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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 2003
--------------
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
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IBT Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2830092
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway 48858
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(989) 772-9471
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(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
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, 4,344,738 as of April 15, 2003
----------------------------------------------------------
IBT BANCORP, INC.
Index to Form 10-Q
Part I Financial Information
Page Numbers
Item 1 Consolidated Financial Statements 3-8
Item 2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9-15
Item 3 Quantitative and Qualitative 16-18
Disclosures About Market Risk
Item 4 Controls and Procedures 19
Part II Other Information
Item 6 Exhibits and Reports on Form 8-K 19
Signature 20
Certifications 20-22
2
ITEM I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IBT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31 December 31
2003 2002
---- ----
(Unaudited)
ASSETS
Cash and demand deposits due from banks $ 38,242 $ 28,587
Federal funds sold 10,850 25,850
--------- ---------
TOTAL CASH AND CASH EQUIVALENTS 49,092 54,437
Investment securities
Securities available for sale (Amortized cost of
$172,197 in 2003 and $153,499 in 2002) 177,019 157,909
Securities held to maturity (Fair value --
$1,761 in 2003 and $1,803 in 2002) 1,716 1,736
--------- ---------
TOTAL INVESTMENT SECURITIES 178,735 159,645
Loans
Agricultural 52,814 53,223
Commercial 140,819 143,957
Residential real estate mortgage 145,762 152,778
Installment 55,456 54,522
--------- ---------
TOTAL LOANS 394,851 404,480
Less allowance for loan losses 5,869 5,593
--------- ---------
NET LOANS 388,982 398,887
Other assets 40,420 39,748
--------- ---------
TOTAL ASSETS $657,229 $652,717
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 63,570 $ 63,106
NOW accounts 109,426 111,195
Certificates of deposit and other savings 320,475 316,845
Certificates of deposit over $100,000 70,863 70,310
--------- ---------
TOTAL DEPOSITS 564,334 561,456
Other borrowed funds 15,290 17,793
Accrued interest and other liabilities 12,157 10,011
--------- ---------
TOTAL LIABILITIES 591,781 589,260
Shareholders' Equity
Common stock -- no par value
10,000,000 shares authorized; outstanding--
4,344,738 in 2003 (4,336,283 in 2002) 45,864 45,610
Retained earnings 17,763 16,299
Accumulated other comprehensive income 1,821 1,548
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 65,448 63,457
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 657,229 $ 652,717
========= =========
See notes to consolidated financial statements.
3
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31
---------------------------
2003 2002
---- ----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 4,336,283 3,884,985
Stock dividend --- 388,757
Issuance of common stock 10,141 13,741
Common stock repurchased (1,686) ---
---------- ----------
BALANCE END OF PERIOD 4,344,738 4,287,483
========== ==========
COMMON STOCK
Balance at beginning of period $ 45,610 $ 31,017
Stock dividend --- 12,829
Issuance of common stock 313 314
Common stock repurchased (59) ---
---------- ----------
BALANCE END OF PERIOD 45,864 44,160
RETAINED EARNINGS
Balance at beginning of period 16,299 24,788
Net income 1,942 1,614
Stock dividend --- (12,829)
Cash dividends ($0.11 per share in 2003 and $0.10 in 2002) (478) (434)
----------- ----------
BALANCE END OF PERIOD 17,763 13,139
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period 1,548 1,023
Unrealized gains (losses) on securities available for sale,
net of income taxes and reclassification adjustment 273 (408)
----------- ----------
BALANCE END OF PERIOD 1,821 615
----------- ----------
TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 65,448 $ 57,914
========== ==========
See notes to consolidated financial statements.
4
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands)
Three Months Ended
March 31
--------
2003 2002
---- ----
INTEREST INCOME
Loans $7,517 $7,943
Investment securities
Taxable 1,157 945
Nontaxable 494 407
Federal funds sold 96 172
------ ------
TOTAL INTEREST INCOME 9,264 9,467
Interest Expense
Deposits 3,136 3,896
Borrowed funds and other 187 175
------ ------
TOTAL INTEREST EXPENSE 3,323 4,071
------ ------
NET INTEREST INCOME 5,941 5,396
Provision for loan losses 212 188
------ ------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,729 5,208
Noninterest Income
Trust fees 159 129
Service charges on deposit accounts 64 69
Other service charges and fees 1,170 509
Gain on sale of mortgage loans 664 258
Title insurance revenue 613 346
Other 284 257
------ ------
TOTAL NONINTEREST INCOME 2,954 1,568
Noninterest Expenses
Salaries, wages and employee benefits 3,269 2,667
Occupancy 371 328
Furniture and equipment 540 524
Other 1,891 1,099
------ ------
TOTAL NONINTEREST EXPENSES 6,071 4,618
INCOME BEFORE FEDERAL INCOME TAXES 2,612 2,158
Federal income taxes 670 544
------ ------
NET INCOME $1,942 $1,614
====== ======
Basic net income per share $ 0.45 $ 0.38
====== ======
Cash dividends per share $ 0.11 $ 0.10
====== ======
See notes to consolidated financial statements.
5
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(dollars in thousands) Three Months Ended
March 31
--------
2003 2002
---- ----
NET INCOME $1,942 $1,614
Other comprehensive income (loss) before income taxes
Unrealized holding gains (losses) arising during period 414 (618)
Income tax (expense) benefit related to comprehensive income (141) 210
------ ------
OTHER COMPREHENSIVE INCOME (LOSS) 273 (408)
------ ------
COMPREHENSIVE INCOME $2,215 $1,206
====== ======
See notes to consolidated financial statements.
6
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
(in thousands) March 31
2003 2002
---- ----
OPERATING ACTIVITIES
Net income 1,942 1,614
Adjustments to reconcile net income to cash provided
by (used in) operations:
Provision for loan losses 212 188
Provision for depreciation 388 336
Net amortization of securities 338 193
Increase in cash value of life insurance (117) (115)
Amortization of intangibles 23 23
Gain on sales of mortgage loans (664) (258)
Proceeds from sales of mortgage loans 56,583 35,211
Mortgage loans originated for sale (59,755) (33,276)
Decrease (increase) in interest receivable 9 (42)
Increase in other assets (717) (492)
Increase (decrease) in accrued interest and
other expenses 2,146 (613)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 388 2,769
INVESTING ACTIVITIES
Activity in available for sale securities
Maturities, calls, and sales 5,035 10,726
Purchases (25,435) (42,531)
Activity in held to maturity securities
Maturities, calls, and sales 1,386 754
Net decrease in loans 13,529 14,799
Purchases of equipment and premises (399) (1,052)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (5,884) (17,304)
FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing deposits 464 (7,525)
Net increase in interest bearing deposits 2,414 26,206
Net (decrease) increase in borrowed funds (2,503) 814
Cash dividends (478) (434)
Proceeds from issuance of common stock 313 314
Common stock repurchased (59) ---
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 151 19,375
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,345) 4,840
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 54,437 55,462
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 49,092 $ 60,302
======== ========
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, 2003 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2003. 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, 2002.
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 4,336,020 as of March 31, 2003, and 4,277,809 as of
March 31, 2002. The Corporation has no common stock equivalents and,
accordingly, presents only basic earnings per share.
NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation (FIN) No. 46, "Consolidation of Variable Interest
Entities." This standard clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," and addresses
consolidation by business enterprises of variable interest entities (more
commonly known as Special Purpose Entities or SPE's). FIN No. 46 requires
existing unconsolidated variable interest entities to be consolidated by their
primary beneficiaries if the entities do not effectively disperse risk among the
parties involved. FIN No. 46 also enhances the disclosure requirements related
to variable interest entities. The Interpretation is effective for interests in
variable interest entities created after January 31, 2003. For interests in
variable interest entities created before February 1, 2003, the Interpretation
shall apply to the first interim or annual reporting period beginning after June
15, 2003. While the precise impact of adoption of FIN No. 46 on results of
operations, financial position and cash flows has not been determined, its
effect is not expected to be material.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major
factors that influenced IBT Bancorp's financial performance. This analysis
should be read in conjunction with the Corporation's 2002 annual report and with
the unaudited consolidated financial statements and notes, as set forth on pages
3 through 8 of this report.
