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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2004
Or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-30973
MBT FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Michigan 38-3516922
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
102 E. FRONT STREET
MONROE, MICHIGAN 48161
(Address of principal executive offices)
(Zip Code)
(734) 241-3431
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of November 4, 2004, there were 17,378,680 shares of the Corporation's Common
Stock outstanding.
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MBT FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS - UNAUDITED
SEPTEMBER 30, DECEMBER 31,
Dollars in thousands 2004 2003
- ------------------------------------------------ -------------- -------------
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 27,110 $ 22,525
-------------- -------------
Total cash and cash equivalents 27,110 22,525
Securities - Held to Maturity 88,045 99,154
Securities - Available for Sale 417,350 397,642
Federal Home Loan Bank stock - at cost 12,810 11,686
Loans held for sale 371 1,406
Loans - Net 930,036 847,944
Accrued interest receivable and other assets 58,293 59,407
Premises and Equipment - Net 20,306 18,024
-------------- -------------
Total assets $ 1,554,321 $ 1,457,788
============== =============
LIABILITIES
Deposits:
Non-interest bearing $ 148,515 $ 135,536
Interest-bearing 923,911 903,581
-------------- -------------
Total deposits 1,072,426 1,039,117
Federal Home Loan Bank advances 253,500 225,000
Federal funds purchased 44,200 45,000
Repurchase agreements 21,000 -
Interest payable and other liabilities 9,875 5,225
-------------- -------------
Total liabilities 1,401,001 1,314,342
-------------- -------------
STOCKHOLDERS' EQUITY
Common stock (no par value) - -
Additional paid-in capital 18,945 20,414
Retained Earnings 132,999 123,867
Accumulated other comprehensive income (loss) 1,376 (835)
-------------- -------------
Total stockholders' equity 153,320 143,446
-------------- -------------
Total liabilities and stockholders' equity $ 1,554,321 $ 1,457,788
-------------- -------------
The accompanying notes to consolidated financial statements are integral part of
these statements.
-2-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
THREE MONTHS ENDED SEPTEMBER 30,
Dollars in thousands, except per share data 2004 2003
- ------------------------------------------- ----------- ----------
INTEREST INCOME
Interest and fees on loans $ 14,888 $ 13,782
Interest on investment securities-
Tax-exempt 1,398 1,524
Taxable 4,458 3,975
Interest on federal funds sold - 18
----------- ----------
Total interest income 20,744 19,299
----------- ----------
INTEREST EXPENSE
Interest on deposits 3,904 3,865
Interest on borrowed funds 3,213 2,659
----------- ----------
Total interest expense 7,117 6,524
----------- ----------
NET INTEREST INCOME 13,627 12,775
PROVISION FOR LOAN LOSSES 600 6,325
----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 13,027 6,450
----------- ----------
OTHER INCOME
Income from trust services 953 761
Service charges and other fees 1,423 1,417
Net gain (loss) on sales of securities (2) 454
Other 1,022 1,250
----------- ----------
Total other income 3,396 3,882
----------- ----------
OTHER EXPENSES
Salaries and employee benefits 4,437 4,064
Occupancy expense 695 626
Other 2,893 2,990
----------- ----------
Total other expenses 8,025 7,680
----------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 8,398 2,652
PROVISION FOR INCOME TAXES 2,289 679
----------- ----------
NET INCOME $ 6,109 $ 1,973
----------- ----------
BASIC EARNINGS PER COMMON SHARE $ 0.35 $ 0.10
----------- ----------
DILUTED EARNINGS PER COMMON SHARE $ 0.35 $ 0.10
----------- ----------
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.16 $ 0.15
----------- ----------
The accompanying notes to consolidated financial statements are integral part of
these statements.
-3-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF INCOME - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30,
Dollars in thousands, except per share data 2004 2003
- ------------------------------------------- ----------- ----------
INTEREST INCOME
Interest and fees on loans $ 42,401 $ 41,778
Interest on investment securities-
Tax-exempt 4,258 4,704
Taxable 11,893 12,287
Interest on federal funds sold 2 109
----------- ----------
Total interest income 58,554 58,878
----------- ----------
INTEREST EXPENSE
Interest on deposits 10,570 12,365
Interest on borrowed funds 8,733 8,832
----------- ----------
Total interest expense 19,303 21,197
----------- ----------
NET INTEREST INCOME 39,251 37,681
PROVISION FOR LOAN LOSSES 1,800 7,975
----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 37,451 29,706
----------- ----------
OTHER INCOME
Income from trust services 2,688 2,454
Service charges and other fees 4,073 3,966
Net gain on sales of securities 116 868
Other 3,106 3,313
----------- ----------
Total other income 9,983 10,601
----------- ----------
OTHER EXPENSES
Salaries and employee benefits 13,419 12,422
Occupancy expense 2,192 1,933
Other 8,298 8,281
----------- ----------
Total other expenses 23,909 22,636
----------- ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES 23,525 17,671
PROVISION FOR INCOME TAXES 6,368 4,860
----------- ----------
NET INCOME $ 17,157 $ 12,811
----------- ----------
BASIC EARNINGS PER COMMON SHARE $ 0.98 $ 0.67
=========== ==========
DILUTED EARNINGS PER COMMON SHARE $ 0.98 $ 0.67
----------- ----------
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.46 $ 0.43
----------- ----------
The accompanying notes to consolidated financial statements are integral part of
these statements.
