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 March 31, 2002 -------------- 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 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, 4,287,483 as of April 15, 2002 ----------------------------------------------------------
IBT BANCORP, INC. Index to Form 10-Q <TABLE> <CAPTION> Part I Financial Information Page Numbers <S> <C> <C> Item 1 Consolidated Financial Statements 3-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 Item 3 Quantitative and Qualitative 18 Disclosures About Market Risk Part II Other Information Item 6 Exhibits and Reports on Form 8-K 19 Signature 20 </TABLE> 2
ITEM I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IBT BANCORP, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (in thousands) March 31 December 31 2002 2001 ---- ---- (Unaudited) <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 21,002 $ 22,562 Federal funds sold 39,300 32,900 --------- --------- TOTAL CASH AND CASH EQUIVALENTS 60,302 55,462 Investment securities Securities available for sale (Amortized cost of $132,499 in 2002 and $100,969 in 2001) 133,431 102,518 Securities held to maturity (Fair value -- $2,845 in 2002 and $3,526 in 2001) 2,781 3,454 --------- --------- TOTAL INVESTMENT SECURITIES 136,212 105,972 Loans Agricultural 46,143 48,523 Commercial 127,789 128,098 Residential real estate mortgage 155,629 167,976 Installment 51,733 53,267 --------- --------- TOTAL LOANS 381,324 397,864 Less allowance for loan losses 5,595 5,471 --------- --------- NET LOANS 375,729 392,393 Other assets 39,868 38,316 --------- --------- TOTAL ASSETS $ 612,111 $ 592,143 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 54,495 $ 62,020 NOW accounts 90,948 86,676 Certificates of deposit and other savings 321,761 308,120 Certificates of deposit over $100,000 67,718 59,425 --------- --------- TOTAL DEPOSITS 534,922 516,241 Other borrowed funds 12,446 11,632 Accrued interest and other liabilities 6,829 7,442 ---------- --------- TOTAL LIABILITIES 554,197 535,315 Shareholders' Equity Common stock -- no par value 10,000,000 shares authorized; outstanding-- 4,287,483 in 2002 (3,884,985 in 2001) 44,160 31,017 Retained earnings 13,139 24,788 Accumulated other comprehensive income 615 1,023 --------- --------- TOTAL SHAREHOLDERS' EQUITY 57,914 56,828 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 612,111 $ 592,143 ========= ========= </TABLE> See notes to consolidated financial statements. 3
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31 ------------------------ 2002 2001 ---- ---- <S> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of period 3,884,985 3,871,552 Stock dividend 388,757 --- Issuance of common stock 13,741 6,538 ---------- ---------- BALANCE END OF PERIOD 4,287,483 3,878,090 ========== ========== COMMON STOCK Balance at beginning of period $ 31,017 $ 30,814 Stock dividend 12,829 --- Issuance of common stock 314 84 ---------- ---------- BALANCE END OF PERIOD 44,160 30,898 RETAINED EARNINGS Balance at beginning of period 24,788 21,049 Net income 1,614 1,388 Stock dividend (12,829) --- Cash dividends ($0.10 per share in 2002 and $0.09 in 2001) (434) (387) ---------- ---------- BALANCE END OF PERIOD 13,139 22,050 ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 1,023 67 Unrealized (losses) gains on securities available for sale, net of income taxes and reclassification adjustment (408) 616 ---------- ---------- BALANCE END OF PERIOD 615 683 ---------- ---------- TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 57,914 $ 53,631 ========== ========== </TABLE> See notes to consolidated financial statements. 4
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> (in thousands) Three Months Ended March 31 -------------------- 2002 2001 ---- ---- <S> <C> <C> INTEREST INCOME Loans $7,943 $ 8,854 Investment securities Taxable 945 743 Nontaxable 407 412 Federal funds sold 172 199 ------- -------- TOTAL INTEREST INCOME 9,467 10,208 INTEREST EXPENSE Deposits 3,896 4,921 Borrowed funds and other 175 120 ------- -------- TOTAL INTEREST EXPENSE 4,071 5,041 ------- -------- NET INTEREST INCOME 5,396 5,167 Provision for loan losses 188 162 ------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,208 5,005 NONINTEREST INCOME Trust fees 129 140 Service charges on deposit accounts 69 74 Other service charges and fees 509 441 Gain on sale of mortgage loans 258 95 Title insurance revenue 346 294 Other 257 142 ------- -------- TOTAL NONINTEREST INCOME 1,568 1,186 NONINTEREST EXPENSES Salaries, wages and employee benefits 2,667 2,315 Occupancy 328 298 Furniture and equipment 524 485 Amortization of acquisition intangibles and goodwill 23 137 Other 1,076 1,045 ------- -------- TOTAL NONINTEREST EXPENSES 4,618 4,280 INCOME BEFORE FEDERAL INCOME TAXES 2,158 1,911 Federal income taxes 544 523 ------- -------- NET INCOME $1,614 $ 1,388 ======= ======== Basic net income per share $ 0.38 $ 0.33 ======= ======== Cash dividends per share $ 0.10 $ 0.09 ======= ======== </TABLE> See notes to consolidated financial statements. 5
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) <TABLE> <CAPTION> (dollars in thousands) Three Months Ended March 31 ---------------------- 2002 2001 ---- ---- <S> <C> <C> NET INCOME $1,614 $1,388 Other comprehensive (loss) income before income taxes Unrealized holding (losses) gains arising during period (618) 933 Income tax (benefit) expense related to comprehensive income (210) 317 ------- ------- OTHER COMPREHENSIVE (LOSS) INCOME (408) 616 ------- ------- COMPREHENSIVE INCOME $1,206 $2,004 ======= ======= </TABLE> See notes to consolidated financial statements. 6
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> (in thousands) Three Months Ended March 31 2002 2001 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Net income $ 1,614 $ 1,388 Adjustments to reconcile net income to cash provided by (used in) operations: Provision for loan losses 188 162 Provision for depreciation 336 288 Net amortization of securities 193 44 Increase in cash value of life insurance (115) --- Amortization of intangibles 23 137 Gain on sales of mortgage loans (258) (95) Proceeds from sales of mortgage loans 35,211 13,775 Mortgage loans originated for sale (33,276) (15,958) (Increase) decrease in interest receivable (42) 147 Increase in other assets (492) (191) (Decrease) increase in accrued interest and other expenses (613) 174 -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,769 (129) INVESTING ACTIVITIES Activity in available for sale securities Maturities, calls, and sales 10,726 11,052 Purchases (42,531) (2,488) Activity in held to maturity securities Maturities, calls, and sales 754 555 Net decrease in loans 14,799 2,323 Purchases of equipment and premises (1,052) (1,181) -------- -------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (17,304) 10,261 FINANCING ACTIVITIES Net decrease in noninterest bearing deposits (7,525) (7,871) Net increase in interest bearing deposits 26,206 8,501 Net increase in federal funds borrowed 814 3,995 Cash dividends (434) (387) Proceeds from issuance of common stock 314 84 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 19,375 4,322 -------- -------- INCREASE IN CASH AND CASH EQUIVALENTS 4,840 14,454 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 55,462 28,425 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 60,302 $ 42,879 ======== ======== </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 generally accepted accounting principles for interim financial information and with the instructions to form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002. 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, 2001. NOTE 2 COMPUTATION OF EARNINGS PER SHARE The net income per share amounts are based on the weighted average number of common shares outstanding. The weighted number of common shares outstanding, as adjusted for the 10% stock dividend paid February 28, 2002, were 4,277,809 as of March 31, 2002, and 4,258,713 as of March 31, 2001. The Corporation has no common stock equivalents and, accordingly, presents only basic earnings per share. NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS On January 1, 2002, the Corporation adopted the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets." Statement No. 142 addresses the reporting standards for the acquisition of intangible assets except for business combinations and for goodwill and other intangible assets subsequent to their acquisition. This Statement requires that goodwill be separately disclosed from other intangible assets on the balance sheet and that goodwill and intangible assets with indefinite useful lives no longer be amortized, but, instead, tested for impairment at least annually. The adoption of Statement No. 142 resulted in the reduction of goodwill amortization of $114,000 or $0.02 per share during the three months ended March 31, 2002. As required by the Statement, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. As a result of the Corporation's analysis, no reclassifications were required as of March 31, 2002. Included in other assets on the accompanying consolidated balance sheets are the following amounts: <TABLE> <CAPTION> March 31 December 31 2002 2001 -------- ----------- <S> <C> <C> Goodwill $2,036 $2,036 Core deposit intangibles 468 492 -------- ------- $2,504 $2,528 ======== ======= </TABLE> 8
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 2001 annual report and with the unaudited consolidated financial statements and notes, as set forth on pages 3 through 8 of this report. THREE MONTHS ENDING MARCH 31, 2002 AND 2001 RESULTS OF OPERATIONS Net income equaled $1.61 million for the three month period ended March 31, 2002, compared to $1.39 million for the same period in 2001. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, equaled 1.07% for the first three months of 2002 and 1.02% for 2001. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 11.31% through March 31, 2002 versus 10.50% for the same period in 2001. SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> March 31 ------------------------- 2002 2001 ---- ---- <S> <C> <C> INCOME STATEMENT DATA Net interest income $5,396 $5,167 Provision for loan losses 188 162 Net income 1,614 1,388 PER SHARE DATA Net income $ 0.38 $ 0.33 Cash dividends 0.10 0.09 RATIOS Average primary capital to average assets 10.31% 10.57% Net income to average assets 1.07 1.02 Net income to average equity 11.31 10.50 </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 $397,000 in 2002 versus $299,000 in 2001. For analytical purposes in Tables 1 and 2, 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. 9
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, and Federal Reserve and Federal Home Loan Bank restricted stock is included in other. <TABLE> <CAPTION> Three Months Ending March 31, 2002 March 31, 2001 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 $ 387,798 7,948 8.20% $ 403,204 $ 8,862 8.79% Taxable investment securities 75,278 907 4.82 47,821 699 5.85 Nontaxable investment securities 39,843 617 6.19 33,651 624 7.42 Federal funds sold 41,887 172 1.64 14,689 199 5.42 Other investments 2,696 38 5.64 2,361 44 7.45 --------- ------ ----- --------- -------- ---- Total Earning Assets 547,502 9,682 7.07 501,726 10,428 8.31 NONEARNING ASSETS Allowance for loan losses (5,527) (5,205) Cash and due from banks 22,208 20,616 Premises and equipment 14,987 11,519 Accrued income and other assets 22,541 15,467 --------- --------- TOTAL ASSETS $ 601,711 $ 544,123 ========= ========= INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 91,488 379 1.66 $ 79,747 603 3.02 Savings deposits 135,102 622 1.84 119,660 930 3.11 Time deposits 243,224 2,895 4.76 223,950 3,388 6.05 Borrowed funds 12,245 175 5.72 8,848 120 5.43 --------- ------ ----- --------- -------- ---- Total Interest Bearing Liabilities 482,059 4,071 3.38 432,205 5,041 4.67 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 55,560 53,109 Other 7,002 5,937 Shareholders' equity 57,090 52,872 --------- --------- TOTAL LIABILITIES AND EQUITY $ 601,711 $ 544,123 ========= ========= NET INTEREST INCOME (FTE) $5,611 $ 5,387 ====== ======== NET YIELD ON INTEREST EARNING ASSETS (FTE) 4.10% 4.29% ===== ==== </TABLE> 10
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> Quarter Ended March 31, 2002 Compared to March 31, 2001 Increase (Decrease) Due to --------------------------------------- Volume Rate Net ------ ---- --- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $ (330) $ (584) $(914) Taxable investment securities 347 (139) 208 Nontaxable investment securities 105 (112) (7) Federal funds sold 182 (209) (27) Other investments 6 (12) (6) ------ ------ ----- Total changes in interest income 310 (1,056) (746) Total changes in interest expense 509 (1,479) (970) ------ ------ ----- Net Change in Interest Margin (FTE) $ (199) $ 423 $ 224 ====== ====== ===== </TABLE> 11
IBT BANCORP, INC. TABLE 3: SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) <TABLE> <CAPTION> Year to Date March 31 ----------------------- 2002 2001 ---- ---- <S> <C> <C> Summary of changes in allowance Allowance for loan losses - January 1 $ 5,471 $ 5,162 Loans charged off (171) (121) Recoveries of charged off loans 107 63 ------- ------- Net loans charged off (64) (58) Provision charged to operations 188 162 ------- ------- Allowance for loan losses - March 31 $ 5,595 $ 5,266 ======= ======= Allowance for loan losses as a % of loans 1.47% 1.30% ======= ======= </TABLE> NONPERFORMING LOANS (Dollars in thousands) <TABLE> <CAPTION> March 31 ----------------------- 2002 2001 ---- ---- <S> <C> <C> Total amount of loans outstanding for the period $381,324 $403,576 ======== ======== Nonaccrual loans $ 1,446 $ 1,153 Accruing loans past due 90 days or more 1,662 1,129 Restructured loans --- --- -------- -------- Total $ 3,108 $ 2,282 ======== ======== Loans classified as nonperforming as a % of outstanding loans 0.82% 0.57% ======== ======== </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. 12
NET INTEREST INCOME (CONTINUED) As shown in Tables number 1 and 2, when comparing the three month period ending March 31, 2002 to the same period in 2001, fully taxable equivalent (FTE) net interest income increased $224,000 or 4.2%. An increase of 9.1% in average interest earning assets provided $310,000 of FTE interest income. The majority of this growth was funded by an 11.5% increase in interest bearing liabilities resulting in $509,000 of additional interest expense. Overall, changes in volume resulted in a $199,000 decrease in FTE interest income. The average FTE interest rate earned on assets declined by 1.24%, decreasing the amount of interest earned by $1.06 million. The average rate paid on deposits decreased 1.29%, decreasing interest expense by $1.48 million. The net change related to interest rate earned and paid was a $423,000 increase in FTE net interest income. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 4.10% during 2002 versus 4.29% in 2001. The 0.19% decrease in the FTE interest margin was primarily a result of a significant change in the mix of assets and funding sources. Average loans outstanding declined from 80.4% of average earning assets in the first quarter of 2001 to 70.8% in 2002. The change in asset mix from higher yielding loans to other investments resulted in the loss of approximately $500,000 in FTE interest income. The decline in loans as a percent of total earnings assets was due to the rewriting of three and five year residential balloon mortgages held by the Corporation's subsidiary banks into fixed rate 15 and 30 year mortgages, which were sold on the secondary market. The Corporation earns a gain on sale and other ancillary fee income as a result of the sale which has, to date, offset the loss of interest income. Another significant factor in the decline in interest margins is the decrease in general interest rate levels. As an example, the Corporation earned 1.64% on the average $41.9 million on Federal Funds Sold while paying an average of 1.76% on interest bearing saving and demand deposits. The Corporation's results from operations may be adversely impacted if there is a significant decline in mortgage loan activity. Additionally, the Corporation's increasing reliance on higher cost deposits such as Certificates of Deposit and Money Markets to fund asset growth continues to adversely impact the Corporation's net interest yields. Management expects the Corporation's reliance on higher cost deposits to fund asset growth to continue. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Net loans outstanding represent 61% 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 March 31, 2002 to March 31, 2001, total loans outstanding decreased 4.2%. The provision for loan losses increased $26,000 to $188,000 in the first quarter of 2002 when compared to 2001. The increase in the provision of loan losses resulted from an increase in nonperforming loans of 36.2% and increased uncertainty about economic performance over the coming months. As set forth in Table 3, loans classified as nonperforming were $3.1 million as of March 31, 2002, an $826,000 increase over the prior year. The allowance for loan losses as a percentage of loans equaled 1.47% compared to 1.30% in 2001. In management's opinion, the allowance for loan losses is adequate as of March 31, 2002. 13
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, and gains and losses on investment securities available for sale. Income earned from these sources increased $382,000 during the three month period ending March 31, 2002, compared to the same period in 2001. Significant individual account changes during this period include a $52,000 increase in income from the sale of title insurance and related services, a $163,000 increase in gains on the sale of residential real estate mortgage loans, and a $115,000 increase in income earned on the cash value of corporate owned life insurance. Included in other assets is $9.2 million in cash value of corporate owned life insurance policies. These policies earned an average rate of 5.11% and, due to their preferential tax treatment, have a taxable equivalent rate of 7.75%. These policies are placed with four different insurance companies with an S & P rating of AA+ or better. The Corporation has established a policy that all 15 and 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 $258,000 gain from the sale of $35.2 million in mortgages during the first quarter of 2002 versus an $95,000 gain on the sale of $13.7 million in the same period in 2001. NONINTEREST EXPENSE Noninterest expense increased $338,000 for the first three months of 2002 when compared to the same period in 2001. The largest component of noninterest expense is salaries and employee benefits, which increased $352,000 or 15.2%. The increase is due to additional staffing and normal merit and promotional salary increases, and approximately a 34% increase in benefits due to medical and pension plan expenses. Occupancy and furniture and equipment expenses increased $69,000 or 8.8% in 2002. The majority of this increase is a result of increases in equipment and building depreciation and service contract expenses. Amortization of acquisition intangibles and goodwill declined by $114,000 due to the adoption of Statement No. 142 (for additional information, see page 8, Note 3). All other operating expenses increased $31,000 or 3.0%. The majority of this increase is related to legal expenses and marketing costs. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 2001, total assets increased $20.0 million to $612.1 million. During the first quarter of 2002, major changes in asset mix included a $1.6 million decrease in cash, a $6.4 million increase in fed funds sold, a $30.2 million increase in investment securities, and a $16.7 million decrease in net loans. Deposits during this period increased $18.7 million. Interest bearing deposits increased $26.2 million and noninterest bearing deposits decreased $7.5 million, borrowed funds increased $814,000, and shareholders' equity increased $1.1 million. 14
LIQUIDITY Liquidity management is designed to ensure 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 March 31, 2002, cash and cash equivalents as a percentage of total assets equaled 9.9%, versus 9.4% as of December 31, 2001. During the first three months of 2002, cash provided by operating activities was $2.8 million, investing activities used $17.3 million, and financing activity provided $19.3 million. The accumulated effect of the Corporation's operating, investing, and financing activities was a $4.8 million increase in cash and cash equivalents during the first three months of 2002. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale equaled $133.4 million as of March 31, 2002 and $102.5 million as of December 31, 2001. The Corporation's liquidity is considered adequate by management of the Corporation. CAPITAL The capital of the Corporation consists solely of common stock, surplus, retained earnings, and accumulated other comprehensive income, and increased approximately $1.1 million since December 31, 2001. 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 shareholder's equity plus the allowance for loan losses less unamortized acquisition intangibles, was 9.9% at March 31, 2002. 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 March 31, 2002: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS <TABLE> <CAPTION> IBT Bancorp Actual Required 03/31/02 ------------ ------------ <S> <C> <C> Equity Capital 4.00% 14.39% Secondary Capital* 4.00 1.25 ---- ----- Total Capital 8.00% 15.64% ==== ===== </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. 15
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 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 16
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 March 31, 2002. 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. 17
Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> March 31, 2002 Fair Value --------------------------------------------------------------------------------------- 2003 2004 2005 2006 2007 Thereafter Total 03/31/02 ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 39,300 --- --- --- --- --- $ 39,300 $ 39,300 Average interest rates 1.75% --- --- --- --- --- 1.75% Fixed interest rate securities $ 24,186 $24,289 $37,166 $10,028 $ 7,028 $ 33,515 $136,212 $136,276 Average interest rates --- --- --- --- --- --- --- Fixed interest rate loans $ 97,286 $73,516 $95,513 $22,269 $28,093 $ 15,161 $331,838 $333,115 Average interest rates 7.85% 8.42% 8.10% 8.41% 8.26% 7.59% 8.11% Variable interest rate loans $ 35,352 $ 5,883 $ 3,876 $ 2,176 $ 1,679 $ 520 $ 49,486 $ 49,486 Average interest rates 7.43% 7.40% 6.32% 6.14% 6.01% 6.53% 7.23% Rate sensitive liabilities Federal funds purchased $ 1,065 $ 1,000 --- --- $ 5,000 $ 5,381 $ 12,446 $ 12,576 Average interest rates 0.94% 5.05% --- --- 5.08% 5.72% 5.00% Savings and NOW accounts $134,291 $21,233 $17,273 $14,003 $12,944 $ 32,238 $231,982 $231,982 Average interest rates 1.47% 1.65% 1.57% 2.32% 1.27% 1.19% 1.50% Fixed interest rate time deposits $148,225 $34,232 $18,263 $30,523 $15,840 $ 27 $247,110 $248,659 Average interest rates 5.23% 5.85% 5.95% 5.97% 6.56% --- 5.55% Variable interest rate time deposits $ 998 $ 337 --- --- --- --- $ 1,335 $ 1,335 Average interest rates 4.09% 4.09% --- --- --- --- 4.09% </TABLE> Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> March 31, 2001 Fair Value --------------------------------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter Total 03/31/01 ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 22,600 --- --- --- --- --- $ 22,600 $ 22,600 Average interest rates 4.50% --- --- --- --- --- 5.00% Fixed interest rate securities $ 18,437 $21,570 $12,900 $ 5,604 $ 1,743 $ 19,690 $ 79,944 $ 79,966 Average interest rates 5.43% 5.14% 5.41% 4.94% 4.84% 5.20% 5.24% Fixed interest rate loans $112,636 $73,497 $86,009 $52,105 $25,607 $ 11,932 $361,786 $362,314 Average interest rates 9.05% 6.44% 6.58% 5.75% 7.36% 8.04% 7.31% Variable interest rate loans $ 39,812 $ 1,828 $ 143 $ 7 --- --- $ 41,790 $ 41,790 Average interest rates 4.59% 10.47% 9.74% 10.49% --- --- 4.87% Rate sensitive liabilities Borrowed funds $ 3,039 --- $ 5,000 --- --- $ 2,400 $ 10,439 $ 10,439 Average interest rates 4.98% --- 5.08% --- --- 6.65% 5.41% Savings and NOW accounts $116,875 $16,562 $13,462 $11,085 $10,256 $ 27,201 $195,441 $195,441 Average interest rates 3.78% 1.96% 1.95% 1.96% 1.96% 1.98% 3.05% Fixed interest rate time deposits $133,506 $38,496 $22,625 $14,274 $19,025 --- $227,926 $230,037 Average interest rates 5.71% 6.21% 6.04% 5.76% 6.60% --- 5.90% Variable interest rate time deposits $ 690 $ 462 --- --- --- --- $ 1,152 $ 1,152 Average interest rates 6.01% 6.01% --- --- --- --- 6.01% </TABLE> 18
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 March 31, 2002. 19
SIGNATURE 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: April 30, 2002 /s/ Dennis P. Angner ------------------- ------------------------------ Dennis P. Angner President and CEO (Principal Financial Officer) 20