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, 2005 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, 4,909,037 as of April 15, 2005
IBT BANCORP, INC. Index to Form 10-Q <TABLE> <CAPTION> Page Numbers <S> <C> PART I FINANCIAL INFORMATION Item 1 Consolidated Financial Statements 3-9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10-19 Item 3 Quantitative and Qualitative Disclosures About Market Risk 19-21 Item 4 Controls and Procedures 22 PART II OTHER INFORMATION Item 6 Exhibits 22-23 Signature 24 Exhibit 31 25-26 Exhibit 32 27 </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 2005 2004 --------- ----------- (Unaudited) <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 16,524 $ 20,760 Investment securities Securities available for sale (Amortized cost of $167,021 in 2005 and $161,561 in 2004) 165,400 162,030 Securities held to maturity (Fair value-- $526 in 2005 and $537 in 2004) 522 523 --------- --------- TOTAL INVESTMENT SECURITIES 165,922 162,553 Mortgage loans available for sale 651 2,339 Loans Agricultural 45,475 49,179 Commercial 149,863 146,152 Residential real estate mortgage 194,235 192,037 Construction and Land Development 32,087 35,384 Installment 28,392 30,143 --------- --------- TOTAL LOANS 450,052 452,895 Less allowance for loan losses 6,657 6,444 --------- --------- NET LOANS 443,395 446,451 Other assets 48,246 45,931 --------- --------- TOTAL ASSETS $ 674,738 $ 678,034 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 63,248 $ 65,736 NOW accounts 100,114 101,362 Certificates of deposit and other savings 325,474 323,954 Certificates of deposit over $100,000 74,147 72,824 --------- --------- TOTAL DEPOSITS 562,983 563,876 Other borrowed funds 28,670 30,982 Accrued interest and other liabilities 10,647 10,582 --------- --------- TOTAL LIABILITIES 602,300 605,440 Shareholders' Equity Common stock -- no par value 10,000,000 shares authorized; outstanding-- 4,909,037 in 2005 (4,896,412 in 2004) 67,328 66,908 Retained earnings 7,393 6,590 Accumulated other comprehensive loss (2,283) (904) --------- --------- TOTAL SHAREHOLDERS' EQUITY 72,438 72,594 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 674,738 $ 678,034 ========= ========= </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 ---------------------- 2005 2004 --------- --------- <S> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of period 4,896,412 4,403,404 Common stock dividend -- 440,191 Issuance of common stock 12,625 11,225 --------- --------- BALANCE END OF PERIOD 4,909,037 4,854,820 ========= ========= COMMON STOCK Balance at beginning of period $ 66,908 $ 47,491 Common stock dividend -- 17,608 Issuance of common stock 420 377 --------- --------- BALANCE END OF PERIOD 67,328 65,476 RETAINED EARNINGS Balance at beginning of period 6,590 20,623 Net income 1,343 1,477 Common stock dividend -- (17,608) Cash dividends ($0.11 per share in 2005 and in 2004) (540) (541) --------- --------- BALANCE END OF PERIOD 7,393 3,951 ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME Balance at beginning of period (904) 822 Other comprehensive (loss) income (1,379) 597 --------- --------- BALANCE END OF PERIOD (2,283) 1,419 --------- --------- TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 72,438 $ 70,846 ========= ========= </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 ---------------------- 2005 2004 --------- --------- <S> <C> <C> INTEREST INCOME Loans, including fees $ 7,159 $ 6,861 Investment securities Taxable 831 1,012 Nontaxable 576 511 Federal funds sold and other 62 66 --------- --------- TOTAL INTEREST INCOME 8,628 8,450 INTEREST EXPENSE Deposits 2,472 2,430 Borrowings 293 240 --------- --------- TOTAL INTEREST EXPENSE 2,765 2,670 --------- --------- NET INTEREST INCOME 5,863 5,780 Provision for loan losses 210 240 --------- --------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,653 5,540 NONINTEREST INCOME Trust fees 183 155 Service charges on deposit accounts 34 62 Other service charges and fees 851 861 Gain on sale of mortgage loans 76 126 Title insurance revenue 503 410 Other 210 326 --------- --------- TOTAL NONINTEREST INCOME 1,857 1,940 NONINTEREST EXPENSES Compensation 3,338 3,293 Occupancy 420 392 Furniture and equipment 645 631 Other 1,454 1,252 --------- --------- TOTAL NONINTEREST EXPENSES 5,857 5,568 INCOME BEFORE FEDERAL INCOME TAXES 1,653 1,912 Federal income taxes 310 435 --------- --------- NET INCOME $ 1,343 $ 1,477 ========= ========= Basic net income per share $ 0.27 $ 0.30 ========= ========= Cash dividends per share $ 0.11 $ 0.11 ========= ========= </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 March 31 ---------------------- 2005 2004 --------- --------- <S> <C> <C> NET INCOME $ 1,343 $ 1,477 Unrealized holding (losses) gains on investment securities arising during period (2,090) 892 Reclassification adjustment for realized gains included in net income -- 13 --------- --------- Other comprehensive (loss) income before income tax benefit (expense) (2,090) 905 Income tax benefit (expense) related to comprehensive (loss) income 711 (308) --------- --------- OTHER COMPREHENSIVE (LOSS) INCOME (1,379) 597 --------- --------- COMPREHENSIVE (LOSS) INCOME $ (36) $ 2,074 ========= ========= </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 ---------------------- 2005 2004 --------- --------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 1,343 $ 1,477 Reconciliation of net income to net cash provided by (used in) operations: Provision for loan losses 210 240 Depreciation 423 368 Net amortization on investment securities 280 432 Gains on sales of investment securities -- (13) Amortization and impairment of mortgage servicing rights 24 55 Increase in cash value of life insurance (91) (105) Amortization of acquisition intangibles 23 23 Gain on sales of mortgage loans (76) (126) Net change in loans held for sale 1,764 (3,145) (Increase) decrease in accrued interest receivable (292) 5 Increase in other assets (996) (1,603) Increase in accrued interest and other liabilities 65 1,389 --------- --------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,677 (1,003) INVESTING ACTIVITIES Activity in available-for-sale securities Maturities, calls, and sales 9,857 9,988 Purchases (15,593) (29,259) Net decrease in loans 2,843 4,828 Purchases of equipment and premises (695) (876) --------- --------- NET CASH USED IN INVESTING ACTIVITIES (3,588) (15,319) FINANCING ACTIVITIES Net decrease in noninterest bearing deposits (2,488) (7,184) Net increase in interest bearing deposits 1,595 11,483 Net (decrease) increase in borrowings (2,312) 7,108 Cash dividends (540) (541) Proceeds from issuance of common stock 420 377 --------- --------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,325) 11,243 --------- --------- DECREASE IN CASH AND CASH EQUIVALENTS (4,236) (5,079) Cash and cash equivalents beginning of period 20,760 31,218 --------- --------- CASH AND CASH EQUIVALENTS END OF PERIOD $ 16,524 $ 26,139 ========= ========= </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, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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, 2004. 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 4,909,037 for quarter ended March 31, 2005, and 4,848,855 for the quarter ended March 31, 2004. The Corporation has no common stock equivalents and, accordingly, presents only basic earnings per share. NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS In April 2005, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for implementation of Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R). The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Corporation will adopt SFAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Corporation's results of operations. In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29, "Accounting for Nonmonetary Transactions", is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of SFAS No. 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Early application is permitted and companies must apply the standard prospectively. The adoption of this standard is not expected to have a material effect on the Corporation's results of operations or financial position. 8
Statement of Position (SOP) 03-3 prohibits "carrying over" or creation of a valuation allowance in the initial accounting for all loans acquired in a transfer. The prohibition of the valuation carryover applies to the purchase of an individual loan, a pool of loans, a group of loans and loans acquired in a purchased business combination. The provisions of SOP 03-3 were effective for loans acquired by the Corporation beginning in 2005. While the adoption of this standard is dependent on the effect of future loan purchases and/or acquisitions, there was no impact in the quarter ended March 31, 2005. 9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the major factors that influenced IBT Bancorp's financial performance. This analysis should be read in conjunction with the Corporation's 2004 annual report and with the unaudited consolidated financial statements and notes, as set forth on pages 3 through 9 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, 2004. 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 2004 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. 10
THREE MONTHS ENDED MARCH 31, 2005 AND 2004 RESULTS OF OPERATIONS Net income equaled $1.34 million for the three month period ended March 31, 2005, compared to $1.48 million for the same period in 2004. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, equaled .78% for the first three months of 2005 and .87% for 2004. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 7.31% for the quarter ended March 31, 2005 versus 8.54% for the same period in 2004. SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended March 31 ---------------------- 2005 2004 --------- --------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $ 5,863 $ 5,780 Provision for loan losses 210 240 Net income 1,343 1,477 PER SHARE DATA Net income 0.27 0.30 Cash dividends 0.11 0.11 RATIOS Average primary capital to average assets 11.54% 11.05% Net income to average assets 0.78 0.87 Net income to average equity 7.31 8.54 </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 $262,000 in 2005 versus $291,000 in 2004. 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. 11
