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