UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2003 ------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File No. 0-25903 IBT Bancorp, Inc. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Pennsylvania 25-1532164 ----------------------------------- ------------------------------------ (State of incorporation or organization) (I.R.S. employer identification no.) 309 Main Street, Irwin, Pennsylvania 15642 - ---------------------------------------- ------------------------------------ (Address of principal executive offices) (zip code) (724) 863-3100 - -------------------------------------------------------------------------------- Issuer's telephone number, including area code Check 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. YES X NO --------- --------- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X NO --------- --------- Number of shares of Common Stock outstanding as of August 10, 2003: 2,977,655 IBT BANCORP, INC. Contents -------- Pages ----- PART I - FINANCIAL INFORMATION Item 1. Financial Statements............................................................. Consolidated balance sheets at June 30, 2003 (unaudited) and December 31, 2002................................................ 1 Consolidated statements of income (unaudited) for the three and six months ended June 30, 2003 and 2002 .................................................... 2 Consolidated statements of cash flows (unaudited) for the six months ended June 30, 2003 and 2002..................................................... 3 Notes to consolidated financial statements....................................... 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................... 6 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 12 Item 4. Controls and Procedures.......................................................... 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings................................................................ 13 Item 2. Changes in Securities and Use of Proceeds........................................ 13 Item 3. Defaults upon Senior Securities.................................................. 13 Item 4. Submission of Matters to a Vote of Security-Holders.............................. 13 Item 5. Other Information................................................................ 13 Item 6. Exhibits and Reports on Form 8-K................................................. 13 Signatures....................................................................................... 14 CONSOLIDATED BALANCE SHEETS IBT BANCORP, INC. AND SUBSIDIARY June 30, 2003 December 31, 2002 ------------- ----------------- (unaudited) (unaudited) ------------- ----------------- ASSETS Cash and due from banks $ 18,443,912 $ 12,677,160 Interest-bearing deposits in banks 1,312,823 760,118 Federal funds sold 11,986,000 1,629,000 Certificate of deposit 100,000 100,000 Securities available for sale 165,029,874 183,564,960 Federal Home Loan Bank stock, at cost 4,599,700 3,152,600 Loans, net 384,534,327 359,871,514 Premises and equipment, net 4,989,949 4,759,015 Other assets 17,458,158 17,520,354 ------------- ------------- Total Assets $ 608,454,743 $ 584,034,721 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Non-interest bearing $ 81,010,939 $ 74,339,035 Interest-bearing 396,711,293 393,918,292 ------------- ------------- Total deposits 477,722,232 468,257,327 Repurchase agreements 13,835,757 14,525,836 Accrued interest and other liabilities 4,206,339 5,100,380 FHLB advances 53,687,540 40,000,000 ------------- ------------- Total liabilities 549,451,868 527,883,543 Stockholders' Equity Capital stock, par value $1.25 per share, 50,000,000 shares authorized, 3,023,799 shares issued, 2,977,655 shares outstanding at June 30, 2003 and December 31, 2002, respectively 3,779,749 3,779,749 Surplus 1,795,638 2,073,102 Retained earnings 51,974,765 48,974,137 Accumulated other comprehensive income 2,795,989 2,667,456 ------------- ------------- 60,346,141 57,494,444 Less: Treasury stock, at cost (1,343,266) (1,343,266) ------------- ------------- Total stockholders' equity 59,002,875 56,151,178 ------------- ------------- Total Liabilities and Stockholders' Equity $ 608,454,743 $ 584,034,721 ============= ============= The accompanying notes are an integral part of these consolidated financial statements. 