-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ITkX3dJA6U2USsw748N95yyZX3ayTflb0cKdmS2p3Nv4VzyB7tHLRDHYbMAztuGx +EDWcNVdxYdscSkzSHpH8A== 0000950124-04-000940.txt : 20040315 0000950124-04-000940.hdr.sgml : 20040315 20040315153911 ACCESSION NUMBER: 0000950124-04-000940 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040315 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MBT FINANCIAL CORP CENTRAL INDEX KEY: 0001118237 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 383516922 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-30973 FILM NUMBER: 04669429 BUSINESS ADDRESS: STREET 1: 102 EAST FRONT STREET CITY: MONROE STATE: MI ZIP: 48161 BUSINESS PHONE: 7342422893 MAIL ADDRESS: STREET 1: 102 EAST FRONT STREET CITY: MONROE STATE: MI ZIP: 48161 10-K 1 k82540e10vk.txt ANNUAL REPORT FOR THE FISCAL YEAR ENDED 12/31/03 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 Commission File Number: 000-30973 MBT FINANCIAL CORP. (Exact Name of Registrant as Specified in its Charter) MICHIGAN 38-3516922 (State of Incorporation) (I.R.S. Employer Identification No.) 102 E. FRONT ST. MONROE, MICHIGAN 48161 (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (734) 241-3431 Securities registered pursuant to section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, No Par Value 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 if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Bank's knowledge, in a definitive proxy statement incorporated by reference in Part III of the Form 10-K or any of the amendments of this Form 10-K. [ ]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES X NO ____. As of June 30, 2003, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $334,379,907. As of March 10, 2004, there were 17,505,054 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Annual Meeting of Shareholders to be held May 6, 2004 are incorporated by reference into Part III of this report on Form 10-K. ================================================================================ Part I Item 1. Business GENERAL MBT Financial Corp. (the "Corporation") operates as a bank holding company headquartered in Monroe, Michigan. The Corporation was incorporated under the laws of the State of Michigan in January 2000, at the direction of the management of Monroe Bank & Trust (the "Bank"), for the purpose of becoming a bank holding company by acquiring all the outstanding shares of Monroe Bank & Trust. At the April 6, 2000 Annual Meeting of Shareholders of Monroe Bank & Trust, shareholders approved a proposal that resulted in the Bank merging with Monroe Interim Bank, a state chartered bank, which was a subsidiary of the Corporation. On July 1, 2000, the merger of Monroe Bank & Trust and Monroe Interim Bank was completed, with Monroe Bank & Trust becoming the wholly owned subsidiary of MBT Financial Corp. Monroe Bank & Trust was incorporated and chartered as Monroe State Savings Bank under the laws of the State of Michigan in 1905. In 1940, Monroe Bank & Trust consolidated with Dansard Bank and moved to the present address of its main office. Monroe Bank & Trust operated as a unit bank until 1950 when it opened its first branch office in Ida, Michigan. It then continued its expansion to its present total of 24 branch offices, including its main office. Monroe Bank & Trust changed its name from "Monroe State Savings Bank" to "Monroe Bank & Trust" in 1968. Monroe Bank & Trust provides customary retail and commercial banking and trust services to its customers, including checking and savings accounts, time deposits, safe deposit facilities, commercial loans, personal loans, real estate mortgage loans, installment loans, IRAs, ATM and night depository facilities, treasury management services, telephone and internet banking, personal trust, employee benefit and investment management services. Monroe Bank & Trust's service areas are comprised of Monroe and Wayne counties in Southern Michigan. Monroe Bank & Trust's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") to applicable legal limits and Monroe Bank & Trust is supervised and regulated by the FDIC and Michigan Office of Financial and Insurance Services Division of Financial Institutions. COMPETITION MBT Financial Corp., through its subsidiary, Monroe Bank & Trust, operates in a highly competitive industry. Monroe Bank & Trust's main competition comes from other commercial banks, national or state savings and loan institutions, securities brokers, mortgage bankers, finance companies and insurance companies. Banks generally compete with other financial institutions through the banking products and services offered, the pricing of services, the level of service provided, the convenience and availability of services, and the degree of expertise and personal manner in which these services are offered. Monroe Bank & Trust encounters strong competition from most of the financial institutions in Monroe Bank & Trust's extended market area. The Bank's primary market area is Monroe County, Michigan. According to the most recent market data, there are approximately seven other deposit taking/lending institutions competing in the Bank's market. According to the most recent market data for deposits, the Bank ranks first in market share with approximately 61% of the Monroe County market. 2 SUPERVISION AND REGULATION MBT Financial Corp., as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the BHC Act), and is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (the Federal Reserve Board). The BHC Act requires the prior approval of the Federal Reserve Board for a bank holding company to acquire or hold more than a 5% voting interest in any bank. The BHC Act allows interstate bank acquisitions anywhere in the country and interstate branching by acquisition and consolidation in those states that have not opted out by January 1, 1997. In addition, MBT Financial Corp. is generally prohibited by the BHC Act from acquiring direct or indirect ownership or control of more than five percent of the voting shares of any company which is not a bank or bank holding company and from engaging directly or indirectly in activities other than those of managing or controlling banks or furnishing services to its subsidiaries. MBT Financial Corp. may, however, subject to the prior approval of the Federal Reserve Board, engage in, or acquire shares of companies engaged in activities which are deemed by the Federal Reserve Board by order or by regulation to be so closely related to banking or managing and controlling a bank as to be a proper activity. On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was enacted into law. The GLB Act made sweeping changes with respect to the permissible financial services which various types of financial institutions may now provide. The Glass-Steagall Act, which had generally prevented banks from affiliation with securities and insurance firms, was repealed. Pursuant to the GLB Act, bank holding companies may elect to become a "financial holding company," provided that all of the depository institution subsidiaries of the bank holding company are "well capitalized" and "well managed" under applicable regulatory standards. Under the GLB Act, a bank holding company that has elected to become a financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Activities that are "financial in nature" include securities underwriting, dealing and market-making, sponsoring mutual funds and investment companies, insurance underwriting and agency, merchant banking, and activities that the Federal Reserve Board has determined to be closely related to banking. MBT Financial Corp. has not elected to become a financial holding company. MBT Financial Corp.'s banking subsidiary is subject to limitations with respect to transactions with affiliates. A substantial portion of the MBT Financial Corp.'s cash revenues is derived from dividends paid by its subsidiary bank. These dividends are subject to various legal and regulatory restrictions. MBT Financial Corp.'s banking subsidiary, Monroe Bank & Trust (the "Bank") is subject to primary supervision, regulation and examination by the Michigan Office of Financial and Insurance Services and the Federal Deposit Insurance Corporation (FDIC). Federal regulators adopted risk-based capital guidelines and leverage standards for banks and bank holding companies. A discussion of the impact of risk-based capital guidelines and leverage standards is presented in Note 14 of the MBT Financial Corp. financial statements included in Part II, Item 8 of this Form 10-K. 3 The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of any FDIC-assisted transaction involving an affiliated insured bank or savings association. Noncompliance with laws and regulations by financial holding companies and banks can lead to monetary penalties and/or an increased level of supervision or a combination of these two items. Management is not aware of any current instances of noncompliance with laws and regulations and does not anticipate any problems maintaining compliance on a prospective basis. Recent regulatory inspections and examinations of MBT Financial Corp. and the Bank have not disclosed any significant instances of noncompliance. The minor instances of noncompliance detected during these inspections and examinations were promptly corrected by management and no action was taken by the regulators against MBT Financial Corp. or the Bank. The earnings and growth of MBT Financial Corp. are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board. Its policies influence the amount of bank loans and deposits and the interest rates charged and paid thereon, and thus have an effect on earnings. The nature of future monetary policies and the effect of such policies on the future business and earnings of MBT Financial Corp. and its subsidiary bank cannot be predicted. EMPLOYEES MBT Financial Corp. has no employees other than its three officers, each of whom is also an employee and officer of Monroe Bank & Trust and who serve in their capacity as officers of MBT Financial Corp. without compensation. As of December 31, 2003, Monroe Bank & Trust had 373 full-time employees and 25 part-time employees. Monroe Bank & Trust provides a number of benefits for its full-time employees, including health and life insurance, workers' compensation, social security, paid vacations, numerous bank services, and a 401(k) plan. EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION - ---- --- -------- Ronald D. LaBeau 60 Chairman & Chief Executive Officer H. Douglas Chaffin 47 President & Chief Operating Officer Donald M. Lieto 48 Executive Vice President, Senior Administration Manager, Monroe Bank & Trust James E. Morr 57 Executive Vice President, Senior Trust Officer & General Counsel, Monroe Bank & Trust Thomas G. Myers 47 Executive Vice President & Chief Lending Manager, Monroe Bank & Trust John L. Skibski 39 Executive Vice President & Chief Financial Officer, Monroe Bank & Trust; Treasurer, MBT Financial Corp. Herbert J. Lock 57 Senior Vice President & Investment Officer, Monroe Bank & Trust; Secretary, MBT Financial Corp.
4 There is no family relationship between any of the Directors or Executive Officers of the registrant and there is no arrangement or understandings between any of the Directors or Executive Officers and any other person pursuant to which he was selected a Director or Executive Officer nor with any respect to the term which each will serve in the capacities stated previously. The Executive Officers of the Bank are elected to serve for a term of one year at the Board of Directors Annual Organizational Meeting, held in May. Ronald D. LaBeau was Chairman & Chief Executive Officer in 2003 and President & Chief Executive Officer in 2002, 2001, 2000, and 1999. H. Douglas Chaffin was President & Chief Operating Officer in 2003, Executive Vice President, Senior Lending Manager in 2002 and 2001, and Senior Vice President & City Executive, Lakeshore Corporate Group, Huntington National Bank, in 2001, 2000 and 1999. Thomas G. Myers was Executive Vice President & Chief Lending Manager in 2003, Senior Vice President, Commercial Group Manager in 2003 and 2002, and Corporate Banking Group Manager, Huntington National Bank, in 2001, 2000, and 1999. Donald M. Lieto was Executive Vice President, Senior Administration Manager in 2003, Senior Vice President, Information Services Manager in 2003, 2002, 2001, and 2000, and Vice President & Information Center Manager in 1999. James E. Morr was Executive Vice President, Senior Trust Officer and General Counsel in 2003, 2002, 2001, 2000 and 1999. John L. Skibski was Senior Vice President & Controller in 2003, Vice President & Controller in 2002, 2001 and 2000, and Second Vice President & Assistant Controller in 1999. Herbert J. Lock was Senior Vice President and Investment Officer in 2003, 2002, 2001, 2000, and 1999. AVAILABLE INFORMATION MBT Financial Corp. makes its annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and all amendments to those reports available on its website, free of charge. The website address is www.mbandt.com. Item 2. Properties MBT Financial Corp. does not conduct any business other than its ownership of Monroe Bank & Trust's stock. MBT Financial Corp. operates its business from Monroe Bank & Trust's main office facility. Monroe Bank & Trust operates its business from its main office complex and 23 full service branches in the counties of Monroe and Wayne, Michigan. In addition, MBT Credit Company, Inc., a wholly owned subsidiary of Monroe Bank & Trust, operates a mortgage loan origination office in Monroe, Michigan, and a loan and trust office in Wyandotte, Michigan. The Bank owns its main office complex and 20 of its branches. The remaining three branches and the two MBT Credit Company, Inc. locations are leased. Item 3. Legal Proceedings MBT Financial Corp. and its subsidiaries are not a party to, nor is any of their property the subject of any material pending 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 4. Submission of Matters to a Vote of Security Holders. No matter was submitted to the vote of holders of MBT Financial Corp. securities during the fourth quarter of 2003. 5 Part II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters Common stock consists of 17,491,784 shares with a book value of $8.20. Dividends declared on common stock during 2003 amounted to $.58 per share. The common stock is traded on the NASDAQ National Market under the symbol MBTF. Below is a schedule of the high and low trading price for the past two years by quarter. These prices represent those known to Management, but do not necessarily represent all transactions that occurred.
