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 March 31, 2003
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File Number: 000-30973
MBT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Michigan 38-3516922
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
102 E. Front Street
Monroe, Michigan 48161
(Address of principal executive offices)
(Zip Code)
(734) 241-3431
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of May 13, 2003, there were 19,110,441 shares of the Corporation's Common
Stock outstanding.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CONDITION
(AMOUNTS IN THOUSANDS)
March 31 December 31,
2003 2002
---- ----
ASSETS
Cash and due from banks $ 22,308 $ 30,618
Federal funds sold 0 13,000
Investment securities
Held to maturity-
Obligations of U.S. Government agencies (Estimated market value of $559 and $649) 573 588
Obligations of states and political subdivisions (Estimated market value of
$109,656 and $117,967) 105,178 113,255
Other securities (Estimated market value of $2,899 and $2,975) 2,978 2,976
Available for sale-
Obligations of U.S. Government agencies 367,580 325,131
Obligations of states and political subdivisions 18,349 14,723
Other securities 85,795 83,064
Loans 804,581 773,360
Loans held for sale 448 445
Allowance for loan losses (13,096) (12,400)
Bank premises and equipment, net 16,623 15,437
Other real estate owned 12,086 15,088
Interest receivable and other assets 36,960 34,409
------------ ------------
Total assets $1,460,363 $1,409,694
============ ============
LIABILITIES
Non-interest bearing demand deposits $ 119,034 $ 123,596
Interest bearing demand deposits 66,600 69,756
Savings deposits 487,421 470,192
Other time deposits 361,820 347,416
------------ ------------
Total deposits 1,034,875 1,010,960
Federal funds purchased 24,900 0
Federal Home Loan Bank advances 225,000 225,000
Interest payable and other liabilities 8,039 6,735
------------ ------------
Total liabilities 1,292,814 1,242,695
------------ ------------
STOCKHOLDERS' EQUITY
Common stock (no par value; 30,000,000 shares authorized, 19,110,441 and
19,160,441 shares issued and outstanding) 0 0
Surplus 50,421 51,080
Undivided profits 117,777 115,395
Net unrealized gains (losses) on securities available for sale, net of tax (649) 524
------------ ------------
Total stockholders' equity 167,549 166,999
------------ ------------
Total liabilities and stockholders' equity $1,460,363 $1,409,694
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-2-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31,
2003 2002
---- ----
INTEREST INCOME
Interest and fees on loans $ 13,816 $ 15,156
Interest on investment securities-
Obligations of U.S. Government agencies 3,075 3,094
Obligations of states and political subdivisions 1,608 1,735
Other securities 1,005 1,584
Interest on Federal funds sold 55 157
----------- -----------
Total interest income 19,559 21,726
----------- -----------
INTEREST EXPENSE
Interest on deposits 4,363 5,898
Interest on borrowed funds 3,192 3,176
----------- -----------
Total interest expense 7,555 9,074
----------- -----------
NET INTEREST INCOME 12,004 12,652
PROVISION FOR LOAN LOSSES 825 2,750
----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 11,179 9,902
----------- -----------
OTHER INCOME
Income from trust services 873 947
Service charges on deposit accounts 1,245 1,026
Security gains 172 7
Other 913 796
----------- -----------
Total other income 3,203 2,776
----------- -----------
OTHER EXPENSES
Salaries and employee benefits 4,222 3,607
Occupancy expense 668 528
Other 2,484 2,871
----------- -----------
Total other expenses 7,374 7,006
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 7,008 5,672
PROVISION FOR INCOME TAXES 1,951 1,560
----------- -----------
NET INCOME $ 5,057 $ 4,112
=========== ===========
COMPREHENSIVE INCOME $ 3,884 $ 2,373
=========== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.26 $ 0.21
=========== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.26 $ 0.21
=========== ===========
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.14 $ 0.13
=========== ===========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
-3-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands)
Three Months Ended March 31,
2003 2002
---- ----
CASH FLOWS PROVIDED BY (USED FOR)
OPERATING ACTIVITIES:
Net income $ 5,057 $ 4,112
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 567 475
Provision for loan losses 825 2,750
(Increase) decrease in net deferred Federal income tax asset (887) (380)
Amortization of investment premium and discount 18 (24)
Net increase (decrease) in interest payable and other liabilities 1,304 (639)
Net (increase) decrease in interest receivable and other assets (1,663) 794
Net increase (decrease) in deferred loan fees 51 22
Other (551) 1,003
--------- ---------
Net cash provided by operating activities $ 4,721 $ 8,113
--------- ---------
CASH FLOWS PROVIDED BY (USED FOR)
INVESTING ACTIVITIES:
Proceeds from maturities and redemptions of investment securities held to maturity $ 9,621 $ 23,393
Proceeds from maturities and redemptions of investment securities available for sale 141,070 107,475
Proceeds from sales of investment securities available for sale 25,664 0
Net (increase) decrease in loans (30,953) 17,111
Proceeds from sales of other real estate owned 3,457 447
Proceeds from sales of other assets 113 51
Purchase of investment securities held to maturity (877) (4,051)
Purchase of investment securities available for sale (217,843) (174,544)
Purchase of bank premises and equipment (1,754) (1,231)
--------- ---------
Net cash used for investing activities $ (71,502) $ (31,349)
--------- ---------
CASH FLOWS PROVIDED BY (USED FOR)
FINANCING ACTIVITIES:
Net increase in deposits $ 23,915 $ 21,163
Net increase in Federal funds purchased 24,900 0
Repurchase of common stock (659) (312)
Dividends paid (2,685) (2,570)
--------- ---------
Net cash provided by financing activities $ 45,471 $ 18,281
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (21,310) $ (4,955)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,618 66,137
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THREE MONTHS $ 22,308 $ 61,182
========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Other Total
Common Undivided Comprehensive Stockholders'
Stock Surplus Profits Income (Loss) Equity
------------ ------------ -------------- --------------- --------------
BALANCE
JANUARY 1, 2003 $ 0 $ 51,080 $ 115,395 $ 524 $ 166,999
ADD (DEDUCT)
Net income for the year 5,057 5,057
Net unrealized losses on securities
available for sale, net of tax
(Note 5) (1,173) (1,173)
Repurchase of 50,000 shares of
common stock (659)
Dividends declared-
Common ($.14 per share) (2,675) (2,675)
------------ ------------ -------------- ---------------- --------------
BALANCE
MARCH 31, 2003 $ 0 $ 50,421 $ 117,777 $ (649) $ 167,549
============ ============ ============== ================ ==============
The accompanying notes to consolidated financial statements are an integral part
of this statement.
-5-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of MBT
Financial Corp. (the "Corporation") and its subsidiary, Monroe Bank & Trust (the
"Bank"). The Bank includes the accounts of its wholly owned subsidiaries, MBT
Credit Company, Inc. and MB&T Financial Services, Inc. The Bank operates
twenty-one offices in Monroe County, Michigan and two offices in Wayne County,
Michigan. MBT Credit Company, Inc. operates a mortgage loan office in Monroe
County and a loan and trust office in Wayne County. The Bank's primary source of
revenue is from providing loans to customers, who are predominantly small and
middle-market businesses and middle-income individuals. The Corporation's sole
business segment is community banking.
At the April 6, 2000 Annual Meeting of Shareholders of Monroe Bank & Trust,
shareholders approved a proposal that resulted in the Bank reorganizing into a
one-bank holding company. The holding company formation involved merging Monroe
Bank & Trust with Monroe Interim Bank, a state chartered bank organized solely
for the purpose of this transaction. The merger of Monroe Bank & Trust and
Monroe Interim Bank, a combination of entities under common control, was treated
in a manner similar to a pooling of interests. The financial information for all
prior periods was restated in the unaudited consolidated financial statements
for MBT Financial Corp. to present the statements as if the merger had been in
effect for all periods presented.
