FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 000-30973
MBT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Michigan 38-3516922
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
102 E. Front Street
Monroe, Michigan 48161
(Address of principal executive offices)
(Zip Code)
(734) 241-3431
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X]
No [ ]
As of August 12, 2002, 19,300,541 shares of the Corporation's Common Stock, No
Par Value, were outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CONDITION
(UNAUDITED)
June 30, December 31,
2002 2001
---- ----
ASSETS
Cash and due from banks $ 44,482,628 $ 26,137,120
Federal funds sold 112,800,000 40,000,000
Investment securities
Held to maturity-
Obligations of U.S. Government agencies (Estimated market value
of $16,104,054 and $30,197,409) 16,010,009 30,044,083
Obligations of states and political subdivisions (Estimated market
value of $119,644,463 and $131,920,520) 115,432,276 129,074,829
Other securities (Estimated market value of $3,047,766
and $2,961,534) 2,972,259 2,968,261
Available for sale-
Obligations of U.S. Government agencies 207,702,122 225,705,947
Obligations of states and
political subdivisions 12,129,510 8,142,334
Other securities 84,047,705 101,565,802
Loans 761,034,439 787,825,052
Allowance for loan losses (13,060,854) (13,000,000)
Bank premises and equipment, net 15,459,148 14,501,021
Other real estate owned 16,083,034 4,326,219
Interest receivable and other assets 34,081,174 36,877,084
--------------- ---------------
Total assets $ 1,409,173,450 $ 1,394,167,752
=============== ===============
LIABILITIES
Non-interest bearing demand deposits $ 124,132,141 $ 122,866,335
Interest bearing demand deposits 71,584,258 67,936,942
Savings deposits 464,861,931 439,381,209
Other time deposits 353,047,747 368,695,291
--------------- ---------------
Total deposits 1,013,626,077 998,879,777
Federal Home Loan Bank advances 225,000,000 225,000,000
Interest payable and other liabilities 7,495,032 8,557,831
--------------- ---------------
Total liabilities 1,246,121,109 1,232,437,608
--------------- ---------------
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized,
19,361,541 and 19,752,542 shares issued and outstanding) -- --
Surplus 53,849,324 58,988,726
Undivided profits 109,102,600 104,055,944
Net unrealized gains (losses) on securities
available for sale, net of tax 100,417 (1,314,526)
--------------- ---------------
Total stockholders' equity 163,052,341 161,730,144
--------------- ---------------
Total liabilities and stockholders' equity $ 1,409,173,450 $ 1,394,167,752
=============== ===============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-2-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended June 30,
2002 2001
---- ----
INTEREST INCOME
Interest and fees on loans $14,618,767 $18,660,267
Interest on investment securities-
Obligations of U.S. Government agencies 3,710,465 3,586,346
Obligations of states and political subdivisions 1,680,670 1,709,434
Other securities 1,224,599 2,243,795
Interest on Federal funds sold 117,272 81,355
----------- -----------
Total interest income 21,351,773 26,281,197
----------- -----------
INTEREST EXPENSE
Interest on deposits 5,562,924 9,849,897
Interest on borrowed funds 3,212,027 3,222,036
----------- -----------
Total interest expense 8,774,951 13,071,933
----------- -----------
NET INTEREST INCOME 12,576,822 13,209,264
PROVISION FOR LOAN LOSSES 1,350,000 900,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,226,822 12,309,264
----------- -----------
OTHER INCOME
Income from trust services 692,985 999,900
Service charges on deposit accounts 1,098,334 672,756
Security gains 730,526 47,281
Other 771,838 1,230,684
----------- -----------
Total other income 3,293,683 2,950,621
----------- -----------
OTHER EXPENSES
Salaries and employee benefits 3,526,014 3,426,186
Occupancy expense 519,815 509,332
Other 2,215,071 2,291,872
----------- -----------
Total other expenses 6,260,900 6,227,390
----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 8,259,605 9,032,495
PROVISION FOR INCOME TAXES 2,243,470 2,458,172
----------- -----------
NET INCOME $ 6,016,135 $ 6,574,323
=========== ===========
COMPREHENSIVE INCOME $ 9,170,550 $ 7,437,625
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.31 $ 0.33
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.31 $ 0.33
=========== ===========
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.13 $ 0.13
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-3-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended June 30,
2002 2001
---- ----
INTEREST INCOME
Interest and fees on loans $29,774,369 $37,427,644
Interest on investment securities-
Obligations of U.S. Government agencies 6,804,614 6,476,954
Obligations of states and political subdivisions 3,416,320 3,456,269
Other securities 2,808,294 4,932,441
Interest on Federal funds sold 274,520 245,074
----------- -----------
Total interest income 43,078,117 52,538,382
----------- -----------
INTEREST EXPENSE
Interest on deposits 11,461,173 20,442,121
Interest on borrowed funds 6,388,026 6,410,103
