UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 2001
------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from to
-------------------- -------------------------
Commission File Number: 0-18415
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IBT Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2830092
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway Mt. Pleasant, MI 48858
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(Address of principal executive offices) (Zip code)
(989) 772-9471
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former fiscal year, if changed since last
report)
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. [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock, no par value, 3,892,442 as of October 16, 2001
------------------------------------------------------------
IBT BANCORP, INC.
Index to Form 10-Q
Part I Financial Information Page Numbers
Item 1 Financial Statements and Notes 3-9
Item 2 Management's Discussion and 10-21
Analysis of Financial Condition
and Results of Operations
Item 3 Quantitative and Qualitative 22-24
Disclosures About Market Risk
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 25
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IBT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) September 30 December 31
2001 2000
---- ----
(Unaudited)
ASSETS
Cash and demand deposits due from banks $ 26,341 $ 27,525
Federal funds sold 6,650 900
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 32,991 28,425
Investment securities
Securities available for sale (amortized cost of
$99,450 in 2001 and $77,412 in 2000) 101,643 77,514
Securities held to maturity (fair value --
$4,247 in 2001 and $10,687 in 2000) 3,943 8,299
-------- --------
TOTAL INVESTMENT SECURITIES 105,586 85,813
Loans
Agricultural 50,469 47,298
Commercial 120,751 129,302
Residential real estate mortgage 177,592 173,041
Installment 55,125 54,038
-------- --------
TOTAL LOANS 403,937 403,679
Less allowance for loan losses 5,377 5,162
-------- --------
NET LOANS 398,560 398,517
Other assets 37,598 28,142
-------- --------
TOTAL ASSETS $574,735 $540,897
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 58,726 $ 60,798
NOW accounts 72,652 83,779
Certificates of deposit and other savings 308,256 293,727
Certificates of deposit over $100 58,884 38,512
-------- --------
TOTAL DEPOSITS 498,518 476,816
Other borrowed funds 11,630 6,444
Accrued interest and other liabilities 7,272 5,707
-------- --------
TOTAL LIABILITIES 517,420 488,967
Shareholders' Equity
Common stock -- no par value
10,000,000 shares authorized; outstanding--
3,892,442 in 2001 (3,871,552 in 2000) 31,292 30,814
Retained earnings 24,576 21,049
Accumulated other comprehensive income 1,447 67
-------- --------
TOTAL SHAREHOLDERS' EQUITY 57,315 51,930
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $574,735 $540,897
======== ========
See notes to consolidated financial statements.
3
IBT BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(dollars in thousands) Nine Months Ended
September 30
-------------
2001 2000
---- ----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 3,871,552 3,848,249
Issuance of common stock 28,600 20,023
Stock repurchased (7,710) --
----------- -----------
BALANCE END OF PERIOD 3,892,442 3,868,272
=========== ===========
COMMON STOCK
Balance at beginning of period $ 30,814 $ 30,322
Issuance of common stock 716 423
Stock repurchased (238) --
----------- -----------
BALANCE END OF PERIOD 31,292 30,745
RETAINED EARNINGS
Balance at beginning of period 21,049 17,816
Net income 4,690 4,004
Cash dividends ($0.30 per share
in 2001 and $0.27 in 2000) (1,163) (1,154)
----------- -----------
BALANCE END OF PERIOD 24,576 20,666
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period 67 (1,031)
Unrealized gains on securities available for sale, net
of income taxes and reclassification adjustment 1,380 608
----------- -----------
BALANCE END OF PERIOD 1,447 (423)
TOTAL SHAREHOLDERS' EQUITY END OF PERIOD $ 57,315 $ 50,988
=========== ===========
See notes to consolidated financial statements.