-4-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
NINE MONTHS ENDED SEPTEMBER 30,
Dollars in thousands 2004 2003
- ------------------------------------------------------------------------------------ ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 17,157 $ 12,811
Adjustments to reconcile net income to net cash from operating activities
Depreciation 1,982 1,759
Provision for loan losses 1,800 7,975
(Increase) decrease in net deferred Federal income tax asset (455) (1,424)
Net Amortization (Accretion) of investment premium and discount 448 75
Net increase (decrease) in interest payable and other liabilities 4,650 318
Net (increase) decrease in interest receivable and other assets (4,997) (3,119)
Net gain on sales of securities (116) (868)
Increase in cash surrender value of life insurance (1,128) (910)
----------- -----------
Net cash provided by operating activities $ 19,341 $ 16,617
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment securities held to maturity $ 18,760 $ 22,514
Proceeds from maturities and redemptions of investment securities available for sale 43,838 343,875
Proceeds from sales of investment securities available for sale 61,238 166,685
Net (increase) decrease in loans (82,857) (64,926)
Proceeds from sales of other real estate owned 6,314 5,509
Proceeds from sales of other assets 26 13
Purchase of investment securities held to maturity (7,630) (4,705)
Purchase of investment securities available for sale (122,858) (510,964)
Purchase of bank premises and equipment (4,264) (4,205)
Purchase of bank owned life insurance - (15,000)
----------- -----------
Net cash used for investing activities $ (87,433) $ (61,204)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 33,309 $ 59,302
Net increase (decrease) in Federal funds purchased (800) -
Net increase (decrease) in Federal Home Loan Bank borrowings 28,500 -
Net increase (decrease) in Repurchase Agreements 21,000 -
Proceeds from issuance of common stock 1,095 186
Repurchase of common stock (2,565) (808)
Dividends paid (7,862) (8,037)
----------- -----------
Net cash provided by (used for) financing activities $ 72,677 $ 50,643
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 4,585 $ 6,056
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,525 43,618
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 27,110 $ 49,674
----------- -----------
The accompanying notes to consolidated financial statements are integral part of
these statements.
-5-
MBT FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - UNAUDITED
ACCUMULATED
ADDITIONAL OTHER
PAID-IN RETAINED COMPREHENSIVE
Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL
- ---------------------------------------------------- ------------ ------------ -------------- -------------
BALANCE - JANUARY 1, 2004 $ 20,414 $ 123,867 $ (835) $ 143,446
Repurchase of Common Stock (150,000 shares) (2,565) - - (2,565)
Issuance of Common Stock - -
Stock options exercised (70,482 shares) 961 961
Other stock issued (7,644 shares) 135 135
Dividends declared ($0.46 per share) - (8,025) - (8,025)
Comprehensive income:
Net income - 17,157 - 17,157
Change in net unrealized loss on securities
available for sale - Net of tax effect of
($1,191) - - 2,211 2,211
------------ ------------ -------------- -------------
Total Comprehensive Income - 17,157 2,211 19,368
------------ ------------ -------------- -------------
BALANCE - SEPTEMBER 30, 2004 $ 18,945 $ 132,999 $ 1,376 $ 153,320
============ ============ ============== =============
The accompanying notes to consolidated financial statements are integral part of
these statements.
-6-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The unaudited consolidated financial statements include the accounts of MBT
Financial Corp. (the "Corporation") and its subsidiary, Monroe Bank & Trust (the
"Bank"). The Bank includes the accounts of its wholly owned subsidiaries, MBT
Credit Company, Inc. and MB&T Financial Services, Inc. The Bank operates
twenty-one branches in Monroe County, Michigan and three branches in Wayne
County, Michigan. MBT Credit Company, Inc. operates a mortgage loan office in
Monroe County and a loan production office in Wayne County. The Bank's primary
source of revenue is from providing loans to customers, who are predominantly
small and middle-market businesses and middle-income individuals. The
Corporation's sole business segment is community banking.
The accounting and reporting policies of the Bank conform to practice within the
banking industry and are in accordance with accounting principles generally
accepted in the United States. Preparation of financial statements in conformity
with generally accepted accounting principles requires Management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant changes in
the near term are the determination of the allowance for loan losses and the
valuation of other real estate owned.
The accompanying unaudited consolidated financial statements of the Corporation
have been prepared in accordance with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
However, such information reflects all adjustments (consisting of normal
recurring adjustments), which are, in the opinion of Management, necessary for
fair statement of results for the interim periods.
The significant accounting policies are as follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its subsidiary. All material intercompany transactions and balances have
been eliminated. Certain prior period amounts have been reclassified to conform
to the current period presentation.
COMPREHENSIVE INCOME
Accounting principles generally require that revenue, expenses, gains, and
losses be included in net income. Certain changes in assets and liabilities,
however, such as unrealized gains and losses on securities available for sale,
are reported as a separate component of the equity section of the balance sheet.
