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, 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 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, 4,860,462 as of July 22, 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 9-21 Item 3 Quantitative and Qualitative Disclosures About Market Risk 22-23 Item 4 Controls and Procedures 24 PART II OTHER INFORMATION Item 2 Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 24 Item 4 Submission of Matters to a Vote of Securities Holders 25 Item 6 Exhibits and Reports on Form 8-K 25-26 Signatures 27 Exhibit Index 28 </TABLE> 2
PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS IBT BANCORP, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands) <TABLE> <CAPTION> June 30 December 31 2004 2003 --------- --------- (Unaudited) <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 28,882 $ 25,918 Federal funds sold 26 5,300 --------- --------- TOTAL CASH AND CASH EQUIVALENTS 28,908 31,218 Investment securities Securities available for sale (Amortized cost of $167,286 in 2004 and $166,730 in 2003) 166,655 169,832 Securities held to maturity (Fair value - $986 in 2004 and $1,349 in 2003) 971 1,312 --------- --------- TOTAL INVESTMENT SECURITIES 167,626 171,144 Mortgage loans available for sale 1,348 4,315 Loans (Note 3) Agricultural 50,233 50,548 Commercial 149,981 141,312 Real estate mortgage 185,714 176,828 Installment 52,591 53,171 --------- --------- TOTAL LOANS 438,519 421,859 Less allowance for loan losses 6,573 6,204 --------- --------- NET LOANS 431,946 415,655 Other assets 44,179 41,747 --------- --------- TOTAL ASSETS $ 674,007 $ 664,079 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 65,780 $ 67,760 NOW accounts 99,382 117,560 Certificates of deposit and other savings 318,954 312,914 Certificates of deposit over $100 75,271 69,473 --------- --------- TOTAL DEPOSITS 559,387 567,707 Other borrowed funds 33,732 18,053 Accrued interest and other liabilities 11,716 9,383 --------- --------- TOTAL LIABILITIES 604,835 595,143 Shareholders' Equity Common stock -- no par value, 10,000,000 shares authorized; outstanding-- 4,860,462 in 2004 (4,403,404 in 2003) 65,641 47,491 Retained earnings 5,173 20,623 Accumulated other comprehensive (loss) income (1,642) 822 --------- --------- TOTAL SHAREHOLDERS' EQUITY 69,172 68,936 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 674,007 $ 664,079 ========= ========= </TABLE> See notes to consolidated financial statements. 3
IBT BANCORP CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30 -------------------------- 2004 2003 ----------- ----------- <S> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of period 4,403,404 4,336,283 Stock dividend 440,191 -- Issuance of common stock 21,438 19,151 Common stock repurchased (4,571) (2,136) ----------- ----------- BALANCE END OF PERIOD 4,860,462 4,353,298 =========== =========== COMMON STOCK Balance at beginning of period $ 47,491 $ 45,610 Stock dividend 17,608 -- Issuance of common stock 734 613 Stock repurchased (192) (77) ----------- ----------- BALANCE END OF PERIOD 65,641 46,146 RETAINED EARNINGS Balance at beginning of period 20,623 16,299 Net income 3,232 3,898 Stock dividend (17,608) -- Cash dividends ($0.22 per share in 2004 and $0.20 in 2003) (1,074) (956) ----------- ----------- BALANCE END OF PERIOD 5,173 19,241 ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME Balance at beginning of period 822 1,548 Unrealized (losses) gains on securities available for sale, net of income taxes and reclassification adjustment (2,464) 817 ----------- ----------- BALANCE END OF PERIOD (1,642) 2,365 ----------- ----------- TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 69,172 $ 67,752 =========== =========== </TABLE> See notes to consolidated financial statements. 4
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 ----------------- ----------------- 2004 2003 2004 2003 ------- ------- ------- ------- <S> <C> <C> <C> <C> INTEREST INCOME Loans $ 6,801 $ 7,360 $13,662 $14,877 Investment securities Taxable 1,048 1,191 2,095 2,348 Nontaxable 538 495 1,049 989 Federal funds sold and other 6 73 42 169 ------- ------- ------- ------- TOTAL INTEREST INCOME 8,393 9,119 16,848 18,383 INTEREST EXPENSE Deposits 2,291 3,034 4,721 6,170 Federal funds purchased 275 204 515 391 ------- ------- ------- ------- TOTAL INTEREST EXPENSE 2,566 3,238 5,236 6,561 ------- ------- ------- ------- NET INTEREST INCOME 5,827 5,881 11,612 11,822 Provision for loan losses 225 333 465 545 ------- ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,602 5,548 11,147 11,277 NONINTEREST INCOME Trust fees 155 155 309 314 Service charges on deposit accounts 66 63 133 127 Other service charges and fees 872 864 1,729 2,034 Gain on sale of mortgage loans 155 819 281 1,483 Title insurance revenue 600 756 1,011 1,369 Other 351 316 672 600 ------- ------- ------- ------- TOTAL NONINTEREST INCOME 2,199 2,973 4,135 5,927 NONINTEREST EXPENSES Compensation expense 3,240 3,366 6,534 6,635 Occupancy 342 363 734 734 Furniture and equipment 573 574 1,205 1,114 Other 1,322 1,576 2,572 3,467 ------- ------- ------- ------- TOTAL NONINTEREST EXPENSES 5,477 5,879 11,045 11,950 INCOME BEFORE FEDERAL INCOME TAXES 2,324 2,642 4,237 5,254 Federal income taxes 568 686 1,005 1,356 ------- ------- ------- ------- NET INCOME $ 1,756 $ 1,956 $ 3,232 $ 3,898 ======= ======= ======= ======= Basic net income per share $ 0.36 $ 0.41 $ 0.67 $ 0.82 ======= ======= ======= ======= Cash dividends per share $ 0.11 $ 0.10 $ 0.22 $ 0.20 ======= ======= ======= ======= </TABLE> See notes to consolidated financial statements. 5
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 ------------------ ------------------ 2004 2003 2004 2003 ------- ------- ------- ------- <S> <C> <C> <C> <C> NET INCOME $ 1,756 $ 1,956 $ 3,232 $ 3,898 Other comprehensive (loss) income before income taxes: Unrealized (losses) gains on available-for-sale securities: Unrealized holding (losses) gains arising during period (4,577) 824 (3,659) 1,238 Reclassification adjustment for realized gains Included in net income (61) -- (74) -- ------- ------- ------- ------- Other comprehensive (loss) income before Income taxes (4,638) 824 (3,733) 1,238 Income tax benefit (expense) related to other comprehensive income 1,577 (280) 1,269 (421) ------- ------- ------- ------- OTHER COMPREHENSIVE (LOSS) INCOME (3,061) 544 (2,464) 817 ------- ------- ------- ------- COMPREHENSIVE (LOSS) INCOME $(1,305) $ 2,500 $ 768 $ 4,715 ======= ======= ======= ======= </TABLE> See notes to consolidated financial statements. 6
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) <TABLE> <CAPTION> Six Months Ended June 30 --------------------- 2004 2003 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 3,232 $ 3,898 Adjustments to reconcile net income to cash provided by operations: Provision for loan losses 465 545 Depreciation 730 772 Net amortization of securities 886 734 Realized gain on sales of investment securities (74) -- Amortization and impairment of mortgage servicing rights 232 706 Increase in cash value of life insurance (212) (235) Amortization of intangibles 47 47 Gain on sales of mortgage loans (281) (1,483) Net change in loans held for sale 3,248 1,614 Decrease in interest receivable 598 237 Increase in other assets (462) (1,670) Increase in accrued interest and other expenses 2,333 2,324 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 10,742 7,489 INVESTING ACTIVITIES Activity in available-for-sale securities Maturities, calls, and sales 44,852 13,975 Purchases (45,879) (46,428) Activity in held to maturity securities Maturities, calls, and sales -- 570 Net (increase) decrease in loans (16,756) 4,827 Purchases of equipment and premises (2,096) (1,173) -------- -------- NET CASH USED BY INVESTING ACTIVITIES (19,879) (28,229) FINANCING ACTIVITIES Net (decrease) increase in noninterest bearing deposits (1,980) 7,125 Net decrease in interest bearing deposits (6,340) (1,270) Net increase (decrease) in other borrowed funds 15,679 (502) Cash dividends (1,074) (956) Proceeds from the issuance of common stock 734 613 Common stock repurchased (192) (77) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 6,827 4,933 -------- -------- DECREASE IN CASH AND CASH EQUIVALENTS (2,310) (15,807) Cash and cash equivalents at beginning of period 31,218 54,437 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 28,908 $ 38,630 ======== ======== </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 six month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended 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 as adjusted for the 10% stock dividend paid February 19, 2004, were 4,852,017 and 4,784,661 for the six month periods ending June 30, 2004 and 2003, respectively. The Corporation has no common stock equivalents and, accordingly, presents only basic earnings per share. NOTE 3 RECLASSIFICATION OF LOANS During June 2004, management of the Corporation became aware of the fact that various loan category amounts as of December 31, 2003 should be reclassified for consistency with the June 30, 2004 consolidated balance sheet presentation as follows: <TABLE> <CAPTION> December 31, 2003 as as Loan Category Reclassified Originally Reported ------------- ------------ ------------------- <S> <C> <C> Agricultural $ 50,548 $ 50,548 Commercial 141,312 149,931 Real estate mortgage 176,828 157,598 Installment 53,171 63,782 ---------- --------- $ 421,859 $ 421,859 ========== ========= </TABLE> The reclassifications have no effect on total loans or any other financial statement measure as of December 31, 2003 or for the year then ended. 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 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 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. SIX MONTHS ENDED JUNE 30, 2004 AND 2003 RESULTS OF OPERATIONS Net income equaled $3.23 million for the six month period ended June 30, 2004 versus $3.90 million in 2003. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, was .95% for the first six months of 2004 and 1.19% in 2003. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 9.29% through June 30, 2004 versus 12.19% for the same period in 2003. 9
SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Six Months Ended June 30 ------------------------ 2004 2003 ---------- ---------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $ 11,612 $ 11,822 Provision for loan losses 465 545 Net income 3,232 3,898 PER SHARE DATA Net income per common share 0.67 0.82 Cash dividends per common share 0.22 0.20 RATIOS Average primary capital to average assets 11.11% 10.56% Net income to average assets .95 1.19 Net income to average equity 9.29 12.19 </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 $610,000 in 2004 versus $ 897,000 in 2003. 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 13) 10
TABLE 1 IBT BANCORP, INC. AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME (Dollars in Thousands) The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. This schedule also presents an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a fully taxable equivalent (FTE) basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. Federal Reserve and Federal Home Loan Bank restricted equity holdings are included in Other Investments. <TABLE> <CAPTION> Six Months Ended June 30, 2004 June 30, 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 $ 426,782 $ 13,662 6.40% $ 392,870 $ 14,879 7.57% Taxable investment securities 125,027 2,016 3.22 121,825 2,296 3.77 Nontaxable investment securities 53,928 1,683 6.24 48,161 1,590 6.60 Federal funds sold + int. bearing deposits 7,041 42 1.19 28,515 169 1.19 Other investments 2,845 78 5.48 2,817 52 3.69 --------- --------- ---- --------- --------- ---- Total Earning Assets 615,623 17,481 5.68 594,188 18,986 6.39 NONEARNING ASSETS Allowance for loan losses (6,465) (5,855) Cash and due from banks 26,938 26,399 Premises and equipment 16,447 15,444 Accrued income and other assets 25,372 24,740 --------- --------- TOTAL ASSETS $ 677,915 $ 654,916 ========= ========= INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 113,446 273 0.48 $ 113,568 590 1.04 Savings deposits 155,900 436 0.56 140,082 752 1.07 Time deposits 240,640 4,012 3.33 251,508 4,827 3.84 Borrowed funds 27,093 515 3.80 16,029 391 4.88 --------- --------- ---- --------- --------- ---- Total Interest Bearing Liabilities 537,079 5,236 1.95 521,187 6,560 2.52 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 60,957 59,226 Other 10,321 10,573 Shareholders' equity 69,558 63,930 --------- --------- TOTAL LIABILITIES AND EQUITY $ 677,915 $ 654,916 ========= ========= --------- --------- NET INTEREST INCOME (FTE) $ 12,245 $ 12,426 ========= ========= ---- ---- NET YIELD ON INTEREST EARNING ASSETS (FTE) 3.98% 4.18% ==== ==== </TABLE> 11
TABLE 2 IBT BANCORP, INC. VOLUME AND RATE VARIANCE ANALYSIS (Dollars in Thousands) The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows: Volume Variance - change in volume multiplied by the previous year's rate. Rate Variance - change in the fully taxable equivalent (FTE) rate multiplied by the prior year's volume. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. <TABLE> <CAPTION> Six Month Period Ended June 30, 2004 Compared to Six Month Period Ended June 30, 2003 Increase (Decrease) Due to ------------------------------------- Volume Rate Net ------- ------- ------- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $ 1,213 $(2,430) $(1,217) Taxable investment securities 59 (339) (280) Nontaxable investment securities 183 (90) 93 Federal funds sold + int. bearing deposits (128) 1 (127) Other investments 1 25 26 ------- ------- ------- Total changes in interest income 1,328 (2,833) (1,505) Total changes in interest expense 99 (1,423) (1,324) ------- ------- ------- NET CHANGE IN INTEREST MARGINS (FTE) $ 1,229 $(1,410) $ (181) ======= ======= ======= </TABLE> 12
NET INTEREST INCOME, CONTINUED As shown in Tables number 1 and 2, when comparing the six month period ending June 30, 2004 to the same period in 2003, fully taxable equivalent (FTE) net interest income decreased $181,000 or 1.46%. An increase of 3.6% in average interest earning assets provided $1.3 million of FTE interest income. The majority of this growth was funded by a 3% increase in interest bearing liabilities, resulting in $99,000 of additional interest expense. Overall, changes in volume resulted in $1.2 million of additional FTE interest income. The average FTE interest rate earned on assets decreased by 0.71%, while the amount of interest earned as a result of changes in rate decreased $2.8 million. The average rate paid on deposits decreased by 0.57%, decreasing interest expense by $1.4 million. The net change related to interest rates earned and paid was a $1.4 million decrease in FTE net interest income. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 3.98 % during the first six months of 2004 versus 4.18% for the same period in 2003. The 0.20% decrease in the FTE interest margin was primarily a result of the average rate earned on earning assets declining faster than the average rate paid on interest bearing liabilities. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Net loans outstanding represent 64% 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, 2004 to June 30, 2003, the provision for loan losses was decreased $80,000 to $465,000. Year to date 2004, the Corporation had net charge-offs of $96,000 in 2004 versus $94,000 in 2003. Loans classified as nonperforming were 0.62% of loans as of June 30, 2004 versus 1.27% for June 30, 2003. The Corporation's peer group, which includes 255 holding companies with assets between $500 million and $1.0 billion, had a nonperforming loans to total loans ratio of 0.68% as of March 31, 2004. As of June 30, 2004, the allowance for loan losses as a percentage of loans equaled 1.50%. In management's opinion, the allowance for loan losses is adequate as of June 30, 2004. 13
TABLE 3 IBT BANCORP, INC. SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) <TABLE> <CAPTION> Six Months Ended June 30 ----------------------- 2004 2003 --------- --------- <S> <C> <C> Summary of changes in allowance Allowance for loan losses - January 1 $ 6,204 $ 5,593 Loans charged off (374) (296) Recoveries of charged off loans 278 202 --------- --------- Net loans charged off (96) (94) Provision charged to operations 465 545 --------- --------- ALLOWANCE FOR LOAN LOSSES - JUNE 30 $ 6,573 $ 6,044 ========= ========= ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.50% 1.57% ========= ========= </TABLE> NONPERFORMING LOANS (Dollars in thousands) <TABLE> <CAPTION> June 30 ----------------------- 2004 2003 --------- --------- <S> <C> <C> Total amount of loans outstanding for the period $ 438,519 $ 386,167 ========= ========= Nonaccrual loans $ 1,756 $ 1,724 Accruing loans past due 90 days or more 968 3,181 --------- --------- Total $ 2,724 $ 4,905 ========= ========= Loans classified as nonperforming as a % of outstanding loans 0.62% 1.27% ========= ========= </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. 14
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. Income earned from these sources decreased $1.8 million during the first six months of 2004 when compared to the same period in 2003. The majority of the decrease in noninterest income is related to a significant decrease in mortgage activity which slowed substantially during 2004 when compared to the first six months of 2003 causing a decrease in mortgage related fee income. Significant individual account changes during this period include a $358,000 decrease from the sale of title insurance and related services, a $1.2 million decrease in gains on the sale of mortgage loans, a $533,000 decrease in residential mortgage servicing income offset by a $260,000 increase in overdraft charges. Activity 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 $10.2 million in cash value of corporate owned life insurance policies. The increase in cash value of these policies of $212,000 and $235,000 during the six month periods ended June 30, 2004 and 2003, respectively, is recorded as other income. These policies earned an average rate of 4.22% and, due to their preferential tax treatment, have a taxable equivalent rate of 6.40%. 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 $281,000 gain from the sale of $22.9 million in mortgages during the first six months of 2004 versus a $1.5 million gain on the sale of $140.1 million in mortgages for the same period in 2003. NONINTEREST EXPENSES Noninterest expenses decreased $905,000 or 7.6% during the first six months of 2004 when compared to 2003. The largest component of noninterest expense is compensation expense, which decreased $101,000 or 1.5%. While there were normal merit and promotional salary increases, the net decrease is related to the reduction in compensation related to the decline in mortgage loan activity. Occupancy and furniture and equipment expenses increased $91,000 or 4.9% in 2004. The majority of this increase is related to equipment depreciation, service contracts, and property tax expense. Other expenses decreased by $895,000 or 25.8%. The decrease is primarily related to a $1.3 million 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 six months of 2004. 15
QUARTER ENDED JUNE 30, 2004 AND 2003 RESULTS OF OPERATIONS Net income equaled $1.76 million for the second quarter in 2004 versus $1.96 million in 2003. Return on average assets equaled 1.03% for the second quarter of 2004 versus 1.19% for the same period in 2003. Return on average equity equaled 10.04% for the second quarter in 2004, versus 11.98% for the second quarter in 2003. SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended June 30 ---------------------- 2004 2003 --------- --------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $ 5,827 $ 5,881 Provision for loan losses 225 333 Net income 1,756 1,956 PER SHARE DATA Net income per common share $ 0.36 $ 0.41 Cash dividend per common share 0.11 0.10 RATIOS Average primary capital to average assets 11.11% 10.75% Net income to average assets 1.03 1.19 Net income to average equity 10.04 11.98 </TABLE> NET INTEREST INCOME When comparing the second quarter of 2004 to 2003, net FTE interest income increased $67,000. An increase of 3.9% in interest earning assets provided $723,000 of FTE interest income. The asset growth was funded primarily by a 2.7% increase in interest bearing liabilities, resulting in $75,000 of increased interest expense. Overall, increased volume resulted in $648,000 of additional FTE interest income. During the second quarter of 2004, the average FTE interest rate earned on assets decreased by 0.62% and the average rate paid on deposits and borrowed funds decreased by 0.57%. The changes in interest rates earned and paid resulted in a $581,000 decrease in FTE interest income. The Corporation's FTE net interest yield as a percentage of average earning assets decreased 0.11% to 4.01% when comparing the second quarter of 2004 to the same period in 2003. The primary factor for the decrease was the average rate earned on earning assets declining faster than the average rate paid on interest bearing liabilities. 16
TABLE 4 IBT BANCORP, INC. AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME (Dollars in Thousands) The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. This schedule also presents an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a fully taxable equivalent (FTE) basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. Federal Reserve and Federal Home Loan Bank restricted stock is included in other investments. <TABLE> <CAPTION> Quarter Ended June 30, 2004 June 30, 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 $ 430,171 $ 6,800 6.32% $ 391,112 $ 7,361 7.53% Taxable investment securities 128,872 1,014 3.15 128,505 1,139 3.55 Nontaxable investment securities 55,607 911 6.55 48,360 792 6.55 Federal funds sold + Int. bearing deposits 1,497 6 1.60 25,087 77 1.23 Other 2,757 43 6.24 2,852 9 1.26 --------- ---------- ---- --------- ---------- ---- Total Earning Assets 618,904 8,774 5.67 595,916 9,378 6.29 NONEARNING ASSETS Allowance for loan losses (6,590) (5,976) Cash and due from banks 25,273 27,009 Premises and equipment 17,590 15,422 Accrued income and other assets 23,949 24,951 --------- --------- TOTAL ASSETS $ 679,126 $ 657,322 ========= ========= INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 105,111 110 0.42 $ 110,300 283 1.03 Savings deposits 156,105 197 0.50 141,983 369 1.04 Time deposits 241,320 1,984 3.29 252,295 2,381 3.77 Borrowed funds 32,487 275 3.39 16,257 204 5.02 --------- ---------- ---- --------- ---------- ---- Total Interest Bearing Liabilities 535,023 2,566 1.92 520,835 3,237 2.49 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS EQUITY Demand deposits 62,724 60,023 Other 11,407 11,158 Shareholders' equity 69,972 65,306 --------- --------- TOTAL LIABILITIES AND EQUITY $ 679,126 $ 657,322 ========= ========= ---------- ---------- NET INTEREST INCOME (FTE) $ 6,208 $ 6,141 ========== ========== ---- ---- NET YIELD ON INTEREST EARNING ASSETS (FTE) 4.01% 4.12% ==== ==== </TABLE> 17
TABLE 5 IBT BANCORP, INC. VOLUME AND RATE VARIANCE ANALYSIS (Dollars in Thousands) The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows: Volume Variance - change in volume multiplied by the previous year's rate. Rate Variance - change in the fully taxable equivalent (FTE) rate multiplied by the prior year's volume. The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each. <TABLE> <CAPTION> Quarter Ended June 30, 2004 Compared to June 30, 2003 Increase (Decrease) Due to ----------------------------- Volume Rate Net -------- ------- ------- <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $ 690 $(1,251) $ (561) Taxable investment securities 3 (128) (125) Nontaxable investment securities 119 0 119 Federal funds sold + int. bearing deposits (89) 18 (71) Other 0 34 34 ------- ------- ------- Total changes in interest income 723 (1,327) (604) Total changes in interest expense 75 (746) (671) ------- ------- ------- Net Change in Interest Margin (FTE) $ 648 $ (581) $ 67 ======= ======= ======= </TABLE> PROVISION FOR LOAN LOSSES The amount provided for loan losses in the second quarter of 2004 was $225,000 versus $333,000 in 2003. During the second quarter of 2004 the Corporation had net charge-offs of $149,000 versus $158,000 during the same period of 2003. The allowance for loan losses as a percent of loans was 1.50% as of June 30, 2004, a 0.07% decrease since June 30, 2003. NONINTEREST INCOME Noninterest income earned in the second quarter of 2004, when compared to the same period in 2003, decreased $774,000 or 26.0%. The most significant changes were a $156,000 decrease from the sale of title insurance and related services, and a $664,000 decrease in gains on the sale of mortgage loans. 18
NONINTEREST EXPENSES Noninterest expenses decreased $402,000 or 6.8% during the second quarter of 2004 when compared to 2003. Noninterest expense includes compensation expense, occupancy, and other operating expenses. The largest component of noninterest expense is compensation expense, which decreased $126,000 or 3.7%. While there were normal merit and promotional salary increases, the net decrease is related to the reduction in compensation related to the decline in mortgage loan activity. Occupancy and furniture and equipment expenses decreased $22,000 or 2.4%. Other operating expenses decreased $254,000 or 16.1%. The most significant change includes a $596,000 decrease in charitable donation expense (through the IBT Foundation) offset by minor increases in numerous other expense items. For additional information regarding the donation expense, please see page 15 under the caption Noninterest Expense. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 2003, total assets increased $9.9 million to $674 million. As of June 30, 2004, total loans increased $16.7 million, cash and demand deposits due from banks increased $3.0 million, federal funds sold decreased $5.3 million, and investment securities decreased $3.5 million when compared to December 31, 2003. Deposits during this period decreased $8.3 million, borrowed funds increased $15.7 million and shareholders' equity increased $236,000. 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 available-for-sale investment securities. As of June 30, 2004, cash and cash equivalents as a percentage of total assets equaled 4.3%, versus 4.7% as of December 31, 2003. During the first six months of 2004, $10.7 million in net cash was provided from operations and $6.8 million was provided from financing activities. Investing activities used $19.9 million. The accumulated effect of the Corporation's operating, investing and financing activities was a $2.3 million decrease in cash and cash equivalents during the first six months of 2004. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale were $166.7 million as of June 30, 2004 and $169.8 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. CAPITAL The capital of the Corporation consists solely of common stock, surplus, retained earnings, and accumulated other comprehensive loss; and increased approximately $236,000 since December 31, 2003. Accumulated other comprehensive loss increased $2.5 million due to unrealized depreciation in available-for-sale securities during 2004. 19
CAPITAL, CONTINUED There are no significant 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 shareholder's equity plus the allowance for loan losses less unamortized acquisition intangibles, was 10.57% as of June 30, 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 June 30, 2004: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS <TABLE> <CAPTION> IBT Bancorp June 30, 2004 Required Actual -------- ------ <S> <C> <C> Equity Capital 4.00% 15.14% Secondary Capital* 4.00 1.25 ----- ----- Total Capital 8.00% 16.39% ===== ===== </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, 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 $63 million at June 30, 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 20
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 June 30, 2004, the Corporation had a total of $911,000 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 June 30, 2004 approximated $1.9 million. 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 filings with the Securities and Exchange Commission. 21
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 borrower's 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 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. 22
The following table provides information about the Corporation's assets and liabilities that are sensitive to changes in interest rates as of June 30, 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. Quantitative Disclosures of Market Risk <TABLE> <CAPTION> June 30, 2004 Fair Value ------------------------------------------------------------------------------------ 2005 2006 2007 2008 2009 Thereafter Total 06/30/04 -------- ------- ------- ------- ------- ---------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets --- $ 199 --- --- --- --- $ 199 $ 199 Average interest rates 0.90% 2.67% --- --- --- --- 3.57% Fixed interest rate securities $ 20,552 $31,031 $27,191 $25,750 $12,747 $50,355 $167,626 $ 167,641 Average interest rates 2.84% 2.32% 2.62% 2.74% 3.16% 3.91% 3.19% Fixed interest rate loans $ 93,654 $62,346 $79,002 $39,638 $52,075 $23,720 $350,435 $ 347,973 Average interest rates 6.67% 7.05% 5.98% 6.45% 5.79% 5.02% 6.31% Variable interest rate loans $ 43,552 $ 9,121 $13,325 $ 8,747 $11,359 $ 3,328 $ 89,432 $ 89,432 Average interest rates 5.61% 4.39% 4.28% 5.13% 4.98% 5.59% 5.16% Rate sensitive liabilities Borrowed funds $ 17,464 $ 87 $ 9,589 $ 92 $ 34 $ 6,466 $ 33,732 $ 31,621 Average interest rates 1.48% 4.88% 3.99% 4.88% 4.88% 9.43% 3.74% Savings and NOW accounts $150,453 $22,626 $18,408 $13,395 $10,003 $30,365 $245,250 $ 245,250 Average interest rates 0.51% 0.32% 0.63% 0.55% 0.56% 0.32% 0.48% Fixed interest rate time deposits $121,003 $35,205 $40,115 $30,761 $17,009 $ 874 $244,967 $ 237,575 Average interest rates 2.38% 4.27% 4.20% 3.93% 3.14% 6.19% 3.21% Variable interest rate time deposits $ 949 $ 2,030 $ 0 $ 305 $ 106 $ 0 $ 3,390 $ 3,390 Average interest rates 1.28% 2.05% --- 4.21% 8.00% --- 2.21% </TABLE> Quantitative Disclosures of Market Risk <TABLE> <CAPTION> June 30, 2003 Fair Value ------------------------------------------------------------------------------------ 2004 2005 2006 2007 2008 Thereafter Total 06/30/03 -------- ------- ------- ------- ------- ---------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 4,650 --- --- --- --- --- $ 4,650 $ 4,650 Average interest rates 1.25% --- --- --- --- --- 1.25% Fixed interest rate securities $ 25,647 $54,645 $35,438 $16,389 $10,718 $49,194 $192,031 $ 192,088 Average interest rates 3.75% 3.61% 2.95% 3.13% 3.52% 3.81% 3.51% Fixed interest rate loans $ 90,415 $85,887 $62,757 $25,205 $30,166 $23,317 $317,747 $ 319,610 Average interest rates 6.99% 7.20% 6.77% 6.32% 6.50% 7.95% 6.97% Variable interest rate loans $ 58,906 $ 7,077 $ 5,739 $ 3,363 $ 5,772 $ 824 $ 81,681 $ 81,681 Average interest rates 5.66% 5.62% 5.91% 5.67% 5.33% 12.08% 5.72% Rate sensitive liabilities Borrowed funds $ 733 $ 1,077 $ 5,081 $ 85 $ 89 $10,226 $ 17,291 $ 18,194 Average interest rates 1.13% 5.01% 5.07% 4.62% 4.65% 5.05% 4.88% Savings and NOW accounts $151,634 $20,007 $16,276 $13,439 $12,461 $33,681 $247,498 $ 247,498 Average interest rates 1.07% 0.98% 1.36% 1.24% 0.81% 0.72% 1.03% Fixed interest rate time deposits $126,141 $34,786 $39,339 $29,141 $18,021 $ 122 $247,550 $ 253,784 Average interest rates 2.61% 4.80% 5.11% 4.53% 4.32% 7.98% 3.67% Variable interest rate time deposits $ 938 $ 527 --- $ 23 $544 --- $ 2,032 $ 2,032 Average interest rates 1.34% 1.34% --- 2.27% 2.27% --- 1.89% </TABLE> 23
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 June 30, 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 June 30, 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 period ended June 30, 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 period that ended June 30, 2004. PART II - OTHER INFORMATION ITEM 2 CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The following table shows information relating to the repurchase of shares of IBT Bancorp, Inc. Common Stock during the three months ended June 30, 2004: <TABLE> <CAPTION> Total Number Maximum of Shares Number Purchased as of Shares Part of Publicly that May Yet be Total Number Average Announced Purchased Under of Shares Price Paid Plans or The Plans or Purchased (1) Per Share Programs Programs <S> <C> <C> <C> <C> April 1 - 30 4,571 42.00 - 0 - - 0 - May 1 - 31 - 0 - - 0 - - 0 - - 0 - June 1 - 30 - 0 - - 0 - - 0 - - 0 - ----- ----- ----- ----- Total 4,571 42.00 - 0 - - 0 - ===== ===== </TABLE> (1) All shares re-purchased in the second quarter of 2004, were re-purchased pursuant to the right of first refusal on shares issued in conjunction with the IBT Bancorp Deferred Director Fee program. 24
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The registrant's annual meeting of shareholders was held on April 27, 2004. At the meeting the shareholders voted upon the following matters: Election of Directors to terms ending 2007: <TABLE> <CAPTION> For Withheld --------- -------- <S> <C> <C> James C. Fabiano 3,456,577 64,450 David W. Hole 3,489,441 31,586 Dale D. Weburg 3,459,453 61,574 </TABLE> 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 (2) 3(c) Amendment to the Articles of Incorporation (3) 3(d) Amendment to the Articles of Incorporation (3) 3(e) Amended and Restated Bylaws 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 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 26, 1994, and incorporated herein by reference. 3) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 22, 2000, and incorporated herein by reference. (b) Reports on Form 8-K The following Forms 8-K were filed during the three month period ended June 30, 2004: On May 13, 2004, the Corporation filed a Form 8-K to disclose that the Corporation had issued a press release to announce the Corporation's first quarter earnings. 25
On May 17, 2004, the Corporation filed a Form 8-K to disclose that the Corporation had issued a press release to announce the holding of the annual shareholders meeting for the Corporation. On June 2, 2004, the Corporation filed a Form 8-K to disclose that the Corporation had issued a press release to announce the appointment of a new director for the Board of Directors of Isabella Bank and Trust a wholly-owned subsidiary of the Corporation. On June 14, 2004, the Corporation filed a Form 8-K to disclose that the Corporation had issued a press release to announce the retirement of a director and the appointment of a new director for the Board of Directors of the Corporation. On June 20, 2004, the Corporation filed a Form 8-K to disclose that the Corporation had issued a press release to announce that a new Chairman had been appointed for the Board of Directors of the Corporation. 26
SIGNATURE 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 4, 2004 /s/ Dennis P. Angner -------------------- Dennis P. Angner President and CEO /s/ Peggy L. Wheeler --------------------- Peggy L. Wheeler Principal Financial Officer 27
EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. DESCRIPTION <S> <C> 3(e) Amended and Restated Bylaws 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> 28