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 September 30, 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, MI 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, 781,182 as of October 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 18 2
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION <TABLE> <CAPTION> (dollars in thousands) September 30 December 31 1996 1995 ------------- ------------ (Unaudited) <S> <C> <C> ASSETS Cash and demand deposits due from banks . . . . . . . . . . . . . . . . . . . . $ 13,928 $ 15,299 Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,500 6,400 ------------- ----------- TOTAL CASH AND CASH EQUIVALENTS 23,428 21,699 Investment securities: Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . 49,828 56,621 Securities held to maturity (Market value -- $8,729 in 1996 and $9,059 in 1995) . . . . . . . . . . . . . . . . . . . . . 8,796 8,985 ------------- ----------- TOTAL INVESTMENT SECURITIES 58,624 65,606 Loans: Commercial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . 38,185 33,585 Real estate mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,676 115,718 Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,311 36,693 ------------- ----------- TOTAL LOANS 207,172 185,996 Less allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . 2,634 2,248 ------------- ----------- NET LOANS 204,538 183,748 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,136 10,452 ------------- ----------- TOTAL ASSETS $ 297,726 $ 281,505 ============= =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Noninterest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,689 $ 39,620 NOW accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,653 39,883 Certificates of deposit and other savings . . . . . . . . . . . . . . . . . . 172,728 163,642 Certificates of deposit over $100,000 . . . . . . . . . . . . . . . . . . . . 14,999 9,860 ------------- ----------- TOTAL DEPOSITS 267,069 253,005 Accrued interest and other liabilities . . . . . . . . . . . . . . . . . . . . . 3,115 2,695 ------------- ----------- TOTAL LIABILITIES 270,184 255,700 Shareholders' Equity: Common stock -- $6 par value . . . . . . . . . . . . . . . . . . . . . . . . . 4,686 4,220 4,000,000 authorized; outstanding-- 781,073 in 1996 (703,248 in 1995) Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,168 10,220 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,713 10,856 Unrealized (loss) gain on securities available for sale - net of tax credit of $12 in 1996 and taxes of $236 in 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) 509 ------------- ----------- TOTAL SHAREHOLDERS' EQUITY 27,542 25,805 ------------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 297,726 $ 281,505 ============= =========== </TABLE> See notes to consolidated financial statements 3
4 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> (dollars in thousands, except per share data) Three Months Ended Nine Months Ended September 30 September 30 ------------------ ------------------ 1996 1995 1996 1995 ------------------ ------------------ <S> <C> <C> <C> <C> INTEREST INCOME Interest and fees on loans . . . . . . . . . . . . . . . . . . . $ 4,522 $ 4,098 $ 13,001 $11,752 Interest on investment securities: Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 683 678 2,203 1,951 Nontaxable . . . . . . . . . . . . . . . . . . . . . . . . . . 176 200 608 656 -------- ------- -------- ------- TOTAL INTEREST ON INVESTMENT SECURITIES 859 878 2,811 2,607 Interest on fed funds sold . . . . . . . . . . . . . . . . . . . 117 117 292 318 -------- ------- -------- ------- TOTAL INTEREST INCOME 5,498 5,093 16,104 14,677 INTEREST ON DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . 2,506 2,305 7,388 6,595 -------- ------- -------- ------- NET INTEREST INCOME 2,992 2,788 8,716 8,082 Provision for loan losses . . . . . . . . . . . . . . . . . . . . . 128 121 368 351 -------- ------- -------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 2,864 2,667 8,348 7,731 OTHER INCOME Trust Department income . . . . . . . . . . . . . . . . . . . . . 78 92 231 260 Service charges on deposit accounts . . . . . . . . . . . . . . . 70 75 215 224 Other service charges and fees . . . . . . . . . . . . . . . . . 282 265 817 756 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 82 344 208 Gain (loss) on the sale of securities available for sale . . . . . . . . . . . . . . . . . . . . . . 0 (5) 4 (16) -------- ------- -------- ------- TOTAL OTHER INCOME 556 509 1,611 1,432 OPERATING EXPENSES Salaries, wages and employee benefits . . . . . . . . . . . . . . 1,147 1,068 3,437 3,191 Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . 185 145 509 442 Furniture and equipment expense . . . . . . . . . . . . . . . . . 