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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 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
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 Street, Mt. Pleasant, Michigan 48858
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (989) 772-9471
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- -------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - No Par Value
---------------------------
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] Yes [ ] No
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $151,823,000 as of March 3, 2004.
The number of shares outstanding of the registrant's Common Stock (no par value)
was 4,885,347 as of March 3, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
(Such documents are incorporated herein only to the extent specifically set
forth in response to an item herein.)
Documents Part of Form 10-K Incorporated into
--------- -----------------------------------
IBT Bancorp, Inc. Proxy Statement
for its Annual Meeting of Shareholders Part III
to be held April 27, 2004
1
PART I
ITEM 1. BUSINESS
GENERAL
IBT Bancorp, Inc. (the Corporation) is a registered financial services holding
company incorporated in September 1988 under Michigan law. The Corporation has
seven subsidiaries: Isabella Bank and Trust, Farmers State Bank of Breckenridge,
IBT Title, IBT Loan Production, IBT Personnel, LLC, IB & T Employee Leasing,
LLC, and Financial Group Information Services. Isabella Bank and Trust has
sixteen banking offices located throughout Isabella County, northeastern
Montcalm County, and southern Clare County, all of which are located in central
Michigan. Farmers State Bank of Breckenridge has three offices located in
Gratiot and Saginaw Counties. IBT Title provides title insurance, abstract
searches, and closes loans in Isabella, Montcalm, and Mecosta Counties. IBT Loan
Production originates residential real estate mortgages. Its principal products
are 15 and 30 year fixed rate loans. All loans originated are sold with
servicing to Isabella Bank and Trust. IBT Personnel, LLC and IB & T Employee
Leasing, LLC, are employee leasing companies. Financial Group Information
Services provides computer services to the Corporation's other subsidiaries. All
employees of the Corporation are employed by IBT Personnel and IB & T Employee
Leasing and leased to each individual subsidiary. The principal city in which
the Corporation operates is Mount Pleasant, which has a population of
approximately 26,000. Markets served include Isabella, Gratiot, Mecosta,
southwestern Midland, western Saginaw, northern Montcalm, and southern Clare.
The area includes significant agricultural production, light manufacturing,
retail, gaming and tourism, and two universities with enrollment of
approximately 30,000 students. The area unemployment rate is approximately 5.0%
and average household income is $38,000.
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 December 31,
2003 approximated $1 million.
COMPETITION
The Corporation competes with other commercial banks, many of which are
subsidiaries of other bank holding companies, savings and loan associations,
finance companies, credit unions, and retail brokerage firms. Its subsidiary
banks are community banks and focus on providing high-quality, personalized
service at a fair price. The banks offer a broad array of banking services to
businesses, institutions, and individuals. Deposit services offered include
checking accounts, savings accounts, certificates of deposit, and direct
deposits. Lending activity includes loans made pursuant to lines of credit, real
estate loans, consumer loans, student loans, and credit card loans. Other
financial related products include trust services, title insurance, stocks,
investment securities, bonds, mutual fund sales, 24 hour banking service locally
and nationally through shared automatic teller machines, safe deposit box
rentals and retail brokerage services.
LENDING
The subsidiary banks limit lending activities to local markets and have not
purchased any loans from the secondary market. They do not make loans to fund
leveraged buyouts, they have no foreign corporate or government loans, and
limited corporate debt securities. The general lending philosophy is to avoid
concentrations to individuals and business segments. The following table sets
forth the composition of the bank loan portfolio as of December 31, 2003.
2
LOANS BY MAJOR LENDING CATEGORY
(in thousands)
Amount %
-------- ------
Residential real estate
One to four family residential $179,420 42.1%
Construction & land development 24,287 5.7
-------- -----
Total 203,707 47.8
Commercial
Commercial real estate 91,001 21.4
Farmland & agricultural production 52,044 12.2
Commercial and other 39,352 9.2
-------- -----
Total 182,397 42.8
Other individual
Other personal 37,625 8.8
Credit cards 2,445 0.6
-------- -----
Total 40,070 9.4
-------- -----
TOTAL $426,174 100.0%
======== =====
First and second residential mortgages are the single largest category of loans
(47.8% of total loans). The Corporation, through its subsidiary banks, offers 3
and 5 year fixed rate balloon mortgages with a maximum 30 year amortization, and
15 and 30 year amortized fixed rate loans. Fixed rate loans with an amortization
of 15 years are generally sold and all loans with an amortization of 30 years
are sold upon origination to the Federal Home Loan Mortgage Association. Fixed
rate residential mortgage loans with an amortization of 15 years or less may be
held for future sale or sold upon origination. Factors used in determining when
to sell these mortgages include management's judgment about the direction of
interest rates, the Corporation's need for fixed rate assets in the management
of its interest rate sensitivity, and overall loan demand.
Lending policies generally limit the maximum loan-to-value ratio on residential
mortgages to 95% of the lower of appraised value of the property or the purchase
price, with the condition that private mortgage insurance is required on loans
with loan-to-value ratios in excess of 80%. The majority of the loans have a
loan-to-value ratio of less than 80%. Underwriting criteria for residential real
estate loans include: evaluation of the borrower's ability to make monthly
payments, the value of the property securing the loan, the payment of principal,
interest, taxes, and hazard insurance does not exceed 28% of a borrower's gross
income, all debt servicing does not exceed 36% of income, acceptable credit
reports, verification of employment, income, and financial information.
Appraisals are performed by independent appraisers. Escrow accounts for taxes
and insurance are required on all loans with loan-to-value ratio in excess of
80%. All mortgage loan requests are reviewed by a mortgage loan committee; loans
in excess of $400,000 require the approval of either the subsidiary bank's Board
of Directors or its loan committee.
Construction and land development loans consist mostly of 1 to 4 family
residential properties. These loans have a 6 to 9 month maturity and are made
using the same underwriting criteria as residential mortgages. Loan proceeds are
disbursed in increments as construction progresses and inspections warrant.
Construction loans are either converted to permanent loans at the completion of
construction or are paid off from financing through another financial
institution.
Commercial loans, which include loans for farmland and agricultural production,
state and political subdivisions, commercial real estate, and commercial
operating loans equaled 42.8% of the Corporation's loan portfolio at
3
December 31, 2003. Repayment of commercial loans is often dependent upon the
successful operation and management of a business; thus, these loans generally
involve greater risk than other types of lending. The Corporation minimizes its
risk by generally limiting the amount of loans to any one borrower to $5.0
million on a consolidated basis at its subsidiary banks. Borrowers with credit
needs of more than $5.0 million are serviced through the use of loan
participations with other commercial banks. All commercial real estate loans
require loan-to-value limits of less than 80%. Depending upon the type of loan,
past credit history, and current operating results, the Corporation may require
the borrower to pledge accounts receivable, inventory, and fixed assets.
Personal guarantees are generally required from the owners of closely held
corporations, partnerships, and proprietorships. In addition, the Corporation
requires annual financial statements, prepares cash flow analysis, and reviews
credit reports.
Consumer loans granted include automobile loans, secured and unsecured personal
loans, credit cards, student loans, and overdraft protection. Loans are
amortized generally for a period of up to 6 years; except home improvement
loans, which are amortized for up to 10 years. The underwriting emphasis is on a
borrower's ability to pay rather than collateral value. Except for student
loans, no installment loans are sold to the secondary market. All student loans
are sold to the secondary market upon reaching a payout status.
SUPERVISION AND REGULATION
The Corporation is subject to supervision and regulation by the Securities and
Exchange Commission under the Securities Act of 1933 and 1934 and by the Federal
Reserve Board under the Financial Services Holding Company Act of 2000. A bank
holding company and its subsidiaries are able to conduct only the business of
commercial banking and activities closely related or incidental to it. (See
Regulation below.)
Isabella Bank and Trust and Farmers State Bank of Breckenridge are chartered by
the State of Michigan. The banks are members of the Federal Reserve System and
their deposits are insured by the Federal Deposit Insurance Corporation to the
extent provided by law. The Banks are members of the Federal Home Loan Bank of
Indianapolis. The banks and IBT Loan Production are supervised and regulated by
the Michigan Office of Financial and Insurance Services (OFIS), and the Federal
Reserve Board. (See Regulation below.)
IBT Title, Inc., a non-banking subsidiary of IBT Bancorp, Inc., is a licensed
title insurance agency and is subject to regulation by the OFIS, as well as the
Federal Real Estate Settlement Procedures Act. IBT Title owns a membership
interest in a similar title insurance agency, FSSB Title, LLC.
PERSONNEL
As of December 31, 2003, the Corporation had four full-time employees, Isabella
Bank and Trust had 186, Farmers State Bank of Breckenridge had 51, IBT Title had
23, IBT Loan Production had one, Financial Group Information Services had 11,
and IBT Personnel LLC and IB & T Employee Leasing have 2 shared employees. The
Corporation provides group life, health, accident, disability and other
insurance programs for employees and a number of other employee benefit
programs. The Corporation believes its relationship with its employees to be
good.
LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Corporation's subsidiary
Banks are periodically involved, such as claims to enforce liens, condemnation
proceedings on making and servicing of real property loans and other
4
issues incidental to the bank's business. However, neither the Corporation nor
the Banks are involved in any material pending litigation.
AVAILABLE INFORMATION
The Corporation does not maintain a website. Consequently, the Corporation's
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy
Statements, Current Reports on Form 8-K and amendments to those reports are not
available on a Corporation website. The Corporation will provide paper copies of
its reports to the SEC free of charge upon request of a shareholder.
The SEC maintains an internet site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding the Corporation
(CIK #0000842517) and other issuers that file electronically with the SEC.
REGULATION
The earnings and growth of the banking industry and therefore the earnings of
the Corporation and of the Banks are affected by the credit policies of monetary
authorities, including the Federal Reserve System. An important function of the
Federal Reserve System is to regulate the national supply of bank credit in
order to combat recession and curb inflationary pressures. Among the instruments
of monetary policy used by the Federal Reserve to implement these objectives are
open market operations in U.S. Treasury securities, changes in the discount rate
on member bank borrowing, and changes in reserve requirements against member
bank deposits. These methods are used in varying combinations to influence
overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans or paid for deposits. The monetary policies of
the Federal Reserve System have had a significant effect on the operating
results of commercial banks and related financial service providers in the past
and are expected to continue to do so in the future. The effect of such policies
upon the future business and earnings of the Corporation and the banks cannot be
predicted.
THE CORPORATION
The Corporation, as a financial services holding company, is regulated under the
Bank Holding Company Act of 1956, as amended ("BHC Act"), and is subject to the
supervision of the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). The Corporation is registered as a financial services holding
company with the Federal Reserve Board and is required to file with the Federal
Reserve Board an annual report and such additional information as the Federal
Reserve Board requires. The Federal Reserve Board may also make inspections and
examinations of the Corporation and its subsidiaries.
Prior to March 13, 2000, a bank holding company generally was prohibited under
the BHC Act from acquiring the beneficial ownership or control of more than 5%
of the voting shares or substantially all the assets of any company, including a
bank, without the Federal Reserve Board's prior approval. Also, prior to March
13, 2000, a bank holding company generally was limited to engaging in banking
and such other activities as determined by the Federal Reserve Board to be
closely related to banking.
Under the Gramm-Leach-Bliley Act of 1999 ("GLB Act"), beginning March 13, 2000,
an eligible bank holding company may elect to become a financial holding company
and thereafter affiliate with securities firms and insurance companies and
engage in other activities that are financial in nature. The GLB Act defines
"financial in nature" to include securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; activities that the
5
Federal Reserve Board has determined to be closely related to banking; and other
activities that the Federal Reserve Board, after consultation with the Secretary
of the Treasury, determines by regulation or order to be financial in nature or
incidental to a financial activity. No Federal Reserve Board approval is
required for a financial holding company to acquire a company, other than a bank
holding company, bank or savings association, engaged in activities that are
financial in nature or incidental to activities that are financial in nature, as
defined in the GLB Act or as determined by the Federal Reserve Board.
A bank holding company is eligible to become a financial holding company if each
of its subsidiary banks and savings associations is well capitalized under the
prompt corrective action provisions of the Federal Deposit Insurance Act ("FDI
Act"), is well managed and has a rating under the Community Reinvestment Act
(CRA) of satisfactory or better. If any bank or savings association subsidiary
of a financial holding company ceases to be well capitalized or well managed,
the Federal Reserve Board may require the financial holding company to divest
the subsidiary. Alternatively, the financial holding company may elect to
conform its activities to those permissible for bank holding companies that do
not elect to become financial holding companies. If any bank or savings
association subsidiary of a financial holding company receives a CRA rating of
less than satisfactory, the financial holding company will be prohibited from
engaging in new activities or acquiring companies other than bank holding
companies, banks or savings associations.
The Corporation became a financial holding company effective March 13, 2000. It
continues to maintain its status as a bank holding company for purposes of other
Federal Reserve Board regulations.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to its subsidiary banks and to commit resources to
support its subsidiaries. This support may be required at times when, in the
absence of such Federal Reserve Board policy, the Corporation would not
otherwise be required to provide it.
Under Michigan law, if the capital of a Michigan state chartered bank (such as
the Corporation's bank subsidiaries) has become impaired by losses or otherwise,
the Commissioner of the Office of Financial and Insurance Services may require
that the deficiency in capital be met by assessment upon the Bank's stockholders
pro rata on the amount of capital stock held by each, and if any such assessment
is not paid by any stockholder within 30 days of the date of mailing of notice
thereof to such stockholder, cause the sale of the stock of such stockholder to
pay such assessment and the costs of sale of such stock.
Any capital loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment. This priority would apparently
apply to guarantees of capital plans under the Federal Deposit Insurance
Corporation Improvement Act of 1991.
On July 30, 2002, the President of the United States signed the Sarbanes-Oxley
Act of 2002 (the "Sarbanes-Oxley Act") into law. The Sarbanes-Oxley Act provides
for sweeping changes dealing with corporate governance, accounting policies and
disclosure requirements for public companies, and also for their directors and
officers. Section 302 of the Sarbanes-Oxley Act, entitled "Corporate
Responsibility for Financial Reports" required the SEC to adopt numerous new
rules to implement the requirements of the Sarbanes-Oxley Act. These
requirements include new financial reporting requirements and rules concerning
corporate governance, among other new requirements. New rules, which took effect
August 29, 2002, require a company's chief executive and chief financial
officers to certify certain financial and other information included in the
company's quarterly and
6
annual reports. The rules also require these officers to certify that they are
responsible for establishing, maintaining and regularly evaluating the
effectiveness of the company's disclosure controls and procedures; that they
have made certain disclosures to the auditors and to the audit committee of the
board of directors about the company's controls and procedures; and that they
have included information in their quarterly and annual filings about their
evaluation and whether there have been significant changes to the controls and
procedures or other factors which would significantly impact these controls
subsequent to their evaluation. See the Certifications filed as Exhibit 31 to
this Form 10-K for such certifications of the financial statements and other
information for this 2003 Form 10-K. See Item 14 9A, "Controls and Procedures"
for the Corporation's evaluation of disclosure controls and procedures. The
Corporation is also filing as Exhibit 32 to this report a certificate called for
under Section 906 of the Sarbanes-Oxley Act.