----------- -----------
Total interest expense 17,849,199 26,852,224
----------- -----------
NET INTEREST INCOME 25,228,918 25,686,158
PROVISION FOR LOAN LOSSES 4,100,000 5,300,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 21,128,918 20,386,158
----------- -----------
OTHER INCOME
Income from trust services 1,639,720 1,999,800
Service charges on deposit accounts 2,124,082 1,336,814
Security gains 737,536 47,281
Other 1,568,533 2,023,512
----------- -----------
Total other income 6,069,871 5,407,407
----------- -----------
OTHER EXPENSES
Salaries and employee benefits 7,133,175 6,693,030
Occupancy expense 1,047,682 1,122,817
Other 5,085,890 4,560,728
----------- -----------
Total other expenses 13,266,747 12,376,575
----------- -----------
INCOME BEFORE PROVISION FOR
INCOME TAXES 13,932,042 13,416,990
PROVISION FOR INCOME TAXES 3,803,415 3,649,403
----------- -----------
NET INCOME $10,128,627 $ 9,767,587
=========== ===========
COMPREHENSIVE INCOME $11,543,570 $14,293,436
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.52 $ 0.49
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.51 $ 0.49
=========== ===========
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.26 $ 0.24
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-4-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended June 30,
2002 2001
---- ----
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Interest and fees received $ 44,812,087 $ 51,197,504
Other income received 5,332,335 5,360,126
Miscellaneous receipts (payments) 638,879 (2,226,254)
Interest paid (18,007,125) (27,303,014)
Cash paid to employees and others (13,626,374) (12,123,362)
Income taxes paid (3,629,859) (3,090,000)
------------- -------------
Net cash provided by operating activities $ 15,519,943 $ 11,815,000
------------- -------------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions of investment securities held to maturity $ 32,468,701 $ 366,975,782
Proceeds from maturities and redemptions of investment securities available for sale 246,130,000 7,000,000
Proceeds from sales of investment securities available for sale 27,703,555 34,317,090
Net (increase) decrease in loans 10,185,487 (24,901,959)
Proceeds from sales of other real estate owned 636,394 656,008
Proceeds from sales of other assets 96,000 52,475
Purchase of investment securities held to maturity (4,794,339) (295,568,269)
Purchase of investment securities available for sale (239,358,022) (137,600,626)
Purchase of bank premises and equipment (1,914,358) (788,442)
------------- -------------
Net cash provided by (used for) investing activities $ 71,153,418 $ (49,857,941)
------------- -------------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Net increase in demand, interest bearing demand, and savings deposits $ 30,393,844 $ 55,237,005
Net decrease in other time deposits (15,647,544) (8,630,328)
Repurchase of common stock (5,139,402) (530,000)
Dividends paid (5,134,751) (4,400,000)
------------- -------------
Net cash provided by financing activities $ 4,472,147 $ 41,676,677
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS $ 91,145,508 $ 3,633,736
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 66,137,120 69,540,039
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF SIX MONTHS $ 157,282,628 $ 73,173,775
============= =============
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED FOR) OPERATING ACTIVITIES:
Net income $ 10,128,627 $ 9,767,587
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 956,231 1,000,218
Provision for loan losses 4,100,000 5,300,000
Decrease in net deferred Federal income tax asset 725,008 1,571,298
Amortization of investment premium and discount (28,149) (855,684)
Net increase (decrease) in interest payable and other liabilities (1,062,799) 957,764
Net (increase) decrease in interest receivable and other assets 2,070,902 (3,023,375)
Net increase in deferred loan fees 53,238 8,218
Other (1,423,115) (2,911,026)
------------- -------------
Net cash provided by operating activities $ 15,519,943 $ 11,815,000
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Transfer of loans to other real estate owned $ 12,512,743 $ 502,072
============= =============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-5-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
Other Total
Common Undivided Comprehensive Stockholders'
Stock Surplus Profits Income (Loss) Equity
------------ ------------ ------------ ------------ ------------
BALANCE
JANUARY 1, 2002 $ 0 $ 58,988,726 $104,055,944 $ (1,314,526) $161,730,144
ADD (DEDUCT)
Net income for the year 10,128,627 10,128,627
Net unrealized gains on securities
available for sale, net of tax 1,414,943 1,414,943
Repurchase of 391,001 shares of
common stock (5,139,402) (5,139,402)
Dividends declared-
Common ($.26 per share) (5,081,971) (5,081,971)
------------ ------------ ------------ ------------ ------------
BALANCE
JUNE 30, 2002 $ 0 $ 53,849,324 $109,102,600 $ 100,417 $163,052,341
============ ============ ============ ============ ============
The accompanying notes to consolidated financial statements are an integral part
of this statement.
-6-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of MBT
Financial Corp. (the "Corporation") and its subsidiary, Monroe Bank & Trust (the
"Bank"). The Bank operates twenty-one offices in Monroe County, Michigan and two
offices in Wayne County, Michigan. The Bank's primary source of revenue is from
providing loans to customers, who are predominantly small and middle-market
businesses and middle-income individuals.
At the April 6, 2000 Annual Meeting of Shareholders of Monroe Bank & Trust,
shareholders approved a proposal that resulted in the Bank reorganizing into a
one-bank holding company. The holding company formation involved merging Monroe
Bank & Trust with Monroe Interim Bank, a state chartered bank organized solely
for the purpose of this transaction. The merger of Monroe Bank & Trust and
Monroe Interim Bank, a combination of entities under common control, was treated
in a manner similar to a pooling of interests. The financial information for all
prior periods was restated in the unaudited consolidated financial statements
for MBT Financial Corp. to present the statements as if the merger had been in
effect for all periods presented.
The reorganization resulted in an exchange of the Monroe Bank & Trust common
stock for MBT Financial Corp. common stock. The exchange rate was two shares of
MBT Financial Corp. for each share of Monroe Bank & Trust. Monroe Bank & Trust
previously had 10,000,000 common shares authorized and outstanding, with a par
value of $3.125 per share. MBT Financial Corp. has 30,000,000 common shares
authorized, of which 19,361,541 are outstanding at June 30, 2002. The MBT
Financial Corp. common stock has no par value. Monroe Bank & Trust is now a
wholly owned subsidiary of MBT Financial Corp., a registered bank holding
company.
The accompanying unaudited consolidated financial statements of the Corporation
have been prepared in accordance with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting of normal
recurring adjustments), which are, in the opinion of Management, necessary for
fair statement of results for the interim periods.
Comprehensive Income is comprised of Net Income and Other Comprehensive Income,
which consists of the change in net unrealized gains (losses) on securities
available for sale, net of tax.
2. EARNINGS PER SHARE
The calculation of net income per common share for the quarters ended June 30 is
as follows:
2002 2001
----------- -----------
BASIC
Net income $ 6,016,135 $ 6,574,323
------------ ------------
Net income applicable to common stock $ 6,016,135 $ 6,574,323
------------ ------------
Average common shares outstanding 19,584,951 19,995,165
------------ ------------
Earnings per common share - basic $ 0.31 $ 0.33
============ ============
-7-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
2002 2001
----------- -----------
DILUTED
Net income $ 6,016,135 $ 6,574,323
=========== ===========
Net income applicable to common stock $ 6,016,135 $ 6,574,323
----------- -----------
Average common shares outstanding 19,584,951 19,995,165
Stock option adjustment 2,694 -
----------- -----------
Average common shares outstanding - diluted 19,587,645 19,995,165
----------- -----------
Earnings per common share - diluted $ 0.31 $ 0.33
=========== ===========
The calculation of net income per common share for the six months ended June 30
is as follows:
2002 2001
------------ -----------
BASIC
Net income $ 10,128,627 $ 9,767,587
============ ===========
Net income applicable to common stock $ 10,128,627 $ 9,767,587
------------ -----------
Average common shares outstanding 19,667,013 19,997,569
------------ -----------
Earnings per common share - basic $ 0.52 $ 0.49
============ ===========
2002 2001
------------ -----------
DILUTED
Net income $ 10,128,627 $ 9,767,587
============ ===========
Net income applicable to common stock $ 10,128,627 $ 9,767,587
------------ -----------
Average common shares outstanding 19,667,013 19,997,569
Stock option adjustment 1,441 -
------------ -----------
Average common shares outstanding - diluted 19,668,454 19,997,569
------------ -----------
Earnings per common share - diluted $ 0.51 $ 0.49
============ ===========
On January 2, 2002, the Corporation issued options for 183,515 shares of its
common stock to its non-employee directors and to certain key executives of the
Bank in accordance with the Long-Term Incentive Compensation Plan that was
approved by shareholders at the Annual Meeting of Shareholders on April 6, 2000.
