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, 2006
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)
Indicated by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
Indicated by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [X] No
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 a large accelerated filer, an
accelerated file, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
One).
[ ] Large accelerated filer [X] Accelerated Filer [ ] Non-accelerated filer
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $241,615,088 as of the last business day of the registrant's most
recently completed second fiscal quarter.
The number of shares outstanding of the registrant's Common Stock (no par value)
was 6,335,861 as of February 27, 2007.
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 May 15, 2007
1
PART I
ITEM 1. BUSINESS (ALL DOLLARS IN THOUSANDS)
GENERAL
IBT Bancorp, Inc. (the Corporation) is a registered financial services holding
company incorporated in September 1988 under Michigan law. The Corporation has
six subsidiaries: Isabella Bank and Trust, FSB Bank, (together, "the Banks"),
IBT Title and Insurance Agency, Inc. ("IBT Title"), 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. FSB Bank has six banking offices in
Gratiot, Clare, and Saginaw Counties. IBT Title provides title insurance,
abstract searches, and closes loans in Isabella, Montcalm, Clare, Mecosta,
Roscommon, and Newaygo Counties. IBT Personnel, LLC and IB & T Employee Leasing,
LLC, are employee leasing companies. Financial Group Information Services
renders computer services to the Corporation and it's subsidiaries. All
employees of the Corporation are employed by IBT Personnel and IB & T Employee
Leasing and are 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 combined
enrollment of approximately 30,000 students. The area unemployment rate is
approximately 5.7% and average household income is $38.
On October 3, 2006, Farmers State Bank of Breckenridge (Farmers) acquired 100%
of the Farwell State Savings Bank (Farwell). As a result of this merger, Farwell
merged with and into Farmers, which was then renamed FSB Bank. The acquisition
was accounted for as a purchase.
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. Isabella Bank and Trust 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,
2006 were $1,318.
COMPETITION
The Corporation competes with other commercial banks, many of which are
subsidiaries of other bank holding companies, savings and loan associations,
mortgage brokers, 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, and safe deposit box
rentals.
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
holdings of 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 loan portfolio as of December
31, 2006.
2
LOANS BY MAJOR LENDING CATEGORY
(in thousands) Amount %
-------- ------
Residential real estate
One to four family residential $276,238 46.74%
Construction and land development 24,412 4.13%
-------- ------
Total 300,650 50.87%
Commercial
Real estate 142,464 24.10%
Farmland 29,223 4.94%
Agricultural production 18,079 3.06%
Commercial operating and other 70,237 11.88%
-------- ------
Total 260,003 43.99%
Other consumer installment
Other personal 29,783 5.04%
Credit cards 606 0.10%
-------- ------
Total 30,389 5.14%
-------- ------
TOTAL $591,042 100.00%
======== ======
First and second residential real estate mortgages are the single largest
category of 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 greater
than 15 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 in the Banks' portfolios, 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 require the approval of 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 provided through another financial
institution.
Commercial loans include loans for commercial real estate, farmland and
agricultural production, state and political subdivisions, and commercial
operating loans. 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 $8,500 on
a consolidated basis at its subsidiary banks. Borrowers with credit needs of
more than $8,500 are serviced through the use of loan participations with other
commercial banks. All commercial real estate loans require loan-to-value limits
of less than 80%. Depending upon the type of loan, past credit history, and
current operating results, the Corporation may require the borrower to pledge
accounts receivable, inventory, and fixed assets. Personal guarantees are
generally required from the owners of closely held corporations, partnerships,
and proprietorships. In addition, the Corporation requires annual financial
statements, prepares cash flow analyses, and reviews credit reports.
3
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. The underwriting emphasis is
on a borrower's ability to pay rather than collateral value. No consumer loans
are sold to the secondary market.
In summary, because approximately 80% of the Corporation's loan portfolio is
secured by real estate, a decline in real estate values driven by deteriorating
state economic conditions could have an adverse impact on lending operations.
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 FSB Bank are chartered by the State of Michigan.
Isabella Bank and Trust is a member of the Federal Reserve System and FSB Bank
is a Federal Deposit Insurance Corporation (FDIC) member, and both of the Banks'
deposits are insured by the FDIC to the extent provided by law. The Banks are
members of the Federal Home Loan Bank of Indianapolis. The Banks are supervised
and regulated by the Michigan Office of Financial and Insurance Services (OFIS),
the Federal Reserve Board, and the FDIC. (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, LTi Title, LLC.
4
PERSONNEL
As of December 31, 2006, the Corporation and its subsidiaries had 303 full-time
leased 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 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 corporate website. The Corporation will provide paper copies of
its SEC reports free of charge upon request of a shareholder.
The SEC maintains an internet site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding the Corporation
(CIK #0000842517) and other issuers.
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 System 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 was able to 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
5
approval is required for a financial holding company to acquire a company, other
than a bank holding company, bank or savings association, engaged in activities
that are financial in nature or incidental to activities that are financial in
nature, as defined in the GLB Act or as determined by the Federal Reserve Board.
A bank holding company is eligible to become a financial holding company if each
of its subsidiary banks and savings associations is well capitalized under the
prompt corrective action provisions of the Federal Deposit Insurance Act ("FDI
Act"), is well managed and has a rating under the Community Reinvestment Act
(CRA) of satisfactory or better. If any bank or savings association subsidiary
of a financial holding company ceases to be well capitalized or well managed,
the Federal Reserve Board may require the financial holding company to divest
the subsidiary. Alternatively, the financial holding company may elect to
conform its activities to those permissible for bank holding companies that do
not elect to become financial holding companies. If any bank or savings
association subsidiary of a financial holding company receives a CRA rating of
less than satisfactory, the financial holding company will be prohibited from
engaging in new activities or acquiring companies other than bank holding
companies, banks or savings associations.
The Corporation became a financial holding company effective March 13, 2000. It
continues to maintain its status as a bank holding company for purposes of other
Federal Reserve Board regulations.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to its subsidiary banks and to commit resources to
support its subsidiaries. This support may be required at times when, in the
absence of such Federal Reserve Board policy, the Corporation would not
otherwise be required to provide it.
Under Michigan law, if the capital of a Michigan state chartered bank (such as
the 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
banks' shareholders pro rata on the amount of capital stock held by each, and if
any such assessment is not paid by any shareholder within 30 days of the date of
mailing of notice thereof to such shareholder, cause the sale of the stock of
such shareholder 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 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 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
Certifications filed as Exhibits 31 (a) and (b) to this Form 10-K for such
certification of the financial statements and other information for this 2006
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 page 27 and in the notes to the consolidated financial statements
"Note 16 - Commitments and Other Matters" and "Note 17 - Minimum Regulatory
Capital Requirements".
SUBSIDIARY BANKS
The Banks are subject to regulation and examination primarily by OFIS and are
also subject to regulation and examination by the FDIC and / or 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.
6
Banking laws and regulations also restrict transactions by insured banks owned
by a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal shareholders, officers, directors and their affiliates, and
investments by the subsidiary banks in the shares or securities of the parent
holding company (or any of the other non-bank or bank affiliates), acceptance of
such 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.
The aforementioned 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, the Federal Bank Merger Act, and the Bank Secrecy Act.
ITEM 1A. RISK FACTORS
In the normal course of business the Corporation is exposed to various risks.
These risks include credit risk, interest rate risk, liquidity risk, operational
risk, compliance risk, economic risk, accounting risk, and disruption of
infrastructure. These risks, if not managed correctly, could have a significant
impact on earnings and capital. Management balances the Corporation's strategic
goals, including revenue and profitability objectives, with associated risks
through the use of policies, systems and procedures which have been adopted to
identify, assess, control, monitor, and manage in each risk area. Senior
management continually reviews the adequacy and effectiveness of these policies,
systems, and procedures.
CREDIT RISK
Credit risk is defined as the risk impacting earnings or capital due to an
obligor's failure to meet the terms of a loan or an investment, or otherwise
failing to perform as agreed. Credit risk occurs any time an institution relies
on another party, issuer, or borrower's performance.
To manage the credit risk arising from lending activities, the Corporation's
most significant source of credit risk, management maintains what it believes
are sound underwriting policies and procedures. Management continuously monitors
asset quality in order to manage the Company's credit risk to determine the
appropriateness of valuation allowances. These valuation allowances take into
consideration various factors including, but not limited to, local, regional,
and national economic conditions.
INTEREST RATE RISK
Interest rate risk is the timing differences in the maturity or repricing
frequency of a financial institution's interest earning assets and its interest
bearing liabilities. Management monitors the potential effects of changes in
interest rates through rate shock and gap analyses. To help mitigate the effects
of interest rate risk, management makes significant efforts to stagger projected
cash flows and maturities of interest sensitive assets and liabilities.
7
LIQUIDITY RISK
Liquidity risk is the risk to earnings or capital arising from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. Liquidity risk includes the inability to manage unplanned
decreases or changes in funding sources, or failure to recognize or address
changes in market conditions that affect the ability to liquidate assets quickly
and with minimal loss in value. The Corporation has significant borrowing
capacity through correspondent banks as well as the ability to sell investments
to fund potential cash shortages.
OPERATIONAL RISK
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people, and systems, or external events. The Corporation is
exposed to operational risk which includes reputation risk and transaction risk.
Reputation risk is developing and retaining marketplace confidence in handling
customers' financial transactions in an appropriate manner as well as protecting
the safety and soundness of the institution. Transaction risk includes losses
from fraud, error, the inability to deliver products or services, and loss or
theft of information. Transaction risk also encompasses product development and
delivery, transaction processing, information technology systems, and the
internal control environment.
To help minimize the potential losses due to operational risks, management has
established an internal audit department and has retained the services of a
certified public accounting firm to perform internal audit work. The focus of
these internal audit procedures is to verify the validity and appropriateness of
various transactions and processes. The results of these procedures are reported
to the Corporation's audit committee.
COMPLIANCE RISK
Compliance risk is the risk of loss from violations of, or nonconformance with
laws, rules, regulations, prescribed practices, or ethical standards. This
includes new or revised tax, accounting, and other laws, regulations, rules and
standards that could significantly impact strategic initiatives, results of
operations, and financial condition. The financial services industry is
extensively regulated and must meet regulatory standards set by the FASB, SEC
and other regulatory bodies. Federal and state laws and regulations are designed
primarily to protect the deposit insurance funds and consumers, and not
necessarily to benefit the Corporation's shareholders. The nature, extent, and
timing of the adoption of significant new laws, changes in existing laws, or
repeal of existing laws may have a material impact on the Corporation's
business, results of operations, and financial condition, the effect of which is
impossible to predict at this time.
The Corporation's compliance department periodically assesses the adequacy and
effectiveness of the Corporation's processes for controlling and managing its
principal compliance risks.
ECONOMIC CONDITIONS
An economic downturn within the Corporation's local markets, as well as
downturns in the state or national markets, could negatively impact household
and corporate incomes. This could lead to decreased demand for both loan and
deposit products, leading to an increase of customers who fail to pay interest
or principal on their loans. Management continually monitors key economic
indicators in an effort to anticipate the possible effects of downturns in the
local, regional, and national economies.
ACCOUNTING RISK
The Corporation's consolidated financial statements conform with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements. These estimates are based on information available to management at
the time the estimates are made. Actual results could differ from those
estimates. For further discussion regarding significant accounting estimates,
see "Note 1- Summary of Significant Accounting Policies" in the attached Notes
to the Consolidated Financial Statements.
DISRUPTION OF INFRASTRUCTURE
The Corporation's operations depend upon its technological and physical
infrastructure, including its equipment and facilities. Extended disruption of
its vital infrastructure by fire, power loss, natural disaster,
telecommunications failure, computer hacking and viruses, or other events
outside of the Corporation's control, could affect the financial outcome of the
Corporation or the financial services industry as a whole. The Corporation has
developed disaster recovery plans, which provide detailed instructions to cover
all significant aspects of the Corporation's operations.
8
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Corporation's executive offices are located at 200 East Broadway, Mt.
Pleasant, Michigan 48858. Isabella Bank and Trust owns 17 branches, while FSB
Bank owns five branches and leases one loan production office. IBT Title owns
one office, and leases four. 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. Management continually monitors and assesses the need for
expansion and / or improvement for all facilities. In management's opinion, each
facility has sufficient capacity and is in good condition.
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 arise out of the
normal course of operating their business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2006 to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, 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. The prices were
reported to management in only some of the transactions and management cannot
confirm the prices that were reported during this period. All of the information
has been adjusted to reflect the 10% stock dividend paid February 15, 2006.
Sale Price
Number of Number of ---------------
Period Sales Shares Low High
------ --------- --------- ------ ------
2006
First Quarter 27 19,003 $44.00 $44.00
Second Quarter 46 30,603 44.00 44.00
Third Quarter 45 13,524 44.00 44.00
Fourth Quarter 46 20,326 44.00 44.00
--- -------
164 83,456
=== =======
2005
First Quarter 34 19,429 38.18 38.18
Second Quarter 53 59,717 38.18 38.18
Third Quarter 60 24,654 38.18 38.18
Fourth Quarter 41 25,893 38.18 40.00
--- -------
188 129,693
=== =======
10
The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10% stock dividend paid on February 15, 2006.
Per Share
-------------
2006 2005
----- -----
First Quarter $0.11 $0.10
Second Quarter 0.11 0.10
Third Quarter 0.11 0.10
Fourth Quarter 0.31 0.30
----- -----
Total $0.64 $0.60
===== =====
IBT Bancorp's authorized common stock consists of 10,000,000 shares, of which
6,335,861 shares are issued and outstanding as of December 31, 2006. As of that
date, there were 2,576 shareholders of record.
In October 2002, the Corporation's Board of Directors authorized the repurchase
of up to $2,000 in dollar value of the Corporation's common stock. This
authorization does not have an expiration date. Based on repurchases since
October 2002, the Corporation is currently able to repurchase up to $1,700 of
its common shares under this plan. Shares repurchased revert back to the status
of authorized and unissued shares. The following table provides information as
of December 31, 2006, with respect to this plan:
Total Number of
Shares Repurchased Shares Purchased
---------------------- as Part of Publicly Maximum Shares That
Average Price Announced Plan May Be Purchased Under
(Dollars in thousands) Number Per Share or Program the Plans or Programs
---------------------- ------ ------------- ------------------- ----------------------
Balance, September 30, 2006 38,636
October 1 - 31, 2006 -- $-- -- --
November 1 - 30, 2006 -- -- -- --
December 1 - 31, 2006 -- -- -- --
--- --- --- ------
Balance December 31, 2006 -- $-- -- 38,636
=== === === ======
Information concerning Securities Authorized for Issuance Under Equity
Compensation Plans appears under "Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Shareholder Matters" included
elsewhere in this annual report on Form 10-K.
11
STOCK PERFORMANCE
The following graph compares the cumulative total shareholder return on
Corporation common stock for the last five years with the cumulative total
return on (1) the NASDAQ Stock Market Index, which is comprised of all United
States common shares traded on the NASDAQ and (2) the NASDAQ Bank Stock Index,
which is comprised of bank and bank holding company common shares traded on the
NASDAQ over the same period. The graph assumes the value of an investment in the
Corporation and each index was $100 at December 31, 2001 and all dividends are
reinvested.
STOCK PERFORMANCE FIVE-YEAR TOATAL RETURN
(PERFORMANCE GRAPH)
The dollar values for total shareholder return plotted in the graph above are
shown in the table below:
COMPARISON FO FIVE YEAR CUMULATIVE
AMONG IBT BANCORP, NASDAQ STOCK MARKET,
AND NASDAQ BANK STOCK
YEAR IBT BANCORP NASDAQ NASDAQ BANKS
---- ----------- ------ ------------
12/31/2001 100.0 100.0 100.0
12/31/2002 117.0 68.7 98.3
12/31/2003 135.9 103.6 129.0
12/31/2004 159.4 113.7 144.8
12/31/2005 169.6 116.2 148.2
12/31/2006 189.2 132.4 169.2
12
ITEM 6. SELECTED FINANCIAL DATA
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. Return on average equity indicates how
effectively the Corporation is able to generate earnings on shareholder invested
capital.
