Back to GetFilings.com
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 2004
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
incorporation or organization) Identification No.)
102 E. Front Street
Monroe, Michigan 48161
(Address of principal executive offices)
(Zip Code)
(734) 241-3431
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [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 6, 2004, there were 17,419,050 shares of the Corporation's Common
Stock outstanding.
================================================================================
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
JUNE 30, DECEMBER 31,
Dollars in thousands 2004 2003
----------- ------------
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 26,126 $ 22,525
----------- -----------
Total cash and cash equivalents 26,126 22,525
Securities - Held to Maturity 91,513 99,154
Securities - Available for Sale 405,189 397,642
Federal Home Loan Bank stock - at cost 12,675 11,686
Loans held for sale 657 1,406
Loans - Net 908,105 847,944
Accrued interest receivable and other 60,261 59,407
assets
Premises and Equipment - Net 19,450 18,024
----------- -----------
Total assets $ 1,523,976 $ 1,457,788
=========== ===========
LIABILITIES
Deposits:
Non-interest bearing $ 142,152 $ 135,536
Interest-bearing 896,289 903,581
----------- -----------
Total deposits 1,038,441 1,039,117
Federal Home Loan Bank advances 253,500 225,000
Federal funds purchased 57,500 45,000
Repurchase agreements 21,900 --
Interest payable and other liabilities 8,242 5,225
----------- -----------
Total liabilities 1,379,583 1,314,342
----------- -----------
STOCKHOLDERS' EQUITY
Common stock (no par value) -- --
Additional paid-in capital 18,899 20,414
Retained Earnings 129,677 123,867
Accumulated other comprehensive loss (4,183) (835)
----------- -----------
Total stockholders' equity 144,393 143,446
----------- -----------
Total liabilities and stockholders' equity $ 1,523,976 $ 1,457,788
=========== ===========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-2-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
THREE MONTHS ENDED JUNE 30,
Dollars in thousands, except per share data 2004 2003
---------- -----------
INTEREST INCOME
Interest and fees on loans $ 13,954 $ 14,180
Interest on investment securities-
Tax-exempt 1,420 1,572
Taxable 3,876 4,232
Interest on federal funds sold -- 36
---------- -----------
Total interest income 19,250 20,020
---------- -----------
INTEREST EXPENSE
Interest on deposits 3,427 4,137
Interest on borrowed funds 2,839 2,981
---------- -----------
Total interest expense 6,266 7,118
---------- -----------
NET INTEREST INCOME 12,984 12,902
PROVISION FOR LOAN LOSSES 600 825
---------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,384 12,077
---------- -----------
OTHER INCOME
Income from trust services 921 820
Service charges and other fees 1,372 1,304
Net gain on sales of securities 11 242
Other 1,057 1,150
---------- -----------
Total other income 3,361 3,516
---------- -----------
OTHER EXPENSES
Salaries and employee benefits 4,494 4,136
Occupancy expense 689 639
Other 2,812 2,807
---------- -----------
Total other expenses 7,995 7,582
---------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 7,750 8,011
PROVISION FOR INCOME TAXES 2,102 2,230
---------- -----------
NET INCOME $ 5,648 $ 5,781
========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.32 $ 0.30
========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.32 $ 0.30
========== ===========
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.15 $ 0.14
========== ===========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-3-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
SIX MONTHS ENDED JUNE 30,
Dollars in thousands, except per share data 2004 2003
---------- -----------
INTEREST INCOME
Interest and fees on loans $ 27,513 $ 27,996
Interest on investment securities-
Tax-exempt 2,860 3,180
Taxable 7,436 8,312
Interest on federal funds sold 1 91
---------- -----------
Total interest income 37,810 39,579
---------- -----------
INTEREST EXPENSE
Interest on deposits 6,666 8,500
Interest on borrowed funds 5,520 6,173
---------- -----------
Total interest expense 12,186 14,673
---------- -----------
NET INTEREST INCOME 25,624 24,906
PROVISION FOR LOAN LOSSES 1,200 1,650
---------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 24,424 23,256
---------- -----------
OTHER INCOME
Income from trust services 1,735 1,693
