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 September 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
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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)
(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, 879,477 as of October 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 9-19
Analysis of Financial Condition
and Results of Operations
Item 3 Quantitative and Qualitative 20-22
Disclosures About Market Risk
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 23
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
IBT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) September 30 December 31
1998 1997
---- ----
(Unaudited)
ASSETS
Cash and demand deposits due from banks .................... $ 10,230 $ 11,005
Federal funds sold ......................................... 9,800 17,500
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 20,030 28,505
Investment securities:
Securities available for sale (amortized cost of
$87,373 in 1998 and $56,985 in 1997) .................. 88,744 57,391
Securities held to maturity (fair value --
$6,764 in 1998 and $7,231 in 1997) .................... 6,649 7,160
-------- --------
TOTAL INVESTMENT SECURITIES 95,393 64,551
Loans:
Commercial and agricultural ............................. 39,539 36,978
Real estate mortgage .................................... 157,538 143,424
Installment ............................................. 41,365 36,847
-------- --------
TOTAL LOANS 238,442 217,249
Less allowance for loan losses ............................. 3,088 2,677
-------- --------
NET LOANS 235,354 214,572
Other assets ............................................... 18,904 11,103
-------- --------
TOTAL ASSETS $369,681 $318,731
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing ..................................... $ 45,162 $ 43,207
NOW accounts ............................................ 50,608 37,892
Certificates of deposit and other savings ............... 219,387 182,314
Certificates of deposit over $100,000 ................... 17,064 21,145
-------- --------
TOTAL DEPOSITS 332,221 284,558
Accrued interest and other liabilities ..................... 3,499 3,215
-------- --------
TOTAL LIABILITIES 335,720 287,773
Shareholders' Equity:
Common stock -- $6 par value ............................ 5,276 4,755
4,000,000 shares authorized; outstanding--
879,367 in 1998 (792,455 in 1997)
Capital surplus.......................................... 18,760 13,687
Retained earnings ....................................... 9,020 12,248
Accumulated other comprehensive income .................. 905 268
-------- --------
TOTAL SHAREHOLDERS' EQUITY 33,961 30,958
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................... $369,681 $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) Nine Months Ended
September 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 7,757 6,864
--------- ---------
BALANCE END OF PERIOD 879,367 790,321
========= =========
COMMON STOCK:
Balance at beginning of period $ 4,755 $ 4,701
10% stock dividend 475
Issuance of common stock 46 41
--------- ---------
Balance end of period 5,276 4,742
CAPITAL SURPLUS:
Balance at beginning of period 13,687 13,262
10% stock dividend 4,670
Issuance of common stock 403 312
--------- ---------
Balance end of period 18,760 13,574
RETAINED EARNINGS:
Balance at beginning of period 12,248 9,916
Net income 2,580 2,648
10% stock dividend (5,145)
Cash dividends ($0.25 per share in 1998 and $0.23 in 1997) (663) (590)
--------- ---------
Balance end of period 9,020 11,974
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 637 90
--------- ---------
Balance end of period 905 211
TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 33,961 $ 30,501
========= =========
See notes to consolidated financial statements.
