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, 2001 ------------- or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from to ------------------ -------------------------- Commission File Number: 0-18415 -------------------------------------------------------- IBT Bancorp, Inc. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-2830092 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 200 East Broadway 48858 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (989) 772-9471 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock no par value, 3,884,650 as of July 27, 2001 --------------------------------------------------------
2 IBT BANCORP, INC. Index to Form 10-Q Part I Financial Information Page Numbers Item 1 Financial Statements 3-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-19 Item 3 Quantitative and Qualitative Disclosures About Market Risk 20-21 Part II Other Information Item 4 Submission of Matters to a Vote of Security Holders 22 Item 6 Exhibits and Reports on Form 8-K 22 2
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IBT BANCORP, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (dollars in thousands) June 30 December 31 2001 2000 ---- ---- (Unaudited) <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 24,093 $ 27,525 Federal funds sold 30,250 900 --------- --------- TOTAL CASH AND CASH EQUIVALENTS 54,343 28,425 Investment securities Securities available for sale (Amortized cost of $78,824 in 2001 and $77,412 in 2000) 80,110 77,514 Securities held to maturity (Fair value -- $6,408 in 2001 and $10,687 in 2000) 6,359 8,299 --------- --------- TOTAL INVESTMENT SECURITIES 86,469 85,813 Loans Agricultural 49,717 47,298 Commercial 121,987 129,302 Real estate mortgage 176,816 173,041 Installment 57,148 54,038 --------- --------- TOTAL LOANS 405,668 403,679 Less allowance for loan losses 5,399 5,162 --------- --------- NET LOANS 400,269 398,517 Other assets 29,351 28,142 --------- --------- TOTAL ASSETS $ 570,432 $ 540,897 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 57,967 $ 60,798 NOW accounts 79,517 83,779 Certificates of deposit and other savings 303,582 293,727 Certificates of deposit over $100 55,739 38,512 --------- --------- TOTAL DEPOSITS 496,805 476,816 Other borrowed funds 11,587 6,444 Accrued interest and other liabilities 6,837 5,707 --------- --------- TOTAL LIABILITIES 515,229 488,967 Shareholders' Equity Common stock -- no par value 10,000,000 shares authorized; outstanding-- 3,884,436 in 2001 (3,871,552 in 2000) 31,070 30,814 Retained earnings 23,284 21,049 Accumulated other comprehensive income 849 67 --------- --------- TOTAL SHAREHOLDERS' EQUITY 55,203 51,930 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 570,432 $ 540,897 ========= ========= </TABLE> See notes to consolidated financial statements. 3
4 IBT BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (dollars in thousands) <Table> <Caption> Six Months Ended June 30 ------- 2001 2000 ---- ---- <S> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of period 3,871,552 3,848,383 Issuance of common stock 20,594 14,223 Stock repurchased (7,710) --- ----------- ----------- BALANCE END OF PERIOD 3,884,436 3,862,606 =========== =========== COMMON STOCK Balance at beginning of period $ 30,814 $ 30,322 Issuance of common stock 494 318 Stock repurchased (238) --- ----------- ----------- BALANCE END OF PERIOD 31,070 30,640 RETAINED EARNINGS Balance at beginning of period 21,049 17,815 Net income 3,010 2,702 Cash dividends ($0.10 per share in 2001 and $0.09 in 2000) (775) (806) ----------- ----------- BALANCE END OF PERIOD 23,284 19,711 ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 67 (1,031) Unrealized gains on securities available for sale, net of income taxes and reclassification adjustment 782 251 ----------- ----------- BALANCE END OF PERIOD 849 (780) ----------- ----------- TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 55,203 $ 49,571 =========== =========== </TABLE> See notes to consolidated financial statements. 4
5 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> (in thousands) Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2001 2000 2001 2000 -------------------- ------------------ <S> <C> <C> <C> <C> INTEREST INCOME Loans $ 8,811 $ 8,057 $ 17,745 $15,750 Investment securities Taxable 707 990 1,450 2,062 Nontaxable 497 394 829 721 Federal funds sold 323 7 522 78 ------- ------- -------- ------- TOTAL INTEREST INCOME 10,338 9,448 20,546 18,611 INTEREST EXPENSE Deposits 4,839 4,230 9,760 8,339 Federal funds purchased 146 187 266 206 ------- ------- -------- ------- TOTAL INTEREST EXPENSE 4,985 4,417 10,026 8,545 ------- ------- -------- ------- NET INTEREST INCOME 5,353 5,031 10,520 10,066 Provision for loan losses 166 179 328 304 ------- ------- -------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,187 4,852 10,192 9,762 NONINTEREST INCOME Trust fees 139 117 279 231 Service charges on deposit accounts 73 85 147 161 Other service charges and fees 501 477 942 939 Gain on sale of mortgage loans 170 20 265 41 Title insurance revenue 401 296 695 507 Net realized gain (loss) on securities available for sale 4 (4) 4 (4) Other 176 174 318 318 ------- ------- -------- ------- TOTAL NONINTEREST INCOME 1,464 1,165 2,650 2,193 NONINTEREST EXPENSES Salaries, wages and employee benefits 2,332 2,173 4,647 4,327 Occupancy 279 230 577 501 Furniture and equipment 521 485 1,006 951 Other 1,263 1,239 2,445 2,445 ------- ------- -------- ------- TOTAL NONINTEREST EXPENSES 4,395 4,127 8,675 8,224 INCOME BEFORE FEDERAL INCOME TAXES 2,256 1,890 4,167 3,731 Federal income taxes 634 527 1,157 1,029 ------- ------- -------- ------- NET INCOME $ 1,622 $ 1,363 $ 3,010 $ 2,702 ======= ======= ======== ======= Net income per share $ 0.41 $ 0.35 $ 0.78 $ 0.70 ======= ======= ======== ======= Cash dividends per share $ 0.10 $ 0.09 $ 0.20 $ 0.18 ======= ======= ======== ======= </TABLE> See notes to consolidated financial statements. 5
6 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2001 2000 2001 2000 --------------------- ------------------ <S> <C> <C> <C> <C> NET INCOME $ 1,622 $ 1,363 $ 3,010 $ 2,702 Other comprehensive income before income taxes: Unrealized gains on securities available for sale: Unrealized holding gains arising during period 256 306 1,189 377 Reclassification adjustment for realized (gains) losses included in net income (4) 4 (4) 4 -------- -------- -------- -------- Other comprehensive income before income taxes 252 310 1,185 381 Income tax expense related to other comprehensive income 86 106 403 130 -------- -------- -------- -------- OTHER COMPREHENSIVE INCOME 166 204 782 251 -------- -------- -------- -------- COMPREHENSIVE INCOME $ 1,788 $ 1,567 $ 3,792 $ 2,953 ======== ======== ======== ======== </TABLE> See notes to consolidated financial statements. 6
7 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> (in thousands) Six Months Ended June 30 2001 2000 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Net income $ 3,010 $ 2,702 Adjustments to reconcile net income to cash provided by operations: Provision for loan losses 328 304 Provision for depreciation 575 566 Net amortization of securities 92 117 Amortization of intangibles 274 289 Gain on sale of mortgage loans (265) (40) Proceeds from sales of mortgage loans 35,283 3,940 Mortgage loans originated for sale (37,554) (3,821) Deferred income tax benefit --- --- Decrease (increase) in interest receivable 354 (61) Increase in other assets (937) (426) Increase (decrease) in accrued interest and other liabilities 1,130 (506) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,290 3,064 INVESTING ACTIVITIES Activity in available for sale securities Maturities, calls, and sales 14,839 13,639 Purchases (17,323) (4,521) Activity in held to maturity securities Maturities, calls, and sales 2,921 2,051 Purchases --- (105) Net decrease (increase) in loans 456 (26,897) Purchases of equipment and premises (1,878) (719) -------- -------- NET CASH USED BY INVESTING ACTIVITIES (985) (16,552) FINANCING ACTIVITIES Net decrease in noninterest bearing deposits (2,831) (5,198) Net increase in interest bearing deposits 22,820 10,335 Net increase (decrease) in other borrowed funds 5,143 (716) Cash dividends (775) (806) Proceeds from the issuance of common stock 494 318 Stock repurchased (238) 0 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 24,613 3,933 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 25,918 (9,555) Cash and cash equivalents at beginning of period 28,425 26,709 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 54,343 $ 17,154 ======== ======== </TABLE> See notes to consolidated financial statements. 7
8 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, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation's annual report for the year ended December 31, 2000. NOTE 2 COMPUTATION OF EARNINGS PER SHARE The net income per share amounts are based on the weighted average number of common shares outstanding. The weighted average number of common shares outstanding was 3,875,282 and 3,856,530 for the six month period ending June 30, 2001 and 2000, respectively. The Corporation has no common stock equivalents and, accordingly, presents only basic earnings per share. NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS The Bank adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS Nos. 137 and 138, as of January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. The adoption of the provisions of SFAS No. 133, as amended, did not have an impact on the results of operations or the financial position of the Banks. In September 2000, SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, a replacement of FASB Statement No. 125, was issued. It revised the standards for accounting for securitizations in 2000 and other transfers and servicing of financial assets (occurring after March 31, 2001) and collateral and requires certain disclosures, but it carries over most of SFAS No. 125's provisions without reconsideration. SFAS No. 140 was adopted by the Banks on April 1, 2001 and did not have a material impact on the Bank's results of operations, financial position, or cash flows. The foregoing does not constitute a comprehensive summary of all material changes or developments affecting the manner in which the Banks maintain their books and records and perform their financial accounting responsibilities. It is intended only as a summary of some of the recent pronouncements made by the FASB which are of particular interest to financial institutions. NOTE 4 Restricted investments of $2,361,000 as of December 31, 2000 were reclassified from held to maturity investments to other assets for the period ending December 31, 2000 to conform with the 2001 presentation. 8
9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following is management's discussion and analysis of the major factors that influenced IBT Bancorp's financial performance. This analysis should be read in conjunction with the Corporation's 2000 annual report and with the unaudited financial statements and notes, as set forth on pages 3 through 8 of this report. SIX MONTHS ENDING JUNE 30, 2001 AND 2000 RESULTS OF OPERATIONS Net income equaled $3.01 million for the six month period ended June 30, 2001 versus $2.7 million in 2000. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, was 1.09% for the first six months of 2001 and 1.07% in 2000. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 11.26% through June 30, 2001 versus 10.95% for the same period in 2000. <TABLE> <CAPTION> SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data Six Months Ended June 30 ---------------------- 2001 2000 --------------------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $10,520 $10,066 Provision for loan losses 328 304 Net income 3,010 2,702 PER SHARE DATA Net income per common share $ 0.78 $ 0.70 Cash dividends per common share 0.20 0.18 RATIOS Average primary capital to average assets 10.55 10.65% Net income to average assets 1.09 1.07 Net income to average equity 11.26 10.95 </TABLE> 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 $709,000 in 2001 versus $453,000 in 2000. For analytical purposes, net interest income is adjusted to a "taxable equivalent" basis by adding the income tax savings from interest on tax-exempt loans and securities, thus making year-to-year comparisons more meaningful. (Continued on page 12) 9
10 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. Federal Reserve and Federal Home Loan Bank restricted equity holdings are included in other investments. <TABLE> <CAPTION> Six Months Ending June 30, 2001 June 30, 2000 Tax Average Tax Average Average Equivalent Yield/ Average Equivalent Yield/ Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- ---------- ---- INTEREST EARNING ASSETS <S> <C> <C> <C> <C> <C> <C> Loans $ 403,566 $ 17,759 8.80% $ 364,666 $ 15,799 8.66% Taxable investment securities 46,830 1,358 5.80 67,929 1,984 5.84 Nontaxable investment securities 34,023 1,256 7.38 29,363 1,091 7.43 Federal funds sold 22,333 522 4.67 2,715 77 5.67 Other investments 2,469 92 7.45 2,185 80 7.32 --------- --------- -------- ---------- --------- ------ Total Earning Assets 509,221 20,987 8.24 466,858 19,031 8.15 NONEARNING ASSETS Allowance for loan losses (5,270) (4,788) Cash and due from banks 20,514 17,381 Premises and equipment 11,841 10,254 Accrued income and other assets 15,374 14,110 --------- ---------- Total Assets $ 551,680 $ 503,815 ========= ========== INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 80,079 $ 1,121 2.80 $ 62,253 787 2.53 Savings deposits 118,949 1,776 2.99 127,094 2,007 3.16 Time deposits 229,555 6,863 5.98 200,218 5,545 5.54 Borrowed funds 9,776 266 5.44 6,383 206 6.45 --------- --------- -------- ---------- --------- ------- Total Interest Bearing Liabilities 438,359 10,026 4.57 395,948 8,545 4.32 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 53,848 52,639 Other 5,986 5,874 Shareholders' equity 53,487 49,354 --------- ---------- Total Liabilities and Equity $ 551,680 $ 503,815 ========= ========== Net interest income (FTE) $ 10,961 $ 10,486 ========= ========== Net yield on interest earning assets (FTE) 4.31% 4.49% ==== ==== </TABLE> 10
11 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. <TABLE> <CAPTION> Six Month Period Ended June 30, 2001 Compared to June 30, 2000 Increase (Decrease) Due to ------------------------------------- Volume Rate Net ------ ---- ----- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $ 1,708 $ 252 $1,960 Taxable investment securities (612) (14) (626) Nontaxable investment securities 172 (7) 165 Federal funds sold 461 (16) 445 Other 11 1 12 ------- ----- ------ Total changes in interest income 1,740 216 1,956 Total changes in interest expense 1,069 412 1,481 ------- ----- ------ Net Change in Interest Margin (FTE) $ 671 $(196) $ 475 ======= ===== ====== </TABLE> 11
12 NET INTEREST INCOME, CONTINUED As shown in Tables number 1 and 2, when comparing the six month period ending June 30, 2001 to the same period in 2000, fully taxable equivalent (FTE) net interest income increased $475,000 or 4.5%. An increase of 9.1% in average interest earning assets provided $1.74 million of FTE interest income. The majority of this growth was funded by a 10.7% increase in interest bearing liabilities, resulting in $1.07 million of additional interest expense. Overall, changes in volume resulted in $671,000 of additional FTE interest income. The average FTE interest rate earned on assets increased by 0.09%, while the amount of interest earned as a result of changes in rate increased $216,000. The average rate paid on deposits increased by 0.25%, increasing interest expense by $412,000. The net change related to interest rates earned and paid was a $196,000 decrease in FTE net interest income. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 4.31% during the first six months of 2001 versus 4.49% for the same period in 2000. The 0.18% decrease in the FTE interest margin was primarily a result of increasing reliance on high cost funding sources such as certificates of deposit, money market accounts, and borrowed federal funds to finance asset growth, and interest rate competition for new commercial, mortgage and personal loans. Management expects both trends to continue into the foreseeable future. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Net loans outstanding represent 70% 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, 2001 to June 30, 2000, the provision for loan losses was increased $24,000 to $328,000. Year to date 2001, the Corporation had net charge-offs of $91,000 versus recoveries of $14,000 in 2000. Loans classified as nonperforming were 0.57% of loans as of June 30, 2001 versus 0.48% for June 30, 2000. The Corporation's peer group, which includes 255 holding companies with assets between $500 million and $1.0 billion, nonperforming loans to total loans ratio was 0.62% as of June 30, 2001. As of June 30, 2001, the allowance for loan losses as a percentage of loans equaled 1.33%. In management's opinion, the allowance for loan losses is adequate as of June 30, 2001. 12
13 TABLE 3 IBT BANCORP, INC. SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) <TABLE> <CAPTION> Year to Date June 30 -------------------------- 2001 2000 ------- ------- <S> <C> <C> Summary of changes in allowance Allowance for loan losses - January 1 $ 5,162 $ 4,622 Loans charged off (198) (199) Recoveries of charged off loans 107 213 ------- ------- Net loans (charged off) recovered (91) 14 Provision charged to operations 328 304 ------- ------- Allowance for loan losses - June 30 $ 5,399 $ 4,940 ======= ======= Allowance for loan losses as a % of loans 1.33% 1.29% ======= ======= NONPERFORMING LOANS (Dollars in thousands) June 30 2001 2000 ------ ------- Total amount of loans outstanding for the period (net of unearned interest) $405,668 $382,678 ======== ======== Nonaccrual loans $ 770 $ 302 Accruing loans past due 90 days or more 1,525 1,519 Restructured loans --- --- -------- -------- Total $ 2,295 $ 1,821 ======== ======== Loans classified as nonperforming as a % of outstanding loans 0.57% 0.48% ===== ===== </TABLE> To management's knowledge, there are no other loans which cause management to have serious doubts as to the ability of a borrower to comply with their loan repayment terms. 13
14 NONINTEREST INCOME Noninterest income consists of trust fees, deposit service charges, fees for other financial services, gains on the sale of mortgage loans, title insurance revenue, gains and losses on investment securities available for sale, and other. There was a $457,000 increase in fees earned from these sources during the first six months of 2001 when compared to the same period in 2000. Significant individual account changes during this period include a $188,000 increase from the sale of title insurance and related services, a $48,000 increase in trust fees, a $43,000 decrease in brokerage commissions, a $224,000 increase in gains on the sale of mortgage loans, a $97,000 increase in NSF and overdraft fees, and a $14,000 decrease in service charges on deposit accounts. The increase in NSF and overdraft fees and the decline in service charges are principally due to the introduction of free checking by Isabella Bank and Trust in 2000. The Bank currently has over 3,000 of these accounts. Many were transferred from other accounts with service charges. The income derived from these accounts results primarily from an increase in the frequency of overdraft activity. The Corporation has established a policy that all 30 year amortized fixed rate mortgage loans will be sold. The calculation of gains on the sale of mortgages exclude at least 25 basis points allocated to the value of servicing rights on these loans. Included in other operating income is a $265,000 gain from the sale of $35.3 million in mortgages during the first six months of 2001 versus a $41,000 gain on the sale of $3.9 million in mortgages for the same period in 2000. NONINTEREST EXPENSES Noninterest expenses increased $451,000 or 5.5% during the first six months of 2001 when compared to 2000. The largest component of noninterest expense is salaries and employee benefits, which increased $320,000 or 7.4%. In addition to increases resulting from additional staffing and normal merit and promotional salary adjustments, the Corporation incurred additional expenses related to benefit improvements for the employees of Farmers State Bank as a result of the merger in August 2000, and a 20% increase in medical expenses. Occupancy and furniture and equipment expenses increased $131,000 or 9.0% in 2001. The majority of the increase is a result of the construction and occupancy of a 15,000 square foot operations center in Mt. Pleasant, Michigan. There were no significant changes in other operating expenses. QUARTER ENDED JUNE 30, 2001 AND 2000 RESULTS OF OPERATIONS Net income equaled $1.62 million for the second quarter in 2001 versus $1.36 million in 2000. Return on average assets equaled 1.16% for the second quarter of 2001 versus 1.07% for the same period in 2000. Return on average equity equaled 11.99% for the second quarter in 2001, versus 10.91% for the second quarter in 2000. 14
15 SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended June 30 ---------------------------- 2001 2000 ---------------------------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $5,353 $5,031 Provision for loan losses 166 179 Net income 1,622 1,363 PER SHARE DATA Net income per common share $ 0.41 $ 0.35 Cash dividend per common share 0.10 0.09 RATIOS Average primary capital to average assets 10.53% 10.70% Net income to average assets 1.16 1.07 Net income to average equity 11.99 10.91 </TABLE> NET INTEREST INCOME When comparing the second quarter of 2001 to 2000, net FTE interest income increased $312,000. An increase of 9.9% in interest earning assets provided $821,000 of FTE interest income. The asset growth was funded primarily by an 11.7% increase in interest bearing liabilities, resulting in $547,000 of increased interest expense. Overall, increased volume resulted in $274,000 of additional FTE interest income. During the second quarter of 2001, the average FTE interest rate earned on assets decreased by 0.06% and the average rate paid on deposits increased by 0.05%. The changes in interest rates earned and paid resulted in a $38,000 increase in FTE interest income. The Corporation's FTE net interest yield as a percentage of average earning assets decreased 0.16% to 4.31% in the second quarter of 2001. The primary factor for the decrease was the Corporation's increasing reliance on interest bearing liabilities to fund assets and a substantial increase in fed funds sold, the lowest rate asset, to total earning assets. PROVISION FOR LOAN LOSSES The amount provided for loan losses in the second quarter of 2001 was $166,000 versus $179,000 in 2000. During the second quarter of 2001 the Corporation had net charge-offs of $32,000 versus $46,000 during the same period of 2000. The allowance for loan losses as a percent of loans was 1.33% as of June 30, 2001, a 0.03% increase since March 31, 2001. NONINTEREST INCOME Noninterest income earned in the second quarter of 2001, when compared to the same period in 2000, increased $299,000 or 25.7%. The most significant changes were a $105,000 increase from the sale of title insurance and related services, a $150,000 increase in gains on the sale of mortgage loans, and a $22,000 increase in trust fees 15
16 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. Federal Reserve and Federal Home Loan Bank restricted stock is included in other investments. <TABLE> <CAPTION> Quarter Ending June 30, 2001 June 30, 2000 Tax Average Tax Average Average Equivalent Yield/ Average Equivalent Yield/ Balance Interest Rata Balance Interest Rate ------- -------- ------- ------- ---------- ---- <S> <C> <C> <C> <C> <C> <C> INTEREST EARNING ASSETS Loans $ 403,927 $ 8,897 8.81% $ 372,146 $ 8,086 8.69% Taxable investment securities 45,838 659 5.75 65,212 952 5.84 Nontaxable investment securities 34,395 632 7.35 30,371 595 7.84 Federal funds sold 29,977 323 4.31 402 6 5.97 Other 2,577 48 7.45 2,250 40 7.11 --------- -------- ------ --------- -------- ---- Total Earning Assets 516,714 10,559 8.17 470,381 9,679 8.23 NONEARNING ASSETS Allowance for loan losses (5,334) (4,861) Cash and due from banks 20,411 17,523 Premises and equipment 12,163 10,307 Accrued income and other assets 15,280 14,239 --------- --------- Total Assets $ 559,234 $ 507,589 ========= ========= INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 80,410 518 2.58 $ 60,751 391 2.57 Savings deposits 118,238 846 2.86 122,135 969 3.17 Time deposits 235,159 3,475 5.91 203,874 2,876 5.64 Borrowed funds 10,703 146 5.46 11,163 181 6.49 --------- ------- ----- --------- -------- ---- Total Interest Bearing Liabilities 444,510 4,985 4.49 397,923 4,417 4.44% NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS EQUITY Demand deposits 54,587 53,937 Other 6,035 5,749 Shareholders' equity 54,102 49,980 --------- --------- Total Liabilities and Equity $ 559,234 $ 507,589 ========= ========= Net interest income (FTE) $5,574 $5,262 ====== ====== Net yield on interest earning assets (FTE) 4.31% 4.47% ====== ===== </TABLE> 16
17 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. <TABLE> <CAPTION> Quarter Ended June 30, 2001 Compared to June 30, 2000 Increase (Decrease) Due to -------------------------------- Volume Rate Net --------- -------- --------- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $699 $112 $ 811 Taxable investment securities (279) (14) (293) Nontaxable investment securities 76 (39) 37 Federal funds sold 319 (2) 317 Other 6 2 8 ------ ------ ------ Total changes in interest income 821 59 880 Total changes in interest expense 547 21 568 ------ ------ ------ Net Change in Interest Margin (FTE) $ 274 $ 38 $ 312 ====== ====== ====== </TABLE> 17
18 NONINTEREST EXPENSES Noninterest expenses increased $268,000 or 6.5% during the second quarter of 2001 when compared to 2000. Noninterest expense includes salary and benefits, occupancy, and other operating expenses. The largest component of noninterest expense is salaries and employee benefits, which increased $159,000 or 7.3%. The increase is related to normal merit and promotional salary increases, increased benefit costs at Farmers State Bank as a result of the August 2000 merger, and increases in medical expenses. Occupancy and furniture and equipment expenses increased $85,000 or 11.9%. The majority of this increase is associated with the occupancy of the operations center. Other operating expenses increased $24,000 or 1.9%. The most significant changes include increases in title insurance costs and postage and printing expenses associated with the mailing of privacy notices to customers of the Corporation. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 2000, total assets increased $29.5 million to $570.4 million. As of June 30, 2001, the loan portfolio increased $2.0 million, cash and demand deposits due from bank decreased $3.4 million, federal funds sold increased $29.4 million, and investment securities increased $656,000 when compared to December 31, 2000. Deposits during this period increased $20.0 million, borrowed funds increased $5.1 million, and shareholders' equity increased $3.3 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, 2001, cash and cash equivalents as a percentage of total assets equaled 9.5%, versus 5.3% as of December 31, 2000. During the first six months of 2001, $2.3 million in net cash was provided from operations and $24.6 million was provided from financing activities. Investing activities used $985,000. The accumulated effect of the Corporation's operating, investing and financing activities was a $25.9 million increase in cash and cash equivalents during the first six months of 2001. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale equaled $80.1 million as of June 30, 2001 and $77.5 million as of December 31, 2000. The Corporation's liquidity is considered adequate by management. CAPITAL The capital of the Corporation consists solely of common stock and retained earnings, increased by accumulated other comprehensive income; and increased approximately $3.3 million since December 31, 2000. 18
19 CAPITAL, CONTINUED 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 9.2% as of June 30, 2001. The Federal Reserve Board has established a minimum risk based capital standard. Under this standard, a framework has been established that assigns risk weights to each category of on- and off-balance sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a bank has adequate capital. The minimum standard is 8%, of which at least 4% must consist of equity capital net of goodwill. The following table sets forth the percentages required under the Risk Based Capital guidelines and the Corporation's ratios as of June 30, 2001: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS <TABLE> <CAPTION> IBT Bancorp Actual Required 06/30/01 -------- ----------- <S> <C> <C> Equity Capital 4.00 13.72% Secondary Capital* 4.00 1.25% ---- ------- Total Capital 8.00 14.97% ==== ======= </TABLE> * 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. 19
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 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, 2001. The Corporation has no interest rate swaps, futures contracts, or other derivative financial options. The principal amounts of assets and time deposits maturing were calculated based on the contractual maturity dates. Savings and NOW accounts are based on management's estimate of their future cash flows. 20
21 Quantitative Disclosures of Market Risk <TABLE> <CAPTION> June 30, 2001 Fair Value -------------------------------------------------------------------------------------------- 2001 2002 2003 2004 2005 Thereafter Total 06/30/01 -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 30,25 --- --- --- --- --- $ 30,250 $ 30,250 Average interest rates 3.75% --- --- --- --- --- 5.00% Fixed interest rate securities $ 14,062 $23,775 $14,645 $10,261 $ 3,609 $20,117 $ 86,469 $ 86,518 Average interest rates 5.41% 5.02% 5.28% 4.87% 4.94% 4.86% 5.07% Fixed interest rate loans $ 111,737 $77,055 $85,227 $49,071 $22,635 $10,992 $356,717 $359,801 Average interest rates 9.48% 8.42% 8.22% 8.23% 8.27% 7.78% 8.65% Variable interest rate loans $ 46,910 $ 1,948 $ 89 $ 4 --- --- $ 48,951 $ 48,951 Average interest rates 8.50% 10.09% 7.75% --- 8.75% --- 8.56% Rate sensitive liabilities Borrowed funds $ 3,187 --- $ 5,000 $ 1,000 --- $ 2,400 $ 11,587 $ 11,587 Average interest rates 4.94% --- 5.08% 5.06% --- 6.65% 5.37% Savings and NOW accounts $ 119,825 $16,670 $13,549 $11,161 $10,325 $27,395 $198,925 $198,925 Average interest rates 3.26% 2.61% 2.47% 2.47% 2.01% 1.60% 2.81% Fixed interest rate time deposits $ 142,268 $38,897 $23,927 $17,886 $15,627 --- $238,605 $241,746 Average interest rates 5.57% 6.03% 5.95% 6.41% 6.64% --- 5.82% Variable interest rate time deposits $ 724 $ 584 --- --- --- --- $ 1,308 $ 1,308 Average interest rates 4.09% 4.09% --- --- --- --- 4.09% </TABLE> Quantitative Disclosures of Market Risk <TABLE> <CAPTION> June 30, 2000 Fair Value -------------------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 Thereafter Total 06/30/00 -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Fixed interest rate securities $ 16,944 $18,511 $20,267 $12,361 $ 6,597 $15,656 $ 90,336 $ 90,314 Average interest rates 5.52% 5.74% 5.47% 5.71% 5.32% 5.05% 5.48% Fixed interest rate loans $ 89,281 $70,752 $69,966 $49,184 $ 45,172 $10,025 $334,380 $334,355 Average interest rates 8.27% 8.06% 8.15% 7.92% 7.93% 7.66% 8.08% Variable interest rate loans $ 46,160 $ 1,881 $ 214 $ 43 --- --- $ 48,298 $ 48,298 Average interest rates 9.69% 10.78% 9.58% 10.95% --- --- 9.73% Rate sensitive liabilities Federal funds purchased $ 5,394 --- --- --- --- --- $ 5,394 $ 5,394 Average interest rates 6.25% --- --- --- --- --- 6.25% Savings and NOW accounts $ 105,175 $18,201 $14,249 $12,790 $ 11,054 $27,562 $189,032 $189,032 Average interest rates 3.73% 2.12% 2.13% 2.13% 2.14% 2.14% 3.02% Fixed interest rate time deposits $ 113,464 $33,678 $26,683 $16,915 $ 14,472 --- $205,212 $205,559 Average interest rates 5.61% 6.22% 6.04% 5.76% 6.58% 6.58% 5.84% Variable interest rate time deposits $ 912 $ 370 --- --- --- --- $ 1,282 $ 1,282 Average interest rates 6.01% 6.01% --- --- --- --- 6.01% </TABLE> 21
22 PART II - OTHER INFORMATION Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The registrant's annual meeting of shareholders was held on May 8, 2001. At the meeting the shareholders voted upon the following matters: Proposal 1 - Election of Directors to terms ending 2004: <TABLE> <CAPTION> For Withheld --- -------- <S> <C> <C> James C. Fabiano 2,798,997 49,838 David W. Hole 2,798,997 49,838 L.A. Johns 2,798,997 49,838 Dale Weburg 2,791,492 57,343 </TABLE> Item 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3(ii) Amendments to the Bylaws of IBT Bancorp, Inc. (b) No Reports on Form 8-K were filed or required to be filed for the quarter ended June 30, 2001. 22
23 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: 8/2/01 /s/ David W. Hole ----------- ----------------------------------- David W. Hole, President/CEO /s/ Dennis P. Angner ----------------------------------- Dennis P. Angner, Treasurer (Principal Financial Officer) 23
24 IBT BANCORP EXHIBIT INDEX Exhibit No. Description Page Number - ------- ----------- ----------- 3(ii) Amendment to IBT Bancorp, Inc. Bylaws 25