UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 2007
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, Mt. Pleasant, MI 48858
(Address of principal executive offices) (Zip code)
(989) 772-9471
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is 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 [ ] Accelerated Filer [X] 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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock no par value, 6,337,685 as of October 15, 2007
1
IBT BANCORP, INC.
Index to Form 10-Q
Page Numbers
------------
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3-14
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-29
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 30-31
Item 4 Controls and Procedures 32
PART II OTHER INFORMATION
Item 1A Risk Factors 33
Item 2 Unregistered Sales of Equity Securities and Use of
Proceeds 33
Item 6 Exhibits 33
Signatures 34
Exhibit 31(a) 35
Exhibit 31(b) 36
Exhibit 32 37
2
Item 1 -- Condensed Consolidated Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
September 30 December 31
2007 2006
------------ -----------
ASSETS
Cash and demand deposits due from banks $ 23,527 $ 31,359
Trading securities 30,062 --
Securities available for sale (amortized
cost of $182,909 in 2007 and $214,600 in 2006) 182,983 213,450
Mortgage loans available for sale 1,382 2,734
Loans
Agricultural 48,967 47,302
Commercial 232,861 212,701
Installment 30,582 30,389
Residential real estate mortgage 297,776 300,650
-------- --------
TOTAL LOANS 610,186 591,042
Less allowance for loan losses 7,614 7,605
-------- --------
NET LOANS 602,572 583,437
Accrued interest receivable 6,619 5,765
Premises and equipment 21,446 20,754
Corporate-owned life insurance policies 13,084 12,763
Acquisition intangibles and goodwill, net 27,075 27,288
Equity securities without readily determinable fair values 6,325 3,480
Other assets 8,646 9,097
-------- --------
TOTAL ASSETS $923,721 $910,127
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 78,470 $ 83,902
NOW accounts 106,255 111,406
Certificates of deposit and other savings 409,581 388,176
Certificates of deposit over $100,000 132,463 142,356
-------- --------
TOTAL DEPOSITS 726,769 725,840
Other borrowed funds ($7,479 carried at fair value in 2007) 67,077 58,303
Escrow funds payable 3,648 2,416
Accrued interest and other liabilities 5,045 7,819
-------- --------
TOTAL LIABILITIES 802,539 794,378
Shareholders' Equity
Common stock -- no par value
10,000,000 shares authorized; outstanding--
6,337,685 in 2007 (6,335,861 in 2006) 115,075 114,785
Retained earnings 6,787 4,451
Accumulated other comprehensive loss (680) (3,487)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 121,182 115,749
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $923,721 $910,127
======== ========
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands except per share data)
Nine Months Ended
September 30
-----------------------
2007 2006
---------- ----------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year 6,335,861 4,974,715
Common stock dividends -- 497,299
Issuance of common stock 43,252 38,404
Common stock repurchased (41,428) --
---------- ----------
BALANCE END OF PERIOD 6,337,685 5,510,418
========== ==========
COMMON STOCK
Balance at beginning of year $ 114,785 $ 72,296
Common stock dividends (10%) -- 20,887
Transfer -- (12,000)
Issuance of common stock 1,470 1,537
Share-based payment awards under
equity compensation plan 621 350
Common stock repurchased (1,801) --
---------- ----------
BALANCE END OF PERIOD 115,075 83,070
RETAINED EARNINGS
Balance at beginning of year 4,451 10,112
Net income 5,662 5,039
Common stock dividends (10%) -- (20,887)
Transfer -- 12,000
Adjustment to initially apply FASB Statement No. 159,
net of tax (Note 5) (1,050) --
Cash dividends ($0.36 per share in 2007 and $0.33 per share
in 2006) (2,276) (1,818)
---------- ----------
BALANCE END OF PERIOD 6,787 4,446
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (3,487) (1,506)
Adjustment to initially apply fair value provisions
of FASB Statement No. 159, net of tax (Note 5) 897 --
Other comprehensive income 1,910 473
---------- ----------
BALANCE END OF PERIOD (680) (1,033)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY END OF PERIOD $ 121,182 $ 86,483
========== ==========
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2007 2006 2007 2006
------- -------- ------- -------
INTEREST INCOME
Loans, including fees $11,227 $ 9,269 $32,625 $26,129
Investment securities
Taxable 967 1,252 2,609 3,572
Nontaxable 954 693 2,659 2,018
Trading account securities 389 -- 1,809 --
Federal funds sold and other 257 98 523 236
------- ------- ------- -------
TOTAL INTEREST INCOME 13,794 11,312 40,225 31,955
INTEREST EXPENSE
Deposits 5,783 4,425 17,030 11,874
Borrowings 907 739 2,463 1,878
------- ------- ------- -------
TOTAL INTEREST EXPENSE 6,690 5,164 19,493 13,752
------- ------- ------- -------
NET INTEREST INCOME 7,104 6,148 20,732 18,203
Provision for loan losses 268 245 618 628
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,836 5,903 20,114 17,575
NONINTEREST INCOME
Service charges and fees 1,223 1,214 3,572 3,403
Title insurance 611 679 1,738 1,826
Trust fees 262 217 708 648
Gain on sale of mortgage loans 50 53 149 164
Net gain on trading activities 246 -- 272 --
Other 327 243 918 702
------- ------- ------- -------
TOTAL NONINTEREST INCOME 2,719 2,406 7,357 6,743
NONINTEREST EXPENSES
Compensation and benefits 3,933 3,148 11,750 10,161
Occupancy 440 457 1,329 1,325
Furniture and equipment 841 677 2,504 2,113
Other 1,781 1,377 5,049 4,337
------- ------- ------- -------
TOTAL NONINTEREST EXPENSES 6,995 5,659 20,632 17,936
INCOME BEFORE FEDERAL INCOME TAXES 2,560 2,650 6,839 6,382
Federal income taxes 464 619 1,177 1,343
------- ------- ------- -------
NET INCOME $ 2,096 $ 2,031 $ 5,662 $ 5,039
======= ======= ======= =======
EARNINGS PER SHARE
Basic $ 0.33 $ 0.37 $ 0.89 $ 0.92
======= ======= ======= =======
Diluted $ 0.32 $ 0.36 $ 0.87 $ 0.89
======= ======= ======= =======
CASH DIVIDENDS PER BASIC SHARE $ 0.12 $ 0.11 $ 0.36 $ 0.33
======= ======= ======= =======
See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
Three Months Ended Nine months Ended
September 30 September 30
------------------ -----------------
2007 2006 2007 2006
------ ------ ------- -------
NET INCOME $2,096 $2,031 $ 5,662 $5,039
------ ------ ------- ------
Unrealized income (losses) on available-for-sale securities:
Unrealized holding income (losses) arising during period 1,860 2,067 (165) 608
Reclassification adjustment for net realized losses
included in net income -- 6 30 109
------ ------ ------- ------
Net unrealized income (losses) 1,860 2,073 (135) 717
Tax effect (632) (705) 46 (244)
------ ------ ------- ------
Unrealized income (losses), net of tax 1,228 1,368 (89) 473
------ ------ ------- ------
Reduction in unrecognized actuarial loss
of defined benefit pension plan -- -- 3,029 --
Tax effect -- -- (1,030) --
------ ------ ------- ------
Reduction in unrecognized actuarial loss
of defined benefit pension plan -- -- 1,999 --
------ ------ ------- ------
Adjustment to initially apply FASB Statement No. 159 -- -- 1,359 --
Tax effect -- -- (462) --
------ ------ ------- ------
FASB Statement No. 159 adjustment, net of tax -- -- 897 --
------ ------ ------- ------
OTHER COMPREHENSIVE INCOME, NET OF TAX 1,228 1,368 2,807 473
------ ------ ------- ------
COMPREHENSIVE INCOME $3,324 $3,399 $ 8,469 $5,512
====== ====== ======= ======
See notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Nine months ended
September 30
-------------------
2007 2006
-------- --------
OPERATING ACTIVITIES
Net income $ 5,662 $ 5,039
Reconciliation of net income to cash provided by operations:
Provision for loan losses 618 628
Depreciation 1,471 1,375
Net amortization of investment securities 136 572
Realized loss on sale of investment securities 30 109
Amortization and impairment of mortgage servicing rights 156 141
Earnings on corporate owned life insurance policies (321) (305)
Amortization of acquisition intangibles 213 70
Deferred income tax benefit 23 --
Share-based payment awards 621 350
Net changes in operating assets and liabilities which provided (used) cash:
Trading securities (including unrealized appreciation of $263 in 2007) 47,777 --
Loans held for sale 1,352 88
Accrued interest receivable (854) (682)
Other assets (3,722) (737)
Escrow funds payable 1,232 (4,131)
Accrued interest and other liabilities 420 (956)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 54,814 1,561
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 39,596 36,182
Purchases (87,269) (46,008)
Net increase in loans (19,753) (40,303)
Purchases of premises and equipment (2,163) (2,183)
Purchase of corporate owned life insurance policies -- (499)
Acquisition of title office -- (400)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (69,589) (53,211)
FINANCING ACTIVITIES
Net (decrease) increase in noninterest bearing deposits (5,432) 192
Net increase in interest bearing deposits 6,361 40,482
Net increase in other borrowed funds 8,621 6,350
Cash dividends paid on common stock (2,276) (1,818)
Proceeds from the issuance of common stock 1,470 1,312
Common stock repurchased (1,801) --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 6,943 46,518
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (7,832) (5,132)
Cash and cash equivalents at beginning of year 31,359 30,825
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 23,527 $ 25,693
======== ========
See notes to condensed consolidated financial statements.