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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
------------ ------------
1998 1997 1998 1997
--------------------- ---------------------
INTEREST INCOME
Loans ..................................................... $5,126 $4,744 $14,714 $13,994
Investment securities:
Taxable ................................................. 1,141 662 3,300 2,061
Nontaxable .............................................. 219 166 648 496
------ ------ ------- -------
TOTAL INTEREST ON INVESTMENT SECURITIES 1,360 828 3,948 2,557
Federal funds sold ........................................ 138 122 344 304
------ ------ ------- -------
TOTAL INTEREST INCOME 6,624 5,694 19,006 16,855
INTEREST EXPENSE ON DEPOSITS ................................ 3,226 2,625 9,261 7,740
------ ------ ------- -------
NET INTEREST INCOME 3,398 3,069 9,745 9,115
Provision for loan losses ................................... 115 134 321 386
------ ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ....... 3,283 2,935 9,424 8,729
NONINTEREST INCOME
Trust fees ................................................ 103 87 309 261
Service charges on deposit accounts ....................... 79 72 232 214
Other service charges and fees ............................ 269 233 765 665
Other ..................................................... 275 155 637 394
Net realized gain (loss) on securities available
for sale ............................................... 2 (4) 48 (15)
------ ------ ------- -------
TOTAL NONINTEREST INCOME 728 543 1,991 1,519
NONINTEREST EXPENSES
Salaries, wages and employee benefits ..................... 1,523 1,208 4,271 3,596
Occupancy ................................................. 185 162 529 477
Furniture and equipment ................................... 306 242 843 703
Other ..................................................... 837 585 2,243 1,750
------ ------ ------- -------
TOTAL NONINTEREST EXPENSE 2,851 2,197 7,886 6,526
INCOME BEFORE FEDERAL INCOME TAXES 1,160 1,281 3,529 3,722
Federal income taxes ........................................ 306 371 949 1,074
------ ------ ------- -------
NET INCOME $ 854 $ 910 $ 2,580 $ 2,648
====== ====== ======= =======
Net income per share ........................................ $ 0.97 $ 1.05 $ 2.95 $ 3.06
====== ====== ======= =======
Cash dividends per share .................................... $ 0.25 $ 0.23 $ 0.75 $ 0.72
====== ====== ======= =======
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 Nine Months Ended
September 30 September 30
------------ ------------
1998 1997 1998 1997
-------------------- --------------------
NET INCOME .................................................. $ 854 $ 910 $2,580 $2,648
Other comprehensive income before income taxes:
Unrealized gains (losses) on securities available for sale:
Unrealized holding gains arising during
period .......................................... 958 146 1,013 121
Reclassification adjustment for realized
(gains) losses included in net income ........... (2) 4 (48) 15
------ ------ ------ ------
Total comprehensive (loss) income before income
taxes .................................................. 956 150 965 136
Income tax expense related to comprehen-
sive income ..................................... 325 51 328 46
------ ------ ------ ------
OTHER COMPREHENSIVE INCOME NET OF INCOME
TAXES ..................................................... 631 99 637 90
------ ------ ------ ------
TOTAL COMPREHENSIVE INCOME $1,485 $1,009 $3,217 $2,738
====== ====== ====== ======
See notes to consolidated financial statements.
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IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands) Nine Months Ended
September 30
1998 1997
---- ----
OPERATING ACTIVITIES
Interest and fees collected on loans
and investments ............................................... $ 18,277 $ 16,853
Other fees and income received .................................. 1,976 1,503
Interest paid ................................................... (9,262) (7,689)
Cash paid to suppliers and employees ............................ (7,983) (6,244)
Income taxes paid ............................................... (971) (1,167)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,037 3,256
INVESTING ACTIVITIES
Proceeds from maturities and sales of
securities available for sale ................................. 25,131 14,499
Proceeds from maturities of
securities held to maturity ................................... 2,502 2,297
Purchase of securities available for sale ....................... (57,450) (11,607)
Purchase of securities held to maturity ......................... (260) (702)
Net increase in loans ........................................... (20,871) (2,517)
Purchases of equipment and premises ............................. (619) (521)
Acquisition of branch offices, less cash received ............... 38,178
Acquisition of title company .................................... (1,450)
-------- --------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (14,839) 1,449
FINANCING ACTIVITIES
Net decrease in non-interest bearing deposits ................... (1,288) (3,101)
Net increase in interest bearing deposits ....................... 5,829 2,336
Cash dividends .................................................. (663) (590)
Proceeds from issuance of common stock .......................... 449 353
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 4,327 (1,002)
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,475) 3,703
Cash and cash equivalents at beginning of period 28,505 15,120
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,030 $ 18,823
======== ========
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
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, 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 average number of common shares
outstanding were 874,625 and 864,831 for the nine month periods ending September
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
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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 thereto, 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 in deposits and $225,000 in
loans. On July 31, 1998, IBT Title, a wholly owned subsidiary of Isabella Bank
and Trust, acquired Isabella County Abstract Company. The acquisition included
premises, equipment, and an abstract title plant. The purchase price was less
than 1% of the Corporation's assets. The Results of Operations and Changes in
Financial Position included in the operating results is from the dates of
purchase.