Such items, along with net income, are components of comprehensive income.
BUSINESS SEGMENTS
While the Corporation's chief decision makers monitor the revenue streams of
various products and services, operations are managed and financial performance
is evaluated on a company wide basis. Accordingly, all of the Corporation's
operations are considered by management to be aggregated in one reportable
segment.
STOCK-BASED COMPENSATION
The Company applies the provisions of APB Opinion No. 25, "Accounting for
Stock-Based Compensation," for all employee stock option grants and has elected
to disclose pro forma net income and earnings per share amounts as if the
fair-value based method has been applied in measuring compensation costs.
-7-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The Company's as reported and pro forma information for the quarter and nine
months ended September 30 were as follows:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
Dollars in thousands, except per share data 2004 2003 2004 2003
- ------------------------------------------- ------------- ---------- ----------- ---------
Net Income as Reported $ 6,109 $ 1,973 $ 17,157 $ 12,811
Pro Forma Adjustment
Due to Stock Options (106) (64) (302) (193)
------------- ---------- ----------- ---------
Pro Forma Net Income $ 6,003 $ 1,909 $ 16,855 $ 12,618
------------- ---------- ----------- ---------
Earnings per Share as Reported
Basic $ 0.35 $ 0.10 $ 0.98 $ 0.67
Diluted $ 0.35 $ 0.10 $ 0.98 $ 0.67
Pro Forma Earnings per Share
Basic $ 0.34 $ 0.10 $ 0.97 $ 0.66
Diluted $ 0.34 $ 0.10 $ 0.96 $ 0.66
Compensation expense in the pro forma disclosures is not indicative of future
amounts, as options vest over several years and additional grants are generally
made each year.
The weighted average fair value of options granted was $3.84 in 2004 and $3.04
in 2003. The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions used
for grants: expected option lives of seven years for both years; expected
volatility of 25.3% in 2004 and 23.9% in 2003; and risk-free interest rates of
3.8% in 2004 and 4.6% in 2003.
2. EARNINGS PER SHARE
The calculation of net income per common share for the three months ended
September 30 is as follows:
2004 2003
------------- --------------
BASIC
Net income $ 6,109,000 $ 1,973,000
Less preferred dividends - -
------------- --------------
Net income applicable to common stock $ 6,109,000 $ 1,973,000
------------- --------------
Average common shares outstanding 17,419,214 19,115,234
------------- --------------
Earnings per common share - basic $ 0.35 $ 0.10
------------- --------------
2004 2003
------------- --------------
DILUTED
Net income $ 6,109,000 $ 1,973,000
Less preferred dividends - -
------------- --------------
Net income applicable to common stock $ 6,109,000 $ 1,973,000
------------- --------------
Average common shares outstanding 17,419,214 19,115,234
Stock option adjustment 101,724 18,387
------------- --------------
Average common shares outstanding - diluted 17,520,938 19,133,621
------------- --------------
Earnings per common share - diluted $ 0.35 $ 0.10
------------- --------------
-8-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The calculation of net income per common share for the nine months ended
September 30 is as follows:
2004 2003
------------- --------------
BASIC
Net income $ 17,157,000 $ 12,811,000
Less preferred dividends - -
------------- --------------
Net income applicable to common stock $ 17,157,000 $ 12,811,000
------------- --------------
Average common shares outstanding 17,449,930 19,120,212
------------- --------------
Earnings per common share - basic $ 0.98 $ 0.67
------------- --------------
2004 2003
------------- --------------
DILUTED
Net income $ 17,157,000 $ 12,811,000
Less preferred dividends - -
------------- --------------
Net income applicable to common stock $ 17,157,000 $ 12,811,000
------------- --------------
Average common shares outstanding 17,449,930 19,120,212
Stock option adjustment 81,295 15,352
------------- --------------
Average common shares outstanding - diluted 17,531,225 19,135,564
------------- --------------
Earnings per common share - diluted $ 0.98 $ 0.67
------------- --------------
The following table summarizes the options that have been granted to
non-employee directors and certain key executives in accordance with the
Long-Term Incentive Compensation Plan that was approved by shareholders at the
Annual Meeting of Shareholders on April 6, 2000.
Weighted Average
Shares Exercise Price
------- ----------------
Options Outstanding, January 1, 2004 480,802 $ 14.74
Granted 161,000 16.69
Exercised 70,482 13.63
Cancelled 24,100 17.33
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Options Outstanding, Sept. 30, 2004 547,220 $ 15.34
======= ==========
Options Exercisable, Sept. 30, 2004 216,363 $ 15.86
------- ----------
3. LOANS
The Bank grants commercial, consumer, and mortgage loans primarily to customers
in Monroe County, Michigan, southern Wayne County, Michigan, and surrounding
areas. Although the Bank has a diversified loan portfolio, a substantial portion
of its debtors' ability to honor their contracts is dependent on the automotive,
manufacturing, and real estate development economic sectors.