SUMMARY OF SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
INCOME STATEMENT DATA
Total interest income $ 44,709 $ 36,882 $ 33,821 $ 35,978 $ 38,161
Net interest income 24,977 23,909 23,364 23,528 22,905
Provision for loan losses 682 777 735 1,455 1,025
Net income 7,001 6,776 6,645 7,205 6,925
BALANCE SHEET DATA
End of year assets $910,127 $741,654 $678,034 $664,079 $652,717
Daily average assets 800,174 700,624 675,157 659,323 623,507
Daily average deposits 639,046 576,091 567,145 563,600 549,970
Daily average loans/net 515,539 459,310 430,854 399,008 390,613
Daily average equity 91,964 74,682 70,787 65,770 59,540
PER SHARE DATA (1)
Earnings per share
Basic $ 1.23 $ 1.25 $ 1.24 $ 1.36 $ 1.33
Diluted 1.19 1.25 1.24 1.36 1.33
Cash dividends 0.64 0.60 0.57 0.55 0.50
Book value (at year end) 18.27 14.78 13.48 12.94 12.09
FINANCIAL RATIOS
Shareholders' equity to assets (at year end) 12.72% 10.91% 10.71% 10.38% 9.71%
Return on average equity 7.61 9.07 9.39 10.95 11.63
Cash dividend payout to net income 53.89 48.02 46.20 39.99 37.33
Return on average assets 0.87 0.97 0.98 1.09 1.11
13
2006 2005
------------------------------------ ---------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------- ------- ------- ------ ------ ------ ------ ------
Quarterly Operating Results:
Total interest income $12,754 $11,312 $10,675 $9,968 $9,832 $9,439 $8,983 $8,628
Interest expense 5,980 5,164 4,526 4,062 3,719 3,425 3,064 2,765
------- ------- ------- ------ ------ ------ ------ ------
Net interest income 6,774 6,148 6,149 5,906 6,113 6,014 5,919 5,863
Provision for loan losses 54 245 216 167 262 196 109 210
Noninterest income 2,354 2,405 2,336 2,001 2,192 2,328 2,099 1,857
Noninterest expenses 6,537 5,659 5,969 6,308 5,514 5,891 5,622 5,857
Net income 1,962 2,031 1,794 1,214 1,924 1,744 1,765 1,343
Per Share of Common Stock: (1)
Earnings per share
Net income $ 0.31 $ 0.37 $ 0.33 $ 0.22 $ 0.35 $ 0.32 $ 0.33 $ 0.25
Diluted 0.30 0.36 0.32 0.21 0.35 0.32 0.33 0.25
Cash dividends 0.31 0.11 0.11 0.11 0.30 0.10 0.10 0.10
Book value (at quarter end) 18.27 15.69 15.14 14.92 14.78 14.02 13.85 13.42
(1) Retroactively restated for the 10% stock dividend paid on February 15,
2006.
14
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, Inc. (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. The Corporation's significant acquisition during 2006 was accounted for
as a purchase transaction, and as such, the related results of operations are
included from the date of acquisition. See "Note 2 - Business and Acquisition"
in the accompanying Notes to the Consolidated Financial Statements included
elsewhere in the report.
CRITICAL ACCOUNTING POLICY: 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 policy regarding
the allowance for loan losses to be its most critical accounting policy.
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 Allocation of the Allowance for Loan Losses.
15
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 for the last three years. 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
which are restricted are included in Other Assets.
2006 2005 2004
----------------------------- ----------------------------- -----------------------------
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 $522,726 $36,575 7.00% $466,001 $30,682 6.58% $437,438 $27,801 6.36%
Taxable investment securities 123,316 4,948 4.01% 106,025 3,487 3.29% 114,806 3,696 3.22%
Non-taxable investment securities 75,712 4,423 5.84% 63,271 3,818 6.03% 55,882 3,206 5.74%
Federal funds sold 2,762 139 5.03% 3,882 116 2.99% 4,516 30 0.66%
Other 5,012 250 4.99% 5,060 199 3.93% 2,978 178 5.98%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total earning assets 729,528 46,335 6.35% 644,239 38,302 5.95% 615,620 34,911 5.67%
NON EARNING ASSETS:
Allowance for loan losses (7,187) (6,691) (6,584)
Cash and due from banks 24,351 19,955 23,831
Premises and equipment 17,690 17,544 18,147
Accrued income and other assets 35,792 25,577 24,143
-------- -------- --------
Total assets $800,174 $700,624 $675,157
======== ======== ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $105,476 1,664 1.58% $103,684 1,001 0.97% $106,471 569 0.53%
Savings deposits 158,327 2,675 1.69% 157,238 1,571 1.00% 157,819 872 0.55%
Time deposits 301,593 12,825 4.25% 245,559 8,802 3.58% 238,323 7,950 3.34%
Other borrowed funds 53,256 2,568 4.82% 37,209 1,599 4.30% 27,328 1,066 3.90%
-------- ------- ---- -------- ------ ---- -------- ------ ----
Total interest bearing
liabilities 618,652 19,732 3.19% 543,690 12,973 2.39% 529,941 10,457 1.97%
NONINTEREST BEARING LIABILITIES:
Demand deposits 73,650 69,610 64,531
Other 15,908 12,642 9,898
Shareholders' equity 91,964 74,682 70,787
-------- -------- --------
Total liabilities and equity $800,174 $700,624 $675,157
======== ======== ========
Net interest income (FTE) $26,603 $25,329 $24,454
======= ======= =======
---- ---- ----
Net yield on interest earning
assets (FTE) 3.65% 3.93% 3.97%
==== ==== ====
16
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 $1,172 in 2006, $1,142
in 2005, and $1,102 in 2004. 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.
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.
2006 Compared to 2005 2005 Compared to 2004
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
------ ------ ------ ------ ------ ------
CHANGES IN INTEREST INCOME:
Loans $3,889 $2,004 $5,893 $1,857 $1,024 $2,881
Taxable investment securities 622 839 1,461 (287) 78 (209)
Nontaxable investment securities 730 (125) 605 440 172 612
Federal funds sold (40) 63 23 (5) 91 86
Other (2) 53 51 96 (75) 21
------ ------ ------ ------ ------ ------
Total changes in interest income 5,199 2,834 8,033 2,101 1,290 3,391
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits 18 645 663 (15) 447 432
Savings deposits 11 1,093 1,104 (3) 702 699
Time deposits 2,215 1,808 4,023 247 605 852
Other borrowings 755 214 969 416 117 533
------ ------ ------ ------ ------ ------
Total changes in interest expense 2,999 3,760 6,759 645 1,871 2,516
------ ------ ------ ------ ------ ------
Net change in interest margin (FTE) $2,200 $ (926) $1,274 $1,456 $ (581) $ 875
====== ====== ====== ====== ====== ======
As shown in the preceding tables, the Corporation has experienced steady
decreases in the net yield on interest earning assets since 2004. The main
contributing factors to this decrease are primarily attributed to the following:
- The current yield curve environment.
- The fact that the rates paid on interest bearing liabilities have
increased at a faster rate than those earned on interest earning
assets.
- The Corporation's increased reliance on higher cost time deposits and
other borrowed funds.
The Corporation, as well as all other financial institutions, has been coping
with an essentially flat yield curve since the third quarter of 2005. This flat
yield curve has encouraged customers to invest their funds in short term
deposits and to borrow long term with fixed rate loans. Banks
17
typically make money through the assumption of credit and interest rate risk.
Interest rate risk is related to borrowing funds short term and investing them
long term. The current yield curve, however, has provided the Corporation with
little opportunity to do this effectively. During much of 2006, the yield curve
was inverted, which means that short term rates were actually higher than long
term rates. The current yield curve has also been the main reason why the rates
paid on interest bearing liabilities have risen faster than those earned on
interest earning assets.
Overall net interest income increased $1,274 for the year ended December 31,
2006 when compared to the same period in 2005. A 13.5% increase in interest
earning assets and interest bearing liabilities provided $2,200 in additional
net interest income in 2006. Net interest income decreased $926 as a result of
interest rate changes. During 2006, the rates paid on interest bearing
liabilities increased 0.80%, while those earned on interest earning assets
increased 0.40%. The decline in interest rate spread is a direct result of a
sharp increase in high cost funding sources such as certificates of deposit and
other borrowed funds. The increase in the cost of these deposits in relation to
other sources is a result of intense deposit competition.
To offset the decreases in interest income from the unfavorable rate
environment, the Corporation has taken a measured growth posture. Most of this
growth has come in the form of commercial loans. This growth has allowed the
Corporation to increase net interest income through volume.
When management looks forward to 2007, it will be a challenging year as far as
interest rates are concerned. The driving force behind this continues to be the
yield curve. Management does not anticipate the yield curve will normalize in
the first six months of 2007. As a result of this condition, the Corporation
does not anticipate any significant relief in interest rate pressure any time
soon. To help offset the decline in income due to rates, the Corporation will
continue to grow its balance sheet, while accepting smaller interest rate
margins.
As shown in the above tables, when comparing year ending December 31, 2005 to
2004, fully taxable equivalent (FTE) net interest income increased $875 or
3.58%. An increase of 4.65% in average interest earning assets provided $2,101
of FTE interest income. The majority of this growth was funded by a 2.59%
increase in interest bearing liabilities, resulting in $645 of additional
interest expense. Overall, changes in volume resulted in $1,456 in additional
FTE interest income. The average FTE interest rate earned on assets increased by
0.28%, increasing FTE interest income by $1,290, and the average rate paid on
deposits and borrowings increased by 0.42%, increasing interest expense by
$1,871. The net change related to interest rates earned and paid was a $581
decrease in FTE net interest income.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the current period loan cost associated
with maintaining an appropriate allowance for loan losses. Periodic fluctuations
in the provision for loan losses result from management's assessment of the
adequacy of the allowance for loan losses. The provision for loan losses for
each period is further dependent upon many factors, including loan growth, net
charge-offs, changes in the composition of the loan portfolio, delinquencies,
assessment by management, third parties and banking regulators of the quality of
the loan portfolio, the value of the underlying collateral on problem loans and
the general economic conditions in our market areas.
18
The following schedule shows the composition of the provision for loan losses
and the allowance for loan losses.
Year Ended December 31
----------------------------------------------------
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Allowance for loan losses - January 1 $ 6,899 $ 6,444 $ 6,204 $ 5,593 $ 5,471
Allowance of acquired bank 726 -- -- -- --
Loans charged off
Commercial and agricultural 368 101 561 578 506
Real estate mortgage 252 166 -- 117 236
Consumer 529 376 374 445 460
-------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF 1,149 643 935 1,140 1,202
Recoveries
Commercial and agricultural 136 105 191 93 140
Real estate mortgage 53 -- 62 29 18
Consumer 258 216 187 174 141
-------- -------- -------- -------- --------
TOTAL RECOVERIES 447 321 440 296 299
-------- -------- -------- -------- --------
Net loans charged off 702 322 495 844 903
Provision charged to income 682 777 735 1,455 1,025
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES - DECEMBER 31 $ 7,605 6,899 6,444 6,204 5,593
======== ======== ======== ======== ========
YTD AVERAGE LOANS $522,726 $466,001 $437,438 $404,453 $396,234
======== ======== ======== ======== ========
NET LOANS CHARGED OFF TO AVERAGE LOANS OUTSTANDING 0.13% 0.07% 0.11% 0.21% 0.23%
======== ======== ======== ======== ========
YEAR END LOANS $591,042 $483,242 $452,895 $421,860 $390,860
======== ======== ======== ======== ========
ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.29% 1.43% 1.42% 1.47% 1.43%
======== ======== ======== ======== ========
Despite increases in the net loans charged off to average loans, nonperforming
loans as a percentage of total loans, and continued growth in the loan
portfolio, the Corporation decreased its provision charged to income in 2006,
which corresponded with a decrease in the allowance for loan losses as a
percentage of loans. The primary factor affecting the decline in the allowance
as a percentage of loans was the acquisition of The Farwell State Savings Bank
and the mix of the loan portfolio that was purchased. Management also believes
its conservative credit underwriting standards have allowed the Corporation, to
date, to avoid significant credit losses. Management will continue to closely
monitor its overall credit quality during 2007.
Based on management's analysis of the allowance for loan losses, the calculated
range for the required allowance was $5,626 to $8,428. As such, the allowance
for loan losses of $7,605 is considered adequate as of December 31, 2006.
19
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 reflect for the probability of losses being
incurred within the following categories as of December 31:
2006 2005 2004 2003 2002
------------------- ------------------- ------------------- ------------------- -------------------
% % % % %
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 $2,687 43.3% $2,771 46.9% $2,634 42.3% $2,140 41.5% $1,868 44.1%
Real estate mortgage 1,367 50.9% 1,192 46.8% 1,463 50.5% 1,584 47.8% 1,649 45.5%
Consumer installment 2,434 5.1% 2,286 5.8% 1,606 6.6% 1,614 9.6% 1,679 9.7%
Impaired loans 594 0.7% 184 0.5% 304 0.6% 622 1.1% 103 0.7%
Unallocated 523 0.0% 466 0.0% 437 0.0% 244 0.0% 294 0.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $7,605 100.0% $6,899 100.0% $6,444 100.0% $6,204 100.0% $5,593 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
NONPERFORMING ASSETS
Loans are generally placed on nonaccrual status when they become 90 days past
due, unless they are well secured and in the process of collection. When a loan
is placed on nonaccrual status, any interest previously accrued and not
collected is generally reversed from income or charged off against the allowance
for loan losses. Loans are charged off when management determines that
collection has become unlikely. Restructured loans are those where a concession
has been granted on either principal or interest paid due to financial
difficulties of the borrower. Other real estate owned (OREO) consists of real
property acquired through foreclosure on the related collateral underlying
defaulted loans.
The following table presents our nonperforming assets for the past five years:
Year Ended December 31
------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
Nonaccrual loans $3,444 $1,375 $1,900 $4,121 $2,484
Accruing loans past due 90 days or more 1,185 1,058 702 1,380 1,840
Restructured loans 697 725 686 -- 479
------ ------ ------ ------ ------
TOTAL NONPERFORMING LOANS 5,326 3,158 3,288 5,501 4,803
Other real estate owned 562 122 40 552 485
------ ------ ------ ------ ------
TOTAL NONPERPERFORMING ASSETS $5,888 $3,280 $3,328 $6,053 $5,288
====== ====== ====== ====== ======
NONPERFORMING LOANS AS A % OF TOTAL LOANS 0.90% 0.65% 0.73% 1.30% 1.23%
====== ====== ====== ====== ======
NONPERFORMING ASSETS AS A % OF TOTAL ASSETS 0.65% 0.44% 0.49% 0.91% 0.81%
====== ====== ====== ====== ======
Nonaccrual loans increased $2,069 from 2005. This included one large credit for
$1,069 with the remaining increase due to an increase in the number of loans
being placed on nonaccrual as of December 31, 2006 compared to December 31,
2005. Management has evaluated such loans and believes the valuation allowance
related to impaired loans to be adequate.
As of December 31, 2006, 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.
20
NONINTEREST INCOME
Year Ended December 31
----------------------------------------------------------
Change Change
--------------- -------------
2006 2005 $ % 2004 $ %
------ ------ ----- ------- ------ ----- -----
Service charges and fee income
NSF and overdraft fees $2,950 $2,586 $ 364 14.1% $2,310 $ 276 11.9%
Trust 866 828 38 4.6% 714 114 16.0%
Freddie Mac servicing fee 635 619 16 2.6% 631 (12) -1.9%
ATM and debit card fees 545 452 93 20.6% 545 (93) -17.1%
Service charges on deposit accounts 315 247 68 27.5% 254 (7) -2.8%
All other 179 196 (17) -8.7% 281 (85) -30.2%
------ ------ ----- ------- ------ ----- -----
Total service charges and fees 5,490 4,928 562 11.4% 4,735 193 4.1%
Gain on sale of mortgage loans 207 270 (63) -23.3% 477 (207) -43.4%
Title insurance revenue 2,389 2,351 38 1.6% 1,957 394 20.1%
Other
Increase in cash value of corporate
owned life insurance policies 404 364 40 11.0% 245 119 48.6%
Brokerage and advisory fees 213 187 26 13.9% 206 (19) -9.2%
(Loss) gain on sale of investment securities (112) 2 (114) -5700.0% 106 (104) -98.1%
All other 507 374 133 35.6% 439 (65) -14.8%
------ ------ ----- ------- ------ ----- -----
Total other 1,012 927 85 9.2% 996 (69) -6.9%
------ ------ ----- ------- ------ ----- -----
TOTAL NONINTEREST INCOME $9,098 $8,476 $ 622 7.3% $8,165 $ 311 3.8%
====== ====== ===== ======= ====== ===== =====
Over the past two years, the Corporation has seen substantial increases in
service charges and fee income. These increases have mainly been driven by
increases in NSF and overdraft fees which are the result of the Banks increasing
the per item overdraft fees that they charge their customers. The increases in
service charges on deposit accounts have been the result of the Banks continued
effort to align their service charges with those of their competitors.
Management does not expect service charges and fees to increase substantially in
2007 as they do not anticipate raising the per item fee charge for NSF items,
which is the largest component of service charges and fees.
The Corporation, as well as all other financial institutions, has observed a
substantial softening of the residential mortgage market since the market's peak
in 2003. The decreased loan demand has increased the level of competition for
mortgage loans as well as for title insurance services. This decreased demand
has been the contributing factor to the decrease in the gain on sale of mortgage
loans. This increased competition has also forced some title insurance companies
to close. IBT Title and Insurance Agency's financial strength has allowed it to
not only keep its doors open, but actually increase its market share. While
management does anticipate title insurance revenues to increase in 2007, the
Corporation does not expect the gain on sale of mortgage loans to fluctuate
significantly from current levels.