4
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(dollars in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
-------------------- ------------------
INTEREST INCOME
Loans $ 8,745 $ 8,633 $ 26,490 $ 24,383
Investment securities
Taxable 829 908 2,279 2,970
Nontaxable 401 352 1,230 1,073
Federal funds sold and other 281 38 803 116
-------- -------- -------- --------
TOTAL INTEREST INCOME 10,256 9,931 30,802 28,542
INTEREST EXPENSES
Deposits 4,717 4,701 14,477 13,040
Short term borrowings 159 133 425 339
-------- -------- -------- --------
TOTAL INTEREST EXPENSE 4,876 4,834 14,902 13,379
NET INTEREST INCOME 5,380 5,097 15,900 15,163
Provision for loan losses 167 186 495 490
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,213 4,911 15,405 14,673
NONINTEREST INCOME
Trust fees 149 117 428 348
Service charges on deposit accounts 70 91 217 252
Other service charges and fees 516 439 1,458 1,378
Gain on sale of mortgage loans 205 22 470 63
Title insurance revenue 431 323 1,126 830
Net realized loss on securities available for sale (6) -- (2) (4)
Other 193 136 511 454
-------- -------- -------- --------
TOTAL NONINTEREST INCOME 1,558 1,128 4,208 3,321
NONINTEREST EXPENSES
Salaries, wages and employee benefits 2,424 2,144 7,071 6,471
Occupancy 289 251 866 752
Furniture and equipment 506 476 1,512 1,427
Amortization of acquisition intangibles and goodwill 139 171 413 429
Other 1,088 1,197 3,259 3,384
-------- -------- -------- --------
TOTAL NONINTEREST EXPENSES 4,446 4,239 13,121 12,463
INCOME BEFORE FEDERAL INCOME TAXES 2,325 1,800 6,492 5,531
Federal income taxes and minority interest 645 498 1,802 1,527
-------- -------- -------- --------
NET INCOME $ 1,680 $ 1,302 $ 4,690 $ 4,004
======== ======== ======== ========
Basic net income per share $ 0.43 $ 0.34 $ 1.21 $ 1.04
======== ======== ======== ========
Cash dividends per share $ 0.10 $ 0.09 $ 0.30 $ 0.27
======== ======== ======== ========
See notes to consolidated financial statements.
5
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2001 2000 2001 2000
-------------------- ---------------------
NET INCOME $1,680 $1,302 $4,690 $4,004
Other comprehensive income before income taxes
Unrealized gains on securities available for sale:
Unrealized holding gains arising during period 1,001 540 2,090 917
Reclassification adjustment for realized
losses included in net income 6 -- 2 4
------ ------ ------ ------
Other comprehensive income before income taxes 1,007 540 2,092 921
Income tax expense related to other
comprehensive income 342 183 712 313
------ ------ ------ ------
OTHER COMPREHENSIVE INCOME 665 357 1,380 608
------ ------ ------ ------
COMPREHENSIVE INCOME $2,345 $1,659 $6,070 $4,612
====== ====== ====== ======
See notes to consolidated financial statements.
6
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands) Nine Months Ended
September 30
2001 2000
---- ----
OPERATING ACTIVITIES
Net income $ 4,690 $ 4,004
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 495 490
Provision for depreciation 868 848
Net amortization of securities 162 83
Amortization of intangibles and goodwill 413 429
Gain on sale of mortgage loans (470) (63)
Proceeds from sales of mortgage loans 60,289 7,162
Mortgage loans originated for sale (64,495) (7,406)
Increase in interest receivable (218) (751)
Increase in other assets (1,481) (433)
Increase (decrease) in accrued interest and other expenses 1,565 (549)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,818 3,814
INVESTING ACTIVITIES
Activity in available for sale securities
Maturities calls, and sales 19,742 15,196
Purchases (42,730) (5,788)
Activity in held to maturity securities
Maturities calls, and sales 5,143 4,957
Purchases -- (2,305)
Net decrease (increase) in loans 4,138 (41,716)
Increase in cash value of life insurance (6,988) --
Purchases of equipment and premises (2,760) (1,147)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (23,455) (30,803)
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits (2,072) (1,255)
Net increase in interest bearing deposits 23,774 18,129
Net increase in other borrowings 5,186 2,896
Cash dividends (1,163) (1,154)
Common stock issued 716 423
Stock repurchased (238) --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 26,203 19,039
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 4,566 (7,950)
Cash and cash equivalents at beginning of period 28,425 26,709
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,991 $ 18,759
======== ========
See notes to consolidated financial statements.
7
IBT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles for interim financial
information and with the instructions to form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three and
nine month periods ended September 30, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Corporation's annual report for the year ended
December 31, 2000.
NOTE 2 COMPUTATION OF EARNINGS PER SHARE
The net income per share amounts are based on the weighted average number of
common shares outstanding. All shares and per share amounts have been adjusted
for the 3.3 shares for 1 stock split declared on December 14, 1999 and paid
February 18, 2000. The weighted average number of common shares outstanding were
3,878,627 and 3,858,302 for the nine month periods ending September 30, 2001 and
2000, respectively.
NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS
The Bank adopted the provisions of Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended by SFAS Nos. 137 and 138, as of January 1, 2001. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. The
adoption of the provisions of SFAS No. 133, as amended, did not have an impact
on the results of operations or the financial position of the Banks.
In September 2000, SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities, a replacement of FASB
Statement No. 125, was issued. It revised the standards for accounting for
securitizations in 2000 and other transfers and servicing of financial assets
(occurring after March 31, 2000) and collateral and requires certain
disclosures, but it carries over most of SFAS No. 125's provisions without
reconsideration. SFAS No. 140 was adopted by the Banks on April 1, 2001 and did
not have a material impact on the Banks' results of operations, financial
position, or cash flows.