The options were granted at the price of $13.85, which was the fair market value
of the Corporation's common stock on the date the options were granted. On
January 2, 2001, the Corporation issued options for 13,834 shares of its common
stock to its non-employee directors in accordance with the Long-Term Incentive
Compensation Plan. The options were granted at a price of $13.94, which was the
fair market value of the Corporation's common stock on the date the options were
granted. On July 1, 2000, the Corporation issued options for 126,600 shares of
its common stock to certain key executives of the Bank in accordance with the
Long-Term Incentive Compensation Plan. The options were granted at the price of
$18.125, which was the fair market value of the Corporation's common stock on
the date the options were granted. The average market value of the common stock
during the first six months of 2002 was $13.96. The average market value of the
common stock for the second quarter of 2002 was $14.05. The options granted on
July 1, 2000 have an anti-dilutive effect on the calculations of earnings per
share, and therefore have not been included.
-8-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
3. LOANS
The Bank grants commercial, consumer, and mortgage loans primarily to customers
in Monroe County, Michigan and surrounding areas. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent on the automotive, manufacturing, and real
estate development economic sectors.
Loans consist of the following (000s omitted):
June 30, December 31,
2002 2001
-----------------------------
Real estate loans $584,879 $595,255
Loans to finance agricultural production and
other loans to farmers 2,849 2,856
Commercial and industrial loans 93,492 99,979
Loans to individuals for household, family,
and other personal expenditures 80,963 90,675
All other loans (including overdrafts) 541 696
-----------------------------
Total loans, gross 762,724 789,461
Less: Deferred loan fees 1,690 1,636
-----------------------------
Total loans, net of deferred loan fees 761,034 787,825
Less: Allowance for loan losses 13,061 13,000
-----------------------------
$747,973 $774,825
=============================
Loans are placed in a nonaccrual status when, in the opinion of Management, the
collection of additional interest is doubtful. All loans internally classified
by Management as substandard or doubtful are reviewed for impairment. Allowances
for loans determined to be impaired are included in the allowance for loan
losses. All cash received on nonaccrual loans is applied to the principal
balance. Nonperforming assets consists of nonaccrual loans, loans 90 days or
more past due, restructured loans, real estate that has been acquired in full or
partial satisfaction of loan obligations or upon foreclosure, and investments
securities that are 90 days or more past due on the interest or principal
payments. The following table summarizes nonperforming assets (000's omitted):
June 30, December 31,
2002 2001
------------------------------
Nonaccrual loans $ 13,443 $ 22,712
Loans 90 days past due 409 450
Restructured loans 297 -
------------------------------
Total nonperforming loans $ 14,149 $ 23,162
Other real estate owned 16,083 4,326
Nonperforming investment securities 180 232
------------------------------
Total nonperforming assets $ 30,412 $ 27,720
==============================
Nonperforming assets to total assets 2.16% 1.99%
Allowance for loan losses to
nonperforming assets 42.95% 46.90%
-9-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000's omitted):
June 30, December 31,
2002 2001
------------------------------
Balance beginning of year $ 13,000 $ 10,600
Provision for loan losses 4,100 7,400
Loans charged off (4,571) (6,164)
Recoveries 532 1,164
------------------------------
Balance end of period $ 13,061 $ 13,000
==============================
For each period, the provision for loan losses in the income statement results
from the combination of an estimate by Management of loan losses that occurred
during the current period and the ongoing adjustment of prior estimates of
losses occurring in prior periods.
