1
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 June 30, 1998
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 48858
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(Address of principal executive offices) (Zip code)
(517) 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 $6 par value, 877,302 as of July 31, 1998
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IBT BANCORP, INC.
Index to Form 10-Q
Part I Financial Information Page Numbers
Item 1 Financial Statements 3-8
Item 2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9-19
Item 3 Quantitative and Qualitative
Disclosures About Market Risk 20-21
Part II Other Information
Item 4 Submission of Matters to a Vote of
Security Holders 22
Item 6 Exhibits and Reports on Form 8-K 22
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
IBT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) June 30 December 31
1998 1997
---- ----
(Unaudited)
ASSETS
Cash and demand deposits due from banks ................................. $ 16,521 $ 11,005
Federal funds sold ...................................................... 3,000 17,500
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 19,521 28,505
Investment securities:
Securities available for sale (Amortized cost of
$89,217 in 1998 and $56,985 in 1997) ............................... 89,634 57,391
Securities held to maturity (Fair value --
$5,595 in 1998 and $7,231 in 1997) ................................ 5,525 7,160
-------- --------
TOTAL INVESTMENT SECURITIES 95,159 64,551
Loans:
Commercial and agricultural .......................................... 42,060 36,978
Real estate mortgage ................................................. 150,552 143,424
Installment .......................................................... 39,862 36,847
-------- --------
TOTAL LOANS 232,474 217,249
Less allowance for loan losses .......................................... 2,975 2,677
-------- --------
NET LOANS 229,499 214,572
Other assets ............................................................ 18,040 11,103
-------- --------
TOTAL ASSETS $362,219 $318,731
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing .................................................. $ 45,430 $ 43,207
NOW accounts ......................................................... 43,831 37,892
Certificates of deposit and other savings ............................ 219,503 182,314
Certificates of deposit over $100,000 ................................ 17,182 21,145
-------- --------
TOTAL DEPOSITS 325,946 284,558
Accrued interest and other liabilities .................................. 3,714 3,215
-------- --------
TOTAL LIABILITIES 329,660 287,773
======== ========
Shareholders' Equity:
Common stock -- $6 par value ......................................... 5,263 4,755
4,000,000 shares authorized; outstanding--
877,252 in 1998 (871,701 in 1997)
Capital surplus ...................................................... 18,636 13,687
Retained earnings .................................................... 8,386 12,248
Accumulated other comprehensive income ............................... 274 268
-------- --------
TOTAL SHAREHOLDERS' EQUITY 32,559 30,958
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................ $362,219 $318,731
======== ========
See notes to consolidated financial statements.
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IBT BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(dollars in thousands)
Six Months Ended
June 30
-------
1998 1997
---- ----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING:
Balance at beginning of period 792,455 783,457
10% stock dividend 79,155
Issuance of common stock 5,642 4,879
---------- ---------
BALANCE END OF PERIOD 877,252 788,336
========== =========
COMMON STOCK:
Balance at beginning of period $ 4,755 $ 4,701
10% stock dividend 475
Issuance of common stock 33 29
---------- ---------
Balance end of period 5,263 4,730
CAPITAL SURPLUS:
Balance at beginning of period 13,687 13,262
10% stock dividend 4,670
Issuance of common stock 279 210
---------- ---------
Balance end of period 18,636 13,472
RETAINED EARNINGS:
Balance at beginning of period 12,248 9,916
Net income 1,726 1,738
10% stock dividend (5,145)
Cash dividends ($0.25 per share in 1998 and $0.23 in 1997) (443) (392)
---------- ---------
Balance end of period 8,386 11,262
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of period 268 121
Unrealized gains (losses) on securities available for sale,
net of income taxes and reclassification adjustment 6 (9)
---------- ---------
Balance end of period 274 112
---------- ---------
TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 32,559 $ 29,576
========== =========
See notes to consolidated financial statements.