The reorganization resulted in an exchange of the Monroe Bank & Trust common
stock for MBT Financial Corp. common stock. The exchange rate was two shares of
MBT Financial Corp. for each share of Monroe Bank & Trust. Monroe Bank & Trust
previously had 10,000,000 common shares authorized and outstanding, with a par
value of $3.125 per share. MBT Financial Corp. has 30,000,000 common shares
authorized, of which 19,110,441 are outstanding at March 31, 2003. The MBT
Financial Corp. common stock has no par value. Monroe Bank & Trust is now a
wholly owned subsidiary of MBT Financial Corp., a registered bank holding
company.
The accompanying unaudited consolidated financial statements of the Corporation
have been prepared in accordance with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting of normal
recurring adjustments), which are, in the opinion of Management, necessary for
fair statement of results for the interim periods.
Comprehensive Income is comprised of Net Income and Other Comprehensive Income,
which consists of the change in net unrealized gains (losses) on securities
available for sale, net of tax.
2. EARNINGS PER SHARE
The calculation of net income per common share for the quarters ended March 31
is as follows:
2003 2002
------------- -------------
BASIC
Net income $ 5,057,054 $ 4,112,492
------------- -------------
Net income applicable to common stock $ 5,057,054 $ 4,112,492
------------- -------------
Average common shares outstanding 19,134,441 19,749,986
------------- -------------
Earnings per common share - basic $ 0.26 $ 0.21
============= =============
-6-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
2003 2002
------------ ------------
DILUTED
Net income $ 5,057,054 $ 4,112,492
------------ ------------
Net income applicable to common stock $ 5,057,054 $ 4,112,492
------------ ------------
Average common shares outstanding 19,134,441 19,749,986
Stock option adjustment - 1,762
------------ ------------
Average common shares outstanding - diluted 19,134,441 19,751,748
------------ ------------
Earnings per common share - diluted $ 0.26 $ 0.21
============ ============
The following table summarizes the options that have been granted to
non-employee directors and certain key executives in accordance with the
Long-Term Incentive Compensation Plan that was approved by shareholders at the
Annual Meeting of Shareholders on April 6, 2000.
Weighted Average
Shares Exercise Price
- -----------------------------------------------------------------------------
Options Outstanding, January 1 323,949 $15.52
Granted 179,500 13.20
Exercised - -
Cancelled - -
- -----------------------------------------------------------------------------
Options Outstanding, March 31 503,449 $14.69
- -----------------------------------------------------------------------------
Options Exercisable, March 31 212,617 $16.40
- -----------------------------------------------------------------------------
The average market value of the common stock during the first quarter of 2003
was $13.1953. All of the options that were outstanding on March 31, 2003 have an
anti-dilutive effect on the calculations of earnings per share, and therefore
have not been included.
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):
March 31, December 31,
2003 2002
------------------------------
Real estate loans $638,148 $610,530
Loans to finance agricultural production and
other loans to farmers 2,284 2,182
Commercial and industrial loans 98,490 91,717
Loans to individuals for household, family,
and other personal expenditures 67,313 70,404
All other loans (including overdrafts) 436 563
------------------------------
Total loans, gross 806,671 775,396
Less: Deferred loan fees 1,642 1,591
------------------------------
Total loans, net of deferred loan fees 805,029 773,805
Less: Allowance for loan losses 13,096 12,400
------------------------------
$791,933 $761,405
==============================
-7-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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):
March 31, December 31,
2003 2002
------------------------------
Nonaccrual loans $ 25,160 $ 22,332
Loans 90 days past due 1,161 81
Restructured loans 5,890 6,807
------------------------------
Total nonperforming loans $ 32,211 $ 29,220
Other real estate owned 12,086 15,088
Nonperforming investment securities 79 88
------------------------------
Total nonperforming assets $ 44,376 $ 44,396
==============================
Nonperforming assets to total assets 3.04% 3.15%
Allowance for loan losses to
nonperforming assets 29.51% 27.93%
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000's omitted):
March 31, December 31,
2003 2002
------------------------------
Balance beginning of year $ 12,400 $ 13,000
Provision for loan losses 825 6,101
Loans charged off (336) (8,697)
Recoveries 207 1,996
------------------------------
Balance end of period $ 13,096 $ 12,400
==============================
For each period, the provision for loan losses in the income statement results
from the combination of an estimate by Management of loan losses that occurred
during the current period and the ongoing adjustment of prior estimates of
losses occurring in prior periods.
