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, 1999 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, 900,412 as of October 31, 1999 ----------------------------------------------------------
2 IBT BANCORP, INC. Index to Form 10-Q Part I Financial Information Page Numbers Item 1 Financial Statements and Notes 3-8 Item 2 Management's Discussion and 9-20 Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative 21-22 Disclosures About Market Risk Part II Other Information Item 6 Exhibits and Reports on Form 8-K 23 2
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ----------------------------- IBT BANCORP, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> (dollars in thousands) September 30 December 31 1999 1998 ---- ---- (Unaudited) <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 15,328 $ 15,497 Federal funds sold -- 15,000 --------- -------- TOTAL CASH AND CASH EQUIVALENTS 15,328 30,497 Investment securities Securities available for sale (amortized cost of $90,335 in 1999 and $88,015 in 1998) 89,711 89,486 Securities held to maturity (fair value -- $6,890 in 1999 and $6,665 in 1998) 6,870 6,548 --------- -------- TOTAL INVESTMENT SECURITIES 96,581 96,034 Loans Commercial and agricultural 46,957 44,917 Real estate mortgage 176,903 165,553 Installment 39,033 36,238 --------- -------- TOTAL LOANS 262,893 246,708 Less allowance for loan losses 3,206 2,977 --------- -------- NET LOANS 259,687 243,731 Other assets 20,638 18,521 --------- -------- TOTAL ASSETS $ 392,234 $388,783 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 48,393 $ 46,348 NOW accounts 51,990 57,990 Certificates of deposit and other savings 222,999 226,930 Certificates of deposit over $100,000 27,790 18,771 --------- -------- TOTAL DEPOSITS 351,172 350,039 Accrued interest and other liabilities 4,137 4,221 --------- -------- TOTAL LIABILITIES 355,309 354,260 Shareholders' Equity Common stock -- $6 par value 4,000,000 shares authorized; outstanding-- 900,302 in 1999 (881,573 in 1998) 5,402 5,290 Capital surplus 20,210 18,894 Retained earnings 11,725 9,369 Accumulated other comprehensive (loss) income (412) 970 --------- -------- TOTAL SHAREHOLDERS' EQUITY 36,925 34,523 --------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 392,234 $388,783 ========= ======== </TABLE> See notes to consolidated financial statements. 3
4 IBT BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> (dollars in thousands) Nine Months Ended September 30 ------------- 1999 1998 ---- ---- <S> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of period 881,573 792,455 10% stock dividend --- 79,155 Issuance of common stock 18,729 7,757 --------- --------- BALANCE END OF PERIOD 900,302 879,367 ========= ========= COMMON STOCK Balance at beginning of period $ 5,290 $ 4,755 10% stock dividend --- 475 Issuance of common stock 112 46 --------- --------- BALANCE END OF PERIOD 5,402 5,276 CAPITAL SURPLUS Balance at beginning of period 18,894 13,687 10% stock dividend --- 4,670 Issuance of common stock 1,316 403 --------- --------- BALANCE END OF PERIOD 20,210 18,760 RETAINED EARNINGS Balance at beginning of period 9,369 12,248 Net income 3,049 2,580 10% stock dividend --- (5,145) Cash dividends ($0.78 per share in 1999 and $0.75 in 1998) (693) (663) --------- --------- BALANCE END OF PERIOD 11,725 9,020 ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 970 268 Unrealized (losses) gains on securities available for sale, net of income taxes and reclassification adjustment (1,382) 637 --------- --------- BALANCE END OF PERIOD (412) 905 --------- --------- TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 36,925 $ 33,961 ========= ========= </TABLE> See notes to consolidated financial statements. 4
5 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except per share data) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1999 1998 1999 1998 ------------------ ------------------ <S> <C> <C> <C> <C> INTEREST INCOME Loans $ 5,316 $5,126 $15,725 $14,714 Investment securities Taxable 1,151 1,141 3,453 3,300 Nontaxable 259 219 720 648 ------- ------ ------- ------- TOTAL INTEREST ON INVESTMENT SECURITIES 1,410 1,360 4,173 3,948 Federal funds sold 252 138 641 344 ------- ------ ------- ------- TOTAL INTEREST INCOME 6,978 6,624 20,539 19,006 Interest expense on deposits 3,313 3,226 9,711 9,261 ------- ------ ------- ------- NET INTEREST INCOME 3,665 3,398 10,828 9,745 Provision for loan losses 102 115 294 321 ------- ------ ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,563 3,283 10,534 9,424 NONINTEREST INCOME Trust fees 108 103 336 309 Service charges on deposit accounts 79 79 244 232 Other service charges and fees 327 269 930 765 Other 524 205 1,147 428 Gain on sale of mortgage loans 52 70 246 209 Net realized (loss) gain on securities available for sale (4) 2 7 48 ------- ------ ------- ------- TOTAL NONINTEREST INCOME 1,086 728 2,910 1,991 NONINTEREST EXPENSE Salaries, wages and employee benefits 1,717 1,523 4,916 4,271 Occupancy 209 185 607 529 Furniture and equipment 345 306 975 843 Other 966 837 2,765 2,243 ------- ------ ------- ------- TOTAL NONINTEREST EXPENSE 3,237 2,851 9,263 7,886 INCOME BEFORE FEDERAL INCOME TAXES 1,412 1,160 4,181 3,529 Federal income taxes 379 306 1,132 949 ------- ------ ------- ------- NET INCOME $ 1,033 $ 854 $ 3,049 $ 2,580 ======= ====== ======= ======= Net income per share $ 1.15 $ 0.97 $ 3.43 $ 2.95 ======= ====== ======= ======= Cash dividends per share $ 0.26 $ 0.25 $ 0.78 $ 0.75 ======= ====== ======= ======= </TABLE> See notes to consolidated financial statements. 5
6 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 ------------ ------------ 1999 1998 1999 1998 ----------------- ---------------- <S> <C> <C> <C> <C> NET INCOME $ 1,033 $ 854 $ 3,049 $ 2,580 Other comprehensive income before income taxes Unrealized (losses) gains on securities available for sale: Unrealized holding (losses) gains arising during period (560) 958 (2,087) 1,013 Reclassification adjustment for realized losses (gains) included in net income 4 (2) (7) (48) ------- ------- ------- ------- Comprehensive (loss) income before income taxes (556) 956 (2,094) 965 Income tax (benefit) expense related to comprehensive income (322) 325 (712) 328 ------- ------- ------- ------- OTHER COMPREHENSIVE (LOSS) INCOME (234) 631 (1,382) 637 ------- ------- ------- ------- COMPREHENSIVE INCOME $ 799 $ 1,485 $ 1,667 $ 3,217 ======= ======= ======= ======= </TABLE> See notes to consolidated financial statements. 6
7 IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> (dollars in thousands) Nine Months Ended September 30 1999 1998 ---- ---- <S> <C> <C> OPERATING ACTIVITIES Interest and fees collected on loans and investments $ 20,598 $ 18,807 Other fees and income received 2,841 1,976 Interest paid (9,737) (9,262) Cash paid to suppliers and employees (8,337) (7,983) Decrease (increase) in loans originated for sale 2,828 (1,921) Income taxes paid (1,536) (971) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,657 646 INVESTING ACTIVITIES Proceeds from maturities and sales of securities available for sale 19,890 25,131 Proceeds from maturities of securities held to maturity 786 2,502 Purchase of securities available for sale (23,380) (57,450) Purchase of securities held to maturity (222) (260) Net increase in loans (19,078) (18,950) Purchases of equipment and premises (590) (824) Acquisition of branch offices, less cash received --- 37,874 Acquisition of title company --- (1,471) -------- -------- NET CASH USED BY INVESTING ACTIVITIES (22,594) (13,448) FINANCING ACTIVITIES Net increase (decrease) in noninterest bearing deposits 2,045 (1,288) Net (decrease) increase in interest bearing deposits (912) 5,829 Cash dividends (693) (663) Proceeds from issuance of common stock 328 449 -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 768 4,327 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (15,169) (8,475) Cash and cash equivalents at beginning of period 30,497 28,505 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,328 $ 20,030 ======== ======== See notes to consolidated financial statements. </TABLE> 7
8 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, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. 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, 1998. 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 were 888,499 and 874,625 for the nine month periods ending September 30, 1999 and 1998, respectively. 8