2003 2002 HIGH LOW HIGH LOW 1st quarter $ 13.50 $ 13.00 $ 14.60 $ 13.55 2nd quarter $ 18.80 $ 13.20 $ 14.38 $ 13.85 3rd quarter $ 17.40 $ 14.50 $ 14.00 $ 13.69 4th quarter $ 18.10 $ 15.20 $ 14.00 $ 13.20
Dividends declared during the past three years on a quarterly basis were as follows:
2003 2002 2001 1st quarter $ 0.14 $ 0.13 $ 0.11 2nd quarter $ 0.14 $ 0.13 $ 0.13 3rd quarter $ 0.15 $ 0.14 $ 0.13 4th quarter $ 0.15 $ 0.14 $ 0.13
At December 31, 2003 the Corporation's surplus account was $20,414,000 and undivided profits account was $123,867,000. Total stockholders' equity was decreased by the amount of net unrealized losses on securities available for sale of $835,000. As of December 31, 2003, the number of common stockholders was 1,322. Management's present expectation is that dividends will continue to be paid in the future. Item 6. Selected Financial Data The selected financial data for the five years ended December 31, 2003 are derived from the audited Consolidated Financial Statements of the Corporation. The financial data set forth below contains only a portion of our financial statements and should be read in conjunction with the Consolidated Financial Statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Form 10-K. 6 SELECTED CONSOLIDATED FINANCIAL DATA
Dollar amounts are in thousands, except per share data 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- CONSOLIDATED STATEMENTS OF INCOME Interest Income $ 77,774 $ 84,604 $ 101,324 $ 99,570 $ 83,179 Interest Expense 27,467 34,387 49,535 49,681 38,290 ----------- ----------- ----------- ----------- ----------- Net Interest Income 50,307 50,217 51,789 49,889 44,889 Provision for Loan Losses 8,005 6,101 7,400 6,298 9,388 ----------- ----------- ----------- ----------- ----------- Net Interest Income after Provision for Loan Losses 42,302 44,116 44,389 43,591 35,501 Other Income 13,803 12,791 10,651 8,709 6,920 Other Expenses 30,179 26,989 23,810 23,094 20,144 ----------- ----------- ----------- ----------- ----------- Income before Provision for Income Taxes 25,926 29,918 31,230 29,206 22,277 Provision for Income Taxes 6,611 8,114 8,307 8,031 5,207 ----------- ----------- ----------- ----------- ----------- Net Income $ 19,315 $ 21,804 $ 22,923 $ 21,175 $ 17,070 =========== =========== =========== =========== =========== Net Income available to Common Shareholders $ 19,315 $ 21,804 $ 21,923 $ 21,168 $ 17,060 =========== =========== =========== =========== =========== PER COMMON SHARE* Basic Net Income $ 1.02 $ 1.12 $ 1.10 $ 1.06 $ 0.85 Diluted Net Income 1.01 1.12 1.10 1.06 0.85 Cash Dividends Declared 0.58 0.54 0.50 0.37 0.36 Book Value at Year End 8.20 8.72 8.19 7.55 6.98 Average Common Shares Outstanding 19,026,369 19,458,737 19,933,580 20,000,000 20,000,000 =========== =========== =========== =========== =========== CONSOLIDATED BALANCE SHEETS (YEAR END) Total Assets $ 1,457,788 $ 1,409,694 $ 1,394,168 $ 1,379,386 $ 1,216,477 Total Securities 508,482 539,737 497,501 452,405 449,579 Loans, Net of Deferred Loan Fees 863,850 773,805 787,825 812,123 703,382 Allowance for Loan Losses 14,500 12,400 13,000 10,600 9,900 Deposits 1,039,117 1,010,960 998,880 994,596 944,076 Borrowings 270,000 225,000 225,000 225,000 125,000 Total Shareholders' Equity 143,446 166,999 161,730 150,955 139,647 =========== =========== =========== =========== =========== SELECTED FINANCIAL RATIOS Return on Average Assets 1.33% 1.55% 1.56% 1.66% 1.52% Return on Average Equity 11.39% 13.29% 13.70% 14.42% 11.99% Net Interest Margin 3.67% 3.79% 3.88% 4.13% 4.19% Dividend Payout Ratio 56.14% 47.99% 45.40% 34.95% 42.18% Allowance for Loan Losses to Period End Loans 1.68% 1.60% 1.65% 1.31% 1.41% Allowance for Loan Losses to Non Performing Loans 30.41% 27.93% 46.90% 51.53% 51.00% Non Performing Loans to Period End Loans 5.50% 5.74% 3.52% 2.53% 2.76% Net Charge Offs to Average Loans 0.72% 0.87% 0.59% 0.73% 1.52% =========== =========== =========== =========== ===========
* The reorganization into a one-bank holding company in 2000 resulted in an exchange of Monroe Bank & Trust stock for MBT Financial Corp. stock. The exchange rate was two shares of MBT Financial Corp. for each share of Monroe Bank & Trust, causing an increase of 10,000,000 shares outstanding. All per-share amounts have been restated to reflect this transaction. 7 Item 7. 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. CRITICAL ACCOUNTING POLICIES - The Bank's Allowance for Loan Losses is a "critical accounting estimate" because it is an estimate that is based on assumptions that are highly uncertain, and if different assumptions were used or if any of the assumptions used were to change, there could be a material impact on the presentation of the Corporation's financial condition. These assumptions include, but are not limited to, collateral values and the effect of economic conditions on the financial condition of the borrowers. To determine the Allowance for Loan Losses, the Bank estimates losses on all loans that are not classified as substandard or doubtful by applying historical loss rates to these loans in accordance with SFAS 5. In addition, all loans that are classified as substandard or doubtful and any loans that are nonaccrual or renegotiated are individually tested for impairment. Any amount of monetary impairment is included in the Allowance for Loan Losses in accordance with SFAS 114. Substandard, doubtful, nonaccrual, or renegotiated loans that do not have any monetary impairment identified are assigned an allowance following the same method as unclassified loans. Management is of the opinion that the Allowance for Loan Losses of $14,500,000 as of December 31, 2003 was adequate. Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of fair value or the loan carrying amount at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by Management and the assets are carried at the lower of carrying amount or fair value less cost to sell. RESULTS OF OPERATIONS - Despite the slowdown in economic activity in 2001, we experienced our second consecutive record earnings year as Net Income increased $751,000, or 4%, compared to 2000. Deposits increased less than 1% and Total Assets increased only 1%. Net Loans showed a slight decrease of 3% as commercial and industrial loans decreased 34% and loans to individuals for household, family, and other personal expenditures decreased 19%. Real estate loans showed a small increase of 9%. Although Total Loans decreased, we increased our Allowance for Loan Losses $2,400,000. This increase was necessary as the weak economic conditions impacted the credit quality of many of our customers. Income before Provision for Income Taxes increased $1,026,000, or 4%, compared to 2000. With a slight increase in our investment in Obligations of States and Political Subdivisions, our Provision for Income Taxes increased only $275,000, or 3%. The effective tax rate was 27.5% in 2001. Net Income decreased slightly in 2002 as we encountered continued low interest rates and a sluggish national and local economy. Net Income decreased $121,000, or less than 1%, compared to 2001. While Deposits and Total Assets each increased 1%, Net Loans decreased 2%. Commercial and industrial loans decreased 8% and loans to individuals for household, family, and 8 other personal expenditures decreased 22% while real estate loans showed a slight increase of 3%. The decrease in loans was partially attributable to the transfer of $12,932,000 of loans to other real estate and charge offs of $8,697,000, which enabled us to reduce our allowance for loan losses $600,000. Income before Provision for Income Taxes decreased $314,000, or 1%, compared to 2001. A larger percentage of our income was in interest on Obligations of States and Political Subdivisions in 2002, resulting in a decrease of $193,000, or 2% in our Provision for Income Taxes. The effective tax rate decreased from 27.5% in 2001 to 27.1% in 2002. In 2003, the deterioration of some large credit relationships led to a $5.5 million addition to the Allowance for Loan Losses. This caused Net Income to decrease $2,489,000, or 11%, compared to 2002. Although average earning assets increased $44.2 million, the net interest margin decreased ten basis points. As a result, the net interest income increased only $90,000. Equity markets began to recover late in 2003, but the low market values for most of the year caused our income from trust services to decline $181,000, or 5%. We were able to increase our deposit account service charges in 2003. While we are still one of the lowest cost providers of deposit services in our market, we increased our fee income by $787,000, or 17%. In 2003, we increased our investment in Bank Owned Life Insurance resulting in an increase of $508,000, or 64% in the earnings on these policies. Total non-interest income increased $1,012,000, or 8%. Non-interest expenses increased as we continued our expansion into the southern Wayne County market. During 2003 we opened two full service branches and we increased our total staffing from 375 to 389. These changes contributed to the increase of $3,190,000, or 12% in our non-interest expenses. Income before Provision for Income Taxes decreased $3,992,000, or 13% compared to 2002. The lower amount of income resulted in a decrease of $1,503,000, or 19% in our Provision for Income Taxes. The effective tax rate decreased from 27.1% in 2002 to 25.5% in 2003. Earnings for the Bank are usually highly reflective of the Net Interest Income. In 2001, the Federal Open Market Committee of the Federal Reserve attempted to prevent a recession by lowering the Federal Funds target rate 11 times, for a total of 475 basis points. Interest income increased only $1.8 million and interest expense decreased $146,000, compared to 2000. As a result, Net Interest Income increased $1.9 million, or 4%. The Provision for Loan Losses increased $1.1 million, as the Allowance for Loan Losses was increased. Non-interest income increased $1.9 million and non-interest expense increased $1.7 million. Income from trust services declined modestly due to a large amount of estate settlement fees collected by the trust department in 2000 and the declining market value of trust assets in 2001. The large increase in service charges on deposit accounts was the result of increases in the rates charged for deposit services and the implementation of new programs for overdrafts. Other non-interest income increased due to increased fees on mortgage originations and gains on the sales of portions of the consumer credit card and commercial lease loan portfolios. These sales resulted in a gain of $717,000. The increase in non-interest expense was primarily the result of an increase in Salaries and Employee Benefits as staffing continued to increase in several areas. The small increase in Net Interest Income, along with the significant increases in Provision for Loan Losses and non-interest income, and the small increase in non-interest expense, resulted in a small increase in Net Income. In 2002, market interest rates remained at historically low levels, prompting many borrowers to refinance their existing debt. The low interest rate environment also resulted in an increase in the amount of investment securities called. These factors lead to a decrease in the yield on earning assets from 7.4% in 2001 to 6.2% in 2002. Total Interest Income decreased $16.7 million while Total Interest Expense decreased only $15.1 million, resulting in a decrease of $1.6 million in Net Interest Income. The Provision for Loan Losses decreased $1.3 million after the large increase in 2001. Other Income increased $2.1 million as service charges on deposit accounts increased due to an overdraft program started late in 2001 and security gains also increased. Non-interest expenses increased 9% compared to 2001. Salaries and Employee Benefits increased 9% as the Bank continued to add staff, particularly in the loan, credit analysis, and loan review areas. This additional staff will allow the Bank to provide 9 better customer service to existing customers, resume the growth in the loan portfolio, and improve the monitoring of existing credit relationships. In 2003, rates remained low, with the Fed lowering the managed rates 25 basis points in June. This caused refinance activity to continue, and the Bank's yield on loans declined from 7.70% to 6.72%. Market rates also were low, and the investment yield dropped from 4.74% to 4.18% in 2003. During the year, the Bank restructured its portfolio of Federal Home Loan Bank advances, converting $95 million, or 42% of its portfolio, from fixed rate to floating rate. This lowered the cost of these borrowings from 5.72% in 2001 and 2002 to 5.05% in 2003. The average cost of interest bearing deposits was 4.1%, 2.4%, and 1.7% for 2001, 2002, and 2003 respectively. The table below shows selected financial ratios for the same three years.
2003 2002 2001 ---- ---- ---- Return on Average Assets 1.33% 1.55% 1.56% Return on Average Equity 11.39% 13.29% 13.70% Dividend Payout Ratio 56.14% 48.21% 45.40% Average Equity to Average Assets 11.71% 11.67% 11.40%
The following table shows the investment portfolio for the last three years (000s omitted).
Held to Maturity ------------------------------------------------------------------------------- December 31, 2003 December 31, 2002 December 31, 2001 ----------------------- ----------------------- ----------------------- Estimated Estimated Estimated Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- --------- --------- --------- --------- --------- U.S. Government agency and corporation obligations $ 536 $ 590 $ 588 $ 649 $ 30,044 $ 30,197 Securities issued by states and political subdivisions in the U.S. 95,634 99,234 113,255 117,968 129,075 131,921 Other domestic securities (debt and equity) 2,984 3,116 2,976 2,975 2,968 2,961 -------- -------- -------- -------- -------- -------- Total $ 99,154 $102,940 $116,819 $121,592 $162,087 $165,079 ======== ======== ======== ======== ======== ======== Pledged securities $ 23,903 $ 25,175 $ 31,972 $ 33,672 $ 35,709 $ 36,775 ======== ======== ======== ======== ======== ========
Available for Sale ------------------------------------------------------------------------------- December 31, 2003 December 31, 2002 December 31, 2001 ----------------------- ----------------------- ----------------------- Estimated Estimated Estimated Amortized Market Amortized Market Amortized Market Cost Value Cost Value Cost Value --------- --------- --------- --------- --------- --------- U.S. Government agency and corporation obligations (excluding mortgage-backed $315,004 $311,944 $322,878 $325,131 $226,027 $225,706 securities) Securities issued by states and political subdivisions in the U.S. 26,047 26,473 14,680 14,723 8,646 8,142 Other domestic securities (debt and equity) 57,876 59,225 73,304 71,814 91,513 90,316 -------- -------- -------- -------- -------- -------- Total $398,927 $397,642 $410,862 $411,668 $326,186 $324,164 ======== ======== ======== ======== ======== ======== Pledged securities $285,427 $283,103 $249,436 $251,994 $140,945 $140,594 ======== ======== ======== ======== ======== ========
10 The following table shows average daily balances, interest income or expense amounts, and the resulting average rates for interest earning assets and interest bearing liabilities for the last three years. Also shown are the net interest income, total interest rate spread, and the net interest margin for the same periods.