7
IBT BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals with the exception of the fair value reporting
election described in Note 5) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2007 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2007. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Corporation's annual report for the year ended December 31, 2006.
All amounts other than share and per share amounts have been rounded to the
nearest thousand ($000) in this report.
Effective October 3, 2006, Isabella Bank and Trust, a subsidiary of the
Corporation, acquired Farwell State Savings Bank. The consolidated financial
statements include the results of operations of Farwell State Savings Bank only
since that time. Refer to Management's Discussion and Analysis for further
consideration of the impact of this transaction on the consolidated financial
statements.
NOTE 2 - COMPUTATION OF EARNINGS PER 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.
Earnings per common share have been computed based on the following amounts:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------- ---------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Average number of common shares outstanding
for basic calculation* 6,338,026 5,503,044 6,337,241 5,491,180
Potential effect of shares in the Deferred
Director fee plan* 180,296 166,278 178,996 163,179
--------- --------- --------- ---------
Average number of common shares outstanding used to
calculate diluted earnings per common share 6,518,322 5,669,322 6,516,237 5,654,359
========= ========= ========= =========
* As adjusted for the 10% stock dividend paid February 15, 2006
8
NOTE 3 - OPERATING SEGMENTS
The Corporation's reportable segments are based on legal entities that account
for at least 10% of net operating results. In April 2007, the individual bank
charters of Isabella Bank and Trust and FSB Bank were consolidated into one bank
charter as a part of the Corporation's strategy to increase efficiencies.
Retail banking operations now present over 90% of the Corporation's total
operating results. As such, no segment reporting is presented.
The accounting policies are the same as those discussed in Note 1 to the
Consolidated Financial Statements included in the Corporation's annual report
for the year ended December 31, 2006 with the exception of those new
pronouncements adopted during 2007 (see Notes 5 and 7).
NOTE 4 - DEFINED BENEFIT PENSION PLAN
The Corporation has a defined benefit pension plan covering substantially all of
its employees. 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 is to freeze the
current participant's accrued benefits as of March 1, 2007 and to limit
participation in the plan only to eligible employees as of December 31, 2006.
Subsequent to the decision to curtail the defined benefit plan, the Corporation
elected to increase its level of contributions to the Corporation's defined
contribution 401(k) plan effective January 1, 2007.
The aggregate effect from the plan curtailment was a loss of $37 for the nine
months ended September 30, 2007, and was determined as follows:
Before Effect of After
Curtailment Curtailment Curtailment
----------- ----------- -----------
Accumulated benefit obligation $ (8,197) $ -- $(8,197)
Effect of future salary increases (2,956) (2,956) --
-------- ------- -------
Projected benefit obligation (11,153) (2,956) (8,197)
Plan assets at fair value 9,244 -- 9,244
-------- ------- -------
Funded status (1,909) (2,956) 1,047
Items not yet recognized in earnings:
Unrecognized prior service cost 37 37 --
Unrecognized net loss 4,061 2,956 1,105
-------- ------- -------
Prepaid pension cost (net amount
recognized) $ 2,189 $ 37 $ 2,152
======== ======= =======
On December 31, 2006 the Corporation adopted Statement of Financial Accounting
Standards (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 the defined
benefit pension plan on the Corporation's consolidated balance sheet and
recognize as a component of accumulated other comprehensive loss, net of tax,
the sum of unamortized actuarial gains or losses and prior service costs at the
close of each reporting period. During each reporting period, recognized
actuarial losses included in net periodic pension expense reduce other
comprehensive income or loss, net of tax.
9
The components of net periodic benefit cost for the three and nine month periods
ended September 30 are as follows:
Pension Benefits
-----------------------------
Three months Nine months
ended ended
September 30 September 30
------------- -------------
2007 2006 2007 2006
----- ----- ----- -----
NET PERIODIC BENEFIT COST
Service cost on benefits earned for services
rendered during the period $ 27 $ 159 $ 82 $ 478
Interest cost on projected benefit obligation 126 152 379 455
Expected return on plan assets (158) (139) (476) (416)
Amortization of unrecognized prior service cost -- 5 2 14
Amortization of unrecognized actuarial net loss 10 58 32 174
----- ----- ----- -----
NET PERIODIC BENEFIT COST 5 235 19 705
Loss on plan curtailment -- -- 37 --
----- ----- ----- -----
TOTAL PERIODIC BENEFIT COST $ 5 $ 235 $ 56 $ 705
===== ===== ===== =====
The Corporation contributed $350 and $1,128 to the pension plan during the nine
month periods ended September 30, 2007 and 2006, respectively.
NOTE 5 -- FINANCIAL INSTRUMENTS RECORDED AT FAIR VALUE
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
expands the use of fair value accounting but does not affect existing standards
which require assets or liabilities to be carried at fair value. Under SFAS No.
159, a company may elect to measure many financial instruments and certain other
assets and liabilities at fair value. The fair value measurement option is not
allowable for deposit or withdrawable on demand liabilities. If the use of fair
value is elected, any upfront costs and fees related to the item must be
recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair
value election is irrevocable and is generally made on an
instrument-by-instrument basis, even if an entity has similar instruments that
it elects not to measure based on fair value. At the adoption date, unrealized
gains and losses on existing items for which fair value has been elected are
reported as a cumulative adjustment to beginning retained earnings as of January
1, 2007. Subsequent to the adoption of SFAS No. 159, changes in fair value are
recognized in earnings. Although, SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007 and is required to be adopted by IBT Bancorp
in the first quarter of fiscal 2008, IBT Bancorp elected to early adopt SFAS No.
159 effective January 1, 2007, the impact of which is detailed in the table
below. For further discussion on the financial statement impact of adopting this
standard, see Management's Discussion and Analysis in Item 2 of this report and
the information presented.
As shown in the following table, the Corporation elected to transfer $77,839 of
its $213,450 available-for-sale securities investment portfolio to trading
status to facilitate more active trading of these securities. In determining
which available-for-sale securities to transfer, the Corporation considered
interest rates, duration, marketability, and balance sheet management
strategies. The securities transferred included obligations of US Government
Agencies, variable rate Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation mortgage backed securities, taxable municipal bonds,
and a limited number of tax exempt bonds. During the second quarter of 2007, the
Corporation sold $34,290 of trading securities, purchased $3,677, and
repositioned its funding position from a net Fed Funds purchased position of
$6,675 to a Fed Funds sold position of $6,240 at June 30, 2007. During the third
quarter of 2007, the Corporation sold $7,298 of trading securities. During the
remainder of 2007, the Corporation plans to reduce its overall trading
securities position to approximately 2.0% to 3.0% of total assets. Management
believes this level to be the optimum amount needed to provide liquidity and
interest margin protection.
The Corporation also elected to report $7,256 of long-term, relatively high
interest rate, Federal Home Loan Bank advances at their fair value upon the
adoption of SFAS No. 159 to provide a hedge against significant movement in
interest rates. These advances had an outstanding principal balance of $7,256 as
of September 30, 2007. During the third quarter there were no changes in
borrowings measured at fair value.
10
Balance Sheet Net Gain / Balance Sheet
1/1/2007 Prior to (Loss) Upon 1/1/2007 After
Adoption of FVO Adoption of FVO Adoption of FVO
----------------- --------------- ---------------
Investment securities $79,198 $(1,359) $77,839
FHLB borrowings included in other borrowed funds (7,256) (232) (7,488)
-------
Pretax cumulative loss effect of adoption
of the fair value option (1,591)
Increase in deferred tax asset 541
-------
Cumulative loss effect of adoption of the
fair value option (charged as a reduction to
retained earnings as of January 1, 2007) $(1,050)
=======
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 to be
applied to GAAP guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007. As the Corporation has elected early adoption of SFAS No. 159, it has
also early adopted SFAS No. 157, as required by SFAS No. 159.
Fair value is the price that would be received to sell an asset or transfer a
liability in an orderly transaction between market participants at the
measurement date. To increase consistency and comparability in fair value
measurements and related disclosures, the fair value hierarchy prioritizes the
inputs to valuation techniques used to measure fair value into three broad
levels. The fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). In some cases, the inputs
used to measure fair value might fall in different levels of the fair value
hierarchy. The level in the fair value hierarchy within which the fair value
measurement in its entirety falls shall be determined based on the lowest level
input that is significant to the fair value measurement in its entirety.
Level 1 instruments are those assets for which the identical item is traded on
an active exchange, such as publicly-traded instruments. The majority of the
fair value amounts included in current period earnings resulted from Level 2
fair value methodologies; that is, the Corporation values the assets and
liabilities based on observable market data for similar instruments.
For further discussion on the financial statement impact of adopting these
standards, see Management's Discussion and Analysis in Item 2 of this report.
11
Fair Value Measurements at
September 30, 2007 Using
-----------------------------------
Quoted Prices
in Active Significant
Fair Value Markets for Other Observable
Measurements Identical Assets Inputs
Description 9/30/2007 (Level 1) (Level 2)
----------- ------------ ---------------- ----------------
RECURRING ITEMS
Trading securities $ 30,062 $ -- $ 30,062
Investment securities
available for sale 182,983 3,981 179,002
Mortgage loans
available for sale 1,382 -- 1,382
Other borrowed funds 7,479 -- 7,479
NONRECURRING ITEMS
Mortgage servicing rights 2,192 -- 2,192
Other real estate owned 755 -- 755
Changes in Fair Value for the 3-month Changes in Fair Value for the 9-month
Period Ended September 30, 2007 for Period Ended September 30, 2007 for
Items Measured at Fair Value Pursuant Items Measured at Fair Value Pursuant
to Election of the Fair Value Option to Election of the Fair Value Option
-------------------------------------- --------------------------------------
Total Changes Total Changes
in Fair Values in Fair Values
Trading Other Included in Trading Other Included in
Gains and Gains and Current Period Gains and Gains and Current Period
Description (Losses) (Losses) Earnings (Losses) (Losses) Earnings
----------- --------- --------- -------------- --------- --------- --------------
RECURRING ITEMS
Trading securities $320 $ -- $320 $263 $ -- $263
Other borrowed funds (74) -- (74) 9 -- 9
NONRECURRING ITEMS
Mortgage servicing rights -- -- -- -- -- --
Other real estate owned -- (38) (38) -- (64) (64)
During the three month period ended March 31, 2007, in accordance with the
provisions of SFAS No. 156, mortgage servicing rights with a carrying amount of
$2,187 were written down to their fair value of $2,186, resulting in an
impairment charge of $1, while during the three month period ended June 30,
2007, mortgage servicing rights with a carrying amount of $2,190 were written up
to their fair value of $2,191, resulting in a decrease in the impairment of $1.
There were no adjustments to the fair value of mortgage servicing rights during
the three month period ended September 30, 2007. Such adjustments were included
in earnings for the nine month period ended September 30, 2007.
During the three month period ended March 31, 2007, in accordance with the
provisions of SFAS No. 144, other real estate owned with a carrying amount of
$643 was written down to its fair value of $617, resulting in an impairment
charge of $26, while during the three month period ended September 30, 2007,
other real estate owned with a carrying amount of $793 was written down to its
fair value of $755, resulting in an impairment charge of $38. There were no
adjustments to the fair value of other real estate owned during the three month
period ended June 30, 2007. Such adjustments were included in earnings for the
nine month period ended September 30, 2007.
12
NOTE 6 -- INCOME TAXES
The Corporation adopted the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" ("FIN 48"), on January 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement 109,
"Accounting for Income Taxes", and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
Based on our evaluation, we have concluded that there are no significant
uncertain tax positions requiring recognition in our financial statements. Our
evaluation was performed for the tax years ended December 31, 2003, 2004, 2005
and 2006, the tax years which remain subject to examination by major tax
jurisdictions as of September 30, 2007.
From time to time, we may be assessed interest or penalties by major tax
jurisdictions, although any such assessments historically have been minimal and
immaterial to our financial results. In the event we have received an assessment
for interest and/or penalties, it has been classified in the financial
statements as other noninterest expenses.
In June 2006, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standards Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes". FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 prescribes a
recognition threshold and measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. On January 1, 2007, the Corporation adopted FIN 48. The adoption of
this standard did not impact the Corporation's consolidated financial
statements.
NOTE 7 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Emerging Issues Task Force ("EITF") reached a tentative
conclusion reflected in the draft abstract for EITF Issue No. 06-5, "Accounting
for Purchases of Life Insurance-Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4." The Task Force's tentative
conclusion states that a policyholder should consider certain additional amounts
included in the contractual terms of the policy in determining the amount that
could be realized under the insurance contract. This issue is effective for
fiscal years beginning after December 15, 2006. The provisions of EITF 06-5 did
not have an impact on the Corporation's consolidated financial statements.
In February 2006 the FASB issued SFAS No. 155 " Accounting for Certain Hybrid
Instruments," which allows financial instruments that have embedded derivatives
to be accounted for as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole instrument on a
fair value basis. The issuance of Statement No. 155 provides the following: 1.
Clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement No. 133; 2. Establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation; 3. Clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and 4. Amends Statement No. 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all financial instruments acquired or
issued after the beginning of the first fiscal year beginning after September
15, 2006. The Corporation adopted SFAS No.155 on January 1, 2007 and it did not
have a material impact on the Corporation's consolidated financial statements.
In March 2006 the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets," which affects the accounting for servicing rights, which
includes mortgage servicing rights and those associated with other types of
financial assets transferred in securitizations such as auto loans, student
loans, credit cards, commercial real estate and equipment financing.
Specifically, Statement No. 156 requires that all separately recognized
servicing rights be initially measured at fair value, if practicable. For
subsequent accounting for servicing assets and liabilities, entities would
choose either to amortize and recognize over a period of estimated net servicing
income or net servicing loss (currently required under Statement No. 140) or
remeasure at fair value at each subsequent reporting date. The choice to measure
at fair value would make it easier to account for hedges of servicing rights,
which currently are difficult to apply under Statement No. 133. Statement No.
156 is effective for all servicing assets or liabilities acquired or assumed
after the beginning of the first fiscal year beginning after September 15, 2006.
In addition, an entity may elect to apply fair value measurement to existing
servicing rights upon adoption. The Corporation adopted SFAS No.156 on January
1, 2007 and it did not have a material impact on the Corporation's consolidated
financial statements.
13
In July of 2006, the Emerging Issues Task Force ("EITF") of FASB issued a draft
abstract for EITF Issue No. 06-4, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements." The EITF reached a consensus that for an endorsement split-dollar
life insurance arrangement within the scope of this Issue, an employer should
recognize a liability for future benefits. IBT Bancorp has purchased
corporation-owned life insurance on certain of its employees. The cash surrender
value of these policies is carried as an asset on the consolidated balance
sheets. The carrying value was $13,084 at September 30, 2007. These life
insurance policies are generally subject to endorsement split-dollar life
insurance arrangements. These arrangements were designed to provide a pre-and
postretirement benefit for senior officers of the Corporation. The Corporation
is required to apply EITF Issue No. 06-4 beginning January 1, 2008, and is
currently evaluating the effect the implementation of EITF Issue No. 06-4 will
have on the 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 to be
applied to GAAP guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007 unless SFAS No. 159 is adopted, in which case SFAS No. 157 would need
to be adopted concurrently. The results of the adoption of this standard are
disclosed in Note 5.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" which provides entities with an
option to report selected financial assets and liabilities at fair value, with
the objective to reduce both the complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. SFAS No. 159 permits fair value to be used for both
the initial and subsequent measurements on a contract-by-contract election, with
changes in fair value to be recognized in earnings as those changes occur. SFAS
No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale
and trading securities. This statement is effective for fiscal years beginning
after November 15, 2007, with an option to early adopt effective January 1,
2007. After review of the standard, the Corporation has early adopted the
standard. The impact of the adoption is presented in Note 5.
NOTE 8 -- COMMON STOCK REPURCHASES
On March 22, 2007, the Board of Directors adopted a repurchase plan which
provides for the repurchase of up to 150,000 shares of the Corporation's common
stock. Any shares repurchased under this plan revert to the status of authorized
but unissued shares. During the nine months ended September 30, 2007, a total of
41,428 shares were repurchased for cash of $1,801, including 18,694 shares
pursuant to this plan during the third quarter.
NOTE 9 - POTENTIAL BUSINESS ACQUISITION
On August 21, 2007, IBT Bancorp, Inc. signed a definitive agreement to acquire
Greenville Community Financial Corporation (GCFC), which was subsequently
amended on September 24, 02007. Pursuant to the terms of the acquisition, GCFC
shareholders shall receive 0.6659 of a share of IBT common stock and $14.70 of
cash for each of their shares of GCFC common stock, resulting in a total
consideration of approximately $34,000. The transaction, which has been approved
by both IBT's and GCFC's Boards of Directors, is expected to be completed in the
fourth quarter of 2007, pending regulatory approval, the approval of GCFC
shareholders, and other customary closing conditions.
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major factors that
influenced IBT Bancorp's financial performance. This analysis should be read in
conjunction with the Corporation's 2006 annual report and with the unaudited
condensed consolidated financial statements and notes, as set forth on pages 3
through 14 of this report.
CRITICAL ACCOUNTING POLICIES: A summary of the Corporation's significant
accounting policies is set forth in Note 1 of the Consolidated Financial
Statements included in the Corporation's Annual Report for the year ended
December 31, 2006. Of these significant accounting policies, the Corporation
considers its policies 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 which is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see Provision for
Loan Losses and Allowance for Loan Losses in the Corporation's 2006 Annual
Report and herein.