To serve as a basis for making this provision, the Bank maintains an extensive
credit risk monitoring process that considers several factors including: current
economic conditions affecting the Bank's customers, the payment performance of
individual large loans and pools of homogeneous small loans, portfolio
seasoning, changes in collateral values, and detailed reviews of specific large
loan relationships. For large loans deemed to be impaired due to an expectation
that all contractual payments will probably not be received, impairment is
measured by comparing the Bank's recorded investment in the loan to the present
value of expected cash flows discounted at the loan's effective interest rate,
the fair value of the collateral, or the loan's observable market price.
The provision for loan losses increases the allowance for loan losses, a
valuation account which is netted against loans on the consolidated statements
of condition. As the specific customer and amount of a loan loss is confirmed by
gathering additional information, taking collateral in full or partial
settlement of the loan, bankruptcy of the borrower, etc., the loan is charged
off, reducing the allowance for loan losses. If, subsequent to a charge off, the
Bank is able to collect additional amounts from the customer or sell collateral
worth more than earlier estimated, a recovery is recorded.
5. INVESTMENT SECURITIES
The following is a summary of the Bank's investment securities portfolio as of
June 30, 2002 and December 31, 2001 (000's omitted):
June 30, 2002 December 31, 2001
------------- -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
-------------------------- ---------------------------
Held to Maturity
Obligations of U.S. Government Agencies $ 16,010 $ 16,104 $ 30,044 $ 30,197
Obligations of States and Political
Subdivisions 115,432 119,644 129,075 131,921
Other Securities 2,972 3,048 2,968 2,961
-------------------------- ---------------------------
$ 134,414 $ 138,796 $ 162,087 $ 165,079
========================== ===========================
-10-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
June 30, 2002 December 31, 2001
------------- -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------------------- --------------------------
Available for Sale
Obligations of U.S. Government Agencies $ 206,415 $ 207,702 $ 226,027 $ 225,706
Obligations of States and Political
Subdivisions 12,281 12,130 8,646 8,142
Other Securities 85,029 84,048 102,763 101,566
------------------------- --------------------------
$ 303,725 $ 303,880 $ 337,436 $ 335,414
========================= ==========================
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for its other lending activities.
Financial instruments whose contractual amounts represent off-balance sheet
credit risk were as follows (000s omitted):
Contractual Amount
------------------------------
June 30, December 31,
2002 2001
------------------------------
Commitments to extend credit:
Unused portion of commercial lines of credit $ 79,868 $ 83,400
Unused portion of credit card lines of credit 9,870 9,394
Unused portion of home equity lines of credit 16,324 14,967
Standby letters of credit and financial guarantees written 18,129 17,968
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, generally have fixed expiration dates or other termination clauses,
and require payment of a fee. Since the lines of credit may expire without being
drawn upon, the total committed amounts do not necessarily represent future cash
requirements. Credit card lines of credit have no established expiration dates,
but are fundable on demand. Home equity lines of credit are secured by real
estate mortgages, have no established expiration dates, but are fundable on
demand. The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of the collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on Management's credit evaluation of the
counterparty.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements and
other business transactions.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Corporation's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of these terms. Actual results could differ materially
from those set forth in forward-looking statements, due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
The Corporation experienced a slight increase of $14.7 million in deposits since
the beginning of the year, representing a 1.5% increase. Demand Deposits
increased $4.9 million and Savings Deposits increased $25.5 million while Other
Time Deposits decreased $15.6 million as many customers have moved their money
to more liquid accounts due to the low interest rates. Local loan demand has
been slow, and mortgage loan refinance activity has continued, causing Loans to
decrease $26.8 million since the beginning of the year. Investment securities
have decreased $59.2 million since the beginning of the year as we have
experienced a high volume of bond calls. The increase in deposits, the lack of
loan growth, and the decrease in investments resulted in an increase of $72.8
million in Federal funds sold.
THREE MONTHS ENDED JUNE 30, 2002 AND 2001
A comparison of the income statements for the three months ended June 30, 2002
and 2001 shows a 4.8% decrease in Net Interest Income. The largest interest
income dollar change was in interest and fees on loans, decreasing $4.0 million,
or 21.7%. This was the result of a decrease of $99.0 million in average loans
outstanding and a decrease in the average yield on those loans from 8.34% to
7.33%. The decrease in loans outstanding was due to slow local loan demand, the
sales of portions of the bankcard and lease loan portfolios in 2001, and a
decrease in residential mortgage loans. Residential mortgage loans decreased as
the low interest rates enticed many of the Bank's customers to refinance their
adjustable rate loans with fixed rate loans, most of which are not held in the
Bank's portfolio. Although the average investment portfolio increased $45.6
million, the yield on those investments decreased from 7.13% to 5.79%. As a
result, interest income on investment securities decreased $924,000. The
decrease in market interest rates has caused new loan rates to drop and
refinance activity to increase. This also has led to an increase in calls in our
portfolio of Obligations of U.S. Government Agencies. We expect the decline in
asset yields to continue through the third quarter, as the possibility of a
double dip recession increases the prospects of further rate cuts by the Fed.
