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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, 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 October 27, 2003, there were 19,115,141 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)
September 30, December 31,
2003 2002
---- ----
ASSETS
Cash and due from banks $ 27,074 $ 30,618
Federal funds sold 22,600 13,000
Investment securities
Held to maturity-
Obligations of U.S. Government agencies (Estimated market value
of $603 and $649) 546 588
Obligations of states and political subdivisions (Estimated market
value of $100,585 and $117,967) 96,663 113,255
Other securities (Estimated market value of $3,130
and $2,975) 2,982 2,976
Available for sale-
Obligations of U.S. Government agencies 320,324 325,131
Obligations of states and political subdivisions 25,856 14,723
Other securities 73,579 83,064
Loans 838,648 773,360
Loans held for sale 411 445
Allowance for loan losses (18,773) (12,400)
Bank premises and equipment, net 17,883 15,437
Other real estate owned 11,578 15,088
Bank Owned Life Insurance 32,895 16,985
Interest receivable and other assets 18,954 17,424
------------- -------------
Total assets $ 1,471,220 $ 1,409,694
============= =============
LIABILITIES
Non-interest bearing demand deposits $ 132,174 $ 123,596
Interest bearing demand deposits 64,317 69,756
Savings deposits 539,634 470,192
Other time deposits 334,137 347,416
------------- -------------
Total deposits 1,070,262 1,010,960
Federal funds purchased 0 0
Federal Home Loan Bank advances 225,000 225,000
Interest payable and other liabilities 7,053 6,735
------------- -------------
Total liabilities 1,302,315 1,242,695
------------- -------------
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized,
19,113,521 and 19,160,441 shares issued and outstanding) 0 0
Surplus 50,458 51,080
Undivided profits 119,988 115,395
Net unrealized gains (losses) on securities
available for sale, net of tax (1,541) 524
------------- -------------
Total stockholders' equity 168,905 166,999
------------- -------------
Total liabilities and stockholders' equity $ 1,471,220 $ 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 September 30,
2003 2002
---- ----
INTEREST INCOME
Interest and fees on loans $ 13,782 $ 15,102
Interest on investment securities-
Obligations of U.S. Government agencies 3,069 3,032
Obligations of states and political subdivisions 1,524 1,668
Other securities 906 1,093
Interest on Federal funds sold 18 268
------------- -------------
Total interest income 19,299 21,163
------------- -------------
INTEREST EXPENSE
Interest on deposits 3,865 5,318
Interest on borrowed funds 2,659 3,249
------------- -------------
Total interest expense 6,524 8,567
------------- -------------
NET INTEREST INCOME 12,775 12,596
PROVISION FOR LOAN LOSSES 6,325 1,400
------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,450 11,196
------------- -------------
OTHER INCOME
Income from trust services 761 956
Service charges on deposit accounts 1,417 1,175
Security gains 454 33
Other 1,250 868
------------- -------------
Total other income 3,882 3,032
------------- -------------
OTHER EXPENSES
Salaries and employee benefits 4,064 3,548
Occupancy expense 626 535
Other 2,990 2,332
------------- -------------
Total other expenses 7,680 6,415
------------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 2,652 7,813
PROVISION FOR INCOME TAXES 679 2,133
------------- -------------
NET INCOME $ 1,973 $ 5,680
============= =============
COMPREHENSIVE INCOME (LOSS) $ (1,629) $ 5,934
============= =============
BASIC EARNINGS PER COMMON SHARE $ 0.10 $ 0.29
============= =============
DILUTED EARNINGS PER COMMON SHARE $ 0.10 $ 0.29
============= =============
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.15 $ 0.14
============= =============
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)
Nine Months Ended September 30,
2003 2002
---- ----
INTEREST INCOME
Interest and fees on loans $ 41,778 $ 44,877
Interest on investment securities-
Obligations of U.S. Government agencies 9,382 9,836
Obligations of states and political subdivisions 4,704 5,085
Other securities 2,905 3,901
Interest on Federal funds sold 109 542
------------- -------------
Total interest income 58,878 64,241
------------- -------------
INTEREST EXPENSE
Interest on deposits 12,365 16,779
Interest on borrowed funds 8,832 9,637
------------- -------------
Total interest expense 21,197 26,416
------------- -------------
NET INTEREST INCOME 37,681 37,825
PROVISION FOR LOAN LOSSES 7,975 5,500
------------- -------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 29,706 32,325
------------- -------------
OTHER INCOME
Income from trust services 2,454 2,596
Service charges on deposit accounts 3,966 3,299
Security gains 868 771
Other 3,313 2,437
------------- -------------
Total other income 10,601 9,103
------------- -------------
OTHER EXPENSES
Salaries and employee benefits 12,422 10,681
Occupancy expense 1,933 1,583
Other 8,281 7,418
------------- -------------
Total other expenses 22,636 19,682
------------- -------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 17,671 21,746
PROVISION FOR INCOME TAXES 4,860 5,937
------------- -------------
NET INCOME $ 12,811 $ 15,809
============= =============
COMPREHENSIVE INCOME $ 10,746 $ 17,478
============= =============
BASIC EARNINGS PER COMMON SHARE $ 0.67 $ 0.81
============= =============
DILUTED EARNINGS PER COMMON SHARE $ 0.67 $ 0.81
============= =============
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.43 $ 0.40
============= =============
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)