RESULTS OF OPERATIONS
The following table outlines the results of operations for the periods ended
September 30, 2007 and 2006. Return on average assets measures the ability of
the 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
Three Months Ended Nine Months Ended
Seotember 30 Seotember 30
------------------ -----------------
2007 2006 2007 2006
-------- ------- ------- -------
INCOME STATEMENT DATA
Net interest income $7,104 $6,148 $20,732 $18,203
Provision for loan losses 268 245 618 628
Net income 2,096 2,031 5,662 5,039
PER SHARE DATA
Earnings per share:
Basic $0.33 $0.37 $0.89 $0.92
Diluted 0.32 0.36 0.87 0.89
Cash dividends per common share 0.12 0.11 0.36 0.33
RATIOS
Average primary capital to average assets 13.71% 11.67% 13.52% 11.69%
Net income to average assets 0.91 1.03 0.82 0.88
Net income to average equity 6.98 9.51 6.39 8.06
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is the
primary source of income for IBT Bancorp. Interest income includes loan fees of
$381 and $957, for the three and nine month periods ended September 30, 2007,
respectively, as compared to $325 and $881 during the same periods in 2006. 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.
(Continued on page 18)
15
AVERAGE BALANCES, INTEREST RATE, AND NET INTEREST INCOME
The following schedules present the daily average amount outstanding for each
major category of interest earning assets, nonearning assets, interest bearing
liabilities, and noninterest bearing liabilities. This schedule also presents an
analysis of interest income and interest expense for the periods indicated. All
interest income is reported on a fully taxable equivalent (FTE) basis using a
34% tax rate. Nonaccruing loans, for the purpose of the following computations,
are included in the average loan amounts outstanding. Federal Reserve and
Federal Home Loan Bank restricted equity holdings are included in Other.
Results for the three and nine month periods ended September 30, 2007 and
September 30, 2006 are as follows:
Three Months Ended
-----------------------------------------------------------------
September 30, 2007 September 30, 2006
------------------------------- --------- ---------------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Balance Interest Rate Balance Interest Rate
-------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans $608,033 $11,227 7.39% $520,348 $ 9,269 7.13%
Taxable investment securities 71,461 967 5.41% 119,936 1,252 4.18%
Nontaxable investment securities 100,295 1,491 5.95% 75,885 1,095 5.77%
Trading account securities 35,694 445 4.99% -- -- --
Federal funds sold 10,453 172 6.58% 2,367 31 5.24%
Other 7,892 85 4.31% 5,299 67 5.06%
-------- ------- ---- -------- ------- ----
Total earning assets 833,828 14,387 6.90% 723,835 11,714 6.47%
NON EARNING ASSETS:
Allowance for loan losses (7,627) (7,081)
Cash and due from banks 21,299 21,281
Premises and equipment 21,468 17,612
Accrued income and other assets 55,186 29,710
-------- --------
Total assets $924,154 $785,357
======== ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $105,670 411 1.56% $104,870 449 1.71%
Savings deposits 194,843 1,200 2.46% 148,988 669 1.80%
Time deposits 348,807 4,172 4.78% 302,956 3,307 4.37%
Other borrowed funds 66,668 907 5.44% 58,756 739 5.03%
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities 715,988 6,690 3.74% 615,570 5,164 3.36%
NONINTEREST BEARING LIABILITIES:
Demand deposits 78,984 69,349
Other 9,058 15,033
Shareholders' equity 120,124 85,405
-------- --------
Total liabilities and equity $924,154 $785,357
======== ========
Net interest income (FTE) $ 7,697 $ 6,550
======= =======
---- ----
Net yield on interest earning
assets (FTE) 3.69% 3.62%
==== ====
16
Nine Months Ended
-----------------------------------------------------------------
September 30, 2007 September 30, 2006
------------------------------- -------------------------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Balance Interest Rate Balance Interest Rate
-------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans $602,077 $ 32,625 7.22% $500,168 $26,129 6.97%
Taxable investment securities 64,278 2,609 5.41% 120,433 3,572 3.95%
Nontaxable investment securities 93,827 4,167 5.92% 74,053 3,195 5.75%
Trading account securities 59,053 1,956 4.42% -- -- --
Federal funds sold 6,957 311 5.96% 1,417 52 4.89%
Other 6,413 212 4.41% 5,135 184 4.78%
-------- -------- ---- -------- ------- ----
Total earning assets 832,605 41,880 6.71% 701,206 33,132 6.30%
NON EARNING ASSETS:
Allowance for loan losses (7,646) (6,983)
Cash and due from banks 20,405 25,361
Premises and equipment 21,263 17,405
Accrued income and other assets 56,506 29,002
-------- --------
Total assets $923,133 $765,991
======== ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $111,693 1,520 1.81% $104,259 1,191 1.52%
Savings deposits 186,740 3,141 2.24% 153,734 1,892 1.64%
Time deposits 350,997 12,369 4.70% 285,361 8,791 4.11%
Other borrowed funds 65,688 2,463 5.00% 52,398 1,878 4.78%
-------- -------- ---- -------- ------- ----
Total interest bearing liabilities 715,118 19,493 3.63% 595,752 13,752 3.08%
NONINTEREST BEARING LIABILITIES:
Demand deposits 79,563 69,559
Other 10,252 17,329
Shareholders' equity 118,200 83,351
-------- --------
Total liabilities and equity $923,133 $765,991
======== ========
Net interest income (FTE) $ 22,387 $19,380
======== =======
---- ----
Net yield on interest earning
assets (FTE) 3.59% 3.69%
==== ====
17
VOLUME AND RATE VARIANCE ANALYSIS
The following table sets forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For the purpose of this
table, changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's
rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Three Months Ended Nine Months Ended
September 30, 2007 September 30, 2007
compared to compared to
September 30, 2006 September 30, 2006
Increase (Decrease) Increase (Decrease)
Due to Due to
---------------------- -------------------------
Volume Rate Net Volume Rate Net
------ ---- ------ ------- ------ ------
CHANGES IN INTEREST INCOME:
Loans $1,609 $349 $1,958 $ 5,492 $1,004 $6,496
Taxable investment securities (593) 308 (285) (2,008) 1,045 (963)
Nontaxable investment securities 362 34 396 876 96 972
Trading account securities 445 -- 445 1,956 -- 1,956
Federal funds sold 131 10 141 245 14 259
Other 29 (11) 18 43 (15) 28
------ ---- ------ ------- ------ ------
Total changes in interest income 1,983 690 2,673 6,604 2,144 8,748
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits 3 (41) (38) 89 240 329
Savings deposits 241 290 531 461 788 1,249
Time deposits 530 335 865 2,201 1,377 3,578
Other borrowings 105 63 168 495 90 585
------ ---- ------ ------- ------ ------
Total changes in interest expense 879 647 1,526 3,246 2,495 5,741
------ ---- ------ ------- ------ ------
Net change in interest margin (FTE) $1,104 $ 43 $1,147 $ 3,358 $ (351) $3,007
====== ==== ====== ======= ====== ======
NET INTEREST INCOME, CONTINUED
During much of 2006 and throughout most of 2007, the yield curve was inverted,
which means that short term rates were higher than long term rates. This yield
curve has encouraged customers to invest their funds in short term deposits and
to borrow long term with fixed rate loans. Banks 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. Inverted and flat
yield curves have provided the Corporation with little opportunity to do this
effectively for much of 2007. However, the yield curve began to correct itself
during the third quarter of 2007, primarily as a result of a .50% decrease in
the federal funds target rate, as this decrease lowered short term interest
rates.
To help combat these tight margins, the Corporation employed a measured growth
strategy to increase its net interest margin through increased volume. This
growth strategy has resulted in a substantial increase in commercial loans. This
commercial loan growth coupled with the acquisition of the Farwell State Savings
Bank has allowed the Corporation to increase net interest income through volume.
The total volume and rate variances resulted in net increases in net FTE
interest margin of $1,147 and $3,007, when the three and nine month periods
ended September 30, 2007 are compared to the same periods in 2006.
During the quarter ended September 30, 2007, long term rates have increased,
resulting in a shift in the yield curve, which is now essentially flat.
Management anticipates that the yield curve will continue to normalize
throughout the remainder of 2007; however, this correction is expected to be
slow. The Corporation did see some relief in the current three month period when
compared to the same period in 2006, with an increase in the net yield on
interest earning assets of .07%. While this increase is not significant it is
the
18
first increase experienced in over two years. When management looks forward to
the remainder of 2007, the net interest position will continue to be challenging
with respect to interest rates. The driving force behind this challenge
continues to be competition and the yield curve. To help offset this, the
Corporation will continue to grow its balance sheet, while accepting smaller
interest rate margins.
IBT Bancorp, Inc. (IBT) elected early adoption of Statement of Financial
Accounting Standards ("SFAS") No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, and SFAS No. 157, Fair Value Measurements.
SFAS No. 159, which was issued in February 2007 (see Note 5 pg 10), generally
permits the measurement of selected eligible financial instruments at fair value
at specified election dates. Subsequent to the issuance of SFAS No. 159 the IBT
Audit Committee, Board of Directors, management, and investment advisors
reviewed the Corporation's assets and liabilities to determine which fluctuate
in value based on changes in market interest rates to determine the potential
impact of the new standard. As a result of these considerations, IBT elected
early adoption of the new accounting standard effective January 1, 2007. The
purpose of the early adoption of this standard was to provide IBT an opportunity
to accelerate the restructuring of its balance sheet to better manage interest
rate risk now and in the future.
The impact of the Corporation's balance sheet restructuring plan implemented
during the second quarter of 2007 was a 0.24% increase in FTE net interest
margin when the quarter ended September 30, 2007 is compared to the quarter
ended March 31, 2007. The restructuring strategies pursued are discussed in the
analysis of changes in financial condition beginning on page 26.
