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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, 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of November 3, 2005, there were 17,198,623 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,
2005 2004
------------- ------------
Dollars in thousands
ASSETS
Cash and Cash Equivalents
Cash and due from banks $ 28,399 $ 20,540
Federal funds sold 1,000 14,000
---------- ----------
Total cash and cash equivalents 29,399 34,540
Securities - Held to Maturity 75,528 84,141
Securities - Available for Sale 444,686 408,353
Federal Home Loan Bank stock - at cost 13,221 12,947
Loans held for sale 640 778
Loans - Net 959,731 931,303
Accrued interest receivable and other assets 62,714 58,047
Premises and Equipment - Net 24,367 22,170
---------- ----------
Total assets $1,610,286 $1,552,279
========== ==========
LIABILITIES
Deposits:
Non-interest bearing $ 151,376 $ 149,469
Interest-bearing 994,035 951,242
---------- ----------
Total deposits 1,145,411 1,100,711
Federal Home Loan Bank advances 256,500 256,500
Federal funds purchased 10,200 --
Repurchase agreements 35,000 30,000
Interest payable and other liabilities 8,956 9,722
---------- ----------
Total liabilities 1,456,067 1,396,933
---------- ----------
STOCKHOLDERS' EQUITY
Common stock (no par value) -- --
Additional paid-in capital 15,836 19,806
Retained Earnings 139,968 135,647
Accumulated other comprehensive income (loss) (1,585) (107)
---------- ----------
Total stockholders' equity 154,219 155,346
---------- ----------
Total liabilities and stockholders' equity $1,610,286 $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 SEPTEMBER 30,
--------------------------------
2005 2004
------- -------
Dollars in thousands, except per share data
INTEREST INCOME
Interest and fees on loans $16,841 $14,888
Interest on investment securities-
Tax-exempt 1,242 1,398
Taxable 5,037 4,458
Interest on federal funds sold 57 --
------- -------
Total interest income 23,177 20,744
------- -------
INTEREST EXPENSE
Interest on deposits 6,218 3,904
Interest on borrowed funds 3,846 3,213
------- -------
Total interest expense 10,064 7,117
------- -------
NET INTEREST INCOME 13,113 13,627
PROVISION FOR LOAN LOSSES 4,100 600
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 9,013 13,027
------- -------
OTHER INCOME
Income from trust services 1,045 953
Service charges and other fees 1,555 1,423
Net gain (loss) on sales of securities (13) (2)
Other 1,096 1,022
------- -------
Total other income 3,683 3,396
------- -------
OTHER EXPENSES
Salaries and employee benefits 4,368 4,437
Occupancy expense 723 695
Other 3,932 2,893
------- -------
Total other expenses 9,023 8,025
------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES 3,673 8,398
PROVISION FOR INCOME TAXES 1,102 2,289
------- -------
NET INCOME $ 2,571 $ 6,109
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.15 $ 0.35
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.15 $ 0.35
======= =======
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.17 $ 0.16
======= =======
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,
-------------------------------
2005 2004
------- -------
Dollars in thousands, except per share data
INTEREST INCOME
Interest and fees on loans $47,595 $42,401
Interest on investment securities-
Tax-exempt 3,764 4,258
Taxable 14,468 11,893
Interest on federal funds sold 188 2
------- -------
Total interest income 66,015 58,554
------- -------
INTEREST EXPENSE
Interest on deposits 16,623 10,570
Interest on borrowed funds 10,966 8,733
------- -------
Total interest expense 27,589 19,303
------- -------
NET INTEREST INCOME 38,426 39,251
PROVISION FOR LOAN LOSSES 5,300 1,800
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 33,126 37,451
------- -------
OTHER INCOME
Income from trust services 3,132 2,688
Service charges and other fees 4,331 4,073
Net gain on sales of securities 273 116