1 CONSOLIDATED STATEMENTS OF INCOME IBT BANCORP, INC. AND SUBSIDIARY Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------- 2003 2002 2003 2002 ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) ------------ ------------ ------------ ------------ Interest Income Loans, including fees $ 6,463,026 $ 6,079,964 $ 12,900,471 $ 11,970,508 Investment securities 1,865,533 2,177,716 3,911,652 4,452,745 Federal funds sold 10,299 85,826 20,291 128,225 ------------ ------------ ------------ ------------ Total interest income 8,338,858 8,343,506 16,832,414 16,551,478 Interest Expense Deposits 2,153,295 2,576,140 4,516,729 5,225,013 FHLB advances 636,817 538,948 1,210,786 1,055,351 Repurchase agreements 35,970 45,940 72,358 88,041 ------------ ------------ ------------ ------------ Total interest expense 2,826,082 3,161,028 5,799,873 6,368,405 ------------ ------------ ------------ ------------ Net Interest Income 5,512,776 5,182,478 11,032,541 10,183,073 Provision for Loan Losses 150,000 250,000 300,000 500,000 ------------ ------------ ------------ ------------ Net Interest Income after Provision for Loan Losses 5,362,776 4,932,478 10,732,541 9,683,073 Other Income (Losses) Service fees 646,818 575,131 1,217,054 1,167,734 Investment security gains 11,883 84,602 236,681 131,525 Investment security losses - (24,925) - (24,925) Other income 1,027,427 619,098 1,672,933 1,314,911 ------------ ------------ ------------ ------------ Total other income 1,686,128 1,253,906 3,126,668 2,589,245 Other Expenses Salaries 1,633,284 1,422,855 2,848,714 2,538,177 Pension and other employee benefits 396,042 321,169 785,563 624,964 Occupancy expense 385,990 318,943 763,134 635,044 Data processing expense 212,495 176,682 406,905 343,565 ATM expense 80,899 94,805 155,816 178,912 Other expenses 1,035,345 929,603 2,030,417 1,793,103 ------------ ------------ ------------ ------------ Total other expenses 3,744,055 3,264,057 6,990,549 6,113,765 ------------ ------------ ------------ ------------ Income Before Income Taxes 3,304,849 2,922,327 6,868,660 6,158,553 Provision for Income Taxes 849,268 779,597 1,783,675 1,584,837 ------------ ------------ ------------ ------------ Net Income $ 2,455,581 $ 2,142,730 $ 5,084,985 $ 4,573,716 ============ ============ ============ ============ Basic Earnings per Share $ .82 $ 0.72 $ 1.71 $ 1.53 ============ ============ ============ ============ Diluted Earnings per Share $ .82 $ 0.72 $ 1.69 $ 1.53 ============ ============ ============ ============ Dividends per Share $ .35 $ 0.30 $ .70 $ 0.60 ============ ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 2 CONSOLIDATED STATEMENTS OF CASH FLOWS IBT BANCORP, INC. AND SUBSIDIARY Six Months Ended June 30, ----------------------------- 2003 2002 ------------ ------------ (unaudited) (unaudited) ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 5,084,985 $ 4,573,716 Adjustments to reconcile net cash from operating activities: Depreciation 397,925 337,710 Net amortization/accretion of premiums and discounts 555,506 128,264 Net investment security gains (236,681) (106,600) Provision for loan losses 300,000 500,000 Increase (decrease) in cash due to changes in assets and liabilities: Other assets (897,166) (1,011,375) Accrued interest and other liabilities (960,254) (1,896,312) ------------ ------------ Net Cash From Operating Activities 4,244,315 2,525,403 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of certificates of deposit 100,000 - Proceeds from maturity of certificates of deposit (100,000) - Proceeds from sales of securities available for sale 14,480,708 25,712,380 Proceeds from maturities of securities available for sale 31,736,099 30,819,565 Purchase of securities available for sale (27,805,800) (59,499,776) Net loans made to customers (24,003,451) (18,052,537) Purchases of premises and equipment (628,859) (339,758) Purchase of Federal Home Loan Bank stock (1,447,100) (260,600) ------------ ------------ Net Cash Used By Investing Activities (7,668,403) (21,620,726) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in deposits 9,464,905 27,756,656 Net increase in securities sold under repurchase agreement (690,079) 1,577,796 Dividends paid (2,084,357) (1,790,505) Proceeds from FHLB advances 14,000,000 5,000,000 Payments on FHLB advances (312,460) - Exercise of stock options (277,464) - Purchase of treasury stock - (258,513) ------------ ------------ Net Cash From Financing Activities 20,100,545 32,285,434 ------------ ------------ Net Change in Cash and Cash Equivalents 16,676,457 13,190,111 Cash and Cash Equivalents at Beginning of Period 15,066,278 25,218,935 ------------ ------------ Cash and Cash Equivalents at End of Period $ 31,742,735 $ 38,409,046 ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 3 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IBT BANCORP, INC. AND SUBSIDIARY Period Ended June 30, 2003 NOTE A - BASIS OF PRESENTATION The accompanying unaudited 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 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 of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three months and six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003 or any future interim period. The interim financial statements should be read in conjunction with the financial