In July 2001, the Financial Accounting Standards Board issued two statements -
Statement 141, Business Combinations, and Statement 142, Goodwill and Other
Intangible Assets, which will potentially impact the Corporation's accounting
for its reported goodwill and other intangible assets.
Statement 141 eliminates the pooling method for accounting for business
combinations; requires that intangible assets that meet certain criteria be
reported separately from goodwill; and requires negative goodwill arising from a
business combination to be recorded as an extraordinary gain.
Statement 142 eliminates the amortization of goodwill and other intangibles that
are determined to have an indefinite life; and requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite life.
8
Upon adoption of these statements, the Corporation is required to re-evaluate
goodwill and other intangible assets that arose from business combinations
entered into before July 1, 2001. If the recorded other intangible assets do not
meet the criteria for recognition, they should be reclassified to goodwill.
Similarly, if there are other intangible assets that meet the criteria for
recognition but were not separately recorded from goodwill, they should be
reclassified from goodwill. Statement 142 also reassesses the useful lives of
intangible assets and adjusts the remaining amortization periods accordingly;
and writes off any remaining negative goodwill.
The Corporation has not yet completed its full assessment of the effects of
these new pronouncements on its financial statements and so is uncertain as to
the impact. The standards generally are required to be implemented by the
Corporation in its 2002 financial statements.
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Banks maintain their
books and records and perform their financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
NOTE 4
Restricted investments of $2,361,000 as of December 31, 2000 were reclassified
from held to maturity investments to other assets for the period ending December
31, 2000 to conform with the 2001 presentation.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major
factors that influenced IBT Bancorp's financial performance. This analysis
should be read in conjunction with the Corporation's 2000 annual report and with
the unaudited consolidated financial statements and notes thereto, as set forth
on pages 3 through 9 of this report.
NINE MONTHS ENDING SEPTEMBER 30, 2001 AND 2000
RESULTS OF OPERATIONS
Net income equaled $4.69 million for the nine month period ended
September 30, 2001, compared to $4.00 million for the same period in 2000, a
17.1% increase. Return on average assets, which measures the ability of the
Corporation to profitably and efficiently employ its resources, equaled 1.11%
for the first nine months of 2001 and 1.05% in 2000. Return on average equity,
which indicates how effectively the Corporation is able to generate earnings on
shareholder invested capital, equaled 11.53% through September 30, 2001 versus
10.90% through September 30, 2000.
REVISED SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data) Year to Date
September 30
--------------------------------
2001 2000
--------------------------------
INCOME STATEMENT DATA
Net interest income $15,900 $15,163
Provision for loan losses 495 490
Net income 4,690 4,004
PER SHARE DATA
Net income per common share $1.21 $1.04
Cash dividends per common share 0.30 0.27
RATIOS
Average primary capital to average assets 10.78% 10.47%
Net income to average assets 1.11 1.05
Net income to average equity 11.53 10.90
10
IBT BANCORP, INC.
TABLE 1
AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
(Dollars in Thousands)
The following schedules present the daily average amount outstanding
for each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding. Federal
Reserve and Federal Home Loan Bank equity holdings are included in other
investments.
Nine Months Ending
September 30, 2001 September 30, 2000
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
-------- ------- ---- -------- -------- ----
INTEREST EARNING ASSETS
Loans $404,179 $26,511 8.75% $373,638 $24,412 8.71%
Taxable investment securities 50,233 2,142 5.69 64,728 2,839 5.85
Nontaxable investment securities 34,049 1,864 7.30 29,450 1,626 7.36
Federal funds sold 25,384 802 4.21 2,528 116 6.12
Other investments 2,574 138 7.15 2,323 131 7.52
-------- ------- ---- -------- ------- ----
Total Earning Assets 516,419 31,457 8.12 472,667 29,124 8.22
NONEARNING ASSETS
Allowance for loan losses (5,315) (4,868)
Cash and due from banks 20,947 17,648
Premises and equipment 12,141 9,491
Accrued income and other assets 16,800 14,156
-------- --------
Total Assets $560,992 $509,094
======== ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 81,474 1,605 2.63 $ 65,240 1,364 2.79
Savings deposits 120,123 2,582 2.87 124,688 2,973 3.18
Time deposits 233,453 10,290 5.88 203,810 8,703 5.69
Borrowed funds 10,419 425 5.44 6,843 339 6.61
-------- ------- ---- -------- ------- -----
Total Interest Bearing Liabilities 445,469 14,902 4.46 400,581 13,379 4.45
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 55,389 54,190
Other 5,907 5,366
Shareholders' equity 54,227 48,957
-------- --------
Total Liabilities and Equity $560,992 $509,094
======== ========
Net interest income (FTE) $16,555 $15,745
======= =======
Net yield on interest earning assets (FTE) 4.27% 4.44%
==== =====
11
IBT BANCORP, INC.