The increase in the cash value of corporate owned life insurance policies is a
result of the Corporation buying new policies in 2006. During 2006, the
Corporation had an average investment of $11,549 in bank-owned life insurance,
as compared to $10,335 in 2005. The average net rate earned on the investment
was approximately 3.50% in 2006 (versus 3.52% in 2005) and, because of the
instruments' tax free accumulation of earnings have a taxable equivalent rate of
5.30% and 5.34% as of December 31, 2006 and 2005, respectively. The rates on
these contracts are adjustable annually on their anniversary date. These
policies are placed with five different insurance companies with an S & P rating
of A- or better. Management does not anticipate any significant additions to
corporate owned life insurance policies in 2007.
The large losses on the sale of investment securities available for sale is a
result of the Corporation examining its investment portfolio in the second
quarter of 2006 and determining that there were securities that could be sold at
a loss and reinvested at a high enough rate to offset the loss on the sale with
increases in interest income by the end of the year. Management will continue to
monitor the investment security portfolio and continue to sell securities if the
proceeds can be reinvested in securities at higher rates to earn additional
interest income to offset the realized losses in the current year.
21
The increase in all other income is primarily the result of the following
factors. During April 2006, the Corporation sold its consumer credit card
portfolio, which resulted in a one time gain of $82. Another major component of
the increase was the result of a renegotiated contract with the Corporation's
primary check provider which amounted to a $34 recovery for 2006. Management
does not anticipate any significant changes in all other income during 2007.
There was a $311 or 3.8% increase in noninterest income during 2005 when
compared to 2004. Significant changes during 2005 include a $193 increase in
service charges and fees, a $394 increase from the sale of title insurance and
related services, a $207 decrease from the gain on sale of mortgage loans, and a
$69 decrease in other income.
The decrease in gain on sale of mortgage loans is a result of the Corporation
selling $38,624 of mortgages during 2005 versus $55,055 of mortgages during
2004.
During 2005, the Corporation had an average investment of $10,300 in bank-owned
life insurance, a $365 increase over 2004. The average net rate earned on the
investment was approximately 3.52% in 2005(versus 4.1% in 2004) and, because of
the instruments' tax free accumulation of earnings have a taxable equivalent
rate of 5.34%. The rates on these contracts are adjustable annually on their
anniversary date. These policies are placed with five different insurance
companies with an S & P rating of A- or better.
22
NONINTEREST EXPENSES
Year Ended December 31
-----------------------------------------------------------
Change Change
------------- -------------
2006 2005 $ % 2004 $ %
------- ------- ------ ---- ------- ----- -----
Compensation
Leased employee salaries $10,105 $ 9,610 $ 495 5.2% $ 9,371 $ 239 2.6%
Leased employee benefits 3,608 3,846 (238) -6.2% 3,233 613 19.0%
All other 156 92 64 69.6% 81 11 13.6%
------- ------- ------ ---- ------- ----- -----
Total compensation 13,869 13,548 321 2.4% 12,685 863 6.8%
------- ------- ------ ---- ------- ----- -----
Occupancy
Depreciation 412 363 49 13.5% 332 31 9.3%
Outside services 334 306 28 9.2% 268 38 14.2%
Property taxes 322 308 14 4.5% 286 22 7.7%
Utilities 320 289 31 10.7% 262 27 10.3%
Building rent 163 125 38 30.4% 103 22 21.4%
Building repairs 129 114 15 13.2% 163 (49) -30.1%
All other 50 48 2 4.2% 90 (42) -46.7%
------- ------- ------ ---- ------- ----- -----
Total occupancy 1,730 1,553 177 11.4% 1,504 49 3.3%
------- ------- ------ ---- ------- ----- -----
Furniture and equipment
Depreciation 1,440 1,372 68 5.0% 1,220 152 12.5%
Service contracts 716 620 96 15.5% 605 15 2.5%
Computer costs 385 353 32 9.1% 445 (92) -20.7%
ATM and debit card fees 263 247 16 6.5% 178 69 38.8%
All other 64 65 (1) -1.5% 36 29 80.6%
------- ------- ------ ---- ------- ----- -----
Total furniture and equipment 2,868 2,657 211 7.9% 2,484 173 7.0%
------- ------- ------ ---- ------- ----- -----
Other
Audit and SOX compliance fees 1,010 606 404 66.7% 990 (384) -38.8%
Marketing 697 624 73 11.7% 522 102 19.5%
Directors fees 584 604 (20) -3.3% 613 (9) -1.5%
Printing and supplies 377 431 (54) -12.5% 433 (2) -0.5%
Education and travel 360 258 102 39.5% 202 56 27.7%
Postage 304 264 40 15.2% 275 (11) -4.0%
Consulting 208 172 36 20.9% 259 (87) -33.6%
All other 2,466 2,167 299 13.8% 2,304 (137) -5.9%
------- ------- ------ ---- ------- ----- -----
Total other 6,006 5,126 880 17.2% 5,598 (472) -8.4%
------- ------- ------ ---- ------- ----- -----
TOTAL NONINTEREST EXPENSES $24,473 $22,884 $1,589 6.9% $22,271 $ 613 2.8%
======= ======= ====== ==== ======= ===== =====
The Corporation has seen moderate increases in compensation expense over the
past three years. The increases in leased employee salaries are a result of
regular merit increases as well as increases in staffing levels due to the
acquisitions of Milltown Title, LLC, and the Farwell State Savings Bank. During
2006, leased employee benefits decreased from the prior year as a result of a
change in the Corporation's medical insurance plan and administrator. The
increases in all other compensation expenses are a result of the Corporation
developing new incentive plans in 2006. Management does anticipate that total
compensation expense will moderately increase throughout 2007.
Occupancy expenses have increased as a result of various factors. Depreciation
expense has increased mainly as a result of the new Canadian Lakes Branch being
completed in 2006. The opening of this new office also increased building rent
expense as Isabella Bank and Trust was operating in a leased building and as
they terminated the lease they incurred termination costs. Outside services and
utilities expenses have been steadily increasing over the past three years as a
result of the Corporation's continued growth as well as increases in the cost of
the services provided. Management expects occupancy expenses to moderately
increase in 2007 due to the factors noted above.
23
Furniture and equipment expenses have steadily increased over the past three
years as a result of growth, both in the Corporation's size as well as in the
Corporation's complexity. To help maintain a competitive advantage in the
market, management is continually analyzing new ways to improve customer service
as well as to increase operating efficiency. To help maximize these goals,
management has made significant investments in various software platforms which
have resulted in increases in depreciation expense, service contracts, and
computer costs. However, management is confident that these purchases will
continue to provide shareholder value for years to come. As the Corporation has
adopted a growth strategy, management does anticipate the furniture and
equipment expenses will continue to increase.
As shown in the preceding table, 2006 audit and SOX compliance fees have
increased substantially compared to 2005. This is a result of a substantial
portion of the 2005 year end audit procedures being performed in 2006 and a
considerable portion of the 2006 year end audit procedures being performed
before December 31, 2006.
Management has taken the following steps to improve cost efficiencies related to
SOX compliance fees:
- Hired a new Vice President of Auditing. This action has allowed the
Corporation to decrease its reliance on sub contracted audit staff.
- Management has worked to consolidate duplicate processes of the bank
subsidiaries and reevaluate identified key controls.
As a result of these changes and other considerations, management anticipates
that SOX compliance fees will decrease in 2007.
One of the most important things every business needs to do is to let
prospective customers know about the products and services they offer. IBT
Bancorp is no exception. To help increase the effectiveness of its marketing
expenditures, Isabella Bank and Trust hired a marketing consultant. The fees
paid to this consultant were recorded as a marketing expense. This consultant
helped the bank develop a marketing strategy as well as numerous successful
marketing campaigns. Isabella Bank and Trust anticipates that it will continue
to utilize the services of this firm throughout 2007.
The increases in education and travel are the result of the Corporation's
increased level of commitment to attracting, developing, and retaining the
highest level of personnel. This investment in staff members of all levels has
been a significant factor in the Corporation's continued success. One of the
largest components of the increase in 2006 was management's decision to develop
a leadership program with the Dale Carnegie Leadership Institute. The
Corporation believes that this program is integral to its success and as such,
will continue offering the program in the future.
Management realizes that as the IBT Bancorp family of companies grows, it must
develop a corporate identity. To help develop this corporate identity, the
Corporation began a branding campaign in late 2006, which resulted in an
increase in consulting expenses. This campaign will continue throughout 2007.
The increase in all other expenses in 2006 is made up of various cost factors,
none of which are individually significant.
Noninterest expenses increased $613 during 2005 when compared to 2004.
Compensation and benefits increased $863, occupancy and furniture and equipment
expenses increased $222, and other expenses including charitable donations
decreased $472.
The $863 increase in compensation and benefits included a 2.62% increase in
salaries expense and a 18.95% increase in benefits expense. The majority of the
increase in benefit expense is related to a $466 increase in medical expenses,
which was the result of higher than normal medical claims in 2005, and a $96
increase in pension expenses and other retirement expenses. The Corporation
continues to evaluate medical costs and is researching alternatives to minimize
the effects of escalating health care costs.
The $222 increase in occupancy and furniture and equipment expenses includes
increases in depreciation expense, ATM and debit card fees, and other expenses.
These increases were partially offset by decreases in computer costs. Of the
$183 increase in depreciation, $152 relates to an increase in furniture and
equipment depreciation, as a result of the Corporation investing in new computer
software in 2005 and 2004.
The $472 decrease in other expenses is mainly the result of a significant
decrease in audit and SOX compliance fees as a result of a substantial portion
of the 2005 year end audit procedures being performed in 2006.
24
FEDERAL INCOME TAXES
Federal income tax expense for 2006 was $1,919 or 21.5% of pre-tax income
compared to $1,948 or 22.3% of pre-tax income in 2005 and $1,878 or 22.0% in
2004. A reconcilement of actual federal income tax expense reported and the
amount computed at the federal statutory rate of 34% is found in Note 13,
"Federal Income Taxes", in the Notes to the accompanying Consolidated Financial
Statements.
25
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
As shown in the following tables, the Corporation enjoyed another year of solid
asset growth. This growth was significantly effected by the October, 3 2006
acquisition of the Farwell State Savings Bank (Farwell), but was also the result
of the Corporation continuing an aggressive growth strategy.
Consolidated Consolidated
Farwell 12/31/2006 ----------------------------------------------
Acquisition w/o Farwell 12/31/2006 12/31/2005 $ Change % Change
----------- ------------ ---------- ---------- --------- --------
ASSETS
Cash and cash equivelants $ 5,281 $ 26,078 $ 31,359 $ 30,825 $ 534 1.73%
Securities available for sale 17,166 196,284 213,450 183,406 30,044 16.38%
Mortgage loans available for sale -- 2,734 2,734 744 1,990 267.47%
Loans 64,130 526,912 591,042 483,242 107,800 22.31%
Allowance for loan losses (726) (6,879) (7,605) (6,899) (706) 10.23%
Bank premises and equipment 907 19,847 20,754 16,971 3,783 22.29%
Other assets 26,136 32,257 58,393 33,365 25,028 75.01%
-------- -------- -------- -------- -------- ------
TOTAL ASSETS $112,894 $797,233 $910,127 $741,654 $168,473 22.72%
======== ======== ======== ======== ======== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $ 73,338 $652,502 $725,840 $592,478 $133,362 22.51%
Other borrowed funds -- 58,303 58,303 52,165 6,138 11.77%
Escrow funds payable -- 2,416 2,416 9,823 (7,407) -75.40%
Accrued interest and other
liabilities 1,114 6,705 7,819 6,286 1,533 24.39%
-------- -------- -------- -------- -------- ------
TOTAL LIABILITIES 74,452 719,926 794,378 660,752 133,626 20.22%
SHAREHOLDERS' EQUITY 38,442 77,307 115,749 80,902 34,847 43.07%
-------- -------- -------- -------- -------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $112,894 $797,233 $910,127 $741,654 $168,473 22.72%
======== ======== ======== ======== ======== ======
26
The following table outlines the growth in the Corporation's balance sheet
excluding the increase in net assets as a result of the 2006 Farwell
acquisition.
$ Change % Change
-------- --------
ASSETS
Cash and cash equivelants $(4,747) -15.40%
Securities available for sale 12,878 7.02%
Mortgage loans available for sale 1,990 267.47%
Loans 43,670 9.04%
Allowance for loan losses 20 -0.29%
Bank premises and equipment 2,876 16.95%
Other assets (1,108) -3.32%
------- ------
TOTAL ASSETS $55,579 7.49%
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $60,024 10.13%
Other borrowed funds 6,138 11.77%
Escrow funds payable (7,407) -75.40%
Accrued interest and other liabilities 419 6.67%
------- ------
TOTAL LIABILITIES 59,174 8.96%
SHAREHOLDERS' EQUITY (3,595) -4.44%
------- ------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $55,579 7.49%
======= ======
A discussion of changes in balance sheet amounts by major categories follows.
INVESTMENT SECURITIES
The primary objective of the Corporation's investing activities is to provide
for safety of the principal invested. Secondary considerations include the need
for earnings, liquidity, and the Corporation's overall exposure to changes in
interest rates. Securities held to maturity in 2004, which were stated at
amortized cost, consisted mostly of local municipal bond issues, and U.S.
Agencies. All securities are currently classified as available-for-sale and are
stated at fair value. The increase in securities in 2006 is consistent with the
Corporation's overall growth.
The following is a schedule of the carrying value of investment securities
available for sale and held to maturity:
December 31
------------------------------
2006 2005 2004
-------- -------- --------
Available for sale
U.S. Government and federal agencies $ 69,020 $ 52,913 $ 51,279
States and political subdivisions 112,754 95,435 84,632
Corporate 11,053 13,220 4,754
Mortgage-backed 20,623 21,838 21,365
-------- -------- --------
TOTAL $213,450 $183,406 $162,030
======== ======== ========
Held to maturity
Mortgage-backed $ -- $ -- $ 3
States and political subdivisions -- -- 520
-------- -------- --------
TOTAL $ -- $ -- $ 523
======== ======== ========
Excluding those holdings of the investment portfolio in U.S. Government and
federal agencies, 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
27
unsuitable due to their inherent credit or market risks. Prohibited investments
include stripped mortgage backed securities, zero coupon bonds, nongovernment
agency asset backed securities, and structured notes.
The following is a schedule of maturities of each category of investment
securities (at carrying value) and their weighted average yield as of December
31, 2006. Weighted average yields have been computed on a fully
taxable-equivalent basis using a tax rate of 34%. Mortgage-backed securities and
collateralized mortgage obligations are included in maturity categories based on
their stated maturity date. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations.
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. Government and federal agencies $28,907 3.89% $ 37,615 4.85% $ 2,498 5.65% $ -- --
States and political subdivisions 26,973 3.85% 51,284 3.86% 32,964 3.82% 1,533 4.16%
Mortgage-backed 2,430 3.17% 16,040 4.38% 2,153 3.64% -- --
Corporate 6,059 4.79% -- -- -- -- 4,994 4.45%
------- ---- -------- ---- ------- ---- ------ ----
TOTAL $64,369 3.93% $104,939 4.29% $37,615 3.93% $6,527 4.38%
======= ==== ======== ==== ======= ==== ====== ====
28
LOANS
The largest component of earning assets is loans. The proper management of
credit and market risk inherent in the loan portfolio 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 areas, 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 the following table.
The following table presents the composition of our loan portfolio for the years
ended December 31:
2006 2005 2004 2003 2002
-------- -------- -------- -------- --------
Commercial $212,701 $179,541 $146,152 $129,392 $126,591
Agricultural 47,302 49,424 49,179 52,044 54,788
Residential real estate mortgage 300,650 226,251 227,421 199,455 170,452
Installment 30,389 28,026 30,143 40,969 39,029
-------- -------- -------- -------- --------
$591,042 $483,242 $452,895 $421,860 $390,860
======== ======== ======== ======== ========
The following table presents the change in the loan categories for the years
ended December 31:
2006 2005 2004
------------------- ------------------- -------------------
$ Change % Change $ Change % Change $ Change % Change
-------- -------- -------- -------- -------- --------
Commercial $ 33,160 18.5% $33,389 22.8% $ 16,760 13.0%
Agricultural (2,122) -4.3% 245 0.5% (2,865) -5.5%
Residential real estate mortgage 74,399 32.9% (1,170) -0.5% 27,966 14.0%
Installment 2,363 8.4% (2,117) -7.0% (10,826) -26.4%
-------- ---- ------- ---- -------- -----
$107,800 22.3% $30,347 6.7% $ 31,035 7.4%
======== ==== ======= ==== ======== =====
The following table presents the change in loan categories excluding the loans
acquired from Farwell:
Less
loans Adjusted Consolidated
Consolidated acquired Consolidated ------------------------------
12/31/06 from Farwell 12/31/06 12/31/05 $ Change % Change
------------ ------------ ------------ -------- -------- --------
Commercial $212,701 $ 1,361 $211,340 $179,541 $31,799 17.7%
Agricultural 47,302 -- 47,302 49,424 (2,122) -4.3%
Residential real estate mortgage 300,650 59,040 241,610 226,251 15,359 6.8%
Installment 30,389 3,729 26,660 28,026 (1,366) -4.9%
-------- ------- -------- -------- ------- ----
$591,042 $64,130 $526,912 $483,242 $43,670 9.0%
======== ======= ======== ======== ======= ====
The growth in commercial loans is a result of the Corporation's efforts to
increase the commercial loan portfolio as a percentage of total loans. A
significant portion of this growth has been driven by the Corporation's new
business development team. Management expects to see continued growth in the
commercial loan portfolio in 2007.