Even if the economic recovery continues, we do not expect increases in interest
rates in the near future.
Average interest bearing deposits decreased from $907 million to $879 million,
while at the same time the average cost of these deposits decreased from 4.35%
to 2.54%. The result was a large decrease in Interest on Deposits of $4.3
million, or 43.5%. Average borrowed funds decreased
-12-
from $226.0 million to $225.1 million while the average cost of these borrowings
increased from 5.64% to 5.65%. The borrowings primarily consist of Federal Home
Loan Bank advances, which were utilized to fund increased investment in earning
assets. The rapid decline in interest rates over the past year allowed us an
opportunity to lower the cost of our deposit sources of funds. While we do
expect to continue to lower the cost of our deposit sources of funds slightly
through the third quarter, the cost of our borrowed funds will not decrease.
The Provision for Loan Losses increased $450,000, or 50%. The Provision for Loan
Losses was higher in 2002 as a significant decline in the value of the
collateral of one large nonperforming loan necessitated an increase in the
Allowance for Loan Losses. Trust Income decreased $307,000, or 30.7%, mainly due
to the declining market values of trust assets. Service Charges on Deposit
Accounts increased $426,000, or 63.3%, primarily due to increases in overdraft
activity. Early in the second quarter of 2002 we sold some securities to fund
seasonal deposit fluctuations. These sales contributed to the security gains of
$731,000, an increase of $683,000 compared to 2001. Other income decreased
$459,000, or 37.3%. This was the result of the sale of a portion of our credit
card loan portfolio in 2001 for a gain of $408,000.
Salaries and Employee Benefits increased $100,000, Occupancy Expense increased
$10,000, and Other Expenses decreased $77,000, compared to the first quarter of
2001. These results were consistent with our expectations for the quarter.
As a result of the above activity, Income Before Provision for Income Taxes
showed a small decrease of $773,000, or 8.6%. The Provision for Income Taxes
decreased $215,000, or 8.7%, and reflects our anticipated annual effective tax
rate of 27.3%. Net Income decreased $558,000, or 8.5%.
The Corporation has maintained sufficient liquidity to fund its loan growth and
allow for fluctuations in deposit levels. Internal sources of liquidity are
provided by the maturities of loans and securities as well as holdings of
securities Available for Sale. External sources of liquidity include a line of
credit with the Federal Home Loan Bank of Indianapolis, and the Federal funds
lines that have been established with correspondent banks.
Total stockholders' equity of the Corporation was $163.1 million at June 30,
2002 and $161.7 million at December 31, 2001. The ratio of equity to assets was
11.6% at June 30, 2002 and December 31, 2001. Federal bank regulatory agencies
have set capital adequacy standards for Total Risk Based Capital, Tier 1 Risk
Based Capital, and Leverage Capital. These standards require banks to maintain
Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of at least
8% to be adequately capitalized. The regulatory agencies consider a bank to be
well capitalized if its Total Risk Based Capital is at least 10% of Risk
Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, and
Leverage Capital Ratio is at least 5%.
The following table summarizes the capital ratios of the Bank:
June 30, 2002 December 31, 2001
------------------- ---------------------
Leverage Capital 11.7% 11.6%
Tier 1 Risk Based Capital 17.4% 17.2%
Total Risk Based Capital 18.7% 18.4%
At June 30, 2002 and December 31, 2001, the Bank was in compliance with the
capital guidelines and is considered "well-capitalized" under regulatory
standards.
Market risk for the Bank, as is typical for most banks, consists mainly of
interest rate risk and market price risk. The Bank's earnings and the economic
value of its equity are exposed to interest rate risk and market price risk, and
monitoring this risk is the responsibility of the Asset/Liability Management
Committee (ALCO) of the Bank. The Bank's market risk is monitored monthly and it
has not changed significantly since year-end 2001.