9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following is management's discussion and analysis of the major factors that influenced IBT Bancorp's financial performance. This analysis should be read in conjunction with the Corporation's 1998 annual report and with the unaudited consolidated financial statements and notes thereto, as set forth on pages 3 through 8 of this report. On June 30, 1999, IBT Title, a wholly owned subsidiary of Isabella Bank and Trust, acquired Mecosta County Abstract and Title Company. The acquisition was accounted for as a purchase and included premises, equipment, and an abstract title plant. The purchase price was less than 1% of the Corporation's assets. The Results of Operations and Changes in Financial Position included in the operating results is from the date of purchase. NINE MONTHS ENDING SEPTEMBER 30, 1999 AND 1998 RESULTS OF OPERATIONS Net income equaled $3.05 million for the nine month period ended September 30, 1999, compared to $2.58 million for the same period in 1998, an 18.2% increase. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, equaled 1.02% for the first nine months of 1999 and 0.98% in 1998. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 11.73% through September 30, 1999 versus 10.78% through September 30, 1998. SUMMARY OF SELECTED FINANCIAL DATA - ---------------------------------- <TABLE> <CAPTION> (Dollars in thousands except per share data) Year to Date September 30 ------------------------ 1999 1998 ------------------------ <S> <C> <C> INCOME STATEMENT DATA Net interest income $10,828 $9,745 Provision for loan losses 294 321 Net income 3,049 2,580 PER SHARE DATA Net income per common share $ 3.43 $ 2.95 Cash dividends per common share 0.78 0.75 RATIOS Average primary capital to average assets 9.44% 9.85% Net income to average assets 1.02 0.98 Net income to average equity 11.73 10.78 </TABLE> 9
10 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, 1999 September 30, 1998 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 $251,298 $15,818 8.39% $225,814 $14,808 8.74% Taxable investment securities 75,881 3,360 5.90 70,755 3,217 6.06 Nontaxable investment securities 20,283 1,091 7.17 18,554 982 7.06 Federal funds sold 17,720 641 4.82 8,373 344 5.48 Other 1,826 93 6.79 1,507 83 7.34 -------- ------- ---- -------- ------- ---- Total Earning Assets 367,008 21,003 7.63 325,003 19,434 7.97 NONEARNING ASSETS Allowance for loan losses (3,127) (2,919) Cash and due from banks 14,114 12,596 Premises and equipment 8,225 6,757 Accrued income and other assets 10,891 9,485 -------- -------- Total Assets $397,111 $350,922 ======== ======== INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 56,595 1,027 2.42 $ 45,479 918 2.69 Savings deposits 101,399 2,312 3.04 83,019 2,015 3.24 Time deposits 156,119 6,372 5.44 144,993 6,312 5.80 Fed funds purchased --- --- --- 358 16 5.96 -------- ------- ---- -------- ------- ---- Total Interest Bearing Liabilities 314,113 9,711 4.12 273,849 9,261 4.51 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 43,745 41,676 Other 4,583 3,474 Shareholders' equity 34,670 31,923 -------- -------- Total Liabilities and Equity $397,111 $350,922 ======== ======== Net interest income (FTE) $11,292 $10,173 ======= ======= Net yield on interest earning assets (FTE) 4.10% 4.17% ===== ===== </TABLE> 10
11 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, 1999 Compared to September 30, 1998 Increase (Decrease) Due to ------------------------------------------ Volume Rate Net ------ ---- --- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $1,622 $(612) $1,010 Taxable investment securities 229 (86) 143 Nontaxable investment securities 93 16 109 Federal funds sold 343 (46) 297 Other investments 17 (7) 10 ------ ----- ------ Total changes in interest income 2,304 (735) 1,569 Total changes in interest expense 1,094 (644) 450 ------ ----- ------ Net Change in Interest Margin (FTE) $1,210 $ (91) $1,119 ====== ===== ====== </TABLE> 11
12 TABLE 3 IBT BANCORP, INC. SUMMARY OF LOAN LOSS EXPERIENCE - ------------------------------- (Dollars in Thousands) <TABLE> <CAPTION> Year to Date September 30 -------------------------- 1999 1998 ---- ---- <S> <C> <C> Summary of changes in allowance for loan losses Allowance for loan losses - January 1 $ 2,977 $ 2,677 Loans charged off (283) (134) Recoveries of previously charged off loans 218 224 --------- --------- Net loans (charged off) recovered (65) 90 Provision charged to operations 294 321 --------- --------- Allowance for loan losses - September 30 $ 3,206 $ 3,088 ========= ========= Allowance for loan losses as a % of loans 1.22% 1.30% ========= ========= <CAPTION> NONPERFORMING LOANS - ------------------- (Dollars in thousands) September 30 1999 1998 ---- ---- <S> <C> <C> Total amount of loans outstanding at the end of period $ 262,893 $ 238,442 ========= ========= Nonaccrual loans $ 373 $ 278 Accruing loans past due 90 days or more 617 964 Restructured loans --- --- --------- --------- Total $ 990 $ 1,242 ========= ========= Loans classified as nonperforming as a % of outstanding loans 0.38% 0.52% ========= ========= Loans classified as substandard to Allowance for loan losses - September 30 30.88% 40.22% ========= ========= </TABLE> To management's knowledge, there are no other loans which cause management to have serious doubts as to the ability of a borrower to comply with their loan repayment terms. 12
13 NET INTEREST INCOME Net interest income equals interest income less interest expense and is the primary source of income for IBT Bancorp. Interest income includes loan fees of $565,000 in the first nine months of 1999 versus $585,000 for the same period in 1998. For analytical purposes, net interest income is adjusted to a "taxable equivalent" basis by adding the income tax savings from interest on tax-exempt loans and securities, thus making year-to-year comparisons more meaningful. As shown in Tables number 1 and 2, when comparing the nine month period ending September 30, 1999 to the same period in 1998, fully taxable equivalent (FTE) net interest income increased $1.12 million or 11.0%. An increase of 12.9% in average interest earning assets provided $2.3 million of FTE interest income. The majority of this increase was funded by a 14.7% increase in interest bearing deposits, resulting in $1.09 million of additional interest expense. Overall, changes in volume resulted in $1.2 million of additional FTE interest income. The average FTE interest rate earned on assets decreased by 0.34%, decreasing FTE interest income by $735,000 and the average rate paid on deposits decreased by 0.39%, decreasing interest expense by $644,000. The decreased interest rates earned and paid reduced FTE net interest income by $91,000. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 4.10% during 1999 versus 4.17% in 1998. The 0.07% 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. In addition to increased reliance on these funds, the cost of obtaining these funds has risen in relation to other interest rates. Management expects the Corporation's reliance on higher cost deposits to fund asset growth to continue. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Net loans outstanding represent 66% 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, 1999 to September 30, 1998, the provision for loan losses was decreased by $27,000 to $294,000. The provision was reduced due to a decrease in nonperforming loans and extremely moderate amount of net charge-offs of $65,000 or 0.03% of average outstanding loans. The provision for loan losses equaled 0.12% of average outstanding loans. Loans classified as nonperforming were 0.38% of gross loans at the end of third quarter 1999 versus 0.52% in 1998. As of September 30, 1999 the allowance for loan losses was $3.2 million or 1.22% of outstanding loans. Based on management's internal analysis, the allowance for loan losses is believed to be adequate as of September 30, 1999. NONINTEREST INCOME Noninterest income consists of trust fees, deposit service charges, fees for other financial services, gains on sale of mortgage loans sold, and gains and losses on investment securities 13
14 NONINTEREST INCOME, CONTINUED available for sale. There was a $919,000 increase in fees earned from these sources during the nine months of 1999 when compared to the same period in 1998. Significant individual account changes during this period include a $654,000 increase in revenue generated for the sale of title insurance and related services, a $162,000 increase in overdraft fees, a $77,000 increase in ATM access fees, a $35,000 increase in brokerage commissions, a $27,000 increase in trust income, a $41,000 decrease in gains on the sale of investment securities available for sale, and a $37,000 increase in gains on the sale of mortgage loans. The Corporation has established a policy that all 30 year amortized fixed rate mortgage loans will be sold. These loans are sold without recourse. The Corporation retains the servicing of these loans. The calculation of gains on the sale of mortgages exclude at least 25 basis points for the servicing of these loans. Included in other noninterest income is a $246,000 gain from the sale of $32.9 million in mortgages through the third quarter of 1999 versus a $209,000 gain on the sale of $33.0 million for the same period in 1998. NONINTEREST EXPENSE Noninterest expense increased $1.4 million or 17.5% during the first nine months of 1999 when compared to 1998. Since March 31, 1998 the Corporation purchased three branches from Old Kent Bank, acquired Isabella County Abstract and Title in July 1998, started IBT Loan Production in January 1999, and acquired Mecosta County Title and Abstract in June 1999. These acquisitions have had a significant impact on noninterest expense. The largest component of noninterest expense is salaries and employee benefits, which increased $645,000 or 15.1%. Salary expenses related to the acquisitions are estimated to equal $415,000. The remaining increase is related to normal merit and promotional salary increases and to increased staffing. Occupancy and Furniture and equipment expenses increased $210,000 or 15.3% in 1999. Approximately two-thirds of the increase is related to acquisitions. Other significant changes include automatic teller machine operating costs and equipment depreciation related to the installation of the bank's teller terminal computer system. Other operating expenses increased $522,000, a 23.3% increase. The majority of this increase is related to the amortization of acquisition intangibles of $146,000, and $132,000 for the cost of title insurance sold. Printing and office supplies, postage, marketing, and State of Michigan taxes accounted for the majority of the remaining increase. QUARTER ENDED SEPTEMBER 30, 1999 AND 1998 RESULTS OF OPERATIONS Net income equaled $1.03 million for the third quarter in 1999 compared to $854,000 for the same period in 1998, a 21.0% increase. Return on average assets equaled 1.01% for the third quarter in 1999 compared to 0.92% for the same period in 1998. Return on average equity equaled 11.52% for the third quarter in 1999, versus 10.42% for the third quarter in 1998. 14
15 SUMMARY OF SELECTED FINANCIAL DATA - ---------------------------------- (Dollars in thousands except per share data) <TABLE> <CAPTION> Quarter Ended September 30 ---------------------- 1999 1998 ---------------------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $3,665 $3,398 Provision for loan losses 102 115 Net income 1,033 854 PER SHARE DATA Net income per common share $1.15 $0.97 Cash dividends per common share 0.26 0.25 RATIOS Net income to average assets 1.01% 0.92% Net income to average equity 11.52 10.42 </TABLE> NET INTEREST INCOME When comparing net interest income for the third quarter of 1999 to the same period in 1998, a 10.4% increase in average interest-earning assets provided $642,000 of additional FTE interest income. The average rate of interest-earning assets decreased 0.37%, resulting in a $288,000 decrease in FTE interest income. The changes in average balances and the rates earned provided an additional $354,000 of FTE interest income. The growth of earning assets was funded primarily by growth in interest-bearing deposits, which increased by 11.2% in 1999. The average cost of these deposits decreased by 0.34%. The changes in the average balances and rate paid on interest-bearing deposits resulted in $89,000 of additional interest expense. Overall, the changes in interest rate earned and paid and average balances resulted in additional net interest income of $265,000 in the third quarter of 1999 when compared to the same period in 1998. The Corporation's average assets and net interest income were impacted during the third quarter due to a deposit in July 1999 of $23.0 million. This deposit increased the Corporation's quarterly average assets by $5.75 million and decreased its FTE net interest income yield by 0.06%. Without this deposit, the Corporation's average asset growth would have equaled 8.7% and its interest margin 4.14%. PROVISION FOR LOAN LOSSES Comparing the quarter ended September 30, 1999 and 1998, average total loans outstanding increased 8.5%. The allowance for loan losses as a percentage of total outstanding loans was 1.22% as of September 30, 1999 and 1.30% in 1998. During the third quarter of 1999, the Corporation had net charge offs of $31,000. The amount provided for loan losses was $102,000 in 1999 versus $115,000 in 1998. The decrease in the provision was due to a decrease in loans classified as substandard to 0.38% as of September 30, 1999 compared to 0.52% in 1998. 15
16 NONINTEREST INCOME Noninterest income earned in the third quarter of 1999 compared to the same period in 1998, increased $358,000. The most significant change was a $350,000 increase in revenue generated for the sale of title insurance and related services. Other changes include an $18,000 decrease in gains on the sale of loans, and a $41,000 increase in ATM access fees. 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, 1999 September 30, 1998 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 $256,377 $5,346 8.34% $236,220 $5,164 8.74% Taxable investment securities 75,999 1,119 5.89 73,794 1,113 6.03 Nontaxable investment securities 21,632 393 7.27 18,726 345 7.37 Federal funds sold 19,897 252 5.07 10,005 138 5.52 Other 1,736 32 7.37 1,532 28 7.31 -------- ------ ---- -------- ------ ---- Total Earning Assets 375,641 7,142 7.61 340,277 6,788 7.98 NONEARNING ASSETS Allowance for loan losses (3,211) (3,033) Cash and due from banks 14,909 13,676 Premises and equipment 8,939 7,612 Accrued income and other assets 11,428 11,240 -------- -------- Total Assets $407,706 $369,772 ======== ======== INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 58,481 364 2.49 $ 49,563 330 2.66 Savings deposits 102,514 794 3.10 88,489 711 3.21 Time deposits 159,941 2,157 5.39 150,609 2,185 5.80 -------- ------ ---- -------- ------ ---- Total Interest Bearing Liabilities 320,936 3,315 4.13 288,661 3,226 4.47 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 45,562 44,813 Other 5,354 3,530 Shareholders' equity 35,854 32,768 -------- -------- Total Liabilities and Equity $407,706 $369,772 ======== ======== Net interest income (FTE) $3,827 $3,562 ====== ====== Net yield on interest earning assets (FTE) 4.08% 4.19% ===== ===== </TABLE> 16
17 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, 1999 Compared to September 30, 1998 Increase (Decrease) Due to -------------------------- Volume Rate Net ------ ---- --- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $428 $(246) $182 Taxable investment securities 32 (26) 6 Nontaxable investment securities 53 (5) 48 Federal funds sold 126 (12) 114 Other Investments 3 1 4 ---- ----- ---- Total changes in interest income 642 (288) 354 Total changes in interest expense 297 (208) 89 ---- ----- ---- Net Change in Interest Margin (FTE) $345 $ (80) $265 ==== ===== ==== </TABLE> 17
18 NONINTEREST EXPENSE Noninterest expense increased $386,000 during the third quarter of 1999 when compared to 1998. Noninterest expense includes salary and benefits, occupancy, and other operating expenses. The previously discussed acquisitions account for $217,000 of the increase in these expenses. Comparing 1999 to 1998, salaries and employee benefits increased $194,000, occupancy expense and furniture and equipment expense increased $63,000, and other operating expenses increased $129,000. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 1998, total assets increased $3.5 million to $392.2 million. During this period the loan portfolio increased $16.2 million, fed funds sold decreased $15.0 million, and investment securities increased $0.5 million. Changes in funding sources include a $2.0 increase in noninterest bearing deposits, a decrease in interest bearing deposits of $0.9 million and a $2.4 million increase in shareholders' equity. LIQUIDITY Liquidity management is designed to have adequate resources available to meet depositor and borrower discretionary demands for funds. Liquidity is also required to fund expanding operations, investment opportunities, and the payment of cash dividends. The primary sources of the Corporation's liquidity are cash, cash equivalents, and investment securities available for sale. As of September 30, 1999, cash and cash equivalents as a percentage of total assets equaled 3.9%, versus 7.8% as of December 31, 1998. During the first nine months of 1999, $6.7 million in net cash was provided from operations, and $768,000 was provided by financing activities. Investing activities used $22.6 million. The accumulated effect of the Corporation's operating, investing, and financing activities was a $15.2 million decrease in cash and cash equivalents during the first nine months of 1999. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale equaled $89.7 million as of September 30, 1999 and $89.5 million as of December 31, 1998. The Corporation's liquidity is considered adequate by the management of the Corporation. 18
19 CAPITAL The capital of the Corporation consists solely of common stock, surplus, retained earnings, and accumulated other comprehensive income; and increased approximately $2.4 million since December 31, 1998. In conjunction with the acquisition of Mecosta County Abstract and Title Corporation, the Corporation issued 14,014 shares valued at $1.1 million. There are significant capital regulatory constraints placed on the Corporation's capital. The Federal Reserve Board's current recommended minimum tier 1 and tier 2 capital to average assets requirement is 6.0%. The Corporation's tier 1 and tier 2 capital to average assets, which consists of shareholders' equity plus the allowance for loan losses, less unamortized acquisition intangible, was 9.3% at September 30, 1999. 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, 1999: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS IBT Bancorp Actual Required 09/30/99 -------- -------- Equity Capital 4.00% 13.59% Secondary Capital* 4.00 1.25 Total Capital 8.00% 14.84% * 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. THE YEAR 2000 The year 2000 (Y2K) poses a significant risk to financial institutions because of their reliance on automation to manage information. If an automated computer application failed to work properly, it would be difficult, if not impossible, to conduct business. There are three basic risk areas: (1) application software and hardware, (2) spillover business risk, and (3) systemic. As of September 30, 1999, the management of the Bank believes that it is in compliance with all regulatory Y2K requirements. 19
20 APPLICATION SOFTWARE AND HARDWARE Isabella Bank and Trust relies solely on outside vendors to provide its main operating system. The main operating system processes customer information and internal accounting information. The failure of any one of its components to be year 2000 compliant could result in financial loss and/or the loss of customer and investor confidence. The Bank has assessed each component of its information systems. The various hardware and software components were risk rated for year 2000 compliance risk as either high, moderate or low. The ratings were based on management's assessment as to the importance of a system in performing its mission critical functions. Systems and applications that were rated as a high risk include the AS 400, NCR sorter and reader, bank application software, and trust services software. As of September 30, 1999, these systems have been upgraded, tested, and validated for year 2000 compliance. Systems that are not mission critical or which have functions which can be done manually were risk rated as either low or moderate and include ATM systems, ACH software, loan and deposit documentation software, and personal computers and their related software. These systems have been upgraded, tested, and validated for year 2000 compliance. SPILLOVER BUSINESS RISK Many of the Bank's loan customers and suppliers utilize computers in their day to day operations. Failure of customers or suppliers to make the necessary adjustments could lead to a loss of business and loss of asset value and could create risk for the Bank. Management has reviewed its list of customers and suppliers to identify those who, based on their products or services, are most likely to have year 2000 compliance issues. These customers and providers were individually contacted to assess their current state of readiness. The Bank will continue to monitor progress of customers and suppliers that it identified as having a material year 2000 compliance risk. SYSTEMIC Banks have extensive institutional linkages. Critical linkages include the correspondent relationships for Federal funds sales and purchases, investment security safekeeping, the Federal Reserve wire transfer and automatic clearing house systems, and check processing systems. Each one of these is an important component of the payment system. The failure of any one of these systems could create an inability for the Bank to conduct business as usual. The Bank exerts no control over these systems and/or the organizations that provide these linkages. A problem in one part of the payment or settlement systems would quickly affect the entire system. Other less critical linkages include ATM networks, credit reporting systems, mortgage loans sold delivery systems, and credit card processing networks. The Corporation has prepared, and will continue to upgrade as necessary, a contingency plan in case any component of its service providing system fails as a result of year 2000. These plans include utilizing information processing backup sites, identifying replacement software vendors, and manually processing, where it may be done cost effectively. FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which are based on management's current expectation regarding economic, legislative and regulatory issues that may impact the Corporation's earnings 20
21 in future periods. Factors that could cause future results to vary from current management's expectations include, but are not limited to general economic conditions: changes in accounting principles, policies or guidelines; changes in legislation and regulation; changes in the ability of the Corporation, its vendors and customers to respond effectively to the year 2000 issue; and other economic, competitive, governmental, regulatory and technological factors affecting the Corporation's operations, pricing, products and services. 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 agricultural and 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 21
22 and timing of the cash flows and the repricing interest rates of those cash flows, the Corporation can project the effect of changing interest rates on its interest income. The following table provides information about the Corporation's assets and liabilities that are sensitive to changes in interest rates as of September 30, 1999. 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. Quantitative Disclosures of Market Risk <TABLE> <CAPTION> September 30 Fair Value -------------------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 Thereafter Total 09/30/99 -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 0 --- --- --- --- --- $ 0 $ 0 Average interest rates 0.00% --- --- --- --- --- 0.00% Fixed interest rate securities $25,117 $18,406 $18,984 $15,044 $ 8,739 $10,291 $ 96,581 $ 96,601 Average interest rates 5.63% 5.84% 5.57% 5.65% 5.77% 6.33% 5.75% Fixed interest rate loans $74,190 $53,468 $47,724 $26,659 $35,213 $10,070 $247,324 $247,842 Average interest rates 8.00% 8.10% 7.79% 7.96% 7.61% 7.66% 7.91% Variable interest rate loans $13,442 $ 1,768 $ 306 $ 53 --- --- $ 15,569 $ 15,569 Average interest rates 10.00% 10.37% 8.69% 8.52% --- --- 10.01% Rate sensitive liabilities Savings and NOW accounts $80,122 $13,238 $10,509 $ 7,721 $ 7,713 $30,050 $149,353 $149,353 Average interest rates 3.50% 2.15% 2.15% 2.15% 2.15% 2.15% 2.87% Fixed interest rate time deposits $83,211 $20,191 $22,946 $13,123 $12,822 $ 5 $152,298 $152,341 Average interest rates 5.01% 5.58% 6.23% 5.97% 5.47% 5.34% 5.39% Variable interest rate time deposits $ 670 $ 449 $ 9 --- --- --- $ 1,128 $ 1,128 Average interest rates 4.96% 4.96% 4.96% --- --- --- 4.96% </TABLE> Quantitative Disclosures of Market Risk <TABLE> <CAPTION> September 30 Fair Value -------------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 Thereafter Total 09/30/98 -------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 9,800 --- --- --- --- --- $ 9,800 $ 9,800 Average interest rates 5.45% --- --- --- --- --- 5.45% Fixed interest rate securities $ 9,553 $25,742 $17,966 $16,290 $ 8,020 $17,822 $ 95,393 $ 95,508 Average interest rates 5.33% 5.87% 5.90% 5.85% 5.95% 6.63% 5.77% Fixed interest rate loans $69,937 $48,029 $52,191 $19,450 $23,707 $ 9,592 $222,906 $226,227 Average interest rates 8.46% 8.37% 8.09% 8.27% 7.98% 7.58% 8.25% Variable interest rate loans $12,179 $ 2,308 $ 714 $ 235 --- $ 100 $ 15,536 $ 15,536 Average interest rates 9.02% 10.17% 9.60% 10.15% --- 8.12% 9.29% Rate sensitive liabilities Savings and NOW accounts $59,103 $15,856 $12,736 $10,774 $ 9,931 $29,683 $138,083 $138,083 Average interest rates 3.60% 2.56% 2.56% 2.54% 2.54% 2.67% 3.02% Fixed interest rate time deposits $89,032 $19,898 $11,639 $16,202 $11,006 $ 129 $147,906 $147,337 Average interest rates 5.50% 6.05% 6.08% 6.62% 6.07% 6.50% 5.79% Variable interest rate time deposits $ 762 $ 303 $ 5 --- --- --- $ 1,070 $ 1,070 Average interest rates 5.29% 5.29% 5.29% --- --- --- 5.29% </TABLE> 22
23 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, 1999. 23
24 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: 11-9-99 /s/David W. Hole ---------------------------- -------------------------------------------- David W. Hole, President/CEO /s/Dennis P. Angner -------------------------------------------- Dennis P. Angner, Treasurer (Principal Financial and Accounting Officer) 24
25 EXHIBIT INDEX EXHIBIT NO DESCRIPTION - ---------- ----------- EX 27 FINANCIAL DATA SCHEDULE