The decrease in agricultural loans is a result of the Corporation's shift
towards higher quality agricultural credits. This shift has resulted in a steady
decrease in its farm loans over the last five years. However, management
anticipates that agricultural loans will moderately grow during 2007 based on
projections from the lenders in this area.
While residential mortgage loans represent the largest component of the
Corporation's portfolio, after excluding the loans purchased from the
acquisition of Farwell, they have not grown as fast as the commercial portfolio.
The Corporation's ability to significantly grow the mortgage
29
portfolio continues to be challenging as a result of the softening housing
market. As a result, management does anticipate that residential mortgage loans
will continue to shrink as a percentage of total loans.
Excluding the effects of the Farwell acquisition, installment loans have been
steadily decreasing over the past few years. This is a result of the increased
competition from credit unions and financing offered from other non-financial
institutions. Management does expect the current declining trend to continue in
the future.
DEPOSITS
The main source of funds for the Corporation is deposits. The deposit portfolio
represents various types of non transaction accounts as well as savings accounts
and time deposits.
The following table presents the composition of our deposit portfolio as of
December 31:
2006 2005 2004
-------- -------- --------
Noninterest bearing demand deposits $ 83,902 $ 73,839 $ 65,736
Interest bearing demand deposits 111,406 104,251 101,362
Savings deposits 178,001 153,397 162,516
Certificates of deposit 320,226 250,246 234,262
Brokered certificates of deposit 27,446 7,076 --
Internet certificates of deposit 4,859 3,669 --
-------- -------- --------
Total $725,840 $592,478 $563,876
======== ======== ========
The following table presents the change in the deposit categories for the years
ended December 31:
2006 2005 2004
---------------- --------------- ----------------
Noninterest bearing demand deposits $ 10,063 13.6% $ 8,103 12.3% $ (2,024) -3.0%
Interest bearing demand deposits 7,155 6.9% 2,889 2.9% (16,198) -13.8%
Savings deposits 24,604 16.0% (9,119) -5.6% 18,807 13.1%
Certificates of deposit 69,980 28.0% 15,984 6.8% (4,416) -1.9%
Brokered certificates of deposit 20,370 287.9% 7,076 100.0% -- 100.0%
Internet certificates of deposit 1,190 32.4% 3,669 100.0% -- 100.0%
-------- ----- ------- ----- -------- -----
Total $133,362 22.5% $28,602 5.1% $ (3,831) -0.7%
======== ===== ======= ===== ======== =====
The following table presents the change in deposit categories excluding the
deposits acquired from Farwell:
Less
deposits Adjusted Consolidated
Consolidated acquired Consolidated ------------------------------
12/31/06 from Farwell 12/31/06 12/31/05 $ Change % Change
------------ ------------ ------------ -------- -------- --------
Noninterest bearing demand deposits $ 83,902 $10,472 $ 73,430 $ 73,839 $ (409) -0.6%
Interest bearing demand deposits 111,406 8,660 102,746 104,251 (1,505) -1.4%
Savings deposits 178,001 17,704 160,297 153,397 6,900 4.5%
Certificates of deposit 320,226 35,507 284,719 250,246 34,473 13.8%
Brokered certificates of deposit 27,446 995 26,451 7,076 19,375 273.8%
Internet certificates of deposit 4,859 -- 4,859 3,669 1,190 32.4%
-------- ------- -------- -------- ------- -----
Total $725,840 $73,338 $652,502 $592,478 $60,024 10.1%
======== ======= ======== ======== ======= =====
As shown in the preceding tables, the Corporation has enjoyed consistent deposit
growth over the past few two years. However, much of this growth has come in the
form of time sensitive deposits, including brokered and internet certificates of
deposit. This change in mix is a direct
30
result of the current interest rate environment. This new mix has resulted in a
dramatic increase in the cost of the funds as certificates of deposits typically
are the highest cost of all deposit types.
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.
31
The following table shows the average balances and corresponding interest rates
paid on deposit accounts as of December 31:
2006 2005 2004
--------------- --------------- ---------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
Noninterest bearing demand deposits $ 73,650 $ 69,610 $ 64,531
Interest bearing demand deposits 105,476 1.58% 103,684 0.97% 106,471 0.53%
Savings deposits 158,327 1.69% 157,238 1.00% 157,819 0.55%
Time deposits 301,593 4.25% 245,559 3.58% 238,323 3.34%
-------- -------- --------
Total $639,046 $576,091 $567,144
======== ======== ========
The time remaining until maturity of time certificates and other time deposits
of $100 or more at December 31, 2006 was as follows:
Maturity
Within 3 months $ 54,364
Within 3 to 6 months 21,197
Within 6 to 12 months 32,568
Over 12 months 34,227
--------
TOTAL $142,356
========
BORROWED FUNDS
As a result of the Corporation's recent loan growth and the increased level of
competition for deposits, the Corporation has increased its other borrowings
significantly over the past year. Management does also anticipate that the
Corporation will continue to increase its borrowings throughout 2007.
ESCROW FUNDS PAYABLE
The Corporation observed a substantial decrease in escrow funds payable during
2006. This decrease can be attributed to Internal Revenue Code Section ("IRC")
1031 exchange account balances being reinvested by customers of IBT Title and
Insurance Agency, Inc. ("IBT Title"). These IRC 1031 accounts allow owners of
business or investment property to defer realized gains from the sale of
business or investment property if the funds are reinvested in another property.
As such, these balances can fluctuate significantly between periods as the funds
are reinvested. The Corporation does not anticipate escrow funds payable to
fluctuate significantly from current levels in 2007.
CAPITAL
The capital of the Corporation consists solely of common stock, capital surplus,
retained earnings, and accumulated other comprehensive income / (loss). The
Corporation offers dividend reinvestment and employee and director stock
purchase plans. Under the provisions of these Plans, the Corporation issued
61,257 shares of common stock generating $2,460 of capital during 2006, and
78,303 shares of common stock generating $2,684 of capital in 2005. The
Corporation also offers share based payment awards through its equity
compensation plan (See Note 18). Pursuant to this plan, the Corporation
generated $470 and $2,704 of capital in 2006 and 2005, respectively. In October
2002 the Board of Directors authorized management to repurchase up to $2,000 in
dollar value of the Corporation's common stock. A total of 4,571 shares were
repurchased in 2004 at an average price of $42 per share. There were no shares
repurchased in 2006 or 2005. Accumulated other comprehensive income decreased
$1,981 and consists of a $747 increase in unrealized gain on available-for-sale
investment securities reduced by $2,728 related to the adoption of FASB
Statement No. 158.
The Federal Reserve Board's current recommended minimum primary capital to
assets requirement is 6.0%. The Corporation's primary capital to average assets,
which consists of shareholders' equity plus the allowance for loan losses less
acquisition intangibles, was 12.49% at year end 2006. There are no commitments
for significant capital expenditures.
32
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, 2006:
Percentage of Capital to Risk Adjusted Assets:
IBT Bancorp
December 31, 2006
-----------------
Required Actual
-------- ------
Equity Capital 4.00% 15.38%
Secondary Capital 4.00% 1.25%
---- -----
Total Capital 8.00% 16.63%
==== =====
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 and FDIC also prescribe minimum capital requirements for the
Corporation's subsidiary Banks. At December 31, 2006, the Banks exceeded these
minimums. For further information regarding the Banks' capital requirements,
refer to Note 17 of the Notes to the accompanying Consolidated Financial
Statements, "Minimum Regulatory Capital Requirements".
LIQUIDITY
The primary sources of the Corporation's liquidity are cash and cash equivalents
and available-for-sale investment securities. These categories totaled $244,809
or 26.9% of assets as of December 31, 2006 as compared to $214,231 or 28.9% in
2005. Liquidity is important for financial institutions because of their need to
meet loan funding commitments, depositor withdrawal requests and various other
commitments discussed in the accompanying notes to consolidated financial
statements. Liquidity varies significantly daily, based on customer activity.
Operating activities used $1,698 of cash in 2006 as compared to providing
$18,452 in 2005. Net cash provided by financing activities equaled $64,846 in
2006 and $49,215 in 2005. The Corporation's investing activities used cash
amounting to $62,614 in 2006 and $57,602 in 2005. The accumulated effect of the
Corporation's operating, investing, and financing activities provided $534 and
$10,065 of cash in 2005 and 2004, respectively.
The primary source of funds for the Banks is deposits. The Banks emphasize
interest-bearing time deposits as part of their funding strategy. The Banks also
seek noninterest bearing deposits, or checking accounts, which reduce the Banks'
cost of funds in an effort to expand the customer base.
In recent periods, the Corporation has experienced some competitive challenges
in obtaining additional deposits to fuel growth. As depositors continue to have
wider access to the Internet and other real-time interest rate monitoring
resources, deposit sourcing and pricing has become more competitive. Deposit
growth is achievable, but at a competitive price, with tight net interest
margins, especially during these most recent periods of low interest rates. As a
result of this increased competition, the Corporation (as discussed above) has
begun to rely more and more on brokered and internet deposits as a key funding
source.
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.
33
INTEREST RATE SENSITIVITY
Interest rate sensitivity management aims at achieving reasonable stability in
the net interest margin through periods of changing interest rates. Interest
rate sensitivity is determined by the amount of earning assets and interest
bearing liabilities repricing within a specific time period, and their relative
sensitivity to a change in interest rates. One tool used by management to
measure interest rate sensitivity is gap analysis. As shown in the following
table, 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 $591,042 in total loans,
$99,099 are variable rate loans. Time deposit liabilities are scheduled based on
their contractual maturity except for variable rate time deposits in the amount
of $6,200 that are included in the 0 to 3 month time frame.
Savings, NOW accounts, and money market 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, 2006, the
Corporation had $94,062 more 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.
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, 2006. The
interest rate sensitivity information for investment securities is based on the
expected prepayments and call dates verses stated maturities. 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 $ 22,513 $ 54,248 $ 97,666 $ 39,023
Loans 133,382 71,044 345,905 37,267
-------- -------- -------- --------
TOTAL $155,895 $125,292 $443,571 $ 76,290
======== ======== ======== ========
Interest Sensitive Liabilities
Borrowed funds $ 17,489 $ 6,000 $ 22,814 $ 12,000
Time deposits 81,085 156,353 114,562 531
Savings 45,127 25,076 107,798 --
Interest bearing demand 40,300 3,819 67,287 --
-------- -------- -------- --------
TOTAL $184,001 $191,248 $312,461 $ 12,531
======== ======== ======== ========
Cumulative gap (deficiency) $(28,106) $(94,062) $ 37,048 $100,807
Cumulative gap (deficiency) as a % of assets (3.09)% (10.34)% 4.07% 11.08%
34
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 2006. 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 $ 63,951 $177,104 $18,948 $260,003
======== ======== ======= ========
Interest Sensitivity
Loans maturing after one year that have:
Fixed interest rates $157,620 $17,961
Variable interest rates 19,484 987
-------- -------
TOTAL $177,104 $18,948
======== =======
35
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 significant 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, except
for interest rate locks, 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. The cash flow of such borrowers and
ability to service 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 flows from these deposits is estimated based on
historical experience. Time deposits have penalties that discourage early
withdrawals.
The second technique used in the management of IRR is to combine the projected
cash flows and repricing characteristics generated by the gap analysis and the
interest rates associated with those cash flows to project future interest
income. By changing the amount and timing of the cash flows and the repricing
interest rates of those cash flows, the Corporation can project the effect of
changing interest rates on its interest income. Based on the projections
prepared for the year ended December 31, 2006 the Corporation's net interest
income would increase during a period of increasing long term interest rates.
36
The following tables provide information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of December 31,
2006 and 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.
37
December 31, 2006
------------------------------------------------------------------------- Fair Value
(dollars in thousands) 2007 2008 2009 2010 2011 Thereafter Total 12/31/06
-------- -------- ------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest bearing assets $ 2,992 $ -- $ -- $ -- $ -- $ -- $ 2,992 $ 2,992
Average interest rates 4.63% -- -- -- -- -- 4.63%
Fixed interest rate securities $ 76,761 $ 48,239 $21,380 $15,064 $12,983 $39,023 $213,450 $213,450
Average interest rates 3.87% 4.41% 4.14% 4.04% 3.75% 3.88% 4.03%
Fixed interest rate loans $108,771 $100,331 $95,442 $75,359 $74,773 $37,267 $491,943 $494,209
Average interest rates 6.45% 6.41% 6.47% 6.55% 7.17% 6.25% 6.56%
Variable interest rate loans $ 66,850 $ 12,598 $13,118 $ 4,301 $ 1,425 $ 807 $ 99,099 $ 99,099
Average interest rates 5.93% 8.81% 8.63% 8.76% 8.26% 9.21% 6.84%
Rate sensitive liabilities
Borrowed funds $ 23,489 $ 6,058 $ 8,500 $ 8,256 $ -- $12,000 $ 58,303 $ 58,390
Average interest rates 5.01% 4.78% 4.88% 5.10% -- 4.85% 4.95%
Savings and NOW accounts $114,322 $ 78,084 $68,816 $22,601 $ 5,584 $ -- $289,407 $289,407
Average interest rates 3.14% 1.37% 0.70% 0.73% 0.92% -- 1.85%
Fixed interest rate time
deposits $231,238 $ 43,789 $22,518 $31,822 $16,433 $ 531 $346,331 $346,395
Average interest rates 4.63% 4.21% 4.17% 4.47% 4.79% 5.27% 4.54%
Variable interest rate time
deposits $ 5,771 $ 424 $ 5 $ -- $ -- $ -- $ 6,200 $ 6,200
Average interest rates 4.16% 4.28% 4.34% -- -- -- 4.17%
December 31, 2005
------------------------------------------------------------------------- Fair Value
2006 2007 2008 2009 2010 Thereafter Total 12/31/05
-------- -------- ------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest bearing assets $ 3,251 $ -- $ -- $ -- $ -- $ -- $ 3,251 $ 3,251
Average interest rates 2.49% -- -- -- -- -- 2.49%
Fixed interest rate securities $ 55,646 $41,790 $28,358 $14,484 $10,289 $32,839 $183,406 $183,406
Average interest rates 4.02% 3.39% 3.53% 3.91% 3.83% 3.52% 3.60%
Fixed interest rate loans $100,287 $72,422 $81,034 $52,992 $55,706 $30,414 $392,855 $396,277
Average interest rates 6.24% 6.09% 6.22% 5.96% 6.41% 6.20% 6.19%
Variable interest rate loans $ 48,475 $16,265 $16,143 $ 5,309 $ 4,121 $ 74 $ 90,387 $ 90,387
Average interest rates 8.46% 7.95% 7.76% 7.74% 7.87% 6.42% 8.19%
Rate sensitive liabilities
Borrowed funds $ 17,266 $ 5,000 $ 5,113 $ 3,500 $ 8,286 $13,000 $ 52,165 $ 52,216
Average interest rates 4.02% 3.72% 4.77% 3.66% 5.11% 4.84% 4.42%
Savings and NOW accounts $ 58,315 $84,868 $83,657 $23,708 $ 7,100 $ -- $257,648 $257,648
Average interest rates 2.97% 1.05% 0.88% 0.74% 0.93% -- 1.36%
Fixed interest rate time
deposits $144,640 $48,977 $27,856 $17,451 $20,316 $ 381 $259,621 $259,245
Average interest rates 3.71% 3.99% 3.82% 3.76% 4.23% 5.29% 3.82%
Variable interest rate time
deposits $ 972 $ 391 $ 7 $ -- $ -- $ -- $ 1,370 $ 1,370
Average interest rates 3.51% 3.54% 3.55% -- -- -- 3.52%
38
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the registrant accompanied by
the report of the independent registered public accounting firm are set forth on
pages 33 through 66 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" under Item 6 on Page
12 of this report.
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
IBT Bancorp, Inc.
Mt. Pleasant, Michigan
We have audited the accompanying consolidated balance sheets of IBT BANCORP,
INC. as of December 31, 2006 and 2005, 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, 2006. We also
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, 2006, based on criteria established in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). IBT BANCORP, INC.'S management is responsible for these
consolidated financial statements, 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 these consolidated financial statements, an opinion on management's
assessment, and an opinion on the effectiveness of the IBT BANCORP, INC.'S
internal control over financial reporting, 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 audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting 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
audits provide a reasonable basis for our opinions.