-8-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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, 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
March 31, 2003 and December 31, 2002 (000's omitted):
March 31, 2003 December 31, 2002
-------------- -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------------------------ -----------------------------
Held to Maturity
- ----------------
Obligations of U.S. Government Agencies $ 573 $ 559 $ 588 $ 649
Obligations of States and Political
Subdivisions 105,178 109,656 113,255 117,967
Other Securities 2,978 2,899 2,976 2,975
------------------------------ -----------------------------
$ 108,729 $ 113,114 $ 116,819 $ 121,591
============================== =============================
March 31, 2003 December 31, 2002
-------------- -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
------------------------------ -----------------------------
Available for Sale
- ------------------
Obligations of U.S. Government Agencies $ 366,749 $ 367,580 $ 322,878 $ 325,131
Obligations of States and Political
Subdivisions 18,385 18,349 14,680 14,723
Other Securities 87,587 85,795 84,554 83,064
------------------------------ -----------------------------
$ 472,721 $ 471,724 $ 422,112 $ 422,918
============================== =============================
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of condition.
-9-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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
---------------------------------
March 31, December 31,
2003 2002
---------------------------------
Commitments to extend credit:
Unused portion of commercial lines of credit $ 99,313 $ 97,402
Unused portion of credit card lines of credit 9,901 10,018
Unused portion of home equity lines of credit 17,215 16,953
Standby letters of credit and financial guarantees written 19,031 17,320
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, generally have fixed expiration dates or other termination clauses,
and require payment of a fee. Since the lines of credit may expire without being
drawn upon, the total committed amounts do not necessarily represent future cash
requirements. Credit card lines of credit have various established expiration
dates, but are fundable on demand. Home equity lines of credit are secured by
real estate mortgages, a majority of which have ten year expiration dates, but
are fundable on demand. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of the collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on Management's credit evaluation
of the counterparty.
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.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Corporation's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of these terms. Actual results could differ materially
from those set forth in forward-looking statements, due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
The Corporation's total deposits increased $23.9 million, or 2.4% since the
beginning of the year. Demand Deposits decreased $7.7 million while Savings
Deposits increased $17.2 million and Other Time Deposits increased $14.4
million. The Corporation typically experiences this level of deposit growth in
the first quarter as local municipalities are depositing their annual tax
collections. Local loan demand has begun to increase, and with our expansion
into the downriver area, Loans increased $31.2 million since the beginning of
the year. Federal funds sold decreased $13.0 million and Federal funds purchased
increased $24.9 million. The deposit growth and the change in the federal funds
position were used to fund the loan growth and an increase of $40.7 million in
investment securities. A majority of our investment portfolio consists of
callable bonds, and we used overnight borrowings to purchase bonds to replace
those that are expected to be called in the second quarter.
The Bank purchased insurance on the lives of each of its directors in the second
half of 2000. The Bank also entered into split dollar life insurance agreements
with them at that time, agreeing to divide death benefits under the insurance
policies with directors' designated beneficiaries. The Bank paid the premiums
for these policies with a lump sum premium payment of $4.9 million. A director's
beneficiaries will receive a fixed amount based on the director's years of
service, ranging from $500,000 for service of fewer than three years to $1
million for service of ten years or more. Because the amount of insurance
purchased in 2000 was later determined to be insufficient to assure the Bank of
recovery of BOLI cash surrender value incident to the death benefit promised to
directors, the Bank purchased additional insurance on the directors' lives in
the second quarter of 2003, paying a premium of approximately $3.3 million for
policies on the lives of directors who have remained on the board since 2000 and
a premium of approximately $457,000 for policies on the life of a director whose
service began in 2003. Including these premiums, the total premiums paid by the
bank in the second quarter of 2003 for insurance on the lives of its directors
and executive officers was $15.0 million.