288 272 819 695 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612 563 1,729 1,939 -------- ------- -------- ------- TOTAL OPERATING EXPENSES 2,232 2,048 6,494 6,267 INCOME BEFORE FEDERAL INCOME TAX 1,188 1,128 3,465 2,896 Federal income tax . . . . . . . . . . . . . . . . . . . . . . . . 335 307 953 749 -------- ------- -------- ------- NET INCOME $ 853 $ 821 $ 2,512 $ 2,147 ======== ======= ======== ======= Net income per share . . . . . . . . . . . . . . . . . . . . . . . $ 1.10 $ 1.07 $ 3.24 $ 2.80 ======== ======= ======== ======= Cash dividends per share . . . . . . . . . . . . . . . . . . . . . $ 0.24 $ 0.22 $ 0.72 $ 0.66 ======== ======= ======== ======= </TABLE> See notes to consolidated financial statements. 4
5 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> (dollars in thousands) Nine Months Ended September 30 1996 1995 ------------- ------------ <S> <C> <C> OPERATING ACTIVITIES Interest and fees collected on loans and investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,134 $ 14,331 Other fees and income received . . . . . . . . . . . . . . . . . . . . . . . . . 1,613 1,457 Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,291) (6,427) Cash paid to suppliers and employees . . . . . . . . . . . . . . . . . . . . . . (5,259) (5,579) Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,141) (726) ------------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,056 3,056 INVESTING ACTIVITIES Proceeds from maturities and sale of investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . 20,563 22,399 Proceeds from maturities of investment securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . 2,866 3,154 Purchase of investment securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,314) (14,981) Purchase of investment securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,136) (5,829) Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,158) (8,806) Purchases of equipment and premises . . . . . . . . . . . . . . . . . . . . . . (971) (599) ------------- ----------- NET CASH USED BY INVESTING ACTIVITIES (16,150) (4,662) FINANCING ACTIVITIES Net decrease in non-interest bearing deposits . . . . . . . . . . . . . . . . . 1,069 (4,196) Net increase (decrease) in interest bearing deposits . . . . . . . . . . . . . . 12,995 5,415 Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (564) (502) Sale of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 273 ------------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 13,823 990 ------------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,729 (616) Cash and cash equivalents at beginning of period $ 21,699 $ 18,010 ------------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,428 $ 17,394 ============= =========== </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 only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended September 30, 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 average number of common shares outstanding, as adjusted for the 10% stock dividend paid in March 1996, were 776,390 and 766,456 for the nine month periods ending September 30, 1996 and 1995, respectively. 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. Effective January 1, 1997, the Corporation expects to adopt SFAS No. 125, and although this statement supercedes SFAS No. 122, it retains the accounting for mortgage servicing rights. 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 read in conjunction with the Corporation's 1995 annual report and with the unaudited financial statements and notes thereto, as set forth on pages 3 through 6 of this report. NINE MONTHS ENDING SEPTEMBER 30, 1996 AND 1995 RESULTS OF OPERATIONS Net income equaled $2.51 million for the nine month period ended September 30, 1996, compared to $2.15 million for the same period in 1995, a 17.0% increase. The increase in net income was due primarily to higher net interest income. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, equaled 1.17% for the first nine months of 1996 and 1.09% in 1995. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 12.61% through September 30, 1996 versus 11.95% through September 30, 1995. SUMMARY OF SELECTED FINANCIAL DATA <TABLE> <CAPTION> (Dollars in thousands except per share data) Year to Date September 30 ----------------- 1996 1995 ----------------- <S> <C> <C> INCOME STATEMENT DATA: Net interest income $8,716 $8,082 Provision for loan losses 368 351 Net income 2,512 2,147 PER SHARE DATA: Net income per common share $ 3.24 $ 2.80 Cash dividend per common share 0.72 0.66 RATIOS: Average primary capital to average assets 10.07% 9.87% Net income to average assets 1.17 1.09 Net income to average equity 12.61 11.95 </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 amortization of net deferred loan fees of $472,000 and $430,000 for 1996 and 1995 respectively. 