Other 3,057 3,106
------- -------
Total other income 10,793 9,983
------- -------
OTHER EXPENSES
Salaries and employee benefits 13,915 13,419
Occupancy expense 2,507 2,192
Other 9,540 8,298
------- -------
Total other expenses 25,962 23,909
------- -------
INCOME BEFORE PROVISION
FOR INCOME TAXES 17,957 23,525
PROVISION FOR INCOME TAXES 5,138 6,368
------- -------
NET INCOME $12,819 $17,157
======= =======
BASIC EARNINGS PER COMMON SHARE $ 0.74 $ 0.98
======= =======
DILUTED EARNINGS PER COMMON SHARE $ 0.74 $ 0.98
======= =======
COMMON STOCK DIVIDENDS DECLARED PER SHARE $ 0.49 $ 0.46
======= =======
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,
-------------------------------
2005 2004
--------- ---------
Dollars in thousands
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 12,819 $ 17,157
Adjustments to reconcile net income to net cash from operating activities
Depreciation 2,172 1,982
Provision for loan losses 5,300 1,800
(Increase) decrease in net deferred Federal income tax asset 300 (455)
Net amortization of investment premium and discount 160 448
Net increase (decrease) in interest payable and other liabilities (582) 4,650
Net (increase) decrease in interest receivable and other assets (9,808) (4,997)
Net gain on sales of securities (273) (116)
Increase in cash surrender value of life insurance (824) (1,128)
--------- ---------
Net cash provided by operating activities $ 9,264 $ 19,341
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and redemptions of investment securities held to
maturity $ 14,366 $ 18,760
Proceeds from maturities and redemptions of investment securities
available for sale 48,915 43,838
Proceeds from sales of investment securities held to maturity 2,994 --
Proceeds from sales of investment securities available for sale 58,625 61,238
Net increase in loans (33,590) (82,857)
Proceeds from sales of other real estate owned 6,614 6,314
Proceeds from sales of other assets 101 26
Purchase of investment securities held to maturity (9,262) (7,630)
Purchase of investment securities available for sale (145,921) (122,858)
Purchase of bank premises and equipment (4,637) (4,264)
--------- ---------
Net cash used for investing activities $ (61,795) $ (87,433)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits $ 44,700 $ 33,309
Net increase in Federal funds purchased 10,200 (800)
Net increase in Federal Home Loan Bank borrowings -- 28,500
Net increase in Repurchase Agreements 5,000 21,000
Proceeds from issuance of common stock 1,200 1,095
Repurchase of common stock (5,354) (2,565)
Dividends paid (8,356) (7,862)
--------- ---------
Net cash provided by financing activities $ 47,390 $ 72,677
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (5,141) $ 4,585
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 34,540 22,525
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 29,399 $ 27,110
========= =========
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
CAPITAL EARNINGS INCOME (LOSS) TOTAL
---------- -------- ------------- ---------
Dollars in thousands
BALANCE - JANUARY 1, 2005 $19,806 $135,647 $ (107) $155,346
Repurchase of Common Stock (275,100 shares) (5,354) -- -- (5,354)
Issuance of Common Stock
Stock options exercised (76,848 shares) 1,093 -- -- 1,093
Other stock issued (5,336 shares) 107 -- -- 107
Tax benefit from exercise of options 184 -- 184
Dividends declared ($0.49 per share) -- (8,498) -- (8,498)
Comprehensive income:
Net income -- 12,819 -- 12,819
Change in net unrealized loss on securities
available for sale - Net of tax effect of $796 -- -- (1,478) (1,478)
------- -------- ------- ---------
Total Comprehensive Income -- 12,819 (1,478) 11,341
------- -------- ------- ---------
BALANCE - SEPTEMBER 30, 2005 $15,836 $139,968 $(1,585) $154,219
======= ======== ======= =========
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
branches in Monroe County, Michigan and five 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.