The policies' cash surrender value is recorded as an asset (Interest Receivable
and Other Assets). The Bank owns the cash surrender value, including accumulated
policy earnings. At the end of the
-11-
first quarter of 2003, the total cash surrender value of bank owned life
insurance included in Interest Receivable and Other Assets was $17.2 million,
compared to $17.0 million at December 31, 2002. Changes in cash surrender value
are recorded in the income statement as Other Income. After payment of the
promised death benefit to the insured person's beneficiaries, the Bank receives
all remaining death benefits. At the death of the insured person and
distribution of policy death benefits, the Bank expects to recover in full the
premiums paid, along with earnings credited to the policies' cash value. Until
the second quarter 2003 additional BOLI premium purchase of $3.3 million on the
lives of the nine directors originally insured in 2000, the Bank would not have
received recovery in full of its BOLI cash surrender value had claims on the
nine directors' insurance policies been paid.
RESULTS OF OPERATIONS
A comparison of the income statements for the three months ended March 31, 2003
and 2002 shows a 5.1% decrease in Net Interest Income. The largest interest
income dollar change was in interest and fees on loans, decreasing $1.3 million,
or 8.8%. Although average loans outstanding increased $9.4 million, the average
yield on those loans decreased from 7.51% to 6.73%. Although the average
investment portfolio increased $26.0 million, the yield on those investments
decreased from 4.96% to 4.21%. As a result, interest income on investment
securities decreased $0.7 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 second
quarter, as the uncertain economic environment increases the prospects of
further rate cuts by the Federal Reserve. Even if the economic recovery
continues, we do not expect increases in interest rates in the near future.
Average deposits increased from $1.018 billion to $1.141 billion, while at the
same time the average cost of these deposits decreased from 2.35% to 1.71%. The
result was a decrease in Interest on Deposits of $1.5 million, or 26.0%. Average
borrowed funds increased from $225.0 million to $229.3 million while the average
cost of these borrowings was decreased from 5.72% 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 last two years allowed us an opportunity to lower the cost of our
deposit sources of funds. We expect to continue to lower the average cost of our
deposits during the second quarter. Also, we expect to lower the cost of our non
deposit sources of funds in the second quarter due to a restructuring of our
portfolio of Federal Home Loan Bank borrowings.
The Provision for Loan Losses decreased $1.9 million, or 70% as the Corporation
aggressively addressed credit quality concerns in the first quarter of 2002.
Although non performing loans increased in the first quarter of 2003, management
has analyzed the credits involved and believes that the amount provided will be
sufficient to maintain an adequate Allowance for Loan Losses. Trust Income
decreased $74,000, or 7.8%, mainly due to the declining market values of trust
assets. Service Charges on Deposit Accounts increased $219,000, or 21.4%, due to
increases in overdraft activity and changes in fees. Other income increased
$117,000, or 14.7%. This was primarily due to the continued low interest rate
environment, which has allowed mortgage loan origination fees to remain strong.
Salaries and Employee Benefits increased $615,000, and Occupancy Expense
increased $140,000, largely due to the Bank's expansion into the southern Wayne
County area. Other Expenses decreased $387,000 due to losses on ORE and higher
state taxes in the first quarter of 2003. These results were consistent with our
expectations for the quarter.
As a result of the above activity, Income Before Provision for Income Taxes
increased $1.3 million, or 23.6%. The Provision for Income Taxes increased
$391,000, or 25.1%, and reflects our anticipated annual effective tax rate of
27.8%. Net Income increased $945,000, or 23.0%.
