UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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[ ] Soliciting Material Pursuant to Section 240.14a-12
IBT BANCORP, INC
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(Name of Registrant as Specified In Its Charter)
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CURRENTLY VALID OMB CONTROL NUMBER.
SEC 1913 (02-02)
IBT BANCORP, INC.
200 EAST BROADWAY
MOUNT PLEASANT, MICHIGAN 48858
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NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 18, 2006
------------
Notice is hereby given that the Annual Meeting of Shareholders of IBT
Bancorp, Inc. will be held on Tuesday, April 18, 2006 at 7:00 p.m. Eastern
Standard Time, at the Holiday Inn, 5665 E. Pickard Street, Mount Pleasant,
Michigan. The meeting is for the purpose of considering and acting upon the
following:
1. The election of four directors.
2. Such other business as may properly come before the meeting, or any
adjournment or adjournments thereof.
The Board of Directors has fixed March 1, 2006 as the record date for
determination of shareholders entitled to notice of, and to vote at, the meeting
or any adjournments thereof.
Your vote is important. Even if you plan to attend the meeting, please date
and sign the enclosed proxy form, indicate your choice with respect to the
matters to be voted upon, and return it promptly in the enclosed envelope. Note
that if stock is held in more than one name, all parties should sign the proxy
form.
By order of the Board of Directors
/s/ DEBRA CAMPBELL
Debra Campbell, Secretary
Dated: March 23, 2006
IBT BANCORP, INC.
200 EAST BROADWAY
MOUNT PLEASANT, MICHIGAN 48858
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PROXY STATEMENT
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GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of IBT Bancorp, Inc. (the Corporation) a
Michigan financial holding company, to be voted at the Annual Meeting of
Shareholders of the Corporation to be held on Tuesday, April 18, 2006 at 7:00
p.m. at the Holiday Inn, 5665 E. Pickard Street, Mount Pleasant, Michigan, or at
any adjournment or adjournments thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Shareholders and in this Proxy
Statement.
This Proxy Statement has been mailed on March 28, 2006 to all holders of
record of common stock as of the record date. If a shareholder's shares are held
in the name of a broker, bank or other nominee, then that party should give the
shareholder instructions for voting the shareholder's shares.
VOTING AT THE MEETING
The Board of Directors of the Corporation has fixed the close of business
on March 1, 2006 as the record date for the determination of shareholders
entitled to notice of, and to vote at, the Annual Meeting of Shareholders and
any adjournment thereof. The Corporation has only one class of common stock and
no preferred stock. As of March 1, 2006, there were 5,472,013 shares of common
stock of the Corporation outstanding. Each outstanding share entitles the holder
thereof to one vote on each separate matter presented for vote at the meeting.
Shareholders may vote on matters that are properly presented at the meeting by
either attending the meeting and casting a vote or by signing and returning the
enclosed proxy. If the enclosed proxy is executed and returned, it may be
revoked at any time before it is exercised at the meeting. All shareholders are
encouraged to date and sign the enclosed proxy, indicate their choice with
respect to the matters to be voted upon, and return it to the Corporation.
The Corporation will hold the Annual Meeting of Shareholders if holders of
a majority of the Corporation's shares of common stock entitled to vote are
represented in person or by proxy at the meeting. If a shareholder signs and
returns the proxy, those shares will be counted to determine whether the
Corporation has a quorum, even if the shareholder abstains or fails to vote on
any of the proposals listed on the proxy.
If a shareholder's shares are held in the name of a nominee, and the
shareholder does not tell the nominee how to vote the shares (referred to as
broker non-votes), then the nominee can vote them as it sees fit only on matters
that are determined to be routine and not on any other proposal. Broker non-
votes will be counted as present to determine if a quorum exists but will not be
counted as present and entitled to vote on any nonroutine proposals.
In the election of directors, director nominees receiving a plurality of
votes cast at the meeting will be elected directors of the Corporation. Shares
not voted, including broker non-votes, have no effect on the election of
directors.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes, with the directors in
each class being elected for a term of three years. At the Annual Meeting of
Shareholders, four directors will be elected for terms ending with the annual
meeting of shareholders in 2009.
Except as otherwise specified in the proxy, proxies will be voted for
election of the four nominees named below. If a nominee becomes unable or
unwilling to serve, proxies will be voted for such other person, if any, as
shall be designated by the Board of Directors. However, the Corporation's
management now knows of no reason to anticipate that this will occur. The four
nominees for election as directors who receive the greatest number of votes cast
will be elected directors. Each of the nominees has agreed to serve as a
director if elected.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE ELECTION
OF EACH OF THE FOUR DIRECTOR NOMINEES NOMINATED BY THE BOARD OF DIRECTORS.