-9-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Loans consist of the following (000s omitted):
September 30, December 31,
2004 2003
------------- ------------
Real estate loans $ 771,690 $ 695,677
Loans to finance agricultural production and
other loans to farmers 2,686 2,263
Commercial and industrial loans 86,627 93,444
Loans to individuals for household, family,
and other personal expenditures 84,586 72,972
All other loans (including overdrafts) 1,281 1,228
------------ ------------
Total loans, gross 946,870 865,584
Less: Deferred loan fees 1,650 1,734
------------ ------------
Total loans, net of deferred loan fees 945,220 863,850
Less: Allowance for loan losses 15,184 14,500
------------ ------------
$ 930,036 $ 849,350
============ ============
Loans are placed in a nonaccrual status when, in the opinion of Management, the
collection of additional interest is doubtful. All loans internally classified
by Management as nonperforming are reviewed for impairment. Allowances for loans
determined to be impaired are included in the allowance for loan losses. All
cash received on nonaccrual loans is applied to the principal balance.
Nonperforming assets consist of nonaccrual loans, loans 90 days or more past
due, restructured loans, real estate that has been acquired in full or partial
satisfaction of loan obligations or upon foreclosure, and investment securities
that are 90 days or more past due on the interest or principal payments. The
following table summarizes nonperforming assets (000's omitted):
September 30, December 31,
2004 2003
------------- ------------
Nonaccrual loans $ 29,993 $ 33,664
Loans 90 days past due 222 100
Restructured loans 3,219 4,755
------------ ------------
Total nonperforming loans $ 33,434 $ 38,519
Other real estate owned 6,255 8,434
Nonperforming investment securities - 140
------------ ------------
Total nonperforming assets $ 39,689 $ 47,093
============ ============
Nonperforming assets to total assets 2.55% 3.23%
Allowance for loan losses to
nonperforming assets 38.26% 30.79%
-10-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000's omitted):
September 30, September 30,
2004 2003
------------- -------------
Balance beginning of year $ 14,500 $ 12,400
Provision for loan losses 1,800 7,975
Loans charged off (1,996) (2,204)
Recoveries 880 602
------------ ------------
Balance end of period $ 15,184 $ 18,773
============ ============
For each period, the provision for loan losses in the income statement results
from the combination of an estimate by Management of loan losses that occurred
during the current period and the ongoing adjustment of prior estimates of
losses occurring in prior periods.
To serve as a basis for making this provision, the Bank maintains an extensive
credit risk monitoring process that considers several factors including: current
economic conditions affecting the Bank's customers, the payment performance of
individual loans and pools of homogeneous loans, portfolio seasoning, changes in
collateral values, and detailed reviews of specific loan relationships. For
loans deemed to be impaired due to an expectation that all contractual payments
will probably not be received, impairment is measured by comparing the Bank's
recorded investment in the loan to the present value of expected cash flows
discounted at the loan's effective interest rate, or the fair value of the
collateral, or the loan's observable market price.
The provision for loan losses increases the allowance for loan losses, a
valuation account which is netted against loans on the consolidated statements
of condition. As the specific customer and amount of a loan loss is confirmed by
gathering additional information, taking collateral in full or partial
settlement of the loan, bankruptcy of the borrower, etc., the loan is charged
off, reducing the allowance for loan losses. If, subsequent to a charge off, the
Bank is able to collect additional amounts from the customer or sell collateral
worth more than earlier estimated, a recovery is recorded.
-11-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
5. INVESTMENT SECURITIES
The following is a summary of the Bank's investment securities portfolio as of
September 30, 2004 and December 31, 2003 (000's omitted):
September 30, 2004 December 31, 2003
---------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
----------- ------------- ----------- ------------
Held to Maturity
Obligations of U.S. Government Agencies $ 503 $ 556 $ 536 $ 590
Obligations of States and Political
Subdivisions 84,526 87,103 95,634 99,234
Other Securities 3,016 3,138 2,984 3,116
----------- ------------- ----------- ------------
$ 88,045 $ 90,797 $ 99,154 $ 102,940
=========== ============= =========== ============
September 30, 2004 December 31, 2003
---------------------------- ---------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
----------- ------------- ----------- ------------
Available for Sale
Obligations of U.S. Government Agencies $ 315,768 $ 316,082 $ 315,004 $ 311,944
Obligations of States and Political
Subdivisions 28,658 29,507 26,047 26,473
Other Securities 70,806 71,761 57,876 59,225
----------- ------------- ----------- ------------
$ 415,232 $ 417,350 $ 398,927 $ 397,642
=========== ============= =========== ============
6. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
statements of condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for its other lending activities.
-12-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
Financial instruments whose contractual amounts represent off-balance sheet
credit risk were as follows (000s omitted):
CONTRACTUAL AMOUNT
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ ----------
Commitments to extend credit:
Unused portion of commercial lines of credit $ 114,346 $ 93,525
Unused portion of credit card lines of credit 7,748 9,761
Unused portion of home equity lines of credit 23,217 17,019
Standby letters of credit and financial guarantees written 18,954 19,381
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Most
commercial lines of credit are secured by real estate mortgages or other
collateral, and generally have fixed expiration dates or other termination
clauses. Since the lines of credit may expire without being drawn upon, the
total committed amounts do not necessarily represent future cash requirements.