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IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands) Three Months Ended Six Months Ended
June 30 June 30
------- -------
1998 1997 1998 1997
----------------- ----------------
INTEREST INCOME
Loans................................................................... $ 4,912 $4,702 $ 9,588 $ 9,250
Investment securities:
Taxable .............................................................. 1,251 699 2,159 1,399
----- ------ ----- -----
Nontaxable ........................................................... 226 165 429 330
TOTAL INTEREST ON INVESTMENT SECURITIES 1,477 864 2,588 1,729
Federal funds sold ..................................................... 96 63 206 182
----- ----- ----- -----
TOTAL INTEREST INCOME 6,485 5,629 12,382 11,161
INTEREST EXPENSE ON DEPOSITS ............................................. 3,176 2,563 6,035 5,115
----- ----- ----- -----
NET INTEREST INCOME 3,309 3,066 6,347 6,046
Provision for loan losses ................................................ 108 129 206 252
----- ----- ----- -----
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,201 2,937 6,141 5,794
NONINTEREST INCOME
Trust fees ............................................................. 103 87 206 174
Service charges on deposit accounts .................................... 79 71 153 142
Other service charges and fees ......................................... 264 214 496 432
Other................................................................... 195 102 362 239
Net realized gain (loss) on securities
available for sale .................................................. 46 (2) 46 (11)
----- ----- ----- -----
TOTAL NONINTEREST INCOME 687 472 1,263 976
NONINTEREST EXPENSES
Salaries, wages and employee benefits .................................. 1,463 1,195 2,748 2,388
Occupancy............................................................... 181 158 344 315
Furniture and equipment................................................. 279 224 537 461
Other .................................................................. 781 576 1,406 1,165
----- ----- ----- -----
TOTAL NONINTEREST EXPENSE 2,704 2,153 5,035 4,329
INCOME BEFORE FEDERAL INCOME TAXES 1,184 1,256 2,369 2,441
Federal income taxes ..................................................... 320 365 643 703
----- ----- ----- -----
NET INCOME $ 864 $ 891 $ 1,726 $ 1,738
===== ===== ===== =====
Net income per share ..................................................... $ 0.99 $ 1.03 $1.98 $ 2.01
===== ===== ===== =====
Cash dividends per share ................................................. $ 0.25 $ 0.23 $0.50 $ 0.46
===== ===== ===== =====
See notes to consolidated financial statements.
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IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
1998 1997 1998 1997
-------------------- -----------------
NET INCOME ........................................................................ $ 864 $ 891 $ 1,726 $ 1,738
Other comprehensive income before income taxes:
Unrealized gains (losses) on securities available for sale:
Unrealized holding (losses) gains arising
during period ......................................................... (65) 176 55 (25)
Reclassification adjustment for realized
(gains) losses included in net income ................................. (46) 2 (46) 11
------- ------- ------- -------
Total comprehensive (loss) income before income
taxes......................................................................... (111) 178 9 (14)
Income tax (benefit) expense related to
comprehensive income .................................................. (38) 60 3 (5)
------- ------- ------- -------
OTHER COMPREHENSIVE (LOSS) INCOME NET OF
INCOME TAXES ........................................... (73) 118 6 (9)
------- ------- ------- -------
TOTAL COMPREHENSIVE INCOME .............................. $ 791 $ 1,009 $ 1,732 $ 1,729
======= ======= ======= =======
See notes to consolidated financial statements.
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IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands) Six Months Ended
June 30
1998 1997
-------- -------
OPERATING ACTIVITIES
Interest and fees collected on loans
and investments .................................................................... $ 11,901 $11,130
Other fees and income received ....................................................... 1,231 1,025
Interest paid......................................................................... (6,076) (5,118)
Cash paid to suppliers and employees ................................................. (4,612) (3,964)
Federal income taxes paid ............................................................ (638) (753)
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,806 2,320
INVESTING ACTIVITIES
Proceeds from maturities and sales of
securities available for sale ...................................................... 21,198 10,066
Proceeds from maturities of
securities held to maturity......................................................... 2,328 2,297
Purchases of securities available for sale............................................ (53,982) (7,576)
Purchases of securities held to maturity.............................................. (260) (202)
Net increase in loans................................................................. (14,901) (287)
Purchases of equipment and premises .................................................. (746) (434)
Acquisition of branch offices, less cash received .................................... 38,178
-------- -------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (8,185) 3,864
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits ......................................... (1,759) (2,864)
Net (decrease) increase in interest bearing deposits ................................. (715) 12
Cash dividends........................................................................ (443) (392)
Proceeds from issuance of common stock ............................................... 312 239
-------- -------
NET CASH USED BY FINANCING ACTIVITIES (2,605) (3,005)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,984) 3,179
Cash and cash equivalents at beginning of period 28,505 15,120
-------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,521 $18,299
======== =======
See notes to consolidated financial statements.