TABLE 2
VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
The following table sets forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For the purpose of this
table, changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Nine Month Period Ended September 30, 2001
Compared to
September 30, 2000
Increase (Decrease) Due to
-------------------------------------------
Volume Rate Net
------ ---- ---
Changes in Interest Income
Loans $ 2,003 $ 96 $2,099
Taxable investment securities (620) (77) (697)
Nontaxable investment securities 252 (14) 238
Federal funds sold 733 (47) 686
Other investments 14 (7) 7
------- ----- ------
Total changes in interest income 2,382 (49) 2,333
Total changes in interest expense 1,640 (117) 1,523
------- ----- ------
Net Change in Interest Margin (FTE) $ 742 $ 68 $ 810
======= ===== ======
12
IBT BANCORP, INC.
TABLE 3
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
Year to Date
September 30
----------------------------------
2001 2000
------- -------
Summary of changes in allowance:
Allowance for loan losses - January 1 $5,162 $4,622
Loans charged off (461) (292)
Recoveries of charged off loans 181 316
------- ------
Net loans (charged off) recovered (280) 24
Provision charged to operations 495 490
------- ------
Allowance for loan losses - September 30 $5,377 $5,136
====== ======
Allowance for loan losses as a % of loans 1.33% 1.29%
===== =====
NONPERFORMING LOANS
(Dollars in thousands)
September 30
2001 2000
-------- --------
Total amount of loans outstanding at the
end of period $403,937 $397,893
======== ========
Nonaccrual loans $ 795 $ 343
Accruing loans past due 90 days or more 3,052 2,181
Restructured loans 139 182
-------- --------
Total $ 3,986 $ 2,706
======== ========
Loans classified as nonperforming as
a % of outstanding loans 0.99% 0.68%
======== ========
Loans classified as substandard to
Allowance for loan losses - September 30 74.1% 52.7%
======== ========
To management's knowledge, there are no other loans which cause management to
have serious doubts as to the ability of a borrower to comply with their loan
repayment terms.
13
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is the
primary source of income for IBT Bancorp. Interest income includes loan fees of
$1.04 million in the first nine months of 2001 versus $719,000 for the same
period in 2000. For analytical purposes, net interest income is adjusted to a
"taxable equivalent" basis by adding the income tax savings from interest on
tax-exempt loans and securities, thus making year-to-year comparisons more
meaningful.
As shown in Tables number 1 and 2, when comparing the nine month period ending
September 30, 2001 to the same period in 2000, fully taxable equivalent (FTE)
net interest income increased $810,000 or 5.1%. An increase of 9.3% in average
interest earning assets provided $2.38 million of FTE interest income. The
majority of this increase was funded by a 11.2% increase in interest bearing
deposits and borrowed funds, resulting in $1.64 million of additional interest
expense. Overall, changes in volume resulted in $742,000 of additional FTE
interest income. The average FTE interest rate earned on assets decreased by
0.10%, decreasing FTE interest income by $49,000 and the average rate paid on
deposits and other borrowings increased by 0.01%, decreasing interest expense by
$117,000. The change in interest rates earned and paid increased FTE net
interest income by $68,000.
The Corporation's FTE net interest yield as a percentage of average earning
assets equaled 4.27% during 2001 versus 4.44% in 2000. The 0.17% decrease in the
FTE net interest yield was primarily a result of a change in asset mix. The
following table shows as a percentage of earning assets the percentage invested
in each earning asset for September 30, 2001 versus the same period in 2000.
2001
September 30 September 30 Average
2001 2000 Change Rate
Loans 78.3% 79.1% (0.80%) 8.75%
Taxable investment securities 9.7 13.7 (4.0) 5.69
Non-taxable investment securities 6.6 6.2 0.4 7.30
Federal funds sold 4.9 0.5 4.4 4.21
Other 0.5 0.5 --- 7.15
------ ------
100.0% 100.0%
====== ======
As shown in the above table, there has been a substantial shift of asset
composition from taxable investment securities to federal funds sold. This shift
accounted for approximately 0.12% of the 0.17% decline in the net interest
margin.
Since the beginning of 2001, the Federal Reserve Board of Governors has
decreased its targeted fed funds rate by 4.0%. Currently, short term interest
rates are at their lowest level since the early 1960's. The decrease in interest
rates is in response to a worsening economic outlook. While the United States is
not officially experiencing a recession, economic growth is at lowest levels
since 1991. Uncertainty created by the terrorist attack on September 11, 2001
has increased the likelihood of continued poor economic performance. In this
environment the Corporation's subsidiary banks, along with the entire financial
services industry, may experience a decrease in demand for the primary products,
loans and deposits, and will most likely experience an increase in past due
loans and charge-offs. Typically, an economic recession
14
results in lower earnings for financial institutions. The aforementioned shift
in earning assets is a direct result of the Corporation lowering its exposure to
credit risk.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 69% of the
Corporation's total assets and is the Corporation's single largest concentration
of risk. The allowance for loan losses is management's estimation of potential
future losses inherent in the existing loan portfolio. Factors used to evaluate
the loan portfolio, and thus to determine the current charge to expense, include
recent loan loss history, financial condition of borrowers, amount of
nonperforming loans, overall economic conditions, and other factors.
