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, 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 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, 4,919,526 as of July 19, 2005
IBT BANCORP, INC. Index to Form 10-Q <TABLE> <CAPTION> Page Numbers <S> <C> PART I FINANCIAL INFORMATION Item 1 Consolidated Financial Statements 3-10 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-23 Item 3 Quantitative and Qualitative Disclosures About Market Risk 24-25 Item 4 Controls and Procedures 26 PART II OTHER INFORMATION Item 4 Submission of Matters to a Vote of Securities Holders 27 Item 6 Exhibits 27 Signatures 28 Exhibit 31 Exhibit 32 </TABLE> 2
PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS IBT BANCORP, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands) <TABLE> <CAPTION> June 30 2005 December 31 (Unaudited) 2004 ----------- ----------- <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 20,505 $ 20,760 Federal funds sold 500 - ----------- ----------- TOTAL CASH AND CASH EQUIVELANTS 21,005 20,760 Investment securities Securities available for sale (Amortized cost of $169,382 in 2005 and $161,561 in 2004) 169,208 162,030 Securities held to maturity (Fair value - $521 in 2005 and $537 in 2004) 524 523 ----------- ----------- TOTAL INVESTMENT SECURITIES 169,732 162,553 Mortgage loans available for sale 1,780 2,339 Loans Agricultural 51,408 49,179 Construction and land development 31,283 35,384 Commercial 153,087 146,152 Personal 27,406 30,143 Residential real estate mortgage 200,468 192,037 ----------- ----------- TOTAL LOANS 463,652 452,895 Less allowance for loan losses 6,740 6,444 ----------- ----------- NET LOANS 456,912 446,451 Other assets 46,597 45,931 ----------- ----------- TOTAL ASSETS $ 696,026 $ 678,034 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 68,898 $ 65,736 NOW accounts 100,640 101,362 Certificates of deposit and other savings 326,320 323,954 Certificates of deposit over $100,000 74,588 72,824 ----------- ----------- TOTAL DEPOSITS 570,446 563,876 Other borrowed funds 37,951 30,982 Accrued interest and other liabilities 12,642 10,582 ----------- ----------- TOTAL LIABILITIES 621,039 605,440 Shareholders' Equity Common stock -- no par value 10,000,000 shares authorized; outstanding-- 4,919,526 in 2005 (4,896,412 in 2004) 67,698 66,908 Retained earnings 8,618 6,590 Accumulated other comprehensive loss (1,329) (904) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 74,987 72,594 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 696,026 $ 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> Six Months Ended June 30 -------------------------- 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 23,114 21,438 Common stock repurchased - (4,571) ----------- ----------- BALANCE END OF PERIOD 4,919,526 4,860,462 =========== =========== COMMON STOCK Balance at beginning of period $ 66,908 $ 47,491 Common stock dividend - 17,608 Issuance of common stock 790 734 Common stock repurchased - (192) ----------- ----------- BALANCE END OF PERIOD 67,698 65,641 RETAINED EARNINGS Balance at beginning of period 6,590 20,623 Net income 3,108 3,232 Common stock dividend - (17,608) Cash dividends ($0.22 per share in 2005 and $0.22 in 2004) (1,080) (1,074) ----------- ----------- BALANCE END OF PERIOD 8,618 5,173 ACCUMULATED OTHER COMPREHENSIVE LOSS Balance at beginning of period (904) 822 Other comprehensive loss (425) (2,464) ----------- ----------- BALANCE END OF PERIOD (1,329) (1,642) ----------- ----------- TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 74,987 $ 69,172 =========== =========== </TABLE> See notes to consolidated financial statements 4
