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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 March 31, 2005
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 May 6, 2005, there were 17,273,320 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
MARCH 31, DECEMBER 31,
Dollars in thousands 2005 2004
- -------------------------------------------------- ------------ ------------
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 21,311 $ 20,540
Federal funds sold - 14,000
------------ ------------
Total cash and cash equivalents 21,311 34,540
Securities - Held to Maturity 76,430 84,141
Securities - Available for Sale 429,422 408,353
Federal Home Loan Bank stock - at cost 13,084 12,947
Loans held for sale 492 778
Loans - Net 927,623 931,303
Accrued interest receivable and other assets 60,590 58,047
Premises and Equipment - Net 22,655 22,170
------------ ------------
Total assets $ 1,551,607 $ 1,552,279
============ ============
LIABILITIES
Deposits:
Non-interest bearing $ 143,289 $ 149,469
Interest-bearing 956,104 951,242
------------ ------------
Total deposits 1,099,393 1,100,711
Federal Home Loan Bank advances 256,500 256,500
Federal funds purchased 1,300 -
Repurchase agreements 30,000 30,000
Interest payable and other liabilities 10,796 9,722
------------ ------------
Total liabilities 1,397,989 1,396,933
------------ ------------
STOCKHOLDERS' EQUITY
Common stock (no par value) - -
Additional paid-in capital 19,733 19,806
Retained Earnings 137,730 135,647
Accumulated other comprehensive income (loss) (3,845) (107)
------------ ------------
Total stockholders' equity 153,618 155,346
------------ ------------
Total liabilities and stockholders' equity $ 1,551,607 $ 1,552,279
============ ============
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 MARCH 31,
----------------------------
Dollars in thousands, except per share data 2005 2004
- ------------------------------------------- -------- -----------
INTEREST INCOME
Interest and fees on loans $ 15,033 $ 13,559
Interest on investment securities-
Tax-exempt 1,258 2,160
Taxable 4,499 2,840
Interest on federal funds sold 129 1
-------- -----------
Total interest income 20,919 18,560
-------- -----------
INTEREST EXPENSE
Interest on deposits 4,920 3,239
Interest on borrowed funds 3,377 2,681
-------- -----------
Total interest expense 8,297 5,920
-------- -----------
NET INTEREST INCOME 12,622 12,640
PROVISION FOR LOAN LOSSES 600 600
-------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,022 12,040
-------- -----------
OTHER INCOME
Income from trust services 1,063 814
Service charges and other fees 1,307 1,278
Net gain (loss) on sales of securities 163 107
Other 913 1,027
-------- -----------
Total other income 3,446 3,226
-------- -----------
OTHER EXPENSES
Salaries and employee benefits 4,672 4,488
Occupancy expense 949 808
Other 3,108 2,593
-------- -----------
Total other expenses 8,729 7,889
-------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES 6,739 7,377
PROVISION FOR INCOME TAXES 1,860 1,977
-------- -----------
NET INCOME $ 4,879 $ 5,400
======== ===========
BASIC EARNINGS PER COMMON SHARE $ 0.28 $ 0.31
======== ===========
DILUTED EARNINGS PER COMMON SHARE $ 0.28 $ 0.31
======== ===========
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 CASH FLOWS - UNAUDITED
THREE MONTHS ENDED MARCH 31,
Dollars in thousands 2005 2004
- ------------------------------------------------------------------------------------ --------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 4,879 $ 5,400
Adjustments to reconcile net income to net cash from operating activities
Depreciation 792 676
Provision for loan losses 600 600
(Increase) decrease in net deferred Federal income tax asset - 18
Net Amortization (Accretion) of investment premium and discount 49 304
Net increase (decrease) in interest payable and other liabilities 1,224 2,780
Net (increase) decrease in interest receivable and other assets (1,545) (2,502)
Net gain on sales of securities (163) (100)
Increase in cash surrender value of life insurance (274) (387)
--------- -----------
Net cash provided by operating activities $ 5,562 $ 6,789
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment securities held to maturity $ 5,271 $ 4,303
Proceeds from maturities and redemptions of investment securities available for sale 35,362 28,522
Proceeds from sales of investment securities held to maturity 2,994 -
Proceeds from sales of investment securities available for sale 13,315 51,147
Net (increase) decrease in loans 3,366 (18,780)
Proceeds from sales of other real estate owned 1,289 2,733