NINE MONTHS ENDING SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
Net income equaled $2.58 million for the nine month period ended
September 30, 1998, compared to $2.65 million for the same period in 1997, a
2.6% decrease. Return on average assets, which measures the ability of the
Corporation to profitably and efficiently employ its resources, equaled 0.98%
for the first nine months of 1998 and 1.18% in 1997. Return on average equity,
which indicates how effectively the Corporation is able to generate earnings on
shareholder invested capital, equaled 10.78% through September 30, 1998 versus
12.11% through September 30, 1997.
SUMMARY OF SELECTED FINANCIAL DATA
- ----------------------------------
(Dollars in thousands except per share data) Year to Date
September 30
---------------------
1998 1997
---------------------
INCOME STATEMENT DATA:
Net interest income $9,745 $9,115
Provision for loan losses 321 386
Net income 2,580 2,648
PER SHARE DATA:
Net income per common share $ 2.95 $ 3.06
Cash dividend per common share 0.75 0.72
RATIOS:
Average primary capital to average assets 9.85% 10.57%
Net income to average assets 0.98 1.18
Net income to average equity 10.78 12.11
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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.
Nine Months Ending
September 30, 1998 September 30, 1997
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS:
Loans $225,814 $14,808 8.74% $215,906 $14,064 8.69%
Taxable investment securities 70,755 3,217 6.06 42,297 1,988 6.27
Nontaxable investment securities 18,554 982 7.06 13,975 752 7.17
Federal funds sold 8,373 344 5.48 7,613 303 5.31
Other 1,507 83 7.34 1,433 73 6.79
-------- ------- ---- -------- ------- ----
Total Earning Assets 325,003 19,434 7.97 281,224 17,180 8.15
NONEARNING ASSETS:
Allowance for loan losses (2,919) (2,827)
Cash and due from banks 12,596 10,251
Premises and equipment 6,757 5,712
Accrued income and other assets 9,485 5,586
-------- --------
Total Assets $350,922 299,946
======== ========
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits $ 45,479 918 2.69 39,376 788 2.67
Savings deposits 83,019 2,015 3.24 70,237 1,698 3.22
Time deposits 144,993 6,312 5.80 120,299 5,254 5.82
Fed funds purchased 358 16 5.96
-------- ------- ---- -------- ------- ----
Total Interest Bearing Liabilities 273,849 9,261 4.51 229,912 7,740 4.49
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Demand deposits 41,676 37,656
Other 3,474 3,211
Shareholders' equity 31,923 29,167
-------- --------
Total Liabilities and Equity $350,922 $299,946
======== ========
Net interest income (FTE) $10,173 $ 9,440
======= =======
Net yield on interest earning assets (FTE) 4.17% 4.48%
==== ====
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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.
Nine Month Period Ended September 30, 1998
Compared to
September 30, 1997
Increase (Decrease) Due to
------------------------------------------
Volume Rate Net
------ ---- ---
CHANGES IN INTEREST INCOME:
Loans $ 650 $ 94 $ 744
Taxable investment securities 1,431 (202) 1,229
Nontaxable investment securities 253 (23) 230
Federal funds sold 31 10 41
Other investments 4 6 10
------ ----- ------
Total changes in interest income 2,369 (115) 2,254
Total changes in interest expense 1,534 (13) 1,521
------ ----- ------
Net Change in Interest Margin (FTE) $ 835 $ 102 $ 733
====== ===== ======
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TABLE 3
IBT BANCORP, INC.