statements and footnotes thereto included in IBT Bancorp, Inc. and subsidiary Annual Report on Form 10-K for the year ended December 31, 2002. NOTE B - ADOPTION OF NEW ACCOUNTING STANDARD During the second quarter of 2003, the Bancorp adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (as permitted by FASB Statement No. 148), prospectively to all employee awards granted, modified or settled after January 1, 2003. Awards under the plan vest over periods ranging from six months to three years. Therefore, the cost related to stock-based employee compensation included in the determination of net income for 2003 is less then that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement 123. The following table illustrates the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period. Three Months Ended Six Months Ended June 30, June 30, ------------------------------------ ------------------------------- 2003 2002 2003 2002 ---------------- ----------------- --------------- -------------- Net income, as reported $ 2,455,581 $ 2,142,730 $ 5,084,985 $ 4,573,716 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects - - - - Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects - (93,486) - (93,486) ---------------- ----------------- --------------- ------------- Pro forma net income $ 2,455,581 $ 2,049,244 $ 5,084,985 $ 4,480,230 ================ ================= =============== ============= Earnings per share: Basic-as reported $ .82 $ .72 $ 1.71 $ 1.53 ================ ================= =============== ============= Basic-pro forma $ .82 $ .69 $ 1.71 $ 1.50 ================ ================= =============== ============= Diluted-as reported $ .82 $ .72 $ 1.69 $ 1.53 ================ ================= =============== ============= Diluted-pro forma $ .82 $ .69 $ 1.69 $ 1.50 ================ ================= =============== ============= 4 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IBT BANCORP, INC. AND SUBSIDIARY Period Ended June 30, 2003 NOTE C- EARNINGS PER SHARE Earnings per share are calculated on the basis of the weighted average number of shares outstanding. The weighted average shares outstanding were 2,977,655 for both the three and six months ended June 30, 2003 and 2,980,842 and 2,982,953 for the three and six months ended June 30, 2002, respectively. NOTE D - COMPREHENSIVE INCOME Total comprehensive income for the three months ended June 30, 2003 and 2002 were $2,934,874 and $4,110,928, respectively and for the six months ended June 30, 2003 and 2002 were $6,538,302 and $5,407,171 respectively. NOTE E - INVESTMENT SECURITIES Investment securities available for sale consist of the following: June 30, 2003 --------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Market Cost Gains Losses Value ------------- ------------- ------------- ------------- Obligations of U.S. Government Agencies $ 62,223,641 $ 1,801,814 $ - $ 64,025,455 Obligations of State and political sub-divisions 36,896,053 2,877,498 (1,305) 39,772,246 Mortgage-backed securities 50,645,988 1,355,541 - 52,001,529 Other securities 708,262 43,283 - 751,545 Equity securities 10,319,583 211,563 (2,052,047) 8,479,099 ------------- ------------- ------------- ------------- $ 160,793,527 $ 6,289,699 $ (2,053,352) $ 165,029,874 ============= ============= ============= ============= NOTE F - STOCK OPTION PLAN As of June 30, 2003, 129,500 stock options have been granted, of which 75,449 are vested and are exercisable as follows: 44,500 are exercisable at $24.50 per share, 18,463 are exercisable at $23.00 per share, and 12,486 are exercisable at $32.88; 23,706 are not yet vested, 26,179 shares have been exercised and 4,166 have been forfeited. No stock options were granted during the six months ended June 30, 2003. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes", "anticipate", "contemplates", "expects", and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. GENERAL IBT Bancorp, Inc. is a bank holding company headquartered in Irwin, Pennsylvania, which provides a full range of commercial and retail banking services through its wholly owned banking subsidiary, Irwin Bank & Trust Co. (collectively, the "Company"). The Company's stock is traded on the American Stock Exchange under the symbol IRW. On June 10, 2003, the Company broke ground at the site of its next full service branch located in the central Greensburg area in Westmoreland county. The Company currently has five branch offices, a loan center, a trust office, and five supermarket branches located in the Pennsylvania counties of Westmoreland and Allegheny. FINANCIAL CONDITION At June 30, 2003, total assets increased $24.5 million, or 4.2%, to $608.5 million from $584.0 million at December 31, 2002. Asset growth was primarily due to an increase of $24.6 million in net loans and $16.7 million in cash and cash