CRITICAL ACCOUNTING POLICIES: The Corporation's significant accounting policies
are set forth in Note 1 of the Consolidated Financial Statements included in the
Corporation's Annual Report for the year ended December 31, 2002. Of these
significant accounting policies, the Corporation considers its policies
regarding the allowance for loan losses and 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 grace 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 Annual Report and
herein.
Servicing assets are recognized when loans are sold with servicing retained.
Servicing assets are amortized in proportion to and over the period of estimated
future net servicing income. The fair value of servicing assets is estimated by
discounting the future cash flows at estimated future current market rates for
the expected life of the loans. The Corporation uses industry prepayment
statistics in estimating the expected life of the loan. Management periodically
evaluates servicing assets for impairment. For purposes of measuring impairment,
the rights are stratified based on original term to maturity. The amount of
impairment recognized is the amount by which the servicing asset for a stratum
exceeds its fair value.
9
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
RESULTS OF OPERATIONS
Net income equaled $1.94 million for the three month period ended March
31, 2003, compared to $1.61 million for the same period in 2002. Return on
average assets, which measures the ability of the Corporation to profitably and
efficiently employ its resources, equaled 1.19% for the first three months of
2003 and 1.07% for 2002. Return on average equity, which indicates how
effectively the Corporation is able to generate earnings on shareholder invested
capital, equaled 12.42% through March 31, 2003 versus 11.31% for the same period
in 2002.
SUMMARY OF SELECTED FINANCIAL DATA
- ------------------------------------------------- Three Months Ended
(Dollars in thousands except per share data) March 31
-------------------------
2003 2002
---- ----
INCOME STATEMENT DATA
Net interest income $ 5,941 $ 5,396
Provision for loan losses 212 188
Net income 1,942 1,614
PER SHARE DATA
Net income 0.45 0.38
Cash dividends 0.11 0.10
RATIOS
Average primary capital to average assets 10.37% 10.31%
Net income to average assets 1.19 1.07
Net income to average equity 12.42 11.31
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 $366,000 in 2003 versus $397,000 in 2002. For analytical purposes in Tables 1
and 2, net interest income is adjusted to a "taxable equivalent" basis by adding
the income tax savings from interest on tax-exempt loans and securities, thus
making year-to-year comparisons more meaningful.
10
IBT BANCORP, INC.
TABLE 1: AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
(Dollars in Thousands)
The following schedules present the daily average amount outstanding
for each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding, and Federal
Reserve and Federal Home Loan Bank restricted stock is included in Other
Investments.
Three Months Ended
March 31, 2003 March 31, 2002
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
INTEREST EARNING ASSETS
Loans $ 394,628 $7,518 7.62% $387,798 $7,948 8.20%
Taxable investment securities 115,145 1,157 4.02 75,278 907 4.82
Nontaxable investment securities 47,962 748 6.24 39,843 617 6.19
Federal funds sold 31,943 92 1.15 41,887 172 1.64
Other investments 2,782 43 6.18 2,696 38 5.64
---------- ------- ----- --------- ------ ----
Total Earning Assets 592,460 9,558 6.45 547,502 9,682 7.07
NONEARNING ASSETS
Allowance for loan losses (5,734) (5,527)
Cash and due from banks 25,789 22,208
Premises and equipment 15,466 14,987
Accrued income and other assets 24,529 22,541
---------- ---------
TOTAL ASSETS $652,510 $601,711
========== ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 116,836 307 1.05 $ 91,488 379 1.66
Savings deposits 138,181 383 1.11 135,102 622 1.84
Time deposits 251,721 2,446 3.90 243,224 2,895 4.76
Borrowed funds 15,801 187 4.73 12,245 175 5.72
---------- ------- ---- --------- ------ -----
Total Interest Bearing Liabilities 522,539 3,323 2.55 482,059 4,071 3.38
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 58,429 55,560
Other 9,988 7,002
Shareholders' equity 62,554 57,090
---------- ---------
TOTAL LIABILITIES AND EQUITY $653,510 $601,711
========== ========
NET INTEREST INCOME (FTE) $6,235 $5,611
====== ======
NET YIELD ON INTEREST EARNING ASSETS (FTE) 4.21% 4.10%
==== ====
11
IBT BANCORP, INC.