IBT BANCORP, INC. (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 ------------------ ------------------- 2005 2004 2005 2004 -------- -------- -------- -------- <S> <C> <C> <C> <C> INTEREST INCOME Loans, including fees $ 7,464 $ 6,801 $ 14,623 $ 13,662 Investment securities Taxable 852 1,048 1,683 2,095 Nontaxable 599 538 1,175 1,049 Federal funds sold and other 68 6 130 42 -------- -------- -------- -------- TOTAL INTEREST INCOME 8,983 8,393 17,611 16,848 INTEREST EXPENSE Deposits 2,699 2,291 5,171 4,721 Borrowings 365 275 658 515 -------- -------- -------- -------- TOTAL INTEREST EXPENSE 3,064 2,566 5,829 5,236 -------- -------- -------- -------- NET INTEREST INCOME 5,919 5,827 11,782 11,612 Provision for loan losses 109 225 319 465 -------- -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,810 5,602 11,463 11,147 NONINTEREST INCOME Trust fees 199 155 382 309 Service charges on deposit accounts 83 66 117 133 Other service charges and fees 911 872 1,762 1,729 Gain on sale of mortgage loans 60 155 136 281 Title insurance revenue 592 600 1,095 1,011 Other 254 351 464 672 -------- -------- -------- -------- TOTAL NONINTEREST INCOME 2,099 2,199 3,956 4,135 NONINTEREST EXPENSES Compensation 3,413 3,240 6,751 6,534 Occupancy 375 342 795 734 Furniture and equipment 666 573 1,311 1,205 Other 1,168 1,322 2,622 2,572 -------- -------- -------- -------- TOTAL NONINTEREST EXPENSE 5,622 5,477 11,479 11,045 INCOME BEFORE FEDERAL INCOME TAXES 2,287 2,324 3,940 4,237 Federal income taxes 522 568 832 1,005 -------- -------- -------- -------- NET INCOME $ 1,765 $ 1,756 $ 3,108 $ 3,232 ======== ======== ======== ======== Basic net income per share $ 0.36 $ 0.36 $ 0.63 $ 0.67 ======== ======== ======== ======== Cash dividends per share $ 0.11 $ 0.11 $ 0.22 $ 0.22 ======== ======== ======== ======== </TABLE> See notes to consolidated financial statements. 5
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30 June 30 -------------------- -------------------- 2005 2004 2005 2004 ------- ------- ------- ------- <S> <C> <C> <C> <C> NET INCOME $ 1,765 $ 1,756 $ 3,108 $ 3,232 Other comprehensive income (loss) before income taxes: Unrealized gains (losses) on available-for-sale securities: Unrealized holding gains (losses) arising during period 1,449 (4,577) (641) (3,659) Reclassification adjustment for net realized gains included in net income (2) (61) (2) (74) ------- ------- ------- ------- Other comprehensive income (loss) before income taxes 1,447 (4,638) (643) (3,733) Income tax (expense) benefit related to other comprehensive income (loss) (493) 1,577 218 1,269 ------- ------- ------- ------- OTHER COMPREHENSIVE INCOME (LOSS) 954 (3,061) (425) (2,464) ------- ------- ------- ------- COMPREHENSIVE INCOME (LOSS) $ 2,719 $(1,305) $ 2,683 $ 768 ======= ======= ======= ======= </TABLE> See notes to consolidated financial statements. 6
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Six Months Ended June 30 2005 2004 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 3,108 $ 3,232 Reconciliation of net income to cash provided by operations: Provision for loan losses 319 465 Provision for depreciation 860 730 Net amortization of securities 523 886 Realized gain on sale of investment securities (2) (74) Amortization of mortgage servicing rights 70 232 Increase in cash value of life insurance (180) (212) Amortization of intangibles 47 47 Gain on sale of mortgage loans (136) (281) Net decrease in loans held for sale 695 3,248 Decrease in interest receivable 278 598 Increase in other assets (288) (462) Increase in accrued interest and other expenses 2,060 2,333 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,354 10,742 INVESTING ACTIVITIES Activity in available-for-sale securities Maturities, calls, and sales 23,876 44,852 Purchases (32,219) (45,879) Net increase in loans (10,780) (16,756) Purchases of equipment and premises (1,235) (2,096) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (20,358) (19,879) FINANCING ACTIVITIES Net increase (decrease) in noninterest bearing deposits 3,162 (1,980) Net increase (decrease) in interest bearing deposits 3,408 (6,340) Net increase in other borrowed funds 6,969 15,679 Cash dividends (1,080) (1,074) Proceeds from the issuance of common stock 790 734 Common stock repurchased - (192) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 13,249 6,827 -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVELANTS 245 (2,310) Cash and cash equivelants at beginning of period 20,760 31,218 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 21,005 $ 28,908 ======== ======== </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, 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 4,909,262 and 4,852,017 for the six month periods ended June 30, 2005 and 2004, respectively. The Corporation has no common stock equivalents and, accordingly, presents only basic earnings per share. 8
