Back to GetFilings.com
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, 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 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 $205,649,000 as of February 25, 2005.
The number of shares outstanding of the registrant's Common Stock (no par value)
was 4,896,412 as of February 25, 2005.
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 Part III
for its Annual Meeting of Shareholders
to be held April 26, 2005
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,
(together, "the Banks"), IBT Title and Insurance Agency, Inc. ("IBT Title"), IBT
Loan Production, IBT Personnel, LLC, IB & T Employee Leasing, LLC, and Financial
Group Information Services. Isabella Bank and Trust has seventeen banking
offices located throughout Isabella County, northeastern Montcalm County,
Mecosta 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, Clare 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
counties. 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
5.7% 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,
2004 approximated $1.7 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. The 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 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 Corporation's or Banks' loan portfolio as of
December 31, 2004.
2
LOANS BY MAJOR LENDING CATEGORY
(in thousands) Amount %
-------- -----
Residential real estate
One to four family residential $194,376 42.7%
Construction & land development 35,384 7.8
-------- -----
Total 229,760 50.5
Commercial
Commercial real estate 96,739 21.2
Farmland 32,383 7.1
Agricultural production 16,796 3.7
Commercial and other 49,413 10.9
-------- -----
Total 195,331 42.9
Other individual
Other personal 28,463 6.2
Credit cards 1,680 0.4
-------- -----
Total 30,143 6.6
-------- -----
TOTAL $455,234 100.0%
======== =====
First and second residential mortgages are the single largest category of loans
(50.5% of total loans). The Corporation, through its 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 ("Freddie Mac").
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
Internal Loan Committee, 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 42.9% of the Corporation's loan portfolio at December
31, 2004. 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 $5.5 million on a
consolidated basis at its subsidiary banks. Borrowers with credit needs of more
than $5.5 million are serviced through the use of loan
3
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 the Securities Exchange
Act of 1934 and by the Federal Reserve Board under the Bank Holding Company Act
of 1956 as amended ("BHC Act") and 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, 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, 2004, the Corporation had five full-time employees, Isabella
Bank and Trust had 191, Farmers State Bank of Breckenridge had 49, IBT Title had
23, IBT Loan Production had one, Financial Group Information Services had 12,
and IBT Personnel LLC and IB & T Employee Leasing LLC 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 Banks are
periodically involved, such as claims to enforce liens, condemnation proceedings
on making and servicing of real property loans and other issues incidental to
the Banks' 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 SEC reports free of charge upon request of a shareholder.
4
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.
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
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 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
5
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 Banks) has become impaired by losses or otherwise, the Commissioner of the
OFIS 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.
The Sarbanes-Oxley Act of 2002 ("SOX") contains important new requirements for
public companies in the area of financial disclosure and corporate governance.
In accordance with Section 302(a) of SOX, a written certification by the
Corporation's principal executive and financial officer is required. This
certification attests that the Corporation's quarterly and annual reports filed
with the SEC do not contain any untrue statement of a material fact. See the
Certification files as Exhibit 31 to this Form 10-K for such certification of
the financial statements and other information for this 2004 Form 10-K. The
Corporation has also implemented a program designed to comply with Section 404
of SOX, which included the identification of significant processes and accounts,
documentation of the design of control effectiveness over process and entity
level controls, and testing of the operating effectiveness of key controls. See
Item 9A, "Controls and Procedures" for the Corporation's evaluation of its
disclosure controls and procedures.
Certain additional information concerning regulatory guidelines for capital
adequacy and other regulatory matters is presented herein under the caption
"Capital" on pages 22-23 and "Note K - Commitments and Other Matters" and "Note
M - Regulatory Capital Matters" on page 51, and 52-54, respectively.
SUBSIDIARY BANKS
The Banks are subject to regulation and examination primarily by OFIS. 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.
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
6
shares or securities of the parent holding company (or any of the other non-bank
or bank affiliates), acceptance of such shares 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 statements
providing that bank holding companies and insured banks should generally pay
dividends only 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 16 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, 2004.
Year Approximate Net
Facility Square Book Value
Opened Footage 12/31/04 (1)
-------- ----------- ------------
Isabella Bank and Trust
Main Office
200 East Broadway (2)
Mt. Pleasant, Michigan 1903 27,640 $357,332
Main Office Extension (2)
Customer Service Center
139 East Broadway
Mt. Pleasant, Michigan 1985 19,136 $907,085
7
Year Approximate Net
Facility Square Book Value
Opened Footage 12/31/04 (1)
-------- ----------- ------------
Operations Center
2750 Three Leaves Drive
Mt. Pleasant, Michigan 2001 15,000 $1,379,131
Isabella County Branch Offices
1416 East Pickard (3)
Mt. Pleasant, Michigan 1983 1,450 $ 438,836
2133 South Mission (6)
Mt. Pleasant, Michigan 1976 1,560 $ 323,857
200 South University (4)
Mt. Pleasant, Michigan 1964 1,795 $ 50,711
1402 West High
Mt. Pleasant, Michigan 1973 2,150 $ 49,734
401 East Main Street (5)
Blanchard, Michigan 1911 6,561 $ 15,524
500 East Wright Avenue
Shepherd, Michigan 1980 1,830 $ 182,599
3388 N. Woodruff Rd
Weidman, Michigan 1975 5,400 $ 57,394
1867 Winn Road
Beal City, Michigan 1977 1,100 $ 40,871
Montcalm County Branch Office
313 W. Bridge Street (6)
Six Lakes, Michigan 1966 1,527 $ 339,898
Clare County Branch Offices
532 N. McEwan Street
Clare, Michigan 1993 7,300 $ 308,631
1125 N. McEwan Street
Clare, Michigan 1997 525 $ 369,773
Mecosta County Division Branch Offices
21440 Perry Street (11)
Big Rapids, Michigan 2004 4,742 $2,049,040
8
Year Approximate Net
Facility Square Book Value
Opened Footage 12/31/04 (1)
-------- ----------- ------------
220 W. Wheatland Street
Remus, Michigan (10) 1998 4,273 $501,897
240 E. Northern Avenue
Barryton, Michigan (12) 1998 4,273 $458,525
8529 - 100th Avenue (8)
Stanwood, Michigan 1998 2,665 $ 8,937
IBT Title
Isabella County
209 E. Broadway
Mt. Pleasant, Michigan 1998 2,640 $192,222
Mecosta County
119 Michigan Avenue
Big Rapids, Michigan 1999 1,700 $ 28,269
Clare County
404 N. McEwan
Clare, Michigan 2001 1,450 $ 15,476
Farmers State Bank of Breckenridge
Main Office
316 E. Saginaw
Breckenridge, Michigan 1967 13,700 $723,331
Ithaca Branch
1402 E. Center
Ithaca, Michigan 1991 2,387 $223,625
Hemlock Branch (9)
16490 Gratiot
Hemlock, Michigan 1994 1,840 $882,018
(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
(11) new office in 2004
(12) substantially remodeled in 2004
9
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 2004 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,
2003 through December 31, 2004 there were, so far as management knows, 161 sales
of the Corporation's common stock. These sales involved 89,409 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 $42 per share in the
fourth quarter of 2004, and the lowest price was $31.82 per share in the first
quarter of 2003. The following is a summary of all known transfers since January
1, 2003. All of the information has been adjusted to reflect the 10% stock
dividend paid February 19, 2004.
Sale Price
Number of Number of ---------------
Period Sales Shares Low High
- -------------- --------- --------- ------ ------
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
2004
First Quarter 13 6,046 40.00 42.00
Second Quarter 21 33,400 42.00 42.00
Third Quarter 36 7,638 42.00 42.00
Fourth Quarter 9 3,592 42.00 42.00
The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10% stock dividend paid on February 19, 2004.
Per Share
-------------
2004 2003
----- -----
First Quarter $0.11 $0.10
Second Quarter 0.11 0.10
Third Quarter 0.11 0.10
Fourth Quarter 0.30 0.30
----- -----
TOTAL $0.63 $0.60
===== =====
IBT Bancorp's authorized common stock consists of 10,000,000 shares, of which
4,896,412 shares are issued and outstanding as of December 31, 2004. As of year
end 2004, there were approximately 2,075 shareholders of record.
10
The Corporation's current share repurchase authorization was approved by the
Board of Directors in October 2002. The authorization was for a repurchase of
up to $2.0 million of the Corporation's common stock. The Corporation did not
repurchase any of its common stock during the quarter ended December 31, 2004.
Based on repurchases since October 2002, the Corporation currently is able to
repurchase up to $1.7 million of its common stock under the repurchase
authorization. This authorization does not have an expiration date.
11
ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
INCOME STATEMENT DATA
Total interest income $ 33,821 $ 35,978 $ 38,161 $ 40,798 $ 38,754
Net interest income 23,364 23,528 22,905 21,538 20,352
Provision for loan losses 735 1,455 1,025 770 565
Net income 6,645 7,205 6,925 6,066 5,431
BALANCE SHEET DATA
End of year assets $678,034 $664,079 $652,717 $592,143 $540,897
Daily average assets 675,157 659,323 623,507 566,547 516,145
Daily average deposits 567,145 563,600 549,970 494,847 452,664
Daily average loans/net 430,854 399,008 390,613 399,239 380,392
Daily average equity 70,787 65,770 59,540 54,787 50,506
PER SHARE DATA (1)
Net income $ 1.36 $ 1.50 $ 1.46 $ 1.29 $ 1.16
Cash dividends 0.63 0.60 0.55 0.50 0.45
Book value (at year end) $ 14.83 14.23 13.30 12.09 11.08
FINANCIAL RATIOS
Shareholders' equity to assets (year end) 10.71% 10.38% 9.71% 9.60% 9.60%
Net income to average equity 9.39 10.95 11.63 11.07 10.75
Cash dividend payout to net income 46.20 39.99 37.33 38.36 38.30
Net income to average assets 0.98 1.09 1.11 1.07 1.05
2004 2003
--------------------------------- ---------------------------------
Quarterly Operating Results: 4th 3rd 2nd 1st 4th 3rd 2nd 1st
- ---------------------------- ------ ------ ------ ------ ------ ------ ------ ------
Total interest income $8,563 $8,415 $8,393 $8,450 $8,560 $9,035 $9,119 $9,264
Interest expense 2,659 2,562 2,566 2,670 2,819 3,070 3,238 3,323
Net interest income 5,904 5,853 5,827 5,780 5,741 5,965 5,881 5,941
Provision for loan losses 150 120 225 240 688 222 333 212
Noninterest income 1,963 2,063 2,199 1,940 1,927 2,891 2,973 2,954
Noninterest expenses 5,724 5,502 5,477 5,568 5,819 5,809 5,879 6,071
Net income 1,663 1,749 1,756 1,477 1,222 2,085 1,956 1,942
Per Share of Common Stock: (1)
Net income $ 0.34 $ 0.36 $ 0.36 $ 0.30 $ 0.25 $ 0.43 $ 0.41 $ 0.41
Cash dividends 0.30 0.11 0.11 0.11 0.30 0.10 0.10 0.10
Book value 15.01 14.86 14.57 14.30 14.23 14.21 14.15 13.69
(1) 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% federal income 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.
2004 2003 2002
----------------------------- ----------------------------- -----------------------------
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 $437,438 $27,801 6.36% $404,953 $29,196 7.21% $396,234 $31,554 7.96%
Taxable investment securities 114,806 3,696 3.22 123,927 4,437 3.58 94,383 4,197 4.45
Nontaxable investment securities 55,882 3,206 5.74 49,531 3,099 6.26 45,663 2,864 6.27
Federal funds sold 4,516 30 0.66 16,311 193 1.18 26,364 423 1.60
Other investments 2,978 178 5.98 2,857 151 5.29 2,735 165 6.03
-------- ------- ---- -------- ------- ---- -------- ------- -----
TOTAL EARNING ASSETS 615,620 34,911 5.67 597,579 37,076 6.20 565,379 39,203 6.93
NONEARNING ASSETS
Allowance for loan losses (6,584) (5,946) (5,621)
Cash and due from banks 23,831 26,840 24,236
Premises and equipment 18,147 15,646 14,983
Accrued income and other assets 24,143 25,204 24,530
-------- -------- --------
TOTAL ASSETS $675,157 $659,323 $623,507
======== ======== ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $106,471 569 0.53 $113,206 1,057 0.93 $ 98,478 1,406 1.43
Savings deposits 157,819 872 0.55 141,227 1,325 0.94 135,792 2,201 1.62
Time deposits 238,323 7,950 3.34 247,516 9,228 3.73 247,182 10,971 4.44
Borrowed funds 27,328 1,066 3.90 18,812 840 4.47 13,960 678 4.86
-------- ------- ---- -------- ------- ---- -------- ------- -----
TOTAL INTEREST BEARING
LIABILITIES 529,941 10,457 1.97 520,761 12,450 2.39 495,412 15,256 3.08
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 64,531 61,651 59,518
Other 9,898 11,141 9,037
Shareholders' equity 70,787 65,770 59,540
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $675,157 $659,323 $623,507
======== ======== ========
NET INTEREST INCOME (FTE) $24,454 $24,626 $23,947
======= ======= =======
NET YIELD ON INTEREST EARNING
ASSETS (FTE) 3.97% 4.12% 4.24%
==== ==== ====
RESULTS OF OPERATIONS
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
0.98% in 2004, 1.09% in 2003, and 1.11% in 2002. 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 9.39% in 2004, 10.95% in 2003, and 11.63% in 2002.
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 $1,102 in 2004, $1,752
in 2003, and $1,524 in 2002. 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.
2004 Compared to 2003 2003 Compared to 2002
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
------ ------- ------- ------ ------- -------
CHANGES IN INTEREST INCOME
Loans $2,231 $(3,626) $(1,395) $ 682 $(3,040) $(2,358)
Taxable investment securities (313) (428) (741) 1,156 (916) 240
Nontaxable investment securities 378 (271) 107 242 (7) 235
Federal funds sold (101) (62) (163) (136) (94) (230)
Other investments 7 20 27 7 (21) (14)
------ ------- ------- ------ ------- -------
TOTAL CHANGES IN INTEREST INCOME 2,202 (4,367) (2,165) 1,951 (4,078) (2,127)
CHANGES IN INTEREST EXPENSE
Interest bearing demand deposits (60) (428) (488) 188 (537) (349)
Savings deposits 141 (594) (453) 85 (961) (876)
Time deposits (333) (945) (1,278) 15 (1,758) (1,743)
Other borrowings 343 (117) 226 220 (58) 162
------ ------- ------- ------ ------- -------
TOTAL CHANGES IN INTEREST EXPENSE 91 (2,084) (1,993) 508 (3,314) (2,806)
------ ------- ------- ------ ------- -------
NET CHANGE IN FTE NET INTEREST INCOME $2,111 $(2,283) $ (172) $1,443 $ (764) $ 679
====== ======= ======= ====== ======= =======
As shown in Tables 1 and 2, when comparing year ending December 31, 2004 to
2003, fully taxable equivalent (FTE) net interest income decreased $172 or
0.70%. An increase of 3.02% in average interest earning assets provided $2,202
of FTE interest income. The majority of this growth was funded by a 1.76%
increase in interest bearing liabilities, resulting in $91 of additional
interest expense. Overall, changes in volume resulted in $2,111 in additional
FTE interest income. The average FTE interest rate earned on assets decreased by
0.53%, decreasing FTE interest income by $4,367, and the average rate paid on
deposits decreased by 0.42%, decreasing interest expense by $2,084. The net
change related to interest rates earned and paid was a $2,283 decrease in FTE
net interest income.
The Corporation's FTE net yield as a percentage of average earning assets
decreased 0.15%. A $650 decline in loan fees in 2004 from 2003 accounted for
0.10% of the decline. The decline in these fees was a result of a $140.1 million
decline in the origination and sales of residential mortgages to the secondary
market as the recent refinancing boom
15
has slowed. The remaining decline was a result of the average rate earned on
earning assets declining faster than the average rate paid on interest bearing
liabilities.
Net interest income increased $679 to $24,626 in 2003 from $23,947 in 2002. As
shown in Tables 1 and 2, in 2003 (FTE) interest income increased $1,951, from a
5.7% increase in the volume of average earning assets. The growth of interest
earning assets was funded primarily by a 5.1% increase in interest bearing
liabilities that resulted in additional interest expense of $508. Overall, the
Corporation earned an additional $1,443 in FTE interest income as a result of
increased volume. The average rate earned in 2003 decreased by 0.73%, decreasing
FTE interest income by $4,078, and the average rate paid on deposits decreased
by 0.69%, 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.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 65.8% of the
Corporation's total year end assets 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 6.8% in 2004 and
increased 5.4% in 2003. The provision for loan losses in 2004 was $735, a $720
decrease from 2003 and a $290 decrease from 2002. Net charge offs to average
loans was 0.11% in 2004 and 0.21% in 2003, and have averaged 0.13% during the
past 5 years versus the average of 0.17% for all commercial banks in the State
of Michigan. The Corporations substandard loans were 0.72% as of December 31,
2004, a 0.57% decrease from 2003, and below the September 30, 2004 ratio of
0.83% for all commercial banks in the State of Michigan. The 2003 provision for
loan losses was increased as a result of a combination of factors. During the
last quarter of 2003 the Corporation experienced a decline in the overall credit
quality of its outstanding agricultural loans. The Corporation undertook a
detailed review of the credit quality of all significant agricultural lending
relationships, and identified the most significant troubled loans. The primary
factor for the decline in the credit quality was a result of three consecutive
years of weak cash flows due to both low farm commodity prices and unfavorable
growing conditions in mid-Michigan. The Corporation tightened its credit
granting standards during 2003 and continues to monitor existing relationships
for further deterioration.
The allowance to loan losses as a percentage of loans decreased from 1.46% as of
December 31, 2003 to 1.42% as of December 31, 2004. Management believes that the
allowance for loans is adequate as of December 31, 2004.
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.
16
Year Ended December 31
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Amount of loans outstanding
at the end of year $455,234 $426,174 $404,480 $397,864 $403,679
======== ======== ======== ======== ========
Average gross loans outstanding
for the year $437,438 $404,953 $396,234 $404,586 $380,392
======== ======== ======== ======== ========
Summary of changes in allowance
Allowance for loan losses - January 1 $ 6,204 $ 5,593 $ 5,471 $ 5,162 $ 4,622
Loans charged off
Commercial and agricultural 561 578 506 271 65
Real estate mortgage 0 117 236 70 58
Personal 374 445 460 351 295
-------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF 935 1,140 1,202 692 418
Recoveries
Commercial and agricultural 191 93 140 35 172
Real estate mortgage 62 29 18 41 64
Personal 187 174 141 155 157
-------- -------- -------- -------- --------
TOTAL RECOVERIES 440 296 299 231 393
Net charge offs 495 844 903 461 25
Provision charged to income 735 1,455 1,025 770 565
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES - DECEMBER 31 $ 6,444 $ 6,204 $ 5,593 $ 5,471 $ 5,162
======== ======== ======== ======== ========
Ratio of net charge offs during the
year to average loans outstanding 0.11% 0.21% 0.23% 0.11% 0.01%
======== ======== ======== ======== ========
Ratio of the allowance for loan losses
to loans outstanding at year end 1.42% 1.46% 1.38% 1.38% 1.28%
======== ======== ======== ======== ========
As shown in Table 4, the percentage of loans classified as nonperforming by the
Corporation as of December 31, 2004 and 2003 was 0.72% and 1.29% of total loans,
respectively. Average nonperforming loans for the peer group were 0.53%. The
peer group is a composite of financial information of all bank holding companies
with assets between $500 million and $1 billion; there were 353 bank holding
companies in the Corporation's peer group nationwide 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
------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
Nonaccrual loans $1,900 $4,121 $2,484 $1,346 $ 382
Accruing loans past due 90 days or more 702 1,380 1,840 1,219 1,484
Restructured loans 686 -- 479 -- --
------ ------ ------ ------ ------
TOTAL NONPERFORMING LOANS $3,288 $5,501 $4,803 $2,565 $1,866
====== ====== ====== ====== ======
NONPERFORMING LOANS AS % OF LOANS 0.72% 1.29% 1.19% 0.64% 0.46%
====== ====== ====== ====== ======
17
As of December 31, 2004, 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
$4,135 to $8,088 as of December 31, 2004. In management's opinion, the allowance
for loan losses of $6,444 is adequate as of December 31, 2004. Management has
allocated, as reflected in Table 5, the allowance for loan losses to the
following categories: 36.9% to commercial and agricultural loans; 22.7% to real
estate loans; 24.9% to installment loans; 8.6% to impaired loans. 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.
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 probability of losses being
incurred within the following categories:
December 31
------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------- -------------------- -------------------- -------------------- --------------------
% 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 $2,381 42.3% $2,140 41.5% $1,868 44.1% $2,081 41.6% $1,301 39.4%
Real Estate Mortgage 1,463 50.5 1,584 47.8 1,649 45.5 1,408 47.8 1,559 48.5
Installment 1,606 6.6 1,614 9.6 1,679 9.7 1,577 10.5 1,923 12.1
Impaired loans 557 0.6 622 1.1 103 0.7 56 0.1 -- --
Unallocated 437 -- 244 -- 294 -- 349 -- 379 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
TOTAL $6,444 100.0% $6,204 100.0% $5,593 100.0% $5,471 100.0% $5,162 100.0%
====== ===== ====== ===== ====== ===== ====== ====== ====== =====
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
$2,580 or 24.0% decrease in noninterest income from these sources during 2004.
Significant changes during 2004 include a $383 decrease from the sale of title
insurance and related services, an $873 decrease in mortgage servicing income,
and a $1,614 decrease in gains on the sale of real estate mortgages, offset by a
$313 increase in overdraft fees. During 2004, the Corporation had an average
investment of $10.1 million in bank-owned life insurance, a $139 increase over
2003. The average net rate earned on the investment was approximately 4.10% in
2004 (versus 4.8% in 2003) and, because of the instruments' tax free
accumulation of earnings they have a taxable equivalent rate of 6.22%. 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.
Included in noninterest income is a $477 gain from the sale of $55,055 of
mortgages during 2004 versus a $2,091 gain on the sale of $195,168 of mortgages
during 2003. The Corporation has established a policy that all 30-year fixed
rate mortgage loans will be sold. During 2004, most 15-year fixed rate mortgage
loans originated were sold on the secondary market. These loans were sold
without recourse, with servicing rights retained.
Noninterest income increased $2,642 in 2003 when compared to 2002. Significant
changes in 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
18
mortgage servicing fees, a $329 increase in gains on the sale of residential
real estate mortgages and a $136 increase in income from bank-owned life
insurance.
NONINTEREST EXPENSES
Noninterest expenses decreased $1,307 or 5.5% during 2004. Noninterest expenses
net of noninterest income divided by average total assets equaled 2.09% in 2004,
1.95% in 2003, and 2.03% in 2002. The increase in the 2004 ratio was primarily a
result of the $1,614 decrease in the gains on the sale of real estate mortgages.
The largest component of noninterest expenses is compensation and benefits
expense, which decreased $660 or 4.9%. Salaries decreased $459. Employee
benefits decreased $218 in 2004. While there were normal merit and promotional
salary increases the net decrease is primarily related to the reduction in
compensation related to the decline in mortgage loan activity, as well as a
decrease related to a 22.7% decline in medical insurance expenses, both of which
were offset by a 13.8% increase in pension expense. Footnote F in the
Corporation's Notes to Consolidated Financial Statements includes 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 $318 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 $1.2 million. Essentially, the actual loss combined with the change in
actuarial assumptions related to the benefit obligation has produced a $2.5
million underfunding of the Plan's assets as of December 31, 2004. This
shortfall has significantly increased the Corporation's pension expense. During
2004 the Plan experienced a 6.4% return on beginning of the year Plan assets.
Occupancy and furniture and equipment expenses decreased $43 or 1.1% in 2004.
The decrease is related to a reduction in depreciation expense. All other
operating expenses decreased $604. The most significant decreases are related to
donations, offset by an increase in professional services principally associated
with SOX mandated compliance efforts. Isabella Bank and Trust contributed
approximately $27 in 2004 to the IBT Foundation compared to a contribution of
$870 made in 2003. (See Note J to the accompanying Consolidated Financial
Statements.)
Noninterest expenses increased $2,806 or 13.5% in 2003. During 2003,
compensation and benefits expense increased $2,038, occupancy and furniture and
equipment expenses increased $332, and all other operating expenses increased
$436.
FEDERAL INCOME TAXES
Federal income tax expense for 2004 was $1,878 or 22.0% of pre-tax income
compared to $2,035 or 22.0% of pre-tax income in 2003 and $2,286 or 24.8% in
2002. A reconcilement of actual federal income tax expense reported and the
amount computed at the federal statutory rate of 34% is found in Note E, Federal
Income Taxes, in notes to the accompanying Consolidated Financial Statements.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Total assets were $678,034 at December 31, 2004, an increase of $13,955 or 2.1%
over year end 2003. Asset growth was primarily funded by a $12,929 increase in
other borrowed funds, and a $3,658 increase in shareholders' equity. A
discussion of changes in balance sheet amounts by major categories follows.
19
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 2004, the Corporation's net holdings of investment
securities decreased $8,591. 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
------------------------------
2004 2003 2002
-------- -------- --------
Available for sale
U.S. Treasury and U.S. government agencies $ 72,644 $ 89,934 $ 90,974
States and political subdivisions 84,632 76,656 64,607
Commercial paper 4,754 3,242 2,328
-------- -------- --------
TOTAL $162,030 $169,832 $157,909
======== ======== ========
Held to maturity
U.S. Treasury and U.S. government agencies $ 3 $ 9 $ 74
States and political subdivisions 520 1,303 1,662
-------- -------- --------
TOTAL $ 523 $ 1,312 $ 1,736
======== ======== ========
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.
20
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, 2004:
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 $20,289 3.10% $30,990 2.76% $ -- % $ --
States and political
subdivisions 9,416 4.64 44,891 4.64 26,910 4.50 3,415 2.90%
Mortgage backed 23 2.70 14,281 3.89 7,061 3.60 -- --
Corporate & other
securities -- -- 4,754 3.56 -- -- -- --
------- ---- ------- ---- ------- ---- ------ ----
TOTAL $29,728 3.59% $94,916 3.86% $33,971 4.31% $3,415 2.90%
======= ==== ======= ==== ======= ==== ====== ====
Held to maturity
States and political
subdivisions $ 195 7.40% $ 200 7.24% $ 125 4.64% $ -- --%
Mortgage backed 3 6.56 -- -- -- -- -- --
------- ---- ------- ---- ------- ---- ------ ----
TOTAL $ 198 7.39% $ 200 7.24% $ 125 4.64% $ -- --%
======= ==== ======= ==== ======= ==== ====== ====
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
----------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Commercial $146,152 $129,392 $126,591 $115,457 $109,735
Agricultural 49,179 52,044 54,788 50,524 49,221
Residential real estate mortgage 229,760 203,769 184,071 190,098 195,841
Installment 30,143 40,969 39,029 41,785 48,881
-------- -------- -------- -------- --------
TOTAL LOANS $455,234 $426,174 $404,479 $397,864 $403,678
======== ======== ======== ======== ========
Total loans increased $29,060 in 2004. The increase was primarily in real estate
mortgages and commercial loans. As of December 31, 2004, as a percentage of
total loans, commercial loans were 32.1%, agricultural were 10.8%, residential
real estate mortgages were 50.5%, and installments were 6.6%.
21
DEPOSITS
Total deposits decreased $3,831 and were $563,876 at year end 2004, a 0.7%
decrease from 2003. Average deposits increased 0.6% in 2004 and 4.2% in 2003.
During 2004, average noninterest bearing deposits increased 4.7%, interest
bearing demand deposits decreased 5.9%, savings deposits increased 11.7%, and
time deposits decreased 3.7%. Time deposits over $100 as a percentage of total
deposits equaled 12.9% and 12.2% as of December 31, 2004 and 2003, respectively.
TABLE 9. AVERAGE DEPOSITS
2004 2003 2002
--------------- --------------- ---------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
Noninterest bearing demand deposits $ 64,531 $ 61,651 $ 59,518
Interest bearing demand deposits 106,471 0.53% 113,206 0.93% 98,478 1.43%
Savings deposits 157,820 0.55 141,227 0.94 135,792 1.62
Time deposits 238,323 3.34 247,516 3.73 247,182 4.44
-------- -------- --------
TOTAL $567,145 $563,600 $540,970
======== ======== ========
TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000
December 31
---------------------------
2004 2003 2002
------- ------- -------
Maturity
Within 3 months $14,415 $18,068 $21,900
Within 3 to 6 months 12,762 11,475 15,928
Within 6 to 12 months 14,216 8,184 18,624
Over 12 months 31,431 31,746 13,858
------- ------- -------
TOTAL $72,824 $69,473 $70,310
======= ======= =======
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 $3,658 in 2004. The Corporation offers a dividend
reinvestment and employee stock purchase plan. Under the provisions of these
Plans, the Corporation issued 57,388 shares of common stock generating $2,001 of
capital during 2004, and 70,340 shares of common stock generating $2,008 of
capital in 2003. In October 2002 the Board of Directors authorized management to
repurchase up to $2.0 million of the Corporation's common stock. A total of
4,571 shares were repurchased in 2004 at an average price of $42 per share.
Accumulated other comprehensive income decreased $1,726 and consists of a $1,738
decrease in unrealized gain on available-for-sale investment securities reduced
by a gain of $12 related to the recognition of a decrease in the additional
minimum pension liability.
22
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 11.2% at year end 2004. 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, 2004:
Percentage of Capital to Risk Adjusted Assets:
Required IBT Bancorp
-------- -----------
Equity Capital 4.00% 15.14%
Secondary Capital 4.00 1.25
----- -----
Total Capital 8.00% 16.39%
===== =====
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, 2004, the Banks exceeded these
minimums. For further information regarding the Banks' capital requirements,
refer to Note M of the Notes to the accompanying Consolidated 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, 2004 and 2003, cash and cash equivalents equaled 3.1% and
4.7%, respectively, of total assets. Net cash provided from operations was
$12,742 in 2004 and $19,864 in 2003. Net cash provided by financing activities
equaled $7,837 in 2004 and $5,511 in 2003. The Corporation's investing
activities used cash amounting to $31,037 in 2004 and $48,594 in 2003. The
accumulated effect of the Corporation's operating, investing, and financing
activities on cash and cash equivalents was a $10,458 decrease in 2004 and a
$23,219 decrease in 2003.
In addition to cash and cash equivalents, available-for-sale investment
securities are another source of liquidity. Securities available for sale
equaled $162,030 as of December 31, 2004 and $169,832 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 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
23
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 $455,234 in total loans,
$94,363 are variable rate loans. Time deposit liabilities are scheduled based on
their contractual maturity except for variable rate time deposits in the amount
of $1,398 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, 2004, the
Corporation had $8,941 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.
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, 2004. 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
Investment securities $ 3,947 $ 11,093 $ 91,290 $56,223
Loans 119,069 43,191 249,905 41,169
-------- -------- -------- -------
TOTAL $123,016 $ 54,284 $341,195 $97,392
======== ======== ======== =======
Interest Sensitive Liabilities
Borrowed funds $ 3,504 $ -- $ 18,166 $ 9,312
Time deposits 35,363 83,825 112,223 2,852
Savings 2,174 6,681 59,007 2,010
Interest bearing demand 27,457 27,237 136,772 2,539
-------- -------- -------- -------
TOTAL $ 68,498 $117,743 $326,168 $16,713
======== ======== ======== =======
Cumulative gap (deficiency) $ 54,518 $ (8,941) $ 6,086 $86,765
Cumulative gap (deficiency) as a % of assets 8.04% (1.32)% 0.90% 12.80%
TABLE 12. LOAN MATURITY AND INTEREST RATE SENSITIVITY
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 2004. 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 $55,680 $133,398 $6,253 $195,331
======= ======== ====== ========
24
Interest Sensitivity:
Loans maturing after one year that have:
Fixed interest rates $108,588 $3,879
Variable interest rates 24,810 2,374
-------- ------
TOTAL $133,398 $6,253
======== ======
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 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
25
projections prepared for the year ended December 31, 2004 the Corporation's net
interest income would increase during a period of increasing 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,
2004 and 2003. The Corporation has no interest rate swaps, futures contracts, or
other derivative financial options. The principal amounts of assets and time
deposits maturing were calculated based on the contractual maturity dates.
Savings and NOW accounts are based on management's estimate of their future cash
flows.
QUANTITATIVE DISCLOSURES OF MARKET RISK
Fair Value
2005 2006 2007 2008 2009 Thereafter Total 12/31/04
-------- ------- ------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest bearing assets $ 199 $ 199 $ 199
Average interest rates 3.79% 3.79%
Fixed interest rate securities $ 15,039 $26,096 $32,359 $24,812 $ 8,024 $56,223 $162,553 $162,567
Average interest rates 3.87% 3.17% 2.99% 3.25% 3.81% 3.72% 3.43%
Fixed interest rate loans $ 69,428 $53,281 $69,581 $58,933 $68,047 $41,601 $360,871 $326,590
Average interest rates 6.44% 6.31% 6.08% 6.10% 5.81% 5.25% 6.04%
Variable interest rate loans $ 64,199 $ 4,434 $ 8,054 $ 8,481 $ 6,320 $ 2,875 $ 94,363 $ 94,363
Average interest rates 6.22% 6.28% 6.30% 6.01% 6.32% 8.65% 6.29%
Rate sensitive liabilities
Borrowed funds $ 3,504 $10,500 $ 4,166 $ 0 $ 3,500 $ 9,312 $ 30,982 $ 26,466
Average interest rates 2.19% 3.86% 3.49% 0.00% 3.66% 5.16% 3.99%
Savings and NOW accounts $ 63,549 $56,872 $73,117 $36,878 $28,915 $ 4,547 $263,878 $263,876
Average interest rates 1.09% 0.56% 0.50% 0.35% 0.73% 0.55% 0.66%
Fixed interest rate time deposits $118,333 $46,859 $34,415 $17,600 $12,805 $ 2,852 $232,864 $219,135
Average interest rates 3.01% 3.87% 3.91% 3.43% 3.51% 4.11% 3.39%
Variable interest rate time deposits $ 855 $ 543 $ 1,398 $ 1,398
Average interest rates 2.02% 2.01% 2.02%
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 $154,490 $22,778 $18,518 $15,160 $14,018 $36,305 $261,269 $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 $ 0 $ 182 $ 467 $ 0 $ 2,145 $ 2,145
Average interest rates 1.24% 1.24% -- -- 3.52% -- 1.63%
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
26
the Private Securities Reform Act of 1995, and is including this statement for
purposes of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Corporation, are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project," or similar
expressions. The Corporation's ability to predict results or the actual effect
of future plans or strategies is inherently uncertain. Factors which could have
a material adverse effect on the operations and future prospects of the
Corporation and the subsidiaries include, but are not limited to, changes in
interest rates, general economic conditions, legislative/regulatory changes,
monetary and fiscal policies of the U.S. Government including policies of the
U.S. Treasury and the Federal Reserve Board, the quality or composition of the
loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Corporation's market area, and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements. Further information concerning the
Corporation and its business, including additional factors that could materially
affect the Corporation's financial results is included in the Corporation's
filings with the Securities and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the registrant and the report
of the independent registered public accounting firm are set forth on pages 28
through 53 of this report:
Report of Independent Registered Public Accounting Firm
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 are set forth
under the table headed "Summary of Selected Financial Data" on Page 12 of this
report.
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, 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, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). 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, 2004 and 2003, and the consolidated results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of IBT Bancorp,
Inc.'s internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 11, 2005 expressed an unqualified opinion on management's
assessment of internal control over financial reporting and an unqualified
opinion on the effectiveness of internal control over financial reporting.
REHMANN ROBSON P.C.
Saginaw, Michigan
February 15, 2005
28
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31
-------------------
2004 2003
-------- --------
ASSETS
Cash and cash equivalents $ 20,760 $ 25,918
Federal funds sold -- 5,300
-------- --------
CASH AND CASH EQUIVALENTS 20,760 31,218
Investment securities
Securities available for sale (amortized cost of
$161,561 in 2004 and $166,730 in 2003) 162,030 169,832
Securities held to maturity (fair value of
$537 in 2004 and $1,349 in 2003) 523 1,312
-------- --------
TOTAL INVESTMENT SECURITIES 162,553 171,144
Mortgage loans available-for-sale 2,339 4,315
Loans (net of the allowance for loan losses) 446,451 415,655
Premises and equipment 18,533 15,785
Bank-owned life insurance 10,168 10,029
Accrued interest receivable 4,315 4,534
Acquisition intangibles and goodwill, net 3,347 3,440
Other assets 9,568 7,959
-------- --------
TOTAL ASSETS $678,034 $664,079
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 65,736 $ 67,760
NOW accounts 101,362 117,560
Certificates of deposit and other savings 323,954 312,914
Certificates of deposit over $100 72,824 69,473
-------- --------
TOTAL DEPOSITS 563,876 567,707
Other borrowed funds 30,982 18,053
Accrued interest and other liabilities 10,582 9,383
-------- --------
TOTAL LIABILITIES 605,440 595,143
Shareholders' equity
Common stock -- no par value;
10,000,000 shares authorized;
4,896,412 shares issued and outstanding
(4,403,404 shares at December 31, 2003) 66,908 47,491
Retained earnings 6,590 20,623
Accumulated other comprehensive (loss) income (904) 822
-------- --------
TOTAL SHAREHOLDERS' EQUITY 72,594 68,936
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $678,034 $664,079
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
YEAR ENDED DECEMBER 31
------------------------------------
2004 2003 2002
---------- ---------- ----------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year 4,403,404 4,336,283 3,884,985
10% stock dividend 440,191 -- 388,758
Issuance of common stock 57,388 70,340 81,326
Common stock repurchased (4,571) (3,219) (18,786)
---------- ---------- ----------
BALANCE END OF YEAR 4,896,412 4,403,404 4,336,283
========== ========== ==========
COMMON STOCK
Balance at beginning of year $ 47,491 $ 45,610 $ 31,017
10% stock dividend 17,608 -- 12,829
Issuance of common stock 2,001 2,008 2,383
Common stock repurchased (192) (127) (619)
---------- ---------- ----------
BALANCE END OF YEAR 66,908 47,491 45,610
RETAINED EARNINGS
Balance at beginning of year 20,623 16,299 24,788
Net income 6,645 7,205 6,925
10% stock dividend (17,608) -- (12,829)
Cash dividends ($0.63 per share in 2004,
$0.60 in 2003, and $0.55 in 2002) (3,070) (2,881) (2,585)
---------- ---------- ----------
BALANCE END OF YEAR 6,590 20,623 16,299
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year 822 1,548 1,023
Other comprehensive (loss) income (1,726) (726) 525
---------- ---------- ----------
BALANCE END OF YEAR (904) 822 1,548
TOTAL SHAREHOLDERS' EQUITY END OF YEAR $ 72,594 $ 68,936 $ 63,457
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
30
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
YEAR ENDED DECEMBER 31
---------------------------
2004 2003 2002
------- ------- -------
INTEREST INCOME
Loans, including fees $27,801 $29,193 $31,527
Investment securities
Taxable 3,841 4,588 4,362
Tax exempt 2,116 2,004 1,849
Federal funds sold and other 63 193 423
------- ------- -------
TOTAL INTEREST INCOME 33,821 35,978 38,161
------- ------- -------
INTEREST EXPENSE
Deposits 9,391 11,610 14,578
Borrowings 1,066 840 678
------- ------- -------
TOTAL INTEREST EXPENSE 10,457 12,450 15,256
------- ------- -------
NET INTEREST INCOME 23,364 23,528 22,905
Provision for loan losses 735 1,455 1,025
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 22,629 22,073 21,880
NONINTEREST INCOME
Service charges and fees 4,735 5,141 2,681
Title insurance revenue 1,957 2,340 2,221
Gain on sale of mortgage loans 477 2,091 1,762
Other 996 1,173 1,439
------- ------- -------
TOTAL NONINTEREST INCOME 8,165 10,745 8,103
NONINTEREST EXPENSES
Compensation and benefits 12,685 13,345 11,307
Occupancy 1,504 1,471 1,422
Furniture and equipment 2,484 2,560 2,277
Charitable donations 109 1,158 815
Other 5,489 5,044 4,951
------- ------- -------
TOTAL NONINTEREST EXPENSES 22,271 23,578 20,772
------- ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 8,523 9,240 9,211
Federal income taxes 1,878 2,035 2,286
------- ------- -------
NET INCOME $ 6,645 $ 7,205 $ 6,925
======= ======= =======
Net income per basic share of common stock $ 1.36 $ 1.50 $ 1.46
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
31
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
YEAR ENDING DECEMBER 31
---------------------------
2004 2003 2002
------- ------- -------
NET INCOME $ 6,645 $ 7,205 $ 6,925
------- ------- -------
Other comprehensive (loss) income before income taxes
Unrealized (losses) gains on securities available for sale
Unrealized holding (loss) gain arising during year (2,527) (1,223) 2,861
Reclassification adjustment for realized gain
included in net income (106) (85) (2)
Minimum pension liability adjustment 18 208 (2,063)
------- ------- -------
Other comprehensive (loss) income before income
tax benefit (expense) (2,615) (1,100) 796
Income tax benefit (expense) related to
other comprehensive (loss) income 889 374 (271)
------- ------- -------
OTHER COMPREHENSIVE (LOSS) INCOME (1,726) (726) 525
------- ------- -------
COMPREHENSIVE INCOME $ 4,919 $ 6,479 $ 7,450
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
32
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31
------------------------------
2004 2003 2002
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,645 $ 7,205 $ 6,925
Reconciliation of net income to net cash provided by operations
Provision for loan losses 735 1,455 1,025
Depreciation 1,552 1,703 1,647
Net amortization on investment securities 1,558 1,592 1,006
Realized gain on sales of investment securities (106) (85) (2)
Amortization and impairment of mortgage servicing rights 135 643 994
Increase in cash surrender value of life insurance (427) (608) (472)
Amortization of acquisition intangibles 93 94 94
Deferred income taxes (benefit) 305 (41) (276)
Gain on sale of mortgage loans (477) (2,091) (1,762)
Net change in loans held for sale 2,453 11,168 (3,369)
Decrease in accrued interest receivable 219 363 64
Increase in other assets (1,235) (1,008) (1,959)
Increase (decrease) in accrued interest and other liabilities 1,292 (526) 2,207
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,742 19,864 6,122
CASH FLOWS FROM INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 72,633 49,776 40,021
Purchases (68,892) (64,710) (93,225)
Activity in held-to-maturity securities
Maturities and calls 765 620 1,386
Net increase in loans (31,531) (31,615) (2,388)
Purchases of premises and equipment (4,300) (3,018) (2,107)
Acquisition of title office -- (36) (25)
Redemption (purchase) of cash value life insurance 288 389 (300)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (31,037) (48,594) (56,638)
CASH FLOWS FROM FINANCING ACTIVITIES
Net (decrease) increase in noninterest bearing deposits (2,024) 4,654 1,086
Net (decrease) increase in interest bearing deposits (1,807) 1,597 44,129
Net increase in borrowings 12,929 260 5,897
Cash dividends (3,070) (2,881) (2,585)
Proceeds from issuance of common stock 2,001 2,008 1,583
Common stock repurchases (192) (127) (619)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,837 5,511 49,491
DECREASE IN CASH AND CASH EQUIVALENTS (10,458) (23,219) (1,025)
Cash and cash equivalents beginning of year 31,218 54,437 55,462
-------- -------- --------
CASH AND CASH EQUIVALENTS END OF YEAR $ 20,760 $ 31,218 $ 54,437
======== ======== ========
Supplemental cash flows information:
Federal income taxes paid $ 2,569 $ 2,034 $ 2,774
Interest paid 10,420 12,450 15,312
The accompanying notes are an integral part of these consolidated financial
statements.
33
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 20 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 mortgage servicing rights, and 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 the
carrying value of foreclosed real estate, management obtains independent
appraisals for significant properties.
34
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 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, customer or
depositor.
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 federally insured
limits or are not insured.
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 over the period 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. In estimating other-than-temporary impairment losses, management
considers 1) the length of time and extent to which the fair value has been less
than cost, 2) the financial condition and near-term prospects of the issuer and
3) the intent and ability of the Corporation to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in
fair value. Gains or losses on the sale of securities available-for-sale are
recorded on the trade date and are determined using the specific identification
method.
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.
35
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 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 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. 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.
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.
The accrual of interest on impaired loans is discontinued when, in the opinion
of management, the borrower may be unable to meet payments as scheduled. 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.
MORTGAGE BANKING ACTIVITIES: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated fair value in
the aggregate. Gains or losses on sales of such loans are recognized when
control over the assets has been surrendered, generally 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 differentials,
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
36
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.
Servicing fee income is earned for servicing loans for others. The fees are
based on a contracted percentage of the outstanding principal, or a fixed amount
per loan, and are recognized as revenue when received. The amortization of
mortgage servicing rights is netted against loan servicing fee income for
presentation purposes.
TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including held for
sale mortgage loans, as described above, and participation loans are accounted
for as sales when control over the assets has been surrendered. Control over
transferred assets is determined to be surrendered when 1) the assets have been
isolated from the Banks, 2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of the right) to pledge or exchange the
transferred assets and 3) the Banks do not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
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. Impairment loses on property to be held and used are measured at the
amount by which the carrying amount of property exceeds its fair value. Costs of
significant property improvements are capitalized, whereas costs relating to
holding property are expensed. The portion of interest costs relating to
development of real estate is capitalized. 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: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. 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:
2004 2003
------- -------
Land $ 3,027 $ 2,617
Buildings and improvements 11,054 10,685
Equipment 20,614 17,146
------- -------
34,695 30,448
Less accumulated depreciation 16,162 14,663
------- -------
NET PREMISES AND EQUIPMENT $18,533 $15,785
======= =======
Depreciation expense was $1,552, $1,703 and $1,647 in 2004, 2003, and 2002,
respectively.
37
RESTRICTED INVESTMENTS: Included in other assets are restricted securities of
$2,910 in 2004 and $2,720 in 2003. 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.
ACQUISITION INTANGIBLES AND GOODWILL: 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 core deposit intangible is included in other assets and is
being amortized on the straight line basis over nine years, the expected life of
the acquired relationship. Goodwill is included in other assets and is not
amortized but is evaluated for impairment at least annually.
OFF-BALANCE-SHEET 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.
PER SHARE AMOUNTS: Net income per share amounts are computed by dividing net
income by the weighted average number of shares outstanding. All per share
amounts have been adjusted for the stock dividend paid February 19, 2004. The
weighted average numbers of common shares outstanding were 4,858,714 in 2004;
4,790,986 in 2003; and 4,721,714 in 2002.
RECLASSIFICATIONS: Certain amounts reported in the 2003 and 2002 consolidated
financial statements have been reclassified to conform with the 2004
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS: In December 2004 the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123R
"Stock Based Compensation" which will require the measurement of the cost of
employee services received in exchange for an award of common stock options as
compensation expense in the consolidated statements of income using the fair
value method. Publicly held entities will begin reporting these costs in the
third quarter of 2005. The effect of implementing this new standard will not
initially impact reported earnings per share since the Corporation does not
currently use options as a component of employee compensation.
38
In 2003, the Emerging Issues Task force (EITF) released Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and It's Applications to Certain
Investments, which provides guidance for reporting equity securities whose fair
value is not readily determinable (that is, equity securities that are outside
the scope of FASB Statement No. 115) if those securities are reported at cost.
Issue No. 03-1 refers to those equity securities as cost method investments.
Issue No. 03-1 describes the three steps a financial institution should take to
assess whether a cost method investment is impaired and, if it is, whether a
loss should be recognized. The recognition and measurement requirements of Issue
No. 03-1 were effective for the third quarter ended September 30, 2004. The
impact on the carrying value of the Corporation's investments in implementing
Issue No. 03-1 was not significant.
39
NOTE B - INVESTMENT SECURITIES
The following is a summary of securities available for sale and held to
maturity:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
DECEMBER 31, 2004
Securities available for sale
U.S. Treasury and U.S.
government agencies $ 73,176 $ 149 $ (681) $ 72,644
States and political
subdivisions 83,619 1,433 (420) 84,632
Commercial paper 4,766 31 (43) 4,754
-------- ------ ------- --------
TOTAL $161,561 $1,613 $(1,144) $162,030
======== ====== ======= ========
Securities held to maturity
U.S. Treasury and U.S.
government agencies $ 3 $ -- $ -- $ 3
States and political
subdivisions 520 18 (4) 534
-------- ------ ------- --------
TOTAL $ 523 $ 18 $ (4) $ 537
======== ====== ======= ========
Gross Gross
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
======== ====== ===== ========
The following table summarizes the fair value, gross realized gains, and gross
realized losses on sales of securities available for sale.
2004 2003 2002
------- ------- ------
Fair value of securities sold on the date of sale $45,044 $16,874 $2,066
Gross realized gains
US Treasury, US government agencies and comm. paper 129 85 2
Gross realized losses
US Treasury, US Government agencies and municipals 23 -- --
40
The following table shows the amortized cost and estimated fair value of
securities owned at December 31, 2004 by contractual maturity. Mortgage-backed
securities have been aggregated and disclosed separately rather than allocated
over several maturity groupings, since they lack a single maturity date and
because the borrowers retain the right to prepay the obligations. 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 $ 29,707 $ 29,705 $195 $198
Due after 1 year thru 5 years 80,607 80,635 200 215
Due after 5 years thru 10 years 26,380 26,910 125 121
Due after 10 years 3,398 3,415 -- --
-------- -------- --- ----
Subtotal 140,092 140,655 520 534
Mortgage backed securities 21,469 21,365 3 3
-------- -------- ---- ----
TOTAL $161,561 $162,030 $523 $537
======== ======== ==== ====
Investment securities with carrying values of approximately $19,989 and $7,087
were pledged to secure public deposits and for other purposes as necessary or
required by law at December 31, 2004 and 2003, respectively.
NOTE C - LOANS
The Banks grant commercial, agricultural, consumer and residential loans to
customers situated primarily in Isabella, Gratiot, Mecosta, Southwestern
Midland, Western Saginaw, Northern Montcalm and Southern Clare counties in
mid-Michigan. The ability of the borrowers to honor their repayment obligations
is often dependent upon the real estate, agricultural, and general economic
conditions of this region. Substantially all of the consumer and residential
mortgage loans are secured by various items of property, while commercial loans
are secured primarily by real estate, business assets and personal guarantees; a
portion of loans are unsecured.
A summary of the major classifications of loans is as follows:
DECEMBER 31
-------------------
Mortgage loans on real estate 2004 2003
-------- --------
Residential 1-4 family $152,706 $143,669
Commercial 96,739 91,001
Agricultural 32,383 29,311
Construction 35,384 24,287
Second mortgages 17,143 16,783
Equity lines of credit 22,188 14,715
-------- --------
Total Mortgage loans 356,543 319,766
Commercial & Agricultural loans
Commercial loans 49,413 38,391
Agricultural Other 16,796 22,733
-------- --------
Total Commercial & Agricultural loans 66,209 61,124
41
Consumer installment loans
Personal 28,463 39,166
Credit cards 1,680 1,803
-------- --------
Total Consumer installment loans 30,143 40,969
Total loans 452,895 421,859
Less: Allowance for Loan Losses (6,444) (6,204)
-------- --------
Loans, Net $446,451 $415,655
======== ========
A summary of changes in the allowance for loan losses follows:
Year Ended December 31:
---------------------------
2004 2003 2002
------- ------- -------
Balance at beginning of year $ 6,204 $ 5,593 $ 5,471
Loans charged off (935) (1,140) (1,202)
Recoveries 440 296 299
Provision charged to income 735 1,455 1,025
------- ------- -------
BALANCE AT END OF YEAR $ 6,444 $ 6,204 $ 5,593
======= ======= =======
The following is a summary of information pertaining to impaired loans at
December 31:
2004 2003 2002
------ ------ ------
Impaired loans without a valuation allowance $1,786 $1,836 $1,085
Impaired loans with a valuation allowance 448 2,787 1,639
------ ------ ------
Total impaired loans $2,234 $4,623 $2,724
====== ====== ======
Valuation allowance related to impaired loans $ 304 $ 622 $ 103
====== ====== ======
Average investment in impaired loans $2,949 $5,155 $2,968
====== ====== ======
Interest income recognized on impaired loans was not significant during any of
the three years ended December 31, 2004. 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 $9,505
and $8,414 at December 31, 2004 and 2003, respectively. During 2004, $5,696 of
new loans were made and repayments totaled $4,605.
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 $253,282, $245,709 and $208,432 at December
31, 2004, 2003, and 2002 respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and taxing authorities, and foreclosure
processing.
42
The following table summarizes the carrying value of mortgage servicing rights
included in other assets as of December 31:
2004 2003 2002
------- ------- ------
Balance at beginning of year $ 1,714 $ 511 $ 402
Mortgage servicing rights capitalized 2,633 3,369 1,632
Accumulated amortization (2,279) (1,955) (885)
Impairment valuation allowance (22) (211) (638)
------- ------- ------
BALANCE AT END OF YEAR $ 2,046 $ 1,714 $ 511
======= ======= ======
Activity in the impairment valuation allowance consisted of reductions of $189
and $427 for the years ended December 31, 2004 and 2003, respectively while in
2002 additions amounted to $467.
NOTE D - FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. 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. These
include, among other elements, the estimated earning power of core deposit
accounts, the trained work force, customer goodwill and similar items.
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.
Mortgage loans held for sale: Fair values are based on commitments on hand from
investors or prevailing market prices.
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
43
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.
Borrowed funds: The carrying amounts of federal funds purchased and borrowings
under repurchase agreements approximate their fair value. The fair values of
other borrowings are estimated using discounted cash flow analyses based on the
Corporation's current incremental borrowing rates for similar types of borrowing
arrangements.
Accrued interest: The carrying amounts of accrued interest approximate fair
value.
Off-balance-sheet credit-related 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.
The following sets forth the estimated fair value and recorded carrying values
of the Corporation's financial instruments as of December 31:
2004 2003
------------------------- -------------------------
Estimated Fair Carrying Estimated Fair Carrying
Value Value Value Value
-------------- -------- -------------- --------
ASSETS
Cash and demand deposits due
from banks $ 20,760 $ 20,760 $ 25,918 $ 25,918
Federal funds sold 0 0 5,300 5,300
Investment securities 162,567 162,553 171,181 171,144
Mortgage loans available for sale 2,334 2,339 4,343 4,315
Net loans 412,175 446,451 417,984 415,655
Accrued interest receivable 4,315 4,315 4,534 4,534
Mortgage servicing rights 2,848 2,046 2,565 1,714
LIABILITIES
Deposits with no stated
maturities 329,612 329,612 329,029 329,029
Deposits with stated maturities 220,533 234,264 245,239 238,678
Borrowed funds 26,466 30,982 19,118 18,053
Accrued interest payable 702 702 830 830
NOTE E - 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 of December 31:
2004 2003
------ ------
Deferred tax assets
Allowance for loan losses $1,411 $1,379
Deferred directors' fees 886 735
44
Employee benefit plans 756 755
Core deposit premium and acquisition expenses 107 192
Net unrealized loss on minimum pension liability 625 631
Other 63 186
------ ------
TOTAL DEFERRED TAX ASSETS 3,848 3,878
------ ------
Deferred tax liabilities
Premises and equipment 745 494
Accretion on securities 19 32
Net unrealized gain on available-for-sale securities 160 1,055
Other 181 138
------ ------
TOTAL DEFERRED TAX LIABILITIES 1,105 1,719
------ ------
NET DEFERRED TAX ASSETS $2,743 $2,159
====== ======
Components of the consolidated provision for income taxes are as follows for the
year ended December 31:
2004 2003 2002
------ ------ ------
Current $1,573 $2,076 $2,562
Deferred (benefit) 305 (41) (276)
------ ------ ------
PROVISION FOR FEDERAL INCOME TAXES $1,878 $2,035 $2,286
====== ====== ======
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:
2004 2003 2002
------- ------- -------
Income taxes at statutory rate $ 2,898 $ 3,142 $ 3,132
Effect of nontaxable income and nondeductible expenses (1,020) (1,107) (846)
------- ------- -------
PROVISION FOR FEDERAL INCOME TAXES $ 1,878 $ 2,035 $ 2,286
======= ======= =======
NOTE F - 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 Corporation uses a January 1, 2004 measurement date for this pension plan.
Changes in the projected benefit obligation and plan assets during each year,
the funded status of the plan and a reconciliation to the amount recognized in
the Corporation's consolidated balance sheets are summarized as follows at
December 31:
2004 2003 2002
------- ------- -------
Change in projected benefit obligation
Benefit obligation January 1 $ 8,083 $ 6,949 $ 5,870
45
Service cost 410 391 297
Interest cost 518 463 425
Actuarial loss 144 687 634
Benefits paid (372) (407) (277)
------- ------- -------
BENEFIT OBLIGATION, DECEMBER 31 $ 8,783 $ 8,083 $ 6,949
======= ======= =======
Change in plan assets
Fair value of plan assets, January 1 $ 5,427 $ 4,830 $ 5,259
Investment return (loss) 348 479 (509)
Corporation contribution 908 525 357
Benefits paid (372) (407) (277)
------- ------- -------
FAIR VALUE OF PLAN ASSETS, DECEMBER 31 $ 6,311 $ 5,427 $ 4,830
======= ======= =======
Reconciliation of funded status
Funded status $(2,472) $(2,656) $(2,119)
Unrecognized net transition asset -- -- (22)
Unrecognized prior service cost 76 94 113
Unrecognized net loss from experience
different than that assumed and
effects of changes in assumptions 4,146 4,254 3,843
Additional minimum pension liability (1,915) (1,951) (2,176)
------- ------- -------
ACCRUED BENEFIT COST $ (165) $ (259) $ (361)
======= ======= =======
The accumulated benefit obligation was $6,476, and $5,686 at December 31, 2004,
and 2003, respectively, resulting in a minimum pension liability at those dates
of $165 and $259.
An adjustment to record the additional minimum pension liability as of December
31, 2004 and 2003 was established by the recording of an intangible pension
asset of $76 and $94, and a credit to other comprehensive income of $16 and $208
in 2004 and 2003, respectively.
The net amount recognized in the consolidated balance sheets consists of the
following accounts at December 31:
Pension Benefits
-----------------
2004 2003
------- -------
Accrued benefit cost $ (165) $ (259)
Intangible asset 76 94
Accumulated other comprehensive loss 1,839 1,855
------- -------
Net amount recognized $ 1,750 $ 1,690
======= =======
Pension Benefits
-----------------
2004 2003
------- -------
Decrease in minimum pension
liability included as a reduction of
other comprehensive loss $ 18 $ 208
======= =======
Net pension expense consists of the following components for the year ended
December 31:
2004 2003 2002
----- ----- -----
Service cost on benefits earned for
services rendered during the year $ 518 $ 391 $ 297
46
Interest cost on projected benefit
obligation 501 463 425
Expected return on plan assets (430) (390) (409)
Amortization of unrecognized transition asset -- (22) (22)
Amortization of unrecognized prior service cost 18 18 18
Amortization of unrecognized actuarial net loss 213 188 113
----- ----- -----
NET PENSION EXPENSE $ 820 $ 648 $ 422
===== ===== =====
Actuarial assumptions used in determining the projected benefit obligation are
as follows for the year ended December 31:
2004 2003 2002
---- ---- ----
Weighted average discount rate 6.25% 6.25% 6.75%
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:
2004 2003 2002
---- ---- ----
Discount rate 6.75% 6.75% 7.25%
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 unchanged in 2004 from 2003. The rate decreased in 2003 to
6.75% from 7.25% in 2002 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.
The Corporation's pension plan weighted-average asset allocations by asset
category are as follows at December 31:
2004 2003
------ ------
Asset Category
Equity securities 51.5% 55.2%
Debt securities 33.9% 21.4%
Other 14.6% 23.4%
------ ------
Total 100.00% 100.00%
====== ======
Debt securities include certificates of deposit with the Banks in the amounts of
$1,082 (17% of total plan assets) and $1,000 (18% of total plan assets) at
December 31, 2004 and 2003, respectively. Also included in other is $881 (14% of
total plan assets) of funds in a money market account with Isabella Bank and
Trust as of December 31, 2004.
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 2004
and 2003 were as follows:
47
Equity securities 55% to 65%
Debt securities 25% to 35%
Real estate 0.00%
Other 15%
The plan's investment in equity securities in 2004 were less than the 55%
minimum established in the Corporation's investment policy as a result of a $640
contribution to the plan on December 29, 2004. The contribution was in a money
market fund, which is included in other; these funds were substantially
re-invested by January 15, 2005.
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.
The Corporation expects to contribute approximately $815 to the pension plan in
2005.
Estimated future benefit payments, which reflect expected future service, as
appropriate, are as follows for the next ten years:
Year Amount
---- ------
2005 $ 314
2006 315
2007 321
2008 329
2009 338
Years 2010 - 2014 $2,313
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
2004, 2003, and 2002 were $65, $388, and $41, respectively, and are being
recognized over the participants' expected years of service.
The Corporation maintains a non-leveraged 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 2004, 2003, and 2002 was $11, $122, and $196, respectively. Total
shares outstanding related to the ESOP at December 31, 2004 and 2003 were
166,155 and 150,583, respectively, and were included in the computation of
dividends and earnings per share in each of the respective years.
48
NOTE G - DEPOSITS
At December 31, 2004, the scheduled maturities of time deposits for each of the
next five years and thereafter are as follows:
YEAR AMOUNT
- ---- -------
2005 119,122
2006 47,183
2007 34,721
2008 17,600
2009 12,788
Thereafter 2,850
NOTE H - BORROWED FUNDS
Borrowed funds consist of the following obligations at December 31:
2003 2004
------- -------
Federal Home Loan Bank advances $27,312 $16,337
Federal Funds purchased 2,974 --
Securities sold under agreements to repurchase 530 1,500
Unsecured note payable 166 216
------- -------
$30,982 $18,053
======= =======
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 follows at
December 31:
2004
--------------
AMOUNT RATE
------- ----
Fixed rate advances due 2006 $ 5,500 2.76%
Two year putable advance due 2006 5,000 5.08
Fixed rate advances due 2007 4,000 3.64
Fixed rate advances due 2009 3,500 3.66
Fixed rate advances due 2010 4,312 5.39
One year putable advance due 2010 3,000 4.98
Fixed rate advance due 2012 2,000 4.90
------- ----
TOTAL ADVANCES $27,312 4.24%
======= ====
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%
======= ====
49
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 $1,017 and $502 at December 31, 2004 and 2003, 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 I - OTHER NON-INTEREST EXPENSES
A summary of expenses included in Other Non-Interest Expenses for the year ended
December 31:
2004 2003 2002
------ ------ ------
Director fees $ 496 $ 459 $ 395
Marketing and advertising 522 538 556
SOX 404 compliance 734 0 0
Other, not individually significant 3,737 4,047 4,000
------ ------ ------
Total Other $5,489 $5,044 $4,951
====== ====== ======
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 $67,590 and $58,448 at December 31,
2004 and 2003, respectively, 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.
50
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, 2004
and 2003 the Corporation had a total of $991 and $715, respectively, 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.
Isabella Bank and Trust 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 Bank periodically makes charitable contributions in
the form of cash transfers to the Foundation. The Foundation is administered by
members of the Isabella Bank and Trust Board of Directors. The assets and
transactions of the Foundation are not included in the consolidated financial
statements of IBT Bancorp, Inc. Donations made to the Foundation by Isabella
Bank and Trust included in noninterest expense were $27, $870 and $649 in 2004,
2003 and 2002, respectively. The assets of the Foundation as of December 31,
2004 approximated $1.7 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 $849 at December 31, 2004, and $12,687 at December 31, 2003.
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,
2004, 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, 2005, the amount available
for dividends without regulatory approval was approximately $4,667.
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 $3,000 per
covered individual. Expenses are accrued based on estimates of the aggregate
liability for claims incurred and the Corporation's experience. Expenses were
$1,184 in 2004, $1,532 in 2003 and $1,370 in 2002.
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
203,301 shares unissued at December 31, 2004. During 2004, 2003 and 2002, 57,388
shares were issued for $2,001, 70,340 shares were issued for $2,008, and 52,473
shares were issued for $1,524, respectively, in cash pursuant to these plans.
51
The subsidiary Banks of the Corporation have obtained approval to borrow up to
$40,000 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.
Certain directors and executive officers of the Corporation and the Banks and
their related interests were deposit customers of the Banks. Total deposits of
these customers aggregate approximately $5,629 and $6,380 at December 31, 2004
and December 31, 2003, 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 $1,083 and $475, and $100 and $831,
respectively at December 31, 2004 and 2003.
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
------------- ---------- ---------- --------
2004
Total assets $542,759 $125,350 $ 9,925 $678,034
Interest income 26,436 7,258 127 33,821
Net interest income 18,247 4,919 198 23,364
Provision for loan losses 550 185 -- 735
Net income (loss) 6,073 1,345 (773) 6,645
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
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,
52
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.
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
meet all capital adequacy requirements to which they are subject.
As of December 31, 2004, 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' categories.
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, 2004
Total capital to risk weighted assets
Isabella Bank and Trust $47,720 13.1% $29,042 8.0% $36,303 10.0%
Farmers State Bank of Breckenridge 14,033 15.5 7,242 8.0 9,052 10.0
Consolidated 75,340 16.4 36,764 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank and Trust 43,351 11.9 14,521 4.0 21,782 6.0
Farmers State Bank of Breckenridge 12,890 14.2 3,621 4.0 5,431 6.0
Consolidated 69,587 15.1 18,382 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank and Trust 43,351 8.1 21,536 4.0 26,920 5.0
Farmers State Bank of Breckenridge 12,890 10.4 4,970 4.0 6,213 5.0
Consolidated 69,587 10.4 26,866 4.0 N/A N/A
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
53
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
NOTE N - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
December 31
-----------------
2004 2003
------- -------
ASSETS
Cash on deposit at subsidiary Banks $ 7,219 $ 7,592
Securities available for sale 3,703 2,133
Investments in subsidiaries 63,999 61,775
Premises and equipment 103 117
Other assets 2,411 1,444
------- -------
TOTAL ASSETS $77,435 $73,061
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 4,841 $ 4,126
Shareholders' equity 72,594 68,935
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $77,435 $73,061
======= =======
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
------------------------
2004 2003 2002
------ ------ ------
Income
Dividends from subsidiaries $3,500 $3,825 $3,325
Interest income 139 128 122
Management fee and other 643 423 292
------ ------ ------
TOTAL INCOME 4,282 4,376 3,739
Expenses 2,065 1,114 824
------ ------ ------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries 2,217 3,262 2,915
Federal income tax benefit 470 218 152
------ ------ ------
2,687 3,480 3,067
Undistributed earnings of subsidiaries 3,958 3,725 3,858
------ ------ ------
NET INCOME $6,645 $7,205 $6,925
====== ====== ======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
---------------------------
2004 2003 2002
------- ------- -------
OPERATING ACTIVITIES
Net income $ 6,645 $ 7,205 $ 6,925
Adjustments to reconcile net income
to cash provided by operations
Undistributed earnings of subsidiaries (3,958) (3,725) (3,858)
Net amortization of securities 12 -- --
(Increase) decrease in interest receivable (4) (2) (2)
54
(Increase) decrease in other assets (1,031) 717 (1,947)
Increase in accrued expenses 809 675 389
Provision for depreciation 21 19 20
Deferred income taxes (benefit) (13) (348) 328
------- ------- -------
NET CASH PROVIDED BY OPERATIONS 2,481 4,541 1,855
INVESTING ACTIVITIES
Proceeds from the maturities of investments
securities available for sale $ 260 $ 185 $ 175
Purchases of investment securities available for sale (1,846) (820) (1,080)
Investment in subsidiaries -- 34 (495)
Purchases of equipment and premises (7) (38) (5)
------- ------- -------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,593) (639) (1,405)
FINANCING ACTIVITIES
Cash dividends (3,070) (2,881) (2,585)
Issuance of common stock 2,001 2,008 1,583
Repurchase of common stock (192) (127) (619)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,261) (1,000) (1,621)
------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (373) 2,902 (1,171)
Cash and cash equivalents at beginning of year 7,592 4,690 5,861
------- ------- -------
CASH AND CASH EQUIVALENTS AT YEAR END $ 7,219 $ 7,592 $ 4,690
======= ======= =======
NOTE O - GOODWILL AND OTHER INTANGIBLE ASSETS
Included in other assets on the accompanying consolidated balance sheets are the
following amounts as of December 31:
2004 2003
------ ------
Branch acquisition goodwill $2,036 $2,036
Title company goodwill 1,100 1,100
------ ------
Total goodwill 3,136 3,136
Core deposit intangibles, net 211 304
------ ------
$3,347 $3,440
====== ======
The core deposit intangibles are being amortized on a straight-line basis over
nine years. Management periodically reviews this asset to determine whether the
carrying value has been impaired.
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 Corporation's
55
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/Chief Financial Officer concluded that
the Corporation's disclosure controls and procedures as of December 31, 2004,
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, 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 December 31, 2004.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for the preparation and integrity of our published financial
statements. The financial statements have been prepared in accordance with
accounting principles generally accepted in the United State of America and,
accordingly, include amounts based on judgments and estimates made by our
management. We also prepared the other information included in the annual report
and are responsible for its accuracy and consistency with the financial
statements.
We are responsible for establishing and maintaining a system of internal control
over financial reporting, which is intended to provide reasonable assurance to
our management and Board of Directors regarding the reliability of our financial
statements. The system includes but is not limited to:
- A documented organizational structure and division of responsibility;
- Established policies and procedures, including a code of conduct to
foster a strong ethical climate which is communicated throughout the
company;
- Internal auditors that monitor the operation of the internal control
system and report findings and recommendations to management and the
Audit Committee;
- Procedures for taking action in response to an internal audit finding
or recommendation;
- Regular reviews of our financial statements by qualified individuals;
and
- the careful selection, training and development of our people.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Also, the effectiveness of an internal control system
may change over time. We have implemented a system of internal control that was
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
We have assessed our internal control system in relation to criteria for
effective internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission. Based upon these criteria, we
believe that, as of December 31, 2004, our system of internal control over
financial reporting was effective.
56
The independent registered public accounting firm, Rehmann Robson PC, has
audited our 2004 consolidated financial statements. Rehmann Robson PC was given
unrestricted access to all financial records and related data, including minutes
of all meetings of stockholders, the Board of Directors and committees of the
Board. Rehmann Robson PC has issued an unqualified audit opinion on our 2004
financial statements as a result of the audit and also has issued an attestation
report on management's assessment of its internal control over financial
reporting.
IBT Bancorp, Inc.
By:
/s/ Dennis P. Angner
- -----------------------------------
Dennis P. Angner
Principal Executive and
Chief Financial Officer
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
Board of Directors and Shareholders
IBT Bancorp, Inc.:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that IBT
Bancorp, Inc. maintained effective internal control over financial reporting as
of December 31, 2004, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). IBT Bancorp, Inc.'s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Corporation's internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles. A company's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
57
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a
material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that IBT Bancorp, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, IBT
Bancorp, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2004, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the 2004 consolidated financial
statements of IBT Bancorp, Inc. and our report dated February 15, 2005 expressed
an unqualified opinion thereon.
Rehmann Robson, PC
Saginaw Michigan
March 11, 2005
ITEM 9 B. OTHER INFORMATION
None
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 2005 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.
58
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.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2004, 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
Available for Future
Number of Securities Issuance
to be Issued Weighted Average Under Equity
Upon Exercise of Exercise Price Compensation Plans
Outstanding of Outstanding (Excluding Securities
Options, Warrants, Options, Warrants Reflected in
and Rights and 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 * 148,974 (1) (1)
1998 executive officer deferred
salary plan * 7,625 (2) (2)
-------
Total 156,599
=======
(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.
59
(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.
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 AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements:
The following consolidated financial statements of IBT Bancorp are
incorporated by reference in Item 8:
Report of Independent Registered Public Accounting Firm
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 (2)
3(c) Amendment to the Articles of Incorporation (4)
3(d) Amendment to the Articles of Incorporation (4)
3(e) Amended Bylaws
10(a) Isabella Bank & Trust Executive Supplemental Income
Agreement (2)*
10(b) Isabella Bank & Trust Deferred Compensation Plan (3)*
10(c) IBT Bancorp, Inc. and Related Companies Deferred
Compensation Plan for Directors (5)*
60
10(d) Isabella Bank and Trust Death Benefit Only Agreement (6)*
14 Code of Business Conduct and Ethics (7)
21 Subsidiaries of the Registrant
23 Consent of Rehmann Robson, P.C. Independent Registered
Public Accounting Firm
31 Certification pursuant to section 302 of the Sarbanes-Oxley
Act of 2002 by the Chief Executive Officer and 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 26, 1994, and incorporated herein by reference.
(3) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
26, 1996, and incorporated herein.
(4) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
22, 2000, and incorporated herein.
(5) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
27, 2001, and incorporated herein.
(6) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
25, 2002, and incorporated herein.
(7) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
15, 2004 and incorporated herein.
* Management Contract or Compensatory Plan or Arrangement.
(b) Exhibits: The response to this portion of Item 15 is submitted as a
separate section of this report entitled, "Index to Exhibits"
(c) Financial Statement Schedules: None
61
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 11, 2005
----------------------------------
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 11, 2005
- -------------------------------------- Executive Officer
Dennis P. Angner (Principal Executive
& Financial Officer)
and Director
/s/ Richard J. Barz Director March 11, 2005
- --------------------------------------
Richard J. Barz
/s/ James C. Fabiano Director March 11, 2005
- --------------------------------------
James C. Fabiano
/s/ David W. Hole Director March 11, 2005
- --------------------------------------
David W. Hole
/s/ W. Joseph Manifold Director March 11, 2005
- --------------------------------------
W. Joseph Manifold
/s/ Ronald E. Schumacher Director March 11, 2005
- --------------------------------------
Ronald E. Schumacher
/s/ William J. Strickler Director March 11, 2005
- --------------------------------------
William J. Strickler
62
/s/ Dale Weburg Director March 11, 2005
- --------------------------------------
Dale Weburg
/s/ David J. Maness Director March 11, 2005
- --------------------------------------
David J. Maness
63
IBT Bancorp
FORM 10-K
Index to Exhibits
Exhibit Form 10-K
Number Exhibit Page Number
- ------- ------- -----------
3(e) Amended and Restated Bylaws 65
21 Subsidiaries of the Registrant 75
23 Consent of Rehmann Robson P.C. 76
Independent Registered Public Accounting Firm
31 Certification pursuant to Rule 13a - 14(a) of the Chief 77
Executive Officer and Principal Financial Officer
32 Section 1350 Certification of Chief Executive Officer 79
and Chief Financial Officer
64