TABLE 2: VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
The following table sets forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For the purpose of this
table, changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Quarter Ended March 31, 2003
Compared to
March 31, 2002
Increase (Decrease) Due to
---------------------------------
Volume Rate Net
------ ---- ---
CHANGES IN INTEREST INCOME
Loans $138 $(568) $(430)
Taxable investment securities 420 (170) 250
Nontaxable investment securities 126 5 131
Federal funds sold (36) (44) (80)
Other investments 1 4 5
---- ----- -----
Total changes in interest income 649 (773) (124)
Total changes in interest expense 235 (983) (748)
---- ----- -----
Net change in interest margin (FTE) $414 $ 210 $ 624
==== ===== =====
12
IBT BANCORP, INC.
TABLE 3: SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
Three Months Ended
March 31
------------------------
2003 2002
---- ----
Summary of changes in allowance
Allowance for loan losses - January 1 $5,593 $5,471
Loans charged off (80) (171)
Recoveries of charged off loans 144 107
------- -------
Net loans recovered (charged off) 64 (64)
Provision charged to operations 212 188
------- -------
Allowance for loan losses - March 31 $5,869 $5,595
======= =======
Allowance for loan losses as a % of loans 1.49% 1.47%
======= =======
NONPERFORMING LOANS
--------------------------------------
(Dollars in thousands)
March 31
------------------------
2003 2002
---- ----
Total amount of loans outstanding for
the period $394,851 $381,324
======== ========
Nonaccrual loans $ 2,121 $ 1,446
Accruing loans past due 90 days or more 1,865 1,662
Restructured loans --- ---
-------- --------
Total $ 3,986 $ 3,108
======== ========
Loans classified as nonperforming as a
% of outstanding loans 1.01% 0.82%
===== =====
To management's knowledge, there are no other loans which cause management
to have serious doubts as to the ability of a borrower to comply with their loan
repayment terms.
13
NET INTEREST INCOME (CONTINUED)
As shown in Tables number 1 and 2, when comparing the three month period
ended March 31, 2003 to the same period in 2002, fully taxable equivalent (FTE)
net interest income increased $624,000 or 11.1%. An increase of 8.2% in average
interest earning assets provided $649,000 of FTE interest income. The majority
of this growth was funded by an 8.3% increase in interest bearing liabilities
resulting in $235,000 of additional interest expense. Overall, changes in volume
resulted in a $414,000 increase in FTE interest income. The average FTE interest
rate earned on assets declined by 0.62%, decreasing the amount of interest
earned by $773,000. The average rate paid on deposits decreased 0.83%,
decreasing interest expense by $983,000. The net change related to interest rate
earned and paid was a $210,000 increase in FTE net interest income.
The Corporation's FTE net interest yield as a percentage of average
earning assets equaled 4.21% during 2003 versus 4.10% in 2002. The 0.11%
increase in the yield was primarily a result of a shift in the funding of
earning assets from time deposits to lower cost saving and interest bearing
demand deposits. As a percentage of average earning assets, time deposits
declined 1.93% and saving and interest bearing demand deposits increased 1.66%.
The change in funding mix resulted in approximately $40,000 in additional net
interest income. Additionally the Corporation's increasing reliance on interest
bearing liabilities to fund asset growth continues to adversely impact net
interest yields. Management expects the Corporation's reliance on higher cost
deposits to fund asset growth to continue.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 59.2% of the
Corporation's total assets and is the Corporation's single largest
concentration of risk. The allowance for loan losses is management's estimation
of potential future losses inherent in the existing loan portfolio. Factors used
to evaluate the loan portfolio, and thus to determine the current charge to
expense, include recent loan loss history, financial condition of borrowers,
amount of nonperforming and impaired loans, overall economic conditions, and
other factors.
Comparing the year to date period of March 31, 2003 to March 31, 2002,
total loans outstanding decreased 3.5%. The provision for loan losses increased
$24,000 to $212,000 in the first quarter of 2003 when compared to 2002. The
increase in the provision of loan losses resulted from an increase in
nonperforming loans of 28.2% and increased uncertainty about economic
performance over the coming months. As set forth in Table 3, loans classified as
nonperforming were $4.0 million as of March 31, 2003, a $878,000 increase over
the prior year. The allowance for loan losses as a percentage of loans equaled
1.49% compared to 1.47% in 2002. In management's opinion, the allowance for loan
losses is adequate as of March 31, 2003.