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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 generally accepted 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 generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six month period ended June 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. 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, 1997.
NOTE 2 COMPUTATION OF EARNINGS PER SHARE
The net income per share amounts are based on the weighted average number of
common shares outstanding. The weighted number of common shares outstanding was
873,178 and 864,272 for the six month period ending June 30, 1998 and 1997,
respectively.
NOTE 3 ADOPTION OF SFAS NO. 130
The Corporation adopted SFAS No. 130, Reporting Comprehensive Income, on January
1, 1998. The Statement establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 130 requires that all
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. For the
Corporation, comprehensive income includes net income and changes in unrealized
gains and losses on securities available for sale.
NOTE 4 BRANCH ACQUISITION
The Corporation's subsidiary bank, Isabella Bank and Trust, completed the
purchase of three branches from Old Kent Bank on March 30, 1998. The purchase
included approximately $43.0 million in deposits and $225,000 in loans. The
Results of Operations and Changes in financial condition include the operating
results of the acquired branches from the date of purchase.
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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 1997 annual report and with the unaudited
financial statements and notes, as set forth on pages 3 through 8 of this
report. The Corporation's subsidiary bank, Isabella Bank and Trust, completed
the purchase of three branches from Old Kent Bank on March 30, 1998. The
purchase included approximately $43.0 million in deposits and $225,000 in loans.
The Results of Operations and Changes in Financial Condition include the
operating results of the acquired branches from the date of purchase.
SIX MONTHS ENDING JUNE 30, 1998 AND 1997
RESULTS OF OPERATIONS
Net income equaled $1.73 million for the six month period ended June 30, 1998,
compared to $1.74 million for the same period in 1997, a 0.07% decrease. Return
on average assets, which measures the ability of the Corporation to profitably
and efficiently employ its resources, was 1.01% for the first six months of 1998
and 1.16% in 1997. Return on average equity, which indicates how effectively the
Corporation is able to generate earnings on shareholder invested capital,
equaled 10.96 % through June 30, 1998 versus 12.09% for the same period in 1997.
SUMMARY OF SELECTED FINANCIAL DATA
- ----------------------------------
(Dollars in thousands except per share data) Year to Date
June 30
-------------------
1998 1997
-------------------
INCOME STATEMENT DATA:
Net interest income $6,347 $6,046
Provision for loan losses 206 252
Net income 1,726 1,738
PER SHARE DATA:
Net income per common share $ 1.98 $ 2.01
Cash dividends per common share 0.50 0.46
RATIOS:
Average primary capital to average assets 9.98% 10.43%
Net income to average assets 1.01 1.16
Net income to average equity 10.96 12.09
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is the
primary source of income for IBT Bancorp. In accordance with Statement of
Accounting Financial Accounting Standards (SFAS) No. 91, "Accounting for Loan
Fees," interest income includes loan fees of $393,000 in 1998 versus $287,000 in
1997. 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.
(Continued on page 13)
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TABLE 1
IBT BANCORP, INC.
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.
Six Months Ending
June 30, 1998 June 30, 1997
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS:
Loans $220,612 $9,644 8.74% $215,376 $ 9,298 8.63%
Taxable investment securities 69,236 2,104 6.08 43,258 1,350 6.24
Nontaxable investment securities 18,469 637 6.90 14,026 500 7.13
Federal funds sold 7,558 206 5.45 6,998 182 5.20
Other 1,495 55 7.36 1,416 49 6.92
---------- ------ ---- ---------- ------- ----
Total Earning Assets 317,370 12,646 7.97 281,074 11,379 8.10
NONEARNING ASSETS:
Allowance for loan losses (2,862) (2,785)
Cash and due from banks 12,057 10,122
Premises and equipment 6,330 5,734
Accrued income and other assets 8,605 5,512
-------- --------
Total Assets $341,500 $299,657
======== ========
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits $ 43,437 588 2.71 $ 40,008 534 2.67
Savings deposits 80,285 1,304 3.25 71,147 1,144 3.22
Time deposits 142,185 4,127 5.81 119,254 3,437 5.76
Fed funds purchased 537 16 5.96
-------- ------ ---- -------- ------ ----
Total Interest Bearing Liabilities 266,444 6,035 4.53 230,409 5,115 4.44
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Demand deposits 40,108 37,234
Other 3,447 3,269
Shareholders' equity 31,501 28,745
--------- --------
Total Liabilities and Equity $ 341,500 $299,657
========= ========
Net interest income (FTE) $6,611 $ 6,264
====== =======
Net yield on interest earning assets (FTE) 4.17% 4.46%
==== ====
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TABLE 2
IBT BANCORP, INC.