Nominees for election and current directors are listed below. Also shown
for each nominee and each current director is his or her principal occupation
for the last five or more years, age and length of service as a director of the
Corporation.
DIRECTOR NOMINEES FOR TERMS ENDING IN 2009
Dennis P. Angner (age 50) has been a director of the Corporation since
2000. He also serves as an ex-officio member of all of the Corporation's
subsidiary Boards of Directors and committees. Mr. Angner has been President and
CEO of the Corporation since December 30, 2001. Prior to his appointment as
President and CEO, he served as Executive Vice President of the Corporation.
David J. Maness (age 52) was appointed as a director of the Corporation in
2004, and serves on the Finance and Planning Committee and the Audit Committee.
He also serves on the Board of Directors of Isabella Bank and Trust and
Financial Group Information Services. Mr. Maness is President of Maness
Petroleum, a geological and geophysical consulting service.
W. Joseph Manifold (age 54) was appointed to IBT Bancorp Inc.'s Board of
Directors in July 2003, and serves as chairperson of the Audit Committee. Mr.
Manifold also serves as a director of IBT Title and Insurance Agency, Inc. Mr.
Manifold is a Certified Public Accountant and President of Federal Broach &
Machine Company, a manufacturing company.
William J. Strickler (age 65) has been a director of the Corporation since
2002, and serves as chairperson of the Human Resource Committee, and also serves
on the Nominating and Corporate Governance Committee. He has been a director of
Isabella Bank and Trust since 1995. Mr. Strickler is President of Michiwest
Energy, an oil and gas producer.
CURRENT DIRECTORS WITH TERMS ENDING IN 2007
James C. Fabiano (age 62) has been a director of Isabella Bank and Trust
since 1979 and of the Corporation since 1988, of which he is currently serving
as Chairperson and is an ex-officio member of all committees. He also serves as
an ex-officio member of all the Corporation's subsidiary Boards of Directors.
Mr. Fabiano is President and CEO of Fabiano Brothers, Inc., a wholesale
distributor of beer, wine and certain specialty beverages.
David W. Hole (age 68) has been a director of Isabella Bank and Trust since
1982. He has served on the Board of the Corporation since 1988 and serves on the
Human Resource Committee and the Finance and Planning Committee. He currently is
a director of Financial Group Information Services. He retired as President and
CEO of Isabella Bank and Trust and the Corporation on December 30, 2001.
Dale Weburg (age 62) has been a director of Farmers State Bank of
Breckenridge since 1987 and currently serves as Chairperson. He has served on
the Board of the Corporation since 2000 and is a member of the Financial Group
Information Services Board of Directors. He also serves on the Nominating and
Corporate Governance Committee, Audit Committee and is chairperson of the
Finance and Planning Committee. Mr. Weburg is President of Weburg Farms, a cash
crop farm operation.
CURRENT DIRECTORS WITH TERMS ENDING IN 2008
Richard J. Barz (age 57) was appointed director of the Corporation in 2002.
He has been a director of Isabella Bank and Trust since 2000. Mr. Barz also
serves on the Board of IBT Title and Insurance Agency, Inc., and Financial Group
Information Services and is a member of the Human Resource Committee. Mr. Barz
has been President and CEO of Isabella Bank and Trust since December 30, 2001.
Prior to his appointment as President and CEO he served as Executive Vice
President of Isabella Bank and Trust.
Sandra L. Caul (age 62) was appointed director of the Corporation in 2005.
She currently serves as director of Isabella Bank and Trust and IBT Title and
Insurance Agency, Inc. She also serves on the Human Resource
2
Committee. Ms. Caul retired in January 2005 as a state representative of the
Michigan State House of Representatives. Ms. Caul is a registered nurse.
Timothy M. Miller (age 54) was appointed director of the Corporation in
2005. He has served as a director of Farmers State Bank of Breckenridge since
2002. Mr. Miller also serves as a director of Financial Group Information
Services. Mr. Miller has been President and CEO of Farmers State Bank of
Breckenridge since January 1, 2003. Prior to his appointment as President and
CEO he served as Senior Vice President of Farmers State Bank of Breckenridge.
Ronald E. Schumacher (age 69) has been a director of the Corporation since
1988 and of Isabella Bank & Trust since 1984, of which he is currently serving
as Chairperson. He also serves on the Human Resource Committee, Audit Committee
and serves as chairperson of the Nominating and Corporate Governance Committee.