A corporation'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 corporation'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 corporation; (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 corporation are being made only in accordance with
authorizations of management and directors of the corporation; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the corporation'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.
As indicated in the accompanying Management's Report on Internal Control Over
Financial Reporting, management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of The Farwell State Savings Bank, which is included in the
2006 consolidated financial statements of IBT Bancorp, Inc. and constituted
approximately $91.3 million and $14.4 million of total and net assets,
respectively, as of December 31, 2006 and approximately $1.3 million and
$400,000 of interest income and net income, respectively, for the period
October 3, 2006 through December 31, 2006. Management did not assess the
effectiveness of internal control over financial reporting at this acquired
entity because of the timing of this purchase, which was completed on
October 3, 2006. Our audit of internal control over financial reporting of
IBT Bancorp, Inc. also did not include an evaluation of the internal control
over financial reporting of The Farwell State Savings Bank.
40
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, 2006 and 2005, and the consolidated results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, management's
assessment that IBT BANCORP, INC. maintained effective internal control over
financial reporting as of December 31, 2006 is fairly stated, in all material
respects, based on criteria established in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Furthermore, in our opinion, IBT BANCORP, INC. maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2006, based on criteria established in the Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).
----------------------------------------
REHMANN ROBSON P.C.
Saginaw, Michigan
March 02, 2007
41
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31
-------------------
2006 2005
-------- --------
ASSETS
Cash and demand deposits due from banks $ 31,359 $ 30,825
Investment securities available for sale (amortized
cost of $214,600 in 2006 and $185,688 in 2005) 213,450 183,406
Mortgage loans available for sale 2,734 744
Net Loans
Loans 591,042 483,242
Less allowance for loan losses 7,605 6,899
-------- --------
TOTAL NET LOANS 583,437 476,343
Premises and equipment 20,754 19,172
Corporate-owned life insurance policies 12,763 10,533
Accrued interest receivable 5,765 4,786
Acquisition intangibles and goodwill, net 27,288 3,253
Other assets 12,577 12,592
-------- --------
TOTAL ASSETS $910,127 $741,654
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 83,902 $ 73,839
NOW accounts 111,406 104,251
Certificates of deposit and other savings 388,176 328,780
Certificates of deposit over $100,000 142,356 85,608
-------- --------
TOTAL DEPOSITS 725,840 592,478
Other borrowed funds 58,303 52,165
Escrow funds payable 2,416 9,823
Accrued interest and other liabilities 7,819 6,286
-------- --------
TOTAL LIABILITIES 794,378 660,752
Shareholders' Equity
Common stock -- no par value
10,000,000 shares authorized; outstanding--
6,335,861 in 2006 (4,974,715 in 2005) 114,785 72,296
Retained earnings 4,451 10,112
Accumulated other comprehensive loss (3,487) (1,506)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 115,749 80,902
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $910,127 $741,654
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
42
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
Year Ended December 31
-------------------------------------
2006 2005 2004
----------- ---------- ----------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year 4,974,715 4,896,412 4,403,404
Common stock dividends 497,299 -- 440,191
Issuance of common stock 66,372 78,303 57,388
Shares issued during bank acquisition 797,475 -- --
Common stock repurchased -- -- (4,571)
---------- ---------- ----------
BALANCE END OF YEAR 6,335,861 4,974,715 4,896,412
========== ========== ==========
COMMON STOCK
Balance at beginning of year $ 72,296 $ 66,908 $ 47,491
Common stock dividends 20,887 -- 17,608
Transfer (12,000) -- --
Issuance of common stock 33,132 2,684 2,001
Share-based payment awards under
equity compensation plan 470 2,704 --
Common stock repurchased -- -- (192)
---------- ---------- ----------
BALANCE END OF YEAR 114,785 72,296 66,908
RETAINED EARNINGS
Balance at beginning of year 10,112 6,590 20,623
Net income 7,001 6,776 6,645
Common stock dividends (20,887) -- (17,608)
Transfer 12,000 -- --
Cash dividends ($0.64 per share in 2006,
$0.60 per share in 2005, $0.57 per
share in 2004) (3,775) (3,254) (3,070)
---------- ---------- ----------
BALANCE END OF YEAR 4,451 10,112 6,590
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (1,506) (904) 822
Adjustment to intially apply FASB
Statement No. 158, net of tax (2,728) -- --
Other comprehensive income (loss) 747 (602) (1,726)
---------- ---------- ----------
BALANCE END OF YEAR (3,487) (1,506) (904)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY END OF
YEAR $ 115,749 $ 80,902 $ 72,594
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
43
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31
---------------------------
2006 2005 2004
------- ------- -------
INTEREST INCOME
Loans, including fees $36,575 $30,682 $27,801
Investment securities
Taxable 4,948 3,487 3,696
Nontaxable 2,797 2,398 2,116
Federal funds sold and other 389 315 208
------- ------- -------
TOTAL INTEREST INCOME 44,709 36,882 33,821
INTEREST EXPENSE
Deposits 17,164 11,374 9,391
Borrowings 2,568 1,599 1,066
------- ------- -------
TOTAL INTEREST EXPENSE 19,732 12,973 10,457
------- ------- -------
NET INTEREST INCOME 24,977 23,909 23,364
Provision for loan losses 682 777 735
------- ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 24,295 23,132 22,629
NONINTEREST INCOME
Service charges and fees 5,490 4,928 4,735
Title insurance revenue 2,389 2,351 1,957
Gain on sale of mortgage loans 207 270 477
Other 1,012 927 996
------- ------- -------
TOTAL NONINTEREST INCOME 9,098 8,476 8,165
NONINTEREST EXPENSES
Compensation and benefits 13,869 13,548 12,685
Occupancy 1,730 1,553 1,504
Furniture and equipment 2,868 2,657 2,484
Other 6,006 5,126 5,598
------- ------- -------
TOTAL NONINTEREST EXPENSES 24,473 22,884 22,271
INCOME BEFORE FEDERAL INCOME TAXES 8,920 8,724 8,523
Federal income taxes 1,919 1,948 1,878
------- ------- -------
NET INCOME $ 7,001 $ 6,776 $ 6,645
======= ======= =======
EARNINGS PER SHARE
Basic $ 1.23 $ 1.25 $ 1.24
======= ======= =======
Diluted $ 1.19 $ 1.25 $ 1.24
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
44
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Year Ending December 31
---------------------------
2006 2005 2004
------- ------- -------
NET INCOME $ 7,001 $ 6,776 $ 6,645
------- ------- -------
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) arising during period 1,020 (2,749) (2,527)
Reclassification adjustment for net realized losses (gains)
included in net income 112 (2) (106)
------- ------- -------
Net realized unrealized gains (losses) 1,132 (2,751) (2,633)
Tax effect (385) 935 895
------- ------- -------
Unrealized gains (lossses), net of tax 747 (1,816) (1,738)
------- ------- -------
Reversal of minimum pension liability adjustment -- 1,839 18
Tax effect -- (625) (6)
------- ------- -------
Minimum pension liability adjustment, net of tax -- 1,214 12
------- ------- -------
Adjustment to initially apply FASB Statement No. 158 (4,134) --
Tax effect 1,406 -- --
------- ------- -------
FASB Statement No. 158 adjustment, net of tax (2,728) -- --
------- ------- -------
OTHER COMPREHENSIVE LOSS, NET OF TAX (1,981) (602) (1,726)
------- ------- -------
COMPREHENSIVE INCOME $ 5,020 $ 6,174 $ 4,919
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
45
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Year Ended December 31
------------------------------
2006 2005 2004
-------- -------- --------
OPERATING ACTIVITIES
Net income $ 7,001 $ 6,776 $ 6,645
Reconciliation of net income to cash provided by operations:
Provision for loan losses 682 777 735
Depreciation 1,852 1,735 1,552
Net amortization of investment securities 705 957 1,558
Realized loss (gain) on sale of investment securities 112 (2) (106)
Amortization and impairment of mortgage servicing rights 184 140 135
Earnings on corporate owned life insurance policies (404) (365) (427)
Amortization of acquisition intangibles 160 94 93
Deferred income taxes 274 263 305
Share-based payment awards 470 -- --
Changes in operating assets and liabilities which (used)
provided cash Loans held for sale (1,990) 1,595 1,976
Accrued interest receivable (626) (471) 219
Other assets (1,333) (1,443) (1,235)
Escrow funds payable (7,407) 8,098 (1,033)
Accrued interest and other liabilities (1,378) 298 2,325
-------- -------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,698) 18,452 12,742
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 57,577 31,962 72,633
Purchases (70,140) (57,044) (68,892)
Activity in held to maturity securities
Maturities, calls, and sales -- 523 765
Net increase in loans (44,372) (30,669) (31,531)
Purchases of premises and equipment (2,467) (2,374) (4,300)
Acquisition of Farwell State Savings Bank, net of cash acquired (2,713) -- --
(Purchase) benefits received on corporate owned life insurance policies (499) -- 288
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (62,614) (57,602) (31,037)
FINANCING ACTIVITIES
Net (decrease) increase in noninterest bearing deposits (409) 8,103 (2,024)
Net increase (decrease) in interest bearing deposits 60,433 20,499 (1,807)
Net increase in other borrowed funds 6,138 21,183 12,929
Cash dividends paid on common stock (3,775) (3,254) (3,070)
Proceeds from the issuance of common stock 2,459 2,684 2,001
Common stock repurchased -- -- (192)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 64,846 49,215 7,837
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVELANTS 534 10,065 (10,458)
Cash and cash equivelants at beginning of year 30,825 20,760 31,218
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 31,359 $ 30,825 $ 20,760
======== ======== ========
Supplemental cash flows information:
Interest paid $ 19,392 $ 12,814 $ 10,420
Federal income taxes paid 1,516 1,000 2,569
The accompanying notes are an integral part of these consolidated financial
statements.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 1 - 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, FSB Bank, IBT Title and Insurance Agency, Inc., Financial Group
Information Services, and its majority owned subsidiaries, IBT Personnel, LLC
(79%), and IB&T Employee Leasing, LLC (79%). All intercompany balances and
accounts have been eliminated in consolidation.
NATURE OF OPERATIONS: IBT Bancorp, Inc. is a financial services holding company
offering a wide array of financial products and services in mid-Michigan. Its
banking subsidiaries, Isabella Bank and Trust and FSB Bank, offer banking
services through 23 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 and Insurance Agency, Inc. (IBT Title) does business under the names
Isabella County Abstract and Title, Mecosta County Abstract and Title, IBT Title
Clare, Benchmark Title of Greenville, Milltown Title, LLC, and Lti, LLC. IBT
Title provides title insurance and abstract searches, and closes real estate
loans.
Financial Group Information Services provides information technology services
for IBT Bancorp and subsidiaries.
IBT Personnel and IB&T Employee Leasing provide payroll services, benefit
administration, and other human resource services to IBT Bancorp and
subsidiaries.
USE OF ESTIMATES: In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the consolidated
balance sheet and reported amounts of revenues and expenses during the reporting
year. 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 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.
SIGNIFICANT GROUP CONCENTRATIONS 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 or customer.
CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash and balances due from banks,
federal funds sold, and other deposit accounts, all of which have original
maturity dates within ninety days.
SECURITIES: Securities are classified as "available for sale" and recorded at
fair value, with unrealized gains and losses, net of the effect of deferred
income taxes, excluded from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
In estimating other-then-temporary impairment losses, management considers (1)
the length of time and the 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
47
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
and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.
LOANS: 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.
For loans that are placed on non-accrual status or charged-off, all interest
accrued in the current calendar year, but not collected, is reversed against
interest income while interest accrued in prior calendar years, but not
collected is charged against the allowance for loan losses. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. 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.
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 as
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. The unallocated
component of the allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it
is probable that the Banks 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 owed. 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, unless such loans are
the subject of a restructuring agreement.
48
LOANS HELD FOR SALE: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or fair value as
determined by aggregating outstanding commitments from investors or current
investor yield requirements. Net unrealized losses, if any, are recognized
through a valuation allowance by charges to income.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Banks. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights. Gains
or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans
sold.
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.
SERVICING: Servicing assets are recognized as separate assets when rights are
acquired through purchase or through sale of financial assets. Generally,
purchased servicing rights are capitalized at the cost to acquire the rights.
For sales of mortgage loans, a portion of the cost of originating the loan is
allocated to the servicing right based on relative fair value. Fair value is
based on market prices for comparable mortgage servicing contracts, when
available, or alternatively, is based on a valuation model that calculates the
present value of estimated future net servicing income. The valuation model
incorporates assumptions that market participants would use in estimating future
net servicing income, such as the cost to service, the discount rate, the
custodial earnings rate, an inflation rate, ancillary income, prepayment speeds
and default rates and losses. Capitalized servicing rights are reported in other
assets and are amortized into non-interest income in proportion to, and over the
period of, the estimated future net servicing income of the underlying financial
assets.
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 into tranches based on predominant risk characteristics, such as interest
rate, loan type, and investor type. Impairment is recognized through a valuation
allowance for an individual tranche, to the extent that fair value is less than
the capitalized amount for the tranche. If the Corporation later determines that
all or a portion of the impairment no longer exists for a particular tranche, a
reduction of the allowance may be recorded as an increase to income.
Servicing fee income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal; or a fixed
amount per loan and are recorded as income when earned. The amortization of
mortgage servicing rights is netted against loan servicing fee income, a
component of noninterest income.
LOANS ACQUIRED THROUGH TRANSFER: American Institute of Certified Public
Accountants' Statement of Position (SOP) 03-3 requires that a valuation
allowance for loans acquired in a transfer, including in a business combination,
reflect only losses incurred after acquisition, and should not be recorded at
acquisition. It applies to any loan acquired in a transfer that shows evidence
of credit quality deterioration since it was originated. The effect on results
of operations and financial position of the Corporation's acquisition of the
allowance for loan losses carried over from The Farwell State Savings Bank
(Farwell) (see Note 2) was not material in 2006 due to the limited number of
troubled loans held by Farwell.
FORECLOSED ASSETS: Assets acquired through, or in lieu, of loan foreclosure are
initially recorded at the lower of the Banks' carrying amount or fair value less
estimated selling costs at the date of transfer, establishing a new cost basis.
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 losses 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.
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.
49
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are
carried at cost less accumulated depreciation. 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.
RESTRICTED INVESTMENTS: Included in other assets are restricted securities of
$3,480 in 2006 and $3,080 in 2005. Restricted securities include the stock of
the Federal Reserve Bank and the Federal Home Loan Bank and have no contractual
maturity.
STOCK COMPENSATION PLANS: In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment. SFAS No. 123(R) requires that the
compensation cost relating to share-based payment transactions be recognized in
the financial statements and that this cost be measured based on the fair value
of the equity or liability instruments issued. SFAS No. 123(R) covers a wide
range of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123(R) applies to new awards and awards
modified, repurchased, or cancelled after January 1, 2006. Compensation expense
is based on the fair value of the awards, which is generally the market price of
the stock on the measurement date and is recognized ratably over the service
period of the award.
The Corporation adopted SFAS No. 123(R) on December 31, 2005, and elected the
modified prospective method. Compensation cost has been measured using the fair
value of an award on the grant dates and is recognized over the service period,
which is usually the vesting period. Compensation cost related to the non-vested
portion of the awards outstanding as of the date was based on the grant date
fair value of those awards as calculated under the original provisions of SFAS
No. 123; that is, the Corporation was not required to re-measure the grant date
fair value estimate of the unvested portion of awards granted prior to the
effective date of SFAS No. 123(R).
CORPORATE OWNED LIFE INSURANCE: The Corporation has purchased 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, or the amount that can be realized. Increases in cash surrender value in
excess of premiums paid are reported as other noninterest income.
ACQUISITION INTANGIBLES AND GOODWILL: Isabella Bank and Trust and FSB Bank
previously acquired branch facilities and related deposits in a business
combination accounted for as a purchase. During October 2006, FSB Bank acquired
The Farwell State Savings Bank (Farwell) resulting in identified core deposit
intangibles and goodwill (see Note 2). The acquisition of the branches included
amounts related to the valuation of customer deposit relationships (core deposit
intangibles). Such core deposit intangibles are included in other assets and are
being amortized on the straight line basis over nine years. Core deposit
intangibles arising from the acquisition of Farwell are being amortized on a 10
year sum of year's digits amortization schedule. Goodwill is included in other
assets and is not amortized but is evaluated for impairment at least annually.
FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined
using the liability (or balance sheet) method. Under this method, the net
deferred tax assets or liability is determined based on the tax effects of the
temporary differences between the book and tax bases on the various balance
sheet assets and liabilities and gives current recognition to changes in tax
rates and laws.