ALLOWANCE FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Total loans outstanding represent 66.1% of the
Corporation's total assets and is the Corporation's single largest concentration
of risk. The allowance for loan losses is management's estimation of potential
future losses inherent in the existing loan portfolio. Factors used to evaluate
the loan portfolio, and thus to determine the current charge to expense, include
recent loan loss history, financial condition of borrowers, amount of
nonperforming and impaired loans, overall economic conditions, and other
factors. The following table summarizes the Corporation's charge off and
recovery activity for the nine month periods ended September 30, 2007 and 2006.
Nine Months Ended
September 30
-------------------
2007 2006
-------- --------
Allowance for loan losses - January 1 $ 7,605 $ 6,899
Loans charged off
Commercial and agricultural 414 181
Real estate mortgage 199 166
Consumer 446 362
-------- --------
TOTAL LOANS CHARGED OFF 1,059 709
Recoveries
Commercial and agricultural 228 98
Real estate mortgage 10 15
Consumer 212 198
-------- --------
TOTAL RECOVERIES 450 311
-------- --------
Net loans charged off 609 398
Provision charged to income 618 628
-------- --------
ALLOWANCE FOR LOAN LOSSES - SEPTEMBER 30 $ 7,614 7,129
======== ========
YEAR TO DATE AVERAGE LOANS $599,629 $500,168
======== ========
NET LOANS CHARGED OFF TO AVERAGE LOANS OUTSTANDING 0.10% 0.08%
======== ========
TOTAL AMOUNT OF LOANS OUTSTANDING AT SEPTEMBER 30 $610,186 $523,147
======== ========
ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.25% 1.36%
======== ========
The allowance for loan losses as a percentage of loans has decreased from 1.36%
as of September 30, 2006 to 1.25% in 2007. The provision for loan losses was
decreased by $10 in 2007, while net charged off loans have increased by $211.
The principal reasons for the decrease in both the allowance as a percentage of
loans and the 2007 provision for loan losses relates to loans that were charged
off in 2007 that had specific reserve allocations in 2006.
19
The nationwide increase in residential mortgage loans past due and in
foreclosures has received considerable attention by both the press and
regulators. Based on information provided by The Mortgage Bankers Association,
the increases in both past dues and foreclosures are related to fixed and
adjustable rate sub-prime mortgages. Additionally, a substantial portion of
sub-prime adjustable rate mortgages are scheduled to reset at higher rates in
the next 9 months. As a result of the rate resetting on these mortgages, it is
expected that troubled sub-prime loans nationally will increase substantially
through the end of 2008. The increase in troubled residential mortgage loans,
higher fixed and variable interest rates, and a tightening of underwriting
standards will most likely result in a further increased inventory of unsold
homes from its current level of over 10 months. The inventory of unsold homes
has not reached these levels since the 1991 recession. The combination of all of
these factors will most likely further reduce average home values and thus
homeowner's equity on a national level.
The Corporation originates and sells fixed rates residential real estate
mortgages to the Federal Home Loan Mortgage Corporation. The Corporation has not
originated loans for either trading or its own portfolio that would be
classified as sub prime, nor has it originated adjustable rate mortgages or
finance loans for more than 80% of market value unless insured by private third
party insurance.
While IBT does not originate variable rate mortgages, nor does it hold sub-prime
mortgage loans, the difficulties experienced in the sub-prime market has the
potential to adversely impact the entire market, and thus the overall credit
quality of the IBT residential mortgage portfolio.
NONPERFORMING ASSETS
September 30
---------------------------------------------------
2007
------------------------------------
Adjusted 2006
Consolidated Farwell w/o Farwell Consolidated
------------ ------- ----------- ------------
Nonaccrual loans $4,703 $ 778 $3,925 $2,272
Accruing loans past due 90 days or more 1,229 646 583 1,308
Restructured loans 686 -- 686 705
------ ------ ------ ------
TOTAL NONPERFORMING LOANS 6,618 1,424 5,194 4,285
Other real estate owned 755 171 584 410
------ ------ ------ ------
TOTAL NONPERPERFORMING ASSETS $7,373 $1,595 $5,778 $4,695
====== ====== ====== ======
NONPERFORMING LOANS AS A % OF TOTAL LOANS 1.08% 2.28% 0.95% 0.82%
====== ====== ====== ======
NONPERFORMING ASSETS AS A % OF TOTAL ASSETS 0.80% 1.89% 0.69% 0.59%
====== ====== ====== ======
Since September 2006, the Corporation has experienced an increase in the percent
of loans classified as nonperforming. While the Corporation has seen increases
in its nonperforming loans, net loans charged off as a percentage of loans have
remained relatively stable. Management does anticipate the level of net charge
offs to moderately increase when compared to the prior period for the remainder
of 2007. This is due to the depressed economy and the decline in the market
value of housing.
The majority of the increase in non-accrual loans is related to two credits.
These credits are both well collateralized and management believes the principal
will be recovered in full. Based on management's analysis of the allowance for
loan losses, the current allowance falls within the acceptable range and,
therefore, the allowance for loan losses is considered adequate as of September
30, 2007.
To management's knowledge, there are no other loans which cause management to
have serious doubts as to the ability of a borrower to comply with their loan
repayment terms.
NONINTEREST INCOME AND EXPENSES
The following discussions of noninterest income and noninterest expenses have
been adjusted for the acquisition of the Farwell State Savings Bank in October
2006 to make the line items more comparable with the prior period numbers.
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, fees for
other financial services, gains on the sale of mortgage loans, title insurance
revenue, and other. Significant account balances are highlighted in the
accompanying tables with additional descriptions of significant fluctuations of
both quarter to date and year to date variances following:
20
Three Months Ended
-------------------------------------------------------------------
September 30
---------------------------------------------------
2007 Adjusted
------------------------------------ Change
Adjusted 2006 -------------
Consolidated Farwell w/o Farwell Consolidated $ %
------------ ------- ----------- ------------ ----- -----
Service charges and fee income
NSF and overdraft fees $ 753 $58 $ 695 $ 798 $(103) -12.9%
Freddie Mac servicing fee 150 -- 150 158 (8) -5.1%
ATM and debit card fees 195 3 192 144 48 33.3%
Service charges on deposit accounts 85 12 73 76 (3) -3.9%
All other 40 11 29 38 (9) -23.7%
------ --- ------ ------ ----- -----
Total service charges and fees 1,223 84 1,139 1,214 (75) -6.2%
Title insurance revenue 611 -- 611 679 (68) -10.0%
Trust fees 262 -- 262 217 45 20.7%
Gain on sale of mortgage loans 50 -- 50 53 (3) -5.7%
Net gain on trading securities 246 -- 246 -- 246 N/A
Other
Increase in cash value of corporate
owned life insurance policies 109 -- 109 102 7 6.9%
Brokerage and advisory fees 73 -- 73 51 22 43.1%
Loss on sale of investment securities -- -- -- (6) 6 100.0%
All other 145 10 135 96 39 40.6%
------ --- ------ ------ ----- -----
Total other 327 10 317 243 74 30.5%
------ --- ------ ------ ----- -----
TOTAL NONINTEREST INCOME $2,719 $94 $2,625 $2,406 $ 219 9.1%
====== === ====== ====== ===== =====
Nine Months Ended
-------------------------------------------------------------------
September 30
------------------------------------------------------
2007 Adjusted
------------------------------------ Change
Adjusted 2006 -------------
Consolidated Farwell w/o Farwell Consolidated $ %
------------ ------- ----------- ------------ ----- -----
Service charges and fee income
NSF and overdraft fees $2,162 $ 131 $2,031 $2,175 $(144) -6.6%
Freddie Mac servicing fee 464 -- 464 475 (11) -2.3%
ATM and debit card fees 535 3 532 400 132 33.0%
Service charges on deposit accounts 251 40 211 228 (17) -7.5%
All other 160 39 121 125 (4) -3.2%
------ ------ ------ ------ ----- -----
Total service charges and fees 3,572 213 3,359 3,403 (44) -1.3%
Title insurance revenue 1,738 -- 1,738 1,826 (88) -4.8%
Trust fees 708 -- 708 648 60 9.3%
Gain on sale of mortgage loans 149 -- 149 164 (15) -9.1%
Net gain on trading activities 272 -- 272 -- 272 N/A
Other
Increase in cash value of corporate
owned life insurance policies 319 -- 319 305 14 4.6%
Brokerage and advisory fees 198 -- 198 156 42 26.9%
Loss on sale of investment securities (30) -- (30) (109) 79 72.5%
All other 431 10 421 350 71 20.3%
------ ------ ------ ------ ----- -----
Total other 918 10 908 702 206 29.3%
------ ------ ------ ------ ----- -----
TOTAL NONINTEREST INCOME $7,357 $ 223 $7,134 $6,743 $ 391 5.8%
====== ====== ====== ====== ===== =====
21
As a result of the persistent compression on interest margins, management
continuously analyzes various fees related to deposit accounts, including
service charges, NSF and overdraft fees, and ATM and debit card fees. Based on
these analyses, the Corporation makes any necessary adjustments to ensure that
its fee structure is within the range of its competitors, while at the same time
making sure that the fees remain fair to deposit customers. Management does not
expect significant changes to its deposit fee structure in 2007.