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 increased $1.39 million during the three month period ending March 31,
2003, compared to the same period in 2002. Significant individual account
changes during this period include a $267,000 increase in income from the sale
of title insurance and related services, a $874,000 increase in gains on the
sale of residential real estate mortgage loans, and a $40,000 increase in
residential mortgage servicing rights. Included in other assets is $9.9 million
in cash value of corporate owned life insurance policies. The increase in cash
value of these policies of $117,000 and $115,000 during the quarters ended March
31, 2003 and 2002, respectively, is recorded
14
as other income. These policies earned an average rate of 4.7% and, due to their
preferential tax treatment, have a taxable equivalent rate of 7.4%. 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 15 and 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 $664,000 gain
from the sale of $56.6 million in mortgages during the first quarter of 2003
versus a $258,000 gain on the sale of $35.2 million in the same period in 2002.
NONINTEREST EXPENSE
Noninterest expense increased $1.45 million for the first three months of
2003 when compared to the same period in 2002. The largest component of
noninterest expense is salaries and employee benefits, which increased $602,000
or 22.6%. The Corporation purchased Benchmark Title on July 1, 2002; of the
total increase in salary and benefits for 2003, $104,000 is related to this
acquisition. The remaining increase is due to additional staffing and normal
merit and promotional salary increases, and approximately a 30% increase in
benefits due to medical and pension plan expenses.
Occupancy and furniture and equipment expenses increased $59,000 or 6.9%
in 2003. The majority of this increase is a result of increases in equipment and
building depreciation and service contract expenses. All other operating
expenses increased $792,000 or 73.6%. The majority of this increase is related
to a $17,000 increase in marketing, a $678,000 increase in charitable donations
to IBT Foundation (see "Financial Instruments with Off Balance Sheet
Arrangements"), and $22,000 in title insurance underwriting expense.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Since December 31, 2002, total assets increased $4.50 million to $657.2
million. During the first quarter of 2003, major changes in asset mix included a
$9.7 million increase in cash, a $15.0 million decrease in fed funds sold, a
$19.1 million increase in investment securities, and a $9.9 million decrease in
net loans. Deposits during this period increased $2.9 million. Interest bearing
deposits increased $2.4 million and noninterest bearing deposits increased
$464,000, borrowed funds decreased $2.5 million, and shareholders' equity
increased $2.0 million.
LIQUIDITY
Liquidity management is designed to ensure adequate resources are
available to meet depositor and borrower discretionary demands for funds.
Liquidity is also required to fund expanding operations, investment
opportunities, and the payment of cash dividends. The primary sources of the
Corporation's liquidity are cash, cash equivalents, and investment securities
available for sale.
As of March 31, 2003, cash and cash equivalents as a percentage of total
assets equaled 7.5%, versus 8.3% as of December 31, 2002. During the first three
months of 2003, cash provided by operating activities was $388,000, financing
activity provided $151,000, and investing activities used $5.9 million. The
accumulated effect of the Corporation's operating, investing, and financing
activities was a $5.3 million decrease in cash and cash equivalents during the
first three months of 2003.
15
In addition to cash and cash equivalents, investment securities available
for sale are another source of liquidity. Securities available for sale equaled
$177.0 million as of March 31, 2003 and $157.9 million as of December 31, 2002.
The Corporation's liquidity is considered adequate by management of the
Corporation.
CAPITAL
The capital of the Corporation consists solely of common stock, surplus,
retained earnings, and accumulated other comprehensive income, and increased
approximately $2.0 million since December 31, 2002.
There are significant capital regulatory constraints placed on the
Corporation's capital. The Federal Reserve Board's current recommended minimum
tier 1 and tier 2 capital to average assets requirement is 6.0%. The
Corporation's tier 1 and tier 2 capital to average assets, which consists of
shareholder's equity plus the allowance for loan losses less unamortized
acquisition intangibles, was 10.3% at March 31, 2003.