Certain additional information concerning regulatory guidelines for capital
adequacy and other regulatory matters is presented herein under the caption
"Capital" on pages 23-24 and "Note K - Commitments and Other Matters" and "Note
M - Regulatory Capital Matters" on pages 51 - 52, and 52-53, respectively.
SUBSIDIARY BANKS
The Banks are subject to regulation and examination primarily by the Office of
Financial and Insurance Services. As insured state banks, which are members of
the Federal Reserve Bank of Chicago, the Subsidiaries are also subject to
regulation and examination by the FDIC and the Federal Reserve Board of
Governances.
The agencies and federal and state laws extensively regulate various aspects of
the banking business including, among other things, permissible types and
amounts of loans, investments and other activities, capital adequacy, branching,
interest rates on loans and on deposits and the safety and soundness of banking
practices.
Banking laws and regulations also restrict transactions by insured banks owned
by a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal shareholders, officers, directors and their affiliates, and
investments by the subsidiary banks in the shares or securities of the parent
holding company (or any of the other non-bank or bank affiliates), acceptance of
such share or securities as collateral security for loans to any borrower.
The banks are also subject to legal limitations on the frequency and amount of
dividends that can be paid to the Corporation. For example, a Michigan state
chartered bank may not declare a cash dividend or a dividend in kind except out
of net profits then on hand after deducting all losses and bad debts, and then
only if it will have a surplus amounting to not less than 20% of its capital
after the payment of the dividend. Moreover, a Michigan state chartered bank may
not declare or pay any cash dividend or dividend in kind until the cumulative
dividends on its preferred stock, if any, have been paid in full. Further, if
the surplus of a Michigan state chartered bank is at any time less than the
amount of its capital, before the declaration of a cash dividend or dividend in
kind, it must transfer to surplus not less than 10% of its net profits for the
preceding half-year (in the case of quarterly or semi-annual dividends) or the
preceding two consecutive half-year periods (in the case of annual dividends).
The payment of dividends by the Corporation and the banks is also affected by
various regulatory requirements and policies, such as the requirement to
maintain adequate capital above regulatory guidelines. Federal laws impose
further restrictions on the payment of dividends by insured banks that fail to
meet specified capital levels. The FDIC may prevent an insured bank from paying
dividends if the bank is in default of payment of any assessment due to the
FDIC. In addition, payment of dividends by a bank may be prevented by the
applicable federal regulatory authority if such payment is determined, by reason
of the financial condition of such bank, to be an unsafe and unsound banking
practice. The Federal Reserve Board and the FDIC have issued policy
7
statements providing that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
These regulations and restrictions may limit the Corporation's ability to obtain
funds from its subsidiary banks for its cash needs, including payment of
dividends and operating expenses.
The activities and operations of the banks are also subject to other federal and
state laws and regulations, including usury and consumer credit laws, the
Federal Truth-in-Lending Act, Truth-in-Saving and Regulation Z of the Federal
Reserve Board and the Federal Bank Merger Act.
ITEM 2. PROPERTIES
The Corporation's offices are located in the main office building of the
Isabella Bank and Trust. Isabella Bank and Trust owns 15 branches and leases one
and Farmers State Bank of Breckenridge owns three branches. IBT Title owns one
office, and leases three. The Corporation's facilities current, planned, and
best use is for conducting its current activities with the exception of
approximately 8% of the main office, and 45% of the Clare office, which is
leased to tenants. In management's opinion, each facility has sufficient
capacity and is in good condition. The following table sets forth the location
of the Corporation's offices, as well as certain additional information relating
to those offices as of December 31, 2003.
Year Approximate Net
Facility Square Book Value
Opened Footage 12/31/03 (1)
-------- ----------- ------------
Isabella Bank and Trust
Main Office
200 East Broadway (2)
Mt. Pleasant, Michigan 1903 27,640 $ 369,062
Main Office Extension (2)
Customer Service Center
139 East Broadway
Mt. Pleasant, Michigan 1985 19,136 $ 964,163
Operations Center
2750 Three Leaves Drive
Mt. Pleasant, Michigan 2001 15,000 $1,422,869
Isabella County Branch Offices
1416 East Pickard (3)
Mt. Pleasant, Michigan 1983 1,450 $ 439,589
2133 South Mission (6)
Mt. Pleasant, Michigan 1976 1,560 $ 320,579
8
Year Approximate Net
Facility Square Book Value
Opened Footage 12/31/03 (1)
-------- ----------- ------------
200 South University (4)
Mt. Pleasant, Michigan 1964 1,795 $ 51,392
1402 West High
Mt. Pleasant, Michigan 1973 2,150 $ 49,734
401 East Main Street (5)
Blanchard, Michigan 1911 6,561 $ 15,991
500 East Wright Avenue
Shepherd, Michigan 1980 1,830 $ 191,825
3388 N. Woodruff Rd.
Weidman, Michigan 1975 5,400 $ 61,145
1867 Winn Road
Beal City, Michigan 1977 1,100 $ 42,806
Montcalm County Branch Office
313 W. Bridge Street (6)
Six Lakes, Michigan 1966 1,527 $ 346,733
Clare County Branch Offices
532 N. McEwan Street
Clare, Michigan 1993 7,300 $ 310,852
1125 N. McEwan Street
Clare, Michigan 1997 525 $ 374,955
Mecosta County Branch Offices
220 W. Wheatland Street
Remus, Michigan (10) 1998 4,273 $ 517,560
240 E. Northern Avenue
Barryton, Michigan 1998 4,273 $ 226,563
8529 - 100th Avenue (8)
Stanwood, Michigan 1998 2,665 $ 14,687
9
Year Approximate Net
Facility Square Book Value
Opened Footage 12/31/03 (1)
-------- ----------- ------------
IBT Title
Isabella County
209 E. Broadway
Mt. Pleasant, Michigan 1998 2,640 $ 198,889
Mecosta County
119 Michigan Avenue
Big Rapids, Michigan 1999 1,700 $ 34,551
Clare County
404 N. McEwan
Clare, Michigan 2001 1,450 $ 17,986
Farmers State Bank of Breckenridge
Main Office 1967 13,700 $ 743,584
316 E. Saginaw
Breckenridge, Michigan
Ithaca Branch
1402 E. Center
Ithaca, Michigan 1991 2,387 $ 234,963
Hemlock Branch (9)
16490 Gratiot
Hemlock, Michigan 1994 1,840 $ 914,033
(1) includes land and buildings
(2) remodeled in 2001
(3) substantially remodeled in 1990
(4) partially remodeled in 1986 and 1988
(5) substantially remodeled in 1976 and partially remodeled in 1986
(6) substantially remodeled in 1992 and 1996
(7) substantially remodeled in 1985 and 1993
(8) leased facilities
(9) substantially remodeled in 2002
(10) substantially remodeled in 2003
10
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its banks are not involved in any material pending legal
proceedings. The banks, because of the nature of their business, are at times
subject to numerous pending and threatened legal actions that arises out of the
normal course of their business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2003 to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK AND DIVIDEND INFORMATION
There is no established market for the Corporation's common stock or public
information with respect to its market price. There are occasional sales by
shareholders of which management of the Corporation is aware. From January 1,
2002 through December 31, 2003 there were, so far as management knows, 195 sales
of the Corporation's common stock. These sales involved 88,254 shares. The
prices were reported to management in only some of the transactions and
management cannot confirm the prices that were reported during this period. The
highest known price paid for the Corporation's stock was $36.36 per share in the
fourth quarter of 2003, and the lowest price was $29.09 per share in the first
quarter of 2002. The following is a summary of all known transfers since January
1, 2002. All of the information has been adjusted to reflect the 10% stock
dividend paid February 19, 2004.
Number of Number of
Period Sales Shares Low High
------ ----- ------ --- ----
2002
First Quarter 27 6,624 $29.09 $30.91
Second Quarter 31 32,134 30.00 30.00
Third Quarter 31 12,692 30.00 30.00
Fourth Quarter 24 6,897 30.00 30.00
2003
First Quarter 28 12,448 31.82 34.55
Second Quarter 17 12,227 36.36 36.36
Third Quarter 21 11,198 36.36 36.36
Fourth Quarter 16 2,860 36.36 36.36
The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10% stock dividend paid on February 19, 2004.
2003 2002
---- ----
First Quarter $0.10 $0.09
Second Quarter 0.10 0.09
Third Quarter 0.10 0.09
Fourth Quarter 0.30 0.28
----- -----
TOTAL $0.60 $0.55
===== =====
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IBT Bancorp's authorized common stock consists of 10,000,000 shares, of which
4,403,404 shares are issued and outstanding as of December 31, 2003. As of year
end 2003, there were approximately 1,840 shareholders of record.
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED FINANCIAL DATA (1)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
INCOME STATEMENT DATA
Total interest income $ 35,978 $ 38,161 $ 40,798 $ 38,754 $ 35,445
Net interest income 23,528 22,905 21,538 20,352 19,224
Provision for loan losses 1,455 1,025 770 565 509
Net income 7,205 6,925 6,066 5,431 5,244
BALANCE SHEET DATA
End of year assets $664,079 $652,717 $592,143 $540,897 $503,596
Daily average assets 659,323 623,507 566,547 516,145 493,606
Daily average deposits 563,600 549,970 494,847 452,664 441,566
Daily average loans/net 399,008 390,613 399,239 380,392 332,083
Daily average equity 65,770 59,540 54,787 50,506 45,482
PER SHARE DATA (2)
Net income $ 1.50 $ 1.46 $ 1.29 $ 1.16 $ 1.14
Cash dividends 0.60 0.55 0.50 0.45 0.41
Book value (at year end) 14.23 13.30 12.09 11.08 10.12
FINANCIAL RATIOS
Shareholders' equity to assets 10.38% 9.71% 9.60% 9.60% 9.35%
Net income to average equity 10.95 11.63 11.07 10.75 11.53
Cash dividend payout to net income 39.99 37.33 38.36 38.30 36.80
Net income to average assets 1.09 1.11 1.07 1.05 1.06
2003 2002
---- ----
4th 3rd 2nd 1st 4th 3rd 2nd 1st
--- --- --- --- --- --- --- ---
Quarterly Operating Results:
Total interest income $8,560 $9,035 $9,119 $9,264 $9,530 $9,731 $9,433 $9,467
Interest expense 2,819 3,070 3,238 3,323 3,581 3,754 3,850 4,071
Net interest income 5,741 5,965 5,881 5,941 5,949 5,977 5,583 5,396
Provision for loan losses 688 222 333 212 487 188 162 188
Noninterest income 1,927 2,891 2,973 2,954 2,750 2,213 1,572 1,568
Noninterest expenses 5,819 5,809 5,879 6,071 6,279 5,227 4,648 4,618
Net income 1,222 2,085 1,956 1,942 1,499 2,063 1,749 1,614
Per Share of Common Stock: (2)
Net income $ 0.25 $ 0.43 $ 0.41 $ 0.41 $ 0.32 $ 0.43 $ 0.37 $ 0.34
Cash dividends 0.30 0.10 0.10 0.10 0.28 0.09 0.09 0.09
Book value 14.23 14.21 14.15 13.69 13.30 13.51 12.75 12.28
(1) 2000 and 1999 were restated for the merger in August 2000 with FSB Bancorp,
which was accounted for as a pooling of interests.
(2) Retroactively restated for the 10% stock dividend paid on February 19,
2004.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IBT BANCORP FINANCIAL REVIEW
(All dollars in thousands)
The following is management's discussion and analysis of the financial condition
and results of operations for IBT Bancorp (the Corporation). This discussion and
analysis is intended to provide a better understanding of the financial
statements and statistical data included elsewhere in the Annual Report.
CRITICAL ACCOUNTING POLICIES: The Corporation's significant accounting policies
are set forth in Note 1 of the Consolidated Financial Statements. 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 periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers that 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.
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 predominant 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.
13
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY;
INTEREST RATE AND INTEREST DIFFERENTIAL
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 Equity holdings are included in Other Investments.
2003 2002 2001
------------------------------ ------------------------------ ------------------------------
Tax Average Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- ---------- ------- --------- ---------- ------- --------- ---------- -------
INTEREST EARNING ASSETS
Loans $404,953 $ 29,196 7.21% $396,234 $ 31,554 7.96% $404,586 $35,118 8.68%
Taxable investment securities 123,927 4,437 3.58 94,383 4,197 4.45 54,171 2,993 5.53
Nontaxable investment securities 49,531 3,099 6.26 45,663 2,864 6.27 34,748 2,481 7.14
Federal funds sold 16,311 193 1.18 26,364 423 1.60 23,827 897 3.76
Other investments 2,857 151 5.29 2,735 165 6.03 2,626 180 6.85
-------- ---------- ---- -------- -------- ------ -------- ------- -----
TOTAL EARNING ASSETS 597,579 37,076 6.20 565,379 39,203 6.93 519,958 41,669 8.01
NONEARNING ASSETS
Allowance for loan losses (5,946) (5,621) (5,347)
Cash and due from banks 26,840 24,236 21,052
Premises and equipment 15,646 14,983 12,461
Accrued income and other assets 25,204 24,530 18,423
-------- -------- --------
TOTAL ASSETS $659,323 $623,507 $566,547
======== ======== ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $113,206 1,057 .93 $ 98,478 1,406 1.43 $ 81,260 1,955 2.41
Savings deposits 141,227 1,325 .94 135,792 2,201 1.62 121,202 3,258 2.69
Time deposits 247,516 9,228 3.73 247,182 10,971 4.44 235,481 13,465 5.72
Borrowed funds 18,812 840 4.47 13,960 678 4.86 10,712 582 5.43
-------- ---------- ---- -------- -------- ------ -------- ------- -----
TOTAL INTEREST BEARING
LIABILITIES 520,761 12,450 2.39 495,412 15,256 3.08 448,655 19,260 4.29
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 61,651 59,518 56,904
Other 11,141 9,037 6,201
Shareholders' equity 65,770 59,540 54,787
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $659,323 $623,507 $566,547
======== ======== ========
NET INTEREST INCOME (FTE) $ 24,626 $ 23,947 $22,409
========== ======== =======
NET YIELD ON INTEREST EARNING ASSETS
(FTE) 4.12% 4.24% 4.31%
===== ====== =====
RESULTS OF OPERATIONS
The Corporation achieved record net income for the seventeenth consecutive year
in 2003.
Two key measures of earnings performance commonly used in the banking industry
are return on average assets and return on average shareholders' equity. Return
on average assets measures the ability of a corporation to profitably and
efficiently employ its resources. The Corporation's return on average assets was
1.09% in 2003, 1.11% in 2002, and 1.07% in 2001. Return on average equity
indicates how effectively a corporation is able to generate earnings on capital
invested by its shareholders. The Corporation's return on average shareholders'
equity was 10.95% in 2003, 11.63% in 2002, and 11.07% in 2001.
