1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 1996 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 48858 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (517) 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 $6 par value, 776,276 as of March 31, 1996 --------------------------------------------------------
2 IBT BANCORP, INC. Index to Form 10-Q Part I Financial Information Page Number Item 1 Financial Statements 3 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Part II Other Information Item 6 Exhibits and Reports on Form 8-K 14 2
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------------------- IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION <TABLE> <CAPTION> (in thousands) March 31 December 31 1996 1995 ---- ---- (Unaudited) <S> <C> <C> ASSETS Cash and demand deposits due from banks................................... $ 11,412 $ 15,299 Federal funds sold........................................................ 2,800 6,400 ------------- ------------- TOTAL CASH AND CASH EQUIVALENTS 14,212 21,699 Investment securities: (Note 3) Securities available for sale.......................................... 61,000 56,621 Securities held to maturity (Market value -- $9,425 in 1996 and $9,059 in 1995) 9,470 8,985 ------------- ------------- TOTAL INVESTMENT SECURITIES 70,470 65,606 Loans: Commercial and agricultural............................................ 33,628 33,585 Real estate mortgage................................................... 118,464 115,718 Installment............................................................ 37,044 36,693 ------------- ------------- TOTAL LOANS 189,136 185,996 Less allowance for loan losses............................................ 2,390 2,248 ------------- ------------- NET LOANS 186,746 183,748 Other assets.............................................................. 10,681 10,452 ------------- ------------- TOTAL ASSETS $ 282,109 $ 281,505 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing.................................................... $ 31,777 $ 39,620 NOW accounts........................................................... 40,849 39,883 Certificates of deposit and other savings.............................. 169,501 163,642 Certificates of deposit over $100,000.................................. 10,467 9,860 ------------- ------------- TOTAL DEPOSITS 252,594 253,005 Accrued interest and other liabilities.................................... 3,375 2,695 ------------- ------------- TOTAL LIABILITIES 255,969 255,700 Shareholders' Equity: Common stock -- $6 par value........................................... 4,657 4,220 4,000,000 authorized; outstanding-- 776,276 in 1996 (703,248 in 1995) Capital surplus........................................................ 12,982 10,220 Retained earnings...................................................... 8,387 10,856 Unrealized gain on securities available for sale - net of taxes of $58,000 in 1996 and $236,000 in 1995....................................................... 114 509 ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 26,140 25,805 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 282,109 $ 281,505 ============= ============= </TABLE> See notes to consolidated financial statements 3
4 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> Three Months Ended (in thousands) March 31 1996 1995 ---- ---- <S> <C> <C> INTEREST INCOME Interest and fees on loans................................................ $4,160 $3,727 Interest on investment securities: Taxable.................................................................. 780 625 Nontaxable............................................................... 222 230 ------ ------ TOTAL INTEREST ON INVESTMENT SECURITIES 1,002 855 Interest on fed funds sold................................................ 102 98 ------ ------ Total interest income 5,264 4,680 INTEREST ON DEPOSITS........................................................ 2,460 2,082 ------ ------ NET INTEREST INCOME 2,804 2,598 Provision for loan losses................................................... 117 113 ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,687 2,485 OTHER INCOME Trust Department income................................................... 78 87 Service charges on deposit accounts....................................... 72 70 Other service charges and fees............................................ 256 231 Other..................................................................... 98 61 Loss on the sale of securities available for sale...................................................... (3) ------ ------ TOTAL OTHER INCOME 504 446 OPERATING EXPENSES Salaries, wages and employee benefits..................................... 1,132 1,067 Net occupancy expense..................................................... 152 148 Furniture and equipment expense........................................... 244 207 Other..................................................................... 555 677 ------ ------ TOTAL OPERATING EXPENSE 2,083 2,099 INCOME BEFORE FEDERAL INCOME TAX 1,108 832 Federal income tax.......................................................... 296 198 ------ ------ NET INCOME $ 812 $ 634 ====== ====== Net income per share $ 1.05 $ 0.83 ====== ====== Cash dividends $ 0.24 $ 0.22 ====== ====== </TABLE> See notes to consolidated financial statements. 4
5 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) <TABLE> <CAPTION> Three Months Ended March 31 1996 1995 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Interest and fees collected on loans and investments........................................................................ $5,079 $4,567 Other fees and income received.......................................................... 670 434 Interest paid........................................................................... (2,359) (1,967) Cash paid to suppliers and employees.................................................... (1,351) (2,351) Income taxes paid....................................................................... (9) ------ ------ NET CASH PROVIDED BY OPERATING ACTIVITIES 2,030 683 INVESTING ACTIVITIES Proceeds from maturities and sale of investment securities available for sale......................................................... 6,420 10,080 Proceeds from maturities of investment securities held to maturity........................................................... 215 246 Purchase of investment securities available for sale.................................................................... (11,147) (5,684) Purchase of investment securities held to maturity...................................................................... (1,018) Net increase in loans................................................................... (3,115) (1,437) Purchases of equipment and premises..................................................... (379) (132) ------ ----- NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (9,024) 2,893 FINANCING ACTIVITIES Net decrease in non-interest bearing deposits........................................... (7,844) (5,099) Net increase (decrease) in interest bearing deposits.................................... 7,433 (1,621) Cash dividends.......................................................................... (191) (167) Sale of common stock.................................................................... 109 90 ------ ----- NET CASH USED BY FINANCING ACTIVITIES (493) (6,797) ------ ------ DECREASE IN CASH AND CASH EQUIVALENTS (7,487) (3,221) Cash and cash equivalents at beginning of year $ 21,699 $ 18,010 -------- -------- CASH AND CASH EQUIVALENTS AT PERIOD END $ 14,212 $ 14,789 ======== ======== </TABLE> See notes to consolidated financial statements 5
6 IBT BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ended December 31, 1996. 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, 1995. 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 in March 1996, were 773,767 as of March 31, 1996 and 763,957 as of March 31, 1995. NOTE 3 ADOPTION OF SFAS NO. 122 The Corporation adopted Statement of Financial Accounting Standard ("SFAS") No. 122, "Accounting for Mortgage Servicing Rights," an amendment of SFAS Statement No. 65 on January 1, 1996. This statement changed the accounting for mortgage servicing rights retained by the loan originator. Under this standard, if the originator sells mortgage loans and retains the related servicing rights, the total cost of the mortgage loan is allocated between the loan (without servicing rights) and the servicing rights, based on their relative fair values. The cost allocated to mortgage servicing rights must be evaluated periodically for impairment. The adoption of SFAS No. 122 did not have a material impact on the Corporation's consolidated financial statements. 6
7 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 used in conjunction with the Corporation's 1995 annual report and with the unaudited financial statements and notes, as set forth on pages 3 through 6 of this report. THREE MONTHS ENDING MARCH 31, 1996 AND 1995 RESULTS OF OPERATIONS Net income equaled $812,000 as of March 31, 1996, compared to $634,000 for the same period in 1995, a 28.1% increase. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, equaled 1.15% during the first quarter of 1996 compared to 0.97% in 1995. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 12.62% through March 31, 1996 versus 10.76% through March 31, 1995.. SUMMARY OF SELECTED FINANCIAL DATA - -------------------------------------------- (Dollars in thousands except per share data) <TABLE> March 31 -------------------- 1996 1995 ------------------------- <S> <C> <C> INCOME STATEMENT DATA: Net interest income $2,804 $2,598 Provision for loan losses 117 113 Net income 812 634 PER SHARE DATA: Net income per common share $ 1.05 $ .83 Cash dividend per common share 0.24 0.22 RATIOS: Average primary capital to average assets 9.87% 9.77% Net income to average assets 1.15 0.97 Net income to average equity 12.62 10.76 </TABLE> NET INTEREST INCOME Net interest income equals interest income less interest expense and is the primary source of income for IBT Bancorp. In accordance with SFAS No. 91, "Accounting for Loan Fees," interest income includes loan fees of $162,000 in 1996 versus $108,000 in 1995. 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 11) 7
8 TABLE 1 IBT BANCORP, INC. AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME - ------------------------------------------------------- (Dollars in Thousands) The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. This schedule also presents an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a fully taxable equivalent (FTE) basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. <TABLE> <CAPTION> Three Months Ending March 31, 1996 March 31, 1995 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 $187,031 $4,186 8.95 % $174,404 $3,753 8.61 % Taxable investment securities 50,582 775 6.13 43,203 621 5.75 Nontaxable investment securities 17,397 336 7.73 17,414 348 7.99 Federal funds sold 7,781 102 5.24 6,674 98 5.87 Other 336 5 5.95 336 5 5.95 -------- ------ ----- -------- ------ ---- Total Earning Assets 263,127 5,404 8.22 % 242,031 4,825 7.97 % NONEARNING ASSETS: Allowance for loan losses (2,320) (2,153) Cash and due from banks 9,951 11,199 Premises and equipment 5,235 5,143 Accrued income and other assets 5,947 4,936 -------- -------- Total Assets $281,940 $261,156 ======== ======== INTEREST BEARING LIABILITIES: Interest bearing demand deposits 41,388 293 2.83 % 46,380 337 2.91 % Savings deposits 69,165 546 3.16 60,378 433 2.87 Time deposits 109,773 1,621 5.91 96,029 1,313 5.47 -------- ------ ---- -------- ------ ----- Total Interest Bearing Liabilities 220,326 2,460 4.47 % 202,787 2,083 4.11 % NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY: Demand deposits 32,794 32,239 Other 3,075 2,560 Shareholders' equity 25,745 23,570 -------- -------- Total Liabilities and Equity $281,940 $261,156 ======== ======== Net interest income (FTE) $2,944 $2,742 ====== ====== Net yield on interest earning assets (FTE) 4.48 % 4.53 % ====== ====== </TABLE> 8
9 TABLE 2 IBT BANCORP, INC. VOLUME AND RATE VARIANCE ANALYSIS - --------------------------------- (Dollars in Thousands) The following tables set 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, 1996 Compared to March 31, 1995 Increase (Decrease) Due to ------------------------------- Volume Rate Net ------ ---- ---- <S> <C> <C> <C> CHANGES IN INTEREST INCOME: Loans $ 279 $ 154 $ 433 Taxable investment securities 111 43 154 Nontaxable investment securities 0 (12) (12) Federal funds sold 15 (11) 4 Other investments 0 0 0 ------- ------ ------ Total changes in interest income 405 174 579 Total changes in interest expense 229 148 377 ------- ------ ------ Net Change in Interest Margin (FTE) $ 176 $ 26 $ 202 ======= ====== ====== </TABLE> 9
10 TABLE 3 IBT BANCORP, INC. SUMMARY OF LOAN LOSS EXPERIENCE - ------------------------------- (Dollars in Thousands) <TABLE> <CAPTION> Year to Date March 31 ------------------ 1996 1995 ---- ---- <S> <C> <C> Summary of changes in allowance: Allowance for loan losses - January 1 $ 2,248 $ 2,083 Loans charged off (28) (101) Recoveries of charged off loans 53 77 -------- -------- Net loans (charged off) recoveries 25 (24) Provision charged to operations 117 113 -------- -------- Allowance for loan losses - March 31 $ 2,390 $ 2,172 ======== ======== Allowance to loan losses as a % of loans 1.26% 1.24% ===== ===== <CAPTION> NONPERFORMING LOANS - ------------------- (Dollars in thousands) March 31 1996 1995 ---- ---- <S> <C> <C> Total amount of loans outstanding for the period (net of unearned interest) $ 189,136 $ 175,351 ========= ========= Nonaccrual loans $ 136 $ 1,078 Accruing loans past due 90 days or more 601 351 Restructured loans 0 0 --------- --------- Total $ 737 $ 1,429 ========= ========= Loans classified as nonperforming to outstanding loans 0.39% 0.81% ===== ===== </TABLE> There are, to management's knowledge, no other loans which cause management to have serious doubts as to the ability of a borrower to comply with their loan repayment terms. 10
11 NET INTEREST INCOME (CONTINUED) As shown in Tables number 1 and 2, when comparing the three month period ending March 31, 1996 to the same period in 1995, fully taxable equivalent (FTE) net interest income increased $202,000 or 7.4%. An increase of 8.7% in average interest earning assets provided $405,000 of FTE interest income. The majority of this growth was funded by an 8.6% increase in interest bearing deposits, resulting in $229,000 of additional interest expense. Overall, changes in volume resulted in $176,000 of additional FTE interest income. The average FTE interest rate earned on assets increased by 0.25%, increasing FTE interest income by $174,000 and the average rate paid on deposits increased by 0.36%, increasing interest expense by $148,000. The net result of increased interest rate earned and paid increased FTE net interest income by $26,000. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 4.48% during the first three months of 1996 versus 4.53% for the same period in 1995. The 0.06% decline in the net interest yield was primarily a result of a shift in deposits from lower rate demand deposits to savings and certificate of deposits. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Loans outstanding represent 67% 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, and overall economic conditions. Comparing the year to date period of March 31, 1996 to March 31, 1995 average loans outstanding increased 7.2%. The provision for loan losses was increased 3.5% to $117,000 in the first quarter of 1996 when compared to the same period in 1995. The increase in the provision is due to an increase in net loans outstanding. As set forth in Table 3, loans classified as nonperforming were $737,000 as of March 31, 1996, a $692,000 decrease from the prior year. The allowance for loan losses as a percentage of loans equaled 1.26% compared to 1.24% for the same period in 1995. In management's opinion, the allowance for loan losses is adequate as of March 31, 1996. NONINTEREST INCOME Noninterest income consists of trust fees, deposit service charges, fees for other financial services, and gains and losses from the sale of securities classified as available for sale. The income earned from these sources increased $58,000 for the three month period ending March 31, 1996, compared to the same period in 1995. The most significant changes were an $24,000 increase in ATM fees, a $9,000 increase in brokerage commissions, a $21,000 increase in gains on the sale of residential real estate mortgages, and a $9,000 decrease in trust income. 11
12 NONINTEREST INCOME, CONTINUED The Corporation has established a policy that all 30 year amortized fixed rate mortgage loans will be sold. These loans are accounted for according to SFAS 122, (see Note 3 on page 6 for further information) and are sold without recourse. The Corporation retains the servicing of these loans. The calculation of gains on the sale of mortgages exclude at least 25 basis points for the servicing of these loans. Included in other operating income is a $25,000 gain from the sale of $3.1 million in mortgages during the first quarter of 1996 versus a $4,000 gain from the sale of $238,000 in the same period in 1995. NONINTEREST EXPENSE Noninterest expense decreased $16,000 or 6.0% for the first three months of 1996 when compared to the same period in 1995. The largest component of noninterest expense is salaries and employee benefits, which increased $65,000 or 6.1%. The majority of this increase is related to increased staffing and normal merit and promotional salary increases. Occupancy and furniture and equipment expenses increased $27,000 or 9.0% in 1996. The majority of this increase was associated with automatic teller machine operating costs and computer operations. Other noninterest expenses decreased $122,000, an 18.0% decrease. The most significant change was a $131,000 decrease in FDIC premiums. CHANGES IN FINANCIAL POSITION Since December 31, 1995, total assets increased $604,000 to $282.1 million. During the first quarter of 1996, major changes in asset mix include a $7.5 million decrease in cash and cash equivalents, a $4.9 million increase in investment securities, and a $3.1 million increase in net loans. Interest bearing deposits increased $7.4 million and noninterest-bearing deposits decreased $7.8 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 March 31, 1996, cash and cash equivalents as a percentage of total assets equaled 5.0%, versus 7.7% as of December 31, 1995. During the first three months of 1996, $2.0 million in net cash was provided from operations, investing activities used $9.0 million, and financing activities used $493,000. The accumulated effect of the Corporation's operating, investing, and financing activities was a $7.5 million decrease in cash and cash equivalents during the first three months of 1996. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale equaled $61.0 million as of March 31, 1996 and $56.6 million as of December 31, 1995. The Corporation's liquidity is considered adequate by the management of the Corporation. 12
13 CAPITAL The capital of the Corporation consists solely of common stock, surplus, retained earnings, and unrealized gain on securities available for sale and increased $335,000 since December 31, 1995. There are no commitments for significant capital expenditures; however, there are 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, was 10.0% at March 31, 1996. 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, 1996: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS: <TABLE> <CAPTION> IBT Bancorp Required 03/31/96 -------- -------- <S> <C> <C> Equity Capital 4.00 16.08 Secondary Capital* 4.00 1.25 ------ ----- Total Capital 8.00 17.21 ====== ===== </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. 13
14 PART II - OTHER INFORMATION Item 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Not Applicable (b) No reports on Form 8-K were filed or required to be filed during the quarter ended March 31, 1996. 14
15 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: May 2, 1996 /s/ David W. Hole --------------------- --------------------------------------------- David W. Hole, President/CEO /s/ Dennis P. Angner --------------------------------------------- Dennis P. Angner, Chief Financial Officer 15
16 Exhibit Index ------------- <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 27 Financial Data Schedule </TABLE>