SUMMARY OF LOAN LOSS EXPERIENCE
- -------------------------------
(Dollars in Thousands)
Year to Date
September 30
---------------------
1998 1997
---- ----
Summary of changes in allowance for loan losses:
Allowance for loan losses - January 1 $ 2,677 $ 2,621
Loans charged off (134) (266)
Recoveries of previously charged off loans 224 224
------- -------
Net loans recovered (charged off) 90 (42)
Provision charged to operations 321 386
------- -------
Allowance for loan losses - September 30 $ 3,088 $ 2,965
======= =======
Allowance for loan losses as a % of loans 1.30% 1.36%
==== ====
NONPERFORMING LOANS
- -------------------
(Dollars in thousands)
September 30
1998 1997
---- ----
Total amount of loans outstanding for
the period (net of unearned interest) $238,442 $217,929
======== ========
Nonaccrual loans $ 278 $ 332
Accruing loans past due 90 days or more 964 649
Restructured loans 105
-------- --------
Total $ 1,242 $ 1,086
======== ========
Loans classified as nonperforming as
a % of outstanding loans 0.52% 0.50%
==== ====
Loans classified as substandard to
Allowance for loan losses - September 30 40.22% 36.63%
===== =====
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
Net interest income equals interest income less interest expense and is the
primary source of income for IBT Bancorp. In accordance with SFAS No. 91,
"Accounting for Loan Fees," interest income includes amortization of net
deferred loan fees of $585,000 in the first nine months of 1998 versus $444,000
for the same period 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.
As shown in Tables number 1 and 2, when comparing the nine month period ending
September 30, 1998 to the same period in 1997, fully taxable equivalent (FTE)
net interest income increased $733,000 or 7.8%. An increase of 15.6% in average
interest earning assets provided $2.37 million of FTE interest income. The
majority of this increase was funded by a 19.1% increase in interest bearing
deposits, resulting in $1.53 million of additional interest expense. Overall,
changes in volume resulted in $835,000 of additional FTE interest income. The
average FTE interest rate earned on assets decreased by 0.18%, decreasing FTE
interest income by $115,000 and the average rate paid on deposits increased by
0.02%, increasing interest expense by $13,000. The increased interest rates
earned and paid reduced FTE net interest income by $102,000.
The Corporation's FTE net interest yield as a percentage of average earning
assets equaled 4.17% during 1998 versus 4.48% in 1997. The 0.31% 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 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. Net 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 loans, overall economic conditions, and other factors.
Comparing the year to date period of September 30, 1998 to September 30, 1997,
the provision for loan losses was decreased by $65,000 to $321,000. The
provision was reduced due to a decrease of $134,000 in charged off loans during
the first nine months of 1998. Year to date
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1998, the Corporation had a net recovery of loans previously charged off of
$90,000 versus net charge-offs of $42,000 in 1997. Loans classified as
nonperforming were 0.52% of loans as of September 30, 1998 versus 0.50% for
September 30, 1997. The allowance for loan losses as a percentage of loans
equaled 1.30%. In management's opinion, the allowance for loan losses is
adequate as of September 30, 1998.
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 $472,000 increase in fees earned from these
sources during the nine months of 1998 when compared to 1997. Significant
individual account changes during this period include a $33,000 increase in
brokerage commissions, a $48,000 increase in trust income, a $63,000 increase in
gains on the sale of investment securities available for sale, a $136,000
increase in gains on the sale of mortgage and student loans, and $92,000 in
revenue from the sale of title insurance.
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 No.
125 and are sold without recourse. The Corporation retains the servicing of
these loans. Included in other operating income is a $254,000 gain from the sale
of $34.6 million in mortgages through the third quarter of 1998 versus a
$104,000 gain on the sale of $12.1 million for the same period in 1997.
NONINTEREST EXPENSE
Noninterest expense increased $1.36 million or 20.3% during the first nine
months of 1998 when compared to 1997. The acquisition of the Old Kent branches
and IBT Title had a significant impact on these expenses. Specifically, of the
increase in noninterest expense, $787,000 is related to their conversion and
operation. Excluding these costs, noninterest expense would have increased
approximately $573,000 or 8.8%.
The largest component of noninterest expense is salaries and employee benefits,
which increased $675,000 or 18.8%. Salary expenses related to the acquisitions
are estimated to equal $354,000. 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 $192,000 or 16.3% 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
$493,000, a 28.2% increase. The periodic amortization of the premium resulting
from the acquisitions accounted for $285,000 of the increase. Printing and
office supplies, postage, and loan acquisition expenses accounted for the
majority of the remaining increase.