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% income 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, 2005 March 31, 2004 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 $451,977 $7,159 6.34% $423,393 $6,862 6.48% Taxable investment securities 102,051 831 3.26 121,182 1,012 3.34 Nontaxable investment securities 62,878 919 5.85 52,249 772 5.91 Federal funds sold 6,345 22 1.39 12,585 31 0.99 Other investments 3,631 40 4.41 2,933 35 4.77 -------- ------ ---- -------- ------ ---- Total Earning Assets 626,882 8,971 5.72 612,342 8,712 5.69 NONEARNING ASSETS Allowance for loan losses (6,498) (6,340) Cash and due from banks 22,336 28,603 Premises and equipment 19,621 15,304 Accrued income and other assets 23,504 26,795 -------- -------- TOTAL ASSETS $685,845 $676,704 ======== ======== INTEREST BEARING LIABILITIES Interest bearing demand deposits $106,314 255 0.96 $121,781 163 0.54 Savings deposits 165,425 236 0.57 155,695 239 0.61 Time deposits 236,073 1,981 3.36 239,960 2,028 3.38 Borrowed funds 29,598 293 3.95 21,699 240 4.42 -------- ------ ---- -------- ------ ---- Total Interest Bearing Liabilities 537,410 2,765 2.06 539,135 2,670 1.98 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 64,337 59,190 Other 10,681 9,235 Shareholders' equity 73,417 69,144 -------- -------- TOTAL LIABILITIES AND EQUITY $685,845 $676,704 ======== ======== NET INTEREST INCOME (FTE) $6,206 $6,042 ====== ====== NET YIELD ON INTEREST EARNING ASSETS (FTE) 3.96% 3.95% ==== ==== </TABLE> 12
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, 2005 Compared to March 31, 2004 Increase (Decrease) Due to ---------------------------- Volume Rate Net ------ ------- ------ <S> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $ 455 $ (158) $ 297 Taxable investment securities (156) (25) (181) Nontaxable investment securities 156 (9) 147 Federal funds sold (19) 10 (9) Other investments 8 (3) 5 ------ ------- ------ Total changes in interest income 444 (185) 259 Total changes in interest expense 38 57 95 ------ ------- ------ Net change in interest margin (FTE) $ 406 $ (242) $ 164 ====== ======= ====== </TABLE> 13
IBT BANCORP, INC. TABLE 3: SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) <TABLE> <CAPTION> Three Months Ended March 31 --------------------- 2005 2004 ------- ------- <S> <C> <C> Summary of changes in allowance Allowance for loan losses - January 1 $ 6,444 $ 6,204 Loans charged off (112) (113) Recoveries of previously charged off loans 115 166 ------- ------- Net loans recovered 3 53 Provision charged to operations 210 240 ------- ------- Allowance for loan losses - March 31 $ 6,657 $ 6,497 ======= ======= Allowance for loan losses as a % of loans 1.48% 1.56% ======= ======= </TABLE> NONPERFORMING LOANS (Dollars in thousands) <TABLE> <CAPTION> March 31 --------------------- 2005 2004 -------- -------- <S> <C> <C> Total amount of loans outstanding at the end of the period $450,052 $417,084 ======== ======== Nonaccrual loans $ 1,683 $ 3,412 Accruing loans past due 90 days or more 2,101 923 Restructured loans 682 -- -------- -------- Total $ 4,466 $ 4,335 ======== ======== Loans classified as nonperforming as a % of outstanding loans .99% 1.04% ======== ======== </TABLE> To management's knowledge, there are no other loans which cause management to have serious doubts as to the ability of borrowers to comply with their loan repayment terms. 14
NET INTEREST INCOME (CONTINUED) As shown in Tables number 1 and 2, when comparing the three month period ended March 31, 2005 to the same period in 2004, fully taxable equivalent (FTE) net interest income increased $164,000 or 2.7%. An increase of 2.4% in average interest earning assets provided $444,000 of FTE interest income. The growth in interest earning assets was primarily funded by an increase in noninterest bearing deposits and net income. Average interest bearing liabilities declined slightly ($537 million at March 31, 2005 versus $539 million at March 31, 2004), resulting in a reduction in interest expense of $38,000. Overall, changes in volume resulted in a $406,000 increase in FTE interest income. The average rate paid on deposits increased 0.08%, increasing interest expense by $57,000. An increase in loans as a percent of total earning assets combined with a decrease in their average rate earned, significantly contributed to a decline of $185,000 in interest income due to rates. The net change related to interest rates earned and paid resulted in a $242,000 decrease in FTE net interest income. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 3.96% during 2005 versus 3.95% in 2004. The increase in the yield was primarily due to the 2.37% increase in earning assets versus the 0.32% decline in interest bearing liabilities. Additionally, the Corporation's reliance on higher cost borrowings to fund asset growth continues to adversely impact net interest yields. Management expects the Corporation's reliance on these higher-cost funds to continue. Management believes that short-term interest rates will continue to rise and will result in a slight increase in net interest margin for the remainder of 2005. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Net loans outstanding represent 65.7% 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 probable 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, 2005 to March 31, 2004, total average loans outstanding increased 6.8%. The provision for loan losses decreased $30,000 to $210,000 in the first quarter of 2005 when compared to 2004. The decrease in the provision for loan losses resulted from a decrease in nonperforming loans as a percentage of total outstanding loans. As set forth in Table 3, loans classified as nonperforming to total loans outstanding were 0.99% as of March 31, 2005, versus 1.04% in the prior year. The allowance for loan losses as a percentage of loans equaled 1.48% in 2005 and 1.56% in 2004. In management's opinion, the allowance for loan losses is adequate as of March 31, 2005. 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 $83,000 during the three month period ended March 31, 2005, compared to the same period in 2004. The majority of the decrease in noninterest income is related to a decrease of mortgage activity during the first quarter of 2005. Individual account changes during this period include a $50,000 decrease in gains on the sale of residential real estate mortgage loans, a $28,000 decrease in service charges on deposit accounts, and a $36,000 decrease in the net income related to mortgage servicing assets which is included in the $116,000 decrease in other income. These declines were offset by a $28,000 increase in trust fee income and a $93,000 15
increase in income from sale of title insurance and related services as a result of an increase in commercial lending activity. 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 $91,000 and $105,000 during the quarters ended March 31, 2005 and 2004, respectively, is recorded as other noninterest income. These policies earned an average rate of 3.56% and 4.23% as of March 31, 2005 and 2004, respectively. Due to the preferential tax treatment, the policies have a taxable equivalent rate of 5.40% and 6.41% as of March 31, 2005 and 2004, respectively. 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 retained on these loans. Included in other noninterest income is a $76,000 gain from the sale of $9.3 million in mortgages during the first quarter of 2005 versus a $126,000 gain on the sale of $13.6 million in the same period in 2004. NONINTEREST EXPENSES Noninterest expenses increased $289,000 for the first three months of 2005 when compared to the same period in 2004. The majority of the increase in these expenses are related to a $232,000 increase in professional services associated with Sarbanes-Oxley Act Section 404 compliance efforts. The largest component of noninterest expense is compensation expense, which increased $45,000 or 1.4%. The increase is due to additional staffing and normal merit and promotional salary increases. Occupancy and furniture and equipment expenses increased $42,000 or 4.1% in 2005. The majority of this increase is a result of an increase in equipment and building depreciation as well as expenses attributable to the Big Rapids branch which was opened in December 2004. Excluding the aforementioned increase in professional fees, other operating expenses decreased $30,000. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 2004, total assets decreased $3.3 million to $674.7 million. During the first quarter of 2005, major changes in asset mix included a $4.2 million decrease in cash and cash equivalents, a $3.4 million increase in investment securities, a $1.7 million decrease in mortgage loans available for sale, and a $3.1 million decrease in net loans. Deposits during this period decreased $893,000. Interest bearing deposits increased $1.6 million and noninterest bearing deposits decreased $2.5 million, borrowed funds decreased $2.3 million, and shareholders' equity decreased $156,000. 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. As of March 31, 2005, cash and cash equivalents as a percentage of total assets equaled 2.4%, versus 3.1% as of December 31, 2004. During the first three months of 2005, cash provided for operating activities was $2.7 16
million, financing activity used $3.3 million, and investing activities used $3.6 million. The accumulated effect of the Corporation's operating, investing, and financing activities was a $4.2 million decrease in cash and cash equivalents during the first three months of 2005. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale equaled $165.4 million as of March 31, 2005 and $162.0 million as of December 31, 2004. 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, and retained earnings, reduced by accumulated other comprehensive loss, and decreased approximately $156,000 since December 31, 2004. The decline in capital was due to a $1.4 million increase in other comprehensive loss as a result of declines in fair value of investment securities offset by net income of $1.3 million. 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 11.05% at March 31, 2005. 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, 2005: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS <TABLE> <CAPTION> IBT Bancorp March 31, 2005 Required Actual -------- ------ <S> <C> <C> Equity Capital 4.00% 15.59% Secondary Capital* 4.00 1.25 ---- ----- Total Capital 8.00% 16.85% ==== ===== </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, 17
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 contractual 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 $61.3 million at March 31, 2005, 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, 2005, the Corporation had a total of $1 million 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, 2005 approximated $1.7 million. 18
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 of the subsidiary banks 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 19
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 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, 2005. The Corporation has no interest rate swaps, futures contracts, or other derivative financial options. The principal amounts of assets and time deposits maturing were calculated based on the contractual maturity dates. Savings and NOW accounts are based on management's estimate of their future cash flows. 20
Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> March 31 Fair Value ---------------------------------------------------------------------------------------------- 2006 2007 2008 2009 2010 Thereafter Total 03/31/05 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 705 -- -- -- -- -- $ 705 $ 705 Average interest rates 2.80% -- -- -- -- -- 2.80% Fixed interest rate securities $ 34,463 $ 38,300 $ 33,079 $ 16,352 $ 10,191 $ 33,537 $ 165,922 $ 165,926 Average interest rates 3.71% 3.23% 3.27% 3.42% 3.81% 3.50% 3.38% Fixed interest rate loans $ 94,403 $ 76,824 $ 69,530 $ 49,723 $ 48,526 $ 22,329 $ 361,335 $ 379,713 Average interest rates 6.38% 5.97% 6.08% 5.87% 5.97% 5.18% 6.04% Variable interest rate loans $ 66,631 $ 4,934 $ 9,245 $ 5,529 $ 1,709 $ 1,320 $ 89,368 $ 89,368 Average interest rates 6.68% 7.72% 6.93% 6.76% 6.80% 9.16% 6.81% Rate sensitive liabilities Borrowed funds $ 8,693 $ 3,000 $ 4,165 $ 2,500 $ 6,000 $ 4,312 $ 28,670 $ 28,854 Average interest rates 3.86% 3.31% 3.65% 3.45% 4.51% 5.82% 4.17% Savings and NOW accounts $ 69,697 $ 52,666 $ 68,098 $ 35,347 $ 33,185 $ 3,953 $ 262,946 $ 262,946 Average interest rates 1.21% 0.60% 0.53% 0.35% 0.98% 0.55% 0.76% Fixed interest rate time deposits $ 126,525 $ 42,684 $ 33,980 $ 16,918 $ 13,565 $ 1,779 $ 235,451 $ 234,603 Average interest rates 3.18% 3.95% 3.89% 3.40% 3.67% 4.28% 3.47% Variable interest rate time deposits $ 796 $ 537 $ 5 -- -- -- $ 1,338 $ 1,338 Average interest rates 2.55% 2.55% 2.58% -- -- -- 2.55% </TABLE> Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> March 31 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> 21
ITEM 4 - CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES The Corporation's management carried out an evaluation, under the supervision and with the participation of the Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of March 31, 2005, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer/Principal Financial Officer concluded that the Corporation's disclosure controls and procedures as of March 31, 2005, were effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the three months ended March 31, 2005, no change occurred in the Corporation's internal control over financial reporting that materially affected, or is likely to materially affect, the Corporation's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 6 - EXHIBITS (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 (4) 3(d) Amendment to the Articles of Incorporation (4) 3(e) Amended Bylaws 10(a) Isabella Bank & Trust Executive Supplemental Income Agreement (2) 10(b) Isabella Bank & Trust Deferred Compensation Plan (3) 10(c) IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan for Directors (5) 10(d) Isabella Bank and Trust Death Benefit Only Agreement (6) 31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer and Principal Financial Officer 32 Section 1350 Certification of Principal Executive Officer and Principal 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. 22
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 26, 1996, 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 16, 2005, and incorporated herein by reference. 23
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, 2005 /s/ Dennis P. Angner -------------------- Dennis P. Angner Principal Executive Officer and Principal Financial Officer 24
EXHIBIT INDEX 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 (4) 3(d) Amendment to the Articles of Incorporation (4) 3(e) Amended Bylaws 10(a) Isabella Bank & Trust Executive Supplemental Income Agreement (2) 10(b) Isabella Bank & Trust Deferred Compensation Plan (3) 10(c) IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan for Directors (5) 10(d) Isabella Bank and Trust Death Benefit Only Agreement (6) 31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer and Principal Financial Officer 32 Section 1350 Certification of Principal Executive Officer and Principal 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 26, 1996, 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 16, 2005, and incorporated herein by reference.