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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 2002
-------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from to
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Commission File Number: 0-18415
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IBT Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2830092
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway 48858
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(989) 772-9471
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(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock no par value, 4,277,798 as of July 27, 2002
--------------------------------------------------------
IBT BANCORP, INC.
Index to Form 10-Q
Part I Financial Information Page Numbers
Item 1 Financial Statements 3-8
Item 2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9-19
Item 3 Quantitative and Qualitative
Disclosures About Market Risk 20-21
Part II Other Information
Item 4 Submission of Matters to a Vote of
Security Holders 22
Item 6 Exhibits and Reports on Form 8-K 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
IBT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands) June 30 December 31
2002 2001
---- ----
(Unaudited)
ASSETS
Cash and demand deposits due from banks $ 25,872 $ 22,562
Federal funds sold 13,900 32,900
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 39,772 55,462
Investment securities
Securities available for sale (Amortized cost of
$147,418 in 2002 and $100,969 in 2001) 150,041 102,518
Securities held to maturity (Fair value --
$2,089 in 2002 and $3,526 in 2001) 2,021 3,454
-------- --------
TOTAL INVESTMENT SECURITIES 152,062 105,972
Loans
Agricultural 53,639 48,523
Commercial 131,026 128,098
Real estate mortgage 157,086 167,976
Installment 53,844 53,267
-------- --------
TOTAL LOANS 395,595 397,864
Less allowance for loan losses 5,640 5,471
-------- --------
NET LOANS 389,955 392,393
Other assets 39,793 38,316
-------- --------
TOTAL ASSETS $621,582 $592,143
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 57,693 $ 62,020
NOW accounts 94,230 86,676
Certificates of deposit and other savings 320,598 308,120
Certificates of deposit over $100 67,842 59,425
-------- --------
TOTAL DEPOSITS 540,363 516,241
Other borrowed funds 12,883 11,632
Accrued interest and other liabilities 8,346 7,442
-------- --------
TOTAL LIABILITIES 561,592 535,315
Shareholders' Equity
Common stock -- no par value
10,000,000 shares authorized; outstanding--
4,277,798 in 2002 (3,884,985 in 2001) 43,798 31,017
Retained earnings 14,461 24,788
Accumulated other comprehensive income 1,731 1,023
-------- --------
TOTAL SHAREHOLDERS' EQUITY 59,990 56,828
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $621,582 $592,143
======== ========
See notes to consolidated financial statements.
3
IBT BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)
(dollars in thousands)
Six Months Ended
June 30
-------
2002 2001
---- ----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 3,884,985 3,871,552
Stock dividend 388,757 ---
Issuance of common stock 22,762 20,594
Stock repurchased (18,706) (7,710)
----------- -----------
BALANCE END OF PERIOD 4,277,798 3,884,436
=========== ===========
COMMON STOCK
Balance at beginning of period $ 31,017 $ 30,814
Stock dividend 12,829 ---
Issuance of common stock 569 494
Stock repurchased (617) (238)
----------- -----------
BALANCE END OF PERIOD 43,798 31,070
RETAINED EARNINGS
Balance at beginning of period 24,788 21,049
Net income 3,363 3,010
Stock dividend (12,829) ---
Cash dividends ($0.10 per share in 2002 and $0.09 in 2001) (861) (775)
----------- -----------
BALANCE END OF PERIOD 14,461 23,284
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period 1,023 67
Unrealized gains on securities available for sale, net
of income taxes and reclassification adjustment 708 782
----------- -----------
BALANCE END OF PERIOD 1,731 849
----------- -----------
TOTAL SHAREHOLDERS' EQUITY END OF PERIOD $ 59,990 $ 55,203
=========== ===========
See notes to consolidated financial statements.
4
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands) Three Months Ended Six Months Ended
June 30 June 30
------- -------
2002 2001 2002 2001
------------------ ------------------
INTEREST INCOME
Loans $ 7,708 $ 8,811 $15,651 $17,745
Investment securities
Taxable 1,167 707 2,112 1,450
Nontaxable 441 497 848 829
Federal funds sold 117 323 289 522
------- ------- ------- -------
TOTAL INTEREST INCOME 9,433 10,338 18,900 20,546
INTEREST EXPENSE
Deposits 3,671 4,839 7,567 9,760
Federal funds purchased 179 146 354 266
------- ------- ------- -------
TOTAL INTEREST EXPENSE 3,850 4,985 7,921 10,026
------- ------- ------- -------
NET INTEREST INCOME 5,583 5,353 10,979 10,520
Provision for loan losses 162 166 350 328
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,421 5,187 10,629 10,192
NONINTEREST INCOME
Trust fees 147 139 276 279
Service charges on deposit accounts 72 73 141 147
Other service charges and fees 526 501 1,035 942
Gain on sale of mortgage loans 162 170 420 265
Title insurance revenue 409 401 755 695
Net realized gain on securities available for sale --- 4 --- 4
Other 256 176 513 318
------- ------- ------- -------
TOTAL NONINTEREST INCOME 1,572 1,464 3,140 2,650
NONINTEREST EXPENSES
Salaries, wages and employee benefits 2,617 2,332 5,284 4,647
Occupancy 333 279 661 577
Furniture and equipment 556 521 1,080 1,006
Amortization of acquisition intangible and goodwill 24 137 47 275
Other 1,118 1,126 2,194 2,170
------- ------- ------- -------
TOTAL NONINTEREST EXPENSES 4,648 4,395 9,266 8,675
INCOME BEFORE FEDERAL INCOME TAXES 2,345 2,256 4,503 4,167
Federal income taxes 596 634 1,140 1,157
------- ------- ------- -------
NET INCOME $ 1,749 $ 1,622 $ 3,363 $ 3,010
======= ======= ======= =======
Basic net income per share $ 0.41 $ 0.37 $ 0.79 $ 0.71
======= ======= ======= =======
Cash dividends per share $ 0.10 $ 0.09 $ 0.20 $ 0.18
======= ======= ======= =======
See notes to consolidated financial statements.
5
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(dollars in thousands)
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2002 2001 2002 2001
--------------------------------------
NET INCOME $ 1,749 $ 1,622 $ 3,363 $ 3,010
Other comprehensive income before income taxes
Unrealized gains on securities available for sale
Unrealized holding gains arising during
period 1,691 256 1,073 1,189
Reclassification adjustment for realized
gains included in net income --- (4) --- (4)
------- ------- ------- -------
Other comprehensive income before income taxes 1,691 252 1,073 1,185
Income tax expense related to other
comprehensive income 575 86 365 403
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME 1,116 166 708 782
------- ------- ------- -------
COMPREHENSIVE INCOME $ 2,865 $ 1,788 $ 4,071 $ 3,792
======= ======= ======= =======
See notes to consolidated financial statements.
6
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six Months Ended
June 30
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $ 3,363 $ 3,010
Adjustments to reconcile net income to cash
provided by operating activities:
Provision for loan losses 350 328
Provision for depreciation 672 575
Net amortization of securities 470 92
Increase in cash value of life insurance (233) ---
Amortization of intangibles 47 274
Gain on sale of mortgage loans (420) (265)
Proceeds from sales of mortgage loans 55,403 35,283
Mortgage loans originated for sale (49,354) (37,554)
Decrease in interest receivable 304 354
Increase in other assets (782) (937)
Increase in accrued interest and other liabilities 904 1,130
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,724 2,290
INVESTING ACTIVITIES
Activity in available for sale securities
Maturities, calls, and sales 19,123 14,839
Purchases (65,365) (17,323)
Activity in held to maturity securities
Maturities, calls, and sales 754 2,921
Net (increase) decrease in loans (3,541) 456
Purchase of cash value life insurance (414) ---
Purchases of equipment and premises (1,435) (1,878)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (50,878) (985)
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits (4,327) (2,831)
Net increase in interest bearing deposits 28,449 22,820
Net increase in other borrowed funds 1,251 5,143
Cash dividends (861) (775)
Proceeds from the issuance of common stock 569 494
Stock repurchased (617) (238)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 24,464 24,613
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,690) 25,918
Cash and cash equivalents at beginning of period 55,462 28,425
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39,772 $ 54,343
======== ========
See notes to consolidated financial statements.
7
IBT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Operating results for the six month
period ended June 30, 2002 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2002. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Corporation's annual report for the year ended December 31, 2001.
NOTE 2 COMPUTATION OF EARNINGS PER SHARE
The net income per share amounts are based on the weighted average number of
common shares outstanding. The weighted average number of common shares
outstanding, as adjusted for the 10% stock dividend paid February 28, 2002, were
4,276,788 as of June 30, 2002 and 4,262,810 as of June 30, 2001. The Corporation
has no common stock equivalents and, accordingly, presents only basic earnings
per share.
NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Corporation adopted the Financial Accounting Standards
Board (FASB) Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets." Statement No. 142 addresses the reporting and other
intangible assets subsequent to their acquisition. This Statement requires that
goodwill be separately disclosed from other intangible assets on the balance
sheet and that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but, instead, tested for impairment at least annually. The
adoption of Statement No. 142 resulted in the reduction of goodwill amortization
of $0.05 per share and $0.03 per share for the six month and three month periods
ending June 30, 2002.
As required by the Statement, intangible assets that do not meet the criteria
for recognition apart from goodwill must be reclassified. As a result of the
Corporation's analysis, no reclassifications were required as of June 30, 2002.
Included in other assets on the accompanying consolidated balance sheets are the
following amounts:
June 30 December 31
2002 2001
------- -----------
Goodwill $2,036 $2,036
Core deposit intangibles 445 492
------ ------
$2,481 $2,528
====== ======
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following is management's discussion and analysis of the major factors that
influenced IBT Bancorp's financial performance. This analysis should be read in
conjunction with the Corporation's 2001 annual report and with the unaudited
financial statements and notes, as set forth on pages 3 through 8 of this
report.
SIX MONTHS ENDING JUNE 30, 2002 AND 2001
RESULTS OF OPERATIONS
Net income equaled $3.4 million for the six month period ended June 30, 2002
versus $3.0 million in 2001. Return on average assets, which measures the
ability of the Corporation to profitably and efficiently employ its resources,
was 1.10% for the first six months of 2002 and 1.09% in 2001. Return on average
equity, which indicates how effectively the Corporation is able to generate
earnings on shareholder invested capital, equaled 11.70% through June 30, 2002
versus 11.26% for the same period in 2001.
SUMMARY OF SELECTED FINANCIAL DATA
- ---------------------------------------------------------------
(Dollars in thousands except per share data)
Six Months Ended
June 30
---------------------
2002 2001
---------------------
INCOME STATEMENT DATA
Net interest income $10,979 $10,520
Provision for loan losses 350 328
Net income 3,363 3,010
PER SHARE DATA
Net income per common share $ 0.79 $ 0.71
Cash dividends per common share 0.20 0.18
RATIOS
Average primary capital to average assets 10.25% 10.55%
Net income to average assets 1.10 1.09
Net income to average equity 11.70 11.26
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is the
primary source of income for IBT Bancorp. Interest income includes loan fees of
$747,000 in 2002 versus $709,000 in 2001. For analytical purposes, net interest
income is adjusted to a "taxable equivalent" basis by adding the income tax
savings from interest on tax-exempt loans and securities, thus making
year-to-year comparisons more meaningful.
(Continued on page 12)
9
TABLE 1
IBT BANCORP, INC.
AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
- -------------------------------------------------------
(Dollars in Thousands)
The following schedule presents the daily average amount outstanding
for each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding. Federal
Reserve Bank and Federal Home Loan Bank restricted equity holdings are included
in other investments.
Six Months Ending
June 30, 2002 June 30, 2001
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
--------- --------- ---- --------- --------- ----
INTEREST EARNING ASSETS
Loans $ 387,281 $ 15,656 8.09% $ 403,566 $ 17,759 8.80%
Taxable investment securities 87,703 2,032 4.63 46,830 1,358 5.80
Nontaxable investment securities 42,608 1,285 6.03 34,023 1,256 7.38
Federal funds sold 34,629 288 1.66 22,333 522 4.67
Other investments 2,722 81 5.95 2,469 92 7.45
--------- --------- ---- --------- --------- ----
Total Earning Assets 554,943 19,342 6.97 509,221 20,987 8.24
NONEARNING ASSETS
Allowance for loan losses (5,587) (5,270)
Cash and due from banks 22,267 20,514
Premises and equipment 14,852 11,841
Accrued income and other assets 23,260 15,374
--------- ---------
Total Assets $ 609,735 $ 551,680
========= =========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 93,259 717 1.54 $ 80,079 1,121 2.80
Savings deposits 136,775 1,209 1.77 118,949 1,776 2.99
Time deposits 246,138 5,681 4.62 229,555 6,863 5.98
Borrowed funds 12,370 314 5.08 9,776 266 5.44
--------- --------- ---- --------- --------- ----
Total Interest Bearing Liabilities 488,542 7,921 3.24 438,359 10,026 4.57
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 56,238 53,848
Other 7,450 5,986
Shareholders' equity 57,505 53,487
--------- ---------
Total Liabilities and Equity $ 609,735 $ 551,680
========= =========
Net interest income (FTE) $11,421 $10,961
======= =======
Net yield on interest earning assets (FTE) 4.12% 4.31%
===== =====
10
TABLE 2
IBT BANCORP, INC.
VOLUME AND RATE VARIANCE ANALYSIS
- ---------------------------------
(Dollars in Thousands)
The following table sets forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For the purpose of this
table, changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated
to volume and rate changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
Six Month Period Ended June 30, 2002
Compared to
June 30, 2001
Increase (Decrease) Due to
------------------------------------------------
Volume Rate Net
------ ---- ---
CHANGES IN INTEREST INCOME
Loans $ (698) $(1,405) $(2,103)
Taxable investment securities 992 (318) 674
Nontaxable investment securities 284 (255) 29
Federal funds sold 202 (436) (234)
Other 9 (20) (11)
------- ------- -------
Total changes in interest income 789 (2,434) 1,645
Total changes in interest expense 935 (3,040) (2,105)
------- ------- -------
Net Change in Interest Margin (FTE) $ (146) $ 606 $ 460
======= ======= =======
11
NET INTEREST INCOME, CONTINUED
As shown in Tables number 1 and 2, when comparing the six month period ending
June 30, 2002 to the same period in 2001, fully taxable equivalent (FTE) net
interest income increased $460,000 or 4.2%. An increase of 9.0% in average
interest earning assets provided $789,000 of FTE interest income. The majority
of this growth was funded by an 11.4% increase in interest bearing liabilities,
resulting in $935,000 of additional interest expense. Overall, changes in volume
resulted in a $146,000 decrease in FTE interest income. The average FTE interest
rate earned on assets decreased by 1.27%, while the amount of interest earned as
a result of changes in rate decreased $2.4 million. The average rate paid on
deposits decreased by 1.33%, decreasing interest expense by $3.0 million. The
net change related to interest rates earned and paid was a $606,000 increase in
FTE net interest income.
The Corporation's FTE net interest yield as a percentage of average earning
assets equaled 4.12% during the first six months of 2002 versus 4.31% for the
same period in 2001. The 0.19% decrease in the FTE interest margin was primarily
a result of a significant change in the mix of assets and interest rate
compression on funding sources. Average loans outstanding declined from 79.3% in
the first six months of 2001 to 69.8% in 2002. The change in asset mix from
higher yielding loans to other investments resulted in a loss of approximately
$800,000 of FTE interest income. The decline in loans as a percent of total
earning assets was due to the refinancing of three and five year residential
balloon mortgages held by the Corporation's subsidiary banks into fixed rate 15
and 30 year mortgages, which were sold to the secondary market. The Corporation
earns a gain on sale and other ancillary fee income as a result of the sale
which has, to date, offset the loss of interest income. Another significant
factor adversely affecting net interest income is the compression of interest
rates resulting from the decline in short term interest rate levels. As an
example, the Corporation earned 1.66% on the average of $34.6 million in Federal
Funds Sold while paying an average of 1.77% on saving deposits. The addition of
$17.8 million in saving deposits during the past year resulted in the direct
loss of interest income of $20,000. The Corporation acknowledges that, in the
short run, decreasing rates on its core deposits result in a decrease in net
income, but has consciously decided that, in the long run, these new deposits
and account relationships will provide increased earnings.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 63% of the
Corporation's total assets and is the Corporation's single largest concentration
of risk. The allowance for loan losses is management's estimation of potential
future losses inherent in the existing loan portfolio. Factors used to evaluate
the loan portfolio, and thus to determine the current charge to expense, include
recent loan loss history, financial condition of borrowers, amount of
nonperforming and impaired loans, overall economic conditions, and other
factors.
Comparing the year to date period of June 30, 2002 to June 30, 2001, the
provision for loan losses, despite a decline in loans, was increased $22,000 to
$350,000. Year to date 2002, the Corporation had net charge-offs of $181,000
versus $91,000 in 2001. Loans classified as nonperforming were 1.21% of loans as
of June 30, 2002 versus 0.57% for June 30, 2001. The increase in nonaccrued
loans of $2.1 million since June 30, 2001 is a result of a $1.5 million loan to
an agricultural concern which will be liquidated in late fall 2002, and a
$500,000 loan secured by real estate to a residential construction contractor.
The Corporation has charged off its estimated losses on all nonaccrual loans,
and thus expect no further losses. The Corporation's peer group, which includes
299 holding companies with assets between $500 million and $1.0 billion,
nonperforming loans to total loans ratio was 0.81% as of June 30, 2002. As of
June 30, 2002, the allowance for loan losses as a percentage of loans equaled
1.43%. In management's opinion, the allowance for loan losses is adequate as of
June 30, 2002.
12
TABLE 3
IBT BANCORP, INC.
SUMMARY OF LOAN LOSS EXPERIENCE
- -------------------------------
(Dollars in Thousands)
Year to Date
June 30
---------------------------------
2002 2001
------- -------
Summary of changes in allowance
Allowance for loan losses - January 1 $ 5,471 $ 5,162
Loans charged off (354) (198)
Recoveries of charged off loans 173 107
------- -------
Net loans charged off (181) (91)
Provision charged to operations 350 328
------- -------
Allowance for loan losses - June 30 $ 5,640 $ 5,399
======= =======
Allowance for loan losses as a % of loans 1.43% 1.33%
======= =======
NONPERFORMING LOANS
- --------------------------------------
(Dollars in thousands)
June 30
2002 2001
-------- --------
Total amount of loans outstanding for
the period (net of unearned interest) $395,595 $405,668
======== ========
Nonaccrual loans $ 2,848 $ 770
Accruing loans past due 90 days or more 1,939 1,525
Restructured loans --- ---
-------- --------
Total $ 4,787 $ 2,295
======== ========
Loans classified as nonperforming as a
% of outstanding loans 1.21% 0.57%
======== ========
To management's knowledge, there are no other loans which cause management to
have serious doubts as to the ability of a borrower to comply with their loan
repayment terms.
13
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, fees for
other financial services, gains on the sale of mortgage loans, title insurance
revenue, gains and losses on investment securities available for sale, and
other. There was a $490,000 increase in fees earned from these sources during
the first six months of 2002 when compared to the same period in 2001.
Significant changes during this period include a $96,000 increase in fees from
mortgage servicing, a $155,000 increase from the gain on sale of mortgages, and
a $233,000 increase in the income earned on the cash value of corporate owned
life insurance. Included in other assets is $9.7 million in cash value of
corporate owned life insurance policies. These policies earned an average FTE
rate of 7.5%. These policies are placed with five different insurance companies
with an S&P rating of AA+ or better.
The Corporation has established a policy that all 30 year amortized fixed rate
mortgage loans will be sold. The calculation of gains on the sale of mortgages
exclude at least 25 basis points allocated to the value of servicing rights on
these loans. Included in other operating income is a $420,000 gain from the sale
of $55.4 million in mortgages during the first six months of 2002 versus a
$265,000 gain on the sale of $35.3 million in mortgages for the same period in
2001.
NONINTEREST EXPENSES
Noninterest expenses increased $591,000 or 6.8% during the first six months of
2002 when compared to 2001. The largest component of noninterest expense is
salaries and employee benefits, which increased $637,000 or 13.7%. The increase
is due to additional staffing, normal merit and promotional salary adjustments,
and an increase of approximately 30% in medical and pension expenses.
Occupancy and furniture and equipment expenses increased $158,000 or 10.0% in
2002. The increase is related to property tax increases of $20,000, an increase
of $30,000 in building depreciation, a $40,000 increase in equipment
depreciation, and a $106,000 increase in service contracts. The majority of the
aforementioned increases is related to the construction and occupation of a new
computer service center. Amortization of goodwill declined by $228,000 due to
the adoption of Statement No. 142 (for additional information see page 8, Note
3). All other operating expenses increased $24,000 or 1.1%.
QUARTER ENDED JUNE 30, 2002 AND 2001
RESULTS OF OPERATIONS
Net income equaled $1.75 million for the second quarter in 2002 versus $1.62
million in 2001. Return on average assets equaled 1.13% for the second quarter
of 2002 versus 1.16% for the same period in 2001. Return on average equity
equaled 12.08% for the second quarter in 2002, versus 11.99% for the second
quarter in 2001.
14
SUMMARY OF SELECTED FINANCIAL DATA
- ----------------------------------
(Dollars in thousands except per share data)
Three Months Ended
June 30
---------------------------------
2002 2001
---------------------------------
INCOME STATEMENT DATA
Net interest income $ 5,583 $ 5,353
Provision for loan losses 162 166
Net income 1,749 1,622
PER SHARE DATA
Net income per common share $ 0.41 $ 0.37
Cash dividend per common share 0.10 0.09
RATIOS
Average primary capital to average assets 10.20 10.53%
Net income to average assets 1.13 1.16
Net income to average equity 12.08 11.99
NET INTEREST INCOME
When comparing the second quarter of 2002 to 2001, net FTE interest income
increased $236,000. An increase of 8.8% in interest earning assets provided
$424,000 of FTE interest income. The asset growth was funded primarily by an
11.4% increase in interest bearing liabilities, resulting in $427,000 of
increased interest expense. Overall, increased volume resulted in a $3,000
decline in FTE interest income. During the second quarter of 2002, the average
FTE interest rate earned on assets decreased by 1.30% and the average rate paid
on deposits decreased by 1.38%. The changes in interest rates earned and paid
resulted in a $239,000 increase in FTE interest income. The Corporation's FTE
net interest yield as a percentage of average earning assets decreased 0.18% to
4.13% in the second quarter of 2002. See page 12 of this report for a discussion
of the factors affecting the Corporation's net interest income.
PROVISION FOR LOAN LOSSES
The amount provided for loan losses in the second quarter of 2002 was $162,000
versus $166,000 in 2001. During the second quarter of 2002 the Corporation had
net charge-offs of $117,000 versus $32,000 during the same period of 2001. The
allowance for loan losses as a percent of loans was 1.43% as of June 30, 2002, a
0.10% increase since June 30, 2001.
NONINTEREST INCOME
Noninterest income earned in the second quarter of 2002, when compared to the
same period in 2001, increased $108,000 or 7.4%. The most significant changes
were a $33,000 increase from the servicing of mortgage loans sold to the
secondary market and a $93,000 increase from the income earned on the cash value
of Corporate-owned life insurance.
15
TABLE 4
IBT BANCORP, INC.
AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
- --------------------------------------------------------------------------------
(Dollars in Thousands)
The following schedule presents the daily average amount outstanding for
each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding. Federal
Reserve and Federal Home Loan Bank restricted stock is included in other
investments.
Quarter Ending
June 30, 2002 June 30, 2001
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
--------- --------- ---- --------- --------- ----
INTEREST EARNING ASSETS
Loans $ 386,763 $ 7,708 7.97% $ 403,927 $ 8,897 8.81%
Taxable investment securities 100,127 1,125 4.49 45,838 659 5.75
Nontaxable investment securities 45,373 668 5.89 34,395 632 7.35
Federal funds sold 27,370 116 1.70 29,977 323 4.31
Other 2,748 43 6.26 2,577 48 7.45
--------- --------- ---- --------- --------- ----
Total Earning Assets 562,381 9,660 6.87 516,714 10,559 8.17
NONEARNING ASSETS
Allowance for loan losses (5,647) (5,334)
Cash and due from banks 22,326 20,411
Premises and equipment 14,716 12,163
Accrued income and other assets 23,976 15,280
--------- ---------
Total Assets $ 617,752 $ 559,234
========= =========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 95,029 338 1.42 $ 80,410 518 2.58
Savings deposits 138,447 587 1.70 118,238 846 2.86
Time deposits 249,050 2,786 4.47 235,159 3,475 5.91
Borrowed funds 12,494 139 4.45 10,703 146 5.46
--------- --------- ---- --------- --------- ----
Total Interest Bearing Liabilities 495,020 3,850 3.11 444,510 4,985 4.49
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS EQUITY
Demand deposits 56,915 54,587
Other 7,897 6,035
Shareholders' equity 57,920 54,102
--------- ---------
Total Liabilities and Equity $ 617,752 $ 559,234
========= =========
Net interest income (FTE) $5,810 $5,574
====== ======
Net yield on interest earning assets (FTE) 4.13% 4.31%
===== =====
16
TABLE 5
IBT BANCORP, INC.
VOLUME AND RATE VARIANCE ANALYSIS
- ---------------------------------
(Dollars in Thousands)
The following table sets forth the effect of volume and rate changes on interest
income and expense for the periods indicated. For the purpose of this table,
changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated to volume
and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Quarter Ended June 30, 2002
Compared to
June 30, 2001
Increase (Decrease) Due to
---------------------------------------------------
Volume Rate Net
------- ------- -------
CHANGES IN INTEREST INCOME
Loans $ (367) $ (822) $(1,189)
Taxable investment securities 637 (171) 466
Nontaxable investment securities 177 (141) 36
Federal funds sold (26) (181) (207)
Other 3 (8) (5)
------- ------- -------
Total changes in interest income 424 (1,323) (899)
Total changes in interest expense 427 (1,562) (1,135)
------- ------- -------
Net Change in Interest Margin (FTE) $ (3) $ 239 $ 236
======= ======= =======
17
NONINTEREST EXPENSES
Noninterest expenses increased $253,000 or 5.8% during the second quarter of
2002 when compared to 2001. Noninterest expense includes salary and benefits,
occupancy, and other operating expenses. The largest component of noninterest
expense is salaries and employee benefits, which increased $285,000 or 12.2%.
The increase is related to normal merit and promotional salary increases,
increased medical and pension expenses.
Occupancy and furniture and equipment expenses increased $89,000 or 11.1%. The
majority of this increase is associated with the occupancy of the operations
center. Amortization of goodwill declined $113,000 as a result of the adoption
of Statement No. 142 (see page 8, Note 3 for further information). Other
operating expenses decreased $8,000 or 0.7%.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Since December 31, 2001, total assets increased $29.4 million to $621.6 million.
As of June 30, 2002, the loan portfolio decreased $2.3 million, cash and demand
deposits due from bank increased $3.3 million, federal funds sold decreased
$19.0 million, and investment securities increased $46.1 million when compared
to December 31, 2001. Deposits during this period increased $24.1 million,
borrowed funds increased $1.3 million, and shareholders' equity increased $3.2
million.
LIQUIDITY
Liquidity management is designed to have adequate resources available to meet
depositor and borrower discretionary demands for funds. Liquidity is also
required to fund expanding operations, investment opportunities, and payment of
cash dividends. The primary sources of the Corporation's liquidity are cash,
cash equivalents, and investment securities available for sale.
As of June 30, 2002, cash and cash equivalents as a percentage of total assets
equaled 6.4%, versus 9.4% as of December 31, 2001. During the first six months
of 2002, $10.7 million in net cash was provided from operations and $24.5
million was provided from financing activities. Investing activities used $50.9
million. The accumulated effect of the Corporation's operating, investing and
financing activities was a $15.7 million decrease in cash and cash equivalents
during the first six months of 2002.
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale equaled
$150.0 million as of June 30, 2002 and $102.5 million as of December 31, 2001.
The Corporation's liquidity is considered adequate by management.
CAPITAL
The capital of the Corporation consists solely of common stock and retained
earnings, increased by accumulated other comprehensive income; and increased
approximately $3.2 million since December 31, 2001.
18
CAPITAL, CONTINUED
There are no significant capital regulatory constraints placed on the
Corporation's capital. The Federal Reserve Board's current recommended minimum
tier 1 and tier 2 average assets requirement is 6.0%. The Corporation's tier 1
and tier 2 capital to assets, which consists of shareholders' equity plus the
allowance for loan losses less unamortized acquisition intangibles and goodwill,
was 10.1% as of June 30, 2002.
The Federal Reserve Board has established a minimum risk based capital standard.
Under this standard, a framework has been established that assigns risk weights
to each category of on- and off-balance sheet items to arrive at risk adjusted
total assets. Regulatory capital is divided by the risk adjusted assets with the
resulting ratio compared to the minimum standard to determine whether a bank has
adequate capital. The minimum standard is 8%, of which at least 4% must consist
of equity capital net of goodwill. The following table sets forth the
percentages required under the Risk Based Capital guidelines and the
Corporation's ratios as of June 30, 2002:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
Actual
Required 06/30/02
-------- --------
Equity Capital 4.00 14.09%
Secondary Capital* 4.00 1.25%
---- ------
Total Capital 8.00 15.34%
==== ======
- - IBT Bancorp's secondary capital consists solely of the allowance for
loan losses. The percentage for the secondary capital under the
required column is the maximum allowed from all sources.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission.
19
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has no foreign exchange risk, holds
limited loans outstanding to oil and gas concerns, and holds no trading account
assets. Any changes in foreign exchange rates or commodity prices would have an
insignificant impact, if any, on the Corporation's interest income and cash
flows.
Interest rate risk ("IRR") is the exposure to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors and senior management to effectively
manage the various risks that can have a material impact on the safety and
soundness of the Corporation. The risks include credit, interest rate,
liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
The Corporation uses several techniques to manage interest rate risk. The first
method is gap analysis. Gap analysis measures the cash flows and/or the earliest
repricing of the Corporation's interest bearing assets and liabilities. This
analysis is useful for measuring trends in the repricing characteristics of the
balance sheet. Significant assumptions are required in this process because of
the imbedded repricing options contained in assets and liabilities. A
substantial portion of the Corporation's assets are invested in loans and
mortgage backed securities. These assets have imbedded options that allow the
borrower to repay the balance prior to maturity without penalty. The amount of
prepayments is dependent upon many factors, including the interest rate of a
given loan in comparison to the current interest rates, for residential
mortgages the level of sales of used homes, and the overall availability of
credit in the market place. Generally, a decrease in interest rates will result
in an increase in the Corporation's cash flows from these assets. Investment
securities, other than those that are callable, do not have any significant
imbedded options. Saving and checking deposits may generally be withdrawn on
request without prior notice. The timing of cash flow from these deposits are
estimated based on historical experience. Time deposits have penalties which
discourage early withdrawals.
The second technique used in the management of interest rate risk is to combine
the projected cash flows and repricing characteristics generated by the gap
analysis and the interest rates associated with those cash flows and projected
future interest income. By changing the amount and timing of the cash flows and
the repricing interest rates of those cash flows, the Corporation can project
the effect of changing interest rates on its interest income.
The following table provides information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of June 30, 2002.
The Corporation has no interest rate swaps, futures contracts, or other
derivative financial options. The principal amounts of assets and time deposits
maturing were calculated based on the contractual maturity dates. Savings and
NOW accounts are based on management's estimate of their future cash flows.
20
*****Consolidated*****
Quantitative Disclosures of Market Risk
June 30, 2002 Fair Value
------------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total 06/30/02
------------------------------------------------------------------------------------------
Rate sensitive assets
Other interest bearing assets $13,900 --- --- --- --- --- $ 13,900 $13,900
Average interest rates 1.75% --- --- --- --- --- 1.75%
Fixed interest rate securities $19,188 $27,738 $41,582 $14,937 $6,961 $41,656 $152,062 $152,130
Average interest rates 4.40% 4.43% 4.07% 4.42% 4.52% 4.81% 4.32%
Fixed interest rate loans $100,614 $76,577 $97,687 $24,884 $26,798 $12,738 $339,298 $341,228
Average interest rates 8.08% 8.28% 8.02% 8.11% 8.01% 10.34% 8.19%
Variable interest rate loans $40,629 $6,412 $4,428 $2,462 $1,787 $579 $56,297 $56,297
Average interest rates 7.20% 7.22% 6.34% 6.17% 6.05% 6.65% 7.05%
Rate sensitive liabilities
Other borrowed funds $1,502 $1,000 --- --- $5,000 $5,381 $12,883 $13,082
Average interest rates 0.94% 5.05% --- --- 5.08% 5.72% 4.86%
Savings and NOW accounts $145,128 $18,820 $15,309 $12,590 $11,663 $30,939 $234,449 $234,449
Average interest rates 1.25% 1.81% 1.64% 2.53% 1.52% 1.19% 1.40%
Fixed interest rate time deposits $143,009 $34,755 $21,775 $27,615 $19,398 $21 $246,573 $248,858
Average interest rates 5.22% 5.81% 5.88% 5.78% 6.20% --- 5.50%
Variable interest rate time deposits $1,044 $401 $9 --- $195 --- $1,649 $1,649
Average interest rates 3.52% 4.09% --- --- --- --- 3.23%
Quantitative Disclosures of Market Risk
June 30, 2001 Fair Value
---------------------------------------------------------------------------------------------
2002 2003 2004 2005 2006 Thereafter Total 06/30/01
---------------------------------------------------------------------------------------------
Rate sensitive assets
Other interest bearing assets $30,250 --- --- --- --- --- $30,250 $30,250
Average interest rates 3.75% --- --- --- --- --- 5.00%
Fixed interest rate securities $14,062 $23,775 $14,645 $10,261 $3,609 $20,117 $86,469 $86,518
Average interest rates 5.41% 5.02% 5.28% 4.87% 4.94% 4.86% 5.07%
Fixed interest rate loans $111,737 $77,055 $85,227 $49,071 $22,635 $10,992 $356,717 $359,801
Average interest rates 9.48% 8.42% 8.22% 8.23% 8.27% 7.78% 8.65%
Variable interest rate loans $46,910 $1,948 $89 $4 --- --- $48,951 $48,951
Average interest rates 8.50% 10.09% 7.75% --- 8.75% --- 8.56%
Rate sensitive liabilities
Borrowed funds $3,187 --- $5,000 $1,000 --- $2,400 $11,587 $11,587
Average interest rates 4.94% --- 5.08% 5.06% --- 6.65% 5.37%
Savings and NOW accounts $119,825 $16,670 $13,549 $11,161 $10,325 $27,395 $198,925 $198,925
Average interest rates 3.26% 2.61% 2.47% 2.47% 2.01% 1.60% 2.81%
Fixed interest rate time deposits $142,268 $38,897 $23,927 $17,886 $15,627 --- $238,605 $241,746
Average interest rates 5.57% 6.03% 5.95% 6.41% 6.64% --- 5.82%
Variable interest rate time deposits $724 $584 --- --- --- --- $1,308 $1,308
Average interest rates 4.09% 4.09% --- --- --- --- 4.09%
21
PART II - OTHER INFORMATION
Item 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The registrant's annual meeting of shareholders was held on
May 7, 2002. At the meeting the shareholders voted upon the
following matters:
Proposal 1 - Election of Directors to terms ending 2005:
For Withheld
--- --------
Gerald D. Cassel 3,135,597 979
Ronald E. Schumacher 3,135,549 1,027
Herbert C. Wybenga 3,128,012 8,564
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(ii) Amendments to the Bylaws of IBT Bancorp, Inc.
(b) No Reports on Form 8-K were filed or required to be
filed for the quarter ended June 30, 2002.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IBT Bancorp, Inc.
-------------------
Date: August 2, 2002 /s/ Dennis P. Angner
----------------------- --------------------------------------
Dennis P. Angner, President/CEO and
Principal Financial Officer
23
IBT BANCORP
EXHIBIT INDEX
Exhibit
No. Description Page Number
------- ---------------------------------- -----------
3(ii) Amendment to the Bylaws of 25
IBT Bancorp, Inc.
24