The decrease in NSF and overdraft fee income is due to a decline in overdraft
occurrences from our customers. Based on year-to-date information this number is
expected to remain at the current level for the reminder of 2007.
The increases in trust fee income are related to increased marketing efforts by
the trust department. The Corporation anticipates that demand for trust services
will remain strong for the remainder of 2007.
The decline in the gain on sale of mortgage loans and title insurance revenue is
a result of the continued slow demand in residential mortgages. Management
anticipates the demand for residential mortgages to remain unchanged for the
remainder of 2007.
The gains recognized on trading activities during the third quarter of 2007 are
a result of decreases in interest rates, as there is an inverse relationship
between the value of the trading portfolio and changes in interest rates.
Management does expect trading gains to stabilize throughout the remainder of
2007.
The first nine months of 2007 have been some of the most productive months in
the Corporation's history for brokerage and advisory services. These results are
due to the increased confidence of consumers in the stock market as well as an
increase in customer base and a conscious effort by management to expand the
Bank's presence in the local market. The Corporation anticipates this trend to
continue throughout the rest of the year.
Losses on sales of available for sale investment securities were incurred by the
Corporation in the first quarter. This was a result of the Corporation selling
investments nearing maturity at low interest rates and reinvesting the proceeds
in higher yielding longer term securities as part of asset and liability
management. Management expects that the additional interest income earned upon
the reinvestment of the proceeds will exceed the losses recognized by the fourth
quarter of 2007.
The increases in all other noninterest income are mainly related to the fact
that the Bank is now collecting monthly commissions related to its sold credit
card portfolio.
22
NONINTEREST EXPENSES
Noninterest expenses include compensation, occupancy, furniture and equipment,
and other expenses. Significant account balances are highlighted in the
accompanying tables with additional descriptions of significant fluctuations of
both quarter to date and year to date variances following:
Three Months Ended
-------------------------------------------------------------------
September 30
---------------------------------------------------
2007 Adjusted
------------------------------------ Change
Adjusted 2006 -------------
Consolidated Farwell w/o Farwell Consolidated $ %
------------ ------- ----------- ------------ ------ ----
Compensation
Leased employee salaries $2,869 $194 $2,675 $2,501 $ 174 7.0%
Leased employee benefits 1,023 79 944 612 332 54.2%
All other 41 5 36 35 1 2.9%
------ ---- ------ ------ ----- ----
Total compensation 3,933 278 3,655 3,148 507 16.1%
------ ---- ------ ------ ----- ----
Occupancy
Depreciation 111 6 105 103 2 1.9%
Outside services 67 -- 67 77 (10) -13.0%
Property taxes 93 4 89 87 2 2.3%
Utilities 81 7 74 78 (4) -5.1%
Building rent 18 -- 18 64 (46) -71.9%
Building repairs 58 3 55 34 21 61.8%
All other 12 -- 12 14 (2) -14.3%
------ ---- ------ ------ ----- ----
Total occupancy 440 20 420 457 (37) -8.1%
------ ---- ------ ------ ----- ----
Furniture and equipment
Depreciation 383 9 374 351 23 6.6%
Computer costs 330 52 278 258 20 7.8%
ATM and debit card 112 4 108 60 48 80.0%
All other 16 7 9 8 1 12.5%
------ ---- ------ ------ ----- ----
Total furniture and equipment 841 72 769 677 92 13.6%
------ ---- ------ ------ ----- ----
Other
Audit and SOX compliance fees 50 4 46 97 (51) -52.6%
Marketing 171 4 167 174 (7) -4.0%
Directors fees 203 17 186 156 30 19.2%
Printing and supplies 108 4 104 82 22 26.8%
Education and travel 78 3 75 98 (23) -23.5%
Postage and freight 110 6 104 111 (7) -6.3%
All other 1,061 209 852 659 193 29.3%
------ ---- ------ ------ ----- ----
Total other 1,781 247 1,534 1,377 157 11.4%
------ ---- ------ ------ ----- ----
TOTAL NONINTEREST EXPENSES $6,995 $617 $6,378 $5,659 $ 719 12.7%
====== ==== ====== ====== ===== ====
23
Nine Months Ended
-------------------------------------------------------------------
September 30
---------------------------------------------------
2007 Adjusted
------------------------------------ Change
Adjusted 2006 -------------
Consolidated Farwell w/o Farwell Consolidated $ %
------------ ------- ----------- ------------ ------ ----
Compensation
Leased employee salaries $ 8,466 $ 554 $ 7,912 $ 7,426 $ 486 6.5%
Leased employee benefits 3,163 244 2,919 2,621 298 11.4%
All other 121 14 107 114 (7) -6.1%
------- ------ ------- ------- ------ ----
Total compensation 11,750 812 10,938 10,161 777 7.6%
------- ------ ------- ------- ------ ----
Occupancy
Depreciation 335 18 317 302 15 5.0%
Outside services 244 -- 244 242 2 0.8%
Property taxes 276 13 263 254 9 3.5%
Utilities 261 16 245 242 3 1.2%
Building rent 53 -- 53 142 (89) -62.7%
Building repairs 126 19 107 102 5 4.9%
All other 34 -- 34 41 (7) -17.1%
------- ------ ------- ------- ------ ----
Total occupancy 1,329 66 1,263 1,325 (62) -4.7%
------- ------ ------- ------- ------ ----
Furniture and equipment
Depreciation 1,136 23 1,113 1,072 41 3.8%
Computer costs 994 127 867 831 36 4.3%
ATM and debit card 322 15 307 188 119 63.3%
All other 52 24 28 22 6 27.3%
------- ------ ------- ------- ------ ----
Total furniture and equipment 2,504 189 2,315 2,113 202 9.6%
------- ------ ------- ------- ------ ----
Other
Audit and SOX compliance fees 345 13 332 672 (340) -50.6%
Marketing 527 12 515 479 36 7.5%
Directors fees 596 65 531 454 77 17.0%
Printing and supplies 307 12 295 284 11 3.9%
Education and travel 317 7 310 230 80 34.8%
Postage and freight 336 32 304 322 (18) -5.6%
All other 2,621 474 2,147 1,896 251 13.2%
------- ------ ------- ------- ------ ----
Total other 5,049 615 4,434 4,337 97 2.2%
------- ------ ------- ------- ------ ----
TOTAL NONINTEREST EXPENSES $20,632 $1,682 $18,950 $17,936 $1,014 5.7%
======= ====== ======= ======= ====== ====
Leased employee salaries expense continues to increase as a result of annual
merit increases and the continued growth of the Corporation. The change in
leased employee benefits is primarily attributed to the Corporation changing
medical insurance administrators in the third quarter of 2006, which resulted in
the Corporation reducing its medical reserve liability by $304 during this
period. Exclusive of the effects of this one time expense reversal, leased
employee benefits have increased slightly since last year. Management believes
that leased employee benefits will approximate current levels for the remainder
of 2007.
Upon completion of a new Canadian Lakes branch location in 2006, the building
lease for the facility that had previously housed the Canadian Lakes office was
terminated. This lease termination resulted in a one time penalty of $37, which
was included in rent expense in 2006. The completion of the project also
resulted in an increase in building depreciation expense beginning in June 2006.
The Corporation anticipates building rent and building depreciation to
approximate current levels for the remainder of 2007.
The increases in computer costs are a result of the Corporation's continuous
investment in its technological infrastructure as well as increases in fees
charged by vendors. This constant reinvestment helps the Corporation maintain a
competitive edge in an ever changing marketplace. Management expects that
computer expenses will remain at the current levels for the remainder of 2007.
Management has been diligently working to decrease audit and (Sarbanes Oxley)
SOX compliance fees. In 2007, this became a reality. These fees decreased as a
result of the following factors:
24
- Many similar processes between subsidiaries have been centralized.
- Testing previously outsourced is now being performed internally as a
result of an expanded internal audit department.
- A substantial portion of the 2006 year end audit work was performed
prior to year end, where in prior years; most of it had been completed
after year end.
Management does anticipate that audit and SOX compliance fees will increase in
the fourth quarter of 2007 as a majority of the SOX work for 2007 will be
completed during this time. However, we do expect the costs to be lower than
2006.
The Corporation places a strong emphasis on continuing education. These
educational programs help provide team members with a competitive edge in the
market place. In the third and fourth quarters of 2006 and during the first six
months of 2007, the Corporation offered structured leadership training to its
employees. This program is designed to help develop and optimize the
communication skills of its participants. There were no classes during the third
quarter of 2007. Management feels that this investment in its employees today
will pay dividends for years to come.
The increases in director fees are a result of additional meetings related to
ongoing strategic planning.
All other expenses include consulting fees, legal fees, title insurance
expenses, as well as other miscellaneous expenses. The main reasons for the
increases in this line item were related to legal expenses incurred for the
potential acquisition of Greenville Community Financial Corporation and service
related expenses incurred to convert the Farwell Division to Isabella Bank and
Trust's core banking platform in August of 2007. The other expenses are not
individually significant.