14
NET INTEREST INCOME
The Corporation derives the majority of its gross income from interest earned on
loans and investments, while its most significant expense is the interest cost
incurred for funds used. Net interest income is the amount by which interest
income on earning assets exceeds the interest cost of deposits and borrowings.
Net interest income is influenced by changes in the balance and mix of assets
and liabilities and market interest rates. Management exerts some control over
these factors, however, Federal Reserve monetary policy and competition have a
significant impact. Interest income includes loan fees of $1,752 in 2003, $1,524
in 2002, and $1,425 in 2001. 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.
TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS
The following table details the dollar amount of changes in FTE net interest
income for each major category of interest earning assets and interest bearing
liabilities and the amount of change attributable to changes in average balances
(volume) or average rates. 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.
2003 Compared to 2002 2002 Compared to 2001
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ -----------------------------
Volume Rate Net Volume Rate Net
------- -------- -------- -------- -------- -------
CHANGES IN INTEREST INCOME
Loans $ 682 $(3,040) $(2,358) $ (713) $(2,851) $(3,564)
Taxable investment securities 1,156 (916) 240 1,878 (674) 1,204
Nontaxable investment securities 242 (7) 235 711 (328) 383
Federal funds sold (136) (94) (230) 87 (561) (474)
Other investments 7 (21) (14) 7 (22) (15)
------- ------- ------- ------- ------- -------
TOTAL CHANGES IN INTEREST INCOME 1,951 (4,078) (2,127) 1,970 (4,436) (2,466)
CHANGES IN INTEREST EXPENSE
Interest bearing demand deposits 188 (537) (349) 357 (906) (549)
Savings deposits 85 (961) (876) 356 (1,413) (1,057)
Time deposits 15 (1,758) (1,743) 642 (3,136) (2,494)
Other borrowings 220 (58) 162 163 (67) 96
------- ------- ------- ------- ------- -------
TOTAL CHANGES IN INTEREST EXPENSE 508 (3,314) (2,806) 1,518 (5,522) (4,004)
NET CHANGE IN FTE NET INTEREST INCOME $ 1,443 $ (764) $ 679 $ 452 $ 1,086 $ 1,538
======= ======= ======= ======= ======= =======
15
As shown in Tables 1 and 2, when comparing year ending December 31, 2003 to
2002, fully taxable equivalent (FTE) net interest income increased $679 or 2.8%.
An increase of 5.7% in average interest earning assets provided $1,951 of FTE
interest income. The majority of this growth was funded by a 5.1% increase in
interest bearing liabilities, resulting in $508 of additional interest expense.
Overall, changes in volume resulted in $1,443 in additional FTE interest income.
The average FTE interest rate earned on assets decreased by .73%, decreasing FTE
interest income by $4,078, and the average rate paid on deposits decreased by
..69%, decreasing interest expense by $3,314. The net change related to interest
rates earned and paid was a $764 decrease in FTE net interest income.
The Corporation's FTE net yield as a percentage of average earning assets
decreased .12%. The decrease was primarily the result of a significant change in
the mix of assets and funding sources. Average investment securities as a
percentage of total earning assets increased 4.3% to 29.0% in 2003, while loans,
the Corporation's highest yielding assets, decreased 2.3% to 67.8%. The change
in mix resulted in a .08% decrease in the FTE net yield on interest earning
assets. The funding of interest earning assets was done primarily through a 5.1%
increase in interest bearing liabilities. The remaining decrease in net interest
margin is related to the average rate earned on earning assets declining
slightly faster than the average rate paid on interest bearing liabilities.
Net interest income increased $1,538 to $23,947 in 2002 from $22,409 in 2001. As
shown in Tables 1 and 2, in 2002 (FTE) interest income increased $1,970, from an
8.7% increase in the volume of average earning assets. The growth of interest
earning assets was funded primarily by a 10.4% increase in interest bearing
liabilities that resulted in additional interest expense of $1,518. Overall, the
Corporation earned an additional $452 in FTE interest income as a result of
increased volume. The average rate earned in 2002 decreased by 1.08%, decreasing
FTE interest income by $4,436, and the average rate paid on deposits decreased
by 1.21%, decreasing interest expense by $5,522. The net change related to
interest rates earned and paid was a $1,086 increase in FTE net interest income.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Total loans outstanding represent 75% of the
Corporation's total year end deposits and is the Corporation's single largest
concentration of risk. Inevitably, poor operating performance may result from
the failure to control credit risk. Given the importance of maintaining sound
underwriting practices, the Banks' Boards of Directors and senior management
teams spend a large portion of their time and effort in loan review. The
provision for loan losses is the amount added to the allowance for loan losses
on a monthly basis. The allowance for loan losses is management's estimation of
potential losses inherent in the loan portfolio, and is maintained at a level
considered by management to be adequate to absorb potential losses. Evaluation
of the allowance for loan losses and the provision for loan losses is based on a
continuous review of the changes in the type and volume of the loan portfolio,
reviews of specific loans to evaluate their collectibility, past and recent loan
loss history, financial condition of borrowers, the amount of impaired loans,
overall economic conditions, and other factors. This evaluation is inherently
subjective as it requires material estimates, including the amounts and timing
of future cash flows expected to be received on impaired loans that may be
subject to significant change.
As shown in Table 3, total loans outstanding increased 5.3% in 2003 and
increased 1.7% in 2002. The provision for loan losses in 2003 was $1,455, a $430
increase from 2002 and a $685 increase from 2001. The 2003 provision for loan
losses was increased as a result of a combination of factors. During the last
quarter of 2003 the
16
Corporation experienced a decline in the overall credit quality of its
outstanding agricultural loans. The Corporation has under taken a detailed
review of the credit quality of all its significant agricultural lending
relationships, and believes that it has identified the most significant troubled
loans. The primary factor for the decline in the credit quality is the third
consecutive year of weak cash flows due to both low farm commodity prices and
unfavorable growing conditions in mid Michigan. The Corporation has tightened
its credit standards for new borrowings and will continue to monitor existing
relationships for further deterioration. Unfavorable prices or poor growing
conditions in 2004 could result in significant increases in the provision for
loan losses and net charge offs. Net charge offs to average loans was 0.21% in
2003 and 0.23% in 2002, and have averaged 0.13% during the past 5 years versus
the average period for the past 5 years for all commercial banks in the State of
Michigan of 0.17%. The Corporations substandard loans were 1.29% as of December
31, 2003, a 0.10% increase from 2002, and slightly above the ratio for all
commercial banks in the State of Michigan of 1.05%.
The allowance to loan losses as a percentage of loans was increased from 1.38%
to 1.46%, primarily due to the increase in loans classified as substandard and
the decline in the overall credit quality of agricultural loans. Management
believes that the allowance for loans is adequate as of December 31, 2003.
TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE
The following is a summary of loan balances at the end of each year and their
daily average balances, changes in the allowance for loan losses arising from
loans charged off and recoveries on loans previously charged off, and additions
to the allowance that have been expensed.
December 31
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Amount of loans outstanding
at the end of year $426,174 $404,480 $397,864 $403,679 $355,846
======== ======== ======== ======== ========
Average gross loans outstanding
for the year $404,953 $396,234 $404,586 $380,392 $332,083
======== ======== ======== ======== ========
Summary of changes in allowance
Allowance for loan losses - January 1 $ 5,593 $ 5,471 $ 5,162 $ 4,622 $ 4,412
Loans charged off
Commercial and agricultural 578 506 271 65 221
Real estate mortgage 117 236 70 58 78
Personal 445 460 351 295 347
-------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF 1,140 1,202 692 418 646
Recoveries
Commercial and agricultural 93 140 35 172 86
Real estate mortgage 29 18 41 64 92
Personal 174 141 155 157 169
-------- -------- -------- -------- --------
TOTAL RECOVERIES 296 299 231 393 347
Net charge offs 844 903 461 25 299
Provision charged to income 1,455 1,025 770 565 509
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES - DECEMBER 31 $ 6,204 $ 5,593 $ 5,471 $ 5,162 $ 4,622
======== ======== ======== ======== ========
17
Ratio of net charge offs during the
year to average loans outstanding .21% 0.23% 0.11% 0.01% 0.09%
======== ======== ======== ======== ========
Ratio of the allowance for loan losses
to loans outstanding at year end 1.46% 1.38% 1.38% 1.28% 1.30%
======== ======== ======== ======== ========
As shown in Table 4, the percentage of loans classified as nonperforming by the
Corporation as of December 31, 2003 and 2002 was 1.29% and 1.19% of total loans,
respectively. Average nonperforming loans for the peer group were 1.47%. The
peer group is a composite of financial information of all bank holding companies
with assets between $500 million and $1 billion; there were 388 bank holding
companies in the Corporation's peer group for the period indicated. The Banks'
policies, including a loan considered impaired under Statement of Financial
Accounting Standards No. 118, are to transfer a loan to nonaccrual status
whenever it is determined that interest should be recorded on the cash basis
instead of the accrual basis because of a deterioration in the financial
position of the borrower, or a determination that payment in full of interest or
principal cannot be expected, or the loan has been in default for a period of 90
days or more, unless it is both well secured and in the process of collection.
TABLE 4. NONPERFORMING LOANS
The following loans are all the credits which require classification for state
or federal regulatory purposes:
December 31
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Nonaccrual loans $4,121 $2,484 $1,346 $ 382 $ 945
Accruing loans past due 90 days or more 1,380 1,840 1,219 1,484 618
Restructured loans --- 479 --- --- ---
------ ------ ------ ------ ------
TOTAL NONPERFORMING LOANS $5,501 $4,803 $2,565 $1,866 $1,563
====== ====== ====== ====== ======
NONPERFORMING LOANS AS % OF LOANS 1.29% 1.19% 0.64% 0.46% 0.44%
====== ====== ====== ====== ======
As of December 31, 2003, there were no other interest bearing assets which
required classification. Management is not aware of any recommendations by
regulatory agencies that, if implemented, would have a material impact on the
Corporation's liquidity, capital, or operations.
Management's internal analysis of the estimated range for the allowance was
$3,326 to $6,937 as of December 31, 2003. In management's opinion, the allowance
for loan losses of $6,204 is adequate as of December 31, 2003. Management has
allocated, as reflected in Table 5, the allowance for loan losses to the
following categories: 34.5% to commercial and agricultural loans; 25.5% to real
estate loans; 26% to installment loans; 9.1% to impaired loans; and 4.9%
unallocated. The above allocation is not intended to imply limitations on usage
of the allowance. The entire allowance is available to fund loan losses without
regard to loan type.
18
TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within the following categories:
December 31
2003 2002 2001 2000 1999
-------------------- -------------------- -------------------- -------------------- --------------------
% of Each % of Each % of Each % of Each % of Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Commercial and
agricultural $ 2,140 27.6% $ 1,868 28.9% $ 2,081 26.7% $ 1,301 26.6% $ 1,502 26.9%
Real estate mortgage 1,584 56.4 1,649 56.9 1,408 59.8 1,559 60.0 1,232 59.8
Installment 1,614 15.0 1,679 13.5 1,577 13.4 1,923 13.4 1,555 13.3
Impaired loans 622 1.0 103 0.7 56 0.1 --- --- --- ---
Unallocated 244 --- 294 --- 349 --- 379 --- 333 ---
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
TOTAL $ 6,204 100.0% $ 5,593 100.0% $ 5,471 100.0% $ 5,162 100.0% $ 4,622 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
NONINTEREST INCOME
Noninterest income consists of trust fees, service charges on deposit accounts,
fees for other financial services, gain on the sale of mortgage loans, title
insurance revenue, and other insignificant categories. As is the case for many
financial institutions, management believes fee income is increasingly important
as a source of net earnings and expects this trend to continue. There was a
$2,642 or 32.6% increase in fees earned from these sources during 2003.
Significant changes during 2003 include a $119 increase from the sale of title
insurance and related services, a $900 increase in overdraft fees, a $1,095
increase in mortgage servicing income, and a $329 increase in gains on the sale
of real estate mortgages. During 2003, the Corporation had an average investment
of $10 million in bank-owned life insurance, a $500 increase over 2002. The
average net rate earned on the investment was approximately 4.8% in 2003 (versus
5.0% in 2002) and, because of their tax free accumulation of earnings, they have
a taxable equivalent rate of 7.3%. The rates on these contracts are adjustable
annually on their anniversary date. The investment is placed with five separate
insurance companies with S&P ratings of AA+ or better. Due to the decrease in
interest rates during 2003 income earned declined from this investment $19 in
2003.
Included in noninterest income is a $2,091 gain from the sale of $195,168 in
mortgages during 2003 versus a $1,762 gain on the sale of $192,407 during 2002.
The Corporation has established a policy that all 30-year fixed rate mortgage
loans will be sold. During 2003, most 15-year fixed rate mortgage loans granted
were sold on the secondary market. These loans were sold without recourse, with
servicing retained.
Noninterest income increased $1,905 in 2002 when compared to 2001. Significant
changes in 2002 include a $643 increase from the sale of title insurance and
related services, a $161 increase in overdraft fees, a $138 increase in mortgage
servicing fees, a $711 increase in gains on the sale of residential real estate
mortgages and a $245 increase in income from bank-owned life insurance.
19
NONINTEREST EXPENSES
Noninterest expenses increased $2,806 or 13.5% during 2003. Noninterest expenses
net of noninterest income divided by average total assets equalled 1.95% in
2003, 2.03% in 2002, and 2.21% in 2001. The decrease in the 2003 ratio was
primarily a result of the $329 increase in the gains on the sale of real estate
mortgages, a $900 increase in overdraft fees, and a $1,095 increase in mortgage
servicing income.
The largest component of noninterest expenses is salaries and employee benefits,
which increased $2,038 or 1.8%. Salaries increased $1,155 due to increases in
staffing and normal merit and promotional salary increases. Employee benefits
increased $883 in 2003. A significant portion of the increase was related to an
11.8% increase in medical insurance expenses, and a 53.6% increase in pension
expense. Footnote G in the Corporation's Notes to Consolidated Financial
Statements include the required disclosures regarding the benefit obligations,
plan assets, and funding status of the Corporation's Defined Benefit Pension
Plan. Over the last three years the plan has experienced an accumulated loss of
$469 on the Plan's investments. The entire loss is related to the general
decline in market value of stock equity investments. Over the same time period,
the actuarial assumption for the long term rate of return on the assets held by
the Plan should have produced a return of $1.27 million. Essentially, the actual
loss combined with the change in actuarial assumptions related to the benefit
obligation has produced a $2.7 million underfunding of the Plan's assets as of
December 31, 2003. This shortfall will significantly increase the Corporation's
pension expense in future periods. The Corporation's Board of Directors approved
a change in investment advisors. During 2003 the Plan experienced a 9.9% return
on beginning Plan assets.