Years Ended December 31, --------------------------------------------------------------------------------------------- 2003 2002 2001 ------------------------------- ----------------------------- ----------------------------- Average Interest Average Interest Average Interest Daily Earned Average Daily Earned Average Daily Earned Average (Dollars in Thousands) Balance or Paid Yield Balance or Paid Yield Balance or Paid Yield ---------------------- --------- --------- ------- --------- --------- ------- --------- --------- ------- Investments Obligations of US Government Agencies 326,442 12,429 3.81% 288,438 13,106 4.54% 203,450 13,081 6.43% Obligations of States & Political Subdivisions(1) 123,489 6,206 5.03% 130,046 6,741 5.18% 127,640 6,822 5.34% Other Securities 84,725 3,737 4.41% 105,876 5,028 4.75% 148,648 8,705 5.86% --------- --------- ------ --------- --------- ------ --------- --------- ------ Total Investments 534,656 22,372 4.18% 524,360 24,875 4.74% 479,738 28,608 5.96% --------- --------- ------ --------- --------- ------ --------- --------- ------ Loans Commercial 549,558 34,671 6.31% 489,498 35,081 7.17% 520,498 43,307 8.32% Mortgage 166,665 11,829 7.10% 160,764 13,333 8.29% 191,752 16,356 8.53% Consumer 104,971 8,754 8.34% 118,026 10,766 9.12% 128,122 12,606 9.84% --------- --------- ------ --------- --------- ------ --------- --------- ------ Total Loans(2) 821,194 55,254 6.73% 768,288 59,180 7.70% 840,372 72,269 8.60% Federal Funds Sold 13,894 148 1.07% 32,950 549 1.67% 12,968 447 3.45% --------- --------- ------ --------- --------- ------ --------- --------- ------ Total Interest Earning Assets 1,369,744 77,774 5.68% 1,325,598 84,604 6.38% 1,333,078 101,324 7.60% Cash & Due From Banks 25,277 30,306 34,200 Interest Receivable and Other Assets 60,631 49,585 43,137 --------- --------- --------- Total Assets 1,455,652 1,405,489 1,410,415 ========= ========= ========= Savings Accounts 132,780 560 0.42% 127,826 1,521 1.19% 117,429 2,453 2.09% NOW Accounts 67,290 281 0.42% 66,648 752 1.13% 59,886 1,280 2.14% Money Market Deposits 372,177 4,219 1.13% 336,370 5,661 1.68% 257,612 8,352 3.24% Certificates of Deposit 348,847 10,932 3.13% 358,846 13,535 3.77% 462,121 24,543 5.31% Federal Funds Purchased 9,136 120 1.31% 2,052 38 1.85% 562 27 4.80% FHLB Advances 225,000 11,355 5.05% 225,000 12,880 5.72% 225,000 12,880 5.72% --------- --------- ------ --------- --------- ------ --------- --------- ------ Total Interest Bearing Liabilities 1,155,230 27,467 2.38% 1,116,742 34,387 3.08% 1,122,610 49,535 4.41% Non-interest Bearing Deposits 126,874 119,613 121,134 Other Liabilities 3,971 5,044 6,598 --------- --------- --------- Total Liabilities 1,286,075 1,241,399 1,250,342 Stockholders' Equity 169,577 164,090 160,073 --------- --------- --------- Total Liabilities & Stockholders' Equity 1,455,652 1,405,489 1,410,415 ========= ========= ========= Net Interest Income 50,307 50,217 51,789 Interest Rate Spread 3.30% 3.30% 3.19% Net Interest Income as a percent of average earning assets 3.67% 3.79% 3.88%
(1) Interest income on Obligations of States and Political Subdivisions is not on a taxable equivalent basis. (2) Total Loans excludes Overdraft Loans, which are non-interest earning. These loans are included in Other Assets. Total Loans includes nonaccrual loans. When a loan is placed in nonaccrual status, all accrued and unpaid interest is charged against interest income. Loans on nonaccrual status do not earn any interest. 11 The following table summarizes the changes in interest income and interest expense attributable to changes in interest rates and changes in the volume of interest earning assets and interest bearing liabilities for the period indicated:
Years Ended December 31, ------------------------------------------------------------------------------------------------------- 2003 versus 2002 2002 versus 2001 2001 versus 2000 ------------------------------- ------------------------------- ------------------------------- Changes due to Changes due to Changes due to increased (decreased) increased (decreased) increased (decreased) ------------------------------- ------------------------------- ------------------------------- (Dollars in Thousands) Rate Volume Net Rate Volume Net Rate Volume Net ---------------------- ------------------------------- ------------------------------- ------------------------------- Interest Income - ------------------------ Investments Obligations of US Government Agencies (2,403) 1,727 (676) (5,440) 5,464 24 (1,126) 2,038 912 Obligations of States & Political Subdivisions (195) (340) (535) (220) 140 (80) 39 (519) (480) Other Securities (287) (1,004) (1,291) (1,172) (2,505) (3,677) (2,344) 1,904 (440) ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Investments (2,885) 383 (2,502) (6,832) 3,099 (3,733) (3,431) 3,423 (8) ------- ------- ------- ------- ------- ------- ------- ------- ------- Loans Commercial (4,715) 4,304 (411) (5,631) (2,595) (8,226) (5,448) 4,895 (553) Mortgage (1,993) 489 (1,504) (380) (2,643) (3,023) 469 1,020 1,489 Consumer (822) (1,191) (2,013) (847) (993) (1,840) (29) 718 689 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Loans (7,530) 3,602 (3,928) (6,858) (6,231) (13,089) (5,008) 6,633 1,625 Federal Funds Sold (84) (318) (402) (587) 689 102 (380) 517 137 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Interest Income (10,499) 3,667 (6,832) (14,277) (2,443) (16,720) (8,819) 10,573 1,754 Interest Expense - ------------------------ Savings Accounts (1,021) 59 (962) (1,149) 217 (932) (426) (76) (502) NOW Accounts (479) 7 (472) (673) 145 (528) (149) (47) (196) Money Market Deposits (2,045) 603 (1,442) (5,244) 2,553 (2,691) (2,126) 2,764 638 Certificates of Deposit (2,226) (377) (2,603) (5,523) (5,485) (11,008) (2,992) 29 (2,963) Federal Funds Purchased (48) 130 82 (62) 73 11 (9) (290) (299) FHLB Advances (1,525) 0 (1,525) 0 0 0 (677) 3,853 3,176 ------- ------- ------- ------- ------- ------- ------- ------- ------- Total Interest Expense (7,344) 422 (6,922) (12,651) (2,497) (15,148) (6,379) 6,233 (146) ------- ------- ------- ------- ------- ------- ------- ------- ------- Net Interest Income (3,155) 3,245 90 (1,626) 54 (1,572) (2,440) 4,340 1,900 ======= ======= ======= ======= ======= ======= ======= ======= =======
Due to a variety of reasons, including volatile interest rates in the past and successful bidding in securing local municipal deposits, we have attempted, for the last several years, to maintain a liquid investment position. The percentage of securities held as Available for Sale increased from 78% as of December 31, 2002 to 80% as of December 31, 2003. As reflected in Note 3 to the consolidated financial statements, the percentage of securities that mature within five years was 13% as of December 31, 2003 and 39% as of December 31, 2002. The table below presents the scheduled maturities for each of the investment categories, and the average yield on the amounts maturing. The yields presented for the Obligations of States and Political Subdivisions are not tax equivalent yields. The interest income on these securities is exempt from federal income tax. The Corporation's statutory federal income tax rate is thirty-five percent. 12
Maturing ----------------------------------------------------------------------------------------------------- Within 1 year 1 - 5 years 5 - 10 Years Over 10 Years Total ----------------- ----------------- ----------------- ----------------- ----------------- Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ----------------- ----------------- ----------------- ----------------- ----------------- (Dollars in Thousands) ---------------------- Obligations of US Government Agencies $ -- 0.00% $ 14,908 3.75% $197,089 3.67% $100,483 4.05% $312,480 3.80% Obligations of States & Political Subdivisions 13,422 3.82% 32,528 5.31% 62,059 4.88% 14,099 4.74% 122,108 4.86% Other Securities -- 0.00% 2,984 6.54% 22,129 7.12% 37,095 2.59% 62,208 4.39% - ----------------------- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Total $ 13,422 3.82% $ 50,420 4.92% $281,277 4.21% $151,677 3.76% $496,796 4.13% ======== ==== ======== ==== ======== ==== ======== ==== ======== ====
Our loan policies also reflect our awareness of the need for liquidity. We have shortened the average terms for most of our loan portfolios, in particular real estate mortgages, the majority of which are normally written for five years or less. The following table shows the maturities or repricing opportunities (whichever is earlier) for the Bank's interest earning assets and interest bearing liabilities at December 31, 2003. The repricing assumptions shown are consistent with those established by the Bank's Asset and Liability Management Committee (ALCO). Savings accounts and regular NOW accounts are non-maturing, variable rate deposits, which may reprice as often as weekly, but are not included in the zero to six month category because in actual practice, these deposits are only repriced if there is a large change in market interest rates. The effect of including these accounts in the zero to six-month category is depicted in a subsequent table. Super NOW accounts and Money Market deposits are also non-maturing, variable rate deposits, however, these accounts are included in the zero to six-month category because they may get repriced following smaller changes in market rates.
Assets/Liabilities at December 31, 2003, Maturing or Repricing in: --------------------------------------------------------------------------- 0 - 6 6 - 12 1 - 2 2 - 5 Over 5 Total (Dollars in Thousands) Months Months Years Years Years Amount ---------------------- --------- --------- --------- --------- --------- --------- Interest Earning Assets - ---------------------------------- US Treas Secs & Obligations of US Gov't Agencies 306,050 2,686 2,011 34 1,699 312,480 Obligations of States & Political Subdivisions 19,811 8,841 17,735 40,920 34,800 122,107 Other Securities 41,880 11,000 3,000 -- 6,329 62,209 Commercial Loans 291,293 21,180 30,205 190,100 40,384 573,162 Mortgage Loans 9,981 9,528 13,338 122,736 30,844 186,427 Consumer Loans 16,945 11,364 19,482 34,658 21,812 104,261 Federal Funds Sold -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- Total Interest Earning Assets 685,960 64,599 85,771 388,448 135,868 1,360,646 --------- --------- --------- --------- --------- --------- Interest Bearing Liabilities - ---------------------------------- Interest Bearing Demand Deposits 55,410 -- -- -- -- 55,410 Savings Deposits 369,840 -- -- -- -- 369,840 Other Time Deposits 133,853 34,332 73,361 95,898 150 337,594 FHLB Advances 95,000 -- -- -- 130,000 225,000 Federal Funds Purchased 45,000 45,000 --------- --------- --------- --------- --------- --------- Total Interest Bearing Liabilities 699,103 34,332 73,361 95,898 130,150 1,032,844 --------- --------- --------- --------- --------- --------- Gap (13,143) 30,267 12,410 292,550 5,718 327,802 Cumulative Gap (13,143) 17,124 29,534 322,084 327,802 327,802 Sensitivity Ratio 0.98 1.88 1.17 4.05 1.04 1.32 Cumulative Sensitivity Ratio 0.98 1.02 1.04 1.36 1.32 1.32
13 If savings and regular NOW accounts were included in the zero to six months category, the Bank's gap would be as shown in the following table:
Assets/Liabilities at December 31, 2003, Maturing or Repricing in: ----------------------------------------------------------------------------- 0-6 6-12 1-2 2-5 Over 5 Months Months Years Years Years Total --------- --------- --------- --------- --------- --------- Total Interest Earning Assets 685,960 64,599 85,771 388,448 135,868 1,360,646 Total Interest Bearing Liabilities 839,840 34,332 73,361 95,898 130,150 1,173,581 --------- --------- --------- --------- --------- --------- Gap (153,880) 30,267 12,410 292,550 5,718 187,065 Cumulative Gap (153,880) (123,613) (111,203) 181,347 187,065 187,065 Sensitivity Ratio 0.82 1.88 1.17 4.05 1.04 1.16 Cumulative Sensitivity Ratio 0.82 0.86 0.88 1.17 1.16 1.16
The amount of loans due after one year with floating interest rates is $261,743,000. The following table shows the remaining maturity for Certificates of Deposit with balances of $100,000 or more as of December 31, 2003 (000s omitted): Maturing Within 3 Months 67,574 3 - 6 Months 6,933 6 - 12 Months 5,007 Over 12 Months 36,140 ------- Total 115,654 =======
For 2004, we expect interest rates to remain low through the first half of the year. Although the economic recovery that began in 2002 continues, low inflation and slow jobs growth will allow the Federal Reserve to continue to provide monetary stimulus. Although recovery in our region lags behind other areas due to the connection to the automotive industry, we expect local loan demand to increase as the low interest rates will begin to encourage borrowing. We opened two full service branches in southern Wayne County in 2003 and plan to open another in mid 2004. These branches are expected to contribute to an increase in loans and deposits in 2004. This growth is expected to produce an increase in Net Interest Income. We believe that our Allowance for Loan Losses provides adequate coverage for the losses in our portfolio, and we anticipate a significant decrease in the Provision for Loan Losses. We anticipate that slower mortgage refinance activity and less gains on the sales of investment securities will result in a small increase in non-interest income. Expenses related to our additional offices and staffing increases will cause non-interest expenses to increase. Primarily due to the anticipated increase in Net Interest Income and the expected decrease in the Provision for Loan Losses, we expect Net Income to increase considerably in 2004. 14 The following table shows the loan portfolio for the last five years (000s omitted).