25
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
September 30 December 31 % Change
2007 2006 $ Change (unannualized)
------------ ----------- -------- --------------
ASSETS
Cash and cash equivelants $ 23,527 $ 31,359 $ (7,832) -25.0%
Trading securities 30,062 -- 30,062 N/A
Securities available for sale 182,983 213,450 (30,467) -14.3%
Mortgage loans available for sale 1,382 2,734 (1,352) -49.5%
Loans 610,186 591,042 19,144 3.2%
Allowance for loan losses (7,614) (7,605) (9) 0.1%
Bank premises and equipment 21,446 20,754 692 3.3%
Other assets 61,749 58,393 3,356 5.7%
-------- -------- -------- -----
TOTAL ASSETS $923,721 $910,127 $ 13,594 1.5%
======== ======== ======== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $726,769 $725,840 $ 929 0.1%
Other borrowed funds 67,077 58,303 8,774 15.0%
Escrow funds payable 3,648 2,416 1,232 51.0%
Accrued interest and other liabilities 5,045 7,819 (2,774) -35.5%
-------- -------- -------- -----
TOTAL LIABILITIES 802,539 794,378 8,161 1.0%
SHAREHOLDERS' EQUITY 121,182 115,749 5,433 4.7%
-------- -------- -------- -----
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $923,721 $910,127 $ 13,594 1.5%
======== ======== ======== =====
As previously mentioned, the Corporation commenced a balance sheet
reorganization strategy in 2007 which resulted in a transfer of
available-for-sale securities to trading securities. The Corporation's overall
intent was to sell a portion of the trading securities to enhance the ongoing
restructuring of assets and liabilities as part of our interest rate risk
management objectives.
Since January 1, 2007, the Corporation has reduced its trading securities by
$47,777 as a result of sales, calls, and maturities. Management has used these
proceeds to help fund its loan growth as well as to invest in available-for-sale
securities. Deposits have remained essentially unchanged since December 31,
2006.
In addition to the balance sheet restructuring resulting from the sales of
trading securities, as investments securities are sold, called, or matured, IBT
implemented a strategy to purchase high quality tax exempt municipal bonds
funded by fixed rate Federal Home Loan Bank advances.
The decline of mortgage loans available for sale is a result of the continued
softening of demand for residential mortgage loans. The residential real estate
mortgage loan market is expected to be consistent throughout the remainder of
2007 resulting in low levels of loan activity and a decreased volume of loans
sold to the secondary market.
The Corporation experienced a substantial increase in escrow funds payable
during the first nine months of 2007. These balances are attributed to Internal
Revenue Code Section ("IRC") 1031 exchange account balances of 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 deposited and reinvested.
The main factor contributing to the decrease in accrued interest and other
liabilities was the curtailment of a portion of our defined benefit pension plan
during the first quarter of 2007.
26
The following table outlines the changes in the loan portfolio:
September 30 December 31 % Change
2007 2006 $ Change (unannualized)
------------ ----------- -------- --------------
Commercial $232,861 $212,701 $ 20,160 9.5%
Agricultural 48,967 47,302 1,665 3.5%
Residential real estate mortgage 297,776 300,650 (2,874) -1.0%
Installment 30,582 30,389 193 0.6%
-------- -------- -------- ---
TOTAL GROSS LOANS $610,186 $591,042 $ 19,144 3.2%
======== ======== ======== ===
As shown in the above table, management has been successful in increasing the
commercial loan portfolio and this trend is expected to continue. The
Corporation has also seen an increase in agricultural loans during the first
nine months of 2007. Agricultural loans are not expected to vary significantly
from current levels for the remainder of 2007.
The decline in residential real estate mortgage loans is a result of the
continued soft mortgage market in Michigan. However, the Corporation does
anticipate that residential real estate mortgages may increase moderately in the
last quarter of 2007. The installment loan portfolio has been steadily
decreasing over the past few years as a result of increased competition as well
as a result of the sale of the consumer credit card portfolio in the second
quarter of 2006. Management anticipates the installment loan portfolio to remain
stable throughout the remainder of 2007.
The following table outlines the changes in the deposit portfolio:
September 30 December 31 % Change
2007 2006 $ Change (unannualized)
------------ ----------- -------- --------------
Noninterest bearing demand deposits $ 78,470 $ 83,902 $ (5,432) -6.5%
Interest bearing demand deposits 106,255 111,406 (5,151) -4.6%
Savings deposits 195,665 178,001 17,664 9.9%
Certificates of deposit 309,414 320,226 (10,812) -3.4%
Brokered certificates of deposit 30,420 27,446 2,974 10.8%
Internet certificates of deposit 6,545 4,859 1,686 34.7%
-------- -------- -------- ----
TOTAL $726,769 $725,840 $ 929 0.1%
======== ======== ======== ====
As shown in the preceding table, the Corporation has been unable to fund the
loan growth with core deposits and instead the growth has been primarily funded
with FHLB Borrowings and the proceeds from the sales of trading securities.
The increase in savings deposits is primarily in money market accounts.
Currently the rates on these accounts are attractive to our customers as the
Corporation strives to price these products competitively.
CAPITAL
The capital of the Corporation consists solely of common stock, capital surplus,
retained earnings, and accumulated other comprehensive loss. The Corporation
offers dividend reinvestment and employee and director stock purchase plans.
Under the provisions of these Plans, the Corporation issued 43,252 shares of
common stock generating $1,470 of capital during the first nine months of 2007,
as compared to 38,404 shares of common stock generating $1,537 of capital as of
the same period in 2006. The Corporation also offers share-based payment awards
through its equity compensation plan. Pursuant to this plan, the Corporation
generated $621 and $350 of capital in 2007 and 2006, 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. In March 2007, the
Board of Directors adopted a new plan which allowed for the repurchase of up to
150,000 shares. During 2007, the Corporation has repurchased 41,428 shares of
common stock at an average price of $43.47 under the new and old plans. There
were no shares repurchased in 2006.
Accumulated other comprehensive loss decreased $2,807, net of tax, and consists
of a $89 increase in unrealized loss on available-for-sale investment
securities, $1,999 of comprehensive income as a result of the curtailment of the
Corporation's defined benefit pension plan, and a $897 cumulative adjustment
related to the adoption of SFAS Statement No. 159.
27
There are no significant regulatory constraints placed on the Corporation's
capital. The Federal Reserve Board's current recommended minimum primary capital
to assets requirement is 6.0%. The Corporation's primary capital to adjusted
average assets, which consists of shareholders' equity plus the allowance for
loan losses less acquisition intangibles, was 11.6% as of September 30, 2007.
There are no commitments for significant capital expenditures, other than the
potential acquisition of Greenville Community Financial Corporation (Note 9).
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 September 30, 2007:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
September 30, 2007
------------------
Required Actual
-------- -------
Equity Capital 4.00% 16.2%
Secondary Capital 4.00% 1.3%
---- ----
Total Capital 8.00% 17.5%
==== ====
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 Bank. At September 30, 2007, the Bank exceeded these
minimum capital requirements.
LIQUIDITY
The primary sources of the Corporation's liquidity are cash and cash
equivalents, trading securities, and available-for-sale securities. These
categories totaled $236,572 or 25.6% of assets as of September 30, 2007 as
compared to $244,809 or 26.9% as of December 31, 2006. Liquidity is important
for financial institutions because of their need to meet loan funding
commitments, depositor withdrawal requests and various other commitments
including expansion of operations, investment opportunities, and payment of cash
dividends. Liquidity varies significantly daily, based on customer activity.
Operating activities provided $54,814 of cash in the first nine months of 2007,
which includes $47,777 of cash provided from the sales, calls, and maturities of
trading securities, as compared to $1,561 during the same period in 2006. Net
cash provided by financing activities equaled $6,943 and $46,518 in the nine
month periods ended September 30, 2007 and 2006, respectively. The Corporation's
investing activities used cash amounting to $69,589 in the first nine months of
2007 and $53,211 in the same period in 2006. The accumulated effect of the
Corporation's operating, investing, and financing activities used $7,832 and
$5,132 in the nine months ended September 30, 2007 and 2006, respectively.
Ordinarily, the primary source of funds for the Bank is deposits. The Bank
emphasizes interest-bearing time deposits as part of their funding strategy. The
Bank also seeks noninterest bearing deposits, or checking accounts, which reduce
the Bank's 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.
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, some obligations of which have been
reported at fair value to mitigate the Corporation's interest rate risk. The
Corporation's liquidity is considered adequate by the management of the
Corporation. The
28
potential acquisition of Greenville Community Financial Corporation (Note 9) is
not anticipated to materially affect the Corporation's liquidity.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET ARRANGEMENTS
The Corporation is party to financial instruments with off-balance-sheet risk.
These instruments are entered into in the normal course of business to meet the
financing needs of its customers. These financial instruments, which include
commitments to extend credit and standby letters of credit, involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The contract or notional amounts
of these instruments reflect the extent of involvement the Corporation has in a
particular class of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in deciding to
make these commitments as it does for extending loans to customers.
Commitments to extend credit, which totaled $84,039 at September 30, 2007, are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have variable
interest rates, fixed expiration dates, or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. At September 30,
2007, the Corporation had a total of $4,220 in outstanding standby letters of
credit.
Generally, these commitments to extend credit and letters of credit mature
within one year. The credit risk involved in these transactions is essentially
the same as that involved in extending loans to customers. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation upon the
extension of credit, is based on management's credit evaluation of the borrower.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and other income producing commercial properties.