-13-
SIX MONTHS ENDED JUNE 30, 2002 AND 2001
A comparison of the income statements for the six months ended June 30, 2002 and
2001 shows a 1.8% decrease in Net Interest Income. The largest interest income
dollar change was in interest and fees on loans, decreasing $7.7 million, or
20.4%. This was the result of a decrease of $82.8 million in average loans
outstanding and a decrease in the average yield on those loans from 8.52% to
7.42%. The decrease in loans outstanding was due to slow local loan demand, the
sales of portions of the bankcard and lease loan portfolios in 2001, and a
decrease in residential mortgage loans. Residential mortgage loans decreased as
the low interest rates enticed many of the Bank's customers to refinance their
adjustable rate loans with fixed rate loans, most of which are not held in the
Bank's portfolio. Although the average investment portfolio increased $51.7
million, the yield on those investments decreased from 7.17% to 5.74%. As a
result, interest income on investment securities decreased $1.8 million. The
decrease in market interest rates has caused new loan rates to drop and
refinance activity to increase. This also has led to an increase in calls in our
portfolio of Obligations of U.S. Government Agencies. We expect the decline in
asset yields to continue through the third quarter, as the possibility of a
double dip recession increases the prospects of further rate cuts by the Fed.
Even if the economic recovery continues, we do not expect increases in interest
rates in the near future.
Average interest bearing deposits decreased from $901 million to $890 million,
while at the same time the average cost of these deposits decreased from 4.58%
to 2.60%. The result was a large decrease in Interest on Deposits of $9.0
million, or 43.9%. Average borrowed funds decreased from $225.9 million to
$225.1 million while the average cost of these borrowings was unchanged at
5.65%. The borrowings primarily consist of Federal Home Loan Bank advances,
which were utilized to fund increased investment in earning assets. The rapid
decline in interest rates over the past year allowed us an opportunity to lower
the cost of our deposit sources of funds. While we do expect to continue to
lower the cost of our deposit sources of funds slightly through the third
quarter, the cost of our borrowed funds will not decrease.
The Provision for Loan Losses decreased $1.2 million, or 22.6%. The Provision
for Loan Losses was higher in 2001 as weakening economic conditions and
increasing nonperforming assets necessitated an increase in the Allowance for
Loan Losses. Trust Income decreased $360,000, or 18.0%, mainly due to the
declining market values of trust assets. Service Charges on Deposit Accounts
increased $787,000, or 58.9%, primarily due to increases in overdraft activity.
In 2002 we sold some securities to fund seasonal deposit fluctuations. These
sales contributed to the security gains of $737,000, an increase of $690,000
compared to 2001. Other income decreased $455,000, or 22.5%. This was the result
of the sale of a portion of our credit card loan portfolio in 2001 for a gain of
$408,000.
Salaries and Employee Benefits increased $440,000, Occupancy Expense decreased
$75,000, and Other Expenses increased $525,000, compared to the first six months
of 2001. These results were consistent with our expectations.
As a result of the above activity, Income Before Provision for Income Taxes
showed a small increase of $515,000, or 3.8%. The Provision for Income Taxes
increased $154,000, or 4.2%, and reflects our anticipated annual effective tax
rate of 27.3%. Net Income increased $361,000, or 3.7%.
-14-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank faces market risk to the extent that the fair values of its financial
instruments are affected by changes in interest rates. The Bank does not face
market risk due to changes in foreign currency exchange rates, commodity prices,
or equity prices. The asset and liability management process of the Bank seeks
to monitor and manage the amount of interest rate risk. This is accomplished by
analyzing the differences in repricing opportunities for assets and liabilities,
by simulating operating results under varying interest rate scenarios, and by
estimating the change in the net present value of the Bank's assets and
liabilities due to interest rate changes.
Each month, the Asset and Liability Committee (ALCO), which includes the senior
management of the Bank, estimates the effect of interest rate changes on the
projected net interest income of the Bank. The sensitivity of the Bank's net
interest income to changes in interest rates is measured by using a computer
based simulation model to estimate the impact on earnings of a gradual increase
or decrease of 100 basis points in the prime rate. The net interest income
projections are compared to a base case projection, which assumes no changes in
interest rates. The table below summarizes the net interest income sensitivity
as of June 30, 2002 compared to December 31, 2001.