QUARTER ENDED SEPTEMBER 30, 1998 AND 1997
RESULTS OF OPERATIONS
Net income equaled $854,000 for the third quarter in 1998 compared to $910,000
for the same period in 1997, a 6.2% decrease. Return on average assets equaled
0.92% for the third quarter in 1998 compared to 1.21% for the same period in
1997. Return on average equity equaled 10.42% for the third quarter in 1998,
versus 12.13% for the third quarter in 1997.
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SUMMARY OF SELECTED FINANCIAL DATA
- ----------------------------------
(Dollars in thousands except per share data)
Quarter Ended
September 30
-----------------------
1998 1997
-----------------------
INCOME STATEMENT DATA:
Net interest income $3,398 $3,069
Provision for loan losses 115 134
Net income 854 910
PER SHARE DATA:
Net income per common share $ 0.97 $ 1.16
Cash dividend per common share 0.25 0.25
RATIOS:
Net income to average assets 0.92% 1.21%
Net income to average equity 10.42 12.13
NET INTEREST INCOME
When comparing net interest income for the third quarter of 1998 to the same
period in 1997, a 20.8% increase in average interest-earning assets provided
$1.03 million of additional FTE interest income. The average rate of
interest-earning assets decreased 0.26%, resulting in a $46,000 decrease in FTE
interest income. The changes in average balances and the rates earned provided
an additional $987,000 of FTE interest income. The growth of earning assets was
funded primarily by growth in interest-bearing deposits, which increased by
26.1% in 1998. The average cost of these deposits decreased by 0.12%. The
changes in the average balances and rate paid on interest-bearing deposits
resulted in $601,000 of additional interest expense. Overall, the changes in
interest rate earned and paid and average balances resulted in additional net
interest income of $386,000 in the third quarter of 1998 when compared to the
same period in 1997.
PROVISION FOR LOAN LOSSES
Comparing the quarter ended September 30, 1998 and 1997, average total loans
outstanding increased 8.9%. The allowance for loan losses as a percentage of
total outstanding loans was 1.30% as of September 30, 1998 and 1.36% in 1997.
During the third quarter of 1998, the Corporation had net charge offs of $2,000.
The amount provided for loan losses was $115,000 in 1998 versus $134,000 in
1997. The decrease in the provision was due to a decrease in loans charged off.
NONINTEREST INCOME
Noninterest income earned in the third quarter of 1998 compared to the same
period in 1997, increased $185,000. The most significant changes were a $24,000
increase in gains on the sale of mortgage loans, a $15,000 increase in overdraft
fees, a $16,000 increase in trust fees, a $12,000 increase in brokerage
commissions, and a $92,000 increase in title insurance premiums.
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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
September 30, 1998 September 30, 1997
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS:
Loans $236,220 5,164 8.74% $216,967 $4,766 8.79%
Taxable investment securities 73,794 1,113 6.03 40,376 638 6.32
Nontaxable investment securities 18,726 345 7.37 13,874 252 7.27
Federal funds sold 10,005 138 5.52 8,844 121 5.47
Other 1,532 28 7.31 1,466 24 6.55
-------- ------ ---- -------- ------ ----
Total Earning Assets 340,277 6,788 7.98 281,527 5,801 8.24
NONEARNING ASSETS:
Allowance for loan losses (3,033) (2,912)
Cash and due from banks 13,676 10,510
Premises and equipment 7,612 5,669
Accrued income and other assets 11,240 5,732
-------- --------
Total Assets $369,772 $300,526
======== ========
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits $ 49,563 330 2.66 $38,112 254 2.67
Savings deposits 88,489 711 3.21 68,415 554 3.24
Time deposits 150,609 2,185 5.80 122,390 1,817 5.94
-------- ------ ---- -------- ------ ----
Total Interest Bearing Liabilities 288,661 3,226 4.47 228,917 2,625 4.59
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Demand deposits 44,813 38,500
Other 3,530 3,097
Shareholders' equity 32,768 30,012
-------- --------
Total Liabilities and Equity $369,772 $300,526
======== ========
Net interest income (FTE) $3,562 $3,176
====== ======
Net yield on interest earning assets
(FTE) 4.19% 4.51%
==== ====
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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 September 30, 1998
Compared to
September 30, 1997
Increase (Decrease) Due to
-------------------------------
Volume Rate Net
------ ---- ---
CHANGES IN INTEREST INCOME:
Loans $ 421 (23) 398
Taxable investment securities 505 (30) 475