Nine Months Ended September 30,
2003 2002
---- ----
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income $ 12,811 $ 15,809
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 1,759 1,446
Provision for loan losses 7,975 5,500
(Increase) decrease in net deferred Federal income tax asset (1,424) 1,154
Amortization of investment premium and discount 75 (2,475)
Net increase (decrease) in interest payable and other liabilities 318 (1,040)
Net (increase) decrease in interest receivable and other assets (106) 596
Net increase (decrease) in deferred loan fees 84 (4)
Other (4,790) (1,687)
------------- -------------
Net cash provided by operating activities $ 16,702 $ 19,299
------------- -------------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions of investment securities held to maturity $ 22,518 $ 53,419
Proceeds from maturities and redemptions of investment securities available for sale 343,870 336,125
Proceeds from sales of investment securities available for sale 166,685 28,671
Net (increase) decrease in loans (65,010) 2,826
Proceeds from sales of other real estate owned 5,509 1,465
Proceeds from sales of other assets 13 113
Purchase of investment securities held to maturity (4,705) (6,704)
Purchase of investment securities available for sale (510,964) (470,454)
Purchase of bank premises and equipment (4,205) (2,636)
Purchase of bank owned life insurance (15,000) 0
------------- -------------
Net cash used for investing activities $ (61,289) $ (57,175)
------------- -------------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Net increase in deposits $ 59,302 $ 67
Net increase in Federal funds purchased 0 13,300
Proceeds from issuance of common stock 186 0
Repurchase of common stock (808) (6,713)
Dividends paid (8,037) (7,652)
------------- -------------
Net cash provided by financing activities $ 50,643 $ (998)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 6,056 $ (38,874)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,618 66,137
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF NINE MONTHS $ 49,674 $ 27,263
============= =============
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 12,811 12,811
Net unrealized losses on securities
available for sale, net of tax (2,065) (2,065)
Repurchase of 60,000 shares of
common stock (808) (808)
Issuance of common stock under
stock option plans 186 186
Dividends declared-
Common ($.43 per share) (8,218) (8,218)
---------- ---------- ---------- ---------- ----------
BALANCE
SEPTEMBER 30, 2003 $ 0 $ 50,458 $ 119,988 $ (1,541) $ 168,905
========== ========== ========== ========== ==========
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 branches in Monroe County, Michigan and three branches in Wayne
County, Michigan. MBT Credit Company, Inc. operates a mortgage loan office in
Monroe County and a loan production 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 19,113,521 are outstanding at September 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 (Loss) 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 September
30 is as follows:
2003 2002
------------- -------------
BASIC
Net income $ 1,973,000 $ 5,680,000
------------- -------------
Net income applicable to common stock $ 1,973,000 $ 5,680,000
------------- -------------
Average common shares outstanding 19,115,234 19,304,661
------------- -------------
Earnings per common share - basic $ 0.10 $ 0.29
============= =============
2003 2002
------------- -------------
DILUTED
Net income $ 1,973,000 $ 5,680,000
------------- -------------
Net income applicable to common stock $ 1,973,000 $ 5,680,000
------------- -------------
Average common shares outstanding 19,115,234 19,304,661
Stock option adjustment 18,387 -
------------- -------------
Average common shares outstanding - diluted 19,133,621 19,304,661
------------- -------------
Earnings per common share - diluted $ 0.10 $ 0.29
============= =============
The calculation of net income per common share for the nine months ended
September 30 is as follows:
2003 2002
------------- -------------
BASIC
Net income $ 12,811,000 $ 15,809,000
------------- -------------
Net income applicable to common stock $ 12,811,000 $ 15,809,000
------------- -------------
Average common shares outstanding 19,120,212 19,544,769
------------- -------------
Earnings per common share - basic $ 0.67 $ 0.81
============= =============
2003 2002
------------- -------------
DILUTED
Net income $ 12,811,000 $ 15,809,000
------------- -------------
Net income applicable to common stock $ 12,811,000 $ 15,809,000
------------- -------------
Average common shares outstanding 19,120,212 19,544,769
Stock option adjustment 15,352 -
------------- -------------
Average common shares outstanding - diluted 19,135,564 19,544,769
------------- -------------
Earnings per common share - diluted $ 0.67 $ 0.81
============= =============
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 11,814 13.87
Cancelled 3,000 13.85
- -------------------------------------------------------------------
Options Outstanding, September 30 488,635 $ 15.56
- -------------------------------------------------------------------
Options Exercisable, September 30 199,801 $ 16.56
- -------------------------------------------------------------------
-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, southern Wayne County, Michigan, and surrounding
areas. Although the Bank has a diversified loan portfolio, a substantial portion
of its debtors' ability to honor their contracts is dependent on the automotive,
manufacturing, and real estate development economic sectors.
Loans consist of the following (000s omitted):
September 30, December 31,
2003 2002
-------------------------------
Real estate loans $ 673,554 $ 610,530
Loans to finance agricultural production and
other loans to farmers 3,071 2,182
Commercial and industrial loans 95,051 91,717
Loans to individuals for household, family,
and other personal expenditures 68,689 70,404
All other loans (including overdrafts) 369 563
-------------------------------
Total loans, gross 840,734 775,396
Less: Deferred loan fees 1,675 1,591
-------------------------------
Total loans, net of deferred loan fees 839,059 773,805
Less: Allowance for loan losses 18,773 12,400
-------------------------------
$ 820,286 $ 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):
September 30, December 31,
2003 2002
-------------------------------
Nonaccrual loans $ 38,854 $ 22,332
Loans 90 days past due 111 81
Restructured loans 7,023 6,807
-------------------------------
Total nonperforming loans $ 45,988 $ 29,220
Other real estate owned 11,578 15,088
Nonperforming investment securities 79 88
-------------------------------
Total nonperforming assets $ 57,645 $ 44,396
===============================
Nonperforming assets to total assets 3.92% 3.15%
Allowance for loan losses to
nonperforming assets 32.57% 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):
September 30, December 31,
2003 2002
-------------------------------
Balance beginning of year $ 12,400 $ 13,000
Provision for loan losses 7,975 6,101
Loans charged off (2,204) (8,697)
Recoveries 602 1,996
-------------------------------
Balance end of period $ 18,773 $ 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
September 30, 2003 and December 31, 2002 (000's omitted):
September 30, 2003 December 31, 2002
------------------ -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
----------------------------- -----------------------------
Held to Maturity
Obligations of U.S. Government Agencies $ 546 $ 603 $ 588 $ 649
Obligations of States and Political
Subdivisions 96,663 100,585 113,255 117,967
Other Securities 2,982 3,130 2,976 2,975
----------------------------- -----------------------------
$ 100,191 $ 104,318 $ 116,819 $ 121,591
============================= =============================
-10-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
September 30, 2003 December 31, 2002
------------------ -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
----------------------------- -----------------------------
Available for Sale
Obligations of U.S. Government Agencies $ 322,875 $ 320,324 $ 322,878 $ 325,131
Obligations of States and Political
Subdivisions 25,865 25,856 14,680 14,723
Other Securities 73,389 73,579 84,554 83,064
----------------------------- -----------------------------
$ 422,129 $ 419,759 $ 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
-------------------------------
September 30, December 31,
2003 2002
-------------------------------
Commitments to extend credit:
Unused portion of commercial lines of credit $ 114,278 $ 97,402
Unused portion of credit card lines of credit 9,935 10,018
Unused portion of home equity lines of credit 17,072 16,953
Standby letters of credit and financial guarantees written 19,943 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 $59.3 million, or 5.9% since the
beginning of the year. Demand Deposits increased $3.1 million, Savings Deposits
increased $69.4 million while Other Time Deposits decreased $13.3 million.
Deposits have migrated from Other Time Deposits to Savings Deposits as customers
have elected to keep their money in more liquid accounts during this period of
low interest rates. In order to control our interest rate risk and to prevent a
rapid increase in our interest expense, we lowered our savings rates and raised
our longer term certificate rates during the third quarter. The deposit growth,
along with a $19.8 million decrease in investments, was used to fund increases
of $55.9 million in loans, $9.6 million in federal funds sold, and $15.9 million
in Bank Owned Life Insurance (BOLI). Local loan demand began to increase in the
second quarter, and our expansion into the Southern Wayne County area
contributed significantly to the loan growth.
RESULTS OF OPERATIONS
A comparison of the income statements for the three months ended September 30,
2003 and 2002 shows a 1.4% increase in Net Interest Income. Interest and fees on
loans decreased $1.3 million, or 8.7% and interest on investment securities and
fed funds sold decreased $0.5 million, or 9.0%. Although average loans
outstanding increased $63.5 million, the average yield on those loans decreased
from 7.45% to 6.16%. Although the average investment portfolio increased $39.1
million, the yield on investments decreased from 4.62% to 4.06%. Most of our
commercial loan rates are based on the prime rate, which remains at a
historically low level. We expect to see our loan yields continue to decline
until the prime rate increases, which we do not anticipate will occur until the
second half of 2004. Investment yields are market driven, and they are already
starting to increase. Despite this, we expect our investment yields to continue
to decline in the fourth quarter as older, higher yielding assets mature and are
replaced with lower yielding securities.
Average deposits increased from $1.013 billion in the third quarter of 2002 to
$1.046 billion in the third quarter of 2003, while at the same time the average
cost of these deposits decreased from 2.08% to 1.47%. The result was a decrease
in Interest on Deposits of $1.5 million, or 27.3%. Average borrowed funds
increased from $225.4 million in the third quarter of 2002 to $237.6
-13-
million in the third quarter of 2003, while the average cost of these borrowings
decreased from 5.72% to 4.44%. This reduction in the cost of the borrowed funds
was due to the refinancing of some of our Federal Home Loan Bank advances and an
increase in the use of federal funds borrowed. The cost of deposits should
continue to decline in the fourth quarter, but we anticipate a slight increase
in the cost of borrowed funds as we do not expect to borrow any federal funds.
The net interest margin decreased from 3.53% in the third quarter of 2002 to
3.42% in the third quarter of 2003. The loan yields and net interest margin will
be negatively impacted in the fourth quarter by the low interest rate
environment and the increase in the amount of loans that are in nonaccrual
status.
The Provision for Loan Losses increased $4.9 million as the Corporation decided
to add $5.5 million to its allowance for loan losses due to the deterioration of
a relationship with a large commercial customer. The Allowance for Loan Losses
is now $18.8 million, or 2.2% of total loans. Although the allowance is only
32.6% of nonperforming assets, management believes the allowance is adequate due
to the underlying collateral securing the nonperforming loans. The $13.9 million
increase in nonaccrual loans was mainly attributable to 5 large commercial
credits, which other than the one mentioned previously, are adequately
collateralized. These credits were originated prior to improvements in our
underwriting and monitoring systems that took place in the last few years.
Although the current economy continues to provide some uncertainty, we believe
that the loans placed on the books in recent years are less susceptible to
losses of this type.
Trust Income decreased 20.4%, as the Bank collected a nonrecurring fee in the
third quarter of 2002. Service Charges on Deposit Accounts increased 20.6%, due
to increases in overdraft activity and changes in fees. Other income increased
44.0%. This was due to the continued low interest rate environment, which has
allowed mortgage loan origination fees to remain strong, and an increase in the
Bank's investment in BOLI. Gains on the sale of securities increased as the Bank
sold securities to fund increases in loans.
Salaries and Employee Benefits increased 14.5%, and Occupancy Expense increased
17.0%, largely due to the Bank's expansion into the southern Wayne County area.
The Bank now operates two full service branches and a loan and trust production
office in Wayne County. As of September 30, 2003, the Wyandotte branch, which
opened in the first quarter, has $11.5 million in deposits, and the Trenton
branch, which opened in the third quarter, has $4.0 million in deposits. Other
Expenses increased $658,000, or 28.2%, largely due to OREO related expenses, and
legal and other professional fees. These results were consistent with our
expectations for the quarter.
As a result of the above activity, Income Before Provision for Income Taxes
decreased $5.2 million, or 66.1%. The Provision for Income Taxes decreased $1.5
million, or 68.2%, and reflects an anticipated annual effective tax rate of
27.5%.
