<PAGE> 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
----------------------------------------------------------
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 25
EXHIBIT INDEX
EXHIBIT NO DESCRIPTION
- ---------- -----------
EX 27 FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,328
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 89,711
<INVESTMENTS-CARRYING> 6,870
<INVESTMENTS-MARKET> 6,890
<LOANS> 262,893
<ALLOWANCE> 3,206
<TOTAL-ASSETS> 392,234
<DEPOSITS> 351,172
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,137
<LONG-TERM> 0
0
0
<COMMON> 5,402
<OTHER-SE> 31,523
<TOTAL-LIABILITIES-AND-EQUITY> 36,925
<INTEREST-LOAN> 15,725
<INTEREST-INVEST> 4,173
<INTEREST-OTHER> 641
<INTEREST-TOTAL> 20,539
<INTEREST-DEPOSIT> 9,711
<INTEREST-EXPENSE> 0
<INTEREST-INCOME-NET> 10,828
<LOAN-LOSSES> 294
<SECURITIES-GAINS> 7
<EXPENSE-OTHER> 9,263
<INCOME-PRETAX> 4,181
<INCOME-PRE-EXTRAORDINARY> 4,181
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,049
<EPS-BASIC> 3.43
<EPS-DILUTED> 3.43
<YIELD-ACTUAL> 4.10
<LOANS-NON> 373
<LOANS-PAST> 617
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,977
<CHARGE-OFFS> 283
<RECOVERIES> 218
<ALLOWANCE-CLOSE> 3,206
<ALLOWANCE-DOMESTIC> 3,206
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,206
</TABLE>