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.
Six Month Period Ended June 30, 1998
Compared to
June 30, 1997
Increase (Decrease) Due to
------------------------------------------------
Volume Rate Net
------ ---- ---
CHANGES IN INTEREST INCOME:
Loans $ 228 $ 118 $ 346
Taxable investment securities 941 (187) 754
Nontaxable investment securities 153 (16) 137
Federal funds sold 15 9 24
Other 3 3 6
------- ----- ------
Total changes in interest income 1,340 (73) 1,267
Total changes in interest expense 877 43 920
------- ----- ------
Net Change in Interest Margin (FTE) $ 463 $(116) $ 347
======= ===== ======
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TABLE 3
IBT BANCORP, INC.
SUMMARY OF LOAN LOSS EXPERIENCE
- -------------------------------
(Dollars in Thousands)
Year to Date
June 30
-------------------------
1998 1997
------- -------
Summary of changes in allowance:
Allowance for loan losses - January 1 $ 2,677 $ 2,621
Loans charged off (82) (174)
Recoveries of charged off loans 174 185
--------- ---------
Net loans recovered 92 11
Provision charged to operations 206 252
--------- ---------
Allowance for loan losses - June 30 $ 2,975 $ 2,884
========= =========
Allowance for loan losses as a % of loans 1.28% 1.34%
========= =========
NONPERFORMING LOANS
- -------------------
(Dollars in thousands)
June 30
1998 1997
--------- ---------
Total amount of loans outstanding for
the period (net of unearned interest) $ 232,474 $ 215,753
========= =========
Nonaccrual loans $ 241 $ 162
Accruing loans past due 90 days or more 803 629
Restructured loans 0 0
--------- ---------
Total $ 1,044 $ 791
========= =========
Loans classified as nonperforming as a
% of outstanding loans 0.45% 0.37%
========= =========
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.
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NET INTEREST INCOME, CONTINUED
As shown in Tables number 1 and 2, when comparing the six month period ending
June 30, 1998 to the same period in 1997, fully taxable equivalent (FTE) net
interest income increased $347,000 or 5.5%. An increase of 12.9% in average
interest earning assets provided $1.34 million of FTE interest income. The
majority of this growth was funded by a 15.6% increase in interest bearing
deposits, resulting in $877,000 of additional FTE interest expense. Overall,
changes in volume resulted in $463,000 of additional FTE interest income. The
average FTE interest rate earned on assets decreased by 0.13%, decreasing FTE
interest income by $73,000. The average rate paid on deposits increased by
0.09%, increasing interest expense by $43,000. The net change related to
interest rates earned and paid was a $116,000 decrease in FTE net interest
income.
The Corporation's FTE net interest yield as a percentage of average earning
assets equaled 4.17% during the first six months of 1998 versus 4.46% in 1997.
The 0.29% decrease in the net interest yield was primarily a result of two
factors. The primary factor was the Bank's purchase of the Old Kent branches.
The net proceeds (due to the assumption of the deposit liabilities) were
invested in investment securities. The investing of these funds was begun in
late January 1998. The overall net FTE interest yield on these additional funds
is estimated to be 2.20%. Management expects the Corporation's overall net FTE
interest yield as a percentage of average assets to decline by an average of
0.25% for the remainder of 1998. The other factor affecting the Corporation's
net interest margin is the increasing reliance on higher cost deposits such as
certificates of deposit and money market accounts to fund asset growth. In
addition to increased reliance on these funds, the cost of obtaining these funds
has risen in relation to other interest rates. Management expects the
Corporation's reliance on higher cost deposits to fund asset growth to continue.
The combination of lower interest margins and the write-off related to the $4.2
million deposit premium paid for the Old Kent branch deposits will result in the
Corporation's overall profitability as a percentage of assets (return on assets)
to decline by approximately 0.20% in 1998.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Loans outstanding represent 64% 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 and
impaired loans, overall economic conditions, and other factors.
Comparing the year to date period of June 30, 1998 to June 30, 1997, the
provision for loan losses was decreased $46,000 to $206,000. The provision was
reduced due to a decrease of $92,000 in charged off loans during the first six
months of 1998 when compared to the prior year. Year to date 1998, the
Corporation had a net recovery of loans previously charged-off of $92,000 versus
$11,000 in 1997. Loans classified as nonperforming were 0.45% of loans as of
June 30, 1998 versus 0.37% for June 30, 1997. As of June 30, 1998, the allowance
for loan losses as a percentage of loans equaled 1.28%. In management's opinion,
the allowance for loan losses is adequate as of June 30, 1998.
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NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, fees for
other financial services, and gains and losses on investment securities
available for sale. There was a $287,000 increase in fees earned from these
sources during the first six months of 1998 when compared to the same period in
1997. Significant individual account changes during this period include a
$20,000 increase in brokerage commissions, a $32,000 increase in trust income, a
$57,000 increase in gains on the sale of investment securities available for
sale, and a $119,000 increase in gains on the sale of mortgage and student
loans.
The Corporation has established a policy that all 30 year amortized fixed rate
mortgage loans will be sold. These loans are accounted for according to SFAS 125
and 122, and 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 for the servicing of these loans. Included in other operating
income is a $162,000 gain from the sale of $24.7 million in mortgages during the
second quarter of 1998 versus a $52,000 gain on the sale of $7.6 million for the
same period in 1997.
NONINTEREST EXPENSES
Noninterest expenses increased $706,000 or 16.3% during the first six months of
1998 when compared to 1997. The purchase of Old Kent branches had a significant
impact on these expenses. Specifically, of the $706,000 increase in noninterest
expense, $410,000 is related to the conversion and operations of the Old Kent
branches. Excluding these costs, noninterest expense would have increased
approximately $296,000 or 6.8%.
The largest component of noninterest expense is salaries and employee benefits,
which increased $360,000 or 15.1%. Salary expenses related to the acquisition
are estimated to equal $170,000. The remaining increase is related to normal
merit and promotional salary increases, and to an across the board increase in
hourly wages to retain its current technical and clerical employees and to
attract qualified workers in a tight labor market.
Occupancy and furniture and equipment expenses increased $105,000 or 13.5% in
1998. Approximately half of the increase is related to the acquisition. Other
significant changes include automatic teller machine operating costs, equipment
depreciation and computer expenses. Other operating expenses increased $241,000,
a 20.7% increase. The amortization of deposit premium recorded in connection
with the Old Kent branch acquisition accounted for $131,000 of the increase.
Printing and office supplies, postage, and loan acquisi-tion expenses accounted
for the majority of the remaining increase.
QUARTER ENDED JUNE 30, 1998 AND 1997
RESULTS OF OPERATIONS
Net income equaled $864,000 for the second quarter in 1998 compared to $891,000
for the same period in 1997, a 3.0% decrease. Return on average assets equaled
0.95% for the second quarter of 1998 versus 1.19% for the same period in 1997.
Return on average equity equaled 10.83% for the second quarter in 1998, versus
12.24% for the second quarter in 1997.
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SUMMARY OF SELECTED FINANCIAL DATA
- ----------------------------------
(Dollars in thousands except per share data)
Quarter Ended
June 30
----------------------------
1998 1997
----------------------------
INCOME STATEMENT DATA:
Net interest income $3,309 $3,066
Provision for loan losses 108 129
Net income 864 891
PER SHARE DATA:
Net income per common share $ 0.99 $ 1.03
Cash dividend per common share 0.25 0.23
RATIOS:
Net income to average assets 0.95% 1.19%
Net income to average equity 10.83 12.24
NET INTEREST INCOME
When comparing the second quarter of 1998 to 1997, net FTE interest income
increased $268,000. An increase of 19.2% in interest earning assets (of which
12.0% is related to the acquisition) provided $1.03 million of FTE interest
income. The asset growth was funded primarily by a 24.0% increase in interest
bearing deposits, resulting in $634,000 of increased interest expense. Overall,
increased volume resulted in $391,000 of additional FTE interest income. During
the second quarter of 1998, the average FTE interest rate earned on assets
decreased by 0.26% and the average rate paid on deposits decreased by 0.01%. The
changes in interest rates earned and paid resulted in a $123,000 decrease in FTE
interest income.
The Corporation's FTE net interest yield as a percentage of average earning
assets equaled 4.12% during the second quarter of 1998 versus 4.53% in 1997. The
0.41% decrease was primarily a result of the same factors that have affected the
year to date net interest yield.
PROVISION FOR LOAN LOSSES
The amount provided for loan losses in the second quarter of 1998 was $108,000
versus $129,000 in 1997. The decrease in the provision resulted from a decrease
in loans charged of $92,000 during the first six months of 1998. During 1998 the
Corporation had a net recovery of loans previously charged-off of $92,000 versus
$11,000 in 1997.
NONINTEREST INCOME
Noninterest income earned in the second quarter of 1998, when compared to the
same period in 1997, increased $215,000. The most significant changes were a
$72,000 increase in gains on the sale of loans, a $16,000 increase in trust
fees, and a $48,000 increase in gains from the sale of investment securities
available for sale, and a $30,000 increase in deposit account service and
overdraft fees.
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TABLE 4
IBT BANCORP, INC.
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.
Quarter Ending
June 30, 1998 June 30, 1997
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Intest Rate Balance Interest Rate
------- ------ ---- ------- -------- ----
INTEREST EARNING ASSETS:
Loans $224,939 $4,940 8.78% $217,077 $4,725 8.71%
Taxable investment securities 80,918 1,224 6.05 43,037 674 6.26
Nontaxable investment securities 19,472 329 6.76 13,863 251 7.24
Federal funds sold 7,012 96 5.48 4,657 63 5.41
Other 1,524 28 7.35 1,463 25 6.84
-------- ------ ---- -------- ------ ----
Total Earning Assets 333,865 6,617 7.93 280,097 5,738 8.19%
NONEARNING ASSETS:
Allowance for loan losses (2,929) (2,848)
Cash and due from banks 13,206 10,065
Premises and equipment 6,855 5,749
Accrued income and other assets 10,940 5,504
-------- --------
Total Assets $361,937 $298,567
======== ========
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits $ 47,474 312 2.63 $39,706 266 2.68
Savings deposits 85,359 683 3.20 70,212 566 3.22
Time deposits 151,160 2,180 5.77 119,125 1,732 5.82
-------- ------ ---- -------- ------ ----
Total Interest Bearing Liabilities 283,993 3,175 4.47 229,043 2,564 4.48
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS EQUITY:
Demand deposits 42,466 37,164
Other 3,556 3,325
Shareholders' equity 31,922 29,125
-------- --------
Total Liabilities and Equity $361,937 $298,567
======== ========
Net interest income (FTE) $3,442 $3,174
====== ======
Net yield on interest earning assets (FTE) 4.12% 4.53%
==== ====
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TABLE 5
IBT BANCORP, INC.
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 June 30, 1998
Compared to
June 30, 1997
Increase (Decrease) Due to
-------------------------------
Volume Rate Net
------- ------ -----
CHANGES IN INTEREST INCOME:
Loans $ 173 $ 42 $215
Taxable investment securities 723 (173) 550
Nontaxable investment securities 96 (18) 78
Federal funds sold 32 1 33
Other 1 2 3
------ ----- ----
Total changes in interest income 1,025 (146) 879
Total changes in interest expense 634 23 611
------ ----- ----
Net Change in Interest Margin (FTE) $ 391 $(123) $268
====== ===== ====
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NONINTEREST EXPENSES
Noninterest expenses increased $551,000 during the second quarter of 1998 when
compared to 1997. Noninterest expense includes salary and benefits, occupancy,
and other operating expenses. The purchase of the Old Kent branches had a
significant impact on these costs. Management estimates that of the $551,000
increase in noninterest expense, $385,000 is related to the conversion and
operations of the Old Kent branches. Excluding these costs, noninterest expense
would have increased approximately $166,000. Comparing 1998 to 1997, salaries
and employee benefits increased $268,000, occupancy expense and furniture and
equipment expense increased $78,000 and other operating expenses increased
$205,000.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Since December 31, 1997, total assets decreased $43.5 million to $362.2 million.
As of June 30, 1998, the loan portfolio increased $15.2 million, fed funds sold
decreased $14.5 million, and investment securities increased $30.6 million when
compared to December 31, 1997. Deposits during this period increased $41.4
million. The majority of the increase in deposits was a result of Isabella Bank
and Trust's acquisition of the three Old Kent branches.
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 payment of
cash dividends. The primary sources of the Corporation's liquidity are cash,
cash equivalents, and investment securities available for sale.
As of June 30, 1998, cash and cash equivalents as a percentage of total assets
equaled 5.4%, versus 8.9% as of December 31, 1997. During the first six months
of 1998, $1.8 million in net cash was provided from operations. Investing
activities used $8.2 million and financing activities used $2.6 million. The
accumulated effect of the Corporation's operating, investing and financing
activities was a $9.0 million decrease in cash and cash equivalents during the
first six months of 1998.
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale equaled
$89.6 million as of June 30, 1998 and $57.4 million as of December 31, 1997. The
Corporation's liquidity is considered adequate by management.
CAPITAL
The capital of the Corporation consists solely of common stock, surplus,
retained earnings, and accumulated other comprehensive income; and increased
approximately $1.6 million since December 31, 1997.
There are no significant capital regulatory constraints placed on the
Corporation's capital. The Federal Reserve Board's current recommended minimum
tier 1 and tier 2 average assets requirement is 6.0%. The Corporation's tier 1
and tier 2 capital to assets, which consists of shareholder's equity plus the
allowance for loan losses, was 10.0% at June 30, 1998.
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CAPITAL, CONTINUED
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 June 30, 1998:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS:
IBT Bancorp
Actual
Required 06/30/98
------------ ------------
Equity Capital 4.00 13.29
Secondary Capital* 4.00 1.25
Total Capital 8.00 14.54
* 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.
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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 agricultural and 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 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 June 30, 1998.
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.
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Quantitative Disclosures of Market Risk
June 30 Fair Value
------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total 06/30/98
------------------------------------------------------------------------------------------
Rate sensitive assets:
Other interest bearing assets $3,000 $3,000 $3,000
Average interest rates 5.45% 5.45%
Fixed interest rate secur $10,350 $18,605 $22,817 $15,081 $13,887 $14,419 $95,159 $95,229
Average interest rates 5.63% 5.93% 5.85% 5.83% 6.08% 6.65% 5.82%
Fixed interest rate loans $72,258 $45,742 $48,931 $22,219 $19,516 $7,871 $216,537 $218,252
Average interest rates 7.98% 8.39% 8.17% 8.19% 8.15% 7.73% 8.14%
Variable interest rate loans $12,560 $2,116 $902 $258 $1 $100 $15,937 $15,937
Average interest rates 10.24% 10.24% 9.56% 10.37% 10.75% 10.00% 10.26%
Rate sensitive liabilities:
Savings and NOW accounts $54,564 $15,351 $12,368 $10,539 $9,761 $28,236 $130,819 $130,819
Average interest rates 3.68% 2.57% 2.57% 2.55% 2.55% 2.63% 3.04%
Fixed interest rate time deposits $85,278 $24,541 $11,872 $15,672 $11,109 $157 $148,629 $149,128
Average interest rates 5.46% 6.11% 6.10% 6.62% 6.32% 6.32% 5.81%
Variable interest rate time deposits $760 $302 $5 $1,067 $1,067
Average interest rates 5.29% 5.29% 5.29% 5.29%
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PART II - OTHER INFORMATION
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant's annual meeting of shareholders was held on May 5,
1998. At that meeting the shareholders voted upon the election of
directors.
VOTES CAST
Election of Directors For Withheld
--------------------- --- --------
All nominees for director were elected:
James C. Fabiano 679,601 10,999
David W. Hole 682,668 7,932
L. A. Johns 680,585 10,015
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Form 8-K, Item 5, Other Events, was filed April 6, 1998
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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: August 5, 1998 /s/ David W. Hole
------------------------- ----------------------------
David W. Hole, President/CEO
/s/ Dennis P. Angner
----------------------------
Dennis P. Angner, Treasurer
(Principal Financial Officer)
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IBT BANCORP
EXHIBIT INDEX
Exhibit
No. Description Page Number
--- ----------- -----------
27 Financial Data Schedule 22
24