Comparing the year to date period of September 30, 2001 to September 30, 2000,
the provision for loan losses was increased by $5,000 to $495,000. The provision
and allowance for loan losses was increased due to an increase in loans
classified as substandard. As a percentage of loans, substandard loans to
outstanding loans was 0.99% in 2001 versus 0.68% in 2000. During 2001 the
Corporation had net charge-offs of loans of $280,000 compared to net recoveries
of loans previously charged off of $24,000 in 2000. As of September 30, 2001 the
allowance for loan losses was $5.38 million or 1.33% of total loans. Based on
management's internal analysis, the allowance for loan losses is believed to be
adequate as of September 30, 2001.
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, fees for
other financial services, gains on sale of mortgage loans sold, and gains and
losses on investment securities available for sale. There was an $887,000
increase in fees earned from these sources during the nine months of 2001 when
compared to the same period in 2000. The increase in revenue from these sources
is largely responsible for the $961,000 increase in pre-tax earnings.
Significant individual account changes during this period include a $296,000
increase in title insurance revenue, $131,000 in NSF and overdraft fees, and a
$407,000 increase in gains on the sale of mortgage loans originated for sale.
The Corporation has established a policy that all 15 and 30 year amortized fixed
rate mortgage loans will be sold. These loans are sold without recourse. The
Corporation retains the servicing of these loans. The calculation of gains on
the sale of mortgages exclude at least 25 basis points allocated to the value of
the servicing rights of these loans. Included in other noninterest income is a
$470,000 gain from the sale of $60.3 million in mortgages through the third
quarter of 2001 versus a $63,000 gain on the sale of $7.2 million for the same
period in 2000.
During the third quarter of 2001, the Corporation invested an additional $7.0
million in bank owned life insurance. The Corporation's total investment equals
$8.6 million. The average net rate earned on the new investment is approximately
5.6% and, because of their tax free accumulation of earnings, they have a
taxable equivalent rate of 8.5%. The rates on these contracts are adjustable
annually on their anniversary date. The investment was done with three separate
insurance companies with S&P ratings of AA+ or better. The investment is
classified in other assets on the consolidated balance sheet and income is
recorded in noninterest income. The income earned from this source increased
$45,000 during the third quarter of 2001.
15
NONINTEREST EXPENSE
Noninterest expense increased $658,000 or 5.3% during the first nine months of
2001 when compared to 2000. The largest component of noninterest expense is
salaries and employee benefits, which increased $600,000 or 9.3%. Normal merit
and promotional salary adjustments account for half of the increase with the
remainder of the increase resulting from increased staffing due to the expansion
of IBT Title into the Clare market, an increase in support staff to handle the
increase in mortgage volume, a 20% increase in medical expenses, and expenses
related to benefit improvement for the employees of Farmers State Bank as a
result of the merger in August 2000.
Occupancy and furniture and equipment expenses increased $199,000 or 9.1% in
2001. The majority of this increase is a result of the construction and
occupancy of a 15,000 square foot operations center in Mt. Pleasant, Michigan.
Other operating expenses declined $141,000 or 3.7%. The decline is related to a
$185,000 decrease in the Michigan Single Business Tax and a $211,000 decline in
merger expenses. These decreases were offset with increases of $64,000 in office
supplies, $79,000 in director fees related to additional directors, and $68,000
in the cost of title insurance.
QUARTER ENDED SEPTEMBER 30, 2001 AND 2000
RESULTS OF OPERATIONS
Net income equaled $1.68 million for the third quarter in 2001 compared to $1.30
million for the same period in 2000, a 29.0% increase. Return on average assets
equaled 1.16% for the third quarter in 2001 compared to 1.00% for the same
period in 2000. Return on average equity equaled 12.06% for the third quarter in
2001, versus 10.81% for the third quarter in 2000.
16
REVISED SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Quarter Ended
September 30
----------------------------
2001 2000
----------------------------
INCOME STATEMENT DATA
Net interest income $5,380 $5,097
Provision for loan losses 167 186
Net income 1,680 1,302
PER SHARE DATA
Net income per common share $ 0.43 $ 0.34
Cash dividends per common share 0.10 0.09
RATIOS
Net income to average assets 1.16% 1.00%
Net income to average equity 12.06 10.81
NET INTEREST INCOME
When comparing net interest income for the third quarter of 2001 to the same
period in 2000, a 9.6% increase in average interest-earning assets provided
$635,000 of additional FTE interest income. The average rate of interest-earning
assets decreased 0.45%, resulting in a $258,000 decrease in FTE interest income.