ADVERTISING COSTS: Advertising costs are expensed as incurred.
EARNINGS PER COMMON SHARE: Basic earnings per share represents income available
to common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustments to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Corporation relate solely to outstanding shares in the Corporation's Deferred
Director fee plan.
50
Earnings per common share have been computed based on the following:
December 31
---------------------------------
2006 2005 2004
--------- --------- ---------
Average number of common shares outstanding* 5,699,514 5,416,961 5,344,585
Effect of shares in the Deferred Director fee plan* 164,800 -- --
--------- --------- ---------
Average number of common shares outstanding used to
calculate diluted earnings per common share 5,864,314 5,416,961 5,344,585
========= ========= =========
* As adjusted for the 10% stock dividend paid February 15, 2006
RECLASSIFICATIONS: Certain amounts reported in the 2005 and 2004 consolidated
financial statements have been reclassified to conform with the 2006
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS:
On January 1, 2006, the Corporation adopted Statement of Financial Accounting
Standards No. 123R (revised 2004), "Share-Based Payment" (SFAS No. 123R) issued
by the Financial Accounting Standards Board (FASB). This 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 instruments issued. The adoption of this standard decreased dilutive
earnings per share by $.04 in 2006 as a resulted of the inclusion of Plan shares
to ultimately be issued in the weighted average number of shares outstanding
calculation.
In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS
No. 155, "Accounting for Certain Hybrid Financial Instruments," an amendment of
SFAS No. 133 and SFAS No. 140. SFAS No. 155 simplifies accounting for certain
hybrid instruments under SFAS No. 133 by permitting fair value remeasurement for
financial instruments that otherwise would require bifurcation and eliminating
SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to
Beneficial Interests in Securitized Financial Assets," which provides that
beneficial interests are not subject to the provisions of SFAS No. 133. SFAS No.
155 also eliminates the previous restriction under SFAS No. 140 on passive
derivative instruments that a qualifying special-purpose entity may hold. SFAS
No. 155 is effective for all financial instruments acquired, issued, or subject
to a remeasurement event occurring after January 1, 2007, and adoption is not
expected to have a significant impact on the Corporation's results of
operations, financial condition or liquidity.
In March 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 156 (SFAS No. 156), "Accounting for Servicing
of Financial Assets". This statement amends Financial Accounting Standards No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", with respect to the accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 requires
companies to recognize a servicing asset or servicing liability each time it
undertakes an obligation to service a financial asset by entering into a
servicing contract. The statement permits a company to choose either the
amortized cost method or fair value measurement method for each class of
separately recognized servicing assets. This statement is effective for the
Corporation on January 1, 2007. The Corporation is currently in the process of
analyzing the impact, if any, of SFAS No. 156 on the Corporation's consolidated
financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value in
generally accepted accounting principles, establishes a framework for measuring
fair value, and expands disclosure about such fair value measurements. SFAS No.
157 is effective on January 1, 2008 and is not expected to have a significant
impact on the Corporation's consolidated financial position and results of
operations.
On December 31, 2006 the Corporation adopted SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans" (SFAS No.
158). SFAS No. 158 required the Corporation to recognize on a prospective basis
the funded status of their defined benefit plan on its consolidated balance
sheet and recognize as a component of other comprehensive income, net of tax,
the gains or losses and prior service costs or credits that arise during the
period but are not recognized as components of net periodic benefit cost. SFAS
No. 158 also required additional disclosures in the notes to the consolidated
financial statements. See Note 18 for the discussion on the application of this
pronouncement on the consolidated financial statements.
51
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertain
Tax Positions", which seeks to reduce the significant diversity in practice
associated with recognition and measurement in the accounting for income taxes.
The provisions of this interpretation apply to all tax positions accounted for
in accordance with FASB Statement No. 109, "Accounting for Income Taxes".
Specifically, the Interpretation requires that a tax position meet a "more
likely than not recognition threshold" for the benefit of the uncertain tax
position to be recognized in the financial statements. This threshold is to be
met assuming that the tax authorities will examine the uncertain tax position.
The Interpretation also contains guidance with respect to the measurement of the
benefit that is recognized for an uncertain tax position, when that benefit
should be derecognized and other matters. The effective date of the
Interpretation for the Corporation is January 1, 2007. The Corporation does not
anticipate that the implementation of this standard will have a significant
impact on the consolidated financial statements as it generally does not have
any significant uncertain tax provisions.
NOTE 2 - BUSINESS COMBINATION
On October 3, 2006, Farmers State Bank of Breckenridge (Farmers) acquired 100
percent of the Farwell State Savings Bank (Farwell). As a result of this
acquisition, Farwell merged with and into Farmers, which was then renamed FSB
Bank. Under the terms of the merger agreement, each share of Farwell common
stock was automatically converted into the right to receive 3.0382 shares of IBT
common stock and $29.00 in cash. As a result of this acquisition, the
Corporation issued 797,475 shares of IBT Bancorp, Inc. common stock valued at
$30,448 and paid a total of $7,612 in cash to Farwell shareholders. Included in
the purchase price was $382 of transaction costs. The total consideration
exchanged including the value of the common stock issued, cash paid to
shareholders, plus cash paid for transaction costs resulted in a total purchase
cost of $38,442. The acquisition of Farwell has increased the overall market
share for IBT Bancorp.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of the acquisition.
Fair Value
Adjustments of
Nonintangible Fair Value
Farwell Net Assets of Net Assets
October 3, 2006 Acquired Acquired
--------------- -------------- -------------
ASSETS
Cash and cash equivelants $ 5,281 $ -- $ 5,281
Securities available for sale 17,166 -- 17,166
Loans, net 63,874 (470) 63,404
Bank premises and equipment 307 600 907
Other assets 2,416 15 2,431
------- ----- -------
TOTAL ASSETS ACQUIRED $89,044 $ 145 $89,189
======= ===== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $73,731 $(393) $73,338
Accrued interest and other liabilities 1,114 -- 1,114
------- ----- -------
TOTAL LIABILITIES ASSUMED 74,845 (393) 74,452
------- ----- -------
NET ASSETS ACQUIRED $14,199 $ 538 14,737
======= =====
Core deposit intangible 1,442
Goodwill 22,263
-------
TOTAL CONSIDERATION PAID $38,442
=======
The fair value adjustments are being amortized over two years using the straight
line amortization method. The core deposit intangible is being amortized using a
10 year sum-of-the-years' digits amortization schedule. Goodwill, which is not
amortized, will be tested for impairment at least annually. As the acquisition
was considered a stock transaction goodwill is not deductible for federal income
tax purposes.
52
The 2006 consolidated statement of income includes operating results of Farwell
since the date of acquisition.
The unaudited pro forma information presented in the following table has been
prepared based on IBT Bancorp's historical results combined with Farwell. The
information has been combined to present the results of operations as if the
acquisition had occurred at the beginning of the periods presented. The pro
forma results are not necessarily indicative of the results which would have
actually been attained if the acquisition had been consummated in the past or
what may be attained in the future:
Year Ended December 31,
-----------------------
2006 2005
------- -------
Net interest income $27,499 $27,371
======= =======
Net income $ 8,023 $ 8,288
======= =======
Basic earnings per share $ 1.28 $ 1.33
======= =======
NOTE 3 - RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
Banking regulations require banks to maintain cash reserve balances in currency
or as deposits with the Federal Reserve Bank. At December 31, 2006 and 2005, the
reserve balances amounted to $979 and $711, respectively.
53
NOTE 4 - INVESTMENT SECURITIES
The amortized cost and fair value of investment securities, with gross
unrealized gains and losses, are as follows as of December 31:
2006
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
----------------------------- --------- ---------- ---------- --------
U.S. Government and federal agencies $ 7,014 $ -- $ 94 $ 6,920
Government-sponsored enterprises 62,472 54 426 62,100
States and political subdivisions 112,966 434 646 112,754
Corporate 11,089 1 37 11,053
Mortgage-backed 21,059 25 461 20,623
-------- ---- ------ --------
TOTAL $214,600 $514 $1,664 $213,450
======== ==== ====== ========
2005
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
----------------------------- --------- ---------- ---------- --------
U.S. Government and federal agencies $ 53,953 $ -- $1,040 $ 52,913
States and political subdivisions 95,976 532 1,073 95,435
Corporate 13,294 3 77 13,220
Mortgage-backed 22,465 22 649 21,838
-------- ---- ------ --------
TOTAL $185,688 $557 $2,839 $183,406
======== ==== ====== ========
The Corporation had pledged investments in the following amounts as of December
31:
2006 2005
------- -------
Pledged for public deposits and for other
purposes necessary or requried by law $24,990 $10,516
Pledged to secure repurchase agreements 6,500 8,832
------- -------
TOTAL $31,490 $19,348
======= =======
54
The amortized cost and fair value of available-for-sale securities by
contractual maturity at December 31, 2006 are as follows:
Available for Sale
--------------------
Amortized Fair
Cost Value
--------- --------
Within 1 year $ 62,318 $ 61,939
Over 1 year through 5 years 89,216 88,899
After 5 years through 10 years 35,490 35,462
Over 10 years 6,517 6,527
-------- --------
193,541 192,827
Mortgage-backed securities 21,059 20,623
-------- --------
$214,600 $213,450
======== ========
Because of their variable payments, mortgage backed securities are not reported
by a specific maturity group.
A summary of the activity related to the sale of available-for-sale securities
during the years ended December 31 is as follows:
2006 2005 2004
------- ------ -------
Proceeds from the sale of available-for-sale
securities $15,257 $4,588 $45,044
======= ====== =======
Gross realized gains $ -- $ 9 $ 129
Gross realized losses (112) (7) (23)
------- ------ -------
Net realized (losses) gains $ (112) $ 2 $ 106
======= ====== =======
Applicable income taxes (benefit) $ (38) $ -- $ 36
======= ====== =======
55
Management evaluates securities for other-than-temporary impairment on at least
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to (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.
Information pertaining to securities with gross unrealized losses at December
31, aggregated by investment category and length of time that individual
securities have been in continuous loss position, follows:
December 31, 2006
--------------------------------------------------------
Less Than Twelve
Months Over Twelve Months
-------------------- --------------------
Gross Gross Total
Unrealized Fair Unrealized Fair Unrealized
Securities Available-for-Sale Losses Value Losses Value Losses
----------------------------- ---------- ------- ---------- ------- ----------
U.S. Government and federal agency $ -- $ -- $ 94 $ 6,920 $ 94
Government-sponsored enterprises 12 15,592 414 30,482 426
States and political subdivisions 80 20,688 566 40,472 646
Corporate 6 4,994 31 2,472 37
Mortgage-backed 3 1,960 458 16,431 461
---- ------- ------ ------- ------
Total securities available-for-sale $101 $43,234 $1,563 $96,777 $1,664
==== ======= ====== ======= ======
December 31, 2005
--------------------------------------------------------
Less Than Twelve
Months Over Twelve Months
-------------------- --------------------
Gross Gross Total
Unrealized Fair Unrealized Fair Unrealized
Securities Available-for-Sale Losses Value Losses Value Losses
----------------------------- ---------- ------- ---------- ------- ----------
U.S. Government and federal agency $157 $17,155 $ 883 $35,171 $1,040
States and political subdivisions 397 27,687 676 26,633 1,073
Corporate 1 931 76 3,563 77
Mortgage-backed 106 7,053 543 13,169 649
---- ------- ------ ------- ------
Total securities available-for-sale $661 $52,826 $2,178 $78,536 $2,839
==== ======= ====== ======= ======
In analyzing an issuer's financial condition, management considers whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and industry analysts'
reports. As the Corporation has the ability to hold debt securities until
maturity, or for the foreseeable future if classified as available for sale, no
declines are deemed to be other than temporary.
56
NOTE 5 - 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
-------------------
2006 2005
-------- --------
Mortgage loans on real estate
Residential 1-4 family $225,612 $160,542
Commercial 142,464 111,997
Agricultural 29,223 29,575
Construction 24,412 17,871
Second mortgages 30,815 24,560
Equity lines of credit 19,811 23,278
-------- --------
Total mortgage loans 472,337 367,823
Commercial and agricultural loans
Commercial 70,237 67,544
Agricultural production 18,079 19,849
-------- --------
Total commercial and agricultural loans 88,316 87,393
Consumer installment loans
Personal 29,783 26,304
Credit cards 606 1,722
-------- --------
Total consumer installment loans 30,389 28,026
Total loans 591,042 483,242
Less: Allowance for loan losses 7,605 6,899
-------- --------
LOANS, NET $583,437 $476,343
======== ========
57
A summary of changes in the allowance for loan losses follows:
Year Ended December 31
-------------------------
2006 2005 2004
------- ------ ------
Balance at beginning of year $ 6,899 $6,444 $6,204
Allowance of acquired bank 726 -- --
Loans charged off (1,149) (643) (935)
Recoveries 447 321 440
Provision charged to income 682 777 735
------- ------ ------
Balance at end of year $ 7,605 $6,899 $6,444
======= ====== ======
The following is a summary of information pertaining to impaired loans at
December 31:
2006 2005 2004
------ ------ ------
Impaired loans without a valuation allowance $ -- $2,211 $1,786
Impaired loans with a valuation allowance 3,928 314 448
------ ------ ------
Total impaired loans $3,928 $2,525 $2,234
====== ====== ======
Valuation allowance related to impaired loans $ 594 $ 184 $ 304
Total nonaccrual loans $3,444 $1,375 $1,900
Accruing loans past due 90 days or more $1,185 $1,058 $ 702
Average investment in impaired loans $3,043 $2,531 $2,949
Interest income recognized on impaired loans was not significant during any of
the three years ended December 31, 2006. No additional funds are committed to be
advanced in connection with impaired loans.
NOTE 6 - SERVICING
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 $255,577, $256,358, and $253,282 at December
31, 2006, 2005, and 2004 respectively; such loans are not included in the
accompanying consolidated balance sheets. The fair value of servicing rights was
determined using a discount rate of 8.7% , prepayment speeds ranging from 8.5%
to 25.4%, depending upon the stratification of the specific right and a weighted
average default rate of 0.0%. Servicing loans for others generally consists of
collecting mortgage payments, maintaining escrow accounts, disbursing payments
to investors and taxing authorities, and foreclosure processing.
The following table summarizes the changes in each year of the carrying value of
mortgage servicing rights included in other assets as of December 31:
2006 2005 2004
------- ------- -------
Balance at beginning of year $ 2,125 $ 2,046 $ 1,714
Mortgage servicing rights capitalized 2,655 2,520 2,633
Accumulated amortization (2,589) (2,429) (2,279)
Impairment valuation allowance (36) (12) (22)
------- ------- -------
BALANCE AT END OF YEAR $ 2,155 $ 2,125 $ 2,046
======= ======= =======
Impairment increases (reductions) $ 24 $ (10) $ (189)
======= ======= =======
58
NOTE 7 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
2006 2005
------- -------
Land $ 3,089 $ 3,027
Buildings and improvements 15,235 12,528
Furniture and equipment 21,501 21,003
------- -------
Total 39,825 36,558
Less: Accumulated depreciation 19,071 17,386
------- -------
PREMISES AND EQUIPMENT, NET $20,754 $19,172
======= =======
Depreciation expense amounted to $1,852, $1,735 and $1,552 in 2006, 2005, and
2004, respectively.
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the year is as follows:
2006 2005
------- ------
Balance January 1 $ 3,136 $3,136
Goodwill assigned to Farwell acquisition 22,263 --
Other acquisitions 490 --
------- ------
BALANCE AT DECEMBER 31 $25,889 $3,136
======= ======
Acquired intangible assets at year end were as follows:
2006
--------------------------------
Net
Gross Accumulated Carrying
Amount Amortization Amount
------ ------------ --------
Amortizable intangible assets:
Core deposit premium resulting from
the Farwell acquisition in 2006 $1,442 $ 66 $1,376
Core deposit premium resulting from
previous acquisitions 2,451 2,428 23
------ ------ ------
TOTAL $3,893 $2,494 $1,399
====== ====== ======
2005
--------------------------------
Net
Gross Accumulated Carrying
Amount Amortization Amount
------ ------------ --------
CORE DEPOSIT PREMIUM RESULTING FROM
BRANCH AND OTHER ACQUISITIONS $2,451 $2,334 $117
====== ====== ====
Amortization expense associated with identified intangible assets was $160, $94,
and $93 in 2006, 2005, and 2004, respectively.
59
Estimated amortization expense associated with identifiable intangibles for each
of the next five years is as follows:
Year Amount
---- ------
2007 $259
2008 210
2009 184
2010 157
2011 131
NOTE 9 - DEPOSITS
Scheduled maturities of time deposits for the years succeeding December 31, 2006
are as follows:
Year Amount
---- --------
2007 $237,009
2008 44,213
2009 22,523
2010 31,822
2011 16,433
Thereafter 531
Interest expense on time deposits greater than $100 was $5,195 in 2006, $2,751
in 2005, and $2,140 in 2004.