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. 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> Nine Months Ending September 30, 1996 September 30, 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 . . . . . . . . . . . . . . . . . . . . . . $ 195,410 $ 13,076 8.92% $ 177,464 $ 11,831 8.89% Taxable investment securities . . . . . . . . . . 47,310 2,188 6.17 42,670 1,951 6.10 Nontaxable investment securities . . . . . . . . 15,798 921 7.77 16,321 994 8.12 Federal funds sold . . . . . . . . . . . . . . . 7,438 293 5.25 7,197 303 5.61 Other . . . . . . . . . . . . . . . . . . . . . . 344 15 5.81 336 15 5.95 --------- -------- ----- --------- -------- ------ Total Earning Assets 266,300 16,493 8.26% 243,988 15,094 8.25% NONEARNING ASSETS: Allowance for loan losses . . . . . . . . . . . . (2,444) (2,223) Cash and due from banks . . . . . . . . . . . . . 10,876 10,971 Premises and equipment . . . . . . . . . . . . . 5,433 5,223 Accrued income and other assets . . . . . . . . . 5,504 5,079 --------- --------- Total Assets $ 285,669 $ 263,038 ========= ========= INTEREST BEARING LIABILITIES: Interest bearing demand deposits . . . . . . . . $ 39,711 813 2.73% 42,399 973 3.06% Savings deposits . . . . . . . . . . . . . . . . 68,363 1,610 3.14 63,361 1,385 2.91 Time deposits . . . . . . . . . . . . . . . . . . 113,027 4,965 5.86 98,329 4,250 5.76 --------- -------- ----- --------- -------- ------ Total Interest Bearing Liabilities 221,101 7,388 4.46% 204,089 6,608 4.32% NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY: Demand deposits . . . . . . . . . . . . . . . . . 34,888 32,256 Other . . . . . . . . . . . . . . . . . . . . . . 3,121 2,732 Shareholders' equity . . . . . . . . . . . . . . 26,559 23,961 --------- --------- Total Liabilities and Equity $ 285,669 $ 263,038 ========= ========= Net interest income (FTE) . . . . . . . . . . . . . $ 9,105 $ 8,486 ======== ======== Net yield on interest earning assets (FTE) . . . . 4.56% 4.64% ==== ======= </TABLE> 8
9 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> Nine Month Period Ended September 30, 1996 Compared to September 30, 1995 Increase (Decrease) Due to --------------------------------- Volume Rate Net --------- -------- ------- <S> <C> <C> <C> CHANGES IN INTEREST INCOME: Loans $ 1,201 $ 44 $ 1,245 Taxable investment securities 215 22 237 Nontaxable investment securities (31) (42) (73) Federal funds sold 10 (20) (10) Total changes in interest income 1,395 4 1,399 Total changes in interest expense 699 81 780 -------- -------- ------- Net Change in Interest Margin (FTE) $ 696 $ (77) $ 619 ======== ======== ======= </TABLE> 9
10 TABLE 3 IBT BANCORP, INC. SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) <TABLE> <CAPTION> Year to Date September 30 ---------------------------------- 1996 1995 ---------- ---------- <S> <C> <C> Summary of changes in allowance for loan losses: Allowance for loan losses - January 1 $ 2,248 $ 2,083 Loans charged off (208) (280) Recoveries of charged off loans 226 157 ---------- ---------- Net loans recovered (charged off) 18 (123) Provision charged to operations 368 351 ---------- ---------- Allowance for loan losses - Sepember 30 $ 2,634 $ 2,311 ========== ========== Allowance to loan losses as a % of loans 1.27% 1.27% ========== ========== </TABLE> NONPERFORMING LOANS (Dollars in thousands) <TABLE> <CAPTION> September 30 1996 1995 ---------- ---------- <S> <C> <C> Total amount of loans outstanding for the period (net of unearned interest) $ 207,172 $ 182,622 ========== ========== Nonaccrual loans $ 35 $ 861 Accruing loans past due 90 days or more 532 1,011 Restructured loans 0 0 ---------- ---------- Total $ 567 $ 1,872 ========== ========== Loans classified as nonperforming to outstanding loans 0.27% 1.03% ========== ========== Loans classified as substandard to Allowance for loan losses - September 30 21.53% 81.00% ========== ========== </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. 10
11 NET INTEREST INCOME (CONTINUED) As shown in Tables number 1 and 2, when comparing the nine month period ending September 30, 1996 to the same period in 1995, fully taxable equivalent (FTE) net interest income increased $619,000 or 7.3%. An increase of 9.1% in average interest earning assets provided $1,395,000 of FTE interest income. The majority of this increase was funded by an 8.3% increase in interest bearing deposits, resulting in $699,000 of additional interest expense. Overall, changes in volume resulted in $696,000 of additional FTE interest income. The average FTE interest rate earned on assets increased by 0.01%, increasing FTE interest income by $4,000 and the average rate paid on deposits increased by 0.14%, increasing interest expense by $81,000. The increased interest rates earned and paid reduced FTE net interest income by $77,000. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 4.56% during the first nine months of 1996 versus 4.64% in 1995. The 0.08% decrease in the net interest yield was primarily a result of the Corporation's increasing reliance on higher cost deposits such as certificates of deposit and money market accounts to fund asset growth. The percentage of assets funded with these deposits increased from 42.1% in 1995 to 46.7%. Management expects the Corporation's reliance on higher cost deposits to fund asset growth to continue. In addition to changes in asset and liability mix, changes in rates have an impact on the Corporation's interest income. Management expects short term interest rates to remain steady during the remainder of 1996. Based on this expectation, the Corporation's assets and liability repricing characteristics and its increased use of higher cost deposits to fund asset growth, management calculates that the Corporation's FTE net interest margin as a percentage of average assets will decrease slightly through the remainder of 1996. Due to the many factors that can affect net interest income, interest income earned cannot be predicted with any certainty. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Loans outstanding represent 70% of the Corporation's total assets and is the Corporation's single largest concentration of risk. The allowance for loan losses is management's estimation of potential future losses inherent in the existing loan portfolio. Factors used to evaluate the loan portfolio, and thus to determine the current charge to expense, include recent loan loss history, financial condition of borrowers, amount of nonperforming loans, overall economic conditions, and other factors. Comparing the year to date period of September 30, 1996 to the same period in 1995, average loans outstanding increased 10.1%. The provision for loan losses was increased 4.8% to $368,000. The increase in the provision was due to the increase in net outstanding loans. During the first nine months of 1996, the Corporation had a net recovery of loans previously charged-off of $18,000 compared to net loans charged off in 1995 of $123,000. Loans classified as nonperforming were 0.27% of loans as of September 30, 1996 versus 1.03% for 1995. As of September 30, 1996, the allowance for loan losses as a percentage of loans equaled 1.27%. In management's opinion, the allowance for loan losses is adequate as of September 30, 1996. 11
12 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 available for sale. The income earned from these sources increased $179,000 for the nine month period ending September 30, 1996, compared to the same period in 1995. Significant changes were a $55,000 increase in ATM fees, a $29,000 increase in brokerage commissions, a $29,000 decrease in trust fees, a $20,000 increase from income earned on bank owned life insurance, a $38,000 increase from the sale of student loans, net gain on sale of investment securities of $20,000, and a $22,000 increase in gains on the sale of residential real estate mortgages. The Corporation has established a policy that all 15 and 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 1996 other operating income is a $70,000 gain from the sale of $9.7 million in mortgages during the first nine months of 1996 versus a $48,000 gain from the sale of $4.5 million in 1995. NONINTEREST EXPENSE Noninterest expense increased $227,000 or 3.6% for the first nine months of 1996 when compared to 1995. The largest component of noninterest expense is salaries and employee benefits, which increased $246,000 or 7.7%. The majority of this increase is related to an increase in staff, normal merit and promotional salary increases, and accruals for early retirement incentives. Occupancy and furniture and equipment expenses increased $191,000. The increase in these expenses is associated with automatic teller machine operating costs, computer operations, and building and equipment depreciation. Other non-operating expenses decreased $210,000, the most significant change was a $248,000 decrease in FDIC insurance premiums. Congress recently passed legislation requiring commercial banks to pay an assessment for the retirement of debt incurred as part of the FDIC insurance payments for insolvent and troubled savings and loans. The assessment is effective for periods beginning after January 1, 1997. Management calculates that the 1997 cost to the Corporation's subsidiary bank will be immaterial. The legislation also required the payment of a one-time assessment for banks with SAIF insured deposits. The Corporation's subsidiary bank has no liability under this provision. QUARTER ENDED SEPTEMBER 30, 1996 AND 1995 RESULTS OF OPERATIONS Net income equaled $853,000 for the third quarter in 1996 compared to $821,000 for the same period in 1995, a 3.9% increase. The increase in net income was due primarily to higher net interest income. Return on average assets equaled 1.17% for the third quarter in 1996 compared to 1.23% in 1995. Return on average equity equaled 12.48% for the third quarter in 1996, versus 13.34% for the third quarter in 1995. 12
13 SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Quarter Ended September 30 ---------------------------------- 1996 1995 ---------- ---------- <S> <C> <C> INCOME STATEMENT DATA: Net interest income $ 2,992 $ 2,788 Provision for loan losses 128 121 Net income 853 821 PER SHARE DATA: Net income per common share $ 1.10 $ 1.07 Cash dividend per common share 0.24 0.22 RATIOS: Net income to average assets 1.17% 1.23% Net income to average equity 12.48 13.34 </TABLE> NET INTEREST INCOME When comparing net interest income for the third quarter of 1996 to the same period in 1995, a 9.5% increase in average interest-earning assets provided $514,000 of additional FTE interest income. The average rate of interest-earning assets decreased 0.15%, resulting in a $117,000 decrease in FTE interest income. The changes in average balances and rates of earning assets provided an additional $397,000 of FTE interest income. The growth of earning assets was funded primarily by growth in interest-bearing deposits, which increased by 8.4% in 1996. The average cost of these deposits decreased by 0.01%. The changes in the average balances and rate paid on interest-bearing deposits resulted in $188,000 of additional interest expense. Overall, the changes in interest rate earned and paid and average balances resulted in additional net interest income of $209,000 in the third quarter of 1996 when compared to the same period in 1995. PROVISION FOR LOAN LOSSES Comparing the quarter ended September 30, 1996 and 1995, average total loans outstanding increased 12.3%. The allowance for loan losses as a percentage of total outstanding loans was 1.27% as of September 30, 1996 and 1995. During the third quarter of 1996, the Corporation had net $23,000 recovery of loans previously charged off compared to net charge-offs of $30,000 in 1995. The amount provided for loan losses in the third quarter of 1996 was $128,000 versus $121,000 in 1995. The increase in the provision was due to the increase in net outstanding loans. 13
14 TABLE 4 IBT BANCORP, INC. AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME (Dollars in Thousands) The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. This schedule also presents an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a fully taxable equivalent (FTE) basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. <TABLE> <CAPTION> Quarter Ending September 30, 1996 September 30, 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 . . . . . . . . . . . . . . . . . . . . . . $ 203,887 $ 4,547 8.92% $ 181,581 $ 4,128 9.09% Taxable investment securities . . . . . . . . . . 43,786 678 6.19 42,726 678 6.35 Nontaxable investment securities . . . . . . . . 14,085 266 7.55 14,759 303 8.21 Federal funds sold . . . . . . . . . . . . . . . 8,911 117 5.25 8,039 102 5.08 Other . . . . . . . . . . . . . . . . . . . . . . 361 5 5.54 336 5 5.95 --------- -------- ----- --------- -------- ------ Total Earning Assets 271,030 5,613 8.28% 247,441 5,216 8.43% NONEARNING ASSETS: Allowance for loan losses . . . . . . . . . . . . (2,552) (2,275) Cash and due from banks . . . . . . . . . . . . . 11,785 10,442 Premises and equipment . . . . . . . . . . . . . 5,578 5,279 Accrued income and other assets . . . . . . . . . 5,207 5,228 --------- --------- Total Assets $ 291,048 $ 266,115 ========= ========= INTEREST BEARING LIABILITIES: Interest bearing demand deposits . . . . . . . . $ 38,310 258 2.69% $ 40,434 309 3.06% Savings deposits . . . . . . . . . . . . . . . . 68,641 545 3.18 63,941 499 3.12 Time deposits . . . . . . . . . . . . . . . . . . 116,479 1,703 5.85 101,790 1,510 5.93 --------- -------- ----- --------- -------- ------ Total Interest Bearing Liabilities 223,430 2,506 4.49% 206,165 2,318 4.50% NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS EQUITY: Demand deposits . . . . . . . . . . . . . . . . . 37,114 32,452 Other . . . . . . . . . . . . . . . . . . . . . . 3,173 2,882 Shareholders' equity . . . . . . . . . . . . . . 27,331 24,616 --------- --------- Total Liabilities and Equity $ 291,048 $ 266,115 ========= ========= Net interest income (FTE) . . . . . . . . . . . . . $ 3,107 $ 2,898 ======== ======== Net yield on interest earning assets (FTE) . . . . 4.59% 4.68% ====== ======= </TABLE> 14
15 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 September 30, 1996 Compared to September 30, 1995 Increase (Decrease) Due to --------------------------------- Volume Rate Net --------- -------- ------- <S> <C> <C> <C> CHANGES IN INTEREST INCOME: Loans $ 499 (80) 419 Taxable investment securities 17 (17) 0 Nontaxable investment securities (13) (24) (37) Federal funds sold 11 4 15 Total changes in interest income 514 (117) 397 Total changes in interest expense 237 (49) 188 -------- -------- ------- Net Change in Interest Margin (FTE) $ 277 (68) $ 209 ======== ======== ======= </TABLE> 15
16 NONINTEREST INCOME Noninterest income earned in the third quarter of 1996, compared to the same period in 1995, increased $47,000. The most significant changes were a $16,000 increase in ATM fees, a $17,000 increase in gains on the sale of student loans, a $15,000 increase in brokerage commissions, a $ 9,000 increase from income earned on bank owned life insurance, and a $14,000 decrease in trust fees. NONINTEREST EXPENSE Noninterest expense increased $184,000 for the third quarter of 1996 when compared to the same period in 1995. Salaries and employee benefits increased $79,000 due to normal merit and promotional salary increases and accruals for early retirement incentives. Occupancy and furniture and equipment expense increased $56,000. The majority of this increase is related to increases in computer operating expenses, building depreciation, building repairs, and ATM operating expenses. Other operating expenses increased $49,000 due to increases in FDIC deposit insurance expense of $14,000 (a partial refund of 1995's second quarter premium was received in September 1995), printing and office supplies, and donations. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 1995, total assets increased $16.2 million to $297.7 million. As of September 30, 1996, the loan portfolio increased $21.2 million, fed funds sold increased $3.1million, and investment securities decreased $7.0 million when compared to December 31, 1995. Asset growth was funded primarily by a $14.1 million increase in deposits and a $1.7 million increase in shareholders' equity. Interest bearing deposits increased $13.0 million and non-interest bearing deposits increased $1.1 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 the payment of cash dividends. The primary sources of the Corporation's liquidity are cash, cash equivalents, and investment securities available for sale. As of September 30, 1996, cash and cash equivalents as a percentage of total assets equaled 7.9%, versus 7.7% as of December 31, 1995. During the first nine months of 1996, $4.1 million in net cash was provided from operations, and $13.8 million was provided by financing activities. Investing activities used $16.2 million. The accumulated effect of the Corporation's operating, investing, and financing activities was a $1.7 million increase in cash and cash equivalents during the first nine 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 $49.8 million as of September 30, 1996 and $56.6 million as of December 31, 1995. The Corporation's liquidity is considered adequate by the management of the Corporation. 16
17 CAPITAL The capital of the Corporation consists solely of common stock, surplus, retained earnings, and unrealized gains or (losses) on securities available for sale; and increased approximately $1.7 million since December 31, 1995. As of September 30, 1996, the Corporation's capital included $25,000 of unrealized losses on securities available for sale. 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 September 30, 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 September 30, 1996: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS: <TABLE> <CAPTION> IBT Bancorp Actual Required 09/30/96 ----------- ----------- <S> <C> <C> Equity Capital 4.00 15.60 Secondary Capital* 4.00 1.25 Total Capital 8.00 16.85 </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. 17
18 PART II - OTHER INFORMATION Item 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27 - Financial Data Schedule (b) No reports on Form 8-K were filed or required to be filed during the quarter ended September 30, 1996. 18
19 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: November 5, 1996 /s/ David W. Hole ----------------------- ------------------------------------- David W. Hole, President/CEO /s/ Dennis P. Angner ------------------------------------- Dennis P. Angner, Treasurer (Principal Financial and Accounting Officer) 19
20 EXHIBIT INDEX ------------- Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule