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, 1999
-------------
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 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, 881,788 as of July 31, 1999
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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 2 Changes in Securities and Use of
Proceeds 22
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
1999 1998
---- ----
(Unaudited)
ASSETS
Cash and demand deposits due from banks $ 15,912 $ 15,497
Federal funds sold 18,200 15,000
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 34,112 30,497
Investment securities
Securities available for sale (Amortized cost of
$93,593 in 1999 and $88,015 in 1998) 93,323 89,486
Securities held to maturity (Fair value --
$4,239 in 1999 and $6,665 in 1998) 4,204 6,548
--------- ---------
TOTAL INVESTMENT SECURITIES 97,527 96,034
Loans
Commercial and agricultural 47,120 44,917
Real estate mortgage 168,259 165,553
Installment 36,876 36,238
--------- ---------
TOTAL LOANS 252,255 246,708
Less allowance for loan losses 3,135 2,977
--------- ---------
NET LOANS 249,120 243,731
Other assets 20,261 18,521
--------- ---------
TOTAL ASSETS $ 401,020 $ 388,783
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 46,122 $ 46,348
NOW accounts 56,313 57,990
Certificates of deposit and other savings 229,853 226,930
Certificates of deposit over $100,000 28,453 18,771
---------- ---------
TOTAL DEPOSITS 360,741 350,039
Accrued interest and other liabilities 4,008 4,221
---------- ----------
TOTAL LIABILITIES 364,749 354,260
Shareholders' Equity
Common stock -- $6 par value
4,000,000 shares authorized; outstanding--
899,083 in 1999 (881,573 in 1998) 5,395 5,290
Capital surplus 20,128 18,894
Retained earnings 10,926 9,369
Accumulated other comprehensive (loss) income (178) 970
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 36,271 34,523
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 401,020 $ 388,783
========== ==========
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
-------
1999 1998
---- ----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 881,573 792,455
10% stock dividend 79,155
--------- ---------
Issuance of common stock 17,510 5,642
--------- ---------
BALANCE END OF PERIOD 899,083 877,252
========= =========
COMMON STOCK
Balance at beginning of period $ 5,290 $ 4,755
10% stock dividend 475
Issuance of common stock 105 33
--------- ---------
BALANCE END OF PERIOD 5,395 5,263
CAPITAL SURPLUS
Balance at beginning of period 18,894 13,687
10% stock dividend 4,670
Issuance of common stock 1,234 279
--------- ---------
BALANCE END OF PERIOD 20,128 18,636
RETAINED EARNINGS
Balance at beginning of period 9,369 12,248
Net income 2,016 1,726
10% stock dividend (5,145)
Cash dividends ($0.52 per share in 1999 and $0.50 in 1998) (459) (443)
--------- ---------
BALANCE END OF PERIOD 10,926 8,386
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance at beginning of period 970 268
Unrealized (losses) gains on securities available for sale,
net of income taxes and reclassification adjustment (1,148) 6
--------- ---------
BALANCE END OF PERIOD (178) 274
--------- ---------
TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 36,271 $ 32,559
========= =========
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
------- -------
1999 1998 1999 1998
-------------------- -------------------
INTEREST INCOME
Loans $ 5,197 $ 4,912 $10,409 $ 9,588
Investment securities
Taxable 1,161 1,251 2,302 2,159
Nontaxable 232 226 461 429
------- ------- ------- -------
TOTAL INTEREST ON INVESTMENT SECURITIES 1,393 1,477 2,763 2,588
Federal funds sold 241 96 389 206
------- ------- ------- -------
TOTAL INTEREST INCOME 6,831 6,485 13,561 12,382
INTEREST EXPENSE ON DEPOSITS 3,216 3,176 6,398 6,035
------- ------- ------- -------
NET INTEREST INCOME 3,615 3,309 7,163 6,347
Provision for loan losses 98 108 192 206
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,517 3,201 6,971 6,141
NONINTEREST INCOME
Trust fees 115 103 228 206
Service charges on deposit accounts 80 79 165 153
Other service charges and fees 314 264 603 496
Other 307 117 623 223
Gain on sale of mortgage loans 86 78 194 139
Net realized gain on securities available for sale 10 46 11 46
------- ------- ------- -------
TOTAL NONINTEREST INCOME 912 687 1,824 1,263
NONINTEREST EXPENSE
Salaries, wages and employee benefits 1,586 1,463 3,199 2,748
Occupancy 193 181 398 344
Furniture and equipment 329 279 630 537
Other 911 781 1,799 1,406
------- ------- ------- -------
TOTAL NONINTEREST EXPENSE 3,019 2,704 6,026 5,035
INCOME BEFORE FEDERAL INCOME TAXES 1,410 1,184 2,769 2,369
Federal income taxes 387 320 753 643
------- ------- ------- -------
NET INCOME $ 1,023 $ 864 $ 2,016 $ 1,726
======= ======= ======= =======
Net income per share $ 1.16 $ 1.00 $ 2.28 $ 1.98
======= ======= ======= =======
Cash dividends per share $ 0.26 $ 0.25 $ 0.52 $ 0.50
======= ======= ======= =======
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
------- -------
1999 1998 1999 1998
--------------------- -------------------
NET INCOME $ 1,023 $ 864 $ 2,016 $ 1,726
Other comprehensive income before income taxes:
Unrealized (losses) gains on securities available for sale:
Unrealized holding (losses) gains arising
during period (893) (65) (1,527) 55
Reclassification adjustment for realized
gains included in net income (10) (46) (11) (46)
------- ------- ------- -------
Comprehensive (loss) income before income
taxes (903) (111) (1,538) 9
Income tax (benefit) expense related to
comprehensive income (174) (38) (390) 3
------- ------- ------- -------
OTHER COMPREHENSIVE (LOSS) INCOME NET OF
INCOME TAXES (729) (73) (1,148) 6
------- ------- ------- -------
COMPREHENSIVE INCOME $ 294 $ 791 $ 868 $ 1,732
======= ======= ======= =======
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
1999 1998
---- ----
OPERATING ACTIVITIES
Interest and fees collected on loans
and investments $ 13,611 $ 12,205
Other fees and income received 1,819 1,231
Interest paid (6,445) (6,076)
Cash paid to suppliers and employees (5,359) (4,612)
Decrease (increase) in loans originated for sale 1,541 (1,608)
Federal income taxes paid (1,059) (638)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,108 502
INVESTING ACTIVITIES
Proceeds from maturities and sales of
securities available for sale 12,055 21,198
Proceeds from maturities of securities held to maturity 722 2,328
Purchases of securities available for sale (16,081) (53,982)
Purchases of securities held to maturity (122) (260)
Net increase in loans (7,122) (13,293)
Purchases of equipment and premises (427) (746)
Acquisition of title office (1,100)
Acquisition of branch offices, less cash received 37,874
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (12,075) (6,881)
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits (226) (1,759)
Net increase (decrease) in interest bearing deposits 10,928 (715)
Cash dividends (459) (443)
Proceeds from issuance of common stock 1,339 312
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 11,582 (2,605)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,615 (8,984)
Cash and cash equivalents at beginning of period 30,497 28,505
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 34,112 $ 19,521
======== ========
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, 1999
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1999. 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, 1998.
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 was 882,995 and 873,178 for the six month period ending June 30,
1999 and 1998, respectively.
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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 1998 annual report and with the unaudited
financial statements and notes, as set forth on pages 3 through 8 of this
report. On June 30, 1999, IBT Title, a wholly owned subsidiary of Isabella Bank
and Trust, acquired Mecosta County Abstract and Title. The acquisition was
accounted for as a purchase and included equipment and abstract title plant. The
acquisition was less than 1% of the Corporation's assets.
SIX MONTHS ENDING JUNE 30, 1999 AND 1998
RESULTS OF OPERATIONS
Net income equaled $2.02 million for the six month period ended June 30, 1999,
compared to $1.73 million for the same period in 1998, a 16.8% increase. Return
on average assets, which measures the ability of the Corporation to profitably
and efficiently employ its resources, was 1.02% for the first six months of 1999
and 1.01% in 1998. Return on average equity, which indicates how effectively the
Corporation is able to generate earnings on shareholder invested capital,
equaled 11.83% through June 30, 1999 versus 10.96% for the same period in 1998.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Year to Date
June 30
---------------------
1999 1998
---------------------
INCOME STATEMENT DATA
Net interest income $7,163 $6,347
Provision for loan losses 192 206
Net income 2,016 1,726
PER SHARE DATA
Net income per common share $2.28 $1.98
Cash dividends per common share 0.52 0.50
RATIOS
Average primary capital to average assets 9.41% 9.98%
Net income to average assets 1.02 1.01
Net income to average equity 11.83 10.96
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is the
primary source of income for IBT Bancorp. Interest income includes loan fees of
$417,000 in 1999 versus $393,000 in 1998. 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, 1999 June 30, 1998
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS
Loans $ 248,759 $10,472 8.42% $220,612 $ 9,644 8.74%
Taxable investment securities 76,021 2,241 5.90 69,236 2,104 6.08
Nontaxable investment securities 19,608 698 7.12 18,469 637 6.90
Federal funds sold 16,632 389 4.68 7,558 206 5.45
Other 1,675 61 7.28 1,495 55 7.36
--------- ------- ---- -------- ------- ----
Total Earning Assets 362,695 13,861 7.64 317,370 12,646 7.97
NONEARNING ASSETS
Allowance for loan losses (3,086) (2,862)
Cash and due from banks 13,717 12,057
Premises and equipment 7,869 6,330
Accrued income and other assets 10,620 8,605
--------- --------
Total Assets $ 391,815 $341,500
========= ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 55,652 663 2.38 $ 43,437 588 2.71
Savings deposits 100,843 1,518 3.01 80,285 1,304 3.25
Time deposits 154,208 4,215 5.47 142,185 4,127 5.81
Fed funds purchased --- --- --- 537 16 5.96
--------- ------- ------ --------- ------- ----
Total Interest Bearing Liabilities 310,703 6,396 4.12 266,444 6,035 4.53
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 42,836 40,108
Other 4,198 3,447
Shareholders' equity 34,078 31,501
--------- --------
Total Liabilities and Equity $ 391,815 $341,500
========= ========
Net interest income (FTE) $ 7,465 $ 6,611
======= =======
Net yield on interest earning assets (FTE) 4.12% 4.17%
====== ====
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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, 1999
Compared to
June 30, 1998
Increase (Decrease) Due to
-------------------------------------
Volume Rate Net
------ ---- ---
CHANGES IN INTEREST INCOME
Loans $1,195 $ (367) $ 828
Taxable investment securities 201 (64) 137
Nontaxable investment securities 40 21 61
Federal funds sold 216 (33) 183
Other 7 (1) 6
------ ------ ------
Total changes in interest income 1,659 (444) 1,215
Total changes in interest expense 796 (435) 361
------ ------ ------
Net Change in Interest Margin (FTE) $ 863 $ (9) $ 854
====== ====== ======
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TABLE 3
IBT BANCORP, INC.
SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
Year to Date
June 30
------------------------
1999 1998
---- ----
Summary of changes in allowance
Allowance for loan losses - January 1 $ 2,977 $ 2,677
Loans charged off (176) (82)
Recoveries of charged off loans 142 174
------- -------
Net loans (charged off) recovered (34) 92
Provision charged to operations 192 206
------- -------
Allowance for loan losses - June 30 $ 3,135 $ 2,975
======= =======
Allowance for loan losses as a % of loans 1.24% 1.28%
======= =======
NONPERFORMING LOANS
(Dollars in thousands)
June 30
1999 1998
---- ----
Total amount of loans outstanding for
the period (net of unearned interest) $252,255 $232,474
======== ========
Nonaccrual loans $ 793 $ 241
Accruing loans past due 90 days or more 836 803
Restructured loans
-------- --------
Total $ 1,629 $ 1,044
======== ========
Loans classified as nonperforming as a
% of outstanding loans 0.65% 0.45%
======== ========
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, 1999 to the same period in 1998, fully taxable equivalent (FTE) net
interest income increased $854,000 or 12.9%. An increase of 14.3% in average
interest earning assets provided $1.66 million of FTE interest income. The
majority of this growth was funded by a 16.6% increase in interest bearing
deposits, resulting in $796,000 of additional interest expense. Overall, changes
in volume resulted in $1.22 million of additional FTE interest income. The
average FTE interest rate earned on assets decreased by 0.33%, decreasing FTE
interest income by $444,000. The average rate paid on deposits decreased by
0.41%, decreasing interest expense by $435,000. The net change related to
interest rates earned and paid was a $9,000 decrease in FTE net interest income.