The changes in average balances and the rates earned provided an additional
$377,000 of FTE interest income. The growth of earning assets was funded
primarily by growth in interest bearing liabilities, which increased by 12.2% in
2001. The average cost of these funds decreased by 0.48%. The changes in the
average balances and rate paid on interest-bearing deposits resulted in $42,000
of additional interest expense. Overall, the changes in interest rate earned and
paid and average balances resulted in additional net interest income of $335,000
in the third quarter of 2001 when compared to the same period in 2000. The
Corporation's FTE net interest yield decreased by 0.12% to 4.22% in the third
quarter of 2001. The primary reason for the decrease was a change in asset mix
as discussed on page 13 of this report and a sharp decrease in interest rates in
2001.
PROVISION FOR LOAN LOSSES
Since December 31, 2000, total average loans outstanding have increased $1.7
million or 0.4% compared to $42.0 million or 11.8% for the same period in 2000.
The allowance for loan losses as a percentage of total outstanding loans was
1.33% as of September 30, 2001 and 1.29% in 2000. During the third quarter of
2001, the Corporation had net charge-offs of $189,000. The amount provided for
loan losses was $167,000 in 2001 versus $186,000 in 2000. The decrease in the
provision is principally due to a slowdown in loan growth and an overall
adequate allowance of loan losses based on management's analysis of September
30, 2001.
17
IBT BANCORP, INC.
TABLE 4
AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
(Dollars in Thousands)
The following schedules present the daily average amount outstanding for
each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding. Federal
Reserve and Federal Home Loan Bank restricted equity holdings are included in
other investments.
Quarter Ending
September 30, 2001 September 30, 2000
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
-------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS
Loans $405,405 $ 8,752 8.64% $391,582 $ 8,613 8.80%
Taxable investment securities 57,039 784 5.50 58,326 855 5.86
Nontaxable investment securities 34,101 608 7.13 29,624 535 7.22
Federal funds sold 31,486 280 3.56 2,154 39 7.24
Other investments 2,784 46 6.61 2,599 51 7.85
-------- ------- ---- -------- ------- -----
Total Earning Assets 530,815 10,470 7.89 484,285 10,093 8.34
NONEARNING ASSETS
Allowance for loan losses (5,405) (5,028)
Cash and due from banks 21,813 18,182
Premises and equipment 12,741 7,965
Accrued income and other assets 19,652 14,248
-------- --------
Total Assets $579,616 $519,652
======== ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 84,264 484 2.30 $ 71,214 577 3.24
Savings deposits 122,471 806 2.63 119,876 966 3.22
Time deposits 241,249 3,427 5.68 210,994 3,158 5.99
Borrowed funds 11,705 159 5.43 7,763 133 6.85
-------- ------- ---- -------- ------- -----
Total Interest Bearing Liabilities 459,689 4,876 4.24 409,847 4,834 4.72
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 58,471 57,292
Other 5,749 4,350
Shareholders' equity 55,707 48,163
-------- --------
Total Liabilities and Equity $579,616 $519,652
======== ========
Net interest income (FTE) $ 5,594 $ 5,259
======= =======
Net yield on interest earning assets (FTE) 4.22% 4.34%
===== =====
18
IBT BANCORP, INC.
TABLE 5
VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
The following table sets forth the effect of volume and rate changes on interest
income and expense for the periods indicated. For the purpose of this table,
changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Quarter Ended September 30, 2001
Compared to
September 30, 2000
Increase (Decrease) Due to
-------------------------------------
Volume Rate Net
------ ---- ---
CHANGES IN INTEREST INCOME
Loans 300 (161) 139
Taxable investment securities (19) (52) (71)
Nontaxable investment securities 80 (7) 73
Federal funds sold 271 (30) 241
Other Investments 3 (8) (5)
---- ----- ----
Total changes in interest income 635 (258) 377
Total changes in interest expense 605 (563) 42
---- ----- ----
Net Change in Interest Margin (FTE) 30 305 335
==== ===== ====
NONINTEREST INCOME
Noninterest income earned in the third quarter of 2001 compared to the same
period in 2000, increased $430,000 or 38.1%. The most significant changes were a
$183,000 increase from the gain on sale of mortgages, an increase of $108,000 in
title and abstract revenue, an increase of $54,000 in income earned on the cash
value of life insurance, an increase of $32,000 in trust fees, and an increase
of $36,000 in NSF and overdraft fees.