Service charges and other fees 2,650 2,549
Net gain on sales of securities 118 414
Other 2,084 2,063
---------- -----------
Total other income 6,587 6,719
---------- -----------
OTHER EXPENSES
Salaries and employee benefits 8,982 8,358
Occupancy expense 1,497 1,307
Other 5,405 5,291
---------- -----------
Total other expenses 15,884 14,956
---------- -----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 15,127 15,019
PROVISION FOR INCOME TAXES 4,079 4,181
---------- -----------
NET INCOME $ 11,048 $ 10,838
========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.63 $ 0.57
========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.63 $ 0.57
========== ===========
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.30 $ 0.28
========== ===========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-4-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
SIX MONTHS ENDED JUNE 30,
Dollars in thousands 2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 11,048 $ 10,838
Adjustments to reconcile net income to net cash from operating activities
Depreciation 1,359 1,161
Provision for loan losses 1,200 1,650
(Increase) decrease in net deferred Federal income tax asset (263) 424
Net Amortization (Accretion) of investment premium and discount 385 224
Net increase (decrease) in interest payable and other liabilities 3,017 (404)
Net (increase) decrease in interest receivable and other assets (3,166) (2,112)
Net gain on sales of securities (118) (414)
Increase in cash surrender value of life insurance (765) (530)
--------- ---------
Net cash provided by operating activities $ 12,697 $ 10,837
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment securities held to maturity $ 12,849 $ 15,924
Proceeds from maturities and redemptions of investment securities available for sale 38,575 306,805
Proceeds from sales of investment securities available for sale 51,247 123,789
Net (increase) decrease in loans (60,612) (55,305)
Proceeds from sales of other real estate owned 5,153 4,849
Proceeds from sales of other assets -- 4
Purchase of investment securities held to maturity (5,193) (2,902)
Purchase of investment securities available for sale (103,790) (407,432)
Purchase of bank premises and equipment (2,785) (3,231)
Purchase of bank owned life insurance -- (15,000)
--------- ---------
Net cash used for investing activities $ (64,556) $ (32,499)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ (676) $ 12,466
Net increase (decrease) in Federal funds purchased 12,500 --
Net increase (decrease) in Federal Home Loan Bank borrowings 28,500 --
Net increase (decrease) in Repurchase Agreements 21,900 --
Proceeds from issuance of common stock 1,050 110
Repurchase of common stock (2,565) (659)
Dividends paid (5,249) (5,360)
--------- ---------
Net cash provided by (used for) financing activities $ 55,460 $ 6,557
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 3,601 $ (15,105)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,525 43,618
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26,126 $ 28,513
========= =========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-5-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL
---------- --------- ------------- ---------
BALANCE - JANUARY 1, 2004 $ 20,414 $ 123,867 $ (835) $ 143,446
Repurchase of Common Stock (150,000 shares) (2,565) -- -- (2,565)
Issuance of Common Stock (75,659 shares) 1,050 -- -- 1,050
Dividends declared ($0.30 per share) -- (5,238) -- (5,238)
Comprehensive income:
Net income -- 11,048 -- 11,048
Change in net unrealized loss on securities
available for sale - Net of tax effect of $1,803 -- -- (3,348) (3,348)
---------- --------- ------------- ---------
Total Comprehensive Income -- 11,048 (3,348) 7,700
---------- --------- ------------- ---------
BALANCE - JUNE 30, 2004 $ 18,899 $ 129,677 $ (4,183) $ 144,393
========== ========= ============= =========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-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.
The accounting and reporting policies of the Bank conform to practice within the
banking industry and are in accordance with accounting principles generally
accepted in the United States. Preparation of financial statements in conformity
with generally accepted accounting principles requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes in
the near term are the determination of the allowance for loan losses and the
valuation of other real estate owned.
