UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the quarterly period ended March 31, 2004 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 48858 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) (989) 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 Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No 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, 4,854,820 as of April 15, 2004
IBT BANCORP, INC. Index to Form 10-Q <TABLE> <CAPTION> Page Numbers <S> <C> PART I FINANCIAL INFORMATION Item 1 Consolidated Financial Statements 3-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-18 Item 3 Quantitative and Qualitative 18-20 Disclosures About Market Risk Item 4 Controls and Procedures 21 PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 21-22 Signatures 23 Exhibit 31(a) 24 Exhibit 31(b) 26 Exhibit 32 28 </TABLE> 2
PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements IBT BANCORP, INC. CONSOLIDATED BALANCE SHEETS (in thousands) <TABLE> <CAPTION> March 31 December 31 2004 2003 ------------ ------------ (Unaudited) <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 22,989 $ 25,918 Federal funds sold 3,150 5,300 ------------ ------------ TOTAL CASH AND CASH EQUIVALENTS 26,139 31,218 Investment securities Securities available for sale (Amortized cost of $185,586 in 2004 and $166,730 in 2003) 189,593 169,832 Securities held to maturity (Fair value -- $1,168 in 2004 and $1,349 in 2003) 1,308 1,312 ------------ ------------ TOTAL INVESTMENT SECURITIES 190,901 171,144 Mortgage loans available for sale 7,586 4,315 Loans Agricultural 49,000 50,548 Commercial 143,260 149,931 Residential real estate mortgage 161,344 157,598 Installment 63,480 63,782 ------------ ------------ TOTAL LOANS 417,084 421,859 Less allowance for loan losses 6,497 6,204 ------------ ------------ NET LOANS 410,587 415,655 Other assets 43,572 41,747 ------------ ------------ TOTAL ASSETS $ 678,785 $ 664,079 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 60,576 $ 67,760 NOW accounts 107,776 117,560 Certificates of deposit and other savings 326,430 312,914 Certificates of deposit over $100,000 77,224 69,473 ------------ ------------ TOTAL DEPOSITS 572,006 567,707 Other borrowed funds 25,161 18,053 Accrued interest and other liabilities 10,772 9,383 ------------ ------------ TOTAL LIABILITIES 607,939 595,143 Shareholders' Equity Common stock -- no par value 10,000,000 shares authorized; outstanding-- 4,854,820 in 2004 (4,403,404 in 2003) 65,476 47,491 Retained earnings 3,951 20,623 Accumulated other comprehensive income 1,419 822 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 70,846 68,936 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 678,785 $ 664,079 ============ ============ </TABLE> See notes to consolidated financial statements. 3
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31 -------------------------- 2004 2003 ----------- ----------- <S> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of period 4,403,404 4,336,283 Common stock dividend 440,191 --- Issuance of common stock 11,225 10,141 Common stock repurchased --- (1,686) ----------- ----------- BALANCE END OF PERIOD 4,854,820 4,344,738 =========== =========== COMMON STOCK Balance at beginning of period $ 47,491 $ 45,610 Common stock dividend 17,608 --- Issuance of common stock 377 313 Common stock repurchased --- (59) ----------- ----------- BALANCE END OF PERIOD 65,476 45,864 RETAINED EARNINGS Balance at beginning of period 20,623 16,299 Net income 1,477 1,942 Common stock dividend (17,608) --- Cash dividends ($0.11 per share in 2004 and $0.10 in 2003) (541) (478) ----------- ----------- BALANCE END OF PERIOD 3,951 17,763 ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 822 1,548 Other comprehensive income 597 273 ----------- ----------- BALANCE END OF PERIOD 1,419 1,821 ----------- ----------- TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 70,846 $ 65,448 =========== =========== </TABLE> See notes to consolidated financial statements. 4
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands) <TABLE> <CAPTION> Three Months Ended March 31 2004 2003 -------- -------- <S> <C> <C> INTEREST INCOME Loans, including fees $ 6,861 $ 7,517 Investment securities Taxable 1,047 1,157 Nontaxable 511 494 Federal funds sold and other 31 96 -------- -------- TOTAL INTEREST INCOME 8,450 9,264 INTEREST EXPENSE Deposits 2,430 3,136 Borrowings 240 187 -------- -------- TOTAL INTEREST EXPENSE 2,670 3,323 -------- -------- NET INTEREST INCOME 5,780 5,941 Provision for loan losses 240 212 -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,540 5,729 NONINTEREST INCOME Trust fees 155 159 Service charges on deposit accounts 62 64 Other service charges and fees 861 1,170 Gain on sale of mortgage loans 126 664 Title insurance revenue 410 613 Other 326 284 -------- -------- TOTAL NONINTEREST INCOME 1,940 2,954 NONINTEREST EXPENSES Compensation 3,293 3,269 Occupancy 392 371 Furniture and equipment 631 540 Other 1,252 1,891 -------- -------- TOTAL NONINTEREST EXPENSES 5,568 6,071 INCOME BEFORE FEDERAL INCOME TAXES 1,912 2,612 Federal income taxes 435 670 -------- -------- NET INCOME $ 1,477 $ 1,942 ======== ======== Basic net income per share $ 0.30 $ 0.41 ======== ======== Cash dividends per share $ 0.11 $ 0.10 ======== ======== </TABLE> See notes to consolidated financial statements. 5
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31 ------------------- 2004 2003 -------- -------- <S> <C> <C> NET INCOME $ 1,477 $ 1,942 Unrealized holding gains arising during period 892 414 Reclassification adjustment for realized gain included in net income 13 --- -------- -------- Other comprehensive income before income tax expense 905 414 Income tax expense related to comprehensive income (308) (141) -------- -------- OTHER COMPREHENSIVE INCOME 597 273 -------- -------- COMPREHENSIVE INCOME $ 2,074 $ 2,215 ======== ======== </TABLE> See notes to consolidated financial statements. 6
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) <TABLE> <CAPTION> Three Months Ended March 31 2004 2003 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 1,477 $ 1,942 Reconciliation of net income to net cash (used in) provided by operations: Provision for loan losses 240 212 Provision for depreciation 368 388 Net amortization on investment securities 432 338 Realized gain on sales of investment securities (13) --- Amortization and impairment of mortgage servicing rights 55 137 Increase in cash value of life insurance (105) (117) Amortization of acquisition intangibles 23 23 Gain on sales of mortgage loans (126) (664) Net change in loans held for sale (3,145) (3,172) Decrease in accrued interest receivable 5 9 Increase in other assets (1,603) (854) Increase in accrued interest and other liabilities 1,389 2,146 -------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,003) 388 INVESTING ACTIVITIES Activity in available-for-sale securities Maturities, calls, and sales 9,988 5,035 Purchases (29,259) (25,435) Activity in held to maturity securities Maturities, calls, and sales --- 1,386 Net decrease in loans 4,828 13,529 Purchases of equipment and premises (876) (399) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (15,319) (5,884) FINANCING ACTIVITIES Net (decrease) increase in noninterest bearing deposits (7,184) 464 Net increase in interest bearing deposits 11,483 2,414 Net increase (decrease) in borrowings 7,108 (2,503) Cash dividends (541) (478) Proceeds from issuance of common stock 377 313 Common stock repurchased --- (59) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 11,243 151 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (5,079) (5,345) Cash and cash equivalents beginning of period 31,218 54,437 -------- -------- CASH AND CASH EQUIVALENTS END OF PERIOD $ 26,139 $ 49,092 ======== ======== </TABLE> 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. Operating results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. 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, 2003. 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 4,848,855 for quarter ended March 31, 2004, and 4,336,020 for the quarter ended March 31, 2003. The Corporation has no common stock equivalents and, accordingly, presents only basic earnings per share. 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 2003 annual report and with the unaudited consolidated financial statements and notes, as set forth on pages 3 through 8 of this report. CRITICAL ACCOUNTING POLICIES: The Corporation's significant accounting policies are set forth in Note 1 of the Consolidated Financial Statements included in the Corporation's Annual Report for the year ended December 31, 2003. Of these significant accounting policies, the Corporation considers its policies regarding the determination of the allowance for loan losses and carrying value of servicing assets to be its most critical accounting policies. The allowance for loan losses requires management's most subjective and complex judgment. Changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation's allowance for loan losses and related matters, see Provision for Loan Losses and Allowance for Loan Losses in the Corporation's 2003 Annual Report and herein. Servicing assets are recognized when loans are sold with servicing retained. Mortgage servicing rights (MSR's) are assets which are amortized in proportion to and over the period of estimated future net servicing income. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominate characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. 9
THREE MONTHS ENDED MARCH 31, 2004 AND 2003 RESULTS OF OPERATIONS Net income equaled $1.48 million for the three month period ended March 31, 2004, compared to $1.94 million for the same period in 2003. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, equaled .87% for the first three months of 2004 and 1.19% for 2003. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 8.54% through March 31, 2004 versus 12.42% for the same period in 2003. SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended March 31 ---------------------- 2004 2003 --------- --------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $ 5,780 $ 5,941 Provision for loan losses 240 212 Net income 1,477 1,942 PER SHARE DATA Net income 0.30 0.41 Cash dividends 0.11 0.10 RATIOS Average primary capital to average assets 11.05% 10.37% Net income to average assets .87 1.19 Net income to average equity 8.54 12.42 </TABLE> 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 $291,000 in 2004 versus $366,000 in 2003. For analytical purposes in Tables 1 and 2, 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. 10
IBT BANCORP, INC. TABLE 1: 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, and Federal Reserve and Federal Home Loan Bank restricted stock is included in Other Investments. <TABLE> <CAPTION> Three Months Ended March 31, 2004 March 31, 2003 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 $ 423,393 $ 6,862 6.48% $ 394,628 $7,518 7.62% Taxable investment securities 121,182 1,012 3.34 115,145 1,157 4.02 Nontaxable investment securities 52,249 772 5.91 47,962 748 6.24 Federal funds sold 12,585 31 .99 31,943 92 1.15 Other investments 2,933 35 4.77 2,782 43 6.18 ---------- ------- ---- --------- ------ ---- Total Earning Assets 612,342 8,712 5.69 592,460 9,558 6.45 NONEARNING ASSETS Allowance for loan losses (6,340) (5,734) Cash and due from banks 28,603 25,789 Premises and equipment 15,304 15,466 Accrued income and other assets 26,795 24,529 ---------- --------- TOTAL ASSETS $ 676,704 $ 652,510 ========== ========= INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 121,781 163 .54 $ 116,836 307 1.05 Savings deposits 155,695 239 .61 138,181 383 1.11 Time deposits 239,960 2,028 3.38 250,721 2,446 3.90 Borrowed funds 21,699 240 4.42 15,801 187 4.73 ---------- ------- ---- --------- ------- ---- Total Interest Bearing Liabilities 539,135 2,670 1.98 521,539 3,323 2.55 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 59,190 58,429 Other 9,235 9,988 Shareholders' equity 69,144 62,554 ---------- --------- TOTAL LIABILITIES AND EQUITY $ 676,704 $ 652,510 ========== ========= NET INTEREST INCOME (FTE) $ 6,042 $ 6,235 ======= ======= NET YIELD ON INTEREST EARNING ASSETS (FTE) 3.95% 4.21% ==== ==== </TABLE> 11
IBT BANCORP, INC. TABLE 2: 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 March 31, 2004 Compared to March 31, 2003 Increase (Decrease) Due to ------------------------------------ Volume Rate Net ---------- ---------- ---------- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $ 521 $ (1,177) $ (656) Taxable investment securities 58 (203) (145) Nontaxable investment securities 65 (41) 24 Federal funds sold (49) (12) (61) Other investments 2 (10) (8) ---------- ---------- ---------- Total changes in interest income 597 (1,443) (846) Total changes in interest expense 21 (674) (653) ---------- ---------- ---------- Net change in interest margin (FTE) $ 576 $ (769) $ (193) ========== ========== ========== </TABLE> 12
IBT BANCORP, INC. TABLE 3: SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) <TABLE> <CAPTION> Three Months Ended March 31 ------------------------ 2004 2003 ---------- ---------- <S> <C> <C> Summary of changes in allowance Allowance for loan losses - January 1 $ 6,204 $ 5,593 Loans charged off (113) (80) Recoveries of charged off loans 166 144 ---------- ---------- Net loans recovered 53 64 Provision charged to operations 240 212 ---------- ---------- Allowance for loan losses - March 31 $ 6,497 $ 5,869 ========== ========== Allowance for loan losses as a % of loans 1.56% 1.56% ========== ========== </TABLE> NONPERFORMING LOANS (Dollars in thousands) <TABLE> <CAPTION> March 31 ------------------------ 2004 2003 ---------- ---------- <S> <C> <C> Total amount of loans outstanding at the end of the period $ 417,084 $ 377,353 ========== ========== Nonaccrual loans $ 3,412 $ 2,121 Accruing loans past due 90 days or more 923 1,865 Restructured loans --- --- ---------- ---------- Total $ 4,335 $ 3,986 ========== ========== Loans classified as nonperforming as a % of outstanding loans 1.04% 1.06% ========== ========== </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. 13
NET INTEREST INCOME (CONTINUED) As shown in Tables number 1 and 2, when comparing the three month period ended March 31, 2004 to the same period in 2003, fully taxable equivalent (FTE) net interest income decreased $193,000 or 3.10%. An increase of 3.4% in average interest earning assets provided $597,000 of FTE interest income. The majority of this growth was funded by an 3.2% increase in interest bearing liabilities resulting in $21,000 of additional interest expense. Overall, changes in volume resulted in a $576,000 increase in FTE interest income. The average FTE interest rate earned on assets declined by .76%, decreasing the amount of interest earned by $1.4 million. The average rate paid on deposits decreased .57%, decreasing interest expense by $674,000. The net change related to interest rate earned and paid was a $769,000 decrease in FTE net interest income. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 3.95% during 2004 versus 4.21% in 2003. The 0.26% decrease in the yield was primarily a result of loan and investment rates declining faster than deposit rates. Additionally, the Corporation's increasing reliance on higher cost interest bearing liabilities to fund asset growth continues to adversely impact net interest yields. Management expects the Corporations' reliance on these liabilities to continue. While management feels that we are at the bottom of the current interest rate cycle, net interest margin will continue to be under pressure for the remainder of 2004. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Net loans outstanding represent 60.5% 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 March 31, 2004 to March 31, 2003, total portfolio loans outstanding increased 1.1%. The provision for loan losses increased $28,000 to $240,000 in the first quarter of 2004 when compared to 2003. The increase in the provision for loan losses resulted from an increase in nonperforming loans of 8.8% and increased uncertainty about economic performance over the coming months. As disclosed in the Corporations 10-K, as of December 31, 2003, the Corporation experienced a decline in the overall credit quality of its outstanding agricultural loans. During the first quarter of 2004, no additional loans have been identified from those identified in 2003. As set forth in Table 3, loans classified as nonperforming were $4.3 million as of March 31, 2004, a $349,000 increase over the prior year. The allowance for loan losses as a percentage of loans equaled 1.56% in both 2004 and 2003. In management's opinion, the allowance for loan losses is adequate as of March 31, 2004. 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, and other noninterest income. Income earned from these sources decreased $1.0 million during the three month period ending March 31, 2004, compared to the same period in 2003. The majority of the decrease in non interest income is related to a significant decrease of mortgage activity during the first quarter of 2004. Individual account changes during this period include a $203,000 decrease in income from the sale of title insurance and related services, a $538,000 decrease in gains on the sale of residential real estate mortgage loans, and a $427,000 decrease in residential mortgage servicing 14
rights. The strong increase in non-interest income from 2003 was from mortgage related fee income. Overall, residential fixed rate mortgage activity slowed substantially during the first quarter of 2004 when compared to the first quarter of 2003. It is projected to pick up throughout the remainder of 2004, however it is not anticipated to reach the level of 2003. Included in other assets is $10.1 million in cash value of corporate owned life insurance policies. The increase in cash value of these policies of $105,000 and $117,000 during the quarters ended March 31, 2004 and 2003, respectively, is recorded as other income. These policies earned an average rate of 4.23% and, due to their preferential tax treatment, have a taxable equivalent rate of 6.41%. These policies are placed with four 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 excludes at least 25 basis points allocated to the value of servicing rights on these loans. Included in other noninterest income is a $126,000 gain from the sale of $13.6 million in mortgages during the first quarter of 2004 versus a $664,000 gain on the sale of $56.6 million in the same period in 2003. NONINTEREST EXPENSES Noninterest expenses decreased $503,000 for the first three months of 2004 when compared to the same period in 2003. The largest component of noninterest expense is compensation expense, which increased $24,000 or .73%. The increase is due to additional staffing and normal merit and promotional salary increases. Occupancy and furniture and equipment expenses increased $112,000 or 12.3% in 2004. The majority of this increase is a result of increases in equipment and building depreciation and service contract expenses. All other operating expenses decreased $639,000 or 33.8%. The decrease is primarily related to a $675,000 decrease in charitable donations to IBT Foundation (see "Financial Instruments with Off Balance Sheet Arrangements"). Due to the overall decline in income, the Corporation did not make contributions to the IBT Foundation in the first quarter of 2004. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 2003, total assets increased $14.7 million to $678.8 million. During the first quarter of 2004, major changes in asset mix included a $5.1 million decrease in cash and cash equivalents, a $19.8 million increase in investment securities, a $3.3 million increase in mortgage loans available for sale, and a $5.1 million decrease in net loans. Deposits during this period increased $4.3 million. Interest bearing deposits increased $11.5 million and noninterest bearing deposits decreased $7.2 million, borrowed funds increased $7.1 million, and shareholders' equity increased $1.9 million. LIQUIDITY Liquidity management is designed to ensure adequate resources are 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. 15
As of March 31, 2004, cash and cash equivalents as a percentage of total assets equaled 3.9%, versus 4.7% as of December 31, 2003. During the first three months of 2004, cash used by operating activities was $1.0 million, financing activity provided $11.2 million, and investing activities used $15.3 million. The accumulated effect of the Corporation's operating, investing, and financing activities was a $5.1 million decrease in cash and cash equivalents during the first three months of 2004. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale equaled $190.0 million as of March 31, 2004 and $170.0 million as of December 31, 2003. In addition to these primary sources of liquidity, the Corporation has the ability to borrow in the federal funds market and at both the Federal Reserve Bank and the Federal Home Loan Bank. The Corporation's liquidity is considered adequate by management of the Corporation. CAPITAL The capital of the Corporation consists solely of common stock, surplus, retained earnings, and accumulated other comprehensive income, and increased approximately $1.9 million since December 31, 2003. There are significant regulatory constraints placed on the Corporation's capital. The Federal Reserve Board's current recommended minimum tier 1 and tier 2 capital to average assets requirement is 6.0%. The Corporation's tier 1 and tier 2 capital to average assets, which consists of shareholder's equity plus the allowance for loan losses less unamortized acquisition intangibles, was 10.19% at March 31, 2004. The Federal Reserve Board has established a minimum risk based capital standard. Under this standard, a framework has been established that assigns risk weights to each category of on- and off-balance sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a bank has adequate capital. The minimum standard is 8%, of which at least 4% must consist of equity capital net of goodwill. The following table sets forth the percentages required under the Risk Based Capital guidelines and the Corporation's ratios as of March 31, 2004: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS <TABLE> <CAPTION> IBT Bancorp Actual Required 03/31/04 -------- -------- <S> <C> <C> Equity Capital 4.00% 14.70% Secondary Capital* 4.00 1.25 ---- ----- Total Capital 8.00% 15.95% ==== ===== </TABLE> * IBT Bancorp's secondary capital consists solely of the allowance for loan losses. The percentage for the secondary capital under the required column is the maximum allowed from all sources. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET ARRANGEMENTS The Corporation is party to financial instruments with off-balance-sheet risk. These instruments are entered into in the normal course of business to meet the financing needs of its customers. These financial instruments, 16
which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in a particular class of financial instruments. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in deciding to make these commitments as it does for extending loans to customers. Commitments to extend credit, which totaled $60 million at March 31, 2004, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have variable interest rates, fixed expiration dates, or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. At March 31, 2004, the Corporation had a total of $736,000 in outstanding standby letters of credit. Generally, these commitments to extend credit and letters of credit mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon the extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and other income producing commercial properties. The Corporation sponsors the IBT Foundation (the "Foundation"), which is a nonprofit entity formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities serviced by Isabella Bank and Trust. The Corporation periodically makes charitable contributions in the form of cash transfers to the Foundation. The Foundation is administered by members of the Corporation's Board of Directors. The assets and transactions of the Foundation are not included in the consolidated financial statements of IBT Bancorp, Inc. The assets of the Foundation as of March 31, 2004 approximated $1.9 million. 17
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 Corporation and the subsidiaries include, but are not limited to, changes in: interest rates, 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 filing with the Securities and Exchange Commission. 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, nor does it utilize interest rate swaps or derivatives in the management of its interest rate risk. The Corporation does have a significant amount of loans extended to borrowers in agricultural production. Their cash flow and their ability to service their debt is largely dependent on the commodity prices for corn, soybeans, sugar beets, milk, beef and a variety of dry beans. The Corporation mitigates these risks by using conservative price and production yields when calculating a borrowers available cash flow to service their debt. 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 18
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 is 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 March 31, 2004. 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. 19
Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> March 31, 2004 Fair Value ------------------------------------------------------------------------------------------ 2005 2006 2007 2008 2009 Thereafter Total 03/31/04 -------- -------- -------- -------- -------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 3,150 $ 199 --- --- --- --- $ 3,349 $ 3,349 Average interest rates 0.90% 2.67% --- --- --- --- 3.57% Fixed interest rate securities $ 43,732 $ 39,234 $ 28,450 $ 20,557 $ 10,566 $ 48,362 $190,901 $190,761 Average interest rates 3.64% 3.44% 3.01% 2.96% 3.28% 4.60% 3.74% Fixed interest rate loans $ 93,105 $ 55,416 $ 73,921 $ 36,199 $ 39,819 $ 41,491 $339,951 $341,027 Average interest rates 6.68% 6.87% 7.01% 6.36% 6.72% 5.83% 6.65% Variable interest rate loans $ 55,071 $ 7,156 $ 5,536 $ 6,509 $ 7,571 $ 2,876 $ 84,719 $ 84,719 Average interest rates 5.50% 5.48% 5.57% 4.04% 5.29% 5.05% 5.35% Rate sensitive liabilities Borrowed funds $ 4,692 $ 87 $ 7,589 $ 92 $ 94 $ 12,607 $ 25,161 $ 25,689 Average interest rates 2.02% 4.88% 4.09% 4.88% 4.88% 4.84% 4.09% Savings and NOW accounts $165,263 $ 22,231 $ 18,086 $ 14,856 $ 13,764 $ 33,132 $267,332 $267,332 Average interest rates 0.56% 0.32% 0.64% 0.53% 0.49% 0.32% 0.51% Fixed interest rate time deposits $100,156 $ 50,533 $ 39,946 $ 31,424 $ 17,948 $ 1,975 $241,982 $244,373 Average interest rates 2.49% 2.18% 4.36% 4.14% 3.83% 3.78% 3.06% Variable interest rate time deposits $ 971 $ 429 $ 2 $ 0 $ 538 $ 176 $ 2,116 $ 2,116 Average interest rates 1.24% 1.24% 1.25% --- 3.17% 2.50% 1.84% </TABLE> Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> March 31, 2003 Fair Value ------------------------------------------------------------------------------------------ 2004 2005 2006 2007 2008 Thereafter Total 03/31/03 -------- -------- -------- -------- -------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 10,850 --- --- --- --- --- $ 10,850 $ 10,850 Average interest rates 1.25% --- --- --- --- --- 1.25% Fixed interest rate securities $ 28,885 $ 53,627 $ 33,453 $ 12,386 $ 9,881 $ 40,503 $178,735 $178,780 Average interest rates 3.82% 3.67% 2.95% 3.83% 3.81% 3.94% 3.64% Fixed interest rate loans $ 91,909 $ 88,755 $ 67,851 $ 26,342 $ 25,040 $ 22,205 $322,102 $323,740 Average interest rates 7.59% 7.53% 7.35% 7.28% 5.45% 7.01% 7.29% Variable interest rate loans $ 49,235 $ 9,482 $ 5,463 $ 3,231 $ 4,415 $ 923 $ 72,749 $ 72,749 Average interest rates 5.83% 5.87% 5.79% 5.91% 5.33% 5.21% 5.80% Rate sensitive liabilities Borrowed funds $ 718 $ 1,053 $ 53 $ 53 $ 5,053 $ 8,360 $ 15,290 $ 16,057 Average interest rates 1.00% 5.01% 4.16% 4.16% 5.08% 5.35% 5.02% Savings and NOW accounts $154,398 $ 20,257 $ 16,481 $ 13,575 $ 12,581 $ 33,631 $250,923 $250,923 Average interest rates 1.14% 1.09% 1.44% 1.27% 1.06% 0.84% 1.12% Fixed interest rate time deposits $129,992 $ 28,992 $ 41,554 $ 26,411 $ 21,073 $ 111 $248,133 $254,098 Average interest rates 2.92% 4.78% 5.53% 4.74% 4.48% --- 3.90% Variable interest rate time deposits $ 897 $ 411 $ 4 --- $ 396 --- $ 1,708 $ 1,708 Average interest rates 2.03% 2.03% --- --- 3.80% --- 2.44% </TABLE> 20
ITEM 4 - CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures - The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. An evaluation was performed under the supervision and with the participation of the Corporation's management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the Corporation's disclosure controls and procedures as of March 31, 2004. Based on that evaluation, the Corporation's management, including the CEO and CFO, concluded that the Corporation's disclosure controls and procedures were effective as of March 31, 2004. (b) Changes in Internal Controls - The Corporation also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the quarter ended March 31, 2004, that have materially affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. Based on this evaluation, there has been no such change during the quarter that ended March 31, 2004. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The following exhibits are filed as part of this report: 3(a) Amended Articles of Incorporation (1) 3(b) Amendment to the Articles of Incorporation (3) 3(c) Amendment to the Articles of Incorporation (4) 3(d) Amendment to the Articles of Incorporation (4) 3(e) Amended Bylaws (1) 3(f) Amendment to Bylaws (2) 3(g) Amendment to Bylaws (3) 3(h) Amendment to Bylaws (5) 3(i) Amendment to Bylaws (6) 3(j) Amendment to Bylaws (7) 31(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer 31(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer 32 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer 21
1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 12, 1991, and incorporated herein by reference. 2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 13, 1990, and incorporated herein by reference. 3) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 26, 1994, and incorporated herein by reference. 4) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 22, 2000, and incorporated herein by reference. 5) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 27, 2001, and incorporated herein by reference. 6) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 25, 2002, and incorporated herein by reference. 7) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 24, 2003, and incorporated herein by reference. (b) Reports on Form 8-K No reports on Form 8-K were filed or required to be filed during the quarter ended March 31, 2004. 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: April 30, 2004 /s/ Dennis P. Angner -------------------- Dennis P. Angner President and CEO /s/ Peggy L. Wheeler -------------------- Peggy L. Wheeler Principal Financial Officer 23
EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO DESCRIPTION - ---------- ----------- <S> <C> 31(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Executive Officer 31(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Chief Financial Officer 32 Section 1350 Certification of Chief Executive Officer and Chief Financial Officer </TABLE>