-7-
MBT FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The Company's as reported and pro forma earnings information for the quarter and
nine months ended September 30 were as follows:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------- ---------------------------
2005 2004 2005 2004
------ ------ ------- -------
Dollars in thousands, except per share data
Net Income as Reported $2,571 $6,109 $12,819 $17,157
Pro Forma Adjustment
Due to Stock Options (115) (64) (345) (302)
------ ------ ------- -------
Pro Forma Net Income $2,456 $6,045 $12,474 $16,855
====== ====== ======= =======
Earnings per Share as Reported
Basic $ 0.15 $ 0.35 $ 0.74 $ 0.98
Diluted $ 0.15 $ 0.35 $ 0.74 $ 0.98
Pro Forma Earnings per Share
Basic $ 0.14 $ 0.34 $ 0.72 $ 0.97
Diluted $ 0.14 $ 0.34 $ 0.71 $ 0.96
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
September 30 is as follows:
2005 2004
----------- -----------
BASIC
Net income $ 2,571,000 $ 6,109,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 2,571,000 $ 6,109,000
----------- -----------
Average common shares outstanding 17,282,699 17,419,214
----------- -----------
Earnings per common share - basic $ 0.15 $ 0.35
=========== ===========
2005 2004
----------- -----------
DILUTED
Net income $ 2,571,000 $ 6,109,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $ 2,571,000 $ 6,109,000
----------- -----------
Average common shares outstanding 17,282,699 17,419,214
Stock option adjustment 83,650 101,724
----------- -----------
Average common shares outstanding - diluted 17,366,349 17,520,938
----------- -----------
Earnings per common share - diluted $ 0.15 $ 0.35
=========== ===========
-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:
2005 2004
----------- -----------
BASIC
Net income $12,819,000 $17,157,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $12,819,000 $17,157,000
----------- -----------
Average common shares outstanding 17,371,928 17,449,930
----------- -----------
Earnings per common share - basic $ 0.74 $ 0.98
=========== ===========
2005 2004
----------- -----------
DILUTED
Net income $12,819,000 $17,157,000
Less preferred dividends -- --
----------- -----------
Net income applicable to common stock $12,819,000 $17,157,000
----------- -----------
Average common shares outstanding 17,371,928 17,449,930
Stock option adjustment 84,409 81,295
----------- -----------
Average common shares outstanding - diluted 17,456,337 17,531,225
----------- -----------
Earnings per common share - diluted $ 0.74 $ 0.98
=========== ===========
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 76,848 14.23
Cancelled -- --
------- ------
Options Outstanding, September 30, 2005 492,939 $17.63
------- ------
Options Exercisable, September 30, 2005 189,789 $15.42
======= ======
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,
2005 2004
------------- ------------
Real estate loans $802,052 $774,670
Loans to finance agricultural production and
other loans to farmers 3,859 2,333
Commercial and industrial loans 92,955 88,035
Loans to individuals for household, family,
and other personal expenditures 75,185 81,119
All other loans (including overdrafts) 541 1,297
-------- --------
Total loans, gross 974,592 947,454
Less: Deferred loan fees 1,656 1,573
-------- --------
Total loans, net of deferred loan fees 972,936 945,881
Less: Allowance for loan losses 12,565 13,800
-------- --------
$960,371 $932,081
======== ========
Loans are placed in a nonaccrual status when, in the opinion of Management, the
collection of additional interest is doubtful. All loan relationships over
$250,000 that are 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,
2005 2004
------------- ------------
Nonaccrual loans $14,872 $29,015
Loans 90 days past due 100 230
Restructured loans 2,731 3,715
------- -------
Total nonperforming loans $17,703 $32,960
Other real estate owned 8,894 6,958
------- -------
Total nonperforming assets $26,597 $39,918
======= =======
Nonperforming assets to total assets 1.65% 2.57%
Allowance for loan losses to
nonperforming assets 47.24% 34.57%
-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, December 31,
2005 2004
------------- ------------
Balance beginning of year $13,800 $14,500
Provision for loan losses 5,300 2,491
Loans charged off (7,917) (4,447)
Transfer to establish reserve for
unfunded loan commitments (275) --
Recoveries 1,657 1,256
------- -------
Balance end of period $12,565 $13,800
======= =======
For each period, the provision for loan losses in the income statement is based
on Management's estimate of the amount required to maintain an adequate
Allowance for Loan Losses.
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. When it is determined that a customer will not repay a loan, 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, 2005 and December 31, 2004 (000's omitted):
September 30, 2005 December 31, 2004
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Held to Maturity
Obligations of U.S. Government Agencies $ 16 $ 17 $ 527 $ 578
Obligations of States and Political
Subdivisions 75,512 76,733 80,622 82,636
Other Securities -- -- 2,992 3,074
------- ------- ------- -------
$75,528 $76,750 $84,141 $86,288
======= ======= ======= =======
September 30, 2005 December 31, 2004
------------------------ ------------------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
--------- ------------ --------- ------------
Available for Sale
Obligations of U.S. Government Agencies $351,679 $348,605 $315,410 $314,381
Obligations of States and Political
Subdivisions 29,433 29,836 28,635 29,187
Other Securities 66,140 66,245 64,472 64,785
-------- -------- -------- --------
$447,252 $444,686 $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.
-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,
2005 2004
------------- ------------
Commitments to extend credit:
Unused portion of commercial lines of credit $122,851 $123,739
Unused portion of credit card lines of credit 7,221 7,265
Unused portion of home equity lines of credit 21,958 23,709
Standby letters of credit and financial guarantees written 13,862 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.
-13-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
MBT Financial Corp. (the "Company) is a bank holding company with one
subsidiary, Monroe Bank & Trust ("the Bank"). The Bank is a commercial bank with
two wholly owned subsidiaries, MBT Credit Company, Inc. and MB&T Financial
Services. MBT Credit Company, Inc. conducts lending operations for the Bank and
MB&T Financial Services is an insurance agency which sells insurance policies to
the Bank. At the end of the third quarter of 2005, the Bank closed its
Frenchtown Mall branch. The Bank now operates 20 branch offices in Monroe
County, Michigan and 5 offices in Wayne County, Michigan. The Bank's primary
source of income is interest income on its loans and investments and its primary
expense is interest expense on its deposits and borrowings.
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 2005, the Bank's deposits increased $44.7
million, or 4.1%. This growth occurred as the Bank increased its use of brokered
certificates of deposit from $39.2 million as of December 31, 2004 to $64.7
million as of September 30, 2005. The brokered deposits that were added have
original maturities ranging from 6 months to 5 years, with a weighted average
maturity of 2.4 years. These deposits were obtained in order to extend the
duration of the Bank's liabilities as part of the Bank's interest rate risk
management strategy. The remaining $19.2 million of deposit growth was generated
in the Bank's existing markets.
Since December 31, 2004, total loans increased $27.1 million (2.9%), total cash
and investments increased $22.6 million (4.1%), and total assets increased $58.0
million (3.7%). Loan growth was restricted by the Bank's efforts to reduce non
performing loans, which decreased $15.3 million. Also, the Bank sold $7 million
of fixed rate mortgage loans in the second quarter of 2005 in order to shorten
the duration of the Bank's assets as a part of its interest rate risk management
strategy. In addition to the deposit growth, the asset growth was funded by an
increase of $15.2 million, or 5.3% in borrowed funds. The loan pipeline
increased during the first three quarters of 2005 and loan growth is expected to
increase in the fourth quarter and continue into 2006.
-14-
The Bank has continued its effort to expand into the southern Wayne County,
Michigan market, opening its fifth Wayne County branch in the second quarter of
2005. Deposits in this market now exceed $80 million and approximately one half
of our commercial loan volume is generated in Wayne County.
The quality of the loan portfolio is continuing to improve. Nonperforming assets
("NPAs") decreased $13.3 million or 33.4% since year end, in part due to net
charge off of $6.3 million. Also, improved lending practices and underwriting
standards have resulted in a reduction of the amount of new NPAs being added.