Book Value at December 31, -------------------------------------------------------- 2003 (a) 2002 (a) 2001 (a) 2000 (a) 1999 (a) -------- -------- -------- -------- -------- Loans secured by real estate: Construction and land development $ 86,221 $ 56,780 $ 47,025 $ 36,146 $ 24,504 Secured by farmland (including farm residential and other improvements) 7,438 7,925 6,172 4,354 3,774 Secured by 1-4 family residential properties 287,638 258,157 275,489 275,299 214,358 Secured by multifamily (5 or more) residential 8,022 6,810 6,714 3,322 3,673 properties Secured by nonfarm nonresidential properties 305,755 280,136 258,879 227,024 190,588 Loans to finance agricultural production and other loans to farmers 2,263 2,182 2,856 2,832 2,087 Commercial and industrial loans to U.S. addresses 92,313 90,838 99,186 150,805 156,489 (domicile) Loans to individuals for household, family, and other personal expenditures (includes purchased paper): Credit cards and related plans 442 1,471 3,353 9,415 10,320 Other 72,542 68,942 87,322 102,089 97,091 Nonrated industrial development obligations (other than securities) of states and political subdivisions in the U.S. -- 67 133 228 380 Other loans: Loans for purchasing or carrying securities (secured and unsecured) -- -- -- -- 9 All other loans 1,228 497 696 609 109 Less: Any unearned income on loans -- -- -- -- -- -------- -------- -------- -------- -------- Total loans and leases, net of unearned income $863,862 $773,805 $787,825 $812,123 $703,382 ======== ======== ======== ======== ======== Nonaccrual loans $ 34,248 $ 22,332 $ 22,712 $ 17,161 $ 16,791 Loans 90 days or more past due $ 100 $ 81 $ 450 $ 193 $ 107 Troubled debt restructurings $ 4,755 $ 6,807 $ -- $ 1,057 $ 1,281
(a) Loan categories are presented net of deferred loan fees. The presentation in Note 4 to the consolidated financial statements differs from this schedule presentation by presenting the loan categories, gross, before deferred loan fees have been subtracted. The following is an analysis of the transactions in the allowance for loan losses:
Year Ended December 31, -------------------------------------------------- (Dollars in Thousands) 2003 2002 2001 2000 1999 ------ ------ ------ ------ ------ Balance Beginning of Period 12,400 13,000 10,600 9,900 11,100 Loans Charged Off Domestic Commercial, Financial, and Agricultural 1,838 4,383 3,399 7,035 10,599 Secured by Real Estate 3,389 2,859 1,242 -- 174 Loans to Individuals 1,456 1,455 1,523 1,091 783 Recoveries Domestic Commercial, Financial, and Agricultural 206 1,351 619 2,138 802 Secured by Real Estate 33 135 111 -- -- Loans to Individuals 539 510 434 390 166 ------ ------ ------ ------ ------ Net Loans Charged Off 5,905 6,701 5,000 5,598 10,588 Provision Charged to Operations 8,005 6,101 7,400 6,298 9,388 ------ ------ ------ ------ ------ Balance End of Period 14,500 12,400 13,000 10,600 9,900 ====== ====== ====== ====== ====== Ratio of Net Loans Charged Off to Average Total Loans Outstanding 0.69% 0.87% 0.59% 0.73% 1.52% ====== ====== ====== ====== ======
15 The following analysis shows the allocation of the allowance for loan losses:
Year Ended December 31, ------------------------------------------------------------------------- 2003 2002 2001 ----------------------- ---------------------- ---------------------- $ % of loans $ % of loans $ % of loans (Dollars in Thousands) Amount to total loans Amount to total loans Amount to total loans ------ -------------- ------ -------------- ------ -------------- Balance at end of period applicable to: Domestic Commercial, Financial, and Agricultural 1,582 11.7% 2,933 13.1% 4,119 13.8% Real Estate - Construction 367 9.9% 94 7.3% 260 6.0% Real Estate - Mortgage 11,506 69.7% 8,108 70.4% 8,038 68.6% Loans to Individuals 1,045 8.7% 1,265 9.2% 583 11.6% Foreign -- 0.0% -- 0.0% -- 0.0% ------ ----- ------ ----- ------ ----- Total 14,500 100.0% 12,400 100.0% 13,000 100.0% ====== ===== ====== ===== ====== =====
Year Ended December 31, ----------------------------------------------------- 2000 1999 ----------------------- ------------------------ $ % of loans $ % of loans (Dollars in Thousands) Amount to total loans Amount to total loans ------ -------------- ----- -------------- Balance at end of period applicable to: Domestic Commercial, Financial, and Agricultural 4,426 19.0% 6,059 22.6% Real Estate - Construction 185 4.5% 57 3.5% Real Estate - Mortgage 5,172 62.8% 3,429 58.6% Loans to Individuals 817 13.7% 355 15.3% Foreign -- 0.0% -- 0.0% ------ ----- ----- ----- Total 10,600 100.0% 9,900 100.0% ====== ===== ===== =====
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. To serve as a basis for making this provision, the Bank maintains an extensive credit risk monitoring process that considers several factors including: current economic conditions affecting the Bank's customers, the payment performance of individual loans and pools of homogeneous loans, portfolio seasoning, changes in collateral values, and detailed reviews of specific loan relationships. For loans deemed to be impaired due to an expectation that all contractual payments will probably not be received, impairment is measured by comparing the Bank's recorded investment in the loan to the present value of expected cash flows discounted at the loan's effective interest rate, the fair value of the collateral, or the loan's observable market price. Year-end nonperforming assets, which include nonaccrual loans, loans ninety days or more past due, renegotiated debt, nonaccrual securities, and other real estate owned, increased $3.3 million, or 7% from 2002 to 2003. Nonperforming assets as a percent of total assets at year-end increased from 3.2% in 2002 to 3.3% in 2003. The Allowance for Loan Losses as a percent of nonperforming assets at year-end increased from 27.9% in 2002 to 30.4% in 2002. The provision for loan losses increases the allowance for loan losses, a valuation account which appears 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. CONTRACTUAL OBLIGATIONS - The following table shows the Company's contractual obligations.
Payment due by period (000s omitted) -------------------------------------------------------------------- Less than 1 More than 5 Total year 1-3 years 3-5 years years ---------- ----------- --------- --------- ----------- Long-Term Debt Obligations $ 225,000 $ - $ - $ - $ 225,000 Operating Lease Obligations 1,192 279 353 254 306 ---------- --------- --------- -------- ---------- Total $ 226,192 $ 279 $ 353 $ 254 $ 225,306 ========== ========= ========= ======== ==========
Item 7A. 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 (gap analysis, as shown in Item 7), 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 16 projections are compared to a base case projection, which assumes no changes in interest rates. The table below summarizes the net interest income sensitivity as of December 31, 2003 and 2002.
Base Rates Rates (Dollars in Thousands) Projection Up 1% Down 1% ---------------------- ---------- ----- ------- Year-End 2003 12 Month Projection Interest Income 73,037 76,410 70,860 Interest Expense 26,907 31,027 24,558 ------ ------ ------ Net Interest Income 46,130 45,383 46,302 Percent Change From Base Projection -1.6% 0.4% ALCO Policy Limit (+/-) 5.0% 5.0%
Base Rates Rates (Dollars in Thousands) Projection Up 1% Down 1% ---------------------- ---------- ----- ------- Year-End 2002 12 Month Projection Interest Income 78,601 85,829 76,840 Interest Expense 29,671 34,654 27,837 ------ ------ ------ Net Interest Income 48,930 51,175 49,003 Percent Change From Base Projection 4.6% 0.1% ALCO Policy Limit (+/-) 5.0% 5.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate risk, as measured by the change in the Bank's projected net interest income, in its policy. Throughout 2003, the estimated variability of the net interest income was within the Bank's established policy limits. The ALCO also monitors interest rate risk by estimating the effect of changes in interest rates on the economic value of the Bank's equity each month. The actual economic value of the Bank's equity is first determined by subtracting the fair value of the Bank's liabilities from the fair value of the Bank's assets. The fair values are determined in accordance with Statement of Financial Accounting Standards Number 107, Disclosures about Fair Value of Financial Instruments. The Bank estimates the interest rate risk by calculating the effect of market interest rate shocks on the economic value of its equity. For this analysis, the Bank assumes immediate increases or decreases of 100 and 200 basis points in the prime lending rate. The discount rates used to determine the present values of the loans and deposits, as well as the prepayment rates for the loans, are based on Management's expectations of the effect of the rate shock on the market for loans and deposits. The table below summarizes the amount of interest rate risk to the fair value of the Bank's assets and liabilities and to the economic value of the Bank's equity. 17
Fair Value at December 31, 2003 Rates (Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2% ---------------------- ---- ----- ----- ------- ------- Assets 1,459,412 1,424,925 1,390,429 1,492,973 n/a Liabilities 1,328,318 1,301,174 1,275,051 1,355,079 n/a --------- --------- --------- --------- ---- Stockholders' Equity 131,094 123,751 115,378 137,894 n/a Change in Equity -5.6% -12.0% 5.2% n/a ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
Fair Value at December 31, 2002 Rates (Dollars in Thousands) Base Up 1% Up 2% Down 1% Down 2% ---------------------- ---- ----- ----- ------- ------- Assets 1,423,339 1,403,002 1,382,282 1,443,392 1,463,252 Liabilities 1,252,659 1,221,105 1,190,916 1,285,665 1,308,038 --------- --------- --------- --------- --------- Stockholders' Equity 170,680 181,897 191,366 157,727 155,214 Change in Equity 6.6% 12.1% -7.6% -9.1% ALCO Policy Limit (+/-) 15.0% 25.0% 15.0% 25.0%
The Bank's ALCO has established limits in the acceptable amount of interest rate risk, as measured by the change in economic value of the Bank's equity, in its policy. Throughout 2003, the estimated variability of the economic value of equity was within the Bank's established policy limits. Item 8. Financial Statements and Supplementary Data Financial Statements and Supplementary Data See Pages 21 - 38 18 Independent Auditor's Report To the Board of Directors and Stockholders MBT Financial Corp. We have audited the accompanying consolidated balance sheets of MBT Financial Corp. as of December 31, 2003 and 2002 and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each year in the two year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of MBT Financial Corp. as of December 31, 2003 and 2002 and the consolidated results of their operations and their cash flows for each year in the two year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ Plante & Moran, PLLC Auburn Hills, Michigan February 2, 2004 19 The following is a copy of a previously issued report and has not been reissued by Arthur Andersen LLP.: Report of Independent Public Accountants To the Stockholders and Board of Directors, MBT Financial Corp.: We have audited the accompanying consolidated statements of condition of MBT FINANCIAL CORP. (a Michigan corporation) and subsidiary as of December 31, 2001 and 2000, and the related consolidated statements of income, cash flows, and changes in stockholders' equity for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Corporation's Management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of MBT Financial Corp. and subsidiary as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Detroit, Michigan, January 14, 2002 20 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, Dollars in thousands 2003 2002 ----------- ----------- ASSETS Cash and Cash Equivalents (Note 2) Cash and due from banks $ 22,525 $ 30,618 Federal funds sold -- 13,000 ----------- ----------- Total cash and cash equivalents 22,525 43,618 Securities - Held to Maturity (Notes 3 and 12) 99,154 116,819 Securities - Available for Sale (Notes 3 and 12) 397,642 411,668 Federal Home Loan Bank stock - at cost 11,686 11,250 Loans held for sale (Notes 4 and 12) 1,406 445 Loans - Net (Notes 4, 5, and 12) 847,944 760,960 Accrued interest receivable and other assets (Notes 7 and 13) 59,407 49,497 Premises and Equipment - Net (Note 6) 18,024 15,437 ----------- ----------- Total assets $ 1,457,788 $ 1,409,694 =========== =========== LIABILITIES Deposits: Non-interest bearing $ 135,536 $ 123,596 Interest-bearing (Note 8) 903,581 887,364 ----------- ----------- Total deposits 1,039,117 1,010,960 Federal Home Loan Bank advances (Notes 9 and 12) 225,000 225,000 Federal funds purchased 45,000 -- Interest payable and other liabilities (Note 10) 5,225 6,735 ----------- ----------- Total liabilities 1,314,342 1,242,695 ----------- ----------- STOCKHOLDERS' EQUITY Common stock (no par value; 30,000,000 shares authorized, 17,491,784 and 19,160,441 shares issued and outstanding) (Note 11) -- -- Additional paid-in capital 20,414 51,080 Retained Earnings 123,867 115,395 Accumulated other comprehensive income (835) 524 ----------- ----------- Total stockholders' equity 143,446 166,999 ----------- ----------- Total liabilities and stockholders' equity $ 1,457,788 $ 1,409,694 =========== ===========
The accompanying notes are an integral part of these statements. 21 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, Dollars in thousands 2003 2002 2001 -------- -------- -------- INTEREST INCOME Interest and fees on loans $ 55,253 $ 59,180 $ 72,269 Interest on investment securities- Tax-exempt 6,206 6,741 6,821 Taxable 16,166 18,134 21,787 Interest on federal funds sold 149 549 447 -------- -------- -------- Total interest income 77,774 84,604 101,324 -------- -------- -------- INTEREST EXPENSE Interest on deposits 15,991 21,469 36,627 Interest on borrowed funds 11,476 12,918 12,908 -------- -------- -------- Total interest expense 27,467 34,387 49,535 -------- -------- -------- NET INTEREST INCOME 50,307 50,217 51,789 PROVISION FOR LOAN LOSSES (Note 5) 8,005 6,101 7,400 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 42,302 44,116 44,389 -------- -------- -------- OTHER INCOME Income from trust services 3,316 3,497 3,392 Service charges and other fees 5,309 4,522 2,858 Net gain on sales of securities 1,041 1,325 417 Other 4,137 3,447 3,984 -------- -------- -------- Total other income 13,803 12,791 10,651 -------- -------- -------- OTHER EXPENSES Salaries and employee benefits (Notes 10 and 16) 16,122 14,224 13,027 Occupancy expense 2,696 2,328 2,174 Other 11,361 10,437 9,609 -------- -------- -------- Total other expenses 30,179 26,989 24,810 -------- -------- -------- INCOME BEFORE PROVISION FOR INCOME TAXES 25,926 29,918 30,230 PROVISION FOR INCOME TAXES (Note 13) 6,611 8,114 8,307 -------- -------- -------- NET INCOME $ 19,315 $ 21,804 $ 21,923 ======== ======== ======== BASIC EARNINGS PER COMMON SHARE $ 1.02 $ 1.12 $ 1.10 ======== ======== ======== DILUTED EARNINGS PER COMMON SHARE (Note 15) $ 1.01 $ 1.12 $ 1.10 ======== ======== ========