The Corporation's FTE net interest yield as a percentage of average earning
assets equaled 4.12% during the first six months of 1999 versus 4.17% for the
same period in 1998. The primary factor affecting the Corporation's net interest
margin was 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.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Loans outstanding represent 63% 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, 1999 to June 30, 1998, the
provision for loan losses was decreased $14,000 to $192,000. Year to date 1999,
the Corporation had net charged off loans of $34,000 versus net recovery of
$92,000 in 1998. Loans classified as nonperforming were 0.65% of loans as of
June 30, 1999 versus 0.45% for June 30, 1998. As of June 30, 1999, the allowance
for loan losses as a percentage of loans equaled 1.24%. In management's opinion,
the allowance for loan losses is adequate as of June 30, 1999.
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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 $561,000 increase in fees earned from these
sources during the first six months of 1999 when compared to the same period in
1998. Significant individual account changes during this period include a
$362,000 increase from the sale of title insurance and related services, a
$13,000 increase in brokerage commissions, a $22,000 increase in trust income, a
$75,000 increase in ATM transaction fees, a $35,000 decrease in gains on the
sale of investment securities available for sale, and a $55,000 increase in
gains on the sale of mortgage 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 No.
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 $194,000 gain from the sale of $28.9 million in
mortgages during the second quarter of 1999 versus a $139,000 gain on the sale
of $24.7 million in mortgages for the same period in 1998.
NONINTEREST EXPENSES
Noninterest expenses increased $991,000 or 19.7% during the first six months of
1999 when compared to 1998. The largest component of noninterest expense is
salaries and employee benefits, which increased $451,000 or 16.4%. In addition
to increases resulting from additional staffing and normal merit and promotional
salary adjustments, the Corporation incurred additional expenses related to its
acquisition of three branches in March 1998, the acquisition of IBT Title in
July 1998, and the start-up of a loan production company (IBT Loan) in the first
quarter of 1999.
Occupancy and furniture and equipment expenses increased $147,000 or 16.7% in
1999. Approximately two-thirds of the increase is related to the acquisitions.
Other significant changes include equipment depreciation related to the bank's
teller terminal computer system and automatic teller machine operating expenses.
Other operating expenses increased $393,000, a 28.0% increase. The majority of
this increase is related to the amortization of acquisition intangibles of
$287,000 and $74,000 for the cost of title insurance sold. Printing and office
supplies accounted for the majority of the remaining increase.
QUARTER ENDED JUNE 30, 1999 AND 1998
RESULTS OF OPERATIONS
Net income equaled $1.02 million for the second quarter in 1999 compared to
$864,000 for the same period in 1998, an 18.40% increase. Return on average
assets equaled 1.03% for the second quarter of 1999 versus 0.95% for the same
period in 1998. Return on average equity equaled 11.84% for the second quarter
in 1999, versus 10.83% for the second quarter in 1998.
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SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Quarter Ended
June 30
--------------------
1999 1998
--------------------
INCOME STATEMENT DATA
Net interest income $3,615 $3,309
Provision for loan losses 98 108
Net income 1,023 864
PER SHARE DATA
Net income per common share $1.16 $ 0.99
Cash dividend per common share 0.26 0.25
RATIOS
Net income to average assets 1.03% 0.95%
Net income to average equity 11.84 10.83
NET INTEREST INCOME
When comparing the second quarter of 1999 to 1998, net FTE interest income
increase $324,000. An increase of 9.6% in interest earning assets provided
$611,000 of FTE interest income. The asset growth was funded primarily by a
10.2% increase in interest bearing deposits, resulting in $245,000 of increased
interest expense. Overall, increased volume resulted in $366,000 of additional
FTE interest income. During the second quarter of 1999, the average FTE interest
rate earned on assets decreased by 0.30% and the average rate paid on deposits
decreased by 0.36%. The changes in interest rates earned and paid resulted in a
$42,000 decrease in FTE interest income. The Corporation's FTE net interest
yield as a percentage of average earning assets equaled 4.12% for both the
second quarter of 1998 and 1999.
