-15-
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 June 30, 2003 compared to December 31, 2002.
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ------------ ----------- ------------
June 30, 2003 12 Month Projection
- ---------------------------------
Interest Income 76,372 82,296 73,858
Interest Expense 27,482 32,833 25,497
------------ ----------- ------------
Net Interest Income 48,890 49,463 48,361
Percent Change From Base Projection 1.2% -1.1%
ALCO Policy Limit (+/-) 5.0% 5.0%
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ------------ ----------- ------------
December 31, 2002 12 Month Projection
- -------------------------------------
Interest Income 78,601 85,829 76,840
Interest Expense 29,671 34,654 27,837
------------ ----------- ------------
Net Interest Income 48,930 51,175 49,003
Percent Change From Base Projection 4.6% 0.1%
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 six months of 2003, 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 parallel shifts of plus or minus 100 and 200 basis points
in interest rates. Currently, the minus 200 shift does not produce meaningful
results. 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
-16-
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.
Fair Value at June 30, 2003
---------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- -----------------------------------------------------------------
Assets 1,436,445 1,417,780 1,397,261 1,453,564 n/a
Liabilities 1,272,901 1,245,415 1,218,986 1,300,167 n/a
-----------------------------------------------------------------
Stockholders' Equity 163,544 172,365 178,275 153,397 n/a
Change in Equity 5.4% 9.0% -6.2% n/a
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
Fair Value at December 31, 2002
-------------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- -----------------------------------------------------------------
Assets 1,423,339 1,403,002 1,382,282 1,443,392 1,463,252
Liabilities 1,252,659 1,221,105 1,190,916 1,285,665 1,308,038
-----------------------------------------------------------------
Stockholders' Equity 170,680 181,897 191,366 157,727 155,214
Change in Equity 6.6% 12.1% -7.6% -9.1%
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 six months of 2003, the estimated variability of
the economic value of equity was within the Bank's established policy limits.
The Bank's interest rate risk, as measured by the net interest income and
economic value of equity simulations, increased slightly in the first quarter of
2003. In order to reduce the interest rate risk, the Bank restructured its
portfolio of Federal Home Loan Bank advances in the second quarter of 2003. The
restructuring consisted of converting $95 million of fixed rate, putable
advances, which had an average cost of 5.96%, to variable rate advances which
will reset quarterly at an average rate of 3 month LIBOR plus 2.27%. This
lowered the average cost of the entire portfolio of $225 million in borrowings
from 5.72% to 4.99%.
-17-
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
June 30, 2003, 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 June 30, 2003,
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 was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended June 30, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
-18-
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of MBT Financial Corp. was held on
May 1, 2003.
(b) The following directors were elected to a new term of office:
Connie S. Cape
Joseph S. Daly
Thomas M. Huner
Gerald L. Kiser
Ronald D. LaBeau
Rocque E. Lipford
William D. McIntyre, Jr.
Michael J. Miller
Richard A. Sieb
Philip P. Swy
(c) The Annual Meeting of Shareholders of MBT Financial Corp. was held for
the following purposes:
1. To elect a Board of Directors for the ensuing year;
2. To transact such other business as may properly come
before the meeting or any adjournment thereof.
The results of the voting are as follows:
Proposal 1, Election of Directors:
Withhold
For Authority
-----------------------------------
Connie S. Cape 12,625,026 110,319
Joseph S. Daly 12,579,396 155,949
Thomas M. Huner 12,538,692 196,653
Gerald L. Kiser 12,503,146 232,199
Ronald D. LaBeau 12,627,414 107,931
Rocque E. Lipford 12,216,634 518,711
William D. McIntyre, Jr. 12,223,560 511,785
Michael J. Miller 12,628,450 106,895
Richard A. Sieb 12,630,946 104,399
Philip P. Swy 12,513,146 222,199
-19-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as a part of this report:
3.1 Restated Articles of Incorporation of MBT Financial Corp.
Previously filed as Exhibit 3.1 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
3.2 Bylaws of MBT Financial Corp. Previously filed as Exhibit 3.2
to MBT Financial Corp.'s Form 10-K for its fiscal year ended
December 31, 2000 and amended in Exhibit 3.2 to MBT Financial
Corp.'s Form 10-Q for its fiscal quarter ended June 30, 2001.
10.1 Separation Agreement and Release of All Claims
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.
(b) Reports on Form 8-K
MBT Financial Corp. filed the following report on Form 8-K during the quarter
ended June 30, 2003:
Date of Event Reported Event Reported
April 14, 2003 Items 9 and 12 - Regulation FD Disclosure, and
Disclosure of Results of Operations and Financial
Condition, First Quarter 2003 Earnings Announcement
-20-
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)
August 12, 2003 /s/ Ronald D. LaBeau
- ------------------ --------------------------------
Date Ronald D. LaBeau
Chairman &
Chief Executive Officer
August 12, 2003 /s/ John L. Skibski
- ------------------ --------------------------------
Date John L. Skibski
Senior Vice President and
Chief Financial Officer
-21-
EXHIBIT INDEX
Exhibit Number Description of Exhibits
3.1 Restated Articles of Incorporation of MBT Financial Corp.
Previously filed as Exhibit 3.1 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
3.2 Bylaws of MBT Financial Corp. Previously filed as Exhibit 3.2
to MBT Financial Corp.'s Form 10-K for its fiscal year ended
December 31, 2000 and amended in Exhibit 3.2 to MBT Financial
Corp.'s Form 10-Q for its fiscal quarter ended June 30, 2001.
10.1 Separation Agreement and Release of All Claims
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 Executive Officer pursuant to 18 U.S.C.
Section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.