19
NONINTEREST EXPENSE
Noninterest expense increased $207,000 or 4.9% during the third quarter of 2001
when compared to 2000. Noninterest expense includes salary and benefits,
occupancy, and other operating expenses. Comparing 2001 to 2000, salaries and
employee benefits increased $280,000, occupancy expense and furniture and
equipment expense increased $68,000, and other operating expenses decreased
$141,000. The decrease in other operating expenses was primarily due to $243,000
of one time merger related expense incurred in the third quarter of 2000.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Since December 31, 2000, total assets increased $33.8 million to $574.7 million.
During this period the loan portfolio increased $258,000, fed funds sold
increased $5.75 million, investment securities increased $19.8 million, and
other assets increased $9.5 million. The increase in other assets is principally
a result of the $7.0 million investment in bank-owned life insurance and $1.5
million investment in a new operations center. Changes in funding sources
include a $2.1 million decrease in noninterest bearing deposits, an increase in
interest bearing deposits of $23.8 million, an increase in borrowings of $5.2
million, and a $5.4 million increase in shareholders' equity.
LIQUIDITY
Liquidity management is designed to have adequate resources available to meet
depositor and borrower discretionary demands for funds. Liquidity is also
required to fund expanding operations, investment opportunities, and the payment
of cash dividends. The primary sources of the Corporation's liquidity are cash,
cash equivalents, and investment securities available for sale.
As of September 30, 2001, cash and cash equivalents as a percentage of total
assets equaled 5.7%, versus 5.3% as of December 31, 2000. During the first nine
months of 2001, $1.8 million in net cash was provided from operations, and $26.2
million was provided by financing activities. Investing activities used $23.5
million. The accumulated effect of the Corporation's operating, investing, and
financing activities was a $4.6 million decrease in cash and cash equivalents
during the first nine months of 2001.
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale equaled
$101.6 million as of September 30, 2001 and $77.5 million as of December 31,
2000. The Corporation's liquidity is considered adequate by the management of
the Corporation.
20
CAPITAL
The capital of the Corporation consists solely of common stock, surplus,
retained earnings, and accumulated other comprehensive income; and increased
approximately $5.4 million since December 31, 2000.
There are significant capital regulatory constraints placed on the Corporation's
capital. The Federal Reserve Board's current recommended minimum tier 1 and tier
2 capital to average assets requirement is 6.0%. The Corporation's tier 1 and
tier 2 capital to average assets, which consists of shareholders' equity plus
the allowance for loan losses, less unamortized acquisition intangible, was
10.4% at September 30, 2001.
The Federal Reserve Board has established a minimum risk based capital standard.
Under this standard, a framework has been established that assigns risk weights
to each category of on- and off-balance sheet items to arrive at risk adjusted
total assets. Regulatory capital is divided by the risk adjusted assets with the
resulting ratio compared to the minimum standard to determine whether a bank has
adequate capital. The minimum standard is 8%, of which at least 4% must consist
of equity capital net of goodwill. The following table sets forth the
percentages required under the Risk Based Capital guidelines and the
Corporation's ratios as of September 30, 2001:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
Actual
Required 09/30/01
-------- --------
Equity Capital 4.00% 13.79%
Secondary Capital* 4.00 1.25
Total Capital 8.00% 15.04%
* IBT Bancorp's secondary capital consists solely of the allowance for
loan losses. The percentage for the secondary capital under the
required column is the maximum allowed from all sources.
21
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward- looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the
Securities and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has no foreign exchange risk, holds
limited loans outstanding to oil and gas concerns, and holds no trading account
assets. Any changes in foreign exchange rates or commodity prices would have an
insignificant impact, if any, on the Corporation's interest income and cash
flows.
Interest rate risk ("IRR") is the exposure to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors and senior management to effectively
manage the various risks that can have a material impact on the safety and
soundness of the Corporation. The risks include credit, interest rate,
liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
The Corporation uses several techniques to manage interest rate risk. The first
method is gap analysis. Gap analysis measures the cash flows and/or the earliest
repricing of the Corporation's interest bearing assets and liabilities. This
analysis is useful for measuring trends in the repricing
22
characteristics of the balance sheet. Significant assumptions are required in
this process because of the imbedded repricing options contained in assets and
liabilities. A substantial portion of the Corporation's assets are invested in
loans and mortgage backed securities. These assets have imbedded options that
allow the borrower to repay the balance prior to maturity without penalty. The
amount of prepayments is dependent upon many factors, including the interest
rate of a given loan in comparison to the current interest rates, for
residential mortgages the level of sales of used homes, and the overall
availability of credit in the market place. Generally, a decrease in interest
rates will result in an increase in the Corporation's cash flows from these
assets. Investment securities, other than those that are callable, do not have
any significant imbedded options. Saving and checking deposits may generally be
withdrawn on request without prior notice. The timing of cash flow from these
deposits are estimated based on historical experience. Time deposits have
penalties which discourage early withdrawals.