equivalents, primarily federal funds sold. Such increases were offset by an $18.5 million decrease in securities available for sale. At June 30, 2003, net loans reached $384.5 million from $359.9 million at December 31, 2002. The change in net loans was primarily attributable to the increase of $23.1 million in the real estate secured loan portfolio, including a $20.5 million increase in commercial real estate loans and an $8.1 million increase in multi-family real estate loans, offset, in part, by a $5.3 million decrease in one-to-four family residential mortgages. The increase in net loans is attributable to increased borrowings in the current historically low interest rate environment. At June 30, 2003, total liabilities increased $21.6 million, or 4.1%, to $549.5 million from $527.9 million at December 31, 2002. This increase was primarily the result of fixed-rate long-term and amortizing borrowings from the Federal Home Loan Bank, which had a net increase of $13.7 million reaching $53.7 million at June 30, 2003 from $40.0 million at December 31, 2002. These low-rate advances were used to fund the growth in the loan portfolio. Non-interest bearing deposits reached $81.0 million at June 30, 2003, from $74.3 million at December 31, 2002. Higher balances in deposit accounts and an increase in the number of demand deposit accounts attributed to this increase. Interest-bearing deposits reached $396.7 million, at June 30, 2003 a $2.8 million increase from $393.9 million at December 31, 2002. This change was primarily attributable to an increase of $6.0 million, $5.0 million, and $3.0 million in savings accounts, interest bearing checking accounts, and money market accounts, respectively. Such increases were offset by a $12.3 million decrease in certificate of deposit accounts resulting primarily from expected deposit reductions of local municipalities. 6 At June 30, 2003, total stockholders' equity increased $2.8 million to $59.0 million from $56.2 million at December 31, 2002. The increase was due to net income of $5.1 million and an increase of $128,000 in accumulated other comprehensive income (net of income taxes), offset by dividends paid of $2.1 million and a $277,000 reduction in surplus (additional paid in capital) due to stock options exercised in the second quarter and the adoption of FASB 123, as amended by FASB 148. Accumulated other comprehensive income increased as a result of changes in the net unrealized gain on securities available for sale. Because of interest rate volatility, the Company's accumulated other comprehensive income could materially fluctuate for each interim period and year-end. See Note E to the consolidated financial statements. RESULTS OF OPERATIONS Net income. Net income for the three months ended June 30, 2003 increased $313,000, to $2.5 million from $2.1 million for the comparable three month period in 2002. Net income for the six months ended June 30, 2003 increased $511,000 to $5.1 million from $4.6 million for the comparable six month period in 2002. The increase for the three and six months ended June 30, 2003 was the result of higher net interest income and other income partially offset by increases in other expenses. Interest income. Interest income for the three months ended June 30, 2003 remained unchanged at $8.3 million compared to the three month period in 2002. While the average balances of interest earning assets increased $59.2 million for the three months ended June 30, 2003, to $573.0 million from $513.8 million for the comparable period in 2002, the yield on these assets decreased 55 basis points to 5.95%, for the three months ended June 30, 2003 from 6.50% for the comparable period in 2002. Interest income for the six months ended June 30, 2003 increased $281,000 to $16.8 million from $16.6 million for the comparable period in 2002. The average balance of interest earning assets increased $59.8 million to $568.3 million for the six months ended June 30, 2003 from $508.5 million for the comparable 2002 period. This increase was offset by a decrease in the yield on these assets of 59 basis points to 5.92% for the six months ended June 30, 2003 from 6.51% for the comparable period in 2002. The reduction of interest rates in the market contributed to the decline in average yields in both the three and six month periods ended in June 2003. See "Average Balance Sheet and Rate/Volume Analysis" Interest expense. Interest expense for the three months ended June 30, 2003 decreased $335,000 to $2.8 million from $3.2 million for the comparable period in 2002. The decrease in interest expense was primarily attributed to a 24 basis point decrease in the average cost of funds to 2.79% for the three months ended June 30, 2003 from 3.03% for the comparable period in 2002, offset by a $46.1 million increase in the average balance of interest bearing liabilities. Interest expense for the six months ended June 30, 2003 decreased $568,000 to $5.8 million from $6.4 million for the comparable 2002 period. This decrease was primarily the result of a 58 basis point reduction in the average cost of funds to 2.51% for the six months ended June 30, 2003 from 3.09% for the comparable six month period in 2002, offset by a $49.4 million increase in the average balance of interest bearing liabilities. The reduction of average cost of funds for the three and six month periods ended June 30, 2003 is reflective of the continued historically low interest rates paid on deposits and borrowings over the past year. See "Average Balance Sheet and Rate/Volume Analysis" 7 Average Balance Sheet The following table sets forth certain information relating to the company for the periods indicated. The average yields and costs are derived by dividing income or expense on an annualized basis by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from average daily balances. Three Months Ended June 30, Three Months Ended June 30, ------------------------------- ---------------------------------- 2003 2002 ------------------------------- ---------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (In Thousands) (In Thousands) Interest-earning assets: Loans receivable (1) $387,790 $ 6,463 6.67% $327,080 $ 6,080 7.44% Investment securities available for sale (2) 181,937 1,866 4.10% 167,417 2,178 5.20% Other interest-earning assets (3) 3,276 10 1.26% 19,299 86 1.76% -------- -------- ------- -------- Total interest earning assets $573,003 $ 8,339 5.82% $513,796 $ 8,344 6.50% ======== ===== ======== ===== Non-interest earning assets 30,972 30,504 -------- -------- Total assets $603,975 $544,300 ======== ======== Interest-bearing liabilities: Money market accounts $ 62,578 $ 168 1.07% $ 61,025 $ 314 2.06% Certificates of Deposit 212,461 1,776 3.34% 196,367 1,910 3.89% Other liabilities 188,485 882 1.87% 160,011 937 2.34% -------- -------- -------- -------- Total interest-bearing liabilities $463,524 $ 2,826 2.44% $417,403 $ 3,161 3.03% ======== ===== ======== ===== Non-interest-bearing liabilities 82,509 76,353 -------- -------- Total liabilities $546,033 $493,756 Retained Earnings (4) 57,942 50,544 -------- ------- Total liabilities and stockholders' equity $603,975 $544,300 ======== ======== Net interest income $ 5,513 $ 5,183 ======== ======== Interest rate spread (5) 3.38% 3.47% ====== ====== Net yield on interest-earning assets (6) 3.85% 4.03% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 123.62% 123.09% ====== ====== (1) Average balances include non-accrual loans, and are net of deferred loan fees. (2) Includes interest-bearing deposits in other financial institutions. (3) Consists of federal funds sold. (4) Includes capital stock, surplus and accumulated other comprehensive income, less treasury stock. (5) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (6) Net yield on interest-earning assets represents annualized net interest income as a percentage of average interest earning assets. 8 Average Balance Sheet The following table sets forth certain information relating to the company for the periods indicated. The average yields and costs are derived by dividing income or expense on an annualized basis by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from average daily balances. Six Months Ended June 30, Six Months Ended June 30, ------------------------------- ---------------------------------- 2003 2002 ------------------------------- ---------------------------------- Average Average Average Average Balance Interest Yield/Cost Balance Interest Yield/Cost ------- -------- ---------- ------- -------- ---------- (In Thousands) (In Thousands) Interest-earning assets: Loans receivable (1) $378,947 $ 12,900 6.81% $322,097 $ 11,970 7.43% Investment securities available for sale (2) 185,928 3,912 4.21% 171,819 4,453 5.18% Other interest-earning assets (3) 3,396 20 1.20% 14,621 128 1.75% -------- -------- -------- -------- Total interest earning assets $568,271 $ 16,832 5.92% $508,537 $ 16,551 6.51% ======== ====== ======== ===== Non-interest earning assets 30,428 28,725 -------- -------- Total assets $598,699 $537,262 ======== ======== Interest-bearing liabilities: Money market accounts $ 61,534 $ 383 1.25% $ 59,471 $ 612 2.06% Certificates of Deposit 218,219 3,669 3.36% 197,296 3,928 3.98% Other liabilities 181,674 1,747 1.92% 155,269 1,828 2.36% -------- -------- -------- -------- Total interest-bearing liabilities $461,427 $ 5,799 2.51% $412,036 $ 6,368 3.09% ======== ====== ======== ===== Non-interest-bearing liabilities 80,076 74,945 -------- -------- Total liabilities $541,503 $486,981 Retained Earnings (4) 57,196 50,281 -------- ------- Total liabilities and stockholders' equity $598,699 $537,262 ======== ======== Net interest income $ 11,033 $ 10,183 ======== ======== Interest rate spread (5) 3.41% 3.42% ====== ====== Net yield on interest-earning assets (6) 3.88% 4.00% ====== ====== Ratio of average interest-earning assets to average interest-bearing liabilities 123.15% 123.42% ====== ====== (1) Average balances include non-accrual loans, and are net of deferred loan fees. (2) Includes interest-bearing deposits in other financial institutions. (3) Consists of federal funds sold. (4) Includes capital stock, surplus and accumulated other comprehensive income, less treasury stock. (5) Interest-rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (6) Net yield on interest-earning assets represents annualized net interest income as a percentage of average interest earning assets. 9 Rate / Volume Analysis The following table shows the effect of changes in volumes and rates on interest income and interest expense. The changes in interest income and interest expense attributable to changes in both volume and rate have been allocated to the changes due to rate. Tax exempt income was not recalculated on a tax equivalent basis due to the immateriality of the change to the table resulting from a recalculation. Three Month Period ended June 30, 2003 Six Month Period ended June 30, 2003 -------------------------------------- ------------------------------------ 2003 vs. 2002 2003 vs. 2002 ------------- ------------- Increase (Decrease) Increase (Decrease) Due to Due to ------ ------ Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- (In Thousands) (In Thousands) Interest income: Loans receivable $ 1,129 $ (746) $ 383 $ 2,113 (1,184) $ 929 Investment securities available for sale 189 (501) (312) 366 (907) (541) Other interest earning assets (72) (4) (76) (98) (9) (107) ------- ------- ------- ------- ------- ------- Total interest-earning assets $ 1,246 $(1,251) $ (5) $ 2,381 (2,100) $ 281 ======= ======= ======= ======= ====== ======= Interest expense: Money market accounts $ 8 $ (154) $ (146) $ 21 $ (250) $ (229) Certificates of deposit 156 (290) (133) 417 (676) (259) Other liabilities 167 (222) (55) 311 (392) (81) ------- ------- ------- ------- ------- ------- Total interest-bearing liabilities $ 313 $ (666) $ (335) $ 749 $(1,318) $ (569) ======= ======= ======= ======= ======= ======= Net change in net interest income $ 915 $ (585) $ 330 $ 1,632 $ (782) $ 850 ======= ======= ======= ======= ======= ======= 10 Provision for loan losses. For the three and six month periods ended June 30, 2003, the provision for loan losses was $150,000 and $300,000, respectively, compared to $250,000 and $500,000, respectively, for the comparable 2002 periods. The provision for loan losses for the six months ended June 30, 2003 was attributable to net losses of $100,000 in the period and the $24.6 million increase in the loan portfolio. The evaluation for determining the provision includes evaluations of concentrations of credit, past loss experience, current economic conditions, amount and composition of fair value of underlying collateral, loan commitments outstanding, delinquencies, and other information available at such time. The Company continues to monitor its allowance for loan losses as economic conditions dictate. Management continues to offer a wider variety of loan products coupled with the continued success of changing the mix of the products offered in the loan portfolio from lower yielding loans (i.e., one-to-four family loans) to higher yielding loans (i.e., equity loans, multi-family (five or more units) buildings, and commercial (nonresidential mortgages). Management periodically estimates the likely level of losses on loans to determine whether the allowance for loan losses is adequate to absorb losses in the existing portfolio for unidentified loans as well as classified loans. Based on these estimates, a provision for loan losses is charged to operations in order to adjust the allowance to a level determined to be adequate to absorb anticipated future losses. The allowance is based on management's evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Large groups of smaller balance homogenous loans are valued collectively for impairment. The amount of loss reserve is calculated using historical loss rates, net of recoveries, adjusted for environmental, and other qualitative factors such as industry, geographical, economic and political factors that can affect loss rates or loss measurements. Allowances for losses on specifically identified loans that are determined to be impaired are calculated based upon collateral value, market value, if determinable, or the present value of estimated future cash flows. The allowance is increased by a charge to operations, and reduced by charge-offs, net of recoveries. The allowance for loan losses is maintained at a level that represents management's best estimate of losses in the portfolio at the balance sheet date. However, there can be no assurance that the allowance for loan losses will be adequate to cover losses, which may be realized in the future, and that additional provisions for losses on loans will not be required. Other income. Total other income for the three months ended June 30, 2003 increased $432,000 to $1.7 million from $1.3 million for the comparable three month period in 2002. Total other income for the six months ended June 30, 2003 increased $538,000 to $3.1 million from $2.6 million for the comparable period in 2002. The increase in other income for the three and six months ended June 30, 2003 are primarily due to a $351,000 gain from the sale of other real estate property and net security gains of $12,000 and $237,000 for the three and six month periods ended June 30, 2003, respectively. Other expense. Total other expense for the three and six month periods ended June 30, 2003 increased $480,000 and $877,000, respectively, to $3.7 million and $7.0 million from $3.3 million and $6.1 million, respectively, for the comparable three and six month period in 2002. Salaries and benefits increased $285,000 and $472,000, respectively, from the comparable periods in 2002 due to merit salary increases, increased pension and health insurance costs, and additional staffing. Occupancy expense for the three and six months ended June 30, 2003 increased $67,000 and $128,000, respectively, to $386,000 and $763,000 from $319,000 and $635,000, respectively, for the comparable three and six month periods in 2002. Such increases at June 30, 2003 were primarily due to depreciation expense related to equipment purchases for technological improvements and increased rental expense due to the relocation of the Company's item processing department. Other expense for the three and six month periods ended June 30, 2003 increased $105,000 and $237,000, respectively, to $1.0 million and $2.0 million from $930,000 and $1.8 million, respectively, for the comparable three and six month periods in 2002. Included in this increase is $46,000 in costs associated with the Company's listing on the American Stock Exchange and other expenses associated with the normal cost of doing business. 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There were no significant changes for the three months ended June 30, 2003 from the information presented in the 10K statement, under the caption Market Risk, for the year ended December 31, 2002. CONTROLS AND PROCEDURES The Company's management evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company's disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. There were no changes in the Company's internal control over financial reporting that occurred during the Company's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings The registrant is not engaged in any legal proceedings at the present time. From time to time, the Bank is a party to legal proceedings within the normal course of business wherein it enforces its security interest in loans made by it, and other matters of a like kind. Item 2. Changes in Securities and Use of Proceeds None. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3(i) Articles of Incorporation of IBT Bancorp, Inc.* 3(ii) Amended Bylaws of IBT Bancorp, Inc.** 10 Change In Control Severance Agreement with Charles G. Urtin *** 10.1 Deferred Compensation Plan For Bank Directors*** 10.2 Retirement Agreement Between Irwin Bank & Trust Co. And J. Curt Gardner*** 10.3 Death Benefit Only Deferred Compensation Plan For Bank Directors effective as of January 1, 1990*** 10.4 Retirement and Death Benefit Deferred Compensation Plan For Bank Directors effective as of January 1, 1990*** 10.5 2000 Stock Option Plan**** 31 Section 302 Certifications 32 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ------------------------- * Incorporated by reference to the identically numbered exhibits of the Registrant's Form 10 (file no. 0-25903) ** Incorporated by reference to the identically numbered exhibit of the Registrants Form 10-K for December 31, 2002. *** Incorporated by reference to the identically numbered exhibits of the Registrant's Form 10K for December 31, 1999. **** Incorporated by reference to the definitive proxy statement of the registrant filed on March 17, 2000. (b) Reports on Form 8-K None. 13 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: August 11, 2003 By:/s/Charles G. Urtin ----------------------------------------- Charles G. Urtin President, Chief Executive Officer (Duly authorized officer) Date: August 11, 2003 By:/s/Raymond G. Suchta ----------------------------------------- Raymond G. Suchta Vice President, Chief Financial Officer (Duly authorized officer) 14