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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended March 31, 2004
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the transition period from ________________ to ________________
Commission File Number: 0-18415
IBT Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2830092
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway 48858
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(989) 772-9471
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock no par value, 4,854,820 as of April 15, 2004
IBT BANCORP, INC.
Index to Form 10-Q
Page Numbers
PART I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements 3-8
Item 2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations 9-18
Item 3 Quantitative and Qualitative 18-20
Disclosures About Market Risk
Item 4 Controls and Procedures 21
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 21-22
Signatures 23
Exhibit 31(a) 24
Exhibit 31(b) 26
Exhibit 32 28
2
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
IBT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31 December 31
2004 2003
------------ ------------
(Unaudited)
ASSETS
Cash and demand deposits due from banks $ 22,989 $ 25,918
Federal funds sold 3,150 5,300
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS 26,139 31,218
Investment securities
Securities available for sale (Amortized cost of
$185,586 in 2004 and $166,730 in 2003) 189,593 169,832
Securities held to maturity (Fair value --
$1,168 in 2004 and $1,349 in 2003) 1,308 1,312
------------ ------------
TOTAL INVESTMENT SECURITIES 190,901 171,144
Mortgage loans available for sale 7,586 4,315
Loans
Agricultural 49,000 50,548
Commercial 143,260 149,931
Residential real estate mortgage 161,344 157,598
Installment 63,480 63,782
------------ ------------
TOTAL LOANS 417,084 421,859
Less allowance for loan losses 6,497 6,204
------------ ------------
NET LOANS 410,587 415,655
Other assets 43,572 41,747
------------ ------------
TOTAL ASSETS $ 678,785 $ 664,079
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 60,576 $ 67,760
NOW accounts 107,776 117,560
Certificates of deposit and other savings 326,430 312,914
Certificates of deposit over $100,000 77,224 69,473
------------ ------------
TOTAL DEPOSITS 572,006 567,707
Other borrowed funds 25,161 18,053
Accrued interest and other liabilities 10,772 9,383
------------ ------------
TOTAL LIABILITIES 607,939 595,143
Shareholders' Equity
Common stock -- no par value
10,000,000 shares authorized; outstanding--
4,854,820 in 2004 (4,403,404 in 2003) 65,476 47,491
Retained earnings 3,951 20,623
Accumulated other comprehensive income 1,419 822
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 70,846 68,936
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 678,785 $ 664,079
============ ============
See notes to consolidated financial statements.
3
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31
--------------------------
2004 2003
----------- -----------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 4,403,404 4,336,283
Common stock dividend 440,191 ---
Issuance of common stock 11,225 10,141
Common stock repurchased --- (1,686)
----------- -----------
BALANCE END OF PERIOD 4,854,820 4,344,738
=========== ===========
COMMON STOCK
Balance at beginning of period $ 47,491 $ 45,610
Common stock dividend 17,608 ---
Issuance of common stock 377 313
Common stock repurchased --- (59)
----------- -----------
BALANCE END OF PERIOD 65,476 45,864
RETAINED EARNINGS
Balance at beginning of period 20,623 16,299
Net income 1,477 1,942
Common stock dividend (17,608) ---
Cash dividends ($0.11 per share in 2004 and $0.10 in 2003) (541) (478)
----------- -----------
BALANCE END OF PERIOD 3,951 17,763
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period 822 1,548
Other comprehensive income 597 273
----------- -----------
BALANCE END OF PERIOD 1,419 1,821
----------- -----------
TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 70,846 $ 65,448
=========== ===========
See notes to consolidated financial statements.
4
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands)
Three Months Ended
March 31
2004 2003
-------- --------
INTEREST INCOME
Loans, including fees $ 6,861 $ 7,517
Investment securities
Taxable 1,047 1,157
Nontaxable 511 494
Federal funds sold and other 31 96
-------- --------
TOTAL INTEREST INCOME 8,450 9,264
INTEREST EXPENSE
Deposits 2,430 3,136
Borrowings 240 187
-------- --------
TOTAL INTEREST EXPENSE 2,670 3,323
-------- --------
NET INTEREST INCOME 5,780 5,941
Provision for loan losses 240 212
-------- --------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,540 5,729
NONINTEREST INCOME
Trust fees 155 159
Service charges on deposit accounts 62 64
Other service charges and fees 861 1,170
Gain on sale of mortgage loans 126 664
Title insurance revenue 410 613
Other 326 284
-------- --------
TOTAL NONINTEREST INCOME 1,940 2,954
NONINTEREST EXPENSES
Compensation 3,293 3,269
Occupancy 392 371
Furniture and equipment 631 540
Other 1,252 1,891
-------- --------
TOTAL NONINTEREST EXPENSES 5,568 6,071
INCOME BEFORE FEDERAL INCOME TAXES 1,912 2,612
Federal income taxes 435 670
-------- --------
NET INCOME $ 1,477 $ 1,942
======== ========
Basic net income per share $ 0.30 $ 0.41
======== ========
Cash dividends per share $ 0.11 $ 0.10
======== ========
See notes to consolidated financial statements.
5
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31
-------------------
2004 2003
-------- --------
NET INCOME $ 1,477 $ 1,942
Unrealized holding gains arising during period 892 414
Reclassification adjustment for realized gain included in net income 13 ---
-------- --------
Other comprehensive income before income tax expense 905 414
Income tax expense related to comprehensive income (308) (141)
-------- --------
OTHER COMPREHENSIVE INCOME 597 273
-------- --------
COMPREHENSIVE INCOME $ 2,074 $ 2,215
======== ========
See notes to consolidated financial statements.
6
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended
March 31
2004 2003
-------- --------
OPERATING ACTIVITIES
Net income $ 1,477 $ 1,942
Reconciliation of net income to net cash (used in) provided
by operations:
Provision for loan losses 240 212
Provision for depreciation 368 388
Net amortization on investment securities 432 338
Realized gain on sales of investment securities (13) ---
Amortization and impairment of mortgage servicing rights 55 137
Increase in cash value of life insurance (105) (117)
Amortization of acquisition intangibles 23 23
Gain on sales of mortgage loans (126) (664)
Net change in loans held for sale (3,145) (3,172)
Decrease in accrued interest receivable 5 9
Increase in other assets (1,603) (854)
Increase in accrued interest and
other liabilities 1,389 2,146
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,003) 388
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 9,988 5,035
Purchases (29,259) (25,435)
Activity in held to maturity securities
Maturities, calls, and sales --- 1,386
Net decrease in loans 4,828 13,529
Purchases of equipment and premises (876) (399)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (15,319) (5,884)
FINANCING ACTIVITIES
Net (decrease) increase in noninterest bearing deposits (7,184) 464
Net increase in interest bearing deposits 11,483 2,414
Net increase (decrease) in borrowings 7,108 (2,503)
Cash dividends (541) (478)
Proceeds from issuance of common stock 377 313
Common stock repurchased --- (59)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,243 151
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (5,079) (5,345)
Cash and cash equivalents beginning of period 31,218 54,437
-------- --------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 26,139 $ 49,092
======== ========
See notes to consolidated financial statements.
7
IBT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 2004 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2004. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Corporation's annual report for the year ended December 31, 2003.
NOTE 2 COMPUTATION OF EARNINGS PER SHARE
The net income per share amounts are based on the weighted average
number of common shares outstanding. The weighted average number of common
shares outstanding were 4,848,855 for quarter ended March 31, 2004, and
4,336,020 for the quarter ended March 31, 2003. The Corporation has no common
stock equivalents and, accordingly, presents only basic earnings per share.
8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major
factors that influenced IBT Bancorp's financial performance. This analysis
should be read in conjunction with the Corporation's 2003 annual report and with
the unaudited consolidated financial statements and notes, as set forth on pages
3 through 8 of this report.
CRITICAL ACCOUNTING POLICIES: The Corporation's significant accounting policies
are set forth in Note 1 of the Consolidated Financial Statements included in the
Corporation's Annual Report for the year ended December 31, 2003. Of these
significant accounting policies, the Corporation considers its policies
regarding the determination of the allowance for loan losses and carrying value
of servicing assets to be its most critical accounting policies.
The allowance for loan losses requires management's most subjective and complex
judgment. Changes in economic conditions can have a significant impact on the
allowance for loan losses and therefore the provision for loan losses and
results of operations. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Corporation's assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers which is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see Provision for
Loan Losses and Allowance for Loan Losses in the Corporation's 2003 Annual
Report and herein.
Servicing assets are recognized when loans are sold with servicing retained.
Mortgage servicing rights (MSR's) are assets which are amortized in proportion
to and over the period of estimated future net servicing income. Servicing
assets are evaluated for impairment based upon the fair value of the rights as
compared to amortized cost. Impairment is determined by stratifying rights by
predominate characteristics, such as interest rates and terms. Fair value is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Impairment is recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the capitalized amount for
the stratum.
9
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
RESULTS OF OPERATIONS
Net income equaled $1.48 million for the three month period ended March
31, 2004, compared to $1.94 million for the same period in 2003. Return on
average assets, which measures the ability of the Corporation to profitably and
efficiently employ its resources, equaled .87% for the first three months of
2004 and 1.19% for 2003. Return on average equity, which indicates how
effectively the Corporation is able to generate earnings on shareholder invested
capital, equaled 8.54% through March 31, 2004 versus 12.42% for the same period
in 2003.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Three Months Ended
March 31
----------------------
2004 2003
--------- ---------
INCOME STATEMENT DATA
Net interest income $ 5,780 $ 5,941
Provision for loan losses 240 212
Net income 1,477 1,942
PER SHARE DATA
Net income 0.30 0.41
Cash dividends 0.11 0.10
RATIOS
Average primary capital to average assets 11.05% 10.37%
Net income to average assets .87 1.19
Net income to average equity 8.54 12.42
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is
the primary source of income for IBT Bancorp. Interest income includes loan fees
of $291,000 in 2004 versus $366,000 in 2003. For analytical purposes in Tables 1
and 2, net interest income is adjusted to a "taxable equivalent" basis by adding
the income tax savings from interest on tax-exempt loans and securities, thus
making year-to-year comparisons more meaningful.
10
IBT BANCORP, INC.
TABLE 1: AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
(Dollars in Thousands)
The following schedules present the daily average amount outstanding
for each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding, and Federal
Reserve and Federal Home Loan Bank restricted stock is included in Other
Investments.
Three Months Ended
March 31, 2004 March 31, 2003
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
---------- ------- ---- --------- ------ ----
INTEREST EARNING ASSETS
Loans $ 423,393 $ 6,862 6.48% $ 394,628 $7,518 7.62%
Taxable investment securities 121,182 1,012 3.34 115,145 1,157 4.02
Nontaxable investment securities 52,249 772 5.91 47,962 748 6.24
Federal funds sold 12,585 31 .99 31,943 92 1.15
Other investments 2,933 35 4.77 2,782 43 6.18
---------- ------- ---- --------- ------ ----
Total Earning Assets 612,342 8,712 5.69 592,460 9,558 6.45
NONEARNING ASSETS
Allowance for loan losses (6,340) (5,734)
Cash and due from banks 28,603 25,789
Premises and equipment 15,304 15,466
Accrued income and other assets 26,795 24,529
---------- ---------
TOTAL ASSETS $ 676,704 $ 652,510
========== =========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 121,781 163 .54 $ 116,836 307 1.05
Savings deposits 155,695 239 .61 138,181 383 1.11
Time deposits 239,960 2,028 3.38 250,721 2,446 3.90
Borrowed funds 21,699 240 4.42 15,801 187 4.73
---------- ------- ---- --------- ------- ----
Total Interest Bearing Liabilities 539,135 2,670 1.98 521,539 3,323 2.55
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 59,190 58,429
Other 9,235 9,988
Shareholders' equity 69,144 62,554
---------- ---------
TOTAL LIABILITIES AND EQUITY $ 676,704 $ 652,510
========== =========
NET INTEREST INCOME (FTE) $ 6,042 $ 6,235
======= =======
NET YIELD ON INTEREST EARNING ASSETS (FTE) 3.95% 4.21%
==== ====
11
IBT BANCORP, INC.
TABLE 2: VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
The following table sets forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For the purpose of this
table, changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Quarter Ended March 31, 2004
Compared to
March 31, 2003
Increase (Decrease) Due to
------------------------------------
Volume Rate Net
---------- ---------- ----------
CHANGES IN INTEREST INCOME
Loans $ 521 $ (1,177) $ (656)
Taxable investment securities 58 (203) (145)
Nontaxable investment securities 65 (41) 24
Federal funds sold (49) (12) (61)
Other investments 2 (10) (8)
---------- ---------- ----------
Total changes in interest income 597 (1,443) (846)
Total changes in interest expense 21 (674) (653)
---------- ---------- ----------
Net change in interest margin (FTE) $ 576 $ (769) $ (193)
========== ========== ==========
12
IBT BANCORP, INC.
TABLE 3: SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
Three Months Ended
March 31
------------------------
2004 2003
---------- ----------
Summary of changes in allowance
Allowance for loan losses - January 1 $ 6,204 $ 5,593
Loans charged off (113) (80)
Recoveries of charged off loans 166 144
---------- ----------
Net loans recovered 53 64
Provision charged to operations 240 212
---------- ----------
Allowance for loan losses - March 31 $ 6,497 $ 5,869
========== ==========
Allowance for loan losses as a % of loans 1.56% 1.56%
========== ==========
NONPERFORMING LOANS
(Dollars in thousands)
March 31
------------------------
2004 2003
---------- ----------
Total amount of loans outstanding
at the end of the period $ 417,084 $ 377,353
========== ==========
Nonaccrual loans $ 3,412 $ 2,121
Accruing loans past due 90 days or more 923 1,865
Restructured loans --- ---
---------- ----------
Total $ 4,335 $ 3,986
========== ==========
Loans classified as nonperforming as a
% of outstanding loans 1.04% 1.06%
========== ==========
To management's knowledge, there are no other loans which cause management
to have serious doubts as to the ability of a borrower to comply with their loan
repayment terms.
13
NET INTEREST INCOME (CONTINUED)
As shown in Tables number 1 and 2, when comparing the three month period
ended March 31, 2004 to the same period in 2003, fully taxable equivalent (FTE)
net interest income decreased $193,000 or 3.10%. An increase of 3.4% in average
interest earning assets provided $597,000 of FTE interest income. The majority
of this growth was funded by an 3.2% increase in interest bearing liabilities
resulting in $21,000 of additional interest expense. Overall, changes in volume
resulted in a $576,000 increase in FTE interest income. The average FTE interest
rate earned on assets declined by .76%, decreasing the amount of interest earned
by $1.4 million. The average rate paid on deposits decreased .57%, decreasing
interest expense by $674,000. The net change related to interest rate earned and
paid was a $769,000 decrease in FTE net interest income.
The Corporation's FTE net interest yield as a percentage of average
earning assets equaled 3.95% during 2004 versus 4.21% in 2003. The 0.26%
decrease in the yield was primarily a result of loan and investment rates
declining faster than deposit rates. Additionally, the Corporation's increasing
reliance on higher cost interest bearing liabilities to fund asset growth
continues to adversely impact net interest yields. Management expects the
Corporations' reliance on these liabilities to continue. While management feels
that we are at the bottom of the current interest rate cycle, net interest
margin will continue to be under pressure for the remainder of 2004.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 60.5% of the
Corporation's total assets and is the Corporation's single largest
concentration of risk. The allowance for loan losses is management's estimation
of potential future losses inherent in the existing loan portfolio. Factors used
to evaluate the loan portfolio, and thus to determine the current charge to
expense, include recent loan loss history, financial condition of borrowers,
amount of nonperforming and impaired loans, overall economic conditions, and
other factors.
Comparing the year to date period of March 31, 2004 to March 31, 2003,
total portfolio loans outstanding increased 1.1%. The provision for loan losses
increased $28,000 to $240,000 in the first quarter of 2004 when compared to
2003. The increase in the provision for loan losses resulted from an increase in
nonperforming loans of 8.8% and increased uncertainty about economic performance
over the coming months. As disclosed in the Corporations 10-K, as of December
31, 2003, the Corporation experienced a decline in the overall credit quality of
its outstanding agricultural loans. During the first quarter of 2004, no
additional loans have been identified from those identified in 2003. As set
forth in Table 3, loans classified as nonperforming were $4.3 million as of
March 31, 2004, a $349,000 increase over the prior year. The allowance for loan
losses as a percentage of loans equaled 1.56% in both 2004 and 2003. In
management's opinion, the allowance for loan losses is adequate as of March 31,
2004.
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, fees
for other financial services, gains on the sale of mortgage loans, title
insurance revenue, and other noninterest income. Income earned from these
sources decreased $1.0 million during the three month period ending March 31,
2004, compared to the same period in 2003. The majority of the decrease in non
interest income is related to a significant decrease of mortgage activity during
the first quarter of 2004. Individual account changes during this period include
a $203,000 decrease in income from the sale of title insurance and related
services, a $538,000 decrease in gains on the sale of residential real estate
mortgage loans, and a $427,000 decrease in residential mortgage servicing
14
rights. The strong increase in non-interest income from 2003 was from mortgage
related fee income. Overall, residential fixed rate mortgage activity slowed
substantially during the first quarter of 2004 when compared to the first
quarter of 2003. It is projected to pick up throughout the remainder of 2004,
however it is not anticipated to reach the level of 2003.
Included in other assets is $10.1 million in cash value of corporate owned
life insurance policies. The increase in cash value of these policies of
$105,000 and $117,000 during the quarters ended March 31, 2004 and 2003,
respectively, is recorded as other income. These policies earned an average rate
of 4.23% and, due to their preferential tax treatment, have a taxable equivalent
rate of 6.41%. These policies are placed with four different insurance companies
with an S & P rating of AA+ or better.
The Corporation has established a policy that all 30 year amortized fixed
rate mortgage loans will be sold. The calculation of gains on the sale of
mortgages excludes at least 25 basis points allocated to the value of servicing
rights on these loans. Included in other noninterest income is a $126,000 gain
from the sale of $13.6 million in mortgages during the first quarter of 2004
versus a $664,000 gain on the sale of $56.6 million in the same period in 2003.
NONINTEREST EXPENSES
Noninterest expenses decreased $503,000 for the first three months of 2004
when compared to the same period in 2003. The largest component of noninterest
expense is compensation expense, which increased $24,000 or .73%. The increase
is due to additional staffing and normal merit and promotional salary increases.
Occupancy and furniture and equipment expenses increased $112,000 or 12.3%
in 2004. The majority of this increase is a result of increases in equipment and
building depreciation and service contract expenses. All other operating
expenses decreased $639,000 or 33.8%. The decrease is primarily related to a
$675,000 decrease in charitable donations to IBT Foundation (see "Financial
Instruments with Off Balance Sheet Arrangements"). Due to the overall decline in
income, the Corporation did not make contributions to the IBT Foundation in the
first quarter of 2004.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Since December 31, 2003, total assets increased $14.7 million to $678.8
million. During the first quarter of 2004, major changes in asset mix included a
$5.1 million decrease in cash and cash equivalents, a $19.8 million increase in
investment securities, a $3.3 million increase in mortgage loans available for
sale, and a $5.1 million decrease in net loans. Deposits during this period
increased $4.3 million. Interest bearing deposits increased $11.5 million and
noninterest bearing deposits decreased $7.2 million, borrowed funds increased
$7.1 million, and shareholders' equity increased $1.9 million.
LIQUIDITY
Liquidity management is designed to ensure adequate resources are
available to meet depositor and borrower discretionary demands for funds.
Liquidity is also required to fund expanding operations, investment
opportunities, and the payment of cash dividends. The primary sources of the
Corporation's liquidity are cash, cash equivalents, and investment securities
available for sale.
15
As of March 31, 2004, cash and cash equivalents as a percentage of total
assets equaled 3.9%, versus 4.7% as of December 31, 2003. During the first three
months of 2004, cash used by operating activities was $1.0 million, financing
activity provided $11.2 million, and investing activities used $15.3 million.
The accumulated effect of the Corporation's operating, investing, and financing
activities was a $5.1 million decrease in cash and cash equivalents during the
first three months of 2004.
In addition to cash and cash equivalents, investment securities available
for sale are another source of liquidity. Securities available for sale equaled
$190.0 million as of March 31, 2004 and $170.0 million as of December 31, 2003.
In addition to these primary sources of liquidity, the Corporation has the
ability to borrow in the federal funds market and at both the Federal Reserve
Bank and the Federal Home Loan Bank. The Corporation's liquidity is considered
adequate by management of the Corporation.
CAPITAL
The capital of the Corporation consists solely of common stock, surplus,
retained earnings, and accumulated other comprehensive income, and increased
approximately $1.9 million since December 31, 2003.
There are significant regulatory constraints placed on the Corporation's
capital. The Federal Reserve Board's current recommended minimum tier 1 and tier
2 capital to average assets requirement is 6.0%. The Corporation's tier 1 and
tier 2 capital to average assets, which consists of shareholder's equity plus
the allowance for loan losses less unamortized acquisition intangibles, was
10.19% at March 31, 2004.
The Federal Reserve Board has established a minimum risk based capital
standard. Under this standard, a framework has been established that assigns
risk weights to each category of on- and off-balance sheet items to arrive at
risk adjusted total assets. Regulatory capital is divided by the risk adjusted
assets with the resulting ratio compared to the minimum standard to determine
whether a bank has adequate capital. The minimum standard is 8%, of which at
least 4% must consist of equity capital net of goodwill. The following table
sets forth the percentages required under the Risk Based Capital guidelines and
the Corporation's ratios as of March 31, 2004:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
Actual
Required 03/31/04
-------- --------
Equity Capital 4.00% 14.70%
Secondary Capital* 4.00 1.25
---- -----
Total Capital 8.00% 15.95%
==== =====
* IBT Bancorp's secondary capital consists solely of the allowance for
loan losses. The percentage for the secondary capital under the
required column is the maximum allowed from all sources.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET ARRANGEMENTS
The Corporation is party to financial instruments with off-balance-sheet risk.
These instruments are entered into in the normal course of business to meet the
financing needs of its customers. These financial instruments,
16
which include commitments to extend credit and standby letters of credit,
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amounts recognized in the consolidated balance sheets. The contract or
notional amounts of these instruments reflect the extent of involvement the
Corporation has in a particular class of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in deciding to
make these commitments as it does for extending loans to customers.
Commitments to extend credit, which totaled $60 million at March 31, 2004, are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have variable
interest rates, fixed expiration dates, or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. At March 31, 2004,
the Corporation had a total of $736,000 in outstanding standby letters of
credit.
Generally, these commitments to extend credit and letters of credit mature
within one year. The credit risk involved in these transactions is essentially
the same as that involved in extending loans to customers. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation upon the
extension of credit, is based on management's credit evaluation of the borrower.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and other income producing commercial properties.
The Corporation sponsors the IBT Foundation (the "Foundation"), which is a
nonprofit entity formed for the purpose of distributing charitable donations to
recipient organizations generally located in the communities serviced by
Isabella Bank and Trust. The Corporation periodically makes charitable
contributions in the form of cash transfers to the Foundation. The Foundation is
administered by members of the Corporation's Board of Directors. The assets and
transactions of the Foundation are not included in the consolidated financial
statements of IBT Bancorp, Inc. The assets of the Foundation as of March 31,
2004 approximated $1.9 million.
17
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filing with the Securities
and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has no foreign exchange risk, holds
limited loans outstanding to oil and gas concerns, and holds no trading account
assets, nor does it utilize interest rate swaps or derivatives in the management
of its interest rate risk. The Corporation does have a significant amount of
loans extended to borrowers in agricultural production. Their cash flow and
their ability to service their debt is largely dependent on the commodity prices
for corn, soybeans, sugar beets, milk, beef and a variety of dry beans. The
Corporation mitigates these risks by using conservative price and production
yields when calculating a borrowers available cash flow to service their debt.
Interest rate risk ("IRR") is the exposure to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors 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
18
repricing opportunity of assets and liabilities, and the frequency of measuring
and reporting to the Board of Directors.
The Corporation uses several techniques to manage interest rate risk. The first
method is gap analysis. Gap analysis measures the cash flows and/or the earliest
repricing of the Corporation's interest bearing assets and liabilities. This
analysis is useful for measuring trends in the repricing characteristics of the
balance sheet. Significant assumptions are required in this process because of
the imbedded repricing options contained in assets and liabilities. A
substantial portion of the Corporation's assets are invested in loans and
mortgage backed securities. These assets have imbedded options that allow the
borrower to repay the balance prior to maturity without penalty. The amount of
prepayments is dependent upon many factors, including the interest rate of a
given loan in comparison to the current interest rates, for residential
mortgages the level of sales of used homes, and the overall availability of
credit in the market place. Generally, a decrease in interest rates will result
in an increase in the Corporation's cash flows from these assets. Investment
securities, other than those that are callable, do not have any significant
imbedded options. Saving and checking deposits may generally be withdrawn on
request without prior notice. The timing of cash flow from these deposits is
estimated based on historical experience. Time deposits have penalties which
discourage early withdrawals.
The second technique used in the management of interest rate risk is to combine
the projected cash flows and repricing characteristics generated by the gap
analysis and the interest rates associated with those cash flows and projected
future interest income. By changing the amount and timing of the cash flows and
the repricing interest rates of those cash flows, the Corporation can project
the effect of changing interest rates on its interest income.
The following table provides information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of March 31,
2004. The Corporation has no interest rate swaps, futures contracts, or other
derivative financial options. The principal amounts of assets and time deposits
maturing were calculated based on the contractual maturity dates. Savings and
NOW accounts are based on management's estimate of their future cash flows.
19
Quantitative Disclosures of Market Risk
(dollars in thousands)
March 31, 2004 Fair Value
------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total 03/31/04
-------- -------- -------- -------- -------- ---------- -------- --------
Rate sensitive assets
Other interest bearing assets $ 3,150 $ 199 --- --- --- --- $ 3,349 $ 3,349
Average interest rates 0.90% 2.67% --- --- --- --- 3.57%
Fixed interest rate securities $ 43,732 $ 39,234 $ 28,450 $ 20,557 $ 10,566 $ 48,362 $190,901 $190,761
Average interest rates 3.64% 3.44% 3.01% 2.96% 3.28% 4.60% 3.74%
Fixed interest rate loans $ 93,105 $ 55,416 $ 73,921 $ 36,199 $ 39,819 $ 41,491 $339,951 $341,027
Average interest rates 6.68% 6.87% 7.01% 6.36% 6.72% 5.83% 6.65%
Variable interest rate loans $ 55,071 $ 7,156 $ 5,536 $ 6,509 $ 7,571 $ 2,876 $ 84,719 $ 84,719
Average interest rates 5.50% 5.48% 5.57% 4.04% 5.29% 5.05% 5.35%
Rate sensitive liabilities
Borrowed funds $ 4,692 $ 87 $ 7,589 $ 92 $ 94 $ 12,607 $ 25,161 $ 25,689
Average interest rates 2.02% 4.88% 4.09% 4.88% 4.88% 4.84% 4.09%
Savings and NOW accounts $165,263 $ 22,231 $ 18,086 $ 14,856 $ 13,764 $ 33,132 $267,332 $267,332
Average interest rates 0.56% 0.32% 0.64% 0.53% 0.49% 0.32% 0.51%
Fixed interest rate time deposits $100,156 $ 50,533 $ 39,946 $ 31,424 $ 17,948 $ 1,975 $241,982 $244,373
Average interest rates 2.49% 2.18% 4.36% 4.14% 3.83% 3.78% 3.06%
Variable interest rate time deposits $ 971 $ 429 $ 2 $ 0 $ 538 $ 176 $ 2,116 $ 2,116
Average interest rates 1.24% 1.24% 1.25% --- 3.17% 2.50% 1.84%
Quantitative Disclosures of Market Risk
(dollars in thousands)
March 31, 2003 Fair Value
------------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total 03/31/03
-------- -------- -------- -------- -------- ---------- -------- --------
Rate sensitive assets
Other interest bearing assets $ 10,850 --- --- --- --- --- $ 10,850 $ 10,850
Average interest rates 1.25% --- --- --- --- --- 1.25%
Fixed interest rate securities $ 28,885 $ 53,627 $ 33,453 $ 12,386 $ 9,881 $ 40,503 $178,735 $178,780
Average interest rates 3.82% 3.67% 2.95% 3.83% 3.81% 3.94% 3.64%
Fixed interest rate loans $ 91,909 $ 88,755 $ 67,851 $ 26,342 $ 25,040 $ 22,205 $322,102 $323,740
Average interest rates 7.59% 7.53% 7.35% 7.28% 5.45% 7.01% 7.29%
Variable interest rate loans $ 49,235 $ 9,482 $ 5,463 $ 3,231 $ 4,415 $ 923 $ 72,749 $ 72,749
Average interest rates 5.83% 5.87% 5.79% 5.91% 5.33% 5.21% 5.80%
Rate sensitive liabilities
Borrowed funds $ 718 $ 1,053 $ 53 $ 53 $ 5,053 $ 8,360 $ 15,290 $ 16,057
Average interest rates 1.00% 5.01% 4.16% 4.16% 5.08% 5.35% 5.02%
Savings and NOW accounts $154,398 $ 20,257 $ 16,481 $ 13,575 $ 12,581 $ 33,631 $250,923 $250,923
Average interest rates 1.14% 1.09% 1.44% 1.27% 1.06% 0.84% 1.12%
Fixed interest rate time deposits $129,992 $ 28,992 $ 41,554 $ 26,411 $ 21,073 $ 111 $248,133 $254,098
Average interest rates 2.92% 4.78% 5.53% 4.74% 4.48% --- 3.90%
Variable interest rate time deposits $ 897 $ 411 $ 4 --- $ 396 --- $ 1,708 $ 1,708
Average interest rates 2.03% 2.03% --- --- 3.80% --- 2.44%
20
ITEM 4 - CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures - The term "disclosure
controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934 (the "Exchange Act"). This term refers to the
controls and procedures of a company that are designed to ensure that
information required to be disclosed by a company in the reports that it files
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission. An
evaluation was performed under the supervision and with the participation of the
Corporation's management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the Corporation's disclosure
controls and procedures as of March 31, 2004. Based on that evaluation, the
Corporation's management, including the CEO and CFO, concluded that the
Corporation's disclosure controls and procedures were effective as of March 31,
2004.
(b) Changes in Internal Controls - The Corporation also conducted an evaluation
of internal control over financial reporting to determine whether any changes
occurred during the quarter ended March 31, 2004, that have materially affected,
or are reasonably likely to materially affect, the Corporation's internal
control over financial reporting. Based on this evaluation, there has been no
such change during the quarter that ended March 31, 2004.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
3(a) Amended Articles of Incorporation (1)
3(b) Amendment to the Articles of Incorporation (3)
3(c) Amendment to the Articles of Incorporation (4)
3(d) Amendment to the Articles of Incorporation (4)
3(e) Amended Bylaws (1)
3(f) Amendment to Bylaws (2)
3(g) Amendment to Bylaws (3)
3(h) Amendment to Bylaws (5)
3(i) Amendment to Bylaws (6)
3(j) Amendment to Bylaws (7)
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
21
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 the IBT Bancorp, Inc. Form 10-K,
dated March 26, 1994, and incorporated herein by reference.
4) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K,
dated March 22, 2000, and incorporated herein by reference.
5) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K,
dated March 27, 2001, and incorporated herein by reference.
6) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K,
dated March 25, 2002, and incorporated herein by reference.
7) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K,
dated March 24, 2003, and incorporated herein by reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed or required to be filed
during the quarter ended March 31, 2004.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IBT Bancorp, Inc.
Date: April 30, 2004 /s/ Dennis P. Angner
--------------------
Dennis P. Angner
President and CEO
/s/ Peggy L. Wheeler
--------------------
Peggy L. Wheeler
Principal Financial Officer
23
EXHIBIT INDEX
EXHIBIT NO DESCRIPTION
- ---------- -----------
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