For the nine months ended September 30, 2003 versus 2002, Net Interest Income
decreased $144,000, or 0.4%. Interest and fees on loans decreased $3.1 million,
or 6.9% and interest on investment securities and fed funds sold decreased $2.3
million, or 11.7%. Although average loans outstanding increased $42.5 million,
the average yield on those loans decreased from 7.82% to 6.89%. The average
investment portfolio increased $27.5 million while the yield on investments
decreased from 4.91% to 4.21%. This decline was consistent with our
expectations, and we anticipate that it will continue, at a slower pace, through
the fourth quarter of this year. Even if the economic recovery continues, we do
not expect increases in managed interest rates in the near future. We expect the
recent improvement in market interest rates to lessen the impact on the
investment portfolio yield.
Average deposits increased from $1.009 billion in the first nine months of 2002
to $1.038 billion in the first nine months of 2003, while at the same time the
average cost of deposits decreased from 2.22% to 1.59%. The result was a
decrease in Interest on Deposits of $4.4 million, or 26.3%. Average borrowed
funds increased from $225.2 million in the first nine months of 2002 to $235.8
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million in the first nine months of 2003 while the average cost of these
borrowings decreased from 5.72% to 5.01%.
The Provision for Loan Losses increased $2.5 million, or 45.0% due to the
additional provision in the third quarter of 2003. Management believes that the
Allowance for Loan Losses is adequate, and does not anticipate the need for
further sizeable increases. Service Charges on Deposit Accounts increased 20.2%,
due to increases in overdraft activity and changes in fees. Other income
increased $876,000, or 35.9%. This was due to the continued low interest rate
environment, which allowed mortgage loan origination fees to remain strong
through the first eight months of the year. Mortgage origination fees account
for $394,000 of this increase. We expect the mortgage origination income to
decline significantly in the fourth quarter of 2003.
Salaries and Employee Benefits increased $1.7 million, and Occupancy Expense
increased $350,000, largely due to the Bank's expansion into the southern Wayne
County area. These results were consistent with our expectations for the first
three quarters of the year, and we do not anticipate significant increases from
these levels in the fourth quarter.
As a result of the above activity, Income Before Provision for Income Taxes
decreased $4.1 million, or 18.7%. The Provision for Income Taxes decreased $1.1
million, or 18.1%, and reflects our anticipated annual effective tax rate of
27.5%. Net Income for the nine months decreased $3.0 million, or 19.0% 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 $168.9 million at September
30, 2003 and $167.0 million at December 31, 2002. The ratio of equity to assets
was 11.5% at September 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:
Minimum to be Well
September 30, 2003 December 31, 2002 Capitalized
------------------ ----------------- ------------------------------
Leverage Capital 11.6% 11.8% 5.0%
Tier 1 Risk Based Capital 17.1% 17.8% 6.0%
Total Risk Based Capital 18.4% 19.0% 10.0%
At September 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.
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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 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 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 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 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, has not changed significantly from
December 31, 2002.
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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
September 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
September 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 September 30, 2003, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
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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
None.
ITEM 5. OTHER INFORMATION
On October 28, 2003, we announced the plans of our current Chairman and Chief
Executive Officer, Ronald D. LaBeau, to retire effective April 2, 2004. We
anticipate the H. Douglas Chaffin, our current President and Chief Operating
Officer will succeed Mr. LaBeau as Chief Executive Officer. However, our board
of directors has not yet acted to elect a successor to Mr. LaBeau as Chief
Executive Officer.
The Company's press release announcing Mr. LaBeau's retirement is filed as
Exhibit 99.
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 Amended and Restated Bylaws of MBT Financial Corp.
10.1 Supplemental Executive Retirement Agreement
10.2 Split Dollar Agreement
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.
99 Press Release announcing retirement of Ronald D. LaBeau, Chairman
and Chief Executive Officer.
(b) Reports on Form 8-K
MBT Financial Corp. filed the following report on Form 8-K during the quarter
ended September 30, 2003:
Date of Event Reported Event Reported
July 14, 2003 Items 9 and 12 - Regulation FD Disclosure, and
Disclosure of Results of Operations and Financial
Condition, Second Quarter 2003 Earnings Announcement
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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)
October 29, 2003 /s/ Ronald D. LaBeau
Date ----------------------------------
Ronald D. LaBeau
Chairman &
Chief Executive Officer
October 29, 2003 /s/ John L. Skibski
Date ----------------------------------
John L. Skibski
Senior Vice President and
Chief Financial Officer
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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 Amended and Restated Bylaws of MBT Financial Corp.
10.1 Supplemental Executive Retirement Agreement
10.2 Split Dollar Agreement
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.
99 Press Release announcing retirement of Ronald D. LaBeau,
Chairman and Chief Executive Officer.