Purchase of investment securities held to maturity (550) (3,268)
Purchase of investment securities available for sale (75,526) (12,430)
Purchase of bank premises and equipment (1,277) (1,500)
--------- -----------
Net cash provided by (used for) investing activities $ (15,756) $ 50,727
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net decrease in deposits $ (1,318) $ (18,929)
Net increase (decrease) in Federal funds purchased 1,300 (34,400)
Proceeds from issuance of common stock 896 254
Repurchase of common stock (1,119) -
Dividends paid (2,794) (2,624)
--------- -----------
Net cash used for financing activities $ (3,035) $ (55,699)
--------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (13,229) $ 1,817
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,540 22,525
--------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,311 $ 24,342
========= ===========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-4-
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, 2005 $ 19,806 $ 135,647 $ (107) $ 155,346
Repurchase of Common Stock (55,000 shares) (1,119) - - (1,119)
Issuance of Common Stock
Stock options exercised (61,550 shares) 854 - - 854
Other stock issued (1,942 shares) 42 - - 42
Tax benefit from exercise of options 150 - 150
Dividends declared ($0.16 per share) - (2,796) - (2,796)
Comprehensive income:
Net income - 4,879 - 4,879
Change in net unrealized loss on securities
available for sale - Net of tax effect of ($2,014) - - (3,738) (3,738)
---------- --------- ------------- ---------
Total Comprehensive Income - 4,879 (3,738) 1,141
---------- --------- ------------- ---------
BALANCE - MARCH 31, 2005 $ 19,733 $ 137,730 $ (3,845) $ 153,618
========== ========= ============= =========
The accompanying notes to consolidated financial statements are integral part of
these statements.
-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 branches in Monroe County, Michigan and four branches in Wayne
County, Michigan. MBT Credit Company, Inc. operates a mortgage loan office in
Monroe 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.
-6-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The Company's as reported and pro forma earnings information for the quarter
ended March 31 were as follows:
Three Months Ended March 31,
Dollars in thousands, except per share data 2005 2004
- ------------------------------------------- -------- --------
Net Income as Reported $ 4,879 $ 5,400
Pro Forma Adjustment Due to Stock Options (115) (105)
-------- --------
Pro Forma Net Income $ 4,764 $ 5,295
======== ========
Earnings per Share as Reported
Basic $ 0.28 $ 0.31
Diluted $ 0.28 $ 0.31
Pro Forma Earnings per Share
Basic $ 0.27 $ 0.30
Diluted $ 0.27 $ 0.30
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 $5.38 in 2005 and $3.84
in 2004. 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 20.8% in 2005 and 25.3% in 2004; and risk-free interest rates of
3.8% in 2005 and 2004.
2. EARNINGS PER SHARE
The calculation of net income per common share for the three months ended March
31 is as follows:
2005 2004
------------- -----------
BASIC
Net income $ 4,879,000 $ 5,400,000
Less preferred dividends - -
------------- -----------
Net income applicable to common stock $ 4,879,000 $ 5,400,000
------------- -----------
Average common shares outstanding 17,498,000 17,501,262
------------- -----------
Earnings per common share - basic $ 0.28 $ 0.31
============= ===========
2005 2004
------------- -----------
DILUTED
Net income $ 4,879,000 $ 5,400,000
Less preferred dividends - -
------------- -----------
Net income applicable to common stock $ 4,879,000 $ 5,400,000
------------- -----------
Average common shares outstanding 17,498,000 17,501,262
Stock option adjustment 95,705 78,767
------------- -----------
Average common shares outstanding - diluted 17,593,705 17,580,029
------------- -----------
Earnings per common share - diluted $ 0.28 $ 0.31
============= ===========
-7-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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, 2005 433,787 $15.22
Granted 136,000 23.40
Exercised 59,608 14.33
Cancelled - -
------- ------
Options Outstanding, March 31, 2005 510,179 $17.50
------- ------
Options Exercisable, March 31, 2005 207,029 $15.29
------- ------
3. LOANS
The Bank grants commercial, consumer, and mortgage loans primarily to customers
in Monroe County, Michigan, southern Wayne County, Michigan, and surrounding
areas. Although the Bank has a diversified loan portfolio, a substantial portion
of its debtors' ability to honor their contracts is dependent on the automotive,
manufacturing, and real estate development economic sectors.
Loans consist of the following (000s omitted):
March 31, December 31,
2005 2004
--------- ------------
Real estate loans $ 774,451 $ 774,670
Loans to finance agricultural production and
other loans to farmers 2,415 2,333
Commercial and industrial loans 84,610 88,035
Loans to individuals for household, family,
and other personal expenditures 78,445 81,119
All other loans (including overdrafts) 1,805 1,297
--------- ------------
Total loans, gross 941,726 947,454
Less: Deferred loan fees 1,571 1,573
--------- ------------
Total loans, net of deferred loan fees 940,155 945,881
Less: Allowance for loan losses 12,040 13,800
--------- ------------
$ 928,115 $ 932,081
========= ============
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.
-8-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The following table summarizes nonperforming assets (000's omitted):
March 31, December 31,
2005 2004
--------- ------------
Nonaccrual loans $ 27,625 $ 29,015
Loans 90 days past due 101 230
Restructured loans 2,041 3,715
--------- ------------
Total nonperforming loans $ 29,767 $ 32,960
Other real estate owned 6,370 6,958
--------- ------------
Total nonperforming assets $ 36,137 $ 39,918
========= ============
Nonperforming assets to total assets 2.33% 2.57%
Allowance for loan losses to
nonperforming assets 33.32% 34.57%
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was as follows (000's omitted):
March 31, December 31,
2005 2004
--------- ------------
Balance beginning of year $ 13,800 $ 14,500
Provision for loan losses 600 2,491
Loans charged off (2,644) (4,447)
Transfer to establish reserve for
unfunded loan commitments (275) -
Recoveries 559 1,256
--------- ------------
Balance end of period $ 12,040 $ 13,800
========= ============
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.
-9-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
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, 2005 and December 31, 2004 (000's omitted):
March 31, 2005 December 31, 2004
-------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Held to Maturity
Obligations of U.S. Government Agencies $ 524 $ 557 $ 527 $ 578
Obligations of States and Political
Subdivisions 75,906 77,399 80,622 82,636
Other Securities - - 2,992 3,074
--------- ------------ --------- ------------
$ 76,430 $ 77,956 $ 84,141 $ 86,288
========= ============ ========= ============
March 31, 2005 December 31, 2004
-------------------------- -------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Available for Sale
Obligations of U.S. Government Agencies $ 348,357 $ 342,404 $ 315,410 $ 314,381
Obligations of States and Political
Subdivisions 29,762 29,984 28,635 29,187
Other Securities 57,219 57,034 64,472 64,785
--------- ------------ --------- ------------
$ 435,338 $ 429,422 $ 408,517 $ 408,353
========= ============ ========= ============
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.
-10-
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
--------------------------
MARCH 31, DECEMBER 31,
2005 2004
----------- ------------
Commitments to extend credit:
Unused portion of commercial lines of credit $ 126,532 $ 123,739
Unused portion of credit card lines of credit 7,029 7,265
Unused portion of home equity lines of credit 22,918 23,709
Standby letters of credit and financial guarantees written 15,929 16,449
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.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained herein are not based on historical facts and are
"forward-looking statements" within the meaning of Section 21A of the Securities
Exchange Act of 1934. Forward-looking statements which are based on various
assumptions (some of which are beyond the Corporation's control), may be
identified by reference to a future period or periods, or by the use of
forward-looking terminology, such as "may," "will," "believe," "expect,"
"estimate," "anticipate," "continue," or similar terms or variations on those
terms, or the negative of these terms. Actual results could differ materially
from those set forth in forward-looking statements, due to a variety of factors,
including, but not limited to, those related to the economic environment,
particularly in the market areas in which the company operates, competitive
products and pricing, fiscal and monetary policies of the U.S. Government,
changes in government regulations affecting financial institutions, including
regulatory fees and capital requirements, changes in prevailing interest rates,
acquisitions and the integration of acquired businesses, credit risk management,
asset/liability management, the financial and securities markets and the
availability of and costs associated with sources of liquidity.