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ---------- ------ ------
June 30, 2002 12 Month Projection
Interest Income 83,174 87,724 79,540
Interest Expense 34,084 37,492 31,598
---------- ------ ------
Net Interest Income 49,090 50,232 47,942
Percent Change From Base Projection 2.3% -2.3%
ALCO Policy Limit (+/-) 5.0% 5.0%
</Table>
<Table>
<Caption>
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ---------- ------ ------
December 31, 2001 12 Month Projection
Interest Income 88,287 92,410 84,510
Interest Expense 37,013 40,229 34,783
------ ------ ------
Net Interest Income 51,274 52,181 49,727
Percent Change From Base Projection 1.8% -3.0%
ALCO Policy Limit (+/-) 5.0% 5.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in the Bank's projected net interest income, in
its policy. Throughout the first six months of 2002, the estimated variability
of the net interest income was within the Bank's established policy limits.
The ALCO also monitors interest rate risk by estimating the effect of changes in
interest rates on the economic value of the Bank's equity each month. The actual
economic value of the Bank's equity is first determined by subtracting the fair
value of the Bank's liabilities from the fair value of the Bank's assets. The
fair values are determined in accordance with Statement of Financial Accounting
Standards Number 107, Disclosures about Fair Value of Financial Instruments. The
Bank estimates the interest rate risk by calculating the effect of market
interest rate shocks on the economic value of its equity. For this analysis, the
Bank assumes immediate increases or decreases of 100 and 200 basis points in the
prime lending rate. The discount rates used to determine the present values of
the loans and deposits, as well as the prepayment rates for the loans, are based
on Management's expectations of the effect of the rate shock on the market for
loans and deposits. The table below summarizes the amount of interest rate risk
to the fair value of the Bank's assets and liabilities and to the economic value
of the Bank's equity.
-15-
Fair Value at June 30, 2002
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- ---------------------------------------------------------------
Assets 1,426,893 1,404,938 1,383,180 1,449,127 1,471,898
Liabilities 1,230,125 1,197,135 1,166,163 1,265,349 1,298,641
---------------------------------------------------------------
Stockholders' Equity 196,768 207,803 217,017 183,778 173,257
Change in Equity 5.6% 10.3% -6.6% -11.9%
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
Fair Value at December 31, 2001
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- ---------------------------------------------------------------
Assets 1,443,434 1,413,138 1,386,039 1,468,405 1,491,722
Liabilities 1,234,305 1,201,405 1,170,838 1,269,827 1,304,571
---------------------------------------------------------------
Stockholders' Equity 209,129 211,733 215,201 198,578 187,151
Change in Equity 1.2% 2.9% -5.0% -10.5%
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. Throughout the first six months of 2002, the estimated variability of
the economic value of equity was within the Bank's established policy limits.
-16-
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of MBT Financial Corp. was held on
May 2, 2002.
(b) The following directors were elected to a new term of office:
Connie S. Cape
Ronald J. Gruber
Thomas M. Huner
Gerald L. Kiser
Ronald D. LaBeau
Rocque E. Lipford
William D. McIntyre, Jr.
Michael J. Miller
Richard A. Sieb
Philip P. Swy
(c) The Annual Meeting of Shareholders of MBT Financial Corp. was held for
the following purposes:
1. To elect a Board of Directors for the ensuing year;
2. To transact such other business as may properly
come before the meeting or any adjournment thereof.
The results of the voting are as follows:
Proposal 1, Election of Directors:
Withhold
For Authority
----------------------------
Connie S. Cape 14,061,723 134,567
Ronald J. Gruber 14,081,909 114,381
Thomas M. Huner 14,082,213 114,077
Gerald L. Kiser 14,163,613 32,677
Ronald D. LaBeau 13,844,611 351,679
Rocque E. Lipford 13,303,562 892,728
William D. McIntyre, Jr. 13,474,911 721,379
Michael J. Miller 14,082,813 113,477
Richard A. Sieb 14,157,193 39,097
Philip P. Swy 14,082,413 113,877
-17-
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as a part of this report:
99.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MBT Financial Corp.
------------------------------
(Registrant)
August 12, 2002 /s/ Ronald D. LaBeau
- ------------------ ------------------------------
Date Ronald D. LaBeau
President
August 12, 2002 /s/ Eugene D. Greutman
- ------------------ --------------------------
Date Eugene D. Greutman
Treasurer
-19-
EXHIBIT INDEX
99.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to section 906 of the Sarbanes-Oxley Act of
2002.