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, 2003:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
Actual
Required 03/31/03
------------ ------------
Equity Capital 4.00% 14.40
Secondary Capital* 4.00 1.25
---- -----
Total Capital 8.00% 15.65
==== =====
* 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
16
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 $52.5 million at March 31, 2003,
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, 2003, the Corporation had a total of $553,000 in outstanding standby
letters of credit.
Generally, these commitments to extend credit and letters of credit mature
within one year. The credit risk involved in these transactions is essentially
the same as that involved in extending loans to customers. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon the
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and other income producing
commercial properties.
The Corporation sponsors the IBT Foundation (the "Foundation"), which is a
nonprofit entity formed for the purpose of distributing charitable donations
to recipient organizations generally located in the communities serviced by
Isabella Bank and Trust. The Corporation periodically makes charitable
contributions in the form of cash transfers to the Foundation. The Foundation
is administered by members of the Corporation's Board of Directors. The assets
and transactions of the Foundation are not included in the consolidated
financial statements of IBT Bancorp, Inc. The assets of the Foundation as of
March 31, 2003 approximated $1.2 million.
17
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings 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. Any changes in foreign exchange rates or commodity prices would have an
insignificant impact, if any, on the Corporation's interest income and cash
flows.
Interest rate risk ("IRR") is the exposure to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors and senior management to effectively
manage the various risks that can have a material impact on the safety and
soundness of the Corporation. The risks include credit, interest rate,
liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
18
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,
2003. The Corporation has no interest rate swaps, futures contracts, or other
derivative financial options. The principal amounts of assets and time deposits
maturing were calculated based on the contractual maturity dates. Savings and
NOW accounts are based on management's estimate of their future cash flows.
19
Quantitative Disclosures of Market Risk
(dollars in thousands)
March 31, 2003 Fair Value
-----------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total 03/31/03
-----------------------------------------------------------------------------------------
Rate sensitive assets
Other interest bearing assets $10,850 --- --- --- --- --- $10,850 $10,850
Average interest rates 1.25% --- --- --- --- --- 1.25%
Fixed interest rate securities $28,885 $53,627 $33,453 $12,386 $9,881 $40,503 $178,735 $178,780
Average interest rates 3.82% 3.67% 2.95% 3.83% 3.81% 3.94% 3.64%
Fixed interest rate loans $91,909 $88,755 $67,851 $26,342 $25,040 $22,205 $322,102 $323,740
Average interest rates 7.59% 7.53% 7.35% 7.28% 5.45% 7.01% 7.29%
Variable interest rate loans $49,235 $9,482 $5,463 $3,231 $4,415 $923 $72,749 $72,749
Average interest rates 5.83% 5.87% 5.79% 5.91% 5.33% 5.21% 5.80%
Rate sensitive liabilities
Borrowed funds $718 $1,053 $53 $53 $5,053 $8,360 $15,290 $16,057
Average interest rates 1.00% 5.01% 4.16% 4.16% 5.08% 5.35% 5.02%
Savings and NOW accounts $154,398 $20,257 $16,481 $13,575 $12,581 $33,631 $250,923 $250,923
Average interest rates 1.14% 1.09% 1.44% 1.27% 1.06% 0.84% 1.12%
Fixed interest rate time deposits $129,992 $28,992 $41,554 $26,411 $21,073 $111 $248,133 $254,098
Average interest rates 2.92% 4.78% 5.53% 4.74% 4.48% --- 3.90%
Variable interest rate time deposits $897 $411 $4 --- $396 --- $1,708 $1,708
Average interest rates 2.03% 2.03% --- --- 3.80% --- 2.44%
Quantitative Disclosures of Market Risk
(dollars in thousands)
March 31, 2002 Fair Value
-----------------------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total 03/31/02
-----------------------------------------------------------------------------------------