The Corporation does not undertake, and specifically disclaims any obligation,
to publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
FINANCIAL CONDITION
During the first quarter of 2005, the Bank's deposits and assets decreased
slightly. The Bank is the depository for several municipalities which collect
taxes beginning in December each year. This typically results in an increase in
deposit and asset totals near year end and little or no growth in the first
quarter. Gross loans decreased $5.7 million, or 0.6%. This decrease was expected
because the loan pipeline decreased temporarily in the fourth quarter of 2004,
the bank sold a $3 million portion of a commercial account, a large commercial
relationship sought financing elsewhere, and the liquidation of $3.8 million in
non-performing loans. Investment securities increased $13.5 million or 2.7%,
which was funded by a reduction in federal funds sold.
Compared to March 31, 2004, loans, deposits, and assets increased 6.6%, 7.8%,
and 9.8%, respectively, largely due to the bank's continuing effort to expand
into the southern Wayne County, Michigan market. The Bank has four branches in
Wayne County, with deposits of $75 million and loans totaling $104 million as of
the end of the first quarter of 2005. A fifth branch is scheduled to open in
mid-May in Taylor, Michigan in a building that formerly served as a branch
location for another financial institution.
Management believes that the quality of the loan portfolio is continuing to
improve. Nonperforming assets ("NPAs") decreased $3.8 million, or 9.5% 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. Although net charge offs in the quarter were high at $2.1 million,
it includes liquidating three non-performing credits for a loss of $1.9 million.
In each of the three cases, the charge off was within the specified allocation
of the Allowance for Loan Losses, which provides support that our allowance
analysis methodology is effective.
-12-
RESULTS OF OPERATIONS - FIRST QUARTER 2005 VS. FIRST QUARTER 2004
A comparison of the income statements for the three months ended March 31, 2005
and 2004 shows a decrease of $18,000, or 0.1% in Net Interest Income. Interest
income on loans and investments increased $2.4 million, or 12.7% and interest
expense increased $2.4 million, or 40.2%. Average loans outstanding increased
$77.2 million and the average yield on those loans increased from 6.18% to
6.42%, resulting in an increase of $1.5 million in interest and fees on loans.
The fed rate increases that began late in the second quarter of 2004 and
continued into the second quarter of 2005 had a positive impact on our income as
our loan portfolio contains approximately $300 million of variable rate, prime
indexed loans. Average investments and fed funds sold increased $57.1 million
and the yield increased from 4.29% to 4.54%. Longer term market interest rates
have not increased as much as short term rates, limiting the amount of
improvement in our fixed rate loan and investment yields.
Average deposits increased 8.5% from $1.03 billion in the first quarter of 2004
to $1.118 billion in the first quarter of 2005. At the same time the average
cost of these deposits increased from 1.26% to 1.79%. The result was a 51.9%
increase in Interest on Deposits from $3.2 million to $4.9 million. Average
borrowed funds increased from $252.4 million in the first quarter of 2004 to
$288.1 million in the first quarter of 2005, while the average cost of these
borrowings increased from 4.27% to 4.75%. This increase in the cost of the
borrowed funds was due to the increases in the fed funds rate and the repricing
of $123 million of Federal Home Loan Bank advances that are indexed to three
month LIBOR. The cost of deposits increased slightly compared to the first
quarter of 2004 as customers continued 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. 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 second quarter. We may also experience an increase in the cost of
borrowed funds as higher short term rates impact our LIBOR based variable rate
FHLB borrowings.
The Provision for Loan Losses was unchanged from the first quarter of 2004 at
$600,000. Although net charge offs increased from $340,000 in 2004 to $2.1
million in 2005, our analysis indicates that the Allowance for Loan Losses is
adequate to cover the losses expected in our portfolio. We believe that the
current provision level will be sufficient to maintain the adequacy of the
allowance.
Non interest income increased 6.8%. The table below summarizes the changes in
the components of non interest income (000s omitted) for the quarters ended:
March 31, March 31,
2005 2004 % Change
----------- ----------- --------
Trust Income $ 1,063 $ 814 30.6%
Deposit Account Service Charges 317 410 -22.7%
Other Deposit Account Related Fees 990 868 14.1%
Origination Fees/Gains on Loans Sold 107 160 -33.1%
Gains (Losses) on Securities Transactions 163 107 52.3%
BOLI Earnings 274 387 -29.2%
Other Income 532 480 10.8%
----------- ----------- -----
$ 3,446 $ 3,226 6.8%
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
-13-
the increase in Other Deposit Account Related Fees, which primarily consists of
NSF and Stop Payment fees. Origination Fees and Gains on Mortgage Loans Sold
decreased, as expected, as rates increased slightly and refinance activity
slowed down. The income from Bank Owned Life Insurance policies decreased as the
yields on the policies owned began to decline in the fourth quarter of 2004.