Credit card lines of credit have various established expiration dates, but are
fundable on demand. Home equity lines of credit are secured by real estate
mortgages, a majority of which have ten year expiration dates, but are fundable
on demand. The Bank evaluates each customer's creditworthiness on a case-by-case
basis. The amount of the collateral obtained, if deemed necessary by the Bank
upon extension of credit, is based on Management's credit evaluation of the
counterparty.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements and
other business transactions.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Corporation's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of these terms. Actual results could differ materially
from those set forth in forward-looking statements, due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
During the first nine months of 2004, the Bank's assets increased $96.5 million,
or 6.6%. Gross loans increased $82.8 million, or 9.6% and investment securities
increased $8.6 million or 1.7%. The asset growth was funded by an increase of
$28.5 million in Federal Home Loan Bank borrowings, $21.0 million in repurchase
agreements, and $33.3 million in deposits. This increase in deposits includes
$30.4 million in brokered certificates of deposit.
The loan growth was consistent with our expectations, with the new loans
originating equally in the Monroe and Downriver market areas. The Bank expects
loans to continue to increase in the fourth quarter as our expansion into Wayne
County continues with the opening of our Downriver regional center in Wyandotte
in October. Management believes that the quality of the loan portfolio is
continuing to improve. Nonperforming assets ("NPAs") decreased 15.7% since year
end as we continue to work out the existing NPAs and improved lending practices
have resulted in a reduction of the amount of new NPAs being identified. Most of
the bank's lending is secured by real estate, which allows us to maintain a
lower ratio of Allowance for Loan Losses to NPAs compared to other banks, and a
low level of net charge offs. Although the charge offs related to these loans
are less, the process of collection can be lengthy. Significant improvements in
the lending staff, the collection staff, the underwriting procedures, and the
loan policy have also contributed to the reduction in NPAs, as shown by a
reduction in the amount of new additions to the NPA list and a reduction in the
delinquency rates for commercial, consumer, and mortgage loans.
Deposits increased $34.0 million in the third quarter, and have now increased
$30.3 million since the beginning of the year. Deposit growth began to increase
due to our new free checking product and a certificate of deposit promotion that
features our new "Rate Hike CD". The Rate Hike CD is a 25 month certificate of
deposit that allows customers to increase the rate on their account to the
current rate once during the original term of the account. This has attracted
nearly $2 million in deposits and targets customers who are reluctant to invest
in CDs due to the low rates offered and their expectation that rates would
eventually increase. Also in the third quarter, we increased our use of brokered
certificates of deposit from $16.9 million at June 30, 2004 to $30.4 million at
-14-
September 30, 2004. The terms of these deposits range from three to seven years
and the rates range from 3.75% to 4.70%. The weighted average maturity is 5.2
years and the weighted average cost is 4.30%. We may continue to utilize
brokered deposit activity to fund our loan growth and manage interest rate risk
in the fourth quarter. We also expect traditional deposits to continue to
increase in the fourth quarter due to the new products and the opening of our
new retail office in Wyandotte, Michigan early in the quarter.
RESULTS OF OPERATIONS - THIRD QUARTER 2004 VS. THIRD QUARTER 2003
A comparison of the income statements for the three months ended September 30,
2004 and 2003 shows a 6.7% increase in Net Interest Income. Interest income on
loans and investments increased $1.4 million, or 7.5% and interest expense
increased $0.6 million, or 9.1%. Although average loans outstanding increased
$106.8 million, the average yield on those loans decreased from 6.61% to 6.32%.
The fed began to increase managed interest rates late in the second quarter, and
continued through the third quarter. This had a positive impact on our earnings
as our loan portfolio contain approximately $300 million of variable rate, prime
indexed loans. Average investments decreased $23.7 million but the yield on
investments increased from 4.07% to 4.54%. Market interest rates began to rise
early in the year, contributing to the improvement in the investment yield. The
recent decrease in the market rates may result in an increase in the amount of
bonds called, and a decrease in the portfolio yield.
Average deposits increased slightly from $1.046 billion in the third quarter of
2003 to $1.063 billion in the third quarter of 2004, while at the same time the
average cost of these deposits decreased from 1.47% to 1.46%. The result was a
slight increase in Interest on Deposits of $39,000, or 1.0%. Average borrowed
funds increased from $237.8 million in the third quarter of 2003 to $314.1
million in the third quarter of 2004, while the average cost of these borrowings
decreased from 4.44% to 4.06%. This reduction in the cost of the borrowed funds
was due to obtaining additional Federal Home Loan Bank advances at lower rates,
and an increase in the use of federal funds borrowed and other lower cost
borrowings. The cost of deposits increased slightly in the third quarter as
customers began to shift funds into higher yielding, longer term certificates of
deposit and we increased our use of brokered CDs as a source of longer term
funding. While our maturing certificates should continue to renew at lower
rates, additional movement of deposits from transaction accounts and short term
certificates into long term certificates, as well as rising market rates, is
expected to cause our deposit costs to increase in the fourth quarter. We may
also experience a slight increase in the cost of borrowed funds as higher short
term rates impact our federal funds borrowed and our LIBOR based variable rate
FHLB borrowings.