Mr. Schumacher is the President of A. Schumacher Sons, a grain and beef farm
operation.
Each of the directors has been engaged in their stated professions for more
than five years. The principal occupation of Dennis P. Angner is with the
Corporation, and he has been employed by Isabella Bank and Trust and/or the
Corporation since 1984. Other executive officers of the Corporation include:
Richard J. Barz, President of Isabella Bank and Trust, an employee of Isabella
Bank & Trust and/or the Corporation since 1972; Timothy M. Miller, President of
Farmers State Bank of Breckenridge, an employee of Farmers State Bank of
Breckenridge and/or the Corporation since 1985; Peggy Wheeler (age 46), Senior
Vice President and Controller of the Corporation, employed by Isabella Bank and
Trust and/or the Corporation since 1977. All officers of the Corporation serve
at the pleasure of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
The Board of Directors of the Corporation met 13 times during 2005. All
incumbent directors attended 75% or more of the meetings held in 2005. The Board
of Directors has an Audit Committee, a Nominating and Corporate Governance
Committee, a Human Resource, and a Finance and Planning Committee.
The Audit Committee is composed of independent directors who meet the
requirements for independence as defined in Rule 4200(a)(15) of the National
Association of Securities Dealers' listing standards. Information regarding the
functions performed by the Committee, its membership, and the number of meetings
held during the year, is set forth in the "Report of the Audit Committee"
included elsewhere in this annual proxy statement. The Audit Committee is
governed by a written charter approved by the Board of Directors that was
attached as Appendix A to the Corporation's proxy statement for the 2005 Annual
Shareholders Meeting. In accordance with the provisions of the Sarbanes -- Oxley
Act of 2002, Director Manifold meets the requirement of Audit Committee
Financial Expert and has been so designated by the Board of Directors.
The Corporation has a standing Nominating and Corporate Governance
Committee consisting of independent directors who meet the requirements for
independence as defined in Rule 4200(a)(15) of the National Association of
Securities Dealers' listing standards. The Committee consists of directors
Schumacher, Strickler and Weburg. The Nominating and Corporate Governance
Committee held five meetings in 2005, and all directors attended 75% or more of
the meetings in 2005. The Board of Directors has approved a Nominating and
Corporate Governance Committee Charter that was attached as Appendix B to the
Corporation's proxy statement for the 2005 Annual Shareholders Meeting. The
Nominating and Corporate Governance Committee is responsible for evaluating and
recommending individuals for nomination to the Board of Directors for approval.
In making its selections and recommendations, the Nominating and Corporate
Governance Committee considers a variety of factors, which generally include the
candidate's personal and professional integrity, independence, business
judgment, and communication skills.
The Nominating and Corporate Governance Committee will consider as
potential nominees, persons recommended by shareholders. Recommendations should
be submitted in writing to the Secretary of the Corporation, 200 East Broadway,
Mount Pleasant, Michigan 48858 and include the shareholder's name, address and
number of shares of the Corporation owned by the shareholder. The recommendation
should also include the name, age, address and qualifications of the recommended
candidate for nomination. Recommendations for the 2007 Annual Meeting of
Shareholders should be delivered no later than November 28, 2006. The Nominating
and Corporate
3
Governance Committee does not evaluate potential nominees for director
differently based on whether they are recommended to the Nominating and
Corporate Governance Committee by a shareholder.
The Human Resource Committee of the Corporation is responsible for
reviewing and recommending to the Corporation's Board of Directors the
compensation of the Corporation's President and its subsidiaries, benefit plans
and the overall percentage increase in salaries. The committee consists of
directors, Barz, Hole, Schumacher, Strickler, and Caul.
The Finance and Planning Committee evaluates new business opportunities and
business acquisitions, assists management in establishing financial goals,
reviews all strategic plans of subsidiaries to assure consistency with overall
corporate goals and reviews interest rate risks, credit risks and insurance
coverage. The committee consists of directors Weburg, Maness, Hole, Barz, and
Miller.
4
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees the Corporation's financial reporting process
on behalf of the Board of Directors. The Committee consists of directors
Fabiano, Maness, Manifold, Schumacher, and Weburg.
The Audit Committee is responsible for pre-approving all auditing services
and permitted non-audit services to be performed during 2005 or thereafter for
the Corporation by its independent auditors or any other auditing or accounting
firm, except as noted below. The Audit Committee has established general
guidelines for the permissible scope and nature of any permitted non-audit
services in connection with its annual review of the audit plan and reviews the
guidelines with the Board of Directors.