Salaries and Employee Benefits increased only $184,000, or 4.1%, even though the
number of full time equivalent employees increased from 386 to 404. The annual
incentive compensation is based on corporate earnings performance compared to
our goal. During the first quarter of 2005 our earnings performance was below
goal, and as a result, the amount of incentive payment accrued was $104,000
lower in 2005. Occupancy Expense increased $141,000, or 17.5%, due to the Bank's
expansion into the southern Wayne County area, the replacement of the Temperance
branch in 2004, and the acceleration of depreciation expense on a parking lot in
downtown Monroe that will become the site of the company's new headquarters.
Other Expenses increased $515,000, or 19.9% largely due to higher expenses
related to non performing assets, particularly the costs associated with legal
and collection expenses and the costs of owning and maintaining Other Real
Estate Owned. Non interest expenses were higher than we anticipated for the
quarter, and we expect them to decrease slightly. Although our efficiency ratio
increased from 46.98% in the first quarter of 2004 to 51.76% in the first
quarter of 2005, it remains better than the average for comparable banks.
As a result of the above activity, Income Before Provision for Income Taxes
decreased $638,000, or 8.6%. The Provision for Income Taxes decreased $117,000,
or 5.9%, and reflects an effective tax rate of 27.6% compared to the effective
tax rate of 26.8% in the first quarter of 2004. The increase in the cost of
funds and the decrease in tax exempt interest income caused the increase in the
effective tax rate. Net Income decreased $521,000, or 9.6% compared to the first
quarter of 2005.
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 $153.6 million at March 31,
2005 and $155.3 million at December 31, 2004. The ratio of equity to assets was
9.9% at March 31, 2005 and 10.0% at December 31, 2004. 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
March 31, 2005 December 31, 2004 Well Capitalized
-------------- ----------------- ----------------
Leverage Capital 10.0% 10.0% 5.0%
Tier 1 Risk Based Capital 14.6% 14.3% 6.0%
Total Risk Based Capital 15.8% 15.6% 10.0%
At March 31, 2005 and December 31, 2004, the Bank was in compliance with the
capital guidelines and is considered "well-capitalized" under regulatory
standards.
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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 2004.
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 three months of 2005, 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. 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 three months of 2005, 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, 2004.
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
-15-
and procedures as of March 31, 2005, 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 March 31, 2005, 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 March 31, 2005, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
The following table summarizes the repurchase activity of the Company's stock
during the three months ended March 31, 2005:
Total Number of Shares Maximum Number of Shares
Purchased as Part of that May Yet Be
Total Number of Average Price Publicly Announced Purchased Under the
Shares Purchased Paid per Share Plans or Programs Plans or Programs
---------------- -------------- ---------------------- ------------------------
January 1, 2005 - January 31, 2005 - $ - - 2,000,000
February 1, 2005 - February 28, 2005 35,000 $ 20.33 35,000 1,965,000
March 1, 2005 - March 31, 2005 20,000 $ 20.35 20,000 1,945,000
------ -------------- ------
Total 55,000 $ 20.34 55,000
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
No matters to be reported.
-16-
ITEM 6. EXHIBITS
The following exhibits are filed as a part of this report:
3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously
filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as
Exhibit 3.2 to MBT Financial Corp.'s Form 10-K for its fiscal year
ended December 31, 2004.
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.
-17-
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 6, 2005 /s/ H. Douglas Chaffin
Date --------------------------
H. Douglas Chaffin
President &
Chief Executive Officer
May 6, 2005 /s/ John L. Skibski
Date --------------------------
John L. Skibski
Executive Vice President and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Number Description of Exhibits
- -------------- -----------------------
3.1 Restated Articles of Incorporation of MBT Financial Corp.
Previously filed as Exhibit 3.1 to MBT Financial Corp.'s Form
10-K for its fiscal year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously
filed as Exhibit 3.2 to MBT Financial Corp.'s Form 10-K for
its fiscal year ended December 31, 2004.
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.