The most significant change in our earnings was due to the reduction in the
Provision for Loan Losses from $6,325,000 to $600,000. This reduction was due to
an additional provision of $5.5 million in the third quarter of 2003. The
additional provision last year was to address our concerns about an individual
credit relationship. We believe our allowance for loan losses is adequate, and
that our current provision level will be sufficient to maintain the adequacy of
the allowance.
Non interest income decreased 12.5%. The table below summarizes the changes in
the components of non interest income (000s omitted) for the quarters ended:
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Sept. 30, Sept. 30,
2004 2003 % Change
---------- ---------- --------
Trust Income $ 953 $ 761 25.2%
Deposit Account Service Charges 361 412 -12.4%
Other Deposit Account Related Fees 1,062 1,004 5.8%
Origination Fees on Loans Sold 131 379 -65.4%
Gains (Losses) on Securities Transactions (2) 454 -100.4%
BOLI Earnings 362 379 -4.5%
Other Income 529 493 7.3%
---------- ---------- ------
$ 3,396 $ 3,882 -12.5%
Trust Income improved due to improvements in the market values of trust accounts
and increases in the fees charged. The decrease in Deposit Account Service
Charges was due to the introduction of our free checking product in the second
quarter of 2004. The introduction of this product has resulted in an increase in
non interest bearing transaction accounts and contributed to the increase in
Other Deposit Account Related Fees, which primarily consists of NSF and Stop
Payment fees. Origination Fees on Mortgage Loans Sold exceeded our expectations
for the third quarter of 2004, but were still well below the level achieved
during the historically low interest rate environment experienced in 2003. The
low interest rates of last year and the need to sell investments to fund loan
growth also provided the opportunity for above normal Gains on Securities
Transactions in 2003. The income from Bank Owned Life Insurance policies
increased due to an additional investment in BOLI policies during the second and
fourth quarters of 2003.
Salaries and Employee Benefits increased $373,000, or 9.2%, due to annual salary
increases, an increase in the number of full time equivalent employees, and
higher health insurance costs. The number of full time equivalent employees
increased from 389 on September 30, 2003 to 404 on September 30, 2004. Occupancy
Expense increased $69,000, or 11.0%, primarily due to the Bank's expansion into
the southern Wayne County area. The Bank now operates two full service branches
and a loan and trust production office in Wayne County. As of September 30,
2004, the Wyandotte branch, which opened at the end of the first quarter of
2003, has $25.0 million in deposits, and the Trenton branch, which opened in the
third quarter of 2003, has $12.5 million in deposits. Other Expenses decreased
$97,000, or 3.2% largely due to lower expenses related to non performing assets,
particularly the costs associated with Other Real Estate Owned. These results
were consistent with our expectations for the quarter, and our efficiency ratio
remains better than the average for comparable banks.
As a result of the above activity, Income Before Provision for Income Taxes
increased $5,746,000, or 216.7%. The Provision for Income Taxes increased
$1,610,000, or 237.1%, and reflects an anticipated annual effective tax rate of
27.2%. Net Income increased $4,136,000, or 209.6% compared to the third quarter
of 2003.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2004 AND SEPTEMBER
30, 2003 A comparison of the income statements for the nine months ended
September 30, 2004 and 2003 shows a 4.2% increase in Net Interest Income.
Interest income on loans and investments increased $623,000, or 1.5% and
interest expense decreased $1.9 million, or 8.9%. Although average loans
outstanding increased $93.9 million, the average yield on those loans decreased
from 6.90% to 6.25%. The recent increases in managed interest rates are expected
to slow the rate of decrease in our loan yields. Average investments decreased
$56.0 million but the yield on investments increased from 4.21% to 4.45% as
increasing market rates in 2004 led to an improvement in the investment yield.
Average deposits increased slightly from $1.038 billion in the first nine months
of 2003 to $1.041 billion in the first nine months of 2004, while at the same
time the average cost of these deposits
-16-
decreased from 1.59% to 1.35%. The result was a decrease in Interest on Deposits
of $1.8 million, or 14.5%. Average borrowed funds increased from $235.8 million
in the first nine months of 2003 to $283.3 million in the first nine months of
2004, while the average cost of these borrowings decreased from 5.01% to 4.11%.
This reduction in the cost of the borrowed funds was due to the refinancing of
some of our Federal Home Loan Bank advances in the second and third quarters of
2003, and lower costs on the additional borrowings, which include FHLB advances,
federal funds borrowed, and repurchase agreements. The market for deposits is
becoming increasingly competitive, and due to our attempts to lengthen the
duration of our liabilities, we do not expect deposit costs to continue to
decline in the fourth quarter of 2004.
It is Management's expectation that rising interest rates would be slightly
beneficial to the Bank's net interest income over the remainder of the year
while falling interest rates would slightly decrease net interest income.
However, a decrease in interest rates would result in an increase in non
interest income which would partially offset any decrease in net interest
income.
The Provision for Loan Losses decreased $6,175,000, or 77.4% due to the
significant provision in the third quarter of 2003. The current level of
provision is expected to be sufficient to maintain an adequate allowance for
loan losses, barring greater than anticipated loan growth.
Non interest income decreased 5.8%. The table below summarizes the changes in
the components of non interest income (000s omitted) for the nine months ended:
Sept. 30, Sept. 30,
2004 2003 % Change
---------- ---------- --------
Trust Income $ 2,688 $ 2,454 9.5%
Deposit Account Service Charges 1,183 1,172 0.9%
Other Deposit Account Related Fees 2,890 2,794 3.4%
Origination Fees on Loans Sold 460 1,011 -54.5%
Gains on Securities Transactions 116 868 -86.6%
BOLI Earnings 1,128 910 24.0%
Other Income 1,518 1,392 9.1%
---------- ---------- -----
$ 9,983 $ 10,601 -5.8%
Trust Income increased due to improvements in the market values of trust
accounts and increases in the fees charged. The Bank began offering a free
checking account product in June, 2004. This product is expected to cause future
decreases in Deposit Account Service Charges, but larger increases in Other
Deposit Account Related Fees. Origination Fees on Mortgage Loans Sold decreased
in 2004 as mortgage refinance activity began to decrease. The income from Bank
Owned Life Insurance policies increased due to additional investments in BOLI
policies in the second and third quarters of 2003.
Salaries and Employee Benefits increased $997,000, or 8.0%, as salaries
increased 9.2% and health insurance and other benefits increased 6.7%. Occupancy
Expense increased $259,000, or 13.4%, primarily due to the Bank's expansion into
the southern Wayne County area. Other Expenses increased $17,000, or 0.2%. These
results were consistent with our expectations for the first nine months of 2004.
As a result of the above activity, Income Before Provision for Income Taxes
increased $5,854,000, or 33.1%. The Provision for Income Taxes increased
$1,508,000, or 31.0%, and reflects an anticipated annual effective tax rate of
27.1%. Net Income increased $4,346,000, or 33.9% compared to the first nine
months of 2003.
LIQUIDITY AND CAPITAL
The Corporation has maintained sufficient liquidity to fund its loan growth and
allow for fluctuations in deposit levels. Internal sources of liquidity are
provided by the maturities of loans
-17-
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 $153.3 million at September
30, 2004 and $143.4 million at December 31, 2003. The ratio of equity to assets
was 9.9% at September 30, 2004 and 9.8% at December 31, 2003. Federal bank
regulatory agencies have set capital adequacy standards for Total Risk Based
Capital, Tier 1 Risk Based Capital, and Leverage Capital. These standards
require banks to maintain Leverage and Tier 1 ratios of at least 4% and a Total
Capital ratio of at least 8% to be adequately capitalized. The regulatory
agencies consider a bank to be well capitalized if its Total Risk Based Capital
is at least 10% of Risk Weighted Assets, Tier 1 Capital is at least 6% of Risk
Weighted Assets, and Leverage Capital Ratio is at least 5%.
The following table summarizes the capital ratios of the Bank:
Minimum to be Well
September 30, 2004 December 31, 2003 Capitalized
------------------ ----------------- ------------------
Leverage Capital 9.8% 9.7% 5.0%
Tier 1 Risk Based Capital 13.9% 14.4% 6.0%
Total Risk Based Capital 15.1% 15.6% 10.0%
At September 30, 2004 and December 31, 2003, the Bank was in compliance with the
capital guidelines and is considered "well-capitalized" under regulatory
standards.
Market risk for the Bank, as is typical for most banks, consists mainly of
interest rate risk and market price risk. The Bank's earnings and the economic
value of its equity are exposed to interest rate risk and market price risk, and
monitoring this risk is the responsibility of the Asset/Liability Management
Committee (ALCO) of the Bank. The Bank's market risk is monitored monthly and it
has not changed significantly since year-end 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Bank faces market risk to the extent that the fair values of its financial
instruments are affected by changes in interest rates. The Bank does not face
market risk due to changes in foreign currency exchange rates, commodity prices,
or equity prices. The asset and liability management process of the Bank seeks
to monitor and manage the amount of interest rate risk. This is accomplished by
analyzing the differences in repricing opportunities for assets and liabilities,
by simulating operating results under varying interest rate scenarios, and by
estimating the change in the net present value of the Bank's assets and
liabilities due to interest rate changes.
Each month, the Asset and Liability Committee (ALCO), which includes the senior
management of the Bank, estimates the effect of interest rate changes on the
projected net interest income of the Bank. The sensitivity of the Bank's net
interest income to changes in interest rates is measured by using a computer
based simulation model to estimate the impact on earnings of a gradual increase
or decrease of 100 basis points in the prime rate. The net interest income
projections are compared to a base case projection, which assumes no changes in
interest rates.
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in the Bank's projected net interest income, in
its policy. Throughout the first nine months of 2004, the estimated variability
of the net interest income was within the Bank's established policy limits.
The ALCO also monitors interest rate risk by estimating the effect of changes in
interest rates on the economic value of the Bank's equity each month. The actual
economic value of the Bank's equity is first determined by subtracting the fair
value of the Bank's liabilities from the fair value of the Bank's assets. The
fair values are determined in accordance with Statement of Financial
-18-
Accounting Standards Number 107, Disclosures about Fair Value of Financial
Instruments. The Bank estimates the interest rate risk by calculating the effect
of market interest rate shocks on the economic value of its equity. For this
analysis, the Bank assumes immediate parallel shifts of plus or minus 100 and
200 basis points in interest rates. Currently, the minus 200 shift does not
produce meaningful results. The discount rates used to determine the present
values of the loans and deposits, as well as the prepayment rates for the loans,
are based on Management's expectations of the effect of the rate shock on the
market for loans and deposits.
The Bank's ALCO has established limits in the acceptable amount of interest rate
risk, as measured by the change in economic value of the Bank's equity, in its
policy. Throughout the first nine months of 2004, the estimated variability of
the economic value of equity was within the Bank's established policy limits.
The Bank's interest rate risk, as measured by the net interest income and
economic value of equity simulations, has not changed significantly from
December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
September 30, 2004, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were effective as of
September 30, 2004, in alerting them in a timely manner to material information
relating to the Company (including its consolidated subsidiaries) required to be
included in the Company's periodic SEC filings.
There was no change in the Company's internal control over financial reporting
that occurred during the Company's fiscal quarter ended September 30, 2004, that
has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.
-19-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their
property the subject of any material legal proceedings other than ordinary
routine litigation incidental to their respective businesses, nor are any such
proceedings known to be contemplated by governmental authorities, other than as
described below.
On July 14, 2004, the Michigan Department of Environmental Quality (the "DEQ")
provided a letter directing Monroe Bank and Trust to take action including
remediation of property owned by the Bank located at 9023 Lewis Avenue, Monroe
County, Michigan. This property was purchased by the Bank in 2003 and was
redeveloped into a Bank branch office. During construction of the facility,
three previously unknown underground storage tanks were discovered on the
property and removed in February of 2004. The Bank notified the DEQ in February
of this year indicating that some of the contents from these tanks had been
released into the soil. An initial assessment report was prepared and submitted
to the DEQ on May 6, 2004 by an environmental testing and consulting firm
engaged by the Bank. Based on this report, the DEQ provided its July 14, 2004
letter, which requires the Bank to develop and implement a remedial action plan
for the property. The Bank has submitted a remedial action plan and is awaiting
approval of the plan. The Bank has established a reserve of $300,000 which is
the estimated cost to implement the remediation plan. MBT Financial Corp. also
reported on this matter in its Quarterly Report on Form 10-Q for its fiscal
quarter ended June 30, 2004, which the Company filed with the SEC on August 9,
2004.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF EQUITY
SECURITIES. The following table summarizes the repurchase activity of the
Company's stock during the three months ended September 30, 2004:
Total Number of Shares Maximum Number of
Average Purchased as Part of Shares that May Yet
Total Number of Price Paid Publicly Announced Be Purchased Under
Shares Purchased per Share Plans or Programs the Plans or Programs
---------------- ---------- ---------------------- ---------------------
July 1, 2004 - July 31, 2004 - $ - - 950,441
August 1, 2004 - August 31, 2004 - $ - - 950,441
September 1, 2004 - September 30, 2004 - $ - - 950,441
--- ----- --- -------
Total - $ - -
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
Inapplicable.
-20-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
The following exhibits are filed as a part of this report:
3.1 Restated Articles of Incorporation of MBT Financial Corp.
Previously filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K
for its fiscal year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp.
31.1 Certification by Chief Executive Officer required by Securities
and Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required by Securities
and Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as enacted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
MBT Financial Corp. filed or furnished the following reports on Form 8-K during
the quarter ended September 30, 2004:
Date of Event Reported Event Reported
- ---------------------- --------------------------------------------
July 15, 2004 Item 7 - Financial Statements and
Exhibits and Item 12 - Results of Operations
and Financial Condition, second quarter 2004
earnings announcement
August 26, 2004 Item 5.03 - Amendments to Articles
of Incorporation or Bylaws; Change in fiscal
Year and Item 9.01 - Financial Statements
and Exhibits, bylaws amendments
-21-
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)
November 5, 2004 /s/ H. Douglas Chaffin
- ----------------- ----------------------------------
Date H. Douglas Chaffin
President &
Chief Executive Officer
November 5, 2004 /s/ John L. Skibski
- ----------------- ----------------------------------
Date John L. Skibski
Executive Vice President and
Chief Financial Officer
-22-
EXHIBIT INDEX
Exhibit Number Description of Exhibits
- -------------- ----------------------------------------------------
3.1 Restated Articles of Incorporation of MBT Financial
Corp. Previously filed as Exhibit 3.1 to MBT
Financial Corp.'s Form 10-K for its fiscal year
ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp.
31.1 Certification by Chief Executive Officer required
by Securities and Exchange Commission Rule 13a-14.
31.2 Certification by Chief Financial Officer required
by Securities and Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification by Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.