Rate sensitive assets
Other interest bearing assets $39,300 --- --- --- --- --- $39,300 $39,300
Average interest rates 1.75% --- --- --- --- --- 1.75%
Fixed interest rate securities $24,186 $24,289 $37,166 $10,028 $7,028 $33,515 $136,212 $136,276
Average interest rates 4.40% 4.43% 4.07% 4.42% 4.52% 4.81% 4.32%
Fixed interest rate loans $97,286 $73,516 $95,513 $22,269 $28,093 $15,161 $331,838 $333,115
Average interest rates 7.85% 8.42% 8.10% 8.41% 8.26% 7.59% 8.11%
Variable interest rate loans $35,352 $5,883 $3,876 $2,176 $1,679 $520 $49,486 $49,486
Average interest rates 7.43% 7.40% 6.32% 6.14% 6.01% 6.53% 7.23%
Rate sensitive liabilities
Federal funds purchased $1,065 $1,000 --- --- $5,000 $5,381 $12,446 $12,576
Average interest rates 0.94% 5.05% --- --- 5.08% 5.72% 5.00%
Savings and NOW accounts $134,291 $21,233 $17,273 $14,003 $12,944 $32,238 $231,982 $231,982
Average interest rates 1.47% 1.65% 1.57% 2.32% 1.27% 1.19% 1.50%
Fixed interest rate time deposits $148,225 $34,232 $18,263 $30,523 $15,840 $27 $247,110 $248,659
Average interest rates 5.23% 5.85% 5.95% 5.97% 6.56% --- 5.55%
Variable interest rate time deposits $998 $337 --- --- --- --- $1,335 $1,335
Average interest rates 4.09% 4.09% --- --- --- --- 4.09%
20
ITEM 4 -- CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures -- Dennis P. Angner, the
Corporate Principal Executive Officer and Principal Financial Officer, has
reviewed and evaluated the effectiveness of the Corporation's disclosure
controls and procedures [as defined in Rules 240.13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934 (the "Exchange Act)] as of a date within
ninety days before the filing date of this quarterly report. Based on that
evaluation he has concluded that the Corporation's disclosure controls and
procedures are effective, providing him with material information relating to
the Corporation as required to be disclosed in the reports the Corporation files
or submits under the Exchange Act on a timely basis.
(b) Changes in Internal Controls -- There were no significant changes in the
Corporation's internal controls or in other factors that could significantly
affect the Corporation's disclosure controls and procedures subsequent to the
date of the evaluation, nor were there any significant deficiencies or material
weaknesses in the Corporation's internal controls.
PART II - OTHER INFORMATION
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Index to Exhibits
(b) Reports on Form 8-K
No reports on Form 8-K were filed or required to be filed
during the quarter ended March 31, 2003.
21
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: April 30, 2003 /s/ Dennis P. Angner
--------------------- ----------------------
Dennis P. Angner
President and CEO
(Principal Financial Officer)
CERTIFICATIONS
I, Dennis P. Angner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of IBT Bancorp, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
22
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: April 30, 2003 /s/Dennis P. Angner
------------------ ------------------------------
President and CEO, Principal
Executive Officer and
Principal Financial Officer
23
INDEX TO EXHIBITS
FOR FORM 10-Q
Exhibit Sequentially
Number Description Numbered Page
3.1 Amended Articles of Incorporation incorporated by
reference to Form 10-K, dated March 12, 1991. ---
3.2 Amendment to the Articles of Incorporation incorporated
by reference to Form 10-K, dated March 27, 1995. ---
3.3 Amendment to the Articles of Incorporation incorporated
by reference to Form 10-K, dated March 22, 2000. ---
3.4 Amendment to the Articles of Incorporation incorporated
by reference to Form 10-K, dated March 27, 2001. ---
3.5 Amended Bylaws incorporated by reference to Form 10-K,
dated March 13, 1990. ---
3.6 Amendment to the Bylaws incorporated by reference to
Form 10-K, dated March 26, 1994. ---
3.7 Amendment to the Bylaws incorporated by reference to
Form 10-K, dated March 27, 1995. ---
3.8 Amendment to the Bylaws incorporated by reference to
Form 10-K, dated March 27, 2001. ---
3.9 Amendment to the Bylaws incorporated by reference to
Form 10-K, dated March 25, 2002. ---
3.10 Amendment to the Bylaws incorporated by reference to
Form 10-K, dated March 24, 2003. ---
99.1* Statement Pursuant to Title 18 -- USC Section 1350 25
- -------
* Filed herein
24