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.
The significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its subsidiary. All material intercompany transactions and balances have
been eliminated. Certain prior period amounts have been reclassified to conform
to the current period presentation.
COMPREHENSIVE INCOME
Accounting principles generally require that revenue, expenses, gains, and
losses be included in net income. Certain changes in assets and liabilities,
however, such as unrealized gains and losses on securities available for sale,
are reported as a separate component of the equity section of the balance sheet.
Such items, along with net income, are components of comprehensive income.
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.
STOCK-BASED COMPENSATION
The Company applies the provisions of APB Opinion No. 25, "Accounting for
Stock-Based Compensation," for all employee stock option grants and has elected
to disclose pro forma net income and earnings per share amounts as if the
fair-value based method has been applied in measuring compensation costs.
-7-
The Company's as reported and pro forma information for the quarter and six
months ended June 30 were as follows:
Three Months Ended June 30, Six Months Ended June 30,
Dollars in thousands, except per share data 2004 2003 2004 2003
------------- ---------- ------------ ------------
Net Income as Reported $ 5,648 $ 5,781 $ 11,048 $ 10,838
Pro Forma Adjustment
Due to Stock Options (91) (65) (197) (129)
------------- ---------- ------------ ------------
Pro Forma Net Income $ 5,557 $ 5,716 $ 10,851 $ 10,709
============= ========== ============ ============
Earnings per Share as Reported
Basic $ 0.32 $ 0.30 $ 0.63 $ 0.57
Diluted $ 0.32 $ 0.30 $ 0.63 $ 0.57
Pro Forma Earnings per Share
Basic $ 0.32 $ 0.30 $ 0.62 $ 0.56
Diluted $ 0.32 $ 0.30 $ 0.62 $ 0.56
Compensation expense in the pro forma disclosures is not indicative of future
amounts, as options vest over several years and additional grants are generally
made each year.
The weighted average fair value of options granted was $3.84 in 2004 and $3.04
in 2003. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants: expected option lives of seven years for both years; expected
volatility of 25.3% in 2004 and 23.9% in 2003; and risk-free interest rates of
3.8% in 2004 and 4.6% in 2003.
2. EARNINGS PER SHARE
The calculation of net income per common share for the three months ended June
30 is as follows:
2004 2003
----------- -----------
BASIC
Net income $ 5,648,000 $ 5,781,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 5,648,000 $ 5,781,000
----------- -----------
Average common shares outstanding 17,429,648 19,111,172
----------- -----------
Earnings per common share - basic $ 0.32 $ 0.30
=========== ===========
2004 2003
----------- -----------
DILUTED
Net income $ 5,648,000 $ 5,781,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 5,648,000 $ 5,781,000
----------- -----------
Average common shares outstanding 17,429,648 19,111,172
Stock option adjustment 71,047 32,439
----------- -----------
Average common shares outstanding - diluted 17,500,695 19,143,611
----------- -----------
Earnings per common share - diluted $ 0.32 $ 0.30
=========== ===========
-8-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The calculation of net income per common share for the six months ended June 30
is as follows:
2004 2003
----------- -----------
BASIC
Net income $11,048,000 $10,838,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $11,048,000 $10,838,000
----------- -----------
Average common shares outstanding 17,465,455 19,122,742
----------- -----------
Earnings per common share - basic $ 0.63 $ 0.57
=========== ===========
2004 2003
----------- -----------
DILUTED
Net income $11,048,000 $10,838,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $11,048,000 $10,838,000
----------- -----------
Average common shares outstanding 17,465,455 19,122,742
Stock option adjustment 69,009 14,254
----------- -----------
Average common shares outstanding - diluted 17,534,464 19,136,996
----------- -----------
Earnings per common share - diluted $ 0.63 $ 0.57
=========== ===========
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, 2004 480,802 $ 14.74
Granted 161,000 16.69
Exercised 15,500 13.61
Cancelled 24,100 17.33
------- ----------------
Options Outstanding, June 30, 2004 602,202 $ 15.19
------- ----------------
Options Exercisable, June 30, 2004 219,363 $ 15.83
------- ----------------
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.
-9-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Loans consist of the following (000s omitted):
June 30, December 31,
2004 2003
-------- ------------
Real estate loans $749,646 $ 695,677
Loans to finance agricultural production and
other loans to farmers 2,716 2,263
Commercial and industrial loans 89,047 93,444
Loans to individuals for household, family,
and other personal expenditures 83,513 72,972
All other loans (including overdrafts) 493 1,228
-------- ------------
Total loans, gross 925,415 865,584
Less: Deferred loan fees 1,677 1,734
-------- ------------
Total loans, net of deferred loan fees 923,738 863,850
Less: Allowance for loan losses 14,976 14,500
-------- ------------
$908,762 $ 849,350
======== ============
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 nonperforming 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 consist 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,
2004 2003
-------- -----------
Nonaccrual loans $31,525 $ 33,664
Loans 90 days past due 189 100
Restructured loans 3,348 4,755
------- ----------
Total nonperforming loans $35,062 $ 38,519
Other real estate owned 6,570 8,434
Nonperforming investment securities 163 140
------- ----------
Total nonperforming assets $41,795 $ 47,093
======= ==========
Nonperforming assets to total assets 2.74% 3.23%
Allowance for loan losses to
nonperforming assets 35.83% 30.79%
-10-
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, June 30,
2004 2003
-------- --------
Balance beginning of year $ 14,500 $ 12,400
Provision for loan losses 1,200 1,650
Loans charged off (1,380) (812)
Recoveries 656 447
-------- --------
Balance end of period $ 14,976 $ 13,685
======== ========
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.
-11-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
5. INVESTMENT SECURITIES
The following is a summary of the Bank's investment securities portfolio as of
June 30, 2004 and December 31, 2003 (000's omitted):
June 30, 2004 December 31, 2003
-------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Held to Maturity
Obligations of U.S. Government Agencies $ 503 $ 538 $ 536 $ 590
Obligations of States and Political
Subdivisions 87,993 90,247 95,634 99,234
Other Securities 3,017 3,131 2,984 3,116
--------- ------------ --------- ------------
$ 91,513 $ 93,916 $ 99,154 $ 102,940
========= ============ ========= ============
June 30, 2004 December 31, 2003
-------------------------- --------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Available for Sale
Obligations of U.S. Government Agencies $ 301,530 $ 294,624 $ 315,004 $ 311,944
Obligations of States and Political
Subdivisions 27,740 27,536 26,047 26,473
Other Securities 82,355 83,029 57,876 59,225
--------- ------------ --------- ------------
$ 411,625 $ 405,189 $ 398,927 $ 397,642
========= ============ ========= ============
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.
-12-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Financial instruments whose contractual amounts represent off-balance sheet
credit risk were as follows (000s omitted):
CONTRACTUAL AMOUNT
2004 2003
-------- --------
Commitments to extend credit:
Unused portion of commercial lines of credit $113,173 $ 93,525
Unused portion of credit card lines of credit 8,577 9,761
Unused portion of home equity lines of credit 15,675 17,019
Standby letters of credit and financial guarantees written 18,558 19,381
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, and generally have fixed expiration dates or other termination
clauses. Since the lines of credit may expire without being drawn upon, the
total committed amounts do not necessarily represent future cash requirements.
Credit card lines of credit have various established expiration dates, but are
fundable on demand. Home equity lines of credit are secured by real estate
mortgages, a majority of which have ten year expiration dates, but are fundable
on demand. The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of the collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on Management's credit evaluation of the
counterparty.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements and
other business transactions.