Isabella Bank and Trust (IB&T), a subsidiary of the Corporation, sponsors the
IBT Foundation (the "Foundation"), which is a nonprofit entity formed for the
purpose of distributing charitable donations to recipient organizations
generally located in the communities serviced by Isabella Bank and Trust. IB&T
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 September 30, 2007 were $1,175.
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 Litigation 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 its 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.
29
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has very limited foreign exchange risk
and does not utilize interest rate swaps or derivatives in the management of its
interest rate risk. The Corporation does have a significant amount of loans
extended to borrowers involved in agricultural production. Cash flow and ability
to service debt of such customers is largely dependent on growing conditions and
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 to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors and senior management to effectively
manage the various risks that can have a material impact on the safety and
soundness of the Corporation. The risks include credit, interest rate,
liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
The Corporation uses two main techniques to manage interest rate risk. The first
method is gap analysis. Gap analysis measures the cash flows and/or the earliest
repricing of the Corporation's interest bearing assets and liabilities. This
analysis is useful for measuring trends in the repricing characteristics of the
balance sheet. Significant assumptions are required in this process because of
the imbedded repricing options contained in assets and liabilities. A
substantial portion of the Corporation's assets are invested in loans and
investment securities. These assets have imbedded options that allow the
borrower to repay the balance prior to maturity without penalty. The amount of
prepayments is dependent upon many factors, including the interest rate of a
given loan in comparison to the current interest rates; for residential
mortgages the level of sales of used homes; and the overall availability of
credit in the market place. Generally, a decrease in interest rates will result
in an increase in the Corporation's cash flows from these assets. Investment
securities, other than those that are callable, do not have any significant
imbedded options. Saving and checking deposits may generally be withdrawn on
request without prior notice. The timing of cash flow from these deposits is
estimated based on historical experience. Time deposits have penalties which
discourage early withdrawals. Cash flows may vary based on current offering
rates, competition, customer need for deposits, and overall economic activity.
As noted above, the Corporation has reclassified a portion of its investment
portfolio and its borrowings into trading accounts. Management feels that these
practices help it mitigate the volatility of the current interest rate
environment.
The second technique used in the management of interest rate risk is to combine
the projected cash flows and repricing characteristics generated by the gap
analysis and the interest rates associated with those cash flows and projected
future interest income. By changing the amount and timing of the cash flows and
the repricing interest rates of those cash flows, the Corporation can project
the effect of changing interest rates on its interest income.
The following table provides information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of September 30,
2007. The Corporation has no interest rate swaps, futures contracts, or other
derivative financial options, except for derivative loan commitments, which are
not significant. 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.
30
September 30, 2007 Fair Value
-------------------------------------------------------------------------------
(dollars in thousands) 2008 2009 2010 2011 2012 Thereafter Total 09/30/07
-------- -------- ------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest bearing
assets $ 1,959 $ -- $ -- $ -- $ -- $ -- $ 1,959 $ 1,959
Average interest rates 4.78% -- -- -- -- -- 4.78%
Trading securities $ 12,696 $ 2,433 $ 3,468 $ 2,576 $ 3,143 $ 5,746 $ 30,062 $ 30,062
Average interest rates 4.91% 5.75% 4.82% 4.81% 3.77% 3.67% 4.60%
Fixed interest rate
securities $ 73,223 $ 10,144 $ 7,991 $10,124 $ 8,180 $73,321 $182,983 $182,983
Average interest rates 5.17% 4.78% 4.88% 4.30% 5.36% 3.84% 4.56%
Fixed interest rate loans $118,354 $102,097 $98,443 $81,327 $65,302 $57,601 $523,124 $525,639
Average interest rates 6.70% 6.57% 6.84% 7.06% 7.31% 6.49% 6.81%
Variable interest rate
loans $ 41,870 $ 14,848 $16,974 $ 4,051 $ 5,602 $ 3,717 $ 87,062 $ 87,062
Average interest rates 8.58% 8.35% 8.35% 7.98% 7.76% 7.65% 8.38%
Rate sensitive liabilities
Borrowed funds $ 13,577 $ 11,500 $17,000 $ 3,000 $12,000 $10,000 $ 67,077 $ 66,632
Average interest rates 5.12% 4.59% 4.81% 4.98% 4.49% 4.84% 4.79%
Savings and NOW accounts $147,194 $ 66,724 $63,080 $20,658 $ 4,264 $ -- $301,920 $301,920
Average interest rates 3.48% 1.17% 0.75% 0.67% -- -- 2.16%
Fixed interest rate time
deposits $216,904 $ 39,740 $42,882 $21,044 $23,531 $ 244 $344,345 $345,938
Average interest rates 4.69% 4.44% 4.59% 4.70% 4.85% 5.03% 4.66%
Variable interest rate
time deposits $ 1,389 $ 645 $ -- $ -- $ -- $ -- $ 2,034 $ 2,034
Average interest rates 4.29% 4.49% -- -- -- -- 4.35%
September 30, 2006 Fair Value
------------------------------------------------------------------------------
2007 2008 2009 2010 2011 Thereafter Total 09/30/06
-------- ------- ------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest bearing
assets $ 3,409 $ -- $ -- $ -- $ -- $ -- $ 3,409 $ 3,409
Average interest rates 1.31% -- -- -- -- -- 1.31%
Fixed interest rate
securities $ 55,374 $44,316 $22,064 $14,303 $22,271 $34,940 $193,268 $193,268
Average interest rates 3.92% 3.71% 3.84% 4.33% 4.52% 4.58% 4.08%
Fixed interest rate loans $127,399 $80,772 $78,644 $58,334 $63,692 $32,735 $441,576 $436,267
Average interest rates 6.39% 6.38% 6.39% 6.47% 7.70% 5.94% 6.55%
Variable interest rate
loans $ 46,872 $14,398 $13,355 $ 4,438 $ 1,603 $ 905 $ 81,571 $ 81,571
Average interest rates 9.51% 8.85% 8.91% 9.54% 8.86% 7.63% 9.26%
Rate sensitive liabilities
Borrowed funds $ 20,671 $ 3,000 $12,558 $ 4,000 $ 5,286 $13,000 $ 58,515 $ 58,547
Average interest rates 5.73% 3.70% 4.89% 4.11% 5.69% 4.84% 5.13%
Savings and NOW accounts $ 98,954 $65,802 $60,842 $19,491 $ 5,310 $ -- $250,399 $250,399
Average interest rates 3.37% 1.19% 0.69% 0.65% 0.78% -- 1.88%
Fixed interest rate time
deposits $199,830 $45,448 $20,224 $28,767 $11,548 $ 1,492 $307,309 $289,268
Average interest rates 4.53% 4.27% 4.04% 4.49% 4.57% 5.18% 4.46%
Variable interest rate
time deposits $ 761 $ 652 $ -- $ -- $ -- $ -- $ 1,413 $ 1,413
Average interest rates 4.23% 4.28% -- -- -- -- 4.25%
31
ITEM 4 -- CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Corporation's management carried out an evaluation, under the supervision
and with the participation of the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) as of September 30, 2007, pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Principal Executive Officer and Principal
Financial Officer concluded that the Corporation's disclosure controls and
procedures as of September 30, 2007, were effective to ensure that information
required to be disclosed by the Corporation in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter, the Corporation has consolidated the data
processing of The Farwell State Savings Bank (FSSB) into IBT Bancorp (IBT).
Additionally, FSSB has adopted IBT's policies and internal control structure.
The effectiveness of the control is currently being tested. Other than the
aforementioned procedures, no changes have occurred in the Corporation's key
controls over financial reporting that materially affected, or is likely to
materially affect, the Corporation's internal control over financial reporting.
32
PART II - OTHER INFORMATION
ITEM 1A -- RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A in
our Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 2 -- UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(A) NONE
(B) NONE
(C) REPURCHASES OF COMMON STOCK
On March 22, 2007, the Board of Directors adopted a repurchase plan which
allowed for the repurchase of up to 150,000 shares of the Corporation's common
stock. This authorization does not have an expiration date. The following table
provides information for the three month period ended September 30, 2007, with
respect to this plan:
Total Number of
Shares Repurchased Shares Purchased Maximum Number of
---------------------- as Part of Publicly Shares That May Yet Be
Average Price Announced Plan Purchased Under the
(Dollars in thousands) Number Per Share or Program Plans or Programs
------ ------------- ------------------- ----------------------
Balance, June 30 2007 140,266
July 1 - 31, 2007 15,094 $44.00 15,094 125,172
August 1 - 31, 2007 4,000 44.00 4,000 121,172
September 1 - 30, 2007 -- -- -- 121,172
------ ------ ------ -------
Balance, September 30 2007 19,094 $44.00 19,094 121,172
====== ====== ====== =======
ITEM 6 - EXHIBITS
(a) Exhibits
31(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 by the Principal 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 Principal Executive Officer and
Principal Financial Officer
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IBT Bancorp, Inc.
Date: October 29, 2007 /s/ Dennis P. Angner
----------------------------------------
Dennis P. Angner
Chief Executive Officer
/s/ Peggy L. Wheeler
----------------------------------------
Peggy L. Wheeler
Principal Financial Officer
34