NOTE 3 OPERATING SEGMENTS The Corporation's reportable segments are based on legal entities that account for at least 10% of operating results. The accounting policies are the same as those discussed in Note A to the Consolidated Financial Statements in the Corporations annual report for the year ended December 31, 2004. The Corporation evaluates performance based principally on net income and asset quality of the respective segments. Summaries of selected financial information for the Corporation's reportable segments as of and for the six and three month period ended June 30 follow: Six Months Ended <TABLE> <CAPTION> All Others Isabella Bank Farmers (Including and Trust State Bank Parent) Total ------------- ---------- ---------- --------- <S> <C> <C> <C> <C> JUNE 30, 2005 Total assets $ 555,424 $ 127,177 $ 13,425 $696,026 Interest income 13,771 3,790 50 17,611 Net interest income 9,102 2,598 82 11,782 Provision for loan losses 229 90 - 319 Net income (loss) 2,726 703 (321) 3,108 JUNE 30, 2004 Total assets 541,960 123,517 8,530 674,007 Interest income 13,206 3,553 89 16,848 Net interest income 9,141 2,354 117 11,612 Provision for loan losses 300 165 - 465 Net income (loss) 2,822 540 (130) 3,232 </TABLE> Quarter Ended <TABLE> <CAPTION> All Others Isabella Bank Farmers (Including and Trust State Bank Parent) Total ------------- ---------- ---------- --------- <S> <C> <C> <C> <C> JUNE 30, 2005 Total assets $ 555,424 $ 127,177 $ 13,425 $696,026 Interest income 7,007 1,934 42 8,983 Net interest income 4,556 1,316 47 5,919 Provision for loan losses 64 45 - 109 Net income (loss) 1,463 363 (61) 1,765 JUNE 30, 2004 Total assets 541,960 123,517 8,530 674,007 Interest income 6,583 1,748 67 8,398 Net interest income 4,580 1,169 78 5,827 Provision for loan losses 150 75 - 225 Net income 1,467 276 13 1,756 </TABLE> 9
NOTE 4 DEFINED BENEFIT PENSION PLAN The Corporation has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employees' average compensation over their best five years of service. The funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to services to date but also for those expected to be earned in the future. The Corporation uses a January 1, 2005 measurement date for this pension plan. The components of net periodic benefit cost related to Corporation administered plans for the three and six-month periods ended June 30 were as follows: <TABLE> <CAPTION> Pension Benefits --------------------------------------- Three months ended Six months ended June 30 June 30 ------------------ ---------------- 2005 2004 2005 2004 ------ ------- ------ ------ (thousands) <S> <C> <C> <C> <C> Components of net periodic benefit cost Service cost $ 137 $ 130 $ 274 $ 260 Interest cost 135 125 270 250 Expected return on plan assets (116) (108) (232) (215) Amortization of prior service cost 5 5 9 9 Amortization of net actuarial loss 50 53 101 106 ------ ------- ------ ------ Net periodic benefit cost $ 211 $ 205 $ 422 $ 410 ====== ======= ====== ====== </TABLE> The Corporation has contributed $232 to the pension plan during the six month period ended June 30, 2005. The Corporation expects to contribute approximately $815 by the end of 2005. NOTE 5 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 June 2005, the Financial Accounting Standards Board issued Statement of Financial Accounts Standards No. 154 (SFAS 154), Accounting Changes and Error Corrections - a replacement of APB No. 20 and FAS No. 3. SFAS 154 changes the requirements for the accounting for and reporting of a change in accounting principle and applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will apply the provisions of this statement effective January 1, 2006, as applicable. 10
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 financial statements and notes, as set forth on pages 3 through 10 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 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. SIX MONTHS ENDED JUNE 30, 2005 AND 2004 RESULTS OF OPERATIONS Net income equaled $3.11 million for the six month period ended June 30, 2005 versus $3.23 million in 2004. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, was 0.90% for the first six months of 2005 and 0.95% in 2004. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 8.40% through June 30, 2005 versus 9.29% for the same period in 2004. 11
SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Six Months Ended June 30 ------------------------- 2005 2004 ---------- ---------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $ 11,782 $ 11,612 Provision for loan losses 319 465 Net income 3,108 3,232 PER SHARE DATA Net income per common share 0.63 0.67 Cash dividends per common share 0.22 0.22 RATIOS Average primary capital to average assets 11.60 % 11.11 % Net Income to average assets 0.90 0.95 Net income to average equity 8.40 9.29 </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 $567,000 in 2005 versus $610,000 in 2004. 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 15) 12
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. <TABLE> <CAPTION> Six Months Ended June 30, 2005 June 30, 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 $ 454,619 $ 14,623 6.43% $ 426,782 $ 13,662 6.40% Taxable investment securities 105,494 1,683 3.19 125,027 2,016 3.22 Non-taxable investment securities 61,415 1,873 6.10 53,928 1,683 6.24 Federal funds sold 4,254 53 2.49 7,041 42 1.19 Other 3,486 77 4.42 2,845 78 5.48 ----------- ---------- ---- --------- ---------- ---- Total earning assets 629,268 18,309 5.82 615,623 17,481 5.68 NON EARNING ASSETS: Allowance for loan losses (6,576) (6,465) Cash and due from banks 21,676 26,938 Premises and equipment 18,850 16,447 Accrued income and other assets 24,819 25,372 ----------- --------- Total assets $ 688,037 $ 677,915 =========== ========= INTEREST BEARING LIABILITIES: Interest-bearing demand deposits $ 104,594 419 0.80% $ 113,446 273 0.48% Savings deposits 160,964 651 0.81 155,900 436 0.56 Time deposits 238,195 4,101 3.44 240,640 4,012 3.33 Other borrowings 31,613 658 4.16 27,093 515 3.80 ----------- ---------- ---- --------- ---------- ---- Total interest bearing liabilities 535,366 5,829 2.18 537,079 5,236 1.95 NONINTEREST BEARING LIABILITIES: Demand deposits 67,425 60,957 Other 11,247 10,321 Shareholders' equity 73,999 69,558 ----------- --------- Total liabilities and equity $ 688,037 $ 677,915 =========== ========= Net interest income (FTE) $ 12,480 $ 12,245 ========== ========== Net yield on interest earning ---- ---- assets (FTE) 3.97% 3.98% ==== ==== </TABLE> 13
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, 2005 Compared to Six Month Period Ended June 30, 2004 Increase (Decrease) Due to ------------------------------------ Volume Rate Net -------- ------ -------- <S> <C> <C> <C> CHANGES IN INTEREST INCOME: Loans $ 895 $ 66 $ 961 Taxable investment securities (312) (21) (333) Nontaxable investment securities 229 (39) 190 Federal funds sold (21) 32 11 Other 16 (17) (1) -------- ------ -------- Total changes in interest income 807 21 828 Total changes in interest expense 41 534 575 -------- ------ -------- Net change in interest margin (FTE) $ 766 $ (513) $ 253 ======== ====== ======== </TABLE> 14
NET INTEREST INCOME, CONTINUED As shown in Tables number 1 and 2, when comparing the six month period ended June 30, 2005 to the same period in 2004, fully taxable equivalent (FTE) net interest income increased $235,000 or 1.92 %. An increase of 2.22% in average interest earning assets provided $807,000 of FTE interest income. The growth in interest earning assets was primarily funded by an increase in noninterest bearing deposits, other borrowings, and shareholders equity. The overall change in volume resulted in $765,000 of additional FTE interest income. The average FTE interest rate earned on assets increased by 0.14%, resulting in an increase in interest income of $21,000. The average rate paid on interest bearing liabilities increased by 0.23%, increasing interest expense by $551,000. The net change related to interest rates earned and paid was a $530,000 decrease in FTE net interest income. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 3.97% during the first six months of 2005 versus 3.98% for the same period in 2004. The 0.01% decrease in the FTE interest margin was primarily a result of the average rate earned on earning assets rising slower 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 65.65% 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, 2005 to June 30, 2004, the provision for loan losses was decreased $146,000 to $319,000. Year to date 2005, the Corporation had net charge-offs of $23,000 in 2005 versus $96,000 in 2004. Loans classified as nonperforming were 0.54% of loans as of June 30, 2005 versus 0.62% for June 30, 2004. 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 0.52% as of March 31, 2005. As of June 30, 2005, the allowance for loan losses as a percentage of loans equaled 1.45%. In management's opinion, the allowance for loan losses is adequate as of June 30, 2005. 15
TABLE 3 IBT BANCORP, INC. SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) <TABLE> <CAPTION> Six Months Ended June 30 --------------------- 2005 2004 ------- ------- <S> <C> <C> Summary of changes in allowance Allowance for loan losses - January 1 $ 6,444 $ 6,204 Loans charged off (200) (374) Recoveries of charged off loans 177 278 ------- ------- Net loans charged off (23) (96) Provision charged to operations 319 465 ------- ------- ALLOWANCE FOR LOAN LOSSES - JUNE 30 $ 6,740 $ 6,573 ======= ======= ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.45% 1.50% ======= ======= </TABLE> NONPERFORMING LOANS (Dollars in thousands) <TABLE> <CAPTION> June 30 ---------------------- 2005 2004 -------- -------- <S> <C> <C> Total amount of loans outstanding for the period $463,652 $438,519 Nonaccrual loans $ 1,168 $ 1,756 Accruing loans past due 90 days or more 1,318 968 -------- -------- Total $ 2,486 $ 2,724 ======== ======== Loans classified as nonperforming as a % of outstanding loans 0.54% 0.62% ======== ======== </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. 16
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 $179,000 during the first six months of 2005 when compared to the same period in 2004. The majority of the decrease in noninterest income is related to a decrease in mortgage activity during 2005. Significant individual account changes during this period include a $145,000 decrease in gains on the sale of mortgage loans, a $72,000 decrease from the gain on sales of securities, a $50,000 decrease in income related to mortgage servicing assets, and a decrease of $32,000 from income from corporate owned life insurance policies. These declines were offset by a $73,000 increase in trust fee income and a $84,000 increase in title insurance revenue. Included in other assets is $10.3 million in cash value of corporate owned life insurance policies. The increase in cash value of these policies of $180,000 and $212,000 during the six month periods ended June 30, 2005 and 2004, respectively, is recorded as other income. These policies earned an average rate of 3.50% and 4.22% during the six month period ended June 30, 2005 and 2004, respectively. Due to their preferential tax treatment, these policies have a taxable equivalent rate of 5.30% and 6.40% as of June 30, 2005 and 2004, respectively. These policies are placed with five different insurance companies with an S & P rating of A- 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 $136,000 gain from the sale of $17.0 million in mortgages during the first six months of 2005 versus a $281,000 gain on the sale of $22.9 million in mortgages for the same period in 2004. NONINTEREST EXPENSES Noninterest expenses increased $434,000 or 3.93% during the first six months of 2005 when compared to 2004. The largest component of noninterest expense is compensation expense, which increased $217,000 or 3.32%. The increase is due an increase in benefit expenses, additional staffing related to Isabella Bank and Trusts' new branch location in Big Rapids, Michigan, and normal merit and promotional salary increases. Occupancy and furniture and equipment expenses increased $167,000 or 8.61% in 2005. The majority of this increase is related to equipment depreciation and service contracts, which is related to the 2004 information systems conversion and upgrade, and property tax expense associated with the new location referred to above. Various other expenses increased by $50,000 or 1.94%. Extended Audit and Sarbanes Oxley Section 404 compliance costs were $294,000 during the first six months of 2005 compared to zero in 2004. These costs were partially offset by decreases in various other expense categories. Due to the overall decline in income, the Corporation did not make contributions to the IBT Foundation in the first six months of 2005 and 2004. 17