Furthermore, we have reduced the amount of automobile and other loans to
individuals and increased the amount of residential mortgage loans, including
home equity loans. The Allowance for Loan and Lease Losses (ALLL) decreased $1.2
million since December 31, 2004 and is now 1.29% of loans, compared to 1.46% at
year end. Due to the reduction of NPAs, the ALLL is now 47.24% of NPAs, an
improvement of 12.67% from year end. Because a significant portion of the Bank's
lending is secured by real estate, we believe that at this level the ALLL
adequately estimates the losses in the loan portfolio. We expect asset quality
to gradually improve over the next several quarters.
Results of Operations - Third Quarter 2005 vs. Third Quarter 2004
Net Interest Income - A comparison of the income statements for the three months
ended September 30, 2005 and 2004 shows a decrease of $514,000, or 3.8% in Net
Interest Income. Interest income on loans increased $2.0 million or 11.7% as the
average loans outstanding increased $34.9 million and the average yield on loans
increased from 6.34% to 6.89%. Interest income on investments and fed funds sold
increased $480,000 as the average amount of investments and fed funds sold
increased $23.1 million and the yield on these assets increased from 4.60% to
4.74%. The yields on assets increased slightly due to the increases in market
interest rates. The shorter term market interest rates increased more rapidly
than the longer term rates, which caused funding costs to rise faster than asset
yields. The interest expense on deposits increased $2.3 million, or 59.3% as
average deposits increased $77.1 million and the average cost of those deposits
increased from 1.46% to 2.16%. The cost of borrowed funds increased $633,000 as
the average amount of borrowed funds decreased $18.7 million while the average
cost of the borrowings increased from 4.07% to 5.17%. The fed rate increases
that began late in the second quarter of 2004 and continued through the third
quarter of 2005 had a positive impact on our income as our loan portfolio
contains approximately $275 million of variable rate, prime indexed loans and
our investment portfolio contains about $50 million in LIBOR based floating rate
securities. The increase in interest rates only affected short term rates, and
this flattening of the yield curve prevented our loan and investment yields from
increasing more.
Provision for Loan Losses - The Provision for Loan Losses increased
significantly in the third quarter of 2005 as compared to the same period in
2004. Each quarter, the Bank conducts a review and analysis of its ALLL. This
analysis involves specific allocations for impaired credits and a general
allocation for losses expected based on historical experience adjusted for
current conditions. Management's concern about the strength of the regional
economy and local real estate values prompted a decision to increase our
provision expense from $600,000 to $4.1 million during the third quarter of
2005. This action was not taken as a response to a deterioration of any specific
credit relationships. We believe that we will be able to return to our previous
provision amount in the fourth quarter unless the regional economic conditions
worsen.
Other Income - Non interest income for the third quarter of 2005 increased
$287,000 or 8.5% compared to the same period of 2004. The table below compares
the components of Other Income for the two quarters:
-15-
Quarters Ended
---------------------
9/30/2005 9/30/2004 % Change
--------- --------- --------
(Dollars in Thousands)
Trust Income $1,045 $ 953 9.7%
Deposit Account Service Charges 300 361 -16.9%
Other Deposit Account Related Fees 1,255 1,062 18.2%
Origination Fees/Gains on Loans Sold 232 131 77.1%
Gains (Losses) on Securities Transactions (13) (2) 550.0%
BOLI Earnings 276 362 -23.8%
Other Income 588 529 11.2%
------ ------ -----
$3,683 $3,396 8.5%
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 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 and Gains on Mortgage Loans Sold increased as the low mortgage rates have
kept mortgage loan activity strong. 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.
Other Expenses - Total non interest expenses increased $1.0 million, or 12.4%
compared to the third quarter of 2004. Salaries and Employee Benefits decreased
$69,000, or 1.6%, even though the number of full time equivalent employees
increased 4.2% from 404 to 421. The decrease in the expense is due to reduction
in the incentive compensation accrual. The Bank pays its employees an annual
incentive payment based on the Company's earnings performance compared to a
goal. Through the third quarter 2005 the projected earnings for the year were
below the goal, requiring reversal of $30,000 of previously accrued compensation
expense. During the third quarter of 2004, the Bank accrued $266,000 for
incentive compensation. As a result, the incentive compensation expense for the
quarter decreased $296,000 compared to last year. Occupancy Expense increased
$28,000, or 4.0%, compared to the third quarter of 2004. Other Expenses
increased $1.0 million or 35.9% primarily due to losses of $789,000 on the sale
of Other Real Estate Owned in the third quarter of 2005. Although $660,000 of
that loss was on the sale of one unique property outside of the Bank's market
area, Management decided to review the carrying values of its remaining OREO
properties. This review resulted in the decision to write down the remaining
properties by $569,000. Total OREO related expenses for the third quarter of
2005 increased $1.4 million compared to the same period in 2004. Core non
interest expenses were consistent with our expectations for the quarter, and we
do not expect them to increase significantly in the fourth quarter of 2005.
As a result of the above activity, Income Before Provision for Income Taxes
decreased $4.7 million, or 56.3%. The Provision for Income Taxes decreased $1.2
million, or 51.9%, and reflects an effective tax rate of 30.0% compared to the
effective tax rate of 27.3% in the third quarter of 2004. The increase in the
cost of funds, the decrease in tax exempt interest income, and the decrease in
BOLI earnings caused the increase in the effective tax rate. Net Income
decreased $3.5 million, or 57.9% compared to the third quarter of 2004.
Results of Operations - September 30, 2005 YTD vs. September 30, 2004 YTD
Net Interest Income - A comparison of the income statements for the nine months
ended September 30, 2005 and 2004 shows a decrease of $825,000, or 2.1% in Net
Interest Income. Interest income on loans increased $5.2 million or 12.2% as the
average loans outstanding increased $53.3 million and the average yield on loans
increased from 6.26% to 6.64%. Interest income on investments and fed funds sold
increased $2.3 million as the average amount of
-16-
investments and fed funds sold increased $44.4 million and the yield on these
assets increased from 4.47% to 4.67%. The yields on assets increased slightly
due to the increases in market interest rates. The shorter term market interest
rates increased more rapidly than the longer term rates, which caused funding
costs to rise faster than asset yields. The interest expense on deposits
increased $6.1 million, or 57.3% as average deposits increased $80.3 million and
the average cost of those deposits increased from 1.36% to 1.98%. The cost of
borrowed funds increased $2.2 million as the average amount of borrowed funds
increased $14.1 million while the average cost of the borrowings increased from
4.12% to 4.93%.
Provision for Loan Losses - The Provision for Loan Losses increased
significantly in the first nine months of 2005 as compared to the same period in
2004. Management's concern about the strength of the regional economy and local
real estate values prompted a decision to increase our provision expense from
$1.8 million in 2004 to $5.3 million in 2005. This action was not taken as a
response to a deterioration of any specific credit relationships. We expect our
provision expense will be approximately $6 million in 2005 and decrease to about
$3 million in 2006 unless the regional economic conditions worsen.
Other Income - Non interest income for the first three quarters of 2005
increased $810,000 or 8.1% compared to the same period of 2004. The following
table compares the components of Other Income for the two periods:
Nine Months Ended
---------------------
9/30/2005 9/30/2004 % Change
--------- --------- --------
(Dollars in Thousands)
Trust Income $ 3,132 $2,688 16.5%
Deposit Account Service Charges 908 1,183 -23.2%
Other Deposit Account Related Fees 3,423 2,890 18.4%
Origination Fees on Loans Sold 537 460 16.7%
Gains on Securities Transactions 273 116 135.3%
BOLI Earnings 824 1,128 -27.0%
Other Income 1,696 1,518 11.7%
------- ------ -----
$10,793 $9,983 8.1%
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 and Gains on Mortgage Loans Sold increased as the
low mortgage rates have kept mortgage loan activity strong. 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.
Other Expenses - Total non interest expenses increased $2.1 million, or 8.6%
compared to the first three quarters of 2004. Salaries and Employee Benefits
increased $496,000, or 3.7%. The average number of full time equivalent
employees increased 6.1% from 392 to 416 due to the continued expansion of our
branch network into Wayne County. The increase in the compensation expense was
less than anticipated due to a reduction in the incentive compensation accrual
from $787,000 to $360,000. The Bank pays its employees an annual incentive
payment based on the Company's earnings performance compared to a goal. Through
the third quarter 2005 the projected earnings for the year were below the goal,
requiring a smaller incentive compensation expense. Occupancy Expense increased
$315,000, or 14.4%, compared to the first three quarters of 2004 due to the
expansion into Wayne County. Also, in the fourth quarter of 2004, the Bank began
to accelerate the depreciation of a parking lot that will become the site of
-17-
its new headquarters building. The new headquarters is expected be completed in
the third quarter of 2006. Other Expenses increased $1.2 million or 15.0%
primarily due to losses and write downs of Other Real Estate Owned. OREO losses
in the first three quarters of 2005 were $1,131,000 compared to $80,000 in the
first three quarters of 2004.
As a result of the above activity, Income Before Provision for Income Taxes
decreased $5.6 million, or 23.7%. The Provision for Income Taxes decreased $1.2
million, or 19.3%, and reflects an effective tax rate of 28.6% compared to the
effective tax rate of 27.1% in the first three quarters of 2004. The increase in
the cost of funds, the decrease in tax exempt interest income, and the decrease
in BOLI earnings caused the increase in the effective tax rate. Net Income
decreased $4.3 million, or 25.3% compared to the first three quarters of 2004.
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, the Federal funds lines
that have been established with correspondent banks, and Repurchase Agreements
with money center banks that allow us to pledge securities as collateral for
borrowings. As of September 30, 2005, the Bank utilized $256.5 million of its
authorized limit of $275 million with the Federal Home Loan Bank of Indianapolis
and $10.2 million of its $110 million of federal funds lines with its
correspondent banks.
Total stockholders' equity of the Corporation was $154.2 million at September
30, 2005 and $155.3 million at December 31, 2004. The ratio of equity to assets
was 9.6% at September 30, 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 Corporation:
Minimum to be Well
September 30, 2005 December 31, 2004 Capitalized
------------------ ----------------- ------------------
Leverage Capital 9.7% 10.0% 5.0%
Tier 1 Risk Based Capital 13.9% 14.3% 6.0%
Total Risk Based Capital 15.1% 15.6% 10.0%
At September 30, 2005 and December 31, 2004, 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 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
-18-
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 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 nine 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 and procedures as of
September 30, 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
September 30, 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 September 30, 2005, 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.
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 September 30, 2005:
Maximum
Total Number of Shares Number of Shares
Purchased as Part that May Yet Be
Total Number of Average Price of Publicly Announced Purchased Under the
Shares Purchased Paid per Share Plans or Programs Plans or Programs
---------------- -------------- ---------------------- -------------------
July 1, 2005 - July 31, 2005 -- $ -- -- 1,745,000
August 1, 2005 - August 31, 2005 20,100 $19.37 20,100 1,724,900
September 1, 2005 - September 30, 2005 -- $ -- -- 1,724,900
------ ------ ------
Total 20,100 $19.23 20,100
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.
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.
-20-
31.2 Certification by Chief Financial Officer required by Securities and
Exchange Commission Rule 13a-14.
32.1 Certification by Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification by Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
-21-
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 4, 2005 /s/ H. Douglas Chaffin
- ---------------- ----------------------------------------
Date H. Douglas Chaffin
President & Chief Executive Officer
November 4, 2005 John L. Skibski
- ---------------- ----------------------------------------
Date John L. Skibski
Executive Vice President and
Chief Financial Officer
-22-
EXHIBIT INDEX
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Restated Articles of Incorporation of MBT Financial Corp. Previously
filed as Exhibit 3.1 to MBT Financial Corp.'s Form 10-K for its fiscal
year ended December 31, 2000.
3.2 Amended and Restated Bylaws of MBT Financial Corp. Previously filed as
Exhibit 3.2 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.