The accompanying notes are an integral part of these statements. 22 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
ACCUMULATED ADDITIONAL OTHER PAID-IN RETAINED COMPREHENSIVE Dollars in thousands CAPITAL EARNINGS INCOME (LOSS) TOTAL -------------------- ------- -------- ------------- ----- BALANCE - JANUARY 1, 2001 $ 62,500 $ 92,084 $ (3,629) $ 150,955 Repurchase of Common Stock (247,458 shares) (Note 11) (3,511) -- -- (3,511) Dividends declared ($0.50 per share) -- (9,951) -- (9,951) Comprehensive income: Net income -- 21,923 -- 21,923 Change in net unrealized loss on securities available for sale - Net of tax effect of $1,246 and reclassifications of $275 -- -- 2,314 2,314 --------- --------- --------- --------- Total Comprehensive Income -- 21,923 2,314 24,237 --------- --------- --------- --------- BALANCE - DECEMBER 31, 2001 $ 58,989 $ 104,056 $ (1,315) $ 161,730 Repurchase of Common Stock (592,101 shares) (Note 11) (7,909) -- -- (7,909) Dividends declared ($0.54 per share) -- (10,465) -- (10,465) Comprehensive income: Net income -- 21,804 -- 21,804 Change in net unrealized loss on securities available for sale - Net of tax effect of $990 and reclassifications of $875 -- -- 1,839 1,839 --------- --------- --------- --------- Total Comprehensive Income -- 21,804 1,839 23,643 --------- --------- --------- --------- BALANCE - DECEMBER 31, 2002 $ 51,080 $ 115,395 $ 524 $ 166,999 Repurchase of Common Stock (1,692,475 shares) (Note 11) (31,008) -- -- (31,008) Issuance of Common Stock (23,818 shares) 342 -- -- 342 Dividends declared ($0.58 per share) -- (10,843) -- (10,843) Comprehensive income: Net income -- 19,315 -- 19,315 Change in net unrealized loss on securities available for sale - Net of tax effect of $732 and reclassifications of $685 -- -- (1,359) (1,359) --------- --------- --------- --------- Total Comprehensive Income -- 19,315 (1,359) 17,956 --------- --------- --------- --------- BALANCE - DECEMBER 31, 2003 $ 20,414 $ 123,867 $ (835) $ 143,446 ========= ========= ========= =========
The accompanying notes are an integral part of these statements. 23 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, Dollars in thousands 2003 2002 2001 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 19,315 $ 21,804 $ 21,923 Adjustments to reconcile net income to net cash from operating activities Provision for deferred taxes (737) 1,607 (1,508) Provision for loan losses 8,005 6,101 7,400 Depreciation 2,471 2,102 1,996 Net (Accretion) Amortization on investment securities 2,981 (2,657) 2,882 Net gain on sales of securities (1,041) (1,325) (417) Increase in cash surrender value of life insurance (1,305) (797) (766) Change in assets and liabilities (Increase) decrease in accrued interest receivable and other assets (3,666) 1,623 3,928 Increase (decrease) in accrued interest payable and other liabilities (1,510) (1,823) (277) --------- --------- --------- Net cash provided by operating activities $ 24,513 $ 26,635 $ 35,161 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of investment securities held to maturity $ 27,956 $ 59,980 $ 682,741 Proceeds from maturities of investment securities available for sale 355,635 479,090 291,958 Proceeds from sales of investment securities available for sale 176,905 52,621 66,599 Net (increase) decrease in loans (95,950) (5,618) 15,933 Proceeds from sales of other real estate owned 12,068 1,720 1,504 Proceeds from sales of other assets 13 113 87 Purchase of investment securities held to maturity (10,300) (10,959) (468,825) Purchase of bank owned life insurance (15,490) (729) (471) Purchase of investment securities available for sale (522,972) (616,156) (616,471) Purchase of bank premises and equipment (5,058) (3,038) (2,807) --------- --------- --------- Net cash used for investing activities $ (77,193) $ (42,976) $ (29,752) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits $ 28,157 $ 12,080 $ 4,283 Net increase in short term borrowings 45,000 -- -- Repurchase of common stock (31,008) (7,909) (3,511) Issuance of common stock 342 -- -- Dividends paid (10,904) (10,349) (9,583) --------- --------- --------- Net cash provided by (used for) financing activities $ 31,587 $ (6,178) $ (8,811) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (21,093) $ (22,519) $ (3,402) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (Note 1) 43,618 66,137 69,539 - --------------------------------------------------------------------------- --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR (Note 1) $ 22,525 $ 43,618 $ 66,137 - --------------------------------------------------------------------------- ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest $ 27,646 $ 25,295 $ 20,972 Cash paid for federal income taxes $ 7,120 $ 8,870 $ 9,870 --------- --------- --------- SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING ACTIVITIES Transfer of loans to other real estate owned $ 6,169 $ 12,932 $ 3,216 Transfer of loans to other assets $ 44 $ 4 $ 148 --------- --------- ---------
The accompanying notes are an integral part of these statements. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of MBT Financial Corp. (the "Corporation") and its wholly owned subsidiary, Monroe Bank & Trust (the "Bank"). The Bank includes the accounts of its wholly owned subsidiaries, MBT Credit Company, Inc. and MB&T Financial Services, Inc. The Bank operates twenty-one offices in Monroe County, Michigan and three offices in Wayne County, Michigan. MBT Credit Company, Inc. operates a mortgage loan office in Monroe County and a loan and trust office in Wayne County. The Bank's primary source of revenue is from providing loans to customers, who are predominantly small and middle-market businesses and middle-income individuals. The Corporation's sole business segment is community banking. 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 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 year amounts have been reclassified to conform to the current year presentation. SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK Most of the Corporation's activities are with customers located within southeast Michigan. Notes 3 and 4 discuss the types of securities and lending that the Corporation engages in. The Corporation does not have any significant concentrations in any one industry or to any one customer. INVESTMENT SECURITIES Investment securities that are "held to maturity" are stated at cost, and adjusted for accumulated amortization of premium and accretion of discount. The Bank has the intention and, in Management's opinion, the ability to hold these investment securities until maturity. Investment securities that are "available for sale" are stated at estimated market value, with the related unrealized gains and losses reported as an amount, net of taxes, as a separate component of stockholders' equity. The market value of securities is based on quoted market prices. For securities that do not have readily available market values, estimated market values are calculated based on the market values of comparable securities. Gains and losses on the sale of securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the term of the security. LOANS The Bank grants mortgage, commercial, and consumer loans to customers. Loans are reported at their outstanding unpaid principal balances, adjusted for charge offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are decreased and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in the process of collection. In all cases, loans are placed on nonaccrual or charged off at an earlier date if principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. LOANS HELD FOR SALE Loans held for sale consist of fixed rate residential mortgage loans with maturities of 15 to 30 years. Such loans are recorded at the lower of aggregate cost or estimated fair value. 25 ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience, adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures. FORECLOSED ASSETS (INCLUDES OTHER REAL ESTATE OWNED) Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of fair value or the loan carrying amount at the date of the foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by Management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost, less accumulated depreciation of $21,047,000 in 2003 and $20,454,000 in 2002. The Bank uses the straight-line method to provide for depreciation, which is charged to operations over the estimated useful lives of the assets. Depreciation expense amounted to $2,471,000 in 2003, $2,102,000 in 2002, and $1,995,000 in 2001. The cost of assets retired and the related accumulated depreciation are eliminated from the accounts and the resulting gains or losses are reflected in operations in the year the assets are retired. 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. The components of accumulated other comprehensive income (loss) and related tax effects are as follows:
Dollars in thousands 2003 2002 2001 ------- ------- ------- Unrealized gains (losses) on securities available for sale $(1,285) $ 806 $(2,022) Tax effect 450 (282) 707 ------- ------- ------- Accumulated other comprehensive income (loss) $ (835) $ 524 $(1,315) ======= ======= =======
26 CASH AND CASH EQUIVALENTS Cash and Cash Equivalents include cash and due from banks and Federal funds sold. Generally, cash equivalents have daily maturities. INCOME TAXES Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the various temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. 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. The Company's as reported and pro forma information for the years ended December 31:
Dollars in thousands, except per share data 2003 2002 2001 ---------- ---------- ---------- Net Income as Reported $ 19,315 $ 21,804 $ 21,924 Pro Forma Adjustment Due to Stock Options (258) (350) (221) ---------- ---------- ---------- Pro Forma Net Income $ 19,057 $ 21,454 $ 21,703 ========== ========== ==========
Earning per Share as Reported Basic $ 1.02 $ 1.12 $ 1.10 Diluted $ 1.01 $ 1.12 $ 1.10 Pro Forma Earnings per Share Basic $ 1.00 $ 1.10 $ 1.09 Diluted $ 1.00 $ 1.10 $ 1.09
Compensation expense in the pro forma disclosures is not indicative of future amounts, as options vest over several years and additional grants are generally made each year. The weighted average fair value of options granted was $3.04, $3.19 and $3.82 in 2003, 2002 and 2001, respectively. 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 in 2003, 2002 and 2001: expected option lives of seven years for all three; expected volatility of 23.9%, 23.9% and 18.6% and risk-free interest rates of 4.6%, 4.6% and 6.1%, respectively. OFF BALANCE SHEET INSTRUMENTS In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit and standby letters of credit. In November 2002, the FASB issued Interpretation No. 45, (FIN 45) "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which elaborates on the disclosures to be made by a guarantor about its obligations under certain guarantees issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation have been applied on a prospective basis to guarantees issued or modified after December 31, 2002. However, the value of such guarantees is immaterial and the adoption of this Standard did not have a material effect on the Corporation's financial statements. ACCOUNTING PRONOUNCEMENTS Effective April 1, 1999, the Bank adopted SFAS 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138. The impact of SFAS 133 was not material to the Bank's financial statements. (2) CASH AND DUE FROM BANKS The Bank is required by regulatory agencies to maintain legal reserve requirements based on the level of balances in deposit categories. Cash balances restricted from usage due to these requirements were $1,532,000 and $1,937,000 at December 31, 2003 and 2002, respectively. Cash and due from banks includes deposits held at correspondent banks in excess of FDIC insurance limits. 27 (3) INVESTMENT SECURITIES The following is a summary of the Bank's investment securities portfolio as of December 31, 2003 and 2002 (000's omitted):
HELD TO MATURITY DECEMBER 31, 2003 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Obligations of U.S. Government Agencies $ 536 $ 54 $ -- $ 590 Obligations of States and Political Subdivisions 95,634 3,744 (144) 99,234 Other Securities 2,984 132 -- 3,116 --------- --------- --------- --------- $ 99,154 $ 3,930 $ (144) $ 102,940 ========= ========= ========= =========
AVAILABLE FOR SALE DECEMBER 31, 2003 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Obligations of U.S. Government Agencies $ 315,004 $ 450 $ (3,510) $ 311,944 Obligations of States and Political Subdivisions 26,047 829 (403) 26,473 Other Securities 57,876 1,374 (25) 59,225 --------- --------- --------- --------- $ 398,927 $ 2,653 $ (3,938) $ 397,642 ========= ========= ========= =========
HELD TO MATURITY DECEMBER 31, 2002 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Obligations of U.S. Government Agencies $ 588 $ 61 $ -- $ 649 Obligations of States and Political Subdivisions 113,255 4,793 (81) 117,967 Other Securities 2,976 1 (2) 2,975 --------- --------- --------- --------- $ 116,819 $ 4,855 $ (83) $ 121,591 ========= ========= ========= =========
AVAILABLE FOR SALE DECEMBER 31, 2002 GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE ---- ----- ------ ----- Obligations of U.S. Government Agencies $ 322,878 $ 2,270 $ (17) $ 325,131 Obligations of States and Political Subdivisions 14,680 505 (462) 14,723 Other Securities 73,304 337 (1,827) 71,814 --------- --------- --------- --------- $ 410,862 $ 3,112 $ (2,306) $ 411,668 ========= ========= ========= =========
The amortized cost and estimated market value of securities at December 31, 2003 and 2002, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties (000's omitted).