Management has the primary responsibility for the consolidated financial
statements and the reporting process including the systems of internal controls.
In fulfilling its oversight responsibilities, the Committee reviewed the audited
consolidated financial statements in the Annual Report with management including
a discussion of the quality, not just the acceptability, of the accounting
principles, the reasonableness of significant judgments, and the clarity of
disclosures in the consolidated financial statements. The Committee also
reviewed with management and the independent auditors, management's assertion on
the design and effectiveness of the Corporation's internal control over
financial reporting as of December 31, 2005.
The Committee reviewed with the independent auditors, who are responsible
for expressing an opinion on the conformity of those audited consolidated
financial statements with accounting principles generally accepted in the United
States of America, their judgments as to the quality, not just the
acceptability, of the Corporation's accounting principles and such other matters
as are required to be discussed with the Committee by the standards of the
Public Company Accounting Oversight Board (United States), including those
described in SAS 61, as may be modified or supplemented. In addition, the
Committee has received the written disclosures and the letter from the
independent accountants required by Independence Standards Board Standard No. 1
as may be modified or supplemented, and has discussed with the independent
accountant the independent accountant's independence.
The Committee discussed with the Corporation's internal and independent
auditors the overall scope and plans for their respective audits. The Committee
meets with the internal and independent auditors, with and without management
present, to discuss the results of their examinations, their evaluations of the
Corporation's internal controls and the overall quality of the Corporation's
financial reporting process. The Committee held seven meetings during 2005, and
all directors attended 75% or more of the meetings held in 2005.
In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors (and the Board has approved) that the
audited consolidated financial statements and reports on management's assertion
on the design and effectiveness of internal control over financial reporting be
included in the Annual Report on Form 10-K for the year ended December 31, 2005
for filing with the Securities and Exchange Commission. The Committee has
appointed Rehmann Robson, P.C. as the independent auditors for the 2006 audit.
Respectfully submitted,
/s/ W. Joseph Manifold
----------------------------------------
W. Joseph Manifold, Audit Committee
Chairperson
James C. Fabiano
David J. Maness
Ronald E. Schumacher
Dale D. Weburg
5
EXECUTIVE OFFICERS
Executive Officers of the Corporation are compensated in accordance with
their employment with the applicable entity. The executive officers of the
Corporation whose annual compensation exceeded $100,000 for the periods
indicated are as follows:
SUMMARY COMPENSATION TABLE
ANNUAL
COMPENSATION
--------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) COMPENSATION(2)
--------------------------- ---- --------- ---------------
Dennis P. Angner,.............................. 2005 $262,530 $ 9,442
President and CEO of IBT Bancorp, Inc. 2004 251,200 9,012
2003 218,090 8,390
Richard J. Barz,............................... 2005 $251,840 $11,720
Executive Vice President of IBT Bancorp, Inc.
and 2004 242,000 11,162
President and CEO of Isabella 2003 216,340 8,993
Bank & Trust
Tim Miller,.................................... 2005 $151,750 $ --
Vice President of IBT Bancorp, Inc. and
President 2004 141,515 --
and CEO of Farmers State Bank of Breckenridge 2003 128,396 1,770
--------
(1) Includes compensation voluntarily deferred under the Corporation's 401(k)
and Non-qualified Deferred Salary Agreement and Board of Directors fees,
paid in cash or deferred under the Non-qualified Deferred Directors
Compensation Plan.
(2) The amounts shown represent contributions by the Corporation under its
Employee Stock Ownership Plan (ESOP), in which substantially all employees
participate and expenses related to a nonqualified supplemental Executive
Retirement Plan (ERP). The amounts contributed are as follows:
YEAR ESOP ERP
---- ------ -------
Dennis P. Angner.................................... 2005 $ -- $ 9,442
2004 -- 9,012
2003 3,006 5,384
Richard J. Barz..................................... 2005 $ -- $11,720
2004 -- 11,162
2003 2,982 6,011
Tim Miller.......................................... 2005 $ -- $ --
2004 -- --
2003 1,770 --
The Corporation believes it generally maintains a conservative level of
perquisites and personal benefits. The dollar value of perquisites and personal
benefits provided to the named executive officer does not exceed 10% of his
annual compensation.
6
REPORT ON EXECUTIVE COMPENSATION
Dennis P. Angner serves as President and Chief Executive Officer of the
Corporation. With the exception of Dennis P. Angner, services performed by other
executive officers of the Corporation are incidental to their primary services
as officers and employees of a subsidiary Bank, and they receive no compensation
directly from the Corