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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 2005
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ___________________ to ______________________
Commission File Number: 0-18415
IBT Bancorp, Inc.
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(Exact name of registrant as specified in its charter)
Michigan 38-2830092
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway 48858
- --------------------------------------- ----------
(Address of principal executive offices) (Zip code)
(989) 772-9471
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(Registrant's telephone number, including area code)
N/A
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock no par value, 4,909,037 as of April 15, 2005
IBT BANCORP, INC.
Index to Form 10-Q
Page Numbers
PART I FINANCIAL INFORMATION
Item 1 Consolidated Financial Statements 3-9
Item 2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations 10-19
Item 3 Quantitative and Qualitative
Disclosures About Market Risk 19-21
Item 4 Controls and Procedures 22
PART II OTHER INFORMATION
Item 6 Exhibits 22-23
Signature 24
Exhibit 31 25-26
Exhibit 32 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
IBT BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
March 31 December 31
2005 2004
--------- -----------
(Unaudited)
ASSETS
Cash and demand deposits due from banks $ 16,524 $ 20,760
Investment securities
Securities available for sale (Amortized cost of
$167,021 in 2005 and $161,561 in 2004) 165,400 162,030
Securities held to maturity (Fair value--
$526 in 2005 and $537 in 2004) 522 523
--------- ---------
TOTAL INVESTMENT SECURITIES 165,922 162,553
Mortgage loans available for sale 651 2,339
Loans
Agricultural 45,475 49,179
Commercial 149,863 146,152
Residential real estate mortgage 194,235 192,037
Construction and Land Development 32,087 35,384
Installment 28,392 30,143
--------- ---------
TOTAL LOANS 450,052 452,895
Less allowance for loan losses 6,657 6,444
--------- ---------
NET LOANS 443,395 446,451
Other assets 48,246 45,931
--------- ---------
TOTAL ASSETS $ 674,738 $ 678,034
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 63,248 $ 65,736
NOW accounts 100,114 101,362
Certificates of deposit and other savings 325,474 323,954
Certificates of deposit over $100,000 74,147 72,824
--------- ---------
TOTAL DEPOSITS 562,983 563,876
Other borrowed funds 28,670 30,982
Accrued interest and other liabilities 10,647 10,582
--------- ---------
TOTAL LIABILITIES 602,300 605,440
Shareholders' Equity
Common stock -- no par value
10,000,000 shares authorized; outstanding--
4,909,037 in 2005 (4,896,412 in 2004) 67,328 66,908
Retained earnings 7,393 6,590
Accumulated other comprehensive loss (2,283) (904)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 72,438 72,594
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 674,738 $ 678,034
========= =========
See notes to consolidated financial statements.
3
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31
----------------------
2005 2004
--------- ---------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 4,896,412 4,403,404
Common stock dividend -- 440,191
Issuance of common stock 12,625 11,225
--------- ---------
BALANCE END OF PERIOD 4,909,037 4,854,820
========= =========
COMMON STOCK
Balance at beginning of period $ 66,908 $ 47,491
Common stock dividend -- 17,608
Issuance of common stock 420 377
--------- ---------
BALANCE END OF PERIOD 67,328 65,476
RETAINED EARNINGS
Balance at beginning of period 6,590 20,623
Net income 1,343 1,477
Common stock dividend -- (17,608)
Cash dividends ($0.11 per share in 2005 and in 2004) (540) (541)
--------- ---------
BALANCE END OF PERIOD 7,393 3,951
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance at beginning of period (904) 822
Other comprehensive (loss) income (1,379) 597
--------- ---------
BALANCE END OF PERIOD (2,283) 1,419
--------- ---------
TOTAL SHAREHOLDERS EQUITY END OF PERIOD $ 72,438 $ 70,846
========= =========
See notes to consolidated financial statements.
4
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands)
Three Months Ended
March 31
----------------------
2005 2004
--------- ---------
INTEREST INCOME
Loans, including fees $ 7,159 $ 6,861
Investment securities
Taxable 831 1,012
Nontaxable 576 511
Federal funds sold and other 62 66
--------- ---------
TOTAL INTEREST INCOME 8,628 8,450
INTEREST EXPENSE
Deposits 2,472 2,430
Borrowings 293 240
--------- ---------
TOTAL INTEREST EXPENSE 2,765 2,670
--------- ---------
NET INTEREST INCOME 5,863 5,780
Provision for loan losses 210 240
--------- ---------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,653 5,540
NONINTEREST INCOME
Trust fees 183 155
Service charges on deposit accounts 34 62
Other service charges and fees 851 861
Gain on sale of mortgage loans 76 126
Title insurance revenue 503 410
Other 210 326
--------- ---------
TOTAL NONINTEREST INCOME 1,857 1,940
NONINTEREST EXPENSES
Compensation 3,338 3,293
Occupancy 420 392
Furniture and equipment 645 631
Other 1,454 1,252
--------- ---------
TOTAL NONINTEREST EXPENSES 5,857 5,568
INCOME BEFORE FEDERAL INCOME TAXES 1,653 1,912
Federal income taxes 310 435
--------- ---------
NET INCOME $ 1,343 $ 1,477
========= =========
Basic net income per share $ 0.27 $ 0.30
========= =========
Cash dividends per share $ 0.11 $ 0.11
========= =========
See notes to consolidated financial statements.
5
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(UNAUDITED)
(dollars in thousands)
Three Months Ended
March 31
----------------------
2005 2004
--------- ---------
NET INCOME $ 1,343 $ 1,477
Unrealized holding (losses) gains on investment securities arising during period (2,090) 892
Reclassification adjustment for realized gains included in net income -- 13
--------- ---------
Other comprehensive (loss) income before income tax benefit (expense) (2,090) 905
Income tax benefit (expense) related to comprehensive (loss) income 711 (308)
--------- ---------
OTHER COMPREHENSIVE (LOSS) INCOME (1,379) 597
--------- ---------
COMPREHENSIVE (LOSS) INCOME $ (36) $ 2,074
========= =========
See notes to consolidated financial statements.
6
IBT BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three Months Ended
March 31
----------------------
2005 2004
--------- ---------
OPERATING ACTIVITIES
Net income $ 1,343 $ 1,477
Reconciliation of net income to net cash provided
by (used in) operations:
Provision for loan losses 210 240
Depreciation 423 368
Net amortization on investment securities 280 432
Gains on sales of investment securities -- (13)
Amortization and impairment of mortgage servicing rights 24 55
Increase in cash value of life insurance (91) (105)
Amortization of acquisition intangibles 23 23
Gain on sales of mortgage loans (76) (126)
Net change in loans held for sale 1,764 (3,145)
(Increase) decrease in accrued interest receivable (292) 5
Increase in other assets (996) (1,603)
Increase in accrued interest and other liabilities 65 1,389
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,677 (1,003)
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 9,857 9,988
Purchases (15,593) (29,259)
Net decrease in loans 2,843 4,828
Purchases of equipment and premises (695) (876)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (3,588) (15,319)
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits (2,488) (7,184)
Net increase in interest bearing deposits 1,595 11,483
Net (decrease) increase in borrowings (2,312) 7,108
Cash dividends (540) (541)
Proceeds from issuance of common stock 420 377
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,325) 11,243
--------- ---------
DECREASE IN CASH AND CASH EQUIVALENTS (4,236) (5,079)
Cash and cash equivalents beginning of period 20,760 31,218
--------- ---------
CASH AND CASH EQUIVALENTS END OF PERIOD $ 16,524 $ 26,139
========= =========
See notes to consolidated financial statements.
7
IBT BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2005. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Corporation's annual report for the year ended December 31, 2004.
NOTE 2 COMPUTATION OF EARNINGS PER SHARE
The net income per share amounts are based on the weighted average number
of common shares outstanding. The weighted average number of common shares
outstanding were 4,909,037 for quarter ended March 31, 2005, and 4,848,855 for
the quarter ended March 31, 2004. The Corporation has no common stock
equivalents and, accordingly, presents only basic earnings per share.
NOTE 3 RECENT ACCOUNTING PRONOUNCEMENTS
In April 2005, the Securities and Exchange Commission adopted a new rule that
amends the compliance dates for implementation of Financial Accounting Standards
Board's ("FASB") Statement of Financial Accounting Standards No. 123 (revised
2004), "Share-Based Payment" (SFAS No. 123R). The Statement requires that
compensation cost relating to share-based payment transactions be recognized in
financial statements and that this cost be measured based on the fair value of
the equity or liability instruments issued. SFAS No. 123R covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. The Corporation will adopt SFAS No. 123R on January 1, 2006 and
is currently evaluating the impact the adoption of the standard will have on the
Corporation's results of operations.
In December 2004, FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets -
An Amendment of APB Opinion No. 29". The guidance in APB Opinion No. 29,
"Accounting for Nonmonetary Transactions", is based on the principle that
exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. The guidance in that Opinion, however, included certain
exceptions to that principle. SFAS No. 153 amends Opinion No. 29 to eliminate
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. The provisions of SFAS No. 153 are effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15,
2005. Early application is permitted and companies must apply the standard
prospectively. The adoption of this standard is not expected to have a material
effect on the Corporation's results of operations or financial position.
8
Statement of Position (SOP) 03-3 prohibits "carrying over" or creation of a
valuation allowance in the initial accounting for all loans acquired in a
transfer. The prohibition of the valuation carryover applies to the purchase of
an individual loan, a pool of loans, a group of loans and loans acquired in a
purchased business combination. The provisions of SOP 03-3 were effective for
loans acquired by the Corporation beginning in 2005. While the adoption of this
standard is dependent on the effect of future loan purchases and/or
acquisitions, there was no impact in the quarter ended March 31, 2005.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major factors
that influenced IBT Bancorp's financial performance. This analysis should be
read in conjunction with the Corporation's 2004 annual report and with the
unaudited consolidated financial statements and notes, as set forth on pages 3
through 9 of this report.
CRITICAL ACCOUNTING POLICIES: The Corporation's significant accounting policies
are set forth in Note 1 of the Consolidated Financial Statements included in the
Corporation's Annual Report for the year ended December 31, 2004. Of these
significant accounting policies, the Corporation considers its policies
regarding the determination of the allowance for loan losses and carrying value
of servicing assets to be its most critical accounting policies.
The allowance for loan losses requires management's most subjective and complex
judgment. Changes in economic conditions can have a significant impact on the
allowance for loan losses and therefore the provision for loan losses and
results of operations. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Corporation's assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers which is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see Provision for
Loan Losses and Allowance for Loan Losses in the Corporation's 2004 Annual
Report and herein.
Servicing assets are recognized when loans are sold with servicing retained.
Mortgage servicing rights (MSR's) are assets which are amortized in proportion
to and over the period of estimated future net servicing income. Servicing
assets are evaluated for impairment based upon the fair value of the rights as
compared to amortized cost. Impairment is determined by stratifying rights by
predominate characteristics, such as interest rates and terms. Fair value is
determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions.
Impairment is recognized through a valuation allowance for an individual
stratum, to the extent that fair value is less than the capitalized amount for
the stratum.
10
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
RESULTS OF OPERATIONS
Net income equaled $1.34 million for the three month period ended March
31, 2005, compared to $1.48 million for the same period in 2004. Return on
average assets, which measures the ability of the Corporation to profitably and
efficiently employ its resources, equaled .78% for the first three months of
2005 and .87% for 2004. Return on average equity, which indicates how
effectively the Corporation is able to generate earnings on shareholder invested
capital, equaled 7.31% for the quarter ended March 31, 2005 versus 8.54% for the
same period in 2004.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Three Months Ended
March 31
----------------------
2005 2004
--------- ---------
INCOME STATEMENT DATA
Net interest income $ 5,863 $ 5,780
Provision for loan losses 210 240
Net income 1,343 1,477
PER SHARE DATA
Net income 0.27 0.30
Cash dividends 0.11 0.11
RATIOS
Average primary capital to average assets 11.54% 11.05%
Net income to average assets 0.78 0.87
Net income to average equity 7.31 8.54
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is
the primary source of income for IBT Bancorp. Interest income includes loan fees
of $262,000 in 2005 versus $291,000 in 2004. For analytical purposes in Tables 1
and 2, net interest income is adjusted to a "taxable equivalent" basis by adding
the income tax savings from interest on tax-exempt loans and securities, thus
making year-to-year comparisons more meaningful.
11
IBT BANCORP, INC.
TABLE 1: AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
(Dollars in Thousands)
The following schedules present the daily average amount outstanding for
each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% income tax rate. Nonaccruing loans, for the purpose of the
following computations, are included in the average loan amounts outstanding,
and Federal Reserve and Federal Home Loan Bank restricted stock is included in
Other Investments.
Three Months Ended
March 31, 2005 March 31, 2004
Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate
-------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS
Loans $451,977 $7,159 6.34% $423,393 $6,862 6.48%
Taxable investment securities 102,051 831 3.26 121,182 1,012 3.34
Nontaxable investment securities 62,878 919 5.85 52,249 772 5.91
Federal funds sold 6,345 22 1.39 12,585 31 0.99
Other investments 3,631 40 4.41 2,933 35 4.77
-------- ------ ---- -------- ------ ----
Total Earning Assets 626,882 8,971 5.72 612,342 8,712 5.69
NONEARNING ASSETS
Allowance for loan losses (6,498) (6,340)
Cash and due from banks 22,336 28,603
Premises and equipment 19,621 15,304
Accrued income and other assets 23,504 26,795
-------- --------
TOTAL ASSETS $685,845 $676,704
======== ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $106,314 255 0.96 $121,781 163 0.54
Savings deposits 165,425 236 0.57 155,695 239 0.61
Time deposits 236,073 1,981 3.36 239,960 2,028 3.38
Borrowed funds 29,598 293 3.95 21,699 240 4.42
-------- ------ ---- -------- ------ ----
Total Interest Bearing Liabilities 537,410 2,765 2.06 539,135 2,670 1.98
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 64,337 59,190
Other 10,681 9,235
Shareholders' equity 73,417 69,144
-------- --------
TOTAL LIABILITIES AND EQUITY $685,845 $676,704
======== ========
NET INTEREST INCOME (FTE) $6,206 $6,042
====== ======
NET YIELD ON INTEREST EARNING ASSETS (FTE) 3.96% 3.95%
==== ====
12
IBT BANCORP, INC.
TABLE 2: VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
The following table sets forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For the purpose of this
table, changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Quarter Ended March 31, 2005
Compared to
March 31, 2004
Increase (Decrease) Due to
----------------------------
Volume Rate Net
------ ------- ------
CHANGES IN INTEREST INCOME
Loans $ 455 $ (158) $ 297
Taxable investment securities (156) (25) (181)
Nontaxable investment securities 156 (9) 147
Federal funds sold (19) 10 (9)
Other investments 8 (3) 5
------ ------- ------
Total changes in interest income 444 (185) 259
Total changes in interest expense 38 57 95
------ ------- ------
Net change in interest margin (FTE) $ 406 $ (242) $ 164
====== ======= ======
13
IBT BANCORP, INC.
TABLE 3: SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
Three Months Ended
March 31
---------------------
2005 2004
------- -------
Summary of changes in allowance
Allowance for loan losses - January 1 $ 6,444 $ 6,204
Loans charged off (112) (113)
Recoveries of previously charged off loans 115 166
------- -------
Net loans recovered 3 53
Provision charged to operations 210 240
------- -------
Allowance for loan losses - March 31 $ 6,657 $ 6,497
======= =======
Allowance for loan losses as a % of loans 1.48% 1.56%
======= =======
NONPERFORMING LOANS
(Dollars in thousands)
March 31
---------------------
2005 2004
-------- --------
Total amount of loans outstanding
at the end of the period $450,052 $417,084
======== ========
Nonaccrual loans $ 1,683 $ 3,412
Accruing loans past due 90 days or more 2,101 923
Restructured loans 682 --
-------- --------
Total $ 4,466 $ 4,335
======== ========
Loans classified as nonperforming as a
% of outstanding loans .99% 1.04%
======== ========
To management's knowledge, there are no other loans which cause management
to have serious doubts as to the ability of borrowers to comply with their loan
repayment terms.
14
NET INTEREST INCOME (CONTINUED)
As shown in Tables number 1 and 2, when comparing the three month period
ended March 31, 2005 to the same period in 2004, fully taxable equivalent (FTE)
net interest income increased $164,000 or 2.7%. An increase of 2.4% in average
interest earning assets provided $444,000 of FTE interest income. The growth in
interest earning assets was primarily funded by an increase in noninterest
bearing deposits and net income. Average interest bearing liabilities declined
slightly ($537 million at March 31, 2005 versus $539 million at March 31, 2004),
resulting in a reduction in interest expense of $38,000. Overall, changes in
volume resulted in a $406,000 increase in FTE interest income. The average rate
paid on deposits increased 0.08%, increasing interest expense by $57,000. An
increase in loans as a percent of total earning assets combined with a decrease
in their average rate earned, significantly contributed to a decline of $185,000
in interest income due to rates. The net change related to interest rates earned
and paid resulted in a $242,000 decrease in FTE net interest income.
The Corporation's FTE net interest yield as a percentage of average
earning assets equaled 3.96% during 2005 versus 3.95% in 2004. The increase in
the yield was primarily due to the 2.37% increase in earning assets versus the
0.32% decline in interest bearing liabilities. Additionally, the Corporation's
reliance on higher cost borrowings to fund asset growth continues to adversely
impact net interest yields. Management expects the Corporation's reliance on
these higher-cost funds to continue. Management believes that short-term
interest rates will continue to rise and will result in a slight increase in net
interest margin for the remainder of 2005.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 65.7% of the
Corporation's total assets and is the Corporation's single largest
concentration of risk. The allowance for loan losses is management's estimation
of probable future losses inherent in the existing loan portfolio. Factors used
to evaluate the loan portfolio, and thus to determine the current charge to
expense, include recent loan loss history, financial condition of borrowers,
amount of nonperforming and impaired loans, overall economic conditions, and
other factors.
Comparing the year to date period of March 31, 2005 to March 31, 2004,
total average loans outstanding increased 6.8%. The provision for loan losses
decreased $30,000 to $210,000 in the first quarter of 2005 when compared to
2004. The decrease in the provision for loan losses resulted from a decrease in
nonperforming loans as a percentage of total outstanding loans. As set forth in
Table 3, loans classified as nonperforming to total loans outstanding were 0.99%
as of March 31, 2005, versus 1.04% in the prior year. The allowance for loan
losses as a percentage of loans equaled 1.48% in 2005 and 1.56% in 2004. In
management's opinion, the allowance for loan losses is adequate as of March 31,
2005.
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, fees
for other financial services, gains on the sale of mortgage loans, title
insurance revenue, and other noninterest income. Income earned from these
sources decreased $83,000 during the three month period ended March 31, 2005,
compared to the same period in 2004. The majority of the decrease in noninterest
income is related to a decrease of mortgage activity during the first quarter of
2005. Individual account changes during this period include a $50,000 decrease
in gains on the sale of residential real estate mortgage loans, a $28,000
decrease in service charges on deposit accounts, and a $36,000 decrease in the
net income related to mortgage servicing assets which is included in the
$116,000 decrease in other income. These declines were offset by a $28,000
increase in trust fee income and a $93,000
15
increase in income from sale of title insurance and related services as a result
of an increase in commercial lending activity.
Included in other assets is $10.2 million in cash value of corporate owned
life insurance policies. The increase in cash value of these policies of $91,000
and $105,000 during the quarters ended March 31, 2005 and 2004, respectively, is
recorded as other noninterest income. These policies earned an average rate of
3.56% and 4.23% as of March 31, 2005 and 2004, respectively. Due to the
preferential tax treatment, the policies have a taxable equivalent rate of 5.40%
and 6.41% as of March 31, 2005 and 2004, respectively. These policies are placed
with four different insurance companies with an S & P rating of AA+ or better.
The Corporation has established a policy that all 30 year amortized fixed
rate mortgage loans will be sold. The calculation of gains on the sale of
mortgages excludes at least 25 basis points allocated to the value of servicing
rights retained on these loans. Included in other noninterest income is a
$76,000 gain from the sale of $9.3 million in mortgages during the first quarter
of 2005 versus a $126,000 gain on the sale of $13.6 million in the same period
in 2004.
NONINTEREST EXPENSES
Noninterest expenses increased $289,000 for the first three months of 2005
when compared to the same period in 2004. The majority of the increase in these
expenses are related to a $232,000 increase in professional services associated
with Sarbanes-Oxley Act Section 404 compliance efforts. The largest component of
noninterest expense is compensation expense, which increased $45,000 or 1.4%.
The increase is due to additional staffing and normal merit and promotional
salary increases.
Occupancy and furniture and equipment expenses increased $42,000 or 4.1%
in 2005. The majority of this increase is a result of an increase in equipment
and building depreciation as well as expenses attributable to the Big Rapids
branch which was opened in December 2004. Excluding the aforementioned increase
in professional fees, other operating expenses decreased $30,000.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Since December 31, 2004, total assets decreased $3.3 million to $674.7
million. During the first quarter of 2005, major changes in asset mix included a
$4.2 million decrease in cash and cash equivalents, a $3.4 million increase in
investment securities, a $1.7 million decrease in mortgage loans available for
sale, and a $3.1 million decrease in net loans. Deposits during this period
decreased $893,000. Interest bearing deposits increased $1.6 million and
noninterest bearing deposits decreased $2.5 million, borrowed funds decreased
$2.3 million, and shareholders' equity decreased $156,000.
LIQUIDITY
Liquidity management is designed to ensure adequate resources are
available to meet depositor and borrower discretionary demands for funds.
Liquidity is also required to fund expanding operations, investment
opportunities, and the payment of cash dividends. The primary sources of the
Corporation's liquidity are cash, cash equivalents, and investment securities
available for sale.
As of March 31, 2005, cash and cash equivalents as a percentage of total
assets equaled 2.4%, versus 3.1% as of December 31, 2004. During the first three
months of 2005, cash provided for operating activities was $2.7
16
million, financing activity used $3.3 million, and investing activities used
$3.6 million. The accumulated effect of the Corporation's operating, investing,
and financing activities was a $4.2 million decrease in cash and cash
equivalents during the first three months of 2005.
In addition to cash and cash equivalents, investment securities available
for sale are another source of liquidity. Securities available for sale equaled
$165.4 million as of March 31, 2005 and $162.0 million as of December 31, 2004.
In addition to these primary sources of liquidity, the Corporation has the
ability to borrow in the federal funds market and at both the Federal Reserve
Bank and the Federal Home Loan Bank. The Corporation's liquidity is considered
adequate by management of the Corporation.
CAPITAL
The capital of the Corporation consists solely of common stock, surplus,
and retained earnings, reduced by accumulated other comprehensive loss, and
decreased approximately $156,000 since December 31, 2004. The decline in capital
was due to a $1.4 million increase in other comprehensive loss as a result of
declines in fair value of investment securities offset by net income of $1.3
million.
There are significant regulatory constraints placed on the Corporation's
capital. The Federal Reserve Board's current recommended minimum tier 1 and tier
2 capital to average assets requirement is 6.0%. The Corporation's tier 1 and
tier 2 capital to average assets, which consists of shareholder's equity plus
the allowance for loan losses less unamortized acquisition intangibles, was
11.05% at March 31, 2005.
The Federal Reserve Board has established a minimum risk based capital
standard. Under this standard, a framework has been established that assigns
risk weights to each category of on- and off-balance sheet items to arrive at
risk adjusted total assets. Regulatory capital is divided by the risk adjusted
assets with the resulting ratio compared to the minimum standard to determine
whether a bank has adequate capital. The minimum standard is 8%, of which at
least 4% must consist of equity capital net of goodwill. The following table
sets forth the percentages required under the Risk Based Capital guidelines and
the Corporation's ratios as of March 31, 2005:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
March 31, 2005
Required Actual
-------- ------
Equity Capital 4.00% 15.59%
Secondary Capital* 4.00 1.25
---- -----
Total Capital 8.00% 16.85%
==== =====
* IBT Bancorp's secondary capital consists solely of the allowance for loan
losses. The percentage for the secondary capital under the required column
is the maximum allowed from all sources.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET ARRANGEMENTS
The Corporation is party to financial instruments with off-balance-sheet risk.
These instruments are entered into in the normal course of business to meet the
financing needs of its customers. These financial instruments,
17
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 contractual or
notional amounts of these instruments reflect the extent of involvement the
Corporation has in a particular class of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in deciding to
make these commitments as it does for extending loans to customers.
Commitments to extend credit, which totaled $61.3 million at March 31, 2005, are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have variable
interest rates, fixed expiration dates, or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. At March 31, 2005,
the Corporation had a total of $1 million in outstanding standby letters of
credit.
Generally, these commitments to extend credit and letters of credit mature
within one year. The credit risk involved in these transactions is essentially
the same as that involved in extending loans to customers. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation upon the
extension of credit, is based on management's credit evaluation of the borrower.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and other income producing commercial properties.
The Corporation sponsors the IBT Foundation (the "Foundation"), which is a
nonprofit entity formed for the purpose of distributing charitable donations to
recipient organizations generally located in the communities serviced by
Isabella Bank and Trust. The Corporation periodically makes charitable
contributions in the form of cash transfers to the Foundation. The Foundation is
administered by members of the Corporation's Board of Directors. The assets and
transactions of the Foundation are not included in the consolidated financial
statements of IBT Bancorp, Inc. The assets of the Foundation as of March 31,
2005 approximated $1.7 million.
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FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filing with the Securities
and Exchange Commission.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has no foreign exchange risk, holds
limited loans outstanding to oil and gas concerns, and holds no trading account
assets, nor does it utilize interest rate swaps or derivatives in the management
of its interest rate risk. The Corporation does have a significant amount of
loans extended to borrowers in agricultural production. Their cash flow and
their ability to service their debt is largely dependent on the commodity prices
for corn, soybeans, sugar beets, milk, beef and a variety of dry beans. The
Corporation mitigates these risks by using conservative price and production
yields when calculating a borrowers available cash flow to service their debt.
Interest rate risk ("IRR") is the exposure to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors of the subsidiary banks 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
19
mismatch in repricing opportunity of assets and liabilities, and the frequency
of measuring and reporting to the Board of Directors.
The Corporation uses several techniques to manage interest rate risk. The first
method is gap analysis. Gap analysis measures the cash flows and/or the earliest
repricing of the Corporation's interest bearing assets and liabilities. This
analysis is useful for measuring trends in the repricing characteristics of the
balance sheet. Significant assumptions are required in this process because of
the imbedded repricing options contained in assets and liabilities. A
substantial portion of the Corporation's assets are invested in loans and
mortgage backed securities. These assets have imbedded options that allow the
borrower to repay the balance prior to maturity without penalty. The amount of
prepayments is dependent upon many factors, including the interest rate of a
given loan in comparison to the current interest rates, for residential
mortgages the level of sales of used homes, and the overall availability of
credit in the market place. Generally, a decrease in interest rates will result
in an increase in the Corporation's cash flows from these assets. Investment
securities, other than those that are callable, do not have any significant
imbedded options. Saving and checking deposits may generally be withdrawn on
request without prior notice. The timing of cash flow from these deposits is
estimated based on historical experience. Time deposits have penalties which
discourage early withdrawals.
The second technique used in the management of interest rate risk is to combine
the projected cash flows and repricing characteristics generated by the gap
analysis and the interest rates associated with those cash flows and projected
future interest income. By changing the amount and timing of the cash flows and
the repricing interest rates of those cash flows, the Corporation can project
the effect of changing interest rates on its interest income.
The following table provides information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of March 31,
2005. The Corporation has no interest rate swaps, futures contracts, or other
derivative financial options. The principal amounts of assets and time deposits
maturing were calculated based on the contractual maturity dates. Savings and
NOW accounts are based on management's estimate of their future cash flows.
20
Quantitative Disclosures of Market Risk
(dollars in thousands)
March 31 Fair Value
----------------------------------------------------------------------------------------------
2006 2007 2008 2009 2010 Thereafter Total 03/31/05
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Rate sensitive assets
Other interest bearing assets $ 705 -- -- -- -- -- $ 705 $ 705
Average interest rates 2.80% -- -- -- -- -- 2.80%
Fixed interest rate securities $ 34,463 $ 38,300 $ 33,079 $ 16,352 $ 10,191 $ 33,537 $ 165,922 $ 165,926
Average interest rates 3.71% 3.23% 3.27% 3.42% 3.81% 3.50% 3.38%
Fixed interest rate loans $ 94,403 $ 76,824 $ 69,530 $ 49,723 $ 48,526 $ 22,329 $ 361,335 $ 379,713
Average interest rates 6.38% 5.97% 6.08% 5.87% 5.97% 5.18% 6.04%
Variable interest rate loans $ 66,631 $ 4,934 $ 9,245 $ 5,529 $ 1,709 $ 1,320 $ 89,368 $ 89,368
Average interest rates 6.68% 7.72% 6.93% 6.76% 6.80% 9.16% 6.81%
Rate sensitive liabilities
Borrowed funds $ 8,693 $ 3,000 $ 4,165 $ 2,500 $ 6,000 $ 4,312 $ 28,670 $ 28,854
Average interest rates 3.86% 3.31% 3.65% 3.45% 4.51% 5.82% 4.17%
Savings and NOW accounts $ 69,697 $ 52,666 $ 68,098 $ 35,347 $ 33,185 $ 3,953 $ 262,946 $ 262,946
Average interest rates 1.21% 0.60% 0.53% 0.35% 0.98% 0.55% 0.76%
Fixed interest rate time deposits $ 126,525 $ 42,684 $ 33,980 $ 16,918 $ 13,565 $ 1,779 $ 235,451 $ 234,603
Average interest rates 3.18% 3.95% 3.89% 3.40% 3.67% 4.28% 3.47%
Variable interest rate time
deposits $ 796 $ 537 $ 5 -- -- -- $ 1,338 $ 1,338
Average interest rates 2.55% 2.55% 2.58% -- -- -- 2.55%
Quantitative Disclosures of Market Risk
(dollars in thousands)
March 31 Fair Value
----------------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total 03/31/04
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Rate sensitive assets
Other interest bearing assets $ 3,150 $ 199 -- -- -- -- $ 3,349 $ 3,349
Average interest rates 0.90% 2.67% -- -- -- -- 3.57%
Fixed interest rate securities $ 43,732 $ 39,234 $ 28,450 $ 20,557 $ 10,566 $ 48,362 $ 190,901 $ 190,761
Average interest rates 3.64% 3.44% 3.01% 2.96% 3.28% 4.60% 3.74%
Fixed interest rate loans $ 93,105 $ 55,416 $ 73,921 $ 36,199 $ 39,819 $ 41,491 $ 339,951 $ 341,027
Average interest rates 6.68% 6.87% 7.01% 6.36% 6.72% 5.83% 6.65%
Variable interest rate loans $ 55,071 $ 7,156 $ 5,536 $ 6,509 $ 7,571 $ 2,876 $ 84,719 $ 84,719
Average interest rates 5.50% 5.48% 5.57% 4.04% 5.29% 5.05% 5.35%
Rate sensitive liabilities
Borrowed funds $ 4,692 $ 87 $ 7,589 $ 92 $ 94 $ 12,607 $ 25,161 $ 25,689
Average interest rates 2.02% 4.88% 4.09% 4.88% 4.88% 4.84% 4.09%
Savings and NOW accounts $ 165,263 $ 22,231 $ 18,086 $ 14,856 $ 13,764 $ 33,132 $ 267,332 $ 267,332
Average interest rates 0.56% 0.32% 0.64% 0.53% 0.49% 0.32% 0.51%
Fixed interest rate time deposits $ 100,156 $ 50,533 $ 39,946 $ 31,424 $ 17,948 $ 1,975 $ 241,982 $ 244,373
Average interest rates 2.49% 2.18% 4.36% 4.14% 3.83% 3.78% 3.06%
Variable interest rate time
deposits $ 971 $ 429 $ 2 $ 0 $ 538 $ 176 $ 2,116 $ 2,116
Average interest rates 1.24% 1.24% 1.25% -- 3.17% 2.50% 1.84%
21
ITEM 4 - CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Corporation's management carried out an evaluation, under the supervision
and with the participation of the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) as of March 31, 2005, pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Principal Executive Officer/Principal Financial
Officer concluded that the Corporation's disclosure controls and procedures as
of March 31, 2005, were effective to ensure that information required to be
disclosed by the Corporation in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the three months ended March 31, 2005, no change occurred in the
Corporation's internal control over financial reporting that materially
affected, or is likely to materially affect, the Corporation's internal control
over financial reporting.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS
(a) Exhibits
The following exhibits are filed as part of this report:
3(a) Amended Articles of Incorporation (1)
3(b) Amendment to the Articles of Incorporation (2)
3(c) Amendment to the Articles of Incorporation (4)
3(d) Amendment to the Articles of Incorporation (4)
3(e) Amended Bylaws
10(a) Isabella Bank & Trust Executive Supplemental Income Agreement (2)
10(b) Isabella Bank & Trust Deferred Compensation Plan (3)
10(c) IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan
for Directors (5)
10(d) Isabella Bank and Trust Death Benefit Only Agreement (6)
31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Principal Executive Officer and Principal Financial
Officer
32 Section 1350 Certification of Principal Executive Officer and
Principal Financial Officer
1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 12, 1991, and incorporated herein by reference.
22
2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1994, and incorporated herein by reference.
3) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1996, and incorporated herein by reference.
4) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 22, 2000, and incorporated herein by reference.
5) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 27, 2001, and incorporated herein by reference.
6) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 25, 2002, and incorporated herein by reference.
7) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 16, 2005, and incorporated herein by reference.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IBT Bancorp, Inc.
Date: April 30, 2005 /s/ Dennis P. Angner
--------------------
Dennis P. Angner
Principal Executive Officer and Principal Financial
Officer
24
EXHIBIT INDEX
Exhibits
The following exhibits are filed as part of this report:
3(a) Amended Articles of Incorporation (1)
3(b) Amendment to the Articles of Incorporation (2)
3(c) Amendment to the Articles of Incorporation (4)
3(d) Amendment to the Articles of Incorporation (4)
3(e) Amended Bylaws
10(a) Isabella Bank & Trust Executive Supplemental Income Agreement (2)
10(b) Isabella Bank & Trust Deferred Compensation Plan (3)
10(c) IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan
for Directors (5)
10(d) Isabella Bank and Trust Death Benefit Only Agreement (6)
31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Principal Executive Officer and Principal Financial
Officer
32 Section 1350 Certification of Principal Executive Officer and
Principal Financial Officer
1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 12, 1991, and incorporated herein by reference.
2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1994, and incorporated herein by reference.
3) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1996, and incorporated herein by reference.
4) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 22, 2000, and incorporated herein by reference.
5) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 27, 2001, and incorporated herein by reference.
6) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 25, 2002, and incorporated herein by reference.
7) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 16, 2005, and incorporated herein by reference.