HELD TO MATURITY DECEMBER 31, 2003 DECEMBER 31, 2002 ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---- ----- ---- ----- Maturing within 1 year $ 13,375 $ 13,496 $ 11,813 $ 11,905 1 to 5 years 35,388 36,986 39,794 41,626 5 to 10 years 37,243 39,205 49,870 52,392 Over 10 years 13,148 13,253 15,342 15,668 -------- -------- -------- -------- $ 99,154 $102,940 $116,819 $121,591 ======== ======== ======== ========
28
AVAILABLE FOR SALE DECEMBER 31, 2003 DECEMBER 31, 2002 ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ---- ----- ---- ----- Maturing within 1 year $ 158 $ 47 $ 25,175 $ 25,240 1 to 5 years 15,120 15,032 130,600 131,113 5 to 10 years 244,895 244,034 57,563 57,875 Over 10 years 137,750 137,457 196,520 196,356 Securities with no stated maturity 1,004 1,072 1,004 1,084 -------- -------- -------- -------- $398,927 $397,642 $410,862 $411,668 ======== ======== ======== ========
Investment securities carried at $309,030,000 and $283,966,000 were pledged or set aside to secure borrowings, public and trust deposits, and for other purposes required by law at December 31, 2003 and December 31, 2002, respectively. At December 31, 2003, Obligations of U. S. Government Agencies included securities issued by the Federal Home Loan Bank with an estimated market value of $166,937,000. At December 31, 2002, Obligations of U. S. Government Agencies included securities issued by the Federal Home Loan Bank with an estimated market value of $181,865,000. Obligations of States and Political Subdivisions included securities carried at $140,000 and $88,000 as of December 31, 2003 and December 31, 2002, respectively, that were more than ninety days past due on their interest payments. These securities are in nonaccrual status. Due to the decline in creditworthiness of the issuer, the securities were reclassified from Held to Maturity to Available for Sale in 2001. For the years ended December 31, 2003, 2002 and 2001, proceeds from sales of securities amounted to $176,809,000, $52,621,000 and $66,599,000, respectively. Gross realized gains amounted to $1,046,000, $1,325,000 and $2,072,000, respectively. Gross realized losses amounted to $5,000, $0 and $1,655,000 respectively. The tax provision applicable to these net realized gains and losses amounted to $364,000, $464,000 and $146,000, respectively. (4) LOANS Loan balances outstanding as of December 31 consist of the following (000s omitted):
2003 2002 -------- -------- Real estate loans $695,677 $610,530 Loans to finance agricultural production and other loans to farmers 2,263 2,182 Commercial and industrial loans 93,444 91,717 Loans to individuals for household, family, and other personal expenditures 72,972 70,404 All other loans (including overdrafts) 1,228 563 -------- -------- Total loans, gross $865,584 $775,396 Less: Deferred loan fees 1,734 1,591 -------- -------- Total loans, net of deferred loan fees $863,850 $773,805 Less: Allowance for loan losses 14,500 12,400 -------- -------- $849,350 $761,405 ======== ========
The following is a summary of impaired loans (000s omitted):
2003 2002 2001 ------- ------- ------- Year-end impaired loans with no allowance for loan losses allocated $11,212 $37,201 $28,325 Year-end impaired loans with allowance for loan losses allocated 32,379 60,898 56,107 Year-end allowance for loan losses allocated to impaired loans 6,873 7,291 8,012 Average investment in impaired loans 30,112 57,738 44,769 Interest income recognized on impaired loans 1,506 3,486 2,332 Cash basis interest income recognized on impaired loans during the year 1,506 3,486 2,332 ------- ------- -------
In 2001, the Bank sold the consumer portion of its credit card loan portfolio. The amount of loans sold was $6,813,000 and the gain recognized on the sale of these loans was $409,000. Also in 2001, the Bank sold a portion of its commercial lease loans. The amount of loans sold was $17,630,000 and the gain on the sale of these loans was $309,000. The gains on these sales are included in other non-interest income. The Allowance for Loan Losses on these loans sold was $410,000. The Bank allocated this amount to the remainder of the loan portfolio. Included in Loans are loans to certain officers, directors, and companies in which such officers and directors have 10 percent or more beneficial ownership in the aggregate amount of $17,451,000 and $11,552,000 at December 31, 2003 and 2002, respectively. In 2003, new loans and other additions amounted to $14,489,000, and 29 repayments and other reductions amounted to $8,590,000. In Management's judgment, these loans were made on substantially the same terms and conditions as those made to other borrowers, and do not represent more than the normal risk of collectibility or present other unfavorable features. Loans carried at $157,868,000 and $167,636,000 at December 31, 2003 and 2002, respectively, were pledged to secure Federal Home Loan Bank advances. (5) ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses was as follows (000s omitted):
2003 2002 2001 -------- -------- -------- Balance beginning of year $ 12,400 $ 13,000 $ 10,600 Provision for loan losses 8,005 6,101 7,400 Loans charged off (6,683) (8,697) (6,164) Recoveries 778 1,996 1,164 -------- -------- -------- Balance end of year $ 14,500 $ 12,400 $ 13,000 ======== ======== ========
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, 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 appears on the consolidated balance sheets. 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. (6) BANK PREMISES AND EQUIPMENT Bank premises and equipment as of year end are as follows (000s omitted):
2003 2002 ------- ------- Land, buildings and improvements $22,725 $19,539 Equipment, furniture and fixtures 18,202 16,352 Total Bank premises and equipment $40,927 $35,891 Less accumulated depreciation 22,903 20,454 ------- ------- Bank premises and equipment, net $18,024 $15,437 ======= =======
The Corporation has entered into lease commitments for office locations. Rental expense charged to operations was $311,000, $205,000, and $148,000 for the years ended December 31, 2003, 2002, and 2001, respectively. The future minimum lease payments are as follows:
Minimum Year Payment - ---- ------- 2004 $279,000 2005 227,000 2006 126,000 2007 128,000 2008 126,000 Thereafter 306,000
(7) INTEREST RECEIVABLE AND OTHER ASSETS The Bank includes the cash surrender value of Bank Owned Life Insurance (BOLI) in Interest Receivable and Other Assets on the accompanying consolidated balance sheets. The cash surrender value of the BOLI was $33,780,000 at December 31, 2003 and $16,985,000 at December 31, 2002. The following is a description of the components of the BOLI: DIRECTOR SPLIT-DOLLAR LIFE INSURANCE On December 21, 2000, the Bank entered into director split-dollar life insurance agreements with each of its ten directors. Under the split-dollar agreement, the policy's interests are divided between the Bank and the director. 30 The Bank owns the cash surrender value, including the accumulated policy earnings, with each director's beneficiaries receiving a fixed amount that is based on his or her years of director service and the Bank receiving the remainder of the death benefits. The directors' death benefits are $500,000 for director service of less than 3 years, $600,000 for service up to 5 years, $750,000 for service up to 10 years, and $1,000,000 for director service of 10 years or more. In 2000, the Bank fully paid the premiums for these ten policies with one lump sum premium payment in the amount of $4,937,000. In 2003, the Bank paid additional premiums of $3,661,000 to increase the coverage for each director to an amount sufficient to provide the maximum split-dollar benefit that could be attained. The increase in cash surrender value is recorded as other non-interest income. The Bank expects to recover in full the cash value from the Bank's portion of the policies' death benefits. SALARY CONTINUATION AGREEMENT AND LIFE INSURANCE POLICY The Bank entered into a Salary Continuation Agreement with Ronald D. LaBeau, Chairman and Chief Executive Officer of the Bank on December 27, 2000. This agreement provides that the Bank will pay an annual salary continuation benefit of $139,600 to Mr. LaBeau or his designated beneficiaries for 10 years after his retirement on or after reaching the normal retirement age of 65. At the same time it entered into the Salary Continuation Agreement with Mr. LaBeau, the Bank purchased an insurance policy on Mr. LaBeau's life, with a single premium payment of $5,880,000. The Bank expects to recover in full the premium paid by it from the Bank's portion of the policy's death benefits. If Mr. LaBeau dies before age 65 while in active service to the Bank, his beneficiaries will receive life insurance proceeds of $958,837. If he dies after retirement, his beneficiaries will receive any payments to which Mr. LaBeau would have been entitled under the Salary Continuation Agreement, but none of the life insurance proceeds. The contractual entitlements under the Salary Continuation Agreement are not funded. These contractual entitlements remain contractual liabilities of Monroe Bank & Trust, payable upon Mr. LaBeau's termination of employment. The life insurance policy is in addition to the split-dollar insurance policy purchased by the Bank on Mr. LaBeau's life for his service as a director, discussed previously, and the split-dollar insurance policy discussed in "Executive Group Term Carve Out Split-Dollar Life Insurance Agreements" below. The Bank entered into a Salary Continuation Agreement with H. Douglas Chaffin, President and Chief Operating Officer of the Bank on July 1, 2003. This agreement provides that the Bank will pay an annual salary continuation benefit of $65,700 to Mr. Chaffin or his designated beneficiaries for 10 years after his retirement on or after reaching the normal retirement age of 65. EXECUTIVE GROUP TERM CARVE OUT SPLIT-DOLLAR LIFE INSURANCE AGREEMENTS In addition to insurance policies on the lives of the directors and the Chairman and Chief Executive Officer of the Bank, the Bank owns life insurance on the lives of several executives, for which the Bank made premium payments of $16,242,000 in the aggregate. The Bank and the executives share rights to death benefits payable under the policies. An executive's beneficiaries are entitled to an amount equal to two times the executive's current annual salary, less $50,000 if he or she dies before retirement, or equal to his or her annual salary at the time of termination of employment if he or she dies after retirement. The Bank will receive the remainder of the death benefits. The Bank expects to recover in full the premium paid by it from the Bank's portion of the policy's death benefits or upon the cancellation or purchase of the policies by the executives. The executives also have life insurance under the Bank's group term life insurance program for all employees, which pays benefits up to $50,000 to the executive's beneficiaries if he or she dies while employed by the Bank. (8) DEPOSITS Interest expense on time certificates of deposit of $100,000 or more in the year 2003 amounted to $3,066,000, as compared with $3,998,000 in 2002, and $10,749,000 in 2001. At December 31, 2003, the balance of time certificates of deposit of $100,000 or more was $115,654,000, as compared with $119,369,000 at December 31, 2002. The amount of time deposits with a remaining term of more than 1 year was $183,060,000 at December 31, 2003 and $179,889,000 at December 31, 2002. All time deposits have a remaining term of less than 5 years. The following table shows the scheduled maturities of Certificates of Deposit as of December 31, 2003:
$100,000 and Under $100,000 over ------------ ------------ 2004 $ 74,898,000 $ 79,514,000 2005 70,549,000 16,141,000 2006 12,737,000 1,891,000 2007 48,372,000 12,248,000 2008 15,182,000 5,860,000 Thereafter 80,000 0 ------------ ------------ Total $221,818,000 $115,654,000 ============ ============
31 (9) FEDERAL HOME LOAN BANK ADVANCES As of December 31, 2003 and December 31, 2002, the Bank had ten loans from the Federal Home Loan Bank of Indianapolis totaling $225,000,000. Five of these advances, with balances totaling $130,000,000 carry fixed rates of interest and contain a put option that allows the FHLB to require repayment or conversion to a variable rate advance each quarter. The average rate on the advances is 5.42%, and no principal payments are required until the final maturities in 2009 and 2010. If converted by the FHLB, the interest rates would float quarterly at rates ranging from 3 month LIBOR to 3 month LIBOR plus .02%. The remaining five advances, totaling $95,000,000, are floating rate loans that float quarterly at rates ranging from 3 month LIBOR plus 2.06% to 3 month LIBOR plus 2.60%. These advances are non-putable and no principal payments are required until the final maturities in 2013. (10) RETIREMENT PLANS In 2000, the Bank implemented a retirement plan that included both a money purchase pension plan, as well as a voluntary profit sharing 401(k) plan for all employees who meet certain age and length of service eligibility requirements. In 2002, the Bank amended its retirement plan to freeze the money purchase plan and retain the 401(k) plan. To ensure that the plan meets the Safe Harbor provisions of the applicable sections of the Internal Revenue Code, the Bank contributes an amount equal to four percent of the employee's base salary to the 401(k) plan for all eligible employees. In addition, an employee may contribute from 1 to 75 percent of his or her base salary, up to a maximum of $12,000 in 2003. This annual contribution limit increases by $1,000 each year until it reaches $15,000 in 2006. The Bank matches the employee's elective contribution up to the first six percent of the employee's annual base salary. Depending on the Bank's profitability, an additional profit sharing contribution may be made by the Bank to the 401(k) plan. The total retirement plan expense was $1,012,000 for the year ended December 31, 2003, $915,000 for the year ended December 31, 2002, and $801,000 for the year ended December 31, 2001. This included profit sharing contributions of two percent in 2003 and three percent in 2002 and 2001. The Bank has a postretirement benefit plan that generally provides for the continuation of medical benefits for all employees who retire from the Bank at age 55 or older, upon meeting certain length of service eligibility requirements. The Bank does not fund its postretirement benefit obligation. Rather, payments are made as costs are incurred by covered retirees. The amount of benefits paid under the postretirement benefit plan was $95,000 in 2003, $84,000 in 2002, and $71,000 in 2001. The amount of insurance premium paid by the Bank for retirees is capped at 200% of the cost of the premium as of December 31, 1992. A reconciliation of the accumulated postretirement benefit obligation ("APBO") to the amounts recorded in the consolidated balance sheets in Interest Payable and Other Liabilities at December 31 is as follows (000s omitted):
2003 2002 ------- ------- APBO $ 2,033 $ 1,757 Unrecognized net transition obligation (482) (536) Unrecognized prior service costs (40) (44) Unrecognized net gain (164) 24 ------- ------- Liability recorded in the consolidated statements of condition $ 1,347 $ 1,201 ======= =======
The changes recorded in the accumulated postretirement benefit obligation were as follows (000s omitted):
2003 2002 ------- ------- APBO at beginning of year $ 1,757 $ 1,513 Service cost 69 49 Interest cost 114 110 Actuarial loss 188 169 Benefits paid during year (95) (84) ------- ------- APBO at end of year $ 2,033 $ 1,757 ======= =======
Components of the Bank's postretirement benefit expense were as follows:
2003 2002 2001 ----- ----- ----- Service cost $ 69 $ 49 $ 42 Interest cost 114 110 106 Amortization of transition obligation 54 54 54 Prior service costs 4 4 4 Amortization of gains -- (5) (8) ----- ----- ----- Net postretirement benefit expense $ 241 $ 212 $ 198 ===== ===== =====
The APBO as of December 31, 2003 and 2002 was calculated using assumed discount rates of 6.25% and 6.75%, respectively. Health care and prescription costs were assumed to rise 8.00% and 12.00%, respectively, in 2004, with the assumed rates of increase decreasing uniformly each year thereafter to a minimum of 5.50% in 2008 and thereafter. To illustrate the significance of these assumptions, a rise in the assumed rate of health care cost increases of 1.00% each year would change the APBO as of December 31, 2003 by 0.40%, or $8,087. 32 (11) STOCKHOLDERS' EQUITY On December 11, 2003, the Corporation repurchased 1,632,475 shares of its stock at $18.50 per share in a self tender offer. On December 21, 2000, the Corporation's Board of Directors authorized the repurchase of up to 2 million shares of MBT Financial Corp. common stock during the two-year period beginning January 2, 2001. On December 19, 2002, the Board of Directors extended the repurchase program until December 31, 2004. Shares purchased are as follows:
Shares Repurchased Cost ----------- ---- 2001 247,458 $ 3,511,274 2002 592,101 7,908,387 2003 60,000 807,650 ----------- ----------- Total 899,559 $12,227,311 =========== ===========
(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Certain of the Bank's assets and liabilities are financial instruments that have fair values that differ from their carrying values in the accompanying consolidated balance sheets. These fair values, along with the methods and assumptions used to estimate such fair values, are discussed below. The fair values of all financial instruments not discussed below are estimated to be equal to their carrying values as of December 31, 2003 and 2002. INVESTMENT SECURITIES Fair value for the Bank's investment securities was determined using the market value at December 31, 2003 and 2002. These Estimated Market Values are disclosed in Note 3. LOANS, NET The fair value of all loans is estimated by discounting the future cash flows associated with the loans, using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The estimated fair value of loans at December 31, 2003, net of the allowance for loan losses, is $865,427,000, compared to the carrying value of $849,350,000. The estimated fair value of loans at December 31, 2002, net of the allowance for loan losses, was $788,731,000, compared to the carrying value of $761,405,000. OTHER TIME DEPOSITS The fair value of other time deposits, consisting of fixed maturity certificates of deposit, is estimated by discounting the related cash flows using the rates currently offered for deposits of similar remaining maturities. The estimated fair value of other time deposits at December 31, 2003 is $348,255,000, compared to the carrying value of $337,472,000. The estimated fair value of other time deposits at December 31, 2002 was $358,887,000, compared to the carrying value of $347,416,000. FEDERAL HOME LOAN BANK ADVANCES A portion of the Federal Home Loan Bank advances in the accompanying consolidated balance sheets were written with a put option that allows the Federal Home Loan Bank to require repayment or conversion to a variable rate advance. The fair value of these putable Federal Home Loan Bank advances is estimated using the binomial lattice option pricing method. The estimated fair value of putable Federal Home Loan Bank advances at December 31, 2003 is $144,546,000, compared to the carrying value of $130,000,000. The fair value and carrying value of the variable rate advances at December 31, 2003 is $95,000,000. The estimated fair value of Federal Home Loan Bank advances at December 31, 2002 was $260,257,000, compared to the carrying value of $225,000,000. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The fair values of commitments to extend credit and standby letters of credit and financial guarantees written are estimated using the fees currently charged to engage into similar agreements. The fair values of these instruments are not significant. (13) FEDERAL INCOME TAXES Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be reversed. The Corporation and the Bank file a consolidated Federal income tax return. The provision for Federal income taxes consists of the following (000s omitted): 33
2003 2002 2001 ------- ------- ------- Federal income taxes currently payable (refundable) $ 7,348 $ 6,507 $ 9,815 Provision (credit) for deferred taxes on: Book (over) under tax loan loss provision (639) 210 (840) Accretion of bond discount (245) 103 111 Net deferred loan origination fees (43) 46 40 Accrued postretirement benefits 5 (58) (84) Tax over (under) book depreciation 441 70 70 Other, net (256) 1,236 (805) ------- ------- ------- $ 6,611 $ 8,114 $ 8,307 ======= ======= =======
The effective tax rate differs from the statutory rate applicable to corporations as a result of permanent differences between accounting and taxable income as follows:
2003 2002 2001 ------ ------ ------ Statutory rate 35.0% 35.0% 35.0% Municipal interest income (7.7) (7.1) (7.0) Other, net (1.8) (0.8) (0.5) ------ ------ ------ Effective tax rate 25.5% 27.1% 27.5% ====== ====== ======
The components of the net deferred Federal income tax asset (included in Interest Receivable and Other Assets on the accompanying consolidated balance sheets) at December 31 are as follows (000s omitted):
2003 2002 ------- ------- Deferred Federal income tax assets: Allowance for loan losses $ 4,979 $ 4,340 Net deferred loan origination fees 601 558 Tax versus book depreciation differences 216 657 Net unrealized losses on securities available for sale 450 -- Accrued postretirement benefits 471 476 Other, net 467 211 ------- ------- $ 7,184 $ 6,242 Deferred Federal income tax liabilities: Net unrealized gains on securities available for sale $ -- $ (282) Accretion of bond discount (342) (587) ------- ------- $ (342) $ (869) ------- ------- Net deferred Federal income tax asset $ 6,842 $ 5,373 ======= =======
(14) REGULATORY CAPITAL REQUIREMENTS The Corporation and the Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Corporation's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the accompanying tables) of Total and Tier I capital to risk weighted assets, and of Tier I capital to average assets. As of December 31, 2003, the Corporation's capital ratios exceeded the required minimums to be considered well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Corporation must maintain minimum Total risk based, Tier I risk based, and Tier I leverage ratios as set forth in the tables. There are no conditions or events since December 31, 2003 that Management believes have changed the Corporation's category. Management believes, as of December 31, 2003, that the Corporation meets all capital adequacy requirements to which it is subject. 34 The Corporation's and Bank's actual capital amounts and ratios are also presented in the table (000's omitted in dollar amounts).
Minimum to Qualify as Actual Well Capitalized ------ ---------------- Amount Ratio Amount Ratio ------ ----- ------ ----- AS OF DECEMBER 31, 2003: Total Capital to Risk-Weighted Assets Consolidated $156,520 15.7% $ 99,873 10.0% Monroe Bank & Trust 156,146 15.6% 99,873 10.0% Tier 1 Capital to Risk-Weighted Assets Consolidated 143,980 14.4% 59,924 6.0% Monroe Bank & Trust 143,606 14.4% 59,924 6.0% Tier 1 Capital to Average Assets Consolidated 143,980 9.8% 73,767 5.0% Monroe Bank & Trust 143,606 9.7% 73,767 5.0%
Minimum to Qualify as Actual Well Capitalized ------ ---------------- Amount Ratio Amount Ratio ------ ----- ------ ----- AS OF DECEMBER 31, 2002: Total Capital to Risk-Weighted Assets Consolidated $177,856 19.0% $ 93,525 10.0% Monroe Bank & Trust 177,675 19.0% 93,525 10.0% Tier 1 Capital to Risk-Weighted Assets Consolidated 166,121 17.8% 56,115 6.0% Monroe Bank & Trust 165,940 17.7% 56,115 6.0% Tier 1 Capital to Average Assets Consolidated 166,121 11.8% 70,610 5.0% Monroe Bank & Trust 165,940 11.8% 70,610 5.0%
(15) EARNINGS PER SHARE THE CALCULATION OF EARNINGS PER COMMON SHARE FOR THE YEARS ENDED DECEMBER 31 IS AS FOLLOWS:
2003 2002 2001 ----------- ----------- ----------- BASIC Net income $19,315,000 $21,804,000 $21,923,000 Less preferred dividends -- -- -- Net income applicable to common stock $19,315,000 $21,804,000 $21,923,000 ----------- ----------- ----------- Average common shares outstanding 19,026,369 19,458,737 19,933,580 ----------- ----------- ----------- Earnings per common share - basic $ 1.02 $ 1.12 $ 1.10 =========== =========== ===========
2003 2002 2001 ----------- ----------- ----------- DILUTED Net income $19,315,000 $21,804,000 $21,923,000 Less preferred dividends -- -- -- Net income applicable to common stock $19,315,000 $21,804,000 $21,923,000 ----------- ----------- ----------- Average common shares outstanding 19,026,369 19,458,737 19,933,580 Stock option adjustment 46,260 933 180 ----------- ----------- ----------- Average common shares outstanding - diluted 19,072,629 19,459,670 19,933,760 ----------- ----------- ----------- Earnings per common share - diluted $ 1.01 $ 1.12 $ 1.10 =========== =========== ===========
(16) STOCK-BASED COMPENSATION PLAN The Long-Term Incentive Compensation Plan approved by shareholders at the April 6, 2000 Annual Meeting of Shareholders of Monroe Bank & Trust authorized the Board of Directors to grant nonqualified stock options to key employees and non-employee directors. Such grants may be made until January 2, 2010 for up to 1,000,000 shares of the Corporation's common stock. The amount that may be awarded to any one individual is limited to 100,000 shares in any one calendar year. Stock options granted under the plan have exercise prices equal to the fair market value at the date of grant. Options granted under the plan may be exercised for a period of no more than ten years from the date of grant. One-third of the options granted to key employees in 2003 and 2002 vest annually, beginning December 31, 2003 and December 31, 2002, respectively. The options granted to key employees in 2000 are vested as of December 31, 2002. The options granted to non-employee directors in 2002 and 2001 vested on December 31, 2002 and December 31, 2001, respectively. 35 A summary of the status of stock options under the plan is presented in the table below.