Nontaxable investment securities 90 3 93
Federal funds sold 16 1 17
Other Investments 1 3 4
------ --- ---
Total changes in interest income 1,033 (46) 987
Total changes in interest expense 647 (46) 601
------ --- ---
Net Change in Interest Margin (FTE) $ 386 0 386
====== === ===
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NONINTEREST EXPENSE
Noninterest expense increased $654,000 during the third quarter of 1998 when
compared to 1997. Noninterest expense includes salary and benefits, occupancy,
and other operating expenses. Acquisitions had a significant impact on these
costs; management estimates that $377,000 of the increase is related to the
acquired businesses. Excluding these costs, non-interest expense would have
increased approximately $277,000. Comparing 1998 to 1997, salaries and employee
benefits increased $315,000, occupancy expense and furniture and equipment
expense increased $87,000, and other operating expenses increased $252,000.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Since December 31, 1997, total assets increased $51.0 million to $369.7 million.
During this period the loan portfolio increased $21.2 million, fed funds sold
decreased $7.7 million, and investment securities increased $30.8 million.
Changes in funding sources include a $2.0 increase in noninterest bearing
deposits, an increase in interest bearing deposits of $45.7 million and a $3.0
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, 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 nine
months of 1998, $2.0 million in net cash was provided from operations, and $4.3
million was provided by financing activities. Financing activities used $14.8
million. The accumulated effect of the Corporation's operating, investing, and
financing activities was a $8.5 million decrease in cash and cash equivalents
during the first nine 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
$88.7 million as of September 30, 1998 and $57.4 million as of December 31,
1997. The Corporation's liquidity is considered adequate by the management of
the Corporation.
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CAPITAL
The capital of the Corporation consists solely of common stock, surplus,
retained earnings, and accumulated other comprehensive income; and increased
approximately $3.0 million since December 31, 1997.
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, was 9.9% at September 30, 1998.
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, 1998:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS:
IBT Bancorp
Actual
Required 09/30/98
-------- --------
Equity Capital 4.00 13.25
Secondary Capital* 4.00 1.25
Total Capital 8.00 14.50
* 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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20
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 September 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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21
Quantitative Disclosures of Market Risk
September 30 Fair Value
--------------------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total 09/30/98
--------------------------------------------------------------------------------------------
Rate sensitive assets:
Other interest bearing assets $ 9,800 $ 9,800 $ 9,800
Average interest rates 5.45% 5.45%
Fixed interest rate securities $ 9,553 $25,742 $17,966 $ 16,290 $ 8,020 $ 17,822 $ 95,393 $ 95,508
Average interest rates 5.33% 5.87% 5.90% 5.85% 5.95% 6.63% 5.77%
Fixed interest rate loans $69,937 $48,029 $52,191 $ 19,450 $23,707 $ 9,592 $222,906 $226,227
Average interest rates 8.46% 8.37% 8.09% 8.27% 7.98% 7.58% 8.25%
Variable interest rate loans $12,179 $ 2,308 $ 714 $ 235 $ 100 $ 15,536 $ 15,536
Average interest rates 9.02% 10.17% 9.60% 10.15% 8.12% 9.29%
Rate sensitive liabilities:
Savings and NOW accounts $59,103 $15,856 $12,736 $ 10,774 $ 9,931 $ 29,683 $138,083 $138,083
Average interest rates 3.60% 2.56% 2.56% 2.54% 2.54% 2.67% 3.02%
Fixed interest rate time deposits $89,032 $19,898 $11,639 $ 16,202 $11,006 $ 129 $147,906 $147,337
Average interest rates 5.50% 6.05% 6.08% 6.62% 6.07% 6.50% 5.79%
Variable interest rate time deposits $ 762 $ 303 $ 5 $ 1,070 $ 1,070
Average interest rates 5.29% 5.29% 5.29% 5.29%
THE YEAR 2000
The year 2000 poses a significant risk to financial institutions because of
their reliance on automation to manage information. If an automated computer
application failed to work properly, it would be difficult, if not impossible,
to conduct business. There are three basic risk areas: (1) application software
and hardware, (2) spillover business risk, and (3) systemic.
APPLICATION SOFTWARE AND HARDWARE
Isabella Bank and Trust relies solely on outside vendors to provide its main
operating system. The main operating system processes customer information and
internal accounting information. The failure of any one of its components to be
year 2000 compliant could result in financial loss and/or the loss of customer
and investor confidence. Primary components of the system include an IBM AS400,
an NCR sorter and reader, bank application software from the Peerless Group, and
trust services software from Sunguard. Secondary components of the system
include an ATM (automatic teller machine) controller and ATMs, automatic
clearing house interface system (direct deposit), and loan and deposit
documentation software.
The AS400 was updated in 1997 and is year 2000 compliant. Other primary and
secondary components of the system are at various stages of compliance. The
Bank's management is closely monitoring the progress of all its vendors in
becoming compliant. The Bank has on file the progress, plans, and timetable for
each vendor to complete their year 2000 upgrades. Based on this information, the
Bank expects all vendors to be substantially compliant by December 1998. These
systems not only need to be made compliant, but must also be thoroughly tested.
The Bank's internal audit department, with the assistance of its independent
outside auditors, will perform testing. Testing is scheduled to begin in the
summer of 1998 with a target completion date of March 1999.
In addition to the above systems, the Bank utilizes stand alone personal
computers and programs in its day to day activities. The Bank is currently in
the process of testing the software and hardware of each personal computer for
year 2000 compliance. Any computer or software that fails to be compliant will
be replaced in 1998.
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22
SPILLOVER BUSINESS RISK
Many of the Bank's loan customers utilize computers in their day to day
operations. Failure of customers to make the necessary adjustments could lead to
a loss of business and loss of asset value and could create credit risk for the
Bank. Management is reviewing all commercial extensions of credit over $50,000
to identify customers, based on the products or services that are most likely to
have year 2000 compliance issues. These customers will be individually contacted
to assess their current state of readiness. Customers that are found to have
year 2000 compliance issues will be asked to provide the Bank with periodic
updates on their progress in becoming compliant.
Additionally, a survey has been developed to assist other commercial borrowers
in identifying their year 2000 risks. The Bank is currently developing plans to
make resources available to businesses that request our assistance in assessing
their risks.
SYSTEMIC
Banks have extensive institutional linkages. Critical linkages include the
correspondent relationships for Federal funds sales and purchases, investment
security book safekeeping, the Federal Reserve wire transfer and automatic
clearing house systems, and check processing systems. Each one of these is an
important component of the payment system. The failure of any one of these
systems could create an inability for the Bank to conduct business as usual. The
Bank exerts no control over these systems and/or the organizations that provide
these linkages. A problem in one part of the payment or settlement systems would
quickly affect the entire system. Other less critical linkages include ATM
networks, credit reporting systems, mortgage loans sold delivery systems, and
credit card processing networks. The Bank is requesting that providers of the
above services furnish periodic updates of progress in updating their systems
for the year 2000 and is reviewing its options if any one of the above systems
fail.
Based on the information currently available, the cost of becoming year 2000
compliant will not have a material impact on the Corporation's financial
position or results of operation. However, if the Corporation's vendors or
customers are unable to resolve this issue in a timely manner, it could result
in a material financial risk. Accordingly, the Corporation plans to devote all
necessary resources to becoming year 2000 compliant in a timely manner.
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23
PART II - OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) No reports on Form 8-K were filed or required to be filed
during the quarter ended September 30, 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: November 6, 1998 /s/David W. Hole
---------------------------- --------------------------------------------
David W. Hole, President/CEO
/s/Dennis P. Angner
--------------------------------------------
Dennis P. Angner, Treasurer
(Principal Financial and Accounting Officer)
24
25
Exhibit Index
Exhibit
Number Description
- ------- -----------
27 Financial Data Schedule