Occupancy and furniture and equipment expenses increased $332 or 9% in 2003. The
majority of this increase is related to building depreciation, property taxes,
service contracts and equipment depreciation. All other operating expenses
increased $436. The most significant increases are related to director fees,
consultant fees, and donations. The Corporation contributed approximately $870
to the Isabella Bank and Trust Community Foundation. (See Note J to the
Consolidated Financial Statements.)
Noninterest expense increased $2,077 or 11.1% in 2002. During 2002, salaries and
benefits increased $1,517, occupancy and furniture and equipment expenses
increased $461, all other operating expenses increased $660, and the
amortization of the acquisition intangibles decreased by $561.
FEDERAL INCOME TAXES
Federal income tax expense for 2003 was $2,035 or 22% of pre-tax income compared
to $2,286 or 24.8% of pre-tax income in 2002 and $2,205 or 26.7% in 2001. The
decrease in income tax expense as a percentage of income in 2002 is attributable
to an increase in nontaxable municipal income and other tax exempt income as a
percentage of the Corporation's pretax net income. A reconcilement of federal
income tax expense and the amount computed at the federal statutory rate of 34%
is found in Note F, Federal Income Taxes, in the accompanying consolidated
financial statements.
20
ANALYSIS OF CHANGES IN THE STATEMENT OF FINANCIAL CONDITION
Total assets were $664,079 at December 31, 2003, an increase of $11,362 or 1.74%
over year end 2002. Asset growth was primarily funded by a $6,251 increase in
deposits, and a $5,479 increase in shareholders' equity. A discussion of changes
in balance sheet amounts by major categories follows.
INVESTMENT SECURITIES
The primary objective of the Corporation's investing activities is to provide
for safety of the principal invested. Secondary considerations include the need
for earnings, liquidity, and the Corporation's overall exposure to changes in
interest rates. During 2003, the Corporation's net holdings of investment
securities increased $11,499. Table 6 shows the carrying value of investment
securities available for sale and held to maturity. Securities held to maturity,
which are stated at amortized cost, consist mostly of local municipal bond
issues, and U.S. Agencies. Securities not classified by management as held to
maturity are classified as available for sale and are stated at fair value.
TABLE 6. INVESTMENT PORTFOLIO
The following is a schedule of the carrying value of investment securities
available for sale and held to maturity:
December 31
2003 2002 2001
---- ---- ----
Available for sale
U.S. Treasury and U.S. government agencies $ 89,934 $ 90,974 $ 53,047
States and political subdivisions 76,656 64,607 47,141
Commercial paper 3,242 2,328 2,330
-------- -------- --------
TOTAL $169,832 $157,909 $102,518
======== ======== ========
Held to maturity
U.S. Treasury and U.S. government agencies $ 9 $ 74 $ 148
States and political subdivisions 1,303 1,662 3,306
-------- -------- --------
TOTAL $ 1,312 $ 1,736 $ 3,454
======== ======== ========
Excluding those holdings of the investment portfolio in U.S. Treasury and U.S.
government agency securities, there were no investments in securities of any one
issuer that exceeded 10% of shareholders' equity. The Corporation has a policy
prohibiting investments in securities that it deems are unsuitable due to their
inherent credit or market risks. Prohibited investments include stripped
mortgage backed securities, zero coupon bonds, nongovernment agency asset backed
securities, and structured notes.
The following is a schedule of maturities of each category of investment
securities (at carrying value) and their weighted average yield as of December
31, 2003:
21
TABLE 7. SCHEDULE OF MATURITIES OF INVESTMENT SECURITIES AND WEIGHTED AVERAGE
YIELDS
Maturing
After One After Five
Year But Years But
Within Within Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Available for sale
U.S. Treasury and U.S.
government agencies $ 39,493 3.54% $ 35,799 2.92% $ 510 2.39% $ --- ---%
States and political
subdivisions 8,097 3.67 39,496 3.25 27,532 4.45 1,531 3.48
Mortgage backed 9 5.54 475 3.13 7,486 4.40 6,162 4.51
Corporate & other
securities 1,276 4.62 1,966 3.28 --- --- --- ---
-------- ---- -------- ---- -------- ---- -------- ----
TOTAL $ 48,875 3.59% $ 77,736 3.10% $ 35,528 4.41% $ 7,693 4.30%
======== ==== ======== ==== ======== ==== ======== ====
Held to maturity
States and political
subdivisions $ 1,108 4.76% $ 195 5.00% $ --- ---% $ --- ---%
Mortgage backed --- --- 9 5.54 --- --- --- ---
-------- ---- -------- ---- -------- ---- -------- ----
TOTAL $ 1,108 4.76% $ 204 5.13% $ --- ---% $ --- ---%
======== ==== ======== ==== ======== ==== ======== ====
LOANS
The largest component of earning assets is loans. The proper management of
credit and market risk inherent in loans is critical to the financial well-being
of the Corporation. To control these risks, the Corporation has adopted strict
underwriting standards. The standards include prohibitions against lending
outside the Corporation's defined market area, lending limits to a single
borrower, and strict loan to collateral value limits. The Corporation also
monitors and limits loan concentrations extended to volatile industries. The
Corporation has no foreign loans and there were no concentrations greater than
10% of total loans that are not disclosed as a separate category in Table 8.
TABLE 8. LOAN PORTFOLIO
December 31
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Commercial $ 71,699 $ 66,326 $ 58,424 $ 60,301 $ 55,247
Agricultural 50,548 53,223 48,523 47,298 40,449
Real estate mortgage 240,145 230,409 237,650 242,042 212,724
Installment 63,782 54,522 53,267 54,038 47,426
-------- -------- -------- -------- --------
TOTAL LOANS $426,174 $404,480 $397,864 $403,679 $355,846
======== ======== ======== ======== ========
22
Total loans increased $21,694 in 2003. The increase was primarily in real estate
mortgages and installment loans. As of December 31, 2003, as a percentage of
total loans, commercial loans were 16.82%, agricultural were 11.86%, real estate
mortgages were 56.35%, and installments were 14.97%.
DEPOSITS
Total deposits increased $6,251 and were $567,707 at year end 2003, a 1.11%
increase over 2002. Average deposits increased 4.2% in 2003 and 9.3% in 2002.
During 2003, average noninterest bearing deposits increased 3.6%, interest
bearing demand deposits increased 15%, savings deposits increased 4%, and time
deposits increased .14%. Time deposits over $100 as a percentage of total
deposits equaled 11.9% and 12.5% as of December 31, 2003 and 2002, respectively.
TABLE 9. AVERAGE DEPOSITS
2003 2002 2001
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Noninterest bearing demand deposits $ 61,651 $ 59,518 $ 56,904
Interest bearing demand deposits 113,206 0.93% 98,478 1.43% 81,260 2.41%
Savings deposits 141,227 0.94 135,792 1.62 121,202 2.69
Time deposits 247,516 3.73 247,182 4.44 235,481 5.72
-------- -------- --------
TOTAL $563,600 $540,970 $494,847
======== ======== ========
TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000
December 31
2003 2002 2001
---- ---- ----
Maturity
Within 3 months $18,068 $21,900 $22,259
Within 3 to 6 months 11,475 15,928 11,418
Within 6 to 12 months 8,184 18,624 11,496
Over 12 months 29,945 13,858 14,252
------- ------- -------
TOTAL $67,672 $70,310 $59,425
======= ======= =======
Within the banking industry there is agreement that competition from mutual
funds and annuities has had a significant impact on deposit growth. In response,
the Corporation's subsidiaries now offer mutual funds and annuities to its
customers. The Corporation's trust department also offers a variety of financial
products in addition to traditional estate services.
CAPITAL
The capital of the Corporation consists solely of common stock, capital surplus,
retained earnings, and accumulated other comprehensive income. Total capital
increased approximately $5,479 in 2003. The Corporation offers a dividend
reinvestment and employee stock purchase plan. Under the provisions of these
Plans, the Corporation issued 70,340 shares of common stock generating $2,008 of
capital during 2003, and
23
52,473 shares of common stock generating $1,524 of capital in 2002. The Board of
Directors authorized management to repurchase up to $2.0 million of common stock
shares. A total of 3,219 shares were repurchased in 2003 at an average price of
$34.50 per share. Accumulated other comprehensive income decreased $726 and
consists of $863 decrease in unrealized gain on available for sale investment
securities reduced by a gain of $137 related to the recognition of an additional
minimum pension liability.
The Federal Reserve Board's current recommended minimum primary capital to
assets requirement is 6.0%. The Corporation's primary capital to assets, which
consists of shareholders' equity plus the allowance for loan losses less
acquisition intangibles, was 10.8% at year end 2003. There are no commitments
for significant capital expenditures.
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
corporation 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 values at December 31, 2003:
Percentage of Capital to Risk Adjusted Assets:
Required IBT Bancorp
-------- -----------
Equity Capital 4.00% 14.68%
Secondary Capital 4.00 1.25
---- -----
Total Capital 8.00% 15.93%
==== =====
IBT Bancorp's secondary capital includes only the allowance for loan losses. The
percentage for the secondary capital under the required column is the maximum
amount allowed from all sources.
The Federal Reserve also prescribes minimum capital requirements for the
Corporation's subsidiary Banks. At December 31, 2003, the Banks exceeded these
minimums. For further information regarding the Banks' capital requirements,
refer to Note M of the Financial Statements, Regulatory Capital Matters.
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 and
cash equivalents and available for sale investment securities.
As of December 31, 2003 and 2002, cash and cash equivalents equaled 4.7% and
8.3%, respectively, of total assets. Net cash provided from operations was
$20,538 in 2003 and $6,122 in 2002. Net cash provided by financing activities
equaled $5,511 in 2003 and $49,491 in 2002. The Corporation's investing
activities used cash amounting to $49,268 in 2003 and $56,638 in 2002. The
accumulated effect of the Corporation's operating, investing, and financing
activities on cash and cash equivalents was a $23,219 decrease in 2003 and a
$1,025 decrease in 2002.
24
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale equaled
$169,832 as of December 31, 2003 and $157,909 as of December 31, 2002. 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 the management of the Corporation.
INTEREST RATE SENSITIVITY
Interest rate sensitivity management aims at achieving reasonable stability in
the net interest margin through periods of changing interest rates. Interest
rate sensitivity is determined by the amount of earning assets and interest
bearing liabilities repricing within a specific time period, and their relative
sensitivity to a change in interest rates. One tool used by management to
measure interest rate sensitivity is gap analysis. As shown in Table 11, the gap
analysis depicts the Corporation's position for specific time periods and the
cumulative gap as a percentage of total assets.
Investment securities and other investments are scheduled according to their
contractual maturity. Fixed rate loans are included in the appropriate time
frame based on their scheduled amortization. Variable rate loans are included in
the time frame of their earliest repricing. Of the $426,174 in total loans,
$88,615 are variable rate loans. Time deposit liabilities are scheduled based on
their contractual maturity except for variable rate time deposits in the amount
of $2,145 that are included in the 0 to 3 month time frame. Money market
accounts reprice monthly and are included in the 0 to 3 month time frame.
Passbook savings, statement savings, and NOW accounts have no contractual
maturity date and are believed to be predominantly noninterest rate sensitive by
management. These accounts have been classified in the gap table according to
their estimated withdrawal rates based upon management's analysis of deposit
runoff over the past five years. Management believes this runoff experience is
consistent with its expectation for the future. As of December 31, 2003, the
Corporation had $22,703 more in liabilities than assets maturing within one
year. A negative gap position results when more liabilities, within a specified
time frame, mature or reprice than assets.
25
TABLE 11. INTEREST RATE SENSITIVITY
The following table shows the time periods and the amount of assets and
liabilities available for interest rate repricing as of December 31, 2003. For
purposes of this analysis, nonaccrual loans and the allowance for loan losses
are excluded.
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years
------ ------ ----- -----
Interest Sensitive Assets
Fed funds sold $ 5,300 $ --- $ --- $ ---
Investment securities 5,851 44,417 78,786 42,090
Loans 126,181 63,150 207,638 25,084
--------- --------- --------- ---------
TOTAL $ 137,332 $ 107,567 $ 286,424 $ 67,174
========= ========= ========= =========
Interest Sensitive Liabilities
Borrowed funds $ 1,525 $ 56 $ 6,000 $ 10,472
Time deposits 43,864 67,811 126,162 841
Savings 83,213 4,799 40,227 15,469
Interest bearing demand 58,650 7,684 46,001 5,225
--------- --------- --------- ---------
TOTAL $ 187,252 $ 80,350 $ 218,390 $ 32,007
========= ========= ========= =========
Cumulative gap $ (49,920) $ (22,703) $ 45,331 $ 80,498
Cumulative gap as a % of assets (7.52%) (3.42%) 6.83% 12.12%
26
TABLE 12. LOAN MATURITY AND INTEREST RATE SENSITIVITY
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 2003. Also provided are the amounts due after one
year, classified according to the sensitivity to changes in interest rates.
Due in
1 Year 1 to 5 Over 5
or Less Years Years Total
-------- -------- ------- --------
Commercial and agricultural $ 62,889 $ 57,859 $ 1,499 $122,247
======== ======== ======= ========
Interest Sensitivity:
Loans maturing after one year that have:
Fixed interest rates $ 42,506 $ 1,284
Variable interest rates 15,353 215
-------- -------
TOTAL $ 57,859 $ 1,499
======== =======
ITEM 7 A. 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, holds no trading account
assets, nor does it utilize interest rate swaps or derivatives in the management
of its interest rate risk. 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. The Corporation does have a significant amount of loans
extended to borrowers in agricultural production. Their cash flow and their
ability to service their debt is largely dependent on the commodity prices for
corn, soybeans, sugar beets, milk, beef, and a variety of dry beans. The
Corporation mitigates these risks by using conservative price and production
yields when calculating a borrower's available cash flow to service their debt.
Interest rate risk ("IRR") is the exposure of 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. IRR
is the fundamental method in which financial institutions earn income and create
shareholder value. Excessive exposure to IRR 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 IRR. 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
27
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 rate 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. Savings 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 that discourage early withdrawals.
The second technique used in the management of IRR is to combine the projected
cash flows and repricing characteristics generated by the gap analysis and the
interest rates associated with those cash flows to project 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. Based on the projections
prepared for the year ended December 31, 2003 the Corporation's net interest
income would decrease during a period of decreasing interest rates.
The following tables provide information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of December 31,
2003 and 2002. The Corporation has no interest rate swaps, futures contracts, or
other derivative financial options. The principal amounts of assets and time
deposits maturing were calculated based on the contractual maturity dates.
Savings and NOW accounts are based on management's estimate of their future cash
flows.