2003 2002 2001 ---- ---- ---- Weighted Average Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- Options Outstanding, January 1 323,949 $15.52 140,434 $17.71 126,600 $18.13 Granted 179,500 13.20 183,515 13.85 13,834 13.94 Exercised 19,647 13.86 -- -- -- -- Cancelled 3,000 13.85 -- -- -- -- Options Outstanding, December 31 480,802 $14.74 323,949 $15.52 140,434 $17.71 ------- ------ ------- ------ ------- ------ Options Exercisable, December 31 306,445 $15.49 212,615 $16.40 98,236 $17.54 ------- ------ ------- ------ ------- ------ Weighted Average Fair Value of Options Granted During Year $ 3.04 $ 3.19 $ 3.82
The options outstanding as of December 31, 2003 are exercisable at prices ranging from $13.20 to $18.125. The options exercisable as of December 31, 2003 are exercisable at prices ranging from $13.20 to $18.125. (17) PARENT COMPANY Condensed parent company financial statements, which include transactions with the subsidiary, are as follows (000s omitted): BALANCE SHEETS
DECEMBER 31, 2003 2002 -------- -------- ASSETS Cash and due from banks $ 2,745 $ 2,715 Investment in subsidiary bank 143,071 166,818 -------- -------- Total assets $145,816 $169,533 ======== ======== LIABILITIES Dividends payable and other liabilities $ 2,370 $ 2,534 -------- -------- Total liabilities 2,370 2,534 -------- -------- STOCKHOLDERS' EQUITY Total stockholders' equity 143,446 166,999 -------- -------- Total liabilities and stockholders' equity $145,816 $169,533 ======== ========
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2003 2002 2001 -------- -------- -------- INCOME Dividends from subsidiary bank $ 42,061 $ 18,357 $ 13,194 -------- -------- -------- Total income 42,061 18,357 13,194 -------- -------- -------- EXPENSE Interest on other borrowed funds -- -- -- Other expense 399 98 123 -------- -------- -------- Total expense 399 98 123 -------- -------- -------- Income before tax and equity in undistributed net income of subsidiary bank 41,662 18,259 13,071 Income tax benefit (102) (34) (45) -------- -------- -------- Income before equity in undistributed net income of subsidiary bank 41,764 18,293 13,116 Equity in undistributed net income (loss) of subsidiary bank (22,449) 3,511 8,807 -------- -------- -------- NET INCOME $ 19,315 $ 21,804 $ 21,923 ======== ======== ========
36 STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003 2002 2001 -------- -------- -------- CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Net income $ 19,315 $ 21,804 $ 21,924 Equity in undistributed net income (loss) of subsidiary bank 22,449 (3,511) (8,808) Net increase (decrease) in other liabilities (164) 80 325 -------- -------- -------- Net cash provided by operating activities $ 41,600 $ 18,373 $ 13,441 -------- -------- CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES: Issuance of common stock $ 342 $ -- $ -- Repurchase of common stock (31,008) (7,908) (3,511) Dividends paid (10,904) (10,349) (9,583) -------- -------- -------- Net cash used for financing activities $(41,570) $(18,257) $(13,094) -------- -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS $ 30 $ 116 $ 347 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 2,715 2,599 2,252 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,745 $ 2,715 $ 2,599 ======== ======== ========
Under current regulations, the Bank is limited in the amount it may loan to the Corporation. Loans to the Corporation may not exceed ten percent of the Bank's capital stock, surplus, and undivided profits plus the allowance for loan losses. Loans from the Bank to the Corporation are required to be collateralized. Accordingly, at December 31, 2003, Bank funds available for loans to the Corporation amounted to $15,841,000. The Bank has not made any loans to the Corporation. (18) 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 balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for its other lending activities. Financial instruments whose contractual amounts represent off-balance sheet credit risk at December 31 were as follows (000s omitted):
Contractual Amount 2003 2002 -------- -------- Commitments to extend credit: Unused portion of commercial lines of credit $118,339 $ 97,402 Unused portion of credit card lines of credit 9,828 10,018 Unused portion of home equity lines of credit 16,907 16,953 Standby letters of credit and financial guarantees written 18,764 17,320
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Most commercial lines of credit are secured by real estate mortgages or other collateral, generally have fixed expiration dates or other termination clauses, and require payment of a fee. Since the lines of credit may expire without being drawn upon, the total committed amounts do not necessarily represent future cash requirements. Credit card lines of credit have various established expiration dates, but are fundable on demand. Home equity lines of credit are secured by real estate mortgages, a majority of which have ten year expiration dates, but are fundable on demand. The Bank evaluates each customer's creditworthiness on a case by case basis. The amount of the collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on Management's credit evaluation of the counter party. 37 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. Approximately $16,037,000 of the letters of credit expires in 2004 and $2,727,000 extends for two to five years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. (19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (000S OMITTED):
2003 FIRST SECOND THIRD FOURTH ---- ----- ------ ----- ------ Total Interest Income $19,559 $20,020 $19,299 $18,896 Total Interest Expense 7,555 7,118 6,524 6,270 ------- ------- ------- ------- Net Interest Income 12,004 12,902 12,775 12,626 Provision for Loan Losses 825 825 6,325 30 Other Income 3,203 3,516 3,882 3,202 Other Expenses 7,374 7,582 7,680 7,543 ------- ------- ------- ------- Income Before Provision For Income Taxes 7,008 8,011 2,652 8,255 Provision For Income Taxes 1,951 2,230 679 1,751 ------- ------- ------- ------- Net Income $ 5,057 $ 5,781 $ 1,973 $ 6,504 ======= ======= ======= ======= Basic Earnings Per Common Share $ 0.26 $ 0.30 $ 0.10 $ 0.36 Diluted Earnings Per Common Share $ 0.26 $ 0.30 $ 0.10 $ 0.35 Dividends Declared Per Share $ 0.14 $ 0.14 $ 0.15 $ 0.15
2002 FIRST SECOND THIRD FOURTH ---- ----- ------ ----- ------ Total Interest Income $21,726 $21,352 $21,163 $20,363 Total Interest Expense 9,074 8,775 8,567 7,971 ------- ------- ------- ------- Net Interest Income 12,652 12,577 12,596 12,392 Provision for Loan Losses 2,750 1,350 1,400 601 Other Income 2,776 3,294 3,032 3,689 Other Expenses 7,006 6,261 6,415 7,307 ------- ------- ------- ------- Income Before Provision For Income Taxes 5,672 8,260 7,813 8,173 Provision For Income Taxes 1,560 2,244 2,133 2,177 ------- ------- ------- ------- Net Income $ 4,112 $ 6,016 $ 5,680 $ 5,996 ======= ======= ======= ======= Basic Earnings Per Common Share $ 0.21 $ 0.31 $ 0.29 $ 0.31 Diluted Earnings Per Common Share $ 0.21 $ 0.31 $ 0.29 $ 0.31 Dividends Declared Per Share $ 0.13 $ 0.13 $ 0.14 $ 0.14
38 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On April 18, 2002, the Board of Directors of MBT Financial Corp. (the "Corporation"), upon the recommendation of its Audit Committee, dismissed Arthur Andersen LLP as the Corporation's independent public accountants and appointed Plante & Moran, PLLC as its new independent public accountants for 2002. This was disclosed in Form 8-K/A filed on April 30, 2002. Item 9A. Controls and Procedures MBT Financial Corp. carried out an evaluation, under the supervision and with the participation of its management, including its 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 December 31, 2003, 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 December 31, 2003, in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be 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 December 31, 2003, that materially affected, or is reasonably likely to affect, the Company's internal control over financial reporting. 39 PART III Item 10. Directors and Executive Officers of the Registrant (A)EXECUTIVE OFFICERS - See "Executive Officers" in part I, Item 1 hereof. (B)DIRECTORS AND EXECUTIVE OFFICERS - information required by this item is incorporated by reference from the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities Exchange Commission. (C)AUDIT COMMITTEE FINANCIAL EXPERT - The Board of Directors has determined that Connie S. Cape, Chair of the Audit Committee, is an "audit committee financial expert" and "independent" as defined under applicable SEC and NASDAQ rules. (D)MBT Financial Corp. has adopted its CODE OF ETHICS, a code of ethics that applies to all its directors, officers, and employees, including its Chief Executive Officer, Chief Financial Officer, and internal auditor. A copy of the Code of Ethics is posted on our website at http://www.mbandt.com. In the event we make any amendment to, or grant any waiver of, a provision of the Code of Ethics that applies to the principal executive officers, principal financial officer, principal accounting officer, or controller, or persons performing similar functions that require disclosure under applicable SEC rules, we intend to disclose such amendment or waiver, the reasons for it, and the nature of any waiver, the name of the person to whom it was granted, and the date, on our internet website. Item 11. Executive Compensation Information required by this item is incorporated by reference from the sections entitled "Executive Compensation and Other Information" and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities and Exchange Commission. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated by reference from the section entitled "Ownership of Voting Shares" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities and Exchange Commission. Securities authorized for issuance under equity compensation plans as of December 31, 2003 were as follows:
Equity Compensation Plan Information Number of securities remaining available for future issuance under equity compensation plans Number of securities to be issued Weighted average exercise price of upon (excluding exercise of outstanding outstanding options, warrants, and securities reflected in options, warrants, and rights rights the first column ) ----------------------------- ---------------------------------- ------------------------- Equity Compensation plans approved by security holders 480,802 $14.74 519,198 Equity Compensation plans not approved by security holders 0 0 0 ------- ------ ------- Total 480,802 $14.74 519,198 ------- ------ -------
40 Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated by reference from the section entitled "Certain Transactions" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities and Exchange Commission. Item 14. Principal Accountant Fees and Services Information required by this item is incorporated by reference from the section entitled "Principal Accounting Firm Fees" in the Proxy Statement for the Annual Meeting of Shareholders that is to be filed with the Securities and Exchange Commission. 41 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K Contents Financial Statements Reports of Independent Public Accountants - Pages 19-20 Consolidated Balance Sheets as of December 31, 2003 and 2002 - Page 21 Consolidated Statements of Income for the Years Ended December 31, 2003, 2002, and 2001 - Page 22 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2003, 2002, and 2001 - Page 23 Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001 - Page 24 Notes to Consolidated Financial Statements - Pages 25 - 38 Reports on Form 8-K MBT Financial Corp. filed the following reports on Form 8-K during the quarter ended December 31, 2003:
Date of Event Reported Event Reported - ---------------------- ------------------------------------------ October 2, 2003 Items 7 and 12 - Financial Statements and Exhibits, and Disclosure of Results of Operations and Financial Condition, Update to Full Year Financial Guidance October 15, 2003 Items 7 and 12 - Financial Statements and Exhibits, and Disclosure of Results of Operations and Financial Condition, Third Quarter 2003 Earnings Announcement
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 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, 2000 and amended in Exhibit 3.2 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 10.1 MBT Financial Corp. Long-Term Incentive Compensation Plan. Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.2 Monroe Bank & Trust Salary Continuation Agreement. Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.3 Monroe Bank & Trust Split Dollar Life Insurance Agreement. Previously filed as Exhibit 10.3 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000.
42 10.4 Monroe Bank & Trust Group Term Carve Out Plan. Previously filed as Exhibit 10.4 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.5 MBT Financial Corp. Employment Agreement. Previously filed as Exhibit 10.5 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2001. 10.6 Monroe Bank & Trust Group Term Carve Out Plan. Previously filed as Exhibit 10.6 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2001. 10.7 Monroe Bank & Trust Supplemental Executive Retirement Agreement. Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 10.8 Monroe Bank & Trust Split Dollar Agreement. Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 21 Subsidiaries of the Registrant. Previously filed as Exhibit 21 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 23 Consent of Independent Auditors 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.
43 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: March 11, 2004 MBT FINANCIAL CORP. By: /s/ John L. Skibski -------------------- John L. Skibski Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. Dated: March 11, 2004 By: /s/ Ronald D. LaBeau By: /s/ John L. Skibski -------------------------- ------------------------------ Ronald D. LaBeau John L. Skibski Chairman, Chief Executive Chief Financial Officer Officer & Director By: /s/ Connie S. Cape By: /s/ Richard A. Sieb -------------------------- ------------------------------ Connie S. Cape Richard A. Sieb Director Director By: /s/ Thomas M. Huner By: /s/ Philip P. Swy -------------------------- ------------------------------ Thomas M. Huner Philip P. Swy Director Director By: /s/ Gerald L. Kiser -------------------------- Gerald L. Kiser Director 44 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 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, 2000 and amended in Exhibit 3.2 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 10.1 MBT Financial Corp. Long-Term Incentive Compensation Plan. Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.2 Monroe Bank & Trust Salary Continuation Agreement. Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.3 Monroe Bank & Trust Split Dollar Life Insurance Agreement. Previously filed as Exhibit 10.3 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.4 Monroe Bank & Trust Group Term Carve Out Plan. Previously filed as Exhibit 10.4 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 10.5 MBT Financial Corp. Employment Agreement. Previously filed as Exhibit 10.5 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2001. 10.6 Monroe Bank & Trust Group Term Carve Out Plan. Previously filed as Exhibit 10.6 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2001. 10.7 Monroe Bank & Trust Supplemental Executive Retirement Agreement. Previously filed as Exhibit 10.1 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 10.8 Monroe Bank & Trust Split Dollar Agreement. Previously filed as Exhibit 10.2 to MBT Financial Corp.'s Form 10-Q for its fiscal quarter ended September 30, 2003. 21 Subsidiaries of the Registrant. Previously filed as Exhibit 21 to MBT Financial Corp.'s Form 10-K for its fiscal year ended December 31, 2000. 23 Consent of Independent Auditors 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.
45 EX-23 3 k82540exv23.txt CONSENT OF INDEPENDENT AUDITORS EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference into the Company's registration statement on Form S-8, filed with the Commission on August 16, 2001, and the Company's registration statement on Form S-8, filed with the Commission on May 30, 2003, of our report dated February 2, 2004 on the consolidated balance sheet of MBT Financial Corp. (the "Company") as of December 31, 2003, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for the years then ended, which report is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. Plante & Moran, PLLC Auburn Hills, Michigan March 12, 2004 46 EX-31.1 4 k82540exv31w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.1 CERTIFICATIONS I, Ronald D. LaBeau, Chairman and Chief Executive Officer of MBT Financial Corp., certify that: 1. I have reviewed this annual report on Form 10-K of MBT Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [THIS PARAGRAPH INTENTIONALLY LEFT BLANK.] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 11, 2004 /s/ Ronald D. LaBeau ------------------------------------ Ronald D. LaBeau Chairman and Chief Executive Officer 47 EX-31.2 5 k82540exv31w2.txt CERTIFICATION OF CHIEF FINANICAL OFFICER EXHIBIT 31.2 CERTIFICATIONS I, John L. Skibski, Chief Financial Officer of MBT Financial Corp., certify that: 1. I have reviewed this annual report on Form 10-K of MBT Financial Corp.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [THIS PARAGRAPH INTENTIONALLY LEFT BLANK.] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 11, 2004 /s/ John L. Skibski --------------------------------- John L. Skibski Chief Financial Officer 48 EX-32.1 6 k82540exv32w1.txt 906 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of MBT Financial Corp. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald D. LaBeau, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Ronald D. LaBeau - ------------------------------ Ronald D. LaBeau Chief Executive Officer March 15, 2004 49 EX-32.2 7 k82540exv32w2.txt 906 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of MBT Financial Corp. (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John L. Skibski, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ John L. Skibski - ------------------------------ John L. Skibski Chief Financial Officer March 15, 2004 50 -----END PRIVACY-ENHANCED MESSAGE-----