NOTE 10 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
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
$6,500 and $8,832 at December 31, 2006 and 2005, 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.
NOTE 11 - BORROWED FUNDS
Borrowed funds consist of the following obligations at December 31:
2006 2005
------- -------
Federal Home Loan Bank advances $50,756 $45,286
Federal Funds purchased 6,765 6,500
Securities sold under agreements to repurchase 724 266
Unsecured note payable 58 113
------- -------
$58,303 $52,165
======= =======
The Federal Home Loan Bank borrowings are collateralized by a blanket lien on
all qualified 1-to-4 family whole mortgage loans and U.S. government and federal
agency securities. Advances are also secured by FHLB stock owned by the Banks.
60
The maturity and weighted average interest rates of FHLB advances follows at
December 31:
2006
--------------
Amount Rate
------- ----
Fixed rate advances due 2007 $16,000 4.79%
Fixed rate advances due 2008 6,000 4.79%
Fixed rate advances due 2009 8,500 4.88%
Fixed rate advances due 2010 5,256 5.17%
One year putable advance due 2010 3,000 4.98%
Fixed rate advances due 2012 2,000 4.90%
Fixed rate advances due 2015 10,000 4.84%
------- ----
$50,756 4.87%
======= ====
2005
--------------
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 5,000 3.72%
Fixed rate advances due 2008 6,000 4.79%
Fixed rate advances due 2009 3,500 3.66%
Fixed rate advances due 2010 5,286 5.18%
One Year putable advance due 2010 3,000 4.98%
Fixed rate advances due 2012 2,000 4.90%
Fixed rate advances due 2015 10,000 4.84%
------- ----
$45,286 4.44%
======= ====
The unsecured note payable has an imputed interest rate of 4.16%; such note is
due in July, 2007.
NOTE 12 - OTHER NON-INTEREST EXPENSES
A summary of expenses included in Other Non-Interest Expenses for the year ended
December 31 is as follows:
2006 2005 2004
------ ------ ------
Director fees $ 477 $ 503 $ 496
Marketing and advertising 697 624 522
Audit and SOX compliance fees 1,010 606 990
Other, not individually significant 3,822 3,393 3,590
------ ------ ------
$6,006 $5,126 $5,598
====== ====== ======
NOTE 13 - FEDERAL INCOME TAXES
Components of the consolidated provision for income taxes are as follows for the
year ended December 31:
2006 2005 2004
------ ------ ------
Currently payable $1,645 $1,685 $1,573
Deferred 274 263 305
------ ------ ------
FEDERAL INCOME TAXES $1,919 $1,948 $1,878
====== ====== ======
61
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:
2006 2005 2004
------- ------- -------
Income taxes at 34% statutory rate $ 3,033 $ 2,966 $ 2,898
Effect of nontaxble income (1,239) (1,100) (1,104)
Effect of nondeductible expenses 125 82 84
------- ------- -------
PROVISION FOR FEDERAL INCOME TAXES $ 1,919 $ 1,948 $ 1,878
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities, included in other assets,
as of December 31 are as follows:
2006 2005
------ ------
DEFERRED TAX ASSETS
Allowance for loan losses $1,728 $1,550
Deferred directors' fees 1,359 919
Employee benefit plans 307 531
Core deposit premium and acquisition expenses -- 23
Net unrealized loss on minimum pension liability 1,405 --
Net unrealized loss on available-for-sale securities 392 776
Other 78 51
------ ------
TOTAL DEFERRED TAX ASSETS 5,269 3,850
====== ======
DEFERRED TAX LIABILITIES
Prepaid pension asset 794 730
Premises and equipment 638 663
Accretion on securities 66 35
Core deposit premium and acquisition expenses 157 --
Other 178 226
------ ------
TOTAL DEFERRED TAX LIABILITIES 1,833 1,654
------ ------
NET DEFERRED TAX ASSETS $3,436 $2,196
====== ======
NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES
CREDIT-RELATED FINANCIAL INSTRUMENTS
The Corporation is party to credit related 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 is exposed to credit-related loss in the event of nonperformance
by the counter parties 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 $85,077 and $69,591 at December 31,
2006 and 2005, 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.
62
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, 2006
and 2005 the Corporation had a total of $4,079 and $1,565, 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.
NOTE 15 - ON-BALANCE SHEET ACTIVITIES
DERIVATIVE LOAN COMMITMENTS
Mortgage loan commitments are referred to as derivative loan commitments if the
loan that will result from exercise of the commitment will be held for sale upon
funding. The Corporation enters into commitments to fund residential mortgage
loans at specific times in the future, with the intention that these loans will
subsequently be sold in the secondary market. A mortgage loan commitment binds
the Corporation to lend funds to a potential borrower at a specified interest
rate within a specified period of time, generally up to 60 days after inception
of the rate lock.
Outstanding derivative loan commitments expose the Corporation to the risk that
the price of the loans arising from the exercise of the loan commitment might
decline from the inception of the rate lock to funding of the loan due to
increases in mortgage interest rates. If interest rates increase, the value of
these loan commitments decreases. Conversely, if interest rates decrease, the
value of these loan commitments increases. The notional amount of undesignated
interest rate lock commitments was $532 and $234 at December 31, 2006 and 2005,
respectively.
FORWARD LOAN SALE COMMITMENTS
To protect against the price risk inherent in derivative loan commitments, the
Corporation utilized both "mandatory delivery" and "best efforts" forward loan
sale commitments to mitigate the risk of potential decreases in the values of
loan that would result from the exercise of the derivative loan commitments.
With a "mandatory delivery" contract, the Corporation commits to deliver a
certain principal amount of mortgage loans to an investor at a specified price
on or before a specified date. If the Corporation fails to deliver the amount of
mortgages necessary to fulfill the commitment by the specified date, it is
obligated to pay a "pair-off" fee, based on then current market prices, to the
investor to compensate the investor for the shortfall.
With a "best efforts" contract, the Corporation commits to deliver an individual
mortgage loan of a specified principal amount and quality to an investor if the
loan to the underlying borrower closes. Generally, the price the investor will
pay the seller for an individual loan is specified prior to the loan being
funded (e.g. on the same day the lender commits to lend funds to a potential
borrower).
The Corporation expects that these forward loan sale commitments will experience
changes in fair value opposite to change in fair value of derivate loan
commitments. The notional amount of undesignated forward loan sale commitments
was $3,266 and $744 at December 31, 2006 and 2005, respectively.
The fair values of the rate lock loan commitments related to the origination of
mortgage loans that will be held for sale and the forward loan sale commitments
are deemed insignificant by management and, accordingly, are not recorded in
these consolidated financial statements.
63
NOTE 16 - COMMITMENTS AND OTHER MATTERS
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 charitable donations reported in noninterest expenses
were $0, $0, and $27 in 2006, 2005 and 2004, respectively. The assets of the
Foundation as of December 31, 2006 and 2005were $1,318 and $1,551, respectively.
Banking regulations limit the transfer of assets in the form of dividends,
loans, or advances from the subsidiary Banks to the Corporation. At December 31,
2006, 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, 2006, the amount available
for dividends without regulatory approval was approximately $781.
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 family.
Medical claims are subject to a lifetime maximum of $5,000 per covered
individual. Expenses are accrued based on estimates of the aggregate liability
for claims incurred and the Corporation's experience. Expenses were $1,316 in
2006, $1,650 in 2005 and $1,184 in 2004.
The Corporation offers dividend reinvestment and employee and director stock
purchase plans. The dividend reinvestment plan allows shareholders to purchase
previously unissued IBT Bancorp common shares. The stock purchase plan allows
employees and directors to purchase IBT Bancorp common stock through payroll
deduction. The number of shares reserved for issuance under these plans are
280,000 with 98,552 shares unissued at December 31, 2006. During 2006, 2005 and
2004, 61,258 shares were issued for $2,460, 58,019 shares were issued for
$2,180, and 57,388 shares were issued for $2,001, respectively, in cash pursuant
to these plans.
The subsidiary banks of the Corporation have obtained approval to borrow up to
$79,000 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.
NOTE 17 - MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Corporation (on a consolidated basis) and its subsidiary banks, Isabella
Bank and Trust and FSB Bank ("Banks") are subject to various regulatory capital
requirements administered by the Federal Reserve Bank and the Federal Deposit
Insurance Corporation (The Regulators). Failure to meet minimum capital
requirements can initiate mandatory and possibly additional discretionary
actions by The Regulators that if undertaken, could have a material effect on
the Corporation's and Banks' financial statements. Under The Regulators' 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, liabilities, capital, and certain
off-balance-sheet items, as calculated under regulatory accounting standards.
The Banks' capital amounts and classifications are also subject to qualitative
judgments by The Regulators about components, risk weightings, and other
factors. Prompt corrective action provisions are not applicable to bank holding
companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2006 and 2005, that the Corporation and the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 2006, the most recent notifications from The Regulators
categorized the Banks as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, an institution
must maintain total risk based, Tier 1 risk-based, and Tier 1 leverage ratios as
set forth in the following tables. There are no conditions or events since the
notifications that management believes has changed the Banks' categories.
64
The Corporation's and each Bank's actual capital amounts (in thousands) and
ratios are also presented in the table.
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
--------------- --------------- ----------------
Amount Ratio Amount Ratio Amount Ratio
------- ----- ------- ----- -------- ------
DECEMBER 31, 2006
Total capital to risk weighted assets
Isabella Bank & Trust $51,484 12.2% $33,748 8.0% $42,185 10.0%
FSB Bank 30,660 20.4 12,025 8.0 15,032 10.0
Consolidated 96,792 16.6 46,552 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank & Trust 46,917 11.1 16,874 4.0 25,311 6.0
FSB Bank 28,767 19.1 6,013 4.0 9,019 6.0
Consolidated 89,514 15.4 23,276 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank & Trust 46,917 7.5 25,146 4.0 31,432 5.0
FSB Bank 28,767 12.3 9,337 4.0 11,672 5.0
Consolidated 89,514 11.6 30,926 4.0 N/A N/A
DECEMBER 31, 2005
Total capital to risk weighted assets
Isabella Bank & Trust $48,092 12.4% $31,040 8.0% $38,800 10.0%
FSB Bank 14,162 14.7 7,733 8.0 9,667 10.0
Consolidated 85,184 17.1 39,761 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank & Trust 43,458 11.2 15,520 4.0 23,280 6.0
FSB Bank 12,941 13.4 3,867 4.0 5,800 6.0
Consolidated 78,963 15.9 19,881 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank & Trust 43,458 7.6 23,011 4.0 28,763 5.0
FSB Bank 12,941 9.5 5,426 4.0 6,783 5.0
Consolidated 78,963 11.3 27,886 4.0 N/A N/A
65
NOTE 18 - 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'
five highest consecutive years of compensation out of the last ten 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.
In December 2006, the Board of Directors voted to curtail the defined benefit
plan effective March 1, 2007. The effect of the curtailment, which will be
recognized in the first quarter of 2007, is to suspend the current participant's
accrued benefits as of March 1, 2007 and to limit participation in the plan to
eligible employees as of December 31, 2006. Subsequent to the decision to
curtail the defined benefit plan, the Corporation decided to increase the
contributions to the Corporation's 401(k) plan effective January 1, 2007 (see
below)
Changes in the projected benefit obligation and plan assets during each year,
the funded status of the plan and a reconciliation of the amount recognized in
the Corporation's consolidated balance sheets are summarized as follows at
December 31:
2006 2005 2004
------- ------- -------
Change in projected benefit obligation
Benefit obligation, January 1 $ 9,557 $ 8,783 $ 8,083
Service cost 593 513 410
Interest cost 607 540 518
Actuarial loss 724 25 144
Benefits paid (485) (304) (372)
------- ------- -------
BENEFIT OBLIGATION, DECEMBER 31 10,996 9,557 8,783
------- ------- -------
Change in plan assets
Fair value of plan assets, January 1 7,609 6,311 5,427
Investment return 947 351 348
Corporation contribution 1,128 1,251 908
Benefits paid (485) (304) (372)
------- ------- -------
FAIR VALUE OF PLAN ASSETS, DECEMBER 31 9,199 7,609 6,311
------- ------- -------
FUNDED STATUS AT DECEMBER 31 $(1,797) $(1,948) $(2,472)
======= ======= =======
The incremental effect of applying FASB Statement No. 158 on individual line
items in the consolidated statement of financial position as of December 31,
2006 are as follows:
Before After
Application of Application of
SFAS 158 Adjustments SFAS 158
-------------- ----------- --------------
(Prepaid) accrued liability for pension benefits $ (2,337) $ 4,134 $ 1,797
Deferred income tax assets 2,030 1,406 3,436
Total liabilities 792,581 1,797 794,378
Accumulated other comprehensive loss (759) (2,728) (3,487)
Total shareholders' equity 118,477 (2,728) 115,749
66
Amounts recognized in accumulated other comprehensive loss consist of:
December 31
-------------------------
2006 2005 2004
------- ---- --------
Additional minimum pension liability $ -- $-- $(1,839)
Tax effect -- -- 625
------- --- -------
Net of tax amount -- -- (1,214)
------- --- -------
Adjustment to initially apply FASB Statement No. 158 (4,134) -- --
Tax effect 1,406 -- --
------- --- -------
Net of tax amount (2,728) -- --
------- --- -------
TOTAL $(2,728) $-- $(1,214)
======= === =======
The accumulated benefit obligation was $8,072 and $7,079 at December 31, 2006
and 2005, respectively. The $4,134 adjustment consists primarily of unrecognized
net losses.
An adjustment to record the additional minimum pension liability as of December
31, 2004 was established by the recording of an intangible pension asset of $76,
and a reduction to other comprehensive loss of $1,839 and $18 in 2005 and 2004,
respectively.
The components of net periodic benefit cost and other amounts recognized in
other comprehensive income (loss) are as follows for the years ended December
31:
2006 2005 2004
------- -------- -----
NET PERIODIC BENEFIT COST
Service cost on benefits earned for
serviced rendered during the year $ 637 $ 558 $ 518
Interest cost on projected benefit obligation 607 540 501
Expected return on plan assets (555) (463) (430)
Amortization of unrecognized prior service cost 18 18 18
Amortization of unrecognized actuarial net loss 232 201 213
------- ------ -----
NET PERIODIC BENEFIT COST 939 854 820
------- ------ -----
OTHER CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS
RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS)
Adjustment to record the additional minimum pension
liability net of tax -- 1,214 12
Adjustment to initially apply FASB Statement No. 158
net of tax (2,728) -- --
------- ------ -----
TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS) (2,728) 1,214 12
------- ------ -----
TOTAL RECOGNIZED IN NET PERIODIC BENEFIT COST AND
OTHER COMPREHENSIVE INCOME (LOSS) $(1,789) $2,068 $ 832
======= ====== =====
Actuarial assumptions used in determining the projected benefit obligation are
as follows for the year ended December 31:
2006 2005 2004
---- ---- ----
Weighted average discount rate 6.00% 6.25% 6.25%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 7.50% 7.50% 8.00%
67
The actual weighted average assumptions used in determining the net periodic
pension costs are as follows for the year ended December 31:
2006 2005 2004
---- ---- ----
Discount rate 6.00% 6.25% 6.75%
Rate of compensation increase 4.50% 4.50% 4.50%
Expected long-term return on plan assets 7.50% 7.50% 8.00%
The discount rate decreased to 6.00% in 2006 from 6.25% in 2005. The expected
long term rate of return is based on the Corporation's actual recommended rate.
The expected rate of return assumption was selected as an estimate of
anticipated future long term rates of return on plan assets as measured on a
market value basis. Factors considered in making this selection include:
- Historical longer term rates of return for broad asset classes.
- Actual past rates of return achieved by the plan.
- The general mix of assets held by the plan.
- The stated investment policy for the plan.
The selected rate of return is net of anticipated investment related expenses.
The Corporation's pension plan weighted-average asset allocations by asset
category are as follows at December 31:
2006 2005
------ ------
Asset Category
Equity securities 0.0% 64.2%
Debt securities 0.0% 28.7%
Other 100.0% 7.1%
------ ------
Total 100.00% 100.00%
====== ======
Debt securities include certificates of deposit with the Banks in the amounts of
$0 (0% of total plan assets) and $1,173 (15% of total plan assets) at December
31, 2006 and 2005, respectively. Also included in other is $4,000 (44% of total
plan assets) and $537 (7% of total plan assets) of funds in a money market
account with Isabella Bank and Trust as of December 31, 2006 and 2005,
respectively. As a result of the Corporation changing investment advisors as of
year end, all of the plan's assets were in money market accounts as of December
31, 2006. These funds were substantially re-invested by January 15, 2007.
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 2006
and 2005 were as follows:
Equity securities 55% to 65%
Debt securities 25% to 35%
Real estate 0.00%
Other 15.00%
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 $861 to the pension plan in
2007.