-12-
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 $167.5 million at March 31,
2003 and $167.0 million at December 31, 2002. The ratio of equity to assets was
11.5% at March 31, 2003 and 11.8% at December 31, 2002. Federal bank regulatory
agencies have set capital adequacy standards for Total Risk Based Capital, Tier
1 Risk Based Capital, and Leverage Capital. These standards require banks to
maintain Leverage and Tier 1 ratios of at least 4% and a Total Capital ratio of
at least 8% to be adequately capitalized. The regulatory agencies consider a
bank to be well capitalized if its Total Risk Based Capital is at least 10% of
Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk Weighted Assets, and
Leverage Capital Ratio is at least 5%.
The following table summarizes the capital ratios of the Bank:
March 31, 2003 December 31, 2002
------------------ ----------------------
Leverage Capital 11.7% 11.8%
Tier 1 Risk Based Capital 17.3% 17.8%
Total Risk Based Capital 18.5% 19.0%
At March 31, 2003 and December 31, 2002, the Bank was in compliance with the
capital guidelines and is considered "well-capitalized" under regulatory
standards.
Market risk for the Bank, as is typical for most banks, consists mainly of
interest rate risk and market price risk. The Bank's earnings and the economic
value of its equity are exposed to interest rate risk and market price risk, and
monitoring this risk is the responsibility of the Asset/Liability Management
Committee (ALCO) of the Bank. The Bank's market risk is monitored monthly and it
has not changed significantly since year-end 2002.
-13-
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 March 31, 2003 compared to December 31, 2002.
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ------------ ----------- ------------
March 31, 2003 12 Month Projection
- ----------------------------------
Interest Income 78,273 84,421 76,069
Interest Expense 30,326 35,516 28,539
------------ ----------- ------------
Net Interest Income 47,947 48,905 47,530
Percent Change From Base Projection 2.0% -0.9%
ALCO Policy Limit (+/-) 5.0% 5.0%
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ------------ ----------- ------------
December 31, 2002 12 Month Projection
- -------------------------------------
Interest Income 78,601 85,829 76,840
Interest Expense 29,671 34,654 27,837
------------ ----------- ------------
Net Interest Income 48,930 51,175 49,003
Percent Change From Base Projection 4.6% 0.1%
ALCO Policy Limit (+/-) 5.0% 5.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in the Bank's projected net interest income, in
its policy. Throughout the first three months of 2003, the estimated variability
of the net interest income was within the Bank's established policy limits.
The ALCO also monitors interest rate risk by estimating the effect of changes in
interest rates on the economic value of the Bank's equity each month. The actual
economic value of the Bank's equity is first determined by subtracting the fair
value of the Bank's liabilities from the fair value of the Bank's assets. The
fair values are determined in accordance with Statement of Financial Accounting
Standards Number 107, Disclosures about Fair Value of Financial Instruments. The
Bank estimates the interest rate risk by calculating the effect of market
interest rate shocks on the economic value of its equity. For this analysis, the
Bank assumes immediate parallel shifts of plus or minus 100 and 200 basis points
in interest rates. Currently, the minus 200 shift does not produce meaningful
results. The discount rates used to determine the present values of the loans
and deposits, as well as the prepayment rates for the loans, are based on
Management's expectations of the effect of the rate shock on the market for
loans and deposits. The table below
-14-
summarizes the amount of interest rate risk to the fair value of the Bank's
assets and liabilities and to the economic value of the Bank's equity.
Fair Value at March 31, 2003
----------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- ------------------------------------------------------------------
Assets 1,464,676 1,445,146 1,425,025 1,483,724 n/a
Liabilities 1,302,134 1,269,916 1,239,081 1,335,829 n/a
------------------------------------------------------------------
Stockholders' Equity 162,542 175,230 185,944 147,895 n/a
Change in Equity 7.8% 14.4% -9.0% n/a
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
Fair Value at December 31, 2002
-------------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2%
---------------------- ------------------------------------------------------------------
Assets 1,423,339 1,403,002 1,382,282 1,443,392 1,463,252
Liabilities 1,252,659 1,221,105 1,190,916 1,285,665 1,308,038
------------------------------------------------------------------
Stockholders' Equity 170,680 181,897 191,366 157,727 155,214
Change in Equity 6.6% 12.1% -7.6% -9.1%
ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. Throughout the first three months of 2003, the estimated variability of
the economic value of equity was within the Bank's established policy limits.
