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, 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 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, 4,277,798 as of July 27, 2002 --------------------------------------------------------
IBT BANCORP, INC. Index to Form 10-Q <TABLE> <CAPTION> Part I Financial Information Page Numbers <S> <C> 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 </TABLE> 2
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- IBT BANCORP, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (dollars in thousands) June 30 December 31 2002 2001 ---- ---- (Unaudited) <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 25,872 $ 22,562 Federal funds sold 13,900 32,900 -------- -------- TOTAL CASH AND CASH EQUIVALENTS 39,772 55,462 Investment securities Securities available for sale (Amortized cost of $147,418 in 2002 and $100,969 in 2001) 150,041 102,518 Securities held to maturity (Fair value -- $2,089 in 2002 and $3,526 in 2001) 2,021 3,454 -------- -------- TOTAL INVESTMENT SECURITIES 152,062 105,972 Loans Agricultural 53,639 48,523 Commercial 131,026 128,098 Real estate mortgage 157,086 167,976 Installment 53,844 53,267 -------- -------- TOTAL LOANS 395,595 397,864 Less allowance for loan losses 5,640 5,471 -------- -------- NET LOANS 389,955 392,393 Other assets 39,793 38,316 -------- -------- TOTAL ASSETS $621,582 $592,143 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 57,693 $ 62,020 NOW accounts 94,230 86,676 Certificates of deposit and other savings 320,598 308,120 Certificates of deposit over $100 67,842 59,425 -------- -------- TOTAL DEPOSITS 540,363 516,241 Other borrowed funds 12,883 11,632 Accrued interest and other liabilities 8,346 7,442 -------- -------- TOTAL LIABILITIES 561,592 535,315 Shareholders' Equity Common stock -- no par value 10,000,000 shares authorized; outstanding-- 4,277,798 in 2002 (3,884,985 in 2001) 43,798 31,017 Retained earnings 14,461 24,788 Accumulated other comprehensive income 1,731 1,023 -------- -------- TOTAL SHAREHOLDERS' EQUITY 59,990 56,828 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $621,582 $592,143 ======== ======== </TABLE> See notes to consolidated financial statements. 3
IBT BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) (dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30 ------- 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 22,762 20,594 Stock repurchased (18,706) (7,710) ----------- ----------- BALANCE END OF PERIOD 4,277,798 3,884,436 =========== =========== COMMON STOCK Balance at beginning of period $ 31,017 $ 30,814 Stock dividend 12,829 --- Issuance of common stock 569 494 Stock repurchased (617) (238) ----------- ----------- BALANCE END OF PERIOD 43,798 31,070 RETAINED EARNINGS Balance at beginning of period 24,788 21,049 Net income 3,363 3,010 Stock dividend (12,829) --- Cash dividends ($0.10 per share in 2002 and $0.09 in 2001) (861) (775) ----------- ----------- BALANCE END OF PERIOD 14,461 23,284 ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 1,023 67 Unrealized gains on securities available for sale, net of income taxes and reclassification adjustment 708 782 ----------- ----------- BALANCE END OF PERIOD 1,731 849 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY END OF PERIOD $ 59,990 $ 55,203 =========== =========== </TABLE> See notes to consolidated financial statements. 4
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> (in thousands) Three Months Ended Six Months Ended June 30 June 30 ------- ------- 2002 2001 2002 2001 ------------------ ------------------ <S> <C> <C> <C> <C> INTEREST INCOME Loans $ 7,708 $ 8,811 $15,651 $17,745 Investment securities Taxable 1,167 707 2,112 1,450 Nontaxable 441 497 848 829 Federal funds sold 117 323 289 522 ------- ------- ------- ------- TOTAL INTEREST INCOME 9,433 10,338 18,900 20,546 INTEREST EXPENSE Deposits 3,671 4,839 7,567 9,760 Federal funds purchased 179 146 354 266 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 3,850 4,985 7,921 10,026 ------- ------- ------- ------- NET INTEREST INCOME 5,583 5,353 10,979 10,520 Provision for loan losses 162 166 350 328 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,421 5,187 10,629 10,192 NONINTEREST INCOME Trust fees 147 139 276 279 Service charges on deposit accounts 72 73 141 147 Other service charges and fees 526 501 1,035 942 Gain on sale of mortgage loans 162 170 420 265 Title insurance revenue 409 401 755 695 Net realized gain on securities available for sale --- 4 --- 4 Other 256 176 513 318 ------- ------- ------- ------- TOTAL NONINTEREST INCOME 1,572 1,464 3,140 2,650 NONINTEREST EXPENSES Salaries, wages and employee benefits 2,617 2,332 5,284 4,647 Occupancy 333 279 661 577 Furniture and equipment 556 521 1,080 1,006 Amortization of acquisition intangible and goodwill 24 137 47 275 Other 1,118 1,126 2,194 2,170 ------- ------- ------- ------- TOTAL NONINTEREST EXPENSES 4,648 4,395 9,266 8,675 INCOME BEFORE FEDERAL INCOME TAXES 2,345 2,256 4,503 4,167 Federal income taxes 596 634 1,140 1,157 ------- ------- ------- ------- NET INCOME $ 1,749 $ 1,622 $ 3,363 $ 3,010 ======= ======= ======= ======= Basic net income per share $ 0.41 $ 0.37 $ 0.79 $ 0.71 ======= ======= ======= ======= Cash dividends per share $ 0.10 $ 0.09 $ 0.20 $ 0.18 ======= ======= ======= ======= </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 Six Months Ended June 30 June 30 ------- ------- 2002 2001 2002 2001 -------------------------------------- <S> <C> <C> <C> <C> NET INCOME $ 1,749 $ 1,622 $ 3,363 $ 3,010 Other comprehensive income before income taxes Unrealized gains on securities available for sale Unrealized holding gains arising during period 1,691 256 1,073 1,189 Reclassification adjustment for realized gains included in net income --- (4) --- (4) ------- ------- ------- ------- Other comprehensive income before income taxes 1,691 252 1,073 1,185 Income tax expense related to other comprehensive income 575 86 365 403 ------- ------- ------- ------- OTHER COMPREHENSIVE INCOME 1,116 166 708 782 ------- ------- ------- ------- COMPREHENSIVE INCOME $ 2,865 $ 1,788 $ 4,071 $ 3,792 ======= ======= ======= ======= </TABLE> See notes to consolidated financial statements. 6
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) <TABLE> <CAPTION> Six Months Ended June 30 2002 2001 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Net income $ 3,363 $ 3,010 Adjustments to reconcile net income to cash provided by operating activities: Provision for loan losses 350 328 Provision for depreciation 672 575 Net amortization of securities 470 92 Increase in cash value of life insurance (233) --- Amortization of intangibles 47 274 Gain on sale of mortgage loans (420) (265) Proceeds from sales of mortgage loans 55,403 35,283 Mortgage loans originated for sale (49,354) (37,554) Decrease in interest receivable 304 354 Increase in other assets (782) (937) Increase in accrued interest and other liabilities 904 1,130 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,724 2,290 INVESTING ACTIVITIES Activity in available for sale securities Maturities, calls, and sales 19,123 14,839 Purchases (65,365) (17,323) Activity in held to maturity securities Maturities, calls, and sales 754 2,921 Net (increase) decrease in loans (3,541) 456 Purchase of cash value life insurance (414) --- Purchases of equipment and premises (1,435) (1,878) -------- -------- NET CASH USED BY INVESTING ACTIVITIES (50,878) (985) FINANCING ACTIVITIES Net decrease in noninterest bearing deposits (4,327) (2,831) Net increase in interest bearing deposits 28,449 22,820 Net increase in other borrowed funds 1,251 5,143 Cash dividends (861) (775) Proceeds from the issuance of common stock 569 494 Stock repurchased (617) (238) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 24,464 24,613 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,690) 25,918 Cash and cash equivalents at beginning of period 55,462 28,425 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,772 $ 54,343 ======== ======== </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. The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating results for the six month period ended June 30, 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 average number of common shares outstanding, as adjusted for the 10% stock dividend paid February 28, 2002, were 4,276,788 as of June 30, 2002 and 4,262,810 as of June 30, 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 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 $0.05 per share and $0.03 per share for the six month and three month periods ending June 30, 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 June 30, 2002. Included in other assets on the accompanying consolidated balance sheets are the following amounts: <TABLE> <CAPTION> June 30 December 31 2002 2001 ------- ----------- <S> <C> <C> Goodwill $2,036 $2,036 Core deposit intangibles 445 492 ------ ------ $2,481 $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 financial statements and notes, as set forth on pages 3 through 8 of this report. SIX MONTHS ENDING JUNE 30, 2002 AND 2001 RESULTS OF OPERATIONS Net income equaled $3.4 million for the six month period ended June 30, 2002 versus $3.0 million in 2001. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, was 1.10% for the first six months of 2002 and 1.09% in 2001. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 11.70% through June 30, 2002 versus 11.26% for the same period in 2001. SUMMARY OF SELECTED FINANCIAL DATA - --------------------------------------------------------------- (Dollars in thousands except per share data) <TABLE> <CAPTION> Six Months Ended June 30 --------------------- 2002 2001 --------------------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $10,979 $10,520 Provision for loan losses 350 328 Net income 3,363 3,010 PER SHARE DATA Net income per common share $ 0.79 $ 0.71 Cash dividends per common share 0.20 0.18 RATIOS Average primary capital to average assets 10.25% 10.55% Net income to average assets 1.10 1.09 Net income to average equity 11.70 11.26 </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 $747,000 in 2002 versus $709,000 in 2001. 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
TABLE 1 IBT BANCORP, INC. AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME - ------------------------------------------------------- (Dollars in Thousands) The following schedule presents 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 Bank and Federal Home Loan Bank restricted equity holdings are included in other investments. <TABLE> <CAPTION> Six Months Ending June 30, 2002 June 30, 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 $ 387,281 $ 15,656 8.09% $ 403,566 $ 17,759 8.80% Taxable investment securities 87,703 2,032 4.63 46,830 1,358 5.80 Nontaxable investment securities 42,608 1,285 6.03 34,023 1,256 7.38 Federal funds sold 34,629 288 1.66 22,333 522 4.67 Other investments 2,722 81 5.95 2,469 92 7.45 --------- --------- ---- --------- --------- ---- Total Earning Assets 554,943 19,342 6.97 509,221 20,987 8.24 NONEARNING ASSETS Allowance for loan losses (5,587) (5,270) Cash and due from banks 22,267 20,514 Premises and equipment 14,852 11,841 Accrued income and other assets 23,260 15,374 --------- --------- Total Assets $ 609,735 $ 551,680 ========= ========= INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 93,259 717 1.54 $ 80,079 1,121 2.80 Savings deposits 136,775 1,209 1.77 118,949 1,776 2.99 Time deposits 246,138 5,681 4.62 229,555 6,863 5.98 Borrowed funds 12,370 314 5.08 9,776 266 5.44 --------- --------- ---- --------- --------- ---- Total Interest Bearing Liabilities 488,542 7,921 3.24 438,359 10,026 4.57 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 56,238 53,848 Other 7,450 5,986 Shareholders' equity 57,505 53,487 --------- --------- Total Liabilities and Equity $ 609,735 $ 551,680 ========= ========= Net interest income (FTE) $11,421 $10,961 ======= ======= Net yield on interest earning assets (FTE) 4.12% 4.31% ===== ===== </TABLE> 10
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, 2002 Compared to June 30, 2001 Increase (Decrease) Due to ------------------------------------------------ Volume Rate Net ------ ---- --- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $ (698) $(1,405) $(2,103) Taxable investment securities 992 (318) 674 Nontaxable investment securities 284 (255) 29 Federal funds sold 202 (436) (234) Other 9 (20) (11) ------- ------- ------- Total changes in interest income 789 (2,434) 1,645 Total changes in interest expense 935 (3,040) (2,105) ------- ------- ------- Net Change in Interest Margin (FTE) $ (146) $ 606 $ 460 ======= ======= ======= </TABLE> 11
NET INTEREST INCOME, CONTINUED As shown in Tables number 1 and 2, when comparing the six month period ending June 30, 2002 to the same period in 2001, fully taxable equivalent (FTE) net interest income increased $460,000 or 4.2%. An increase of 9.0% in average interest earning assets provided $789,000 of FTE interest income. The majority of this growth was funded by an 11.4% increase in interest bearing liabilities, resulting in $935,000 of additional interest expense. Overall, changes in volume resulted in a $146,000 decrease in FTE interest income. The average FTE interest rate earned on assets decreased by 1.27%, while the amount of interest earned as a result of changes in rate decreased $2.4 million. The average rate paid on deposits decreased by 1.33%, decreasing interest expense by $3.0 million. The net change related to interest rates earned and paid was a $606,000 increase in FTE net interest income. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 4.12% during the first six months of 2002 versus 4.31% for the same period 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 interest rate compression on funding sources. Average loans outstanding declined from 79.3% in the first six months of 2001 to 69.8% in 2002. The change in asset mix from higher yielding loans to other investments resulted in a loss of approximately $800,000 of FTE interest income. The decline in loans as a percent of total earning assets was due to the refinancing 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 to 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 adversely affecting net interest income is the compression of interest rates resulting from the decline in short term interest rate levels. As an example, the Corporation earned 1.66% on the average of $34.6 million in Federal Funds Sold while paying an average of 1.77% on saving deposits. The addition of $17.8 million in saving deposits during the past year resulted in the direct loss of interest income of $20,000. The Corporation acknowledges that, in the short run, decreasing rates on its core deposits result in a decrease in net income, but has consciously decided that, in the long run, these new deposits and account relationships will provide increased earnings. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Net loans outstanding represent 63% of the Corporation's total assets and is the Corporation's single largest concentration of risk. The allowance for loan losses is management's estimation of potential future losses inherent in the existing loan portfolio. Factors used to evaluate the loan portfolio, and thus to determine the current charge to expense, include recent loan loss history, financial condition of borrowers, amount of nonperforming and impaired loans, overall economic conditions, and other factors. Comparing the year to date period of June 30, 2002 to June 30, 2001, the provision for loan losses, despite a decline in loans, was increased $22,000 to $350,000. Year to date 2002, the Corporation had net charge-offs of $181,000 versus $91,000 in 2001. Loans classified as nonperforming were 1.21% of loans as of June 30, 2002 versus 0.57% for June 30, 2001. The increase in nonaccrued loans of $2.1 million since June 30, 2001 is a result of a $1.5 million loan to an agricultural concern which will be liquidated in late fall 2002, and a $500,000 loan secured by real estate to a residential construction contractor. The Corporation has charged off its estimated losses on all nonaccrual loans, and thus expect no further losses. The Corporation's peer group, which includes 299 holding companies with assets between $500 million and $1.0 billion, nonperforming loans to total loans ratio was 0.81% as of June 30, 2002. As of June 30, 2002, the allowance for loan losses as a percentage of loans equaled 1.43%. In management's opinion, the allowance for loan losses is adequate as of June 30, 2002. 12
TABLE 3 IBT BANCORP, INC. SUMMARY OF LOAN LOSS EXPERIENCE - ------------------------------- (Dollars in Thousands) <TABLE> <CAPTION> Year to Date June 30 --------------------------------- 2002 2001 ------- ------- <S> <C> <C> Summary of changes in allowance Allowance for loan losses - January 1 $ 5,471 $ 5,162 Loans charged off (354) (198) Recoveries of charged off loans 173 107 ------- ------- Net loans charged off (181) (91) Provision charged to operations 350 328 ------- ------- Allowance for loan losses - June 30 $ 5,640 $ 5,399 ======= ======= Allowance for loan losses as a % of loans 1.43% 1.33% ======= ======= </TABLE> NONPERFORMING LOANS - -------------------------------------- (Dollars in thousands) <TABLE> <CAPTION> June 30 2002 2001 -------- -------- <S> <C> <C> Total amount of loans outstanding for the period (net of unearned interest) $395,595 $405,668 ======== ======== Nonaccrual loans $ 2,848 $ 770 Accruing loans past due 90 days or more 1,939 1,525 Restructured loans --- --- -------- -------- Total $ 4,787 $ 2,295 ======== ======== Loans classified as nonperforming as a % of outstanding loans 1.21% 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. 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, gains and losses on investment securities available for sale, and other. There was a $490,000 increase in fees earned from these sources during the first six months of 2002 when compared to the same period in 2001. Significant changes during this period include a $96,000 increase in fees from mortgage servicing, a $155,000 increase from the gain on sale of mortgages, and a $233,000 increase in the income earned on the cash value of corporate owned life insurance. Included in other assets is $9.7 million in cash value of corporate owned life insurance policies. These policies earned an average FTE rate of 7.5%. These policies are placed with five different insurance companies with an S&P rating of AA+ or better. 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 $420,000 gain from the sale of $55.4 million in mortgages during the first six months of 2002 versus a $265,000 gain on the sale of $35.3 million in mortgages for the same period in 2001. NONINTEREST EXPENSES Noninterest expenses increased $591,000 or 6.8% during the first six months of 2002 when compared to 2001. The largest component of noninterest expense is salaries and employee benefits, which increased $637,000 or 13.7%. The increase is due to additional staffing, normal merit and promotional salary adjustments, and an increase of approximately 30% in medical and pension expenses. Occupancy and furniture and equipment expenses increased $158,000 or 10.0% in 2002. The increase is related to property tax increases of $20,000, an increase of $30,000 in building depreciation, a $40,000 increase in equipment depreciation, and a $106,000 increase in service contracts. The majority of the aforementioned increases is related to the construction and occupation of a new computer service center. Amortization of goodwill declined by $228,000 due to the adoption of Statement No. 142 (for additional information see page 8, Note 3). All other operating expenses increased $24,000 or 1.1%. QUARTER ENDED JUNE 30, 2002 AND 2001 RESULTS OF OPERATIONS Net income equaled $1.75 million for the second quarter in 2002 versus $1.62 million in 2001. Return on average assets equaled 1.13% for the second quarter of 2002 versus 1.16% for the same period in 2001. Return on average equity equaled 12.08% for the second quarter in 2002, versus 11.99% for the second quarter in 2001. 14
SUMMARY OF SELECTED FINANCIAL DATA - ---------------------------------- (Dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended June 30 --------------------------------- 2002 2001 --------------------------------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $ 5,583 $ 5,353 Provision for loan losses 162 166 Net income 1,749 1,622 PER SHARE DATA Net income per common share $ 0.41 $ 0.37 Cash dividend per common share 0.10 0.09 RATIOS Average primary capital to average assets 10.20 10.53% Net income to average assets 1.13 1.16 Net income to average equity 12.08 11.99 </TABLE> NET INTEREST INCOME When comparing the second quarter of 2002 to 2001, net FTE interest income increased $236,000. An increase of 8.8% in interest earning assets provided $424,000 of FTE interest income. The asset growth was funded primarily by an 11.4% increase in interest bearing liabilities, resulting in $427,000 of increased interest expense. Overall, increased volume resulted in a $3,000 decline in FTE interest income. During the second quarter of 2002, the average FTE interest rate earned on assets decreased by 1.30% and the average rate paid on deposits decreased by 1.38%. The changes in interest rates earned and paid resulted in a $239,000 increase in FTE interest income. The Corporation's FTE net interest yield as a percentage of average earning assets decreased 0.18% to 4.13% in the second quarter of 2002. See page 12 of this report for a discussion of the factors affecting the Corporation's net interest income. PROVISION FOR LOAN LOSSES The amount provided for loan losses in the second quarter of 2002 was $162,000 versus $166,000 in 2001. During the second quarter of 2002 the Corporation had net charge-offs of $117,000 versus $32,000 during the same period of 2001. The allowance for loan losses as a percent of loans was 1.43% as of June 30, 2002, a 0.10% increase since June 30, 2001. NONINTEREST INCOME Noninterest income earned in the second quarter of 2002, when compared to the same period in 2001, increased $108,000 or 7.4%. The most significant changes were a $33,000 increase from the servicing of mortgage loans sold to the secondary market and a $93,000 increase from the income earned on the cash value of Corporate-owned life insurance. 15
TABLE 4 IBT BANCORP, INC. AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME - -------------------------------------------------------------------------------- (Dollars in Thousands) The following schedule presents 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, 2002 June 30, 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 $ 386,763 $ 7,708 7.97% $ 403,927 $ 8,897 8.81% Taxable investment securities 100,127 1,125 4.49 45,838 659 5.75 Nontaxable investment securities 45,373 668 5.89 34,395 632 7.35 Federal funds sold 27,370 116 1.70 29,977 323 4.31 Other 2,748 43 6.26 2,577 48 7.45 --------- --------- ---- --------- --------- ---- Total Earning Assets 562,381 9,660 6.87 516,714 10,559 8.17 NONEARNING ASSETS Allowance for loan losses (5,647) (5,334) Cash and due from banks 22,326 20,411 Premises and equipment 14,716 12,163 Accrued income and other assets 23,976 15,280 --------- --------- Total Assets $ 617,752 $ 559,234 ========= ========= INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 95,029 338 1.42 $ 80,410 518 2.58 Savings deposits 138,447 587 1.70 118,238 846 2.86 Time deposits 249,050 2,786 4.47 235,159 3,475 5.91 Borrowed funds 12,494 139 4.45 10,703 146 5.46 --------- --------- ---- --------- --------- ---- Total Interest Bearing Liabilities 495,020 3,850 3.11 444,510 4,985 4.49 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS EQUITY Demand deposits 56,915 54,587 Other 7,897 6,035 Shareholders' equity 57,920 54,102 --------- --------- Total Liabilities and Equity $ 617,752 $ 559,234 ========= ========= Net interest income (FTE) $5,810 $5,574 ====== ====== Net yield on interest earning assets (FTE) 4.13% 4.31% ===== ===== </TABLE> 16
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, 2002 Compared to June 30, 2001 Increase (Decrease) Due to --------------------------------------------------- Volume Rate Net ------- ------- ------- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $ (367) $ (822) $(1,189) Taxable investment securities 637 (171) 466 Nontaxable investment securities 177 (141) 36 Federal funds sold (26) (181) (207) Other 3 (8) (5) ------- ------- ------- Total changes in interest income 424 (1,323) (899) Total changes in interest expense 427 (1,562) (1,135) ------- ------- ------- Net Change in Interest Margin (FTE) $ (3) $ 239 $ 236 ======= ======= ======= </TABLE> 17
NONINTEREST EXPENSES Noninterest expenses increased $253,000 or 5.8% during the second quarter of 2002 when compared to 2001. Noninterest expense includes salary and benefits, occupancy, and other operating expenses. The largest component of noninterest expense is salaries and employee benefits, which increased $285,000 or 12.2%. The increase is related to normal merit and promotional salary increases, increased medical and pension expenses. Occupancy and furniture and equipment expenses increased $89,000 or 11.1%. The majority of this increase is associated with the occupancy of the operations center. Amortization of goodwill declined $113,000 as a result of the adoption of Statement No. 142 (see page 8, Note 3 for further information). Other operating expenses decreased $8,000 or 0.7%. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 2001, total assets increased $29.4 million to $621.6 million. As of June 30, 2002, the loan portfolio decreased $2.3 million, cash and demand deposits due from bank increased $3.3 million, federal funds sold decreased $19.0 million, and investment securities increased $46.1 million when compared to December 31, 2001. Deposits during this period increased $24.1 million, borrowed funds increased $1.3 million, and shareholders' equity increased $3.2 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, 2002, cash and cash equivalents as a percentage of total assets equaled 6.4%, versus 9.4% as of December 31, 2001. During the first six months of 2002, $10.7 million in net cash was provided from operations and $24.5 million was provided from financing activities. Investing activities used $50.9 million. The accumulated effect of the Corporation's operating, investing and financing activities was a $15.7 million decrease in cash and cash equivalents during the first six 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 $150.0 million as of June 30, 2002 and $102.5 million as of December 31, 2001. 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 $3.2 million since December 31, 2001. 18
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 shareholders' equity plus the allowance for loan losses less unamortized acquisition intangibles and goodwill, was 10.1% as of June 30, 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 June 30, 2002: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS <TABLE> <CAPTION> IBT Bancorp Actual Required 06/30/02 -------- -------- <S> <C> <C> Equity Capital 4.00 14.09% Secondary Capital* 4.00 1.25% ---- ------ Total Capital 8.00 15.34% ==== ====== </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. 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 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. 19
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, 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. 20
*****Consolidated***** Quantitative Disclosures of Market Risk <TABLE> <CAPTION> June 30, 2002 Fair Value ------------------------------------------------------------------------------------------ 2003 2004 2005 2006 2007 Thereafter Total 06/30/02 ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $13,900 --- --- --- --- --- $ 13,900 $13,900 Average interest rates 1.75% --- --- --- --- --- 1.75% Fixed interest rate securities $19,188 $27,738 $41,582 $14,937 $6,961 $41,656 $152,062 $152,130 Average interest rates 4.40% 4.43% 4.07% 4.42% 4.52% 4.81% 4.32% Fixed interest rate loans $100,614 $76,577 $97,687 $24,884 $26,798 $12,738 $339,298 $341,228 Average interest rates 8.08% 8.28% 8.02% 8.11% 8.01% 10.34% 8.19% Variable interest rate loans $40,629 $6,412 $4,428 $2,462 $1,787 $579 $56,297 $56,297 Average interest rates 7.20% 7.22% 6.34% 6.17% 6.05% 6.65% 7.05% Rate sensitive liabilities Other borrowed funds $1,502 $1,000 --- --- $5,000 $5,381 $12,883 $13,082 Average interest rates 0.94% 5.05% --- --- 5.08% 5.72% 4.86% Savings and NOW accounts $145,128 $18,820 $15,309 $12,590 $11,663 $30,939 $234,449 $234,449 Average interest rates 1.25% 1.81% 1.64% 2.53% 1.52% 1.19% 1.40% Fixed interest rate time deposits $143,009 $34,755 $21,775 $27,615 $19,398 $21 $246,573 $248,858 Average interest rates 5.22% 5.81% 5.88% 5.78% 6.20% --- 5.50% Variable interest rate time deposits $1,044 $401 $9 --- $195 --- $1,649 $1,649 Average interest rates 3.52% 4.09% --- --- --- --- 3.23% </TABLE> Quantitative Disclosures of Market Risk <TABLE> <CAPTION> June 30, 2001 Fair Value --------------------------------------------------------------------------------------------- 2002 2003 2004 2005 2006 Thereafter Total 06/30/01 --------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $30,250 --- --- --- --- --- $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> 21
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 7, 2002. At the meeting the shareholders voted upon the following matters: Proposal 1 - Election of Directors to terms ending 2005: <TABLE> <CAPTION> For Withheld --- -------- <S> <C> <C> Gerald D. Cassel 3,135,597 979 Ronald E. Schumacher 3,135,549 1,027 Herbert C. Wybenga 3,128,012 8,564 </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, 2002. 22
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IBT Bancorp, Inc. ------------------- Date: August 2, 2002 /s/ Dennis P. Angner ----------------------- -------------------------------------- Dennis P. Angner, President/CEO and Principal Financial Officer 23
IBT BANCORP EXHIBIT INDEX <TABLE> <CAPTION> Exhibit No. Description Page Number ------- ---------------------------------- ----------- <S> <C> <C> 3(ii) Amendment to the Bylaws of 25 IBT Bancorp, Inc. </TABLE> 24