68
Estimated future benefit payments, which reflect expected future service, as
appropriate, are as follows for the next ten years:
Year Amount
---- ------
2007 $ 327
2008 333
2009 341
2010 370
2011 391
Years 2012 - 2016 (total) 3,042
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
2006, 2005, and 2004 were $97, $85, and $65, 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 2006, 2005, and 2004 was $13, $11, and $11, respectively. Total
allocated shares outstanding related to the ESOP at December 31, 2006 and 2005
were 161,762 and 159,987, respectively, and were included in the computation of
dividends and earnings per share in each of the respective years.
401(K) PLAN
The Corporation has a 401(k) plan in which substantially all employees are
eligible to participate. Employees may contribute up to 15% of their
compensation subject to certain limits based on federal tax laws. The
Corporation began making matching contributions equal to 25% of the first 3% of
an employee's compensation contributed to the plan in 2005. Employees are 0%
vested through their first three years of employment and are 100% vested after 3
years of service. For the year ended December 31, 2006 and 2005, expenses
attributable to the Plan were $47 and $49, respectively.
As a result of the curtailment of the defined benefit plan noted above the
Corporation decided to increase the contributions to the Corporation's 401(k)
plan effective January 1, 2007. The enhancement includes a 3.0% drop-in
contribution for all eligible employees and matching contributions equal to 50%
of the first 4.0% of an employee's compensation contributed to the Plan during
the year. As a result of the curtailment, an adjustment in the accounting for
the Corporation's defined benefit plan will be reported in accordance with SFAS
No. 88 "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and for Termination Benefits" in the first quarter of
2007. The Corporation does not anticipate a significant impact on the operating
results or statement of position in future years.
EQUITY COMPENSATION PLAN
Pursuant to the terms of a Deferred Director fee plan, directors of the
Corporation are required to defer at least 25%, and may defer up to 100%, of
their earned board fees. Deferred director 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 dividends as declared.
Upon retirement from the board, a participant is eligible to receive one share
of common stock for each one stock unit. Prior to December 31, 2005, the Plan
contained a cash payout option, and a liability was recorded in the consolidated
financial statements. The Plan as modified does not allow for cash settlement
and, therefore, such share-based payment awards qualify for classification as
equity. In connection with the amendment, $2,704 was reclassified from other
liabilities and recorded as an addition to the common stock account as of
December 31, 2005. All authorized but unissued shares of common stock are
eligible for issuance under this Plan. As of December 31, 2006 and 2005, 171,014
and 161,571 shares, respectively, were to be issued under this plan, as adjusted
for the 10% stock dividend paid on February 15, 2006, pursuant to an existing
antidilution provision required by the plan.
69
NOTE 19 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Banks have granted loans to principal
officers and directors and their affiliates (including their families and
companies in which they have 10% or more ownership). Annual activity consisted
of the following:
2006 2005
-------- -------
Beginning balance $ 9,679 $ 9,505
New loans 12,521 7,718
Repayments (11,451) (7,544)
-------- -------
Ending Balance $ 10,749 $ 9,679
======== =======
Total deposits of these principal officers and directors and their affiliates
amounted to $10,467 and $6,685 at December 31, 2006 and 2005, respectively. In
addition, IBT Bancorp's defined benefit plan and the Employee Stock Ownership
Plan (Note 18) held deposits with the banks aggregating $4,000 and $862, and
$1,710 and $497 respectively at December 31, 2006 and 2005.
NOTE 20 - 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. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
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. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its 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 fair 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 of cash and short-term
instruments approximate fair values.
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 of mortgage loans held for sale are
based on commitments on hand from investors or prevailing market prices.
LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
Fair values for other loans (e.g., real estate mortgage, agricultural,
commercial, and installment) are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The resulting amounts are adjusted to
estimate the effect of declines, if any, in the credit quality of borrowers
since the loans were originated. Fair values for non-performing loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
DEPOSIT LIABILITIES: Demand, savings, and money market deposits are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). Fair values for variable rate certificates of deposit
approximate their recorded book balance. Fair values for fixed-rate certificates
of deposit are estimated using discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
70
MORTGAGE SERVICING RIGHTS: Fair value is determined using prices for similar
assets with similar characteristics when applicable, or based upon discounted
cash flow analyses.
SHORT-TERM BORROWINGS: The carrying amounts or federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within ninety days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analyses based on
the Corporation's current incremental borrowing rates for similar types of
borrowings arrangements.
BORROWINGS: The fair values of the Corporation's long-term borrowings are
estimated using discounted cash flow analyses based on the Corporation's current
incremental borrowing arrangements. 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.
DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for derivative loan commitments
and forward loan sale commitments are based on fair values of the underlying
mortgage loans and the probability of such commitments being exercised.
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:
2006 2005
--------------------- ---------------------
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
---------- -------- ---------- --------
ASSETS
Cash and demand deposits due from banks $ 31,359 $ 31,359 $ 30,825 $ 30,825
Investment securities 213,450 213,450 183,406 183,406
Mortgage loans available for sale 2,765 2,734 757 744
Net loans 585,703 583,437 479,765 476,343
Accrued interest receivable 5,765 5,765 4,786 4,786
Mortgage servicing rights 2,155 2,155 2,125 2,125
LIABILITIES
Deposits with no stated maturities 373,309 373,309 331,487 331,487
Deposits with stated maturities 352,595 352,531 260,615 260,991
Borrowed funds 58,390 58,303 52,216 52,165
Accrued interest payable 1,197 1,197 857 857
71
NOTE 21 - PARENT COMPANY ONLY FINANCIAL INFORMATION (UNAUDITED)
CONDENSED BALANCE SHEETS
December 31
------------------
2006 2005
-------- -------
ASSETS
Cash on deposit at subsidiary Banks $ 4,075 $ 8,749
Securities available for sale 2,534 4,789
Investments in subsidiaries 106,064 61,841
Premises and equipment 3,094 3,025
Other assets 2,995 3,576
-------- -------
TOTAL ASSETS $118,762 $81,980
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 3,013 $ 1,078
Shareholders' equity 115,749 80,902
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $118,762 $81,980
======== =======
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
------------------------
2006 2005 2004
------ ------ ------
Income
Dividends from subsidiaries $4,025 $7,275 $3,500
Interest income 305 182 139
Management fee and other 1,280 1,384 643
------ ------ ------
TOTAL INCOME 5,610 8,841 4,282
Expenses 3,872 2,808 2,065
------ ------ ------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries 1,738 6,033 2,217
Federal income tax benefit 825 478 470
------ ------ ------
2,563 6,511 2,687
Undistributed earnings of subsidiaries 4,438 265 3,958
------ ------ ------
NET INCOME $7,001 $6,776 $6,645
====== ====== ======
72
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
---------------------------
2006 2005 2004
------- ------- -------
OPERATING ACTIVITIES
Net income $ 7,001 $ 6,776 $ 6,645
Adjustments to reconcile net income
to cash provided by operations
Undistributed earnings of subsidiaries (4,438) (265) (3,958)
Share based payment awards 470 -- --
Depreciation 591 533 21
Net amortization of investment securities 21 27 12
Realized loss on sale of investment securities 8 -- --
Deferred income taxes (benefit) 128 680 (13)
Changes in operating assets and liabilities which
provided (used) cash
Interest receivable 29 (29) (4)
Other assets (522) (746) (1,031)
Accrued interest and other expenses 138 (894) 809
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,426 6,082 2,481
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 6,650 344 260
Purchases (4,380) (1,523) (1,846)
Purchases of equipment and premises (660) (3,455) (7)
Advances to (repayment of) investment in subsidiaries (8,394) 652 --
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (6,784) (3,982) (1,593)
FINANCING ACTIVITIES
Cash dividends paid on common stock (3,775) (3,254) (3,070)
Proceeds from the issuance of common stock 2,459 2,684 2,001
Common stock repurchased -- -- (192)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,316) (570) (1,261)
------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVELANTS (4,674) 1,530 (373)
Cash and cash equivelants at beginning of year 8,749 7,219 7,592
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,075 $ 8,749 $ 7,219
======= ======= =======
73
NOTE 22 - 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 1 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 (Including
and Trust FSB Bank Parent) Total
------------- -------- ---------- --------
2006
Total assets $641,672 $260,400 $ 8,055 $910,127
Interest income 34,450 10,201 58 44,709
Net interest income 18,686 6,074 217 24,977
Provision for loan losses 532 150 -- 682
Net income (loss) 6,373 1,921 (1,293) 7,001
2005
Total assets $583,505 $136,853 $21,296 $741,654
Interest income 28,867 7,939 76 36,882
Net interest income 18,436 5,289 184 23,909
Provision for loan losses 585 192 -- 777
Net income (loss) 5,900 1,456 (580) 6,776
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
NOTE 23 - SUBSEQUENT EVENT
In February 2007, IBT Bancorp filed an application with the Federal Reserve to
merge FSB Bank into Isabella Bank and Trust. The merger is expected to be
approved in March 2007. The consolidation into a single charter will further
reduce operating expenses through the elimination of duplications in
memberships, licensing, service contracts, compliance, computer platforms, and
computer processing. The legal reorganization will have no significant effect on
the Corporation's consolidated financial statements.
74
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 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 December 31, 2006, pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Chief Executive Officer and Principal Financial
Officer concluded that the Corporation's disclosure controls and procedures as
of December 31, 2006, 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, 2006, that have materially affected, or are reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
Based on this evaluation, management has concluded that there have been no such
changes during the quarter ended December 31, 2006.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for the preparation and integrity of our published
consolidated financial statements. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States 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 consolidated 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
consolidated 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 consolidated 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 consolidated 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.
This assessment excluded internal control over financial reporting of The
Farwell State Savings Bank as permitted by the Securities
75
and Exchange Commission for current year acquisitions. The Farwell State Savings
Bank was acquired on October 3, 2006, and represented 12.4% of consolidated
assets at December 31, 2006 and 5.7% of consolidated net income for 2006.
Based upon these criteria, we believe that, as of December 31, 2006, our system
of internal control over financial reporting was effective.
Our independent registered public accounting firm, Rehmann Robson PC, has
audited our 2006 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 2006
consolidated 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
Chief Executive Officer
March 12, 2007
//s// Peggy L. Wheeler
-------------------------------------
Peggy L. Wheeler
Principal Financial Officer
March 5, 2007
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 2006 Annual Meeting Proxy Statement
("Proxy Statement") which is incorporated herein by reference.
For Information concerning the Corporation's Audit Committee financial experts,
see "Committees of the Board of Directors and Meeting Attendance" in the Proxy
Statement which is incorporated herein by reference.
The Corporation has adopted a Code of Business Conduct and Ethics that applies
to the Corporation's Chief Executive Officer and Principal Financial Officer.
The Corporation shall provide to any person without charge upon request, a copy
of its Code of Business Conduct and Ethics. Written requests should be sent to:
Secretary, IBT Bancorp, Inc., 200 East Broadway, Mount Pleasant, Michigan 48858.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning executive compensation, see "Executive Officers,"
"Compensation Committee Report," "Compensation Committee Interlocks and Insider
Participation," "Compensation Discussion and Analysis," and "Remuneration of
Directors" in the Proxy Statement which is incorporated herein by reference.
76
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, 2006, with respect
to compensation plans under which common shares of the Corporation are
authorized for issuance to directors, officers or employees in exchange for
consideration in the form of goods or services.
Number of Securities
Remaining
Number of Securities Available for Future
to be Issued Weighted Average Issuance
Upon Exercise of Exercise Price Under Equity
Outstanding of Outstanding Compensation Plans
Options, Warrants, Options, Warrants, (Excluding Securities
and Rights and Rights Reflected in Column (A))
Plan Category (A) (B) (C)
------------- -------------------- ------------------ ------------------------
Equity compensation plans approved by
Shareholders: None -- -- --
Equity compensation plans not
approved by shareholders (1):
1984 deferred director fee plan* 146,883 (1) (1)
Deferred director compensation Plan* 24,131 (2) (2)
-------
TOTAL 171,014
=======
(1) Pursuant to the terms of the Deferred Director fee plan, which was last
amended effective December 31, 2005, 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 dividends as declared. Upon retirement from
the board, a participant is eligible to receive one share of common stock
for each one stock unit. The Plan as modified does not allow for cash
settlement, and therefore such share-based payment awards qualify for
classification as equity. In connection with the amendment, $2,704 was
reclassified from other liabilities and recorded as an addition to the
common stock account. All authorized but unissued shares of common stock
are eligible for issuance under this Plan. As of 2005, 161,571 shares were
to be issued under the plan, as adjusted for the 10% stock dividend paid on
February 15, 2006 pursuant to an existing antidilution provision required
by the plan.
(2) Pursuant to the terms of the Deferred Compensation Plan for Non-Employee
Directors, which was effective January 1, 2006, directors of the
Corporation and its subsidiaries are required to defer at least 25% of
their earned board fees. Deferred fees are quarterly basis into stock units
of the Corporation's common stock. The fees are converted to stock units
based on the market price of the Corporation's common stock. Stock units
credited to a participant's account are eligible for stock and cash
dividends as declared. Upon retirement from the board, a participant is
eligible to receive one share of common stock for each one stock unit. All
authorized but unissued shares of common stock are eligible for issuance
under this Plan. As of December 31, 2006, 171,014 shares were to be issued
under the plan, as adjusted for the 10% stock dividend paid on February 15,
2006 pursuant to an existing antidilution provision required by the plan.
* As adjusted for the 10% stock dividend paid February 15, 2006.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For information, see "Indebtedness of and Transactions with Management" and
"Election of Directors" in the Proxy Statement, which is incorporated herein by
reference.
77
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.
78
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. See the exhibits listed below under Item 15(b):
(b) The following exhibits required by Item 601 of Regulation S-K 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 (8)
3(f) Amendment to Bylaws (10)
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)*
10(e) Deferred Compensation Plan for Non-Employee Directors
(9)*
10(f) IBT Bancorp Retirement Bonus Plan (11)*
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(a) Certification pursuant to section 302 of the Sarbanes-
Oxley Act of 2002 by the Chief Executive Officer
31(b) Certification pursuant to section 302 of the Sarbanes-
Oxley Act of 2002 by the Principal Financial Officer
32 Section 1350 Certification of Chief 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 IBT Bancorp, Inc. Form 10-K, dated March
26, 1996, and incorporated herein by reference.
(4) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
22, 2000, and incorporated herein by reference.
(5) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
27, 2001, and incorporated herein by reference.
79
(6) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
25, 2002, and incorporated herein by reference.
(7) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
15, 2004 and incorporated herein by reference.
(8) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
16, 2005, and incorporated herein by reference.
(9) Previously filed as an Exhibit to IBT Bancorp, Inc. Current Report on Form
8-K, dated December 14, 2005, and incorporated herein by reference.
(10) Previously filed as an Exhibit to IBT Bancorp, Inc. Current Report on Form
8-K, dated November 20, 2006, and incorporated herein by reference.
(11) Previously filed as an Exhibit to IBT Bancorp, Inc. Current Report on Form
8-K, dated December 26, 2006, and incorporated herein by reference.
* Management Contract or Compensatory Plan or Arrangement.
80
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 12, 2007
---------------------------------
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 12, 2007
------------------------------------- Executive Officer and
Dennis P. Angner Director
/s/ Richard J. Barz Director March 05, 2007
-------------------------------------
Richard J. Barz
/s/ Sandra L. Caul Director March 07, 2007
-------------------------------------
Sandra L. Caul
/s/ James C. Fabiano Director March 05, 2007
-------------------------------------
James C. Fabiano
/s/ David W. Hole Director March 07, 2007
-------------------------------------
David W. Hole
/s/ David J. Maness Director March 05, 2007
------------------------------------
David J. Maness
/s/ W. Joseph Manifold Director March 05, 2007
-------------------------------------
W. Joseph Manifold
/s/ Timothy M. Miller Director March 07, 2007
-------------------------------------
Timothy Miller
/s/ Ronald E. Schumacher Director March 05, 2007
-------------------------------------
Ronald E. Schumacher
81
/s/ William J. Strickler Director March 06, 2007
-------------------------------------
William J. Strickler
/s/ Dale Weburg Director March 12, 2007
-------------------------------------
Dale Weburg
/s/ Peggy L. Wheeler Sr. Vice President and March 05, 2007
------------------------------------- Controller (Principal
Peggy L. Wheeler Financial Officer)
82
IBT Bancorp
FORM 10-K
Index to Exhibits
Exhibit Form 10-K
Number Exhibit Page Number
------- --------------------------------------------- -----------
21 Subsidiaries of the Registrant 75
23 Consent of Rehmann Robson P.C. 76
Independent Registered Public Accounting Firm
31 (a) Certification pursuant to Rule 13a - 14(a) of
the Chief Executive Officer 77
31 (b) Certification pursuant to Rule 13a - 14(a) of
the Principal Financial Officer 78
32 Section 1350 Certification of Chief Executive
Officer and Principal Financial Officer 79
83