QUARTER ENDED JUNE 30, 2005 AND 2004 RESULTS OF OPERATIONS Net income equaled $1.77 million for the second quarter in 2005 versus $1.76 million in 2004. Return on average assets equaled 1.02% for the second quarter of 2005 versus 1.03% for the same period in 2004. Return on average equity equaled 9.48% for the second quarter in 2005, versus 10.04% for the second quarter in 2004. SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended June 30 ----------------------- 2005 2004 --------- --------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $ 5,919 $ 5,827 Provision for loan losses 109 225 Net income 1,765 1,756 PER SHARE DATA Net income per common share 0.36 0.36 Cash dividends per common share 0.11 0.11 RATIOS Average primary capital to average assets 11.62% 11.11% Net income to average assets 1.02 1.03 Net income to average equity 9.48 10.04 </TABLE> NET INTEREST INCOME When comparing the second quarter of 2005 to 2004, net FTE interest income increased $66,000. An increase of 2.35% in interest earning assets provided $390,000 of FTE interest income. The growth in interest earning assets was primarily funded by an increase in noninterest bearing deposits, other borrowings, and shareholders equity. Overall, increased volume resulted in $374,000 of additional FTE interest income. During the second quarter of 2005, the average FTE interest rate earned on assets increased by 0.23% and the average rate paid on deposits and borrowed funds increased by 0.37%. The changes in interest rates earned and paid resulted in a $308,000 decrease in FTE interest income. The Corporation's FTE net interest yield as a percentage of average earning assets decreased 0.05% to 3.96% when comparing the second quarter of 2005 to the same period in 2004. The primary factor for the decrease was the average rate earned on earning assets rising slower than the average rate paid on interest bearing liabilities. 18
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. <TABLE> <CAPTION> Quarter Ended June 30, 2005 June 30, 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 $ 457,257 $ 7,464 6.53% $ 430,171 $ 6,801 6.32% Taxable investment securities 106,189 852 3.21 128,872 1,014 3.15 Non-taxable investment securities 62,693 954 6.09 55,607 910 6.55 Federal funds sold 3,786 25 2.64 1,497 6 1.60 Other 3,538 43 4.86 2,757 43 6.24 --------- ---------- ---- --------- ---------- ---- Total earning assets 633,463 9,338 5.90 618,904 8,774 5.67 NON EARNING ASSETS: Allowance for loan losses (6,654) (6,590) Cash and due from banks 21,297 25,273 Premises and equipment 18,985 17,590 Accrued income and other assets 24,698 23,949 --------- --------- Total assets $ 691,789 $ 679,126 ========= ========= INTEREST BEARING LIABILITIES: Interest-bearing demand deposits $ 102,876 217 0.84 $ 105,111 110 0.42 Savings deposits 157,383 361 0.92 156,105 197 0.50 Time deposits 240,312 2,120 3.53 241,320 1,984 3.29 Other borrowings 35,179 366 4.16 32,487 275 3.39 --------- ---------- ---- --------- ---------- ---- Total interest bearing liabilities 535,750 3,064 2.29 535,023 2,566 1.92 NONINTEREST BEARING LIABILITIES: Demand deposits 69,810 62,724 Other 11,735 11,407 Shareholders' equity 74,494 69,972 --------- --------- Total liabilities and equity $ 691,789 $ 679,126 ========= ---------- ========= ---------- Net interest income (FTE) $ 6,274 $ 6,208 ========== ========== Net yield on interest earning ---- ---- assets (FTE) 3.96% 4.01% ==== ==== </TABLE> 19