The second technique used in the management of interest rate risk is to combine
the projected cash flows and repricing characteristics generated by the gap
analysis and the interest rates associated with those cash flows and projected
future interest income. By changing the amount and timing of the cash flows and
the repricing interest rates of those cash flows, the Corporation can project
the effect of changing interest rates on its interest income.
The following table provides information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of September 30,
2001. The Corporation has no interest rate swaps, futures contracts, or other
derivative financial options. The principal amounts of assets and time deposits
maturing were calculated based on the contractual maturity dates. Savings and
NOW accounts are based on management's estimate of their future cash flows.
23
-----Consolidated-----
Quantitative Disclosures of Market Risk
September 30 Fair Value
--------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total 09/30/01
--------------------------------------------------------------------------------------------
Rate sensitive assets
Other interest bearing assets $ 6,650 --- --- --- --- --- $ 6,650 $ 6,650
Average interest rates 3.00% --- --- --- --- --- 3.00%
Fixed interest rate securities $ 6,090 $29,135 $17,574 $15,374 $ 4,484 $32,929 $105,586 $105,890
Average interest rates 5.73% 4.55% 5.12% 4.68% 4.60% 4.91% 4.85%
Fixed interest rate loans $105,133 $78,711 $92,646 $40,006 $23,459 $14,484 $354,439 $363,569
Average interest rates 9.32% 8.42% 8.18% 8.30% 8.26% 7.58% 8.56%
Variable interest rate loans $ 47,506 $ 1,923 $ 68 $ 1 --- --- $ 49,498 $ 49,498
Average interest rates 8.02% 10.06% 7.75% 8.75% --- --- 8.10%
Rate sensitive liabilities
Borrowed funds $ 3,230 --- $ 5,000 $ 1,000 --- $ 2,400 $ 11,630 $ 12,107
Average interest rates 4.94% --- 5.08% 5.06% --- 6.65% 5.36%
Savings and NOW accounts $115,215 $17,249 $14,018 $11,528 $10,661 $28,080 $196,751 $196,751
Average interest rates 2.70% 2.27% 2.18% 2.54% 1.84% 1.46% 2.39%
Fixed interest rate time deposits $146,620 $35,644 $22,555 $24,522 $12,496 --- $241,837 $247,908
Average interest rates 5.47% 6.04% 5.95% 6.40% 6.63% --- 5.75%
Variable interest rate time deposits $ 778 $ 426 --- --- --- --- $ 1,204 $ 1,204
Average interest rates 4.09% 4.09% --- --- --- --- 4.09%
Quantitative Disclosures of Market Risk
September 30 Fair Value
---------------------------------------------------------------------------------------------
2001 2002 2003 2004 2005 Thereafter Total 09/30/00
---------------------------------------------------------------------------------------------
Rate sensitive assets
Fixed interest rate securities $ 13,680 $20,770 $21,768 $12,522 $ 5,144 $16,017 $ 89,901 $ 89,887
Average interest rates 5.87% 5.82% 5.55% 5.71% 5.42% 5.37% 5.64%
Fixed interest rate loans $105,638 $68,688 $78,588 $59,373 $30,259 $ 9,009 $351,555 $352,936
Average interest rates 8.39% 8.20% 8.41% 8.03% 8.30% 8.28% 8.29%
Variable interest rate loans $ 44,342 $ 1,800 $ 177 $ 19 --- --- $ 46,338 $ 46,338
Average interest rates 10.79% 10.91% 9.60% 10.49% --- --- 10.79%
Rate sensitive liabilities
Borrowed funds $ 9,006 --- --- --- --- --- $ 9,006 $ 9,006
Average interest rates 6.65% --- --- --- --- --- 6.65%
Savings and NOW accounts $110,737 $16,662 $13,089 $11,778 $10,240 $26,341 $188,847 $188,847
Average interest rates 3.94% 2.13% 2.13% 2.13% 2.13% 2.15% 3.19%
Fixed interest rate time deposits $115,634 $40,128 $23,320 $16,835 $17,363 --- $213,280 $212,905
Average interest rates 5.71% 6.21% 6.04% 5.76% 6.61% --- 5.92%
Variable interest rate time deposits $ 911 $ 282 --- --- --- --- $ 1,193 $ 1,193
Average interest rates 6.01% 6.01% --- --- --- --- 6.01%
24
PART II - OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) No reports on Form 8-K were filed or required to be filed
during the quarter ended September 30, 2001.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IBT Bancorp, Inc.
------------------------------
Date: October 31, 2001 /s/David W. Hole
------------------ ---------------------------------------------
David W. Hole, President/CEO
/s/Dennis P. Angner
---------------------------------------------
Dennis P. Angner, Treasurer
(Principal Financial and Accounting Officer)
26