PROVISION FOR LOAN LOSSES
The amount provided for loan losses in the second quarter of 1999 was $98,000
versus $108,000 in 1998. During the second quarter of 1999 the Corporation had
net charged off loans of $24,000 versus $4,000 in the same period of 1998.
NONINTEREST INCOME
Noninterest income earned in the second quarter of 1999, when compared to the
same period in 1998, increased $225,000 or 32.8%. The most significant changes
were a $187,000 increase from the sale of title insurance and related services,
a $38,000 increase in ATM transaction fees, a $36,000 decrease in gains on the
sale of investment securities available for sale, an $8,000 increase in gains on
the sale of mortgage loans, and a $12,000 increase in trust income.
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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, 1999 June 30, 1998
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS
Loans $ 250,559 $5,269 8.41% $224,939 $ 4,940 8.78%
Taxable investment securities 76,745 1,128 5.88 80,918 1,224 6.05
Nontaxable investment securities 19,777 351 7.10 19,472 329 6.76
Federal funds sold 16,965 199 4.69 7,012 96 5.48
Other 1,735 33 7.61 1,524 28 7.35
---------- ------ ---- -------- -------- ----
Total Earning Assets 365,781 6,980 7.63 333,865 6,617 7.93
NONEARNING ASSETS
Allowance for loan losses (3,120) (2,929)
Cash and due from banks 14,215 13,206
Premises and equipment 7,883 6,855
Accrued income and other assets 11,430 10,940
---------- --------
Total Assets $ 396,189 $361,937
========== ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 55,590 326 2.35 $ 47,474 312 2.63
Savings deposits 100,676 754 3.00 85,359 683 3.20
Time deposits 156,725 2,134 5.45 151,160 2,180 5.77
---------- ------ ---- -------- -------- ----
Total Interest Bearing Liabilities 312,991 3,214 4.11 283,993 3,175 4.47
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 44,457 42,466
Other 4,201 3,556
Shareholders' equity 34,540 31,922
--------- --------
Total Liabilities and Equity $ 396,189 $361,937
========== ========
Net interest income (FTE) $ 3,766 $ 3,442
========== ========
Net yield on interest earning assets (FTE) 4.12% 4.12%
==== ====
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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, 1999
Compared to
June 30, 1998
Increase (Decrease) Due to
-------------------------------
Volume Rate Net
------ ---- ---
CHANGES IN INTEREST INCOME
Loans $ 546 $(217) $329
Taxable investment securities (63) (33) (96)
Nontaxable investment securities 6 16 22
Federal funds sold 118 (15) 103
Other 4 1 5
----- ----- ----
Total changes in interest income 611 (248) 363
Total changes in interest expense 245 (206) 39
----- ----- ----
Net Change in Interest Margin (FTE) $ 366 $ (42) $324
===== ===== ====
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NONINTEREST EXPENSES
Noninterest expenses increased $315,000 or 11.6% during the second quarter of
1999 when compared to 1998. Noninterest expense includes salary and benefits,
occupancy, and other operating expenses. The purchase of IBT Title and the
start-up of IBT Loan had a significant impact on these costs. Total noninterest
expense related to these operations during the second quarter were $176,000. The
majority of the remaining increase is related to additional staffing, normal
merit and promotional salary adjustments, and increased medical insurance
expenses.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Since December 31, 1998, total assets increased $12.2 million to $401.0 million.
As of June 30, 1999, the loan portfolio increased $5.5 million, fed funds sold
increased $3.2 million, and investment securities increased $1.5 million when
compared to December 31, 1998. Deposits during this period increased $10.7
million.
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, 1999, cash and cash equivalents as a percentage of total assets
equaled 8.5%, versus 7.8% as of December 31, 1998. During the first six months
of 1999, $4.1 million in net cash was provided from operations and $11.6 was
provided from financing activities. Investing activities used $12.1 million. The
accumulated effect of the Corporation's operating, investing and financing
activities was a $3.6 million increase in cash and cash equivalents during the
first six months of 1999.
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale equaled
$93.3 million as of June 30, 1999 and $89.5 million as of December 31, 1998. 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 $1.7 million since December 31, 1998. In conjunction with the
Corporation's acquisition of Mecosta County Abstract and Title, the Corporation
issued 14,014 shares valued at $1.1 million.
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 less unamortized acquisition intangibles, was 8.8% as
of June 30, 1999.
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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, 1999:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
Actual
Required 06/30/99
-------- --------
Equity Capital 4.00% 13.60%
Secondary Capital* 4.00 1.25
Total Capital 8.00 14.85
* 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, 1999.
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
-------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total 06/30/99
------------------------------------------------------------------------------------------
Rate sensitive assets
Other interest bearing assets $18,200 -- -- -- -- -- $ 18,200 $ 18,200
Average interest rates 4.95% -- -- -- -- -- 4.95%
Fixed interest rate securities $21,458 $20,442 $20,522 $15,315 $ 9,377 $10,413 $ 97,527 $ 97,562
Average interest rates 5.78% 5.84% 5.58% 5.74% 5.62% 6.57% 5.81%
Fixed interest rate loans $72,357 $50,359 $50,196 $22,658 $30,776 $10,751 $237,097 $239,671
Average interest rates 7.97% 8.15% 7.92% 8.06% 7.64% 7.62% 7.95%
Variable interest rate loans $13,094 $ 1,638 $ 344 $ 80 $ 2 $ 0 $ 15,158 $ 15,158
Average interest rates 9.65% 10.48% 8.31% 8.32% 7.75% 0.00% 9.70%
Rate sensitive liabilities
Savings and NOW accounts $88,294 $13,534 $10,715 $ 7,876 $ 7,810 $ 30,712 $158,941 $158,941
Average interest rates 3.40% 2.15% 2.15% 2.15% 2.15% 2.15% 2.84%
Fixed interest rate time deposits $88,819 $20,381 $18,773 $13,777 $12,746 $ 83 $154,579 $155,016
Average interest rates 5.10% 5.59% 5.59% 6.15% 5.46% 6.72% 5.44%
Variable interest rate time deposits $ 695 $ 395 $ 9 -- -- -- $ 1,099 $ 1,099
Average interest rates 4.67% 4.67% 4.67% -- -- -- 4.67%
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 securities $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%
The Year 2000
As of June 30, 1999 the Corporation had completed the renovation and testing of
all its mission critical software and hardware. Management is confident that all
mission critical systems will operate properly after December 31, 1999.
Management is also confident that the Corporation's significant depositors and
loan customers are aware of, and are addressing year 2000 issues.
There are several risks that management cannot control. These risks include the
preparedness of government agencies, utilities, communication services, and
security settlement systems. Additionally, the public response to the year 2000
issues is a concern. In response to these concerns and in accordance with
regulatory requirements, the Corporation has developed a contingency operating
and liquidity plan.
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PART II - OTHER INFORMATION
Item 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) On June 30, 1999, IBT Title, a wholly owned subsidiary of
Isabella Bank and Trust, acquired Mecosta County Abstract and
Title pursuant to a statutory merger of Mecosta County Abstract
and Title with and into IBT Title. In conjunction with the
merger, IBT Bancorp issued 14,014 shares of its common stock,
valued at $1.1 million, to Shawn M. Downey and Keith F. Lobert,
the shareholders of Mecosta County Abstract and Title. The
transaction was exempt from the registration requirements of
the Securities Act of 1933, as amended (the "Act") pursuant to
Section 4(2) of the Act which exempts transactions by an issuer
not involving any public offering.
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The registrant's annual meeting of shareholders was held on April
20, 1999. At that meeting the shareholders voted upon the election
of directors.
VOTES CAST
Election of Directors For Withheld
--------------------- --- --------
All nominees for director were elected:
Gerald D. Cassel 650,143 7,846
Ronald E. Schumacher 649,686 8,303
Robert O. Smith 649,513 8,476
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 June 30, 1999.
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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 10, 1999 /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