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, 2005 Compared to June 30, 2004 Increase (Decrease) Due to --------------------------- Volume Rate Net ------ ------- ------- <S> <C> <C> <C> CHANGES IN INTEREST INCOME: Loans $ 437 $ 226 $ 663 Taxable investment securities (182) 20 (162) Nontaxable investment securities 111 (67) 44 Federal funds sold 13 6 19 Other 11 (11) - ------ ------- ------- Total changes in interest income 390 174 564 Total changes in interest expense 16 464 480 ------ ------- ------- Net change in interest margin (FTE) $ 374 $ (290) $ 84 ====== ======= ======= </TABLE> PROVISION FOR LOAN LOSSES The amount provided for loan losses in the second quarter of 2005 was $109,000 versus $225,000 in 2004. During the second quarter of 2005 the Corporation had net charge-offs of $26,000 versus $149,000 during the same period of 2004. The allowance for loan losses as a percent of loans was 1.45% as of June 30, 2005, a 0.05% decrease since June 30, 2004. NONINTEREST INCOME Noninterest income earned in the second quarter of 2005, when compared to the same period in 2004, decreased $100,000 or 4.55%. Significant individual account changes during the period include a $95,000 decrease in gains on the sale of mortgage loans, a decrease of $60,000 in gains on the sale of securities, and a decrease of $28,000 in various other income accounts. These declines were offset by a $44,000 increase in trust fees and a $39,000 increase in other service charges and fees. 20
NONINTEREST EXPENSES Noninterest expenses increased $145,000 or 2.65% during the second quarter of 2005 when compared to 2004. Noninterest expense includes compensation expense, occupancy, and other operating expenses. The largest component of noninterest expense is compensation expense, which increased $173,000 or 5.34%. The increase is due to an increase in benefit expenses, additional staffing related to Isabella Bank and Trusts' new branch location in Big Rapids, Michigan, and normal merit and promotional salary increases. Occupancy and furniture and equipment expenses increased $126,000 or 13.77%. The majority of this increase is related to equipment depreciation and service contracts, which is related to the 2004 information systems conversion and upgrade, and property tax expense associated with the new location referred to above. Various other operating expenses decreased $154,000 or 11.65%. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 2004, total assets increased $18.0 million to $696.0 million. As of June 30, 2005, total loans increased $10.8 million, cash and demand deposits due from banks decreased $255,000, federal funds sold increased $500,000, and investment securities increased $7.2 million when compared to December 31, 2004. Deposits during this period increased $6.6 million, borrowed funds increased $7.0 million and shareholders' equity increased $2.4 million. LIQUIDITY Liquidity management is designed to have adequate resources available to meet depositor and borrower discretionary demands for funds. Liquidity is also required to fund expanding operations, investment opportunities, and payment of cash dividends. The primary sources of the Corporation's liquidity are cash, cash equivalents, and available-for-sale investment securities. As of June 30, 2005, cash and cash equivalents as a percentage of total assets equaled 3.02%, versus 3.06% as of December 31, 2004. During the first six months of 2005, $7.4 million in net cash was provided from operations and $13.2 million was provided from financing activities. Investing activities used $20.4 million. The accumulated effect of the Corporation's operating, investing and financing activities was a $245,000 increase in cash and cash equivalents during the first six months of 2005. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale were $169.2 million as of June 30, 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. 21
CAPITAL The capital of the Corporation consists solely of common stock, surplus, retained earnings, and accumulated other comprehensive loss; and increased approximately $2.4 million since December 31, 2004. Accumulated other comprehensive loss increased $425,000 due to unrealized losses in available-for-sale securities during 2005. 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 average assets, which consists of shareholder's equity plus the allowance for loan losses less unamortized acquisition intangibles, was 11.40% as of June 30, 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 June 30, 2005: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS <TABLE> <CAPTION> IBT Bancorp June 30, 2005 Required Actual -------- ------ <S> <C> <C> Equity Capital 4.00% 15.34% Secondary Capital* 4.00 1.25 ---- ----- Total Capital 8.00% 16.59% ==== ===== </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 $79.3 million at June 30, 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, 22
including commercial paper, bond financing, and similar transactions. At June 30, 2005, the Corporation had a total of $933,000 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, 2005 approximated $1.7 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. 23
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 growing conditions and 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. The following table provides information about the Corporation's assets and liabilities that are sensitive to changes in interest rates as of June 30, 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. 24
Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> Fair June 30, 2005 Value ----------------------------------------------------------------------------- -------- 2006 2007 2008 2009 2010 Thereafter Total 06/30/05 -------- -------- -------- -------- ------- ---------- --------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 810 $ - $ - $ - $ - $ - $ 810 $ 810 Average interest rates 3.07% - - - - - 3.07% Fixed interest rate securities $ 24,402 $ 44,721 $ 38,314 $ 16,047 $11,316 $ 34,932 $ 169,732 $169,729 Average interest rates 3.32% 3.30% 3.30% 3.49% 3.90% 3.17% 3.38% Fixed interest rate loans $ 89,308 $ 75,952 $ 73,547 $ 52,286 $53,195 $ 24,623 $ 368,911 $382,654 Average interest rates 6.52% 5.98% 6.12% 5.90% 6.22% 5.33% 6.12% Variable interest rate loans $ 50,378 $ 15,173 $ 19,495 $ 6,741 $ 3,645 $ 1,089 $ 96,521 $ 96,521 Average interest rates 7.47% 6.90% 6.81% 6.95% 6.96% 7.40% 7.19% Rate sensitive liabilities Borrowed funds $ 15,973 $ 4,000 $ 4,166 $ 2,500 $ 6,312 $ 5,000 $ 37,951 $ 37,977 Average interest rates 3.62% 3.50% 3.65% 3.45% 5.03% 4.95% 4.01% Savings and NOW accounts $ 51,847 $ 96,826 $ 78,705 $ 22,421 $ 6,117 $ - $ 255,916 $255,916 Average interest rates 1.55% 1.28% 0.98% 1.25% 1.97% - 1.26% Fixed interest rate time deposits $124,939 $ 52,390 $ 31,436 $ 16,315 $18,157 $ 1,010 $ 244,247 $244,345 Average interest rates 3.37% 3.94% 3.90% 3.42% 3.95% 4.62% 3.61% Variable interest rate time deposits $ 936 $ 441 $ 8 $ - $ - $ - $ 1,385 $ 1,385 Average interest rates 2.90% 2.90% 2.93% - - - 2.90% </TABLE> Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> Fair June 30, 2004 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 $ 506 $ 199 $ - $ - $ - $ - $ 705 $ 705 Average interest rates 1.38% 2.67% - - - - 1.74% 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% 4.76% 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 $ - $ 305 $ 106 $ - $ 3,390 $ 3,390 Average interest rates 1.28% 2.05% - 4.21% 8.00% - 2.21% </TABLE> 25
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 June 30, 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 June 30, 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 most recent fiscal quarter, 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. 26
PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS The registrant's annual meeting of shareholders was held on April 26, 2005. At the meeting the shareholders voted upon the following matters: Election of Directors to terms ending 2007: <TABLE> <CAPTION> For Witheld -------- ------- <S> <C> <C> Richard J. Barz 3,300,211 1,991 Sandra L. Caul 3,296,172 6,031 Timothy M. Miller 3,288,527 13,675 Ronald E. Schumacher 3,300,209 1,993 </TABLE> 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 (7) 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. 27
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: July 29, 2005 /s/ Dennis P. Angner -------------------------------- Dennis P. Angner Principal Executive Officer and Principal Financial Officer 28
Exhibit Index <TABLE> <CAPTION> Exhibit No. Description - ----------- -------------------------------------------------------------- <S> <C> 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 (7) 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 </TABLE> 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.