QUANTITATIVE DISCLOSURES OF MARKET RISK
Fair Value
2004 2005 2006 2007 2008 Thereafter Total 12/31/03
--------- -------- -------- -------- -------- ---------- --------- ----------
- ---
Rate sensitive assets
Other interest bearing assets $ 5,400 $ 99 --- --- --- --- $ 5,499 $ 5,499
Average interest rates 1.03% 2.67% --- --- --- 1.06%
Fixed interest rate securities $ 50,268 $33,303 $24,377 $14,790 $ 6,316 $42,090 $171,144 $171,181
Average interest rates 3.61% 2.87% 3.09% 3.18% 3.69% 4.42% 3.56%
Fixed interest rate loans $ 99,216 $71,181 $69,309 $24,607 $43,471 $29,775 $337,559 $340,558
Average interest rates 6.74% 7.11% 6.17% 6.57% 6.10% 4.97% 6.45%
Variable interest rate loans $ 62,619 $ 6,722 $ 6,227 $ 4,802 $ 6,724 $ 1,521 $ 88,615 $ 88,615
Average interest rates 5.54% 5.62% 5.52% 5.49% 5.06% 4.55% 5.49%
Rate sensitive liabilities
Borrowed funds $ 1,552 $ 1,053 $ 53 $ 53 $ 5,053 $10,289 $ 18,053 $ 19,118
Average interest rates 0.86% 5.01% 4.16% 4.16% 5.08% 4.35% 4.29%
Savings and NOW accounts $154,489 $22,778 $18,518 $15,160 $14,018 $36,305 $261,268 $261,268
Average interest rates 0.76% 0.76% 0.78% 0.69% 0.48% 0.43% 0.70%
Fixed interest rate time deposits $110,188 $52,683 $33,216 $27,802 $11,803 $ 841 $236,533 $243,094
Average interest rates 2.33% 4.73% 4.48% 4.20% 3.47% 7.95% 3.46%
Variable interest rate time deposits $ 1,048 $ 448 $ --- $ 182 $ 467 $ --- $ 2,145 $ 2,145
Average interest rates 1.24% 1.24% --- --- 3.52% --- 1.63%
28
Fair Value
2003 2004 2005 2006 2007 Thereafter Total 12/31/02
--------- -------- -------- -------- -------- ---------- --------- ----------
- ---
Rate sensitive assets
Other interest bearing assets $ 25,950 --- --- --- --- --- $ 25,950 $ 25,950
Average interest rates 1.25% --- --- --- --- --- 1.25%
Fixed interest rate securities $ 30,393 $50,671 $23,853 $12,169 $ 6,514 $36,045 $159,645 $159,712
Average interest rates 4.00% 3.77% 3.32% 4.06% 4.17% 4.76% 4.01%
Fixed interest rate loans $ 98,028 $86,180 $83,675 $27,107 $21,906 $20,160 $337,056 $338,585
Average interest rates 7.80% 7.69% 7.40% 7.57% 7.07% 5.89% 7.49%
Variable interest rate loans $ 45,756 $ 9,646 $ 4,541 $ 3,297 $ 3,689 $ 495 $ 67,424 $ 67,424
Average interest rates 6.13% 6.11% 5.95% 5.95% 5.52% 5.30% 6.07%
Rate sensitive liabilities
Borrowed funds $ 3,263 $ 1,094 $ 94 $ 5,094 $ 93 $ 8,155 $ 17,793 $ 18,507
Average interest rates 0.88% 5.07% 5.23% 5.08% 5.20% 5.30% 4.41%
Savings and NOW accounts $150,280 $20,646 $16,779 $13,749 $12,706 $32,928 $247,088 $247,088
Average interest rates 1.42% 1.25% 1.49% 1.57% 1.15% 0.91% 1.34%
Fixed interest rate time deposits $131,911 $32,404 $37,843 $26,984 $20,473 $ 59 $249,674 $255,167
Average interest rates 3.08% 4.85% 5.79% 4.89% 4.61% 7.20% 4.04%
Variable interest rate time deposits $ 816 $ 449 $ 9 --- $ 314 --- $ 1,588 $ 1,588
Average interest rates 2.03% 2.03% --- --- 3.82% --- 2.37%
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.
29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the registrant and report of
independent auditors are set forth on pages 28 through 52 of this report:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The supplementary data regarding quarterly results of operations set forth under
the table named "Summary of Selected Financial Data" on Page 12 of this report.
30
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
IBT Bancorp, Inc.
Mt. Pleasant, Michigan
We have audited the accompanying consolidated balance sheets of IBT Bancorp,
Inc. as of December 31, 2003 and 2002, and the related consolidated statements
of changes in shareholders' equity, income, comprehensive income, and cash flows
for each of the years in the three year period ended December 31, 2003. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IBT
Bancorp, Inc. as of December 31, 2003 and 2002, and the consolidated results of
their operations and their cash flows for each of the years in the three year
period ended December 31, 2003 in conformity with accounting principles
generally accepted in the United States of America.
REHMANN ROBSON P.C.
Saginaw, Michigan
January 30, 2004
31
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31
2003 2002
---- ----
ASSETS
Cash and cash equivalents $ 25,918 $ 28,587
Federal funds sold 5,300 25,850
-------- --------
CASH AND CASH EQUIVALENTS 31,218 54,437
Investment securities
Securities available for sale (amortized cost of
$166,730 in 2003 and $153,499 in 2002) 169,832 157,909
Securities held to maturity (fair value of
$1,349 in 2003 and $1,803 in 2002) 1,312 1,736
-------- --------
TOTAL INVESTMENT SECURITIES 171,144 159,645
Mortgage Loans available for sale 4,315 13,392
Loans
Agricultural 50,548 53,223
Commercial 149,931 143,957
Residential real estate mortgage 157,598 139,386
Installment 63,782 54,522
-------- --------
TOTAL LOANS 421,859 391,088
Less allowance for loan losses 6,204 5,593
-------- --------
NET LOANS 415,655 385,495
Premises and equipment 15,785 14,470
Bank-owned life insurance 10,029 9,810
Accrued interest receivable 4,534 4,897
Acquisition intangibles and goodwill, net 3,440 3,498
Other assets 7,959 7,073
-------- --------
TOTAL ASSETS $664,079 $652,717
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 67,760 $ 63,106
NOW accounts 117,560 111,195
Certificates of deposit and other savings 312,914 316,845
Certificates of deposit over $100 69,473 70,310
-------- --------
TOTAL DEPOSITS 567,707 561,456
Other borrowed funds 18,053 17,793
Accrued interest and other liabilities 9,383 10,011
-------- --------
TOTAL LIABILITIES 595,143 589,260
Shareholders' equity
Common stock -- no par value;
10,000,000 shares authorized;
4,403,404 shares issued and outstanding
(4,336,283 shares at December 31, 2002) 47,491 45,610
Retained earnings 20,623 16,299
Accumulated other comprehensive income 822 1,548
-------- --------
TOTAL SHAREHOLDERS' EQUITY 68,936 63,457
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $664,079 $652,717
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
32
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
YEAR ENDED DECEMBER 31
2003 2002 2001
---- ---- ----
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year 4,336,283 3,884,985 3,871,552
10% stock dividend --- 388,758 ---
Issuance of common stock 70,340 81,326 37,434
Common stock repurchased (3,219) (18,786) (24,001)
----------- ----------- -----------
BALANCE END OF YEAR 4,403,404 4,336,283 3,884,985
=========== =========== ===========
COMMON STOCK
Balance at beginning of year $ 45,610 $ 31,017 $ 30,814
10% stock dividend --- 12,829 ---
Issuance of common stock 2,008 2,383 971
Common stock repurchased (127) (619) (768)
----------- ----------- -----------
BALANCE END OF YEAR 47,491 45,610 31,017
RETAINED EARNINGS
Balance at beginning of year 16,299 24,788 21,049
Net income 7,205 6,925 6,066
10% stock dividend --- (12,829) ---
Cash dividends ($0.60 per share in 2003,
$0.55 in 2002, and $0.50 in 2001) (2,881) (2,585) (2,327)
----------- ----------- -----------
BALANCE END OF YEAR 20,623 16,299 24,788
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of year 1,548 1,023 67
Other comprehensive (loss) income (726) 525 956
----------- ----------- -----------
BALANCE END OF YEAR 822 1,548 1,023
TOTAL SHAREHOLDERS' EQUITY END OF YEAR $ 68,936 $ 63,457 $ 56,828
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
33
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
YEAR ENDED DECEMBER 31
2003 2002 2001
---- ---- ----
INTEREST INCOME
Loans, including fees $29,193 $31,527 $35,091
Investment securities
Taxable 4,588 4,362 3,173
Tax exempt 2,004 1,849 1,637
Federal funds sold and other 193 423 897
------- ------- -------
TOTAL INTEREST INCOME 35,978 38,161 40,798
------- ------- -------
INTEREST EXPENSE
Deposits 11,610 14,578 18,678
Borrowings 840 678 582
------- ------- -------
TOTAL INTEREST EXPENSE 12,450 15,256 19,260
------- ------- -------
NET INTEREST INCOME 23,528 22,905 21,538
Provision for loan losses 1,455 1,025 770
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,073 21,880 20,768
NONINTEREST INCOME
Service charges and fees 5,141 2,681 2,522
Title insurance revenue 2,340 2,221 1,578
Gain on sale of mortgage loans 2,091 1,762 1,051
Other 1,173 1,439 1,047
------- ------- -------
TOTAL NONINTEREST INCOME 10,745 8,103 6,198
NONINTEREST EXPENSES
Compensation 13,345 11,307 9,790
Occupancy 1,471 1,422 1,201
Furniture and equipment 2,560 2,277 2,037
Charitable donations 1,158 815 490
Other 5,044 4,951 5,177
------- ------- -------
TOTAL NONINTEREST EXPENSES 23,578 20,772 18,695
------- ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 9,240 9,211 8,271
Federal income taxes 2,035 2,286 2,205
------- ------- -------
NET INCOME $ 7,205 $ 6,925 $ 6,066
======= ======= =======
Net income per basic share of common stock $ 1.50 $ 1.46 $ 1.29
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
34
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
YEAR ENDING DECEMBER 31
2003 2002 2001
---- ---- ----
NET INCOME $ 7,205 $ 6,925 $ 6,066
------- ------- -------
Other comprehensive income (loss) before income taxes
Unrealized (losses) gains on securities available for sale
Unrealized holding (loss) gain arising during year (1,223) 2,861 1,440
Reclassification adjustment for realized (gain) loss
included in net income (85) (2) 8
Minimum pension liability adjustment 208 (2,063) --
------- ------- -------
Other comprehensive (loss) income before income
tax benefit (expense) (1,100) 796 1,448
Income tax benefit (expense) related to
other comprehensive (loss) income 374 (271) (492)
------- ------- -------
OTHER COMPREHENSIVE (LOSS) INCOME (726) 525 956
------- ------- -------
COMPREHENSIVE INCOME $ 6,479 $ 7,450 $ 7,022
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
35
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES
Net income $ 7,205 $ 6,925 $ 6,066
Reconciliation of net income to net cash provided by operations
Provision for loan losses 1,455 1,025 770
Depreciation 1,703 1,647 1,197
Net amortization on investment securities 1,592 1,006 295
Realized (gain) loss on sales of investment securities (85) (2) 8
Amortization and impairment of mortgage servicing rights 643 994 390
Decrease (increase) in cash surrender value of life insurance 66 (472) (205)
Amortization of acquisition intangibles 94 94 655
Deferred income tax (benefit) (41) (276) (277)
Gain on sale of mortgage loans (2,091) (1,762) (1,051)
Net change in loans held for sale 11,168 (3,369) (6,061)
Decrease in accrued interest receivable 363 64 92
Increase in other assets (1,008) (1,959) (1,461)
(Decrease) increase in accrued interest and other liabilities (526) 2,207 1,735
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 20,538 6,122 2,153
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 49,776 40,021 24,927
Purchases (64,710) (93,225) (48,479)
Activity in held-to-maturity securities
Maturities and calls 620 1,386 4,537
Net (increase) decrease in loans (31,615) (2,388) 12,466
Purchases of premises and equipment (3,018) (2,107) (3,921)
Acquisition of title office (36) (25) --
Purchase of cash value life insurance (285) (300) (7,135)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (49,268) (56,638) (17,605)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits 4,654 1,086 1,222
Net increase in interest bearing deposits 1,597 44,129 38,203
Net increase in borrowings 260 5,897 5,188
Cash dividends (2,881) (2,585) (2,327)
Proceeds from issuance of common stock 2,008 1,583 971
Common stock repurchase (127) (619) (768)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,511 49,491 42,489
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (23,219) (1,025) 27,037
Cash and cash equivalents beginning of year 54,437 55,462 28,425
-------- -------- --------
CASH AND CASH EQUIVALENTS END OF YEAR $ 31,218 $ 54,437 $ 55,462
======== ======== ========
Supplemental cash flows information:
Federal income taxes paid $ 2,034 $ 2,774 $ 2,670
Interest paid 12,450 15,312 19,357
The accompanying notes are an integral part of these consolidated financial
statements.
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE A - BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements
include the accounts of IBT Bancorp, Inc. (the "Corporation"), a Financial
Services Holding company, and its wholly owned subsidiaries, Isabella Bank and
Trust, Farmers State Bank of Breckenridge, IBT Title, IBT Loan Production,
Financial Group Information Services, and its majority owned subsidiaries, IBT
Personnel, LLC (79%), and IB&T Employee Leasing, LLC (79%). All intercompany
transactions and accounts have been eliminated.
NATURE OF OPERATIONS: IBT Bancorp is a Financial Service Holding Company
offering a wide array of financial products and services in mid-Michigan. Its
banking subsidiaries, Isabella Bank and Trust and Farmers State Bank of
Breckenridge, offer banking services through 19 locations, 24-hour banking
services locally and nationally through shared automatic teller machines, and
direct deposits to businesses, institutions, and individuals. Lending services
offered include commercial real estate loans and lines of credit, agricultural
loans, residential real estate loans, consumer loans, student loans, and credit
cards. Deposit services include interest and noninterest bearing checking
accounts, savings accounts, money market accounts, and certificates of deposit.
Other related financial products include trust services, safe deposit box
rentals, and credit life insurance. Active competition, principally from other
commercial banks, savings banks and credit unions, exists in all of the Banks'
principal markets. The Corporation's results of operations can be significantly
affected by changes in interest rates or changes in the local economic
environment.
IBT Title does business under the names Isabella County Abstract and Title,
Mecosta County Abstract and Title, IBT Title Clare, and Benchmark Title of
Greenville. IBT Title provides title insurance and abstract searches, and closes
real estate loans.
Financial Group Information Services provides network processing for all of IBT
Bancorp's subsidiaries.
IBT Loan Production is a mortgage loan origination company. Principal loan
products include 15 and 30 year fixed rate mortgage loans. All loans originated
are sold to Isabella Bank and Trust.
IBT Personnel and IB&T Employee Leasing provides payroll services, benefit
administration, and other human resource services to IBT Bancorp's subsidiaries.
USE OF ESTIMATES: The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and foreclosed real estate, management obtains independent
appraisals for significant properties.
SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK. Most of the Corporation's
activities conducted are with customers located within the central Michigan
area. A significant amount of its outstanding loans are secured
37
by real estate or are made to finance agricultural production. Other than these
types of loans, there is no significant concentration to any other industry or
customer.
CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash
flows, the Corporation considers cash on hand, demand deposits due from banks,
and federal funds sold as cash and cash equivalents. Generally, federal funds
are sold for a one day period. The Corporation maintains deposit accounts in
various financial institutions which at times may exceed FDIC insured limits or
are not insured. Management believes the Corporation is not exposed to any
significant interest rate or other financial risk as a result of these deposits.
SECURITIES: Management determines the appropriate classification of debt
securities at the time of purchase. Debt securities are classified as held to
maturity when the Corporation has the positive intent and ability to hold the
securities to maturity. Securities held to maturity are stated at amortized
cost. Debt securities not classified as held to maturity are classified as
available for sale and are stated at fair value with the unrealized gains and
losses net of taxes excluded from earnings and reported in other comprehensive
income.
The amortized cost of debt securities classified as either held to maturity or
available for sale is adjusted for amortization of premiums and accretion of
discounts to maturity and is computed using a method that approximates the level
yield method. Declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are determined to be other
than temporary are reflected in earnings as realized losses. Gains or losses on
the sale of securities available for sale are calculated using the adjusted cost
for the specific securities sold.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of the loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
management believes affect its estimate of probable losses inherent in the
portfolio. The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the methodologies for
estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as
38
impaired. Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of the
circumstance surrounding the loan and the borrower, including the length of the
delay, the reason for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owned.
Impairment is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
LOANS AND RELATED INCOME: Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding principal balance adjusted for any charge offs,
the allowance for loans losses, and any deferred fees or costs on originated
loans. Interest income on loans is accrued over the term of the loan based on
the principal amount outstanding. The accrual of interest on mortgage and
commercial loans is discontinued at the time the loan is 90 days or more past
due unless the credit is well-secured and in the process of collection. Credit
card loans and other personal loans are typically charged off no later than 180
days past due. Past due status is based on contractual terms of the loan. In all
cases, loans are placed on nonaccrual or charged off at an earlier date if
collection of principal or interest is considered doubtful.
When the accrual of interest is discontinued, all uncollected accrued interest
is reversed against interest income. The interest income on such loans is
subsequently recognized only to the extent cash payment is received. Loans are
returned to accrual status when all principal and interest amounts contractually
due are brought current and future payments are reasonably assured. For impaired
loans not classified as nonaccrual, interest income continues to be accrued over
the term of the loan based on the principal amount outstanding.
Loan origination fees and certain direct loan origination costs are capitalized
and recognized as a component of interest income over the term of the loan using
the constant yield method.
MORTGAGE BANKING ACTIVITIES: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. Gains or losses on sales of such loans are recognized at the
time of sale and are determined by the difference between the net sales proceeds
and the unpaid principal balance of the loans sold, adjusted for any yield
differential, servicing fees, and servicing costs applicable to future years.
Net unrealized losses, if any, are recognized in a valuation allowance by
charges to income.
The Corporation currently retains servicing on all loans originated and sold
into the secondary market. Originated mortgage servicing rights retained are
recognized for loans sold by allocating total costs incurred between the loan
and the servicing rights based on their relative fair values. Mortgage servicing
rights ("MSR") are reported in other assets and amortized into noninterest
income in proportion to, and over the period of, estimated 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 predominant 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.
39
OTHER REAL ESTATE OWNED: Real estate properties acquired through or in lieu of
loan foreclosure are initially recorded at the lower of the Bank's carrying
amount or fair value less estimated selling costs at the date of transfer. Any
write-downs based on the asset's fair value at the date of acquisition are
charged to the allowance for loan losses. After foreclosure, property held for
sale is carried at the lower of the new cost basis or fair value less costs to
sell. Costs of significant property improvements are capitalized, whereas costs
relating to holding property are expensed. Valuations are periodically performed
by management, and any subsequent write-downs are recorded as a charge to
operations, if necessary, to reduce the carrying value of a property to the
lower of its cost or fair value less costs to sell.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Premises include land and buildings. For financial
reporting purposes, the provision for depreciation is computed principally by
the straight line method based upon the useful lives of the assets which
generally range from 5 to 30 years. Maintenance, repairs and minor alterations
are charged to current operations as expenditures occur and major improvements
are capitalized. Management annually reviews these assets to determine whether
carrying values have been impaired.
A summary of premises and equipment at December 31 follows:
2003 2002
---- ----
Premises $13,302 $12,194
Equipment 17,146 15,479
------- -------
30,448 27,673
Less accumulated depreciation 14,663 13,203
------- -------
NET PREMISES AND EQUIPMENT $15,785 $14,470
======= =======
RESTRICTED INVESTMENTS: Included in other assets are restricted securities of
$2,720 in 2003 and $2,648 in 2002. Restricted securities include the stock of
the Federal Reserve Bank and the Federal Home Loan Bank and have no contractual
maturity.
BANK OWNED LIFE INSURANCE: The Corporation maintains life insurance policies on
key members of management. In the event of death of one of these individuals,
the Corporation would receive a specified cash payment equal to the face value
of the policy. Such policies are recorded at their cash surrender value.
Increases in cash surrender value in excess of premiums paid are reported as
other noninterest income.
CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, the
Corporation has entered into commitments to extend credit, including commitments
under credit card arrangements, home equity lines of credit, commercial letters
of credit, and standby letters of credit. Such financial instruments are
recorded only when funded.
FEDERAL INCOME TAXES: Federal income taxes are provided for the tax effects of
transactions reported in the consolidated financial statements and consist of
taxes currently due plus deferred income taxes. Deferred income taxes are
recognized for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Deferred income tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets or liabilities are recorded or settled. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. As changes in income tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
40
PER SHARE AMOUNTS: Net income per share amounts were computed by dividing net
income by the weighted average number of shares outstanding. All per share
amounts have been adjusted for the stock dividend declared on December 17, 2003
and paid February 19, 2004. The weighted average numbers of common shares
outstanding were 4,790,986 in 2003; 4,721,714 in 2002; and 4,692,791 in 2001, as
adjusted for the stock dividend.
ACQUISITION INTANGIBLES: Isabella Bank and Trust previously acquired branch
facilities and related deposits in a business combination accounted for as a
purchase. The acquisition of the branches included amounts related to the
valuation of customer deposit relationships (core deposit intangibles). The
deposit intangible is being amortized on the straight line basis over nine
years, the expected life of the acquired relationship.
RECLASSIFICATIONS: Certain amounts reported in the 2002 and 2001 consolidated
financial statements have been reclassified to conform with the 2003
presentation.
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 addressed 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, which was revised in December 2003, 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
applies to the first interim or annual reporting period beginning after March
15, 2004. The adoption of FIN No. 46 on consolidated results of operations,
financial position and cash flows is not expected to be material.
In April 2003 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 149 which amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement clarifies under
what circumstances a contract with an initial net investment meets the
characteristic of a derivative discussed in paragraph 6(b) of SFAS No. 133,
clarifies when a derivative contains a financing component, amends the
definition of an underlying to conform to language used in FASB Interpretation
No. 45, and amends certain other existing pronouncements. This statement was
effective for contracts entered into or modified after June 30, 2003. The
adoption of Statement No. 149 did not have a material impact on the financial
position, results of operations or cash flows of the Corporation.
In May 2003 the FASB issued SFAS No. 150, which establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). This statement was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of Statement No. 150 did not have a material impact on the
financial position, results of operations or cash flows of the Corporation.
In December 2003, the FASB issued SFAS No. 132 (revised 2003), "Employers'
Disclosures about Pensions and Other postretirement Benefits -- an amendment of
FASB Statements No. 87, 88 and 106" (SFAS 132 revised
41
2003). SFAS 132 (revised 2003) is effective for fiscal years ending after
December 15, 2003. The statement addresses disclosures only and does not address
measurement and recognition accounting for pension and postretirement benefits.
Interim disclosure requirements under SFAS 132 (revised 2003) are effective for
interim periods beginning after December 15, 2003, and required disclosures
related to estimated benefit payments are effective for fiscal years ending
after June 15, 2004.
SFAS 132 (revised 2003) retains the disclosure requirements in the original SFAS
132, but requires additional disclosures related to the description of plan
assets including investment strategies, plan obligations, cash flows and net
periodic benefit cost of defined benefit pension and other defined benefit
postretirement plans.
NOTE B - BUSINESS COMBINATION
On July 1, 2002, the Corporation's subsidiary IBT Title completed the purchase
of Benchmark Abstract and Title of Greenville, Michigan. The acquisition was
accounted for as a purchase according to the SFAS No. 141. The purchase price of
Benchmark was approximately $1.1 million, which was funded through the issuance
of $800 (24,243 shares) of IBT Bancorp stock, $25 cash, and a note payable in
the amount of $264. The purchase price was allocated $25 to premises and
equipment and $1,064 to goodwill. Results of operations of the acquired business
have not been significant.
42
NOTE C - INVESTMENT SECURITIES
The following is a summary of securities available for sale and held to
maturity:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- --------- ---------
DECEMBER 31, 2003
Securities available for sale
U.S. Treasury and U.S.
government agencies $ 88,802 $ 1,256 $ (124) $ 89,934
States and political
subdivisions 74,717 2,183 (244) 76,656
Commercial paper 3,211 31 -- 3,242
--------- --------- --------- ---------
TOTAL $ 166,730 $ 3,470 $ (368) $ 169,832
========= ========= ========= =========
Securities held to maturity
U.S. Treasury and U.S.
government agencies $ 9 $ -- $ -- $ 9
States and political
subdivisions 1,303 37 -- 1,340
--------- --------- --------- ---------
TOTAL $ 1,312 $ 37 $ -- $ 1,349
========= ========= ========= =========
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- -------- -------- -------
DECEMBER 31, 2002
Securities available for sale
U.S. Treasury and U.S.
government agencies $ 88,546 $ 2,428 $ -- $ 90,974
Corporate 2,284 44 -- 2,328
States and political
subdivisions 62,669 1,960 (22) 64,607
-------- -------- -------- --------
TOTAL $153,499 $ 4,432 $ (22) $157,909
======== ======== ======== ========
Securities held to maturity
U.S. Treasury and U.S.
government agencies $ 74 $ 1 $ -- $ 75
States and political
subdivisions 1,662 66 -- 1,728
-------- -------- -------- --------
TOTAL $ 1,736 $ 67 $ -- $ 1,803
======== ======== ======== ========
The following table summarizes the fair value, realized gains, and realized
losses on sales of securities available for sale.
2003 2002 2001
------- ------- -------
Fair value of securities sold on the date of sale $16,874 $ 2,066 $ 3,165
Gross realized gains
U.S. Treasury and U.S. government agencies 85 2 4
Gross realized losses
Municipals -- -- 12
43
The following table shows the amortized cost and estimated fair value of
securities owned at December 31, 2003 by contractual maturity. Expected
maturities will differ from contractual maturities because the issuers of
securities may have the right to prepay obligations without prepayment penalty.
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due within one year or less $ 47,189 $ 47,842 $ 1,108 $ 1,135
Due after 1 year thru 5 years 76,696 78,073 195 205
Due after 5 years thru 10 years 23,943 24,805 -- --
Due after 10 years 4,915 4,981 -- --
-------- -------- -------- --------
Subtotal 152,743 155,701 1,303 1,340
Mortgage backed securities 13,987 14,131 9 9
-------- -------- -------- --------
TOTAL $166,730 $169,832 $ 1,312 $ 1,349
======== ======== ======== ========
Investment securities with carrying values of approximately $7,087 and $10,359
were pledged to secure public deposits and for other purposes as necessary or
required by law at December 31, 2003 and 2002, respectively.
NOTE D - LOANS
An analysis of changes in the allowance for loan losses follows:
2003 2002 2001
------- ------- -------
Balance at beginning of year $ 5,593 $ 5,471 $ 5,162
Loans charged off (1,140) (1,202) (692)
Recoveries 296 299 231
Provision charged to income 1,455 1,025 770
------- ------- -------
BALANCE AT END OF YEAR $ 6,204 $ 5,593 $ 5,471
======= ======= =======
The following is a summary of information pertaining to impaired loans at
December 31:
2003 2002 2001
------ ------ ------
Impaired loans without a valuation allowance $1,836 $1,085 $ --
Impaired loans with a valuation allowance 2,787 1,639 544
------ ------ ------
Total impaired loans $4,623 $2,724 $ 544
====== ====== ======
Valuation allowance related to impaired loans $ 622 $ 103 $ 56
====== ====== ======
Average investment in impaired loans $5,155 $2,968 $ 544
====== ====== ======
Interest income recognized on impaired loans was not significant during any of
the three years ended December 31, 2003. No additional funds are committed to be
advanced in connection with impaired loans.
Certain directors and executive officers (including their families and companies
in which they have 10% or more ownership) of the Corporation and the Banks were
loan customers of the Banks. Total loans to these customers aggregated $8,414
and $7,721 at December 31, 2003 and 2002, respectively. During 2003, $5,488 of
new loans were made and repayments totaled $4,795.
Residential mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
mortgages serviced for others was $245,709, $208,432 and $153,136 at December
31, 2003, 2002, and 2001 respectively. Servicing loans for others generally
consists of collecting
44
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and taxing authorities, and foreclosure processing.
The following table summarizes the fair value of mortgage servicing rights
included in other assets as of December 31:
2003 2002 2001
------- ------- -------
Balance at beginning of year $ 511 $ 402 $ 271
Mortgage servicing rights capitalized 3,369 1,632 660
Accumulated amortization (1,955) (885) (358)
Impairment valuation allowance (211) (638) (171)
------- ------- -------
BALANCE AT END OF YEAR $ 1,714 $ 511 $ 402
======= ======= =======
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation utilizes quoted market prices, where available, to compute the
fair value of its financial instruments. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Certain financial instruments and all
nonfinancial instruments are excluded from the disclosure requirements.
Accordingly, the aggregate of the fair value amounts presented are not
necessarily indicative of the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts reported in the balance sheets
for cash and demand deposits due from banks and federal funds sold approximate
those assets' fair value.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are unavailable, fair
values are based on quoted market prices of comparable instruments.
Loans: Fair values for variable rate loans that reprice at least quarterly and
have no significant change in credit risk are assumed to equal recorded book
value. Fixed rate loans are valued using present value discounted cash flow
techniques. The discount rate used in these calculations was the U.S. government
bond rate for securities with similar maturities adjusted for servicing costs,
credit loss, and prepayment risk.
Deposit liabilities: Demand, savings, and money market deposits have no stated
maturities and are payable on demand; thus their estimated fair value is equal
to their recorded book balance. Fair values for variable rate certificates of
deposit approximate their recorded book balance. Fair values for fixed rate
certificates of deposit are determined using discounted cash flow techniques
that apply interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into consideration the remaining terms of the agreements and
the counterparties' credit standings. The Corporation does not charge fees for
lending commitments; thus it is not practicable to estimate the fair value of
these instruments.
45
The following sets forth the estimated fair value and recorded book balance of
the Corporation's financial instruments as of December 31:
2003 2002
---- ----
Estimated Fair Recorded Book Estimated Fair Recorded Book
Value Balance Value Balance
-------- ------- -------- -------
ASSETS
Cash and demand deposits due
from banks $ 25,918 $ 25,918 $ 28,587 $ 28,587
Federal funds sold 5,300 5,300 25,850 25,850
Investment securities 171,181 171,144 159,712 159,645
Mortgage loans available for sale 4,343 4,315 13,599 13,392
Net loans 417,984 415,655 386,817 385,495
Accrued interest receivable 4,534 4,534 4,897 4,897
Mortgage servicing rights 2,565 1,714 1,011 511
LIABILITIES
Deposits with no stated
maturities 329,029 329,029 310,194 310,194
Deposits with stated maturities 245,239 238,678 256,755 251,262
Borrowed funds 19,118 18,053 18,507 17,793
Accrued interest payable 830 830 1,037 1,037
NOTE F - FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities, included in other assets,
as of December 31 are as follows:
2003 2002
------ ------
Deferred tax assets
Allowance for loan losses $1,379 $1,175
Deferred directors' fees 735 664
Employee benefit plans 755 608
Core deposit premium and acquisition expenses 192 245
Net unrealized loss on minimum pension liability 631 701
Other 186 225
------ ------
TOTAL DEFERRED TAX ASSETS 3,878 3,618
------ ------
Deferred tax liabilities
Premises and equipment 494 222
Accretion on securities 32 73
Net unrealized gain on available-for-sale securities 1,055 1,498
Other 138 80
------ ------
TOTAL DEFERRED TAX LIABILITIES 1,719 1,873
------ ------
NET DEFERRED TAX ASSETS $2,159 $1,745
====== ======
46
Components of the consolidated provision for income taxes are as follows for the
year ended December 31:
2003 2002 2001
------- ------- -------
Current $ 2,076 $ 2,562 $ 2,482
Deferred benefit (41) (276) (277)
------- ------- -------
PROVISION FOR FEDERAL INCOME TAXES $ 2,035 $ 2,286 $ 2,205
======= ======= =======
The reconciliation of the provision for federal income taxes and the amount
computed at the federal statutory tax rate of 34% of income before federal
income taxes is as follows for the year ended December 31:
2003 2002 2001
------- ------- -------
Income tax on pretax income $ 3,142 $ 3,132 $ 2,812
Effect of nontaxable income and nondeductible expenses (1,107) (846) (607)
------- ------- -------
PROVISION FOR FEDERAL INCOME TAX $ 2,035 $ 2,286 $ 2,205
======= ======= =======
NOTE G - BENEFIT PLANS
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 defined pension plan's assets are invested primarily in common
stocks.
Changes in the projected benefit obligation and plan assets during each year,
the funded status of the plan and reconciliation to the amount recognized in the
Corporation's consolidated balance sheets are summarized as follows at December
31:
2003 2002 2001
------- ------- -------
Change in projected benefit obligation
Benefit obligation January 1 $ 6,949 $ 5,870 $ 5,130
Service cost 391 297 271
Interest cost 463 425 384
Actuarial loss 687 634 305
Benefits paid (407) (277) (220)
------- ------- -------
BENEFIT OBLIGATION, DECEMBER 31 $ 8,083 $ 6,949 $ 5,870
======= ======= =======
Change in plan assets
Fair value of plan assets, January 1 $ 4,830 $ 5,259 $ 5,446
Investment return (loss) 479 (509) (439)
Corporation contribution 525 357 472
47
Benefits paid (407) (277) (220)
------- ------- -------
FAIR VALUE OF PLAN ASSETS, DECEMBER 31 $ 5,427 $ 4,830 $ 5,259
======= ======= =======
Reconciliation of funded status
Funded status $(2,656) $(2,119) $ (611)
Unrecognized net transition asset -- (22) (44)
Unrecognized prior service cost 94 113 125
Unrecognized net loss from experience
different than that assumed and
effects of changes in assumptions 4,254 3,843 2,409
Additional minimum pension liability (1,951) (2,176) --
------- ------- -------
(ACCRUED LIABILITY) PREPAID PENSION COST $ (259) $ (361) $ 1,879
======= ======= =======
An adjustment to record the additional minimum pension liability as of December
31, 2003 and 2002 was established by the recording of an intangible pension
asset of $94 and $113, and a credit (charge) to other comprehensive income of
$208 and ($2,063) in 2003 and 2002, respectively.
The amounts recognized in the consolidated statement of financial position
consists of:
Pension Benefits
2003 2002
------- -------
Accrued benefit cost $ (259) $ (361)
Intangible assets 94 113
Accumulated other comprehensive income 1,855 2,063
------- -------
Net amount recognized $ 1,690 $ 1,815
======= =======
The accumulated benefit obligation was $5,686, and $5,191 at December 31, 2003,
and 2002 respectively.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets for year ended December 31:
2003 2002
---- ----
Projected benefit obligation $8,083 $6,949
Accumulated benefit obligation 5,686 5,191
Fair value of plan assets 5,427 4,831
Pension Benefits
2003 2002
------ -------
Increase in minimum liability included in other
comprehensive income (loss) $ 208 $(2,063)
Net pension expense consists of the following components for the year ended
December 31:
2003 2002 2001
---- ---- ----
Service cost on benefits earned for
services rendered during the year $ 391 $ 297 $ 271
Interest cost on projected benefit
obligation 463 425 384
Expected return on plan assets (390) (409) (445)
Amortization of unrecognized transition asset (22) (22) (22)
48
Amortization of unrecognized prior service cost 18 18 18
Amortization of unrecognized actuarial net loss 188 113 48
----- ----- -----
NET PENSION EXPENSE $ 648 $ 422 $ 254
===== ===== =====
Actuarial assumptions used in determining the projected benefit obligation are
as follows for the year ended December 31:
2003 2002 2001
---- ---- ----
Weighted average discount rate 6.25% 6.75% 7.25%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 8.00% 8.00% 8.00%
The actual weighted average assumptions used in determining the net periodic
pension costs are as follows for the year ended December 31:
2003 2002 2001
---- ---- ----
Discount rate 6.75% 7.25% 7.50%
Expected long-term return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 4.50% 4.50% 4.50%
The discount rate was decreased from 6.75% to 6.25% to reflect lower rates of
return on high quality fixed income investments. The expected long term rate of
return is based on the Corporation's actual recommended rate. The factors used
to establish the rate include historical plan performance, comparison of rates
used by similar plans with similar asset allocations, and historical performance
of long-term investments.
IBT Bancorp's pension plan weighted-average asset allocations at December 31,
2003, and 2002, by asset category as are follows:
2003 2002
------ ------
Asset Category
Equity securities 55.23% 50.58%
Debt securities 21.41% 24.42%
Other 23.36% 25.00%
------ ------
Total 100.00% 100.00%
====== ======
The Corporation's investment policy for the benefit plan includes asset holdings
in publicly traded equities, U.S. Government agency obligations and investment
grade corporate and municipal bonds. The policy restricts equity investment to
less than 20% of equity investments in any sector and to less than 4% of plans
assets in any one company. The Corporation's weighted asset allocations in 2003
and 2002 were as follows:
Equity Securities 55.0% to 65%
Debt Securities 25.0% to 35%
Real Estate 0.00%
Other 15.0%
The asset mix, the sector weighting of equity investments, and debt issues to
hold are based on a third party investment advisor retained by the Corporation
to manage the plan. The Corporation reviews the performance of the advisor no
less than annually.
49
OTHER EMPLOYEE BENEFIT PLANS
The Corporation maintains a nonqualified supplementary retirement plan for
officers to provide supplemental retirement benefits and death benefits to each
participant. Insurance policies, designed primarily to fund death benefits, have
been purchased on the life of each participant with the Corporation as the sole
owner and beneficiary of the policies. Expenses related to this program for
2003, 2002, and 2001 were $388, $41, and $84, respectively, and are being
recognized over the participants' expected years of service.
The Corporation maintains an employee stock ownership plan (ESOP) and a profit
sharing plan which cover substantially all of its employees. Contributions to
the Plans are discretionary and are approved by the Board of Directors and
recorded as compensation expense. Compensation expense related to the Plans for
2003, 2002, and 2001 was $122, $196, and $146, respectively. Total shares
outstanding related to the ESOP at December 31, 2003 and 2002 were 150,583 and
166,139, respectively, and were included in the computation of dividends and
earnings per share in each of the respective years.
NOTE H - DEPOSITS
At December 31, 2003, the scheduled maturities of time deposits were as follows:
YEAR AMOUNT
- ---- --------
2004 $111,236
2005 53,131
2006 33,216
2007 27,984
2008 12,270
Thereafter 841
NOTE I - BORROWED FUNDS
Borrowed funds at December 31 consist of the following obligations:
2003 2002
---- ----
Federal Home Loan Bank advances $ 16,337 $ 14,360
Securities sold under agreements to repurchase 1,500 3,169
Unsecured note payable 216 264
-------- --------
$ 18,053 $ 17,793
======== ========
The Federal Home Loan Bank borrowings are collateralized by a blanket lien on
all qualified 1 to 4 family residential mortgage loans and U.S. Treasury and
government agency securities. Advances are also secured by FHLB stock owned by
the Banks.
The maturity and weighted average interest rates of FHLB advances at December 31
follow:
2003
----
AMOUNT RATE
------ ----
Fixed rate advance due 2004 $ 1,000 5.05%
Two year putable advance due 2006 5,000 5.08
Fixed rate advance due 2009 1,000 4.19
Fixed rate advance due 2010 2,337 6.62
One year putable advance due 2010 3,000 4.98
Fixed rate advance due 2010 2,000 3.97
Fixed rate advance due 2012 2,000 4.90
------- ----
TOTAL ADVANCES $16,337 5.07%
======= ====
50
2002
----
AMOUNT RATE
------ ----
Fixed rate advance due 2004 $1,000 5.05%
Two year putable advance due 2006 5,000 5.08
Fixed rate advance due 2009 1,000 4.19
Fixed rate advance due 2010 2,360 6.62
One year putable advance due 2010 3,000 4.98
Fixed rate advance due 2012 2,000 4.90
------- ----
TOTAL ADVANCES $14,360 5.22%
======= ====
Securities sold under agreements to repurchase, which are classified as secured
borrowings, generally mature within one to four days from the transaction date.
Securities sold under agreements to repurchase are reflected at the amount of
cash received in connection with the transaction. The U.S. government agency
securities underlying the agreements have a carrying value and a fair value of
approximately $502 and $3,625 at December 31, 2003 and 2002, respectively. Such
securities remain under the control of the Corporation. The Corporation may be
required to pledge additional collateral based on the fair value of the
underlying securities.
The unsecured note payable has an imputed interest rate of 4.16% and is payable
in annual installments of $60,000, including interest, through July 2007.
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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 instrument.
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 $58,448 at December 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 December 31,
2003, the Corporation had a total of $715 in outstanding standby letters of
credit.
51
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 December 31,
2003 approximated $1 million.
NOTE K - COMMITMENTS AND OTHER MATTERS
Banking regulations require banks to maintain cash reserve balances in currency
or as deposits with the Federal Reserve Bank. The Corporation's requirement was
approximately $12,687 at December 31, 2003, and $11,031 at December 31, 2002.
Banking regulations also limit the transfer of assets in the form of dividends,
loans, or advances from the subsidiary Banks to the Corporation. At December 31,
2003, substantially all of the subsidiary Banks' assets were restricted from
transfer to the Corporation in the form of loans or advances. Consequently, bank
dividends are the principal source of funds for the Corporation. Payment of
dividends without regulatory approval is limited to the current years retained
net income plus retained net income for the preceding two years, less any
required transfers to capital surplus. At January 1, 2004, the amount available
for dividends without regulatory approval was approximately $7,321.
The Corporation maintains a self-funded medical plan under which the Corporation
is responsible for the first $50 per year of claims made by a covered
individual. Medical claims are subject to a lifetime maximum of $2,000 per
covered individual.
Expenses are accrued based on estimates of the aggregate liability for claims
incurred and the Corporation's experience. Expenses were $1,532 in 2003, $1,370
in 2002 and $1,063 in 2001.
The Corporation offers a dividend reinvestment and employee stock purchase plan.
The dividend reinvestment plan allows shareholders to purchase previously
unissued IBT Bancorp common shares. The employee stock purchase plan allows
employees to purchase IBT Bancorp common stock through payroll deduction. The
number of shares authorized for issuance under these plans are 280,000 with
74,198 shares unissued at December 31, 2003. During 2003, 2002 and 2001, 70,340
shares were issued for $2,008, 52,473 shares were issued for $1,524, and 37,434
shares were issued for $971, respectively, in cash pursuant to these plans.
The subsidiary Banks of the Corporation have obtained approval to borrow up to
$30,000 from the Federal Home Loan Bank (FHLB) of Indianapolis. Under the terms
of the agreement, the Banks may obtain advances at the stated rate at the time
of the borrowings. The Banks have agreed to pledge eligible mortgage loans and
U.S. Treasury and governmental agencies as collateral for any such borrowings.
52
Certain directors and executive officers and their related interests of the
Corporation and the Banks were deposit customers of the Banks. Total deposits of
these customers aggregate approximately $6,380 and $6,956 at December 31, 2003
and December 31, 2002, respectively. In addition, the IBT Bancorp's defined
benefit plan and the Employee Stock Ownership Plan (Note G) held certificates of
deposit with the Banks aggregating $100 and $831 and $350 and $100, respectively
at December 31, 2003 and 2002.
NOTE L - 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. The
Corporation evaluates performance based principally on net income and asset
quality of the respective segments. A summary of selected financial information
for the Corporation's reportable segments follows:
All Others
Isabella Bank Farmers (Including
and Trust State Bank Parent) Total
------------- ---------- ---------- --------
2003
Total assets $527,805 $127,124 $ 9,150 $664,079
Interest income 28,013 7,797 168 35,978
Net interest income 18,295 5,005 228 23,528
Provision for loan losses 570 885 --- 1,455
Net income (loss) 6,415 1,008 (218) 7,205
2002
Total assets $515,831 $126,850 $10,036 $652,717
Interest income 29,689 8,353 119 38,161
Net interest income 17,559 5,135 211 22,905
Provision for loan losses 650 375 --- 1,025
Net income 5,516 1,206 203 6,925
2001
Total assets $469,408 $116,903 $ 5,832 $592,143
Interest income 31,718 8,987 93 40,798
Net interest income 16,292 5,003 243 21,538
Provision for loan losses 500 270 --- 770
Net income (loss) 4,824 1,269 (27) 6,066
NOTE M - REGULATORY CAPITAL MATTERS
The Corporation (on a consolidated basis) and its subsidiary banks, Isabella
Bank and Trust and Farmers State Bank of Breckenridge ("Banks") are subject to
various regulatory capital requirements administered by their primary regulator,
the Federal Reserve Bank. Failure to meet minimum capital requirements can
initiate mandatory and/or discretionary actions by the Federal Reserve. These
actions could have a material effect on the Corporation's and Banks' financial
statements. Under the Federal Reserve's capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Corporation and the Banks
must meet specific capital guidelines that include quantitative measures of
their assets, certain off-balance-sheet items, and capital, as calculated under
regulatory accounting standards. The Banks' required capital is also subject to
regulatory qualitative judgment regarding the Banks' interest rate risk exposure
and credit risk. Prompt corrective action provisions are not applicable to bank
holding companies.
53
Measurements established by regulation to ensure capital adequacy require the
Corporation and the Banks to maintain minimum total capital to risk weighted
assets (as defined in the regulations), Tier 1 capital to risk weighted assets
(as defined), and Tier 1 capital to average assets (as defined). Management
believes, as of December 31, 2003 and 2002, that the Corporation and the Banks
met all capital adequacy requirements to which they are subject.
As of December 31, 2003, the most recent notifications from the Federal Reserve
Bank categorized the Banks as well capitalized. To be categorized as well
capitalized, a bank must maintain total risk based capital, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the following tables. There have been
no conditions or events since the notifications that management believes has
changed the Banks' category.
The Corporation's and each Bank's actual capital amounts (in thousands) and
ratios are also presented in the table.
Minimum
To Be Well Capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Action Provisions
------ ------------ -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
AS OF DECEMBER 31, 2003
Total capital to risk weighted assets
Isabella Bank and Trust $43,727 13.1% $26,749 8.0% $33,436 10.0%
Farmers State Bank of Breckenridge 13,320 14.6 7,289 8.0 9,111 10.0
Consolidated 68,638 15.9 34,456 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank and Trust 39,734 11.9 13,375 4.0 20,062 6.0
Farmers State Bank of Breckenridge 12,168 13.4 3,645 4.0 5,467 6.0
Consolidated 63,244 14.7 17,228 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank and Trust 39,734 7.6 21,043 4.0 26,304 5.0
Farmers State Bank of Breckenridge 12,168 9.6 5,062 4.0 6,328 5.0
Consolidated 63,244 9.7 26,227 4.0 N/A N/A
AS OF DECEMBER 31, 2002
Total capital to risk weighted assets
Isabella Bank and Trust $40,385 12.9% $24,998 8.0% $31,247 10.0
Farmers State Bank of Breckenridge 12,957 14.2 7,284 8.0 9,106 10.0
Consolidated 62,030 15.2 32,670 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank and Trust 36,525 11.7 12,499 4.0 18,748 6.0
Farmers State Bank of Breckenridge 11,811 13.0 3,642 4.0 5,463 6.0
Consolidated 56,919 13.9 16,335 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank and Trust 36,525 7.4 19,856 4.0 24,820 5.0
Farmers State Bank of Breckenridge 11,811 9.6 4,912 4.0 6,140 5.0
Consolidated 56,919 9.2 24,795 4.0 N/A N/A
54
NOTE N - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEET December 31
2003 2002
---- ----
ASSETS
Cash on deposit at subsidiary Banks $ 7,592 $ 4,690
Securities available for sale 2,133 1,497
Investments in subsidiaries 61,775 58,949
Premises and equipment 117 98
Other assets 1,444 1,722
------- -------
TOTAL ASSETS $73,061 $66,956
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 4,126 $ 3,553
Shareholders' equity 68,935 63,403
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $73,061 $66,956
======= =======
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
2003 2002 2001
---- ---- ----
Income
Dividends from subsidiaries $3,825 $3,325 $3,115
Interest income 128 122 154
Management fee and other 423 292 245
------ ------ ------
TOTAL INCOME 4,376 3,739 3,514
Expenses 1,114 824 680
------ ------ ------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries 3,262 2,915 2,834
Federal income tax benefit 218 152 103
------ ------ ------
3,480 3,067 2,937
Undistributed earnings of subsidiaries 3,725 3,858 3,129
------ ------ ------
NET INCOME $7,205 $6,925 $6,066
====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
2003 2002 2001
---- ---- ----
OPERATING ACTIVITIES
Net income $ 7,205 $ 6,925 $ 6,066
Adjustments to reconcile net income
to cash provided by operations
Undistributed earnings of subsidiaries (3,725) (3,858) (3,129)
Net amortization of securities --- --- 1
(Increase) decrease in interest receivable (2) (2) 1
Decrease (increase) in other assets 717 (1,947) (240)
Increase in accrued expenses 675 389 1,353
Provision for depreciation 19 20 19
Deferred income taxes (benefit) (348) 328 (401)
------- ------- -------
NET CASH PROVIDED BY OPERATIONS 4,541 1,855 3,670
55
INVESTING ACTIVITIES
Proceeds from the maturities of investments
securities available for sale $ 185 $ 175 $ 75
Purchases of investment securities available for sale (820) (1,080) ---
Investment in subsidiaries 34 (495) ---
Purchases of equipment and premises (38) (5) (39)
------- ------- -------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (639) (1,405) 36
FINANCING ACTIVITIES
Cash dividends (2,881) (2,585) (2,327)
Issuance of common stock 2,008 1,583 971
Repurchase of common stock (127) (619) (768)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,000) (1,621) (2,124)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,902 (1,171) 1,582
Cash and cash equivalents at beginning of year 4,690 5,861 4,279
------- ------- -------
CASH AND CASH EQUIVALENTS AT YEAR END $ 7,592 $ 4,690 $ 5,861
======= ======= =======
NOTE O - GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Corporation adopted FASB Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets." Statement
No. 142 addresses the reporting of other intangible assets subsequent to their
acquisition. This Statement requires that goodwill be separately disclosed if
material from other intangible assets on the consolidated balance sheet and that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead, tested for impairment at least annually. The adoption of
Statement No. 142 resulted in the reduction of goodwill amortization of $392 in
2003 and 2002 or $0.08 and $0.09 per share in 2003 and 2002, respectively.
As required by the Statement, intangible assets that do not meet the criteria
for recognition apart from goodwill must be reclassified. As a result of the
Corporation's analysis, no reclassifications were required as of December 31,
2003. Included in other assets on the accompanying consolidated balance sheets
are the following amounts as of December 31:
2003 2002
---- ----
Branch acquisition goodwill $2,036 $2,036
Title company goodwill 1,100 1,064
------ ------
Total goodwill 3,136 3,100
Core deposit intangibles 304 398
------ ------
$3,440 $3,498
====== ======
The core deposit intangibles are being amortized on a straight-line basis over
nine years.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 9 A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Corporation's management carried out an evaluation, under the supervision
and with the participation of the Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the
56
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 December 31, 2003, pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Chief Executive Officer along with the Chief
Financial Officer concluded that the Corporation's disclosure controls and
procedures as of December 31, 2003, are effective in timely alerting them to
material information relating to the Corporation (including its consolidated
subsidiaries) required to be included in the Corporation's periodic filings
under the Exchange Act.
CHANGES IN INTERNAL CONTROL
The Corporation also conducted an evaluation of internal control over financial
reporting to determine whether any changes occurred during the quarter ended
December 31, 2003, that have materially affected, or are reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
Based on this evaluation, there has been no such change during the quarter that
ended December 31, 2003.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning directors and certain executive officers of the
Corporation, see "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Corporation's 2004 Annual Meeting Proxy Statement
("Proxy Statement") which is incorporated herein by reference.
For Information concerning the Corporation's Audit Committee financial experts,
see "Committees of the Board of Directors and Meeting Attendance" in the Proxy
Statement which is incorporated herein by reference.
The Corporation has adopted a Code of Business Conduct and Ethics that applies
to the Corporation's Chief Executive Officer and Principal Financial Officer.
The Corporation shall provide to any person without charge upon request, a copy
of its Code of Business Conduct and Ethics. Written requests should be sent to:
Secretary, IBT Bancorp, Inc., 200 East Broadway, Mount Pleasant, Michigan 48858.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning executive compensation, see "Executive Officers,"
"Report on Executive Compensation," "The Defined Benefit Pension Plan,"
"Compensation Committee Interlocks and Insider Participation," "Remuneration of
Directors," and "Stock Performance" in the Proxy Statement which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
For information concerning the security ownership of certain owners and
management, see "Security Ownership of Certain Beneficial Owners and Management"
in the Proxy Statement which is incorporated herein by reference.
57
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2003, with respect
to compensation plans under which common shares of the Corporation are
authorized for issuance to directors, officers or employees in exchange for
consideration in the form of goods or services.
Number of
Securities
Remaining
Number of Available for
Securities to be Weighted Future Issuance
Issued upon Average Under Equity
Exercise of Exercise Price Compensation
Outstandings of Outstanding Plans (Excluding
Options, Options, Securities
Warrants, and Warrants and Reflected in
Rights Rights Column (A))
Plan Category (A) (B) (C)
- ------------- ---------------- -------------- ----------------
Equity compensation approved by
Shareholders: None --- --- ---
Equity compensation plans not
approved by shareholders:
1984 deferred director fee plan * 136,057 (1) (1)
1998 executive officer deferred
salary plan * 6,557 (2) (2)
-------
Total 142,614
=======
(1) Pursuant to the terms of the Deferred Director fee plan, directors of the
Corporation and its subsidiaries are required to defer at least 25% of their
earned board fees. Deferred fees are converted on a quarterly basis into stock
units of the Corporation's common stock. The fees are converted to stock units
based on the purchase price for a share of common stock under the Corporation's
Dividend Reinvestment Plan. Stock units credited to a participant's account are
eligible for stock and cash dividend as payable. Upon retirement from the board,
a participant can convert one stock unit into one share of common stock. All
authorized but unissued shares of common stock are eligible for issuance under
this Plan.
(2) The Executive Officer Deferred Salary Plan allows executive officers of the
Corporation and its subsidiaries to defer up to 5% of their annual salary to
purchase stock units. The mechanics of the plan operate exactly the same as the
Deferred Director Fee Plan as discussed in (1) above.
* As adjusted for the 10% stock dividend paid February 10, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information concerning certain relationships and related transactions, see
"Indebtedness of and Transactions with Management" in the Proxy Statement, which
is incorporated herein by reference.
58
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For information concerning the principal accountant fees and services see "Fees
for Professional Services Provided by Rehmann Robson P.C." and "Pre-approval
Policies and Procedures" in the Proxy Statement which is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following consolidated financial statements of IBT Bancorp are
incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
All schedules are omitted because they are neither applicable nor
required, or because the required information is included in the
consolidated financial statements or related notes.
3. Exhibits:
3(a) Amended Articles of Incorporation (1)
3(b) Amendment to the Articles of Incorporation (3)
3(c) Amendment to the Articles of Incorporation (5)
3(d) Amendment to the Articles of Incorporation (5)
3(e) Amended Bylaws (1)
3(f) Amendment to the Bylaws (2)
3(g) Amendment to the Bylaws (3)
3(h) Amendment to the Bylaws (6)
3(i) Amendment to the Bylaws (7)
3(j) Amendments to the Bylaws (8)
10(a) Isabella Bank & Trust Executive Supplemental Income Agreement
(3)*
10(b) Isabella Bank & Trust Deferred Compensation Plan (4)*
10(c) IBT Bancorp, Inc. and Related Companies Deferred Compensation
Plan for Directors (6)*
10(d) Isabella Bank and Trust Death Benefit Only Agreement (7)*
14 Code of Business Conduct and Ethics
21 Subsidiaries of the Registrant
23 Consent of Rehmann Robson, P.C. Independent Auditors
31 (a) Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
59
31 (b) Certification pursuant to section 302 of the Sarbanes-Oxley
Act of 2002 by the Chief Financial Officer
32 Section 1350 Certification of Chief Executive Officer and
Chief Financial Officer
(1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K,
dated March 12, 1991, and incorporated herein by reference.
(2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K,
dated March 13, 1990, and incorporated herein by reference.
(3) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 26, 1994, and incorporated herein by reference.
(4) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 26, 1996, and incorporated herein.
(5) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 22, 2000, and incorporated herein.
(6) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 27, 2001, and incorporated herein.
(7) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 25, 2002, and incorporated herein.
(8) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 24, 2003 and incorporated herein.
* Management Contract or Compensatory Plan or Arrangement.
(b) During the three months ended December 31, 2003, the Corporation filed the
following current report on Form 8-K: The Corporation filed a Form 8-K on
November 4, 2003, announcing the issuance of its earnings release for the
third quarter of 2003
(c) Exhibits: The response to this portion of Item 15 is submitted as a
separate section of this report entitled, "Index to Exhibits"
(d) Financial Statement Schedules: None
60
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IBT BANCORP, INC.
(Registrant)
by:/s/Dennis P. Angner Date: March 9, 2004
-----------------------------------------
Dennis P. Angner
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Capacity Date
---------- -------- ----
/s/Dennis P. Angner President and Chief March 9, 2004
- ------------------------------------ Executive Officer
Dennis P. Angner (Principal Executive
Officer) and Director
/s/Peggy Wheeler Vice President and March 9, 2004
- ------------------------------------ Controller (Principal
Financial Officer)
/s/Richard J. Barz Director March 9, 2004
- ------------------------------------
/s/Frederick L. Bradford Director March 9, 2004
- ------------------------------------
Frederick L. Bradford
/s/Gerald D. Cassel Director March 9, 2004
- ------------------------------------
Gerald D. Cassel
/s/James C. Fabiano Director March 9, 2004
- ------------------------------------
James C. Fabiano
61
Signatures Capacity Date
---------- -------- ----
/s/David W. Hole Director March 9, 2004
- ------------------------------------
David W. Hole
/s/W. Joseph Manifold Director March 9, 2004
- ------------------------------------
W. Joseph Manifold
/s/Ronald E. Schumacher Director March 9, 2004
- ------------------------------------
Ronald E. Schumacher
/s/William J. Strickler Director March 9, 2004
- ------------------------------------
William J. Strickler
/s/Herbert C. Wybenga Vice President and March 9, 2004
- ------------------------------------ Director
Herbert C. Wybenga
/s/Dale Weburg Director March 9, 2004
- ------------------------------------
Dale Weburg
62
IBT Bancorp
FORM 10-K
Index to Exhibits
Exhibit Form 10-K
Number Exhibit Page Number
- ------ ------- -----------
14 Code of Business Conduct and Ethics 64
21 Subsidiaries of the Registrant 70
23 Consent of Rehmann Robson P.C. 71
Independent Certified Public Accountants
31 (a) Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 by the Chief
Executive Officer
31 (b) Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 by the Chief
Financial Officer
32 Section 1350 Certification of Chief Executive
Officer and Chief Financial Officer
63