-13-
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
During the first half of 2004, the Bank's gross loans increased $59.9 Million,
or 6.9%. During that same period, deposit and investment totals did not change
significantly. In order to fund the loan growth, the Bank increased its use of
federal funds borrowed by $12.5 million, increased its borrowings from the
Federal Home Loan Bank by $28.5 million, and entered into a repurchase agreement
secured by investment securities for $21.9 million.
The loan growth was consistent with our expectations, with the new loans
originating equally in the Monroe and Downriver market areas. The Bank expects
loans to continue to increase in the third quarter as the economic recovery and
our expansion into Wayne County continue, and as construction and land
development lines continue to be drawn upon. Management believes that the
quality of the loan portfolio is continuing to improve. Nonperforming assets
("NPAs") decreased 11.3% since year end as we continue to work out the existing
NPAs and improved lending practices have resulted in a reduction of the amount
of new NPAs being identified. Most of the bank's lending is secured by real
estate, which allows us to maintain a lower ratio of Allowance for Loan Losses
to NPAs and a low level of net charge offs. Although the charge offs related to
these loans are less, the process of collection can be lengthy. Significant
improvements in the lending staff, the collection staff, the underwriting
procedures, and the loan policy have also contributed to the reduction in NPAs,
as shown by a reduction in the amount of new additions to the NPA list and a
reduction in the delinquency rates for commercial, consumer, and mortgage loans.
Deposit growth was less than anticipated for a variety of reasons: the low
interest rates and improving equity markets have resulted in an increase in
disintermediation; Management decided to reduce interest expense by changing its
pricing philosophy from being the market leader for all products to pricing
competitively, but focusing on the products that matched our Asset/Liability
Management needs; and competitors have aggressively offered special rates to
attract new customers. We continue to monitor the local market and adjust our
products and pricing. Effective June 1, 2004, we began to offer free checking to
individuals and businesses, which contributed to the increase in the
non-interest bearing deposits amounts. Also in the second quarter, in order to
-14-
manage our interest rate risk, we obtained $16.9 million of brokered
certificates of deposit. The terms of these deposits range from three to five
years and the rates range from 3.75% to 4.50%. The weighted average maturity is
4.23 years and the weighted average cost is 4.23%. We may continue to utilize
brokered deposits to fund our loan growth and manage interest rate risk in the
third quarter, and we also expect traditional deposits to increase in the third
quarter.
RESULTS OF OPERATIONS -- SECOND QUARTER 2004 VS. SECOND QUARTER 2003
A comparison of the income statements for the three months ended June 30, 2004
and 2003 shows a 0.6% increase in Net Interest Income. Interest income on loans
and investments decreased $0.8 million, or 3.8% and interest expense decreased
$0.9 million, or 12.0%. Although average loans outstanding increased $88.9
million, the average yield on those loans decreased from 6.52% to 5.85%. Average
investments decreased $64.6 million but the yield on investments increased from
4.35% to 4.51%. Market interest rates began to rise early in the year,
contributing to the improvement in the investment yield. The first increase in
managed interest rates in more than four years occurred on June 30, 2004, and
had no impact on our second quarter earnings. We expect additional increases in
managed rates in the second half of this year, which will lead to an improvement
in loan yields.
Average deposits decreased slightly from $1.036 billion in the second quarter of
2003 to $1.029 billion in the second quarter of 2004, while at the same time the
average cost of these deposits decreased from 1.61% to 1.34%. The result was a
decrease in Interest on Deposits of $0.7 million, or 17.2%. Average borrowed
funds increased from $240.1 million in the second quarter of 2003 to $283.0
million in the second quarter of 2004, while the average cost of these
borrowings decreased from 4.95% to 4.03%. This reduction in the cost of the
borrowed funds was due to the refinancing of some of our Federal Home Loan Bank
advances, obtaining additional FHLB advances at lower rates, and an increase in
the use of federal funds borrowed and other lower cost borrowings. The cost of
deposits increased slightly in the second quarter as customers began to shift
funds into higher yielding, longer term certificates of deposit. While our
maturing certificates should renew at lower rates, additional movement of
deposits from transaction accounts and short term certificates into long term
certificates, as well as rising market rates, is expected to cause our deposit
costs to increase in the third quarter. We may also experience a slight increase
in the cost of borrowed funds as we expect to borrow less federal funds and
because some of our FHLB borrowings have variable rates.