The Bank's interest rate risk, as measured by the net interest income and
economic value of equity simulations, increased slightly in the first quarter of
2003. In order to reduce the interest rate risk, the Bank restructured its
portfolio of Federal Home Loan Bank advances in April, 2003. The restructuring
consisted of converting $55 million of fixed rate, putable advances, which had
an average cost of 5.95%, to variable rate advances which will reset quarterly
at an average rate of 3 month LIBOR plus 2.09%. This lowered the average cost of
these advances to 3.41%. The tables below show the sensitivity of net interest
income and economic value of equity to changes in interest rates including the
impact of the restructuring.
Base Rates Rates
(Dollars in Thousands) Projection Up 1% Down 1%
---------------------- ------------ ----------- ------------
March 31, 2003 12 Month Projection
- ----------------------------------
Interest Income 78,312 81,134 77,285
Interest Expense 28,935 31,815 27,955
------------ ----------- ------------
Net Interest Income 49,377 49,319 49,330
Percent Change From Base Projection -0.1% -0.1%
ALCO Policy Limit (+/-) 5.0% 5.0%
Fair Value at March 31, 2003
----------------------------
Rates
(Dollars in Thousands) Base Up 1% Up 2% Down 1% Up 4%
---------------------- ------------------------------------------------------------------
Assets 1,464,676 1,445,274 1,425,148 1,483,865 1,385,455
Liabilities 1,302,134 1,274,441 1,246,467 1,333,997 1,193,806
------------------------------------------------------------------
Stockholders' Equity 162,542 170,833 178,681 149,868 191,649
Change in Equity 5.1% 9.9% -7.8% 17.9%
ALCO Policy Limit (+/-) 15.0% 25.0% 25.0% n/a
-15-
ITEM 4. CONTROLS AND PROCEDURES
DISCLOSURE OF EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company (including
its consolidated subsidiaries) required to be included in the Company's periodic
SEC filings.
There were no significant changes made in the Company's internal controls or in
other factors that could significantly affect these internal controls subsequent
to the date of the evaluation performed by the Company's Chief Executive Officer
and Chief Financial Officer.
-16-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation may from time to time be involved in legal proceedings occurring
in the ordinary course of business which in the aggregate involve amounts which
are believed by management to be immaterial to the financial condition of the
Corporation. The Corporation is not currently involved in any legal proceedings
which management believes are of a material nature.
-17-
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.
(b) Reports on Form 8-K
No reports were filed on Form 8-K in the three months ended March 31, 2003.
-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)
May 14, 2003 /s/ Ronald D. LaBeau
- ------------------ ----------------------------------
Date Ronald D. LaBeau
Chairman &
Chief Executive Officer
May 14, 2003 /s/ John L. Skibski
- --------------------------- ----------------------------------
Date John L. Skibski
Chief Financial Officer
-19-
CERTIFICATIONS
I, Ronald D. LaBeau, President and Chief Executive Officer of MBT Financial
Corp., certify that:
1. I have reviewed this quarterly report on Form 10-Q of MBT Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
May 14, 2003 /s/ Ronald D. LaBeau
- ------------------ ----------------------------------
Date Ronald D. LaBeau
Chairman &
Chief Executive Officer
-20-
I, John L. Skibski, Chief Financial Officer of MBT Financial Corp., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of MBT Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. Designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
May 14, 2003 /s/ John L. Skibski
- --------------------------- ---------------------------------
Date John L. Skibski
Chief Financial Officer
-21-
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX-99.1 Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-99.2 Certification pursuant to 18 U.S.C., Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002