The Provision for Loan Losses decreased $225,000, or 27.3%. This level of
provision is expected to be sufficient to maintain an adequate allowance for
loan losses, barring greater than anticipated loan growth.
Non interest income decreased 4.4%. The table below summarizes the changes in
the components of non interest income (000s omitted) for the quarters ended:
June 30, June 30,
2004 2003 % Change
------- -------- --------
Trust Income $ 921 $ 820 12.3%
Deposit Account Service Charges 412 383 7.6%
Other Deposit Account Related Fees 960 921 4.2%
Origination Fees on Loans Sold 169 356 -52.5%
Gains on Securities Transactions 11 242 -95.5%
BOLI Earnings 379 329 15.2%
Other Income 509 465 9.5%
------- -------- --------
$ 3,361 $ 3,516 -4.4%
Trust Income improved due to improvements in the market values of trust accounts
and increases in the fees charged. The increase in Deposit Account Service
Charges was due to increased deposit
-15-
account activity and fees. The Bank began offering a free checking account
product in the second quarter of 2004, which is expected to result in smaller
increases in these fees. Origination Fees on Mortgage Loans Sold exceeded our
expectations for the second quarter of 2004, but were still well below the level
achieved during the historically low interest rate environment of the second
quarter of 2003. The low interest rates of last year and the need to sell
investments to fund loan growth also provided the opportunity for above normal
Gains on Securities Transactions in 2003. The income from Bank Owned Life
Insurance policies increased due to an additional investment in BOLI policies
during the second quarter of 2003.
Salaries and Employee Benefits increased $358,000, or 8.7%, due to annual salary
increases and higher health insurance costs. The number of full time equivalent
employees decreased slightly from 386 on June 30, 2003 to 384 on June 30, 2004.
Occupancy Expense increased $50,000, or 7.8%, primarily 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
June 30, 2004, the Wyandotte branch, which opened at the end of the first
quarter of 2003, has $21.6 million in deposits, and the Trenton branch, which
opened in the third quarter of 2003, has $9.8 million in deposits. Other
Expenses increased $5,000, or 0.2%. These results were consistent with our
expectations for the quarter, and our efficiency ratio remains better than the
average for comparable banks.
As a result of the above activity, Income Before Provision for Income Taxes
decreased $261,000, or 3.3%. The Provision for Income Taxes decreased $128,000,
or 5.7%, and reflects an anticipated annual effective tax rate of 27.0%. Net
Income decreased $133,000, or 2.3% compared to the second quarter of 2003.
RESULTS OF OPERATIONS -- SIX MONTHS ENDED JUNE 30, 2004 AND JUNE 30, 2003
A comparison of the income statements for the six months ended June 30, 2004 and
2003 shows a 2.9% increase in Net Interest Income. Interest income on loans and
investments decreased $1.8 million, or 4.5% and interest expense decreased $2.5
million, or 16.9%. Although average loans outstanding increased $87.5 million,
the average yield on those loans decreased from 6.62% to 5.89%. Average
investments decreased $71.8 million but the yield on investments increased from
4.28% to 4.40% as increasing market rates in 2004 led to an improvement in the
investment yield. Anticipated increases in managed rates in the second half of
this year are expected to result in an improvement in loan yields.
Average deposits decreased slightly from $1.034 billion in the first half of
2003 to $1.029 billion in the first half of 2004, while at the same time the
average cost of these deposits decreased from 1.66% to 1.30%. The result was a
decrease in Interest on Deposits of $1.8 million, or 21.6%. Average borrowed
funds increased from $234.7 million in the first half of 2003 to $267.7 million
in the first half of 2004, while the average cost of these borrowings decreased
from 5.30% to 4.15%. This reduction in the cost of the borrowed funds was due to
the refinancing of some of our Federal Home Loan Bank advances in the second and
third quarters of 2003, and lower costs on the additional borrowings, which
include FHLB advances, federal funds borrowed, and repurchase agreements. The
market for deposits is becoming increasingly competitive, and we do not expect
deposit costs to continue to decline in the second half of 2004.
It is Management's expectation that rising interest rates would be slightly
beneficial to the Bank's net interest income over the remainder of the year
while falling interest rates would not materially affect net interest income.
The Provision for Loan Losses decreased $450,000, or 27.3%. This level of
provision is expected to be sufficient to maintain an adequate allowance for
loan losses, barring greater than anticipated loan growth.
-16-
Non interest income decreased 2.0%. The table below summarizes the changes in
the components of non interest income (000s omitted) for the six months ended:
June 30, June 30,
2004 2003 % Change
-------- --------- ---------
Trust Income $ 1,735 $ 1,693 2.5%
Deposit Account Service Charges 822 760 8.2%
Other Deposit Account Related Fees 1,828 1,789 2.2%
Origination Fees on Loans Sold 329 632 -47.9%
Gains on Securities Transactions 118 414 -71.5%
BOLI Earnings 765 530 44.3%
Other Income 990 901 9.9%
-------- --------- ---------
$ 6,587 $ 6,719 -2.0%
Trust Income increased due to improvements in the market values of trust
accounts and increases in the fees charged. The Bank began offering a free
checking account product in June, 2004, which is expected to result in smaller
future increases in Deposit Account Service Charges. Origination Fees on
Mortgage Loans Sold decreased in 2004 as mortgage rates began to increase. The
income from Bank Owned Life Insurance policies increased due to an additional
investment in BOLI policies in the second quarter of 2003.
Salaries and Employee Benefits increased $624,000, or 7.5%, as salaries
increased 8.9% and health insurance and other benefits increased 5.7%. Occupancy
Expense increased $190,000, or 14.5%, primarily due to the Bank's expansion into
the southern Wayne County area. Other Expenses increased $114,000, or 2.2%.
These results were consistent with our expectations for the first half of 2004.
As a result of the above activity, Income Before Provision for Income Taxes
increased $108,000, or 0.7%. The Provision for Income Taxes decreased $102,000,
or 2.4%, and reflects an anticipated annual effective tax rate of 27.0%. Net
Income increased $210,000, or 1.9% compared to the first half of 2003.
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 $144.4 million at June 30,
2004 and $143.4 million at December 31, 2003. The ratio of equity to assets was
9.5% at June 30, 2004 and 9.8% at December 31, 2003. 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
June 30, 2004 December 31, 2003 Capitalized
------------- ----------------- ------------------
Leverage Capital 10.0% 9.7% 5.0%
Tier 1 Risk Based Capital 13.9% 14.4% 6.0%
Total Risk Based Capital 15.2% 15.6% 10.0%
-17-
At June 30, 2004 and December 31, 2003, 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 2003.
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 six months of 2004, 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 six months of 2004, 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, 2003.
-18-
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, 2004, 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, 2004,
in alerting them in a timely manner to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended June 30, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
-19-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their
property the subject of any material legal proceedings other than ordinary
routine litigation incidental to their respective businesses, nor are any such
proceedings known to be contemplated by governmental authorities, other than as
described below.
On July 14, 2004, the Michigan Department of Environmental Quality (the "DEQ")
provided a letter directing Monroe Bank and Trust to take action including
remediation of property owned by the Bank located at 9023 Lewis Avenue, Monroe
County, Michigan. This property was purchased by the Bank in 2003 and is
currently being redeveloped into a Bank branch office. During construction of
the facility, three previously unknown underground storage tanks were discovered
on the property and removed in February of 2004. The Bank notified the DEQ in
February of this year indicating that some of the contents from these tanks had
been released into the soil. An initial assessment report was prepared and
submitted to the DEQ on May 6, 2004 by an environmental testing and consulting
firm engaged by the Registrant. Based on this report, the DEQ provided its July
14, 2004 letter, which requires the Bank to develop and implement a remedial
action plan for the property. Registrant's consulting firm is currently in the
process of completing its final assessment of the property and will assist the
Bank in developing its remedial action plan. This matter is in an early stage
and Registrant's management is not yet in a position to assess accurately the
extent of remediation costs or other expenses associated with the planned
remediation of the property.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF EQUITY
SECURITIES.
The following table summarizes the repurchase activity of the Company's stock
during the three months ended June 30, 2004:
Total Number of Shares Maximum Number of
Average Purchased as Part of Shares that May Yet
Total Number of Price Paid Publicly Announced Be Purchased Under
Shares Purchased per Share Plans or Programs the Plans or Programs
---------------- ----------- ---------------------- ---------------------
April 1, 2004 - April 30, 2004 100,000 $ 17.10 100,000 1,000,441
May 1, 2004 - May 31, 2004 50,000 $ 17.10 50,000 950,441
June 1, 2004 - June 30, 2004 -- $ -- -- 950,441
---------------- ----------- ---------------------- ---------------------
Total 150,000 $ 17.10 150,000
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of MBT Financial Corp. was held on May 6,
2004. The following directors were elected to a new term of office:
Connie S. Cape
H. Douglas Chaffin
Joseph S. Daly
Thomas M. Huner
Gerald L. Kiser
Rocque E. Lipford
William D. McIntyre, Jr.
Michael J. Miller
Richard A. Sieb
Philip P. Swy
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 consider and act upon a proposed Amendment to the Articles of
Incorporation to eliminate Article IV requiring a two-thirds vote
by shareholders to approve certain mergers involving the
Corporation;
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
-20-
The results of the voting are as follows:
Proposal 1, Election of Directors:
WITHHOLD
FOR AUTHORITY
---------- ---------
Connie S. Cape 13,567,273 628,712
H Douglas Chaffin 14,010,935 185,050
Joseph S. Daly 13,601,185 594,800
Thomas M. Huner 13,924,819 271,166
Gerald L. Kiser 13,694,021 501,964
Rocque E. Lipford 10,721,410 3,474,575
William D. McIntyre, Jr. 11,914,632 2,281,353
Michael J. Miller 13,902,060 293,925
Richard A. Sieb 13,983,368 212,617
Philip P. Swy 13,897,802 298,183
Proposal 2, Amendment to the Articles of Incorporation
For 9,144,097
Against 2,605,969
Abstain 149,381
Proposal 2 did not receive the two-thirds vote of outstanding shares required
for approval.
ITEM 5. OTHER INFORMATION
Inapplicable.
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. Previously filed as
Exhibit 3.2 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter
ended September 30, 2003.
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.
-21-
(b) Reports on Form 8-K
MBT Financial Corp. filed or furnished the following reports on Form 8-K during
the quarter ended June 30, 2004:
Date of Event Reported Event Reported
- ---------------------- --------------
April 6, 2004 Item 9 -- Regulation FD Disclosure, Announcement of
promotion of H. Douglas Chaffin to President & Chief
Executive Officer
April 14, 2004 Items 9 and 12 -- Regulation FD Disclosure, and
Disclosure of Results of Operations and Financial
Condition, first quarter 2004 earnings announcement
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 9, 2004 /s/ H. Douglas Chaffin
- -------------- ----------------------------
Date H. Douglas Chaffin
President &
Chief Executive Officer
August 9, 2004 /s/ John L. Skibski
- -------------- ----------------------------
Date John L. Skibski
Executive Vice President and
Chief Financial Officer
-22-
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.
Previously filed as Exhibit 3.2 of MBT Financial Corp.'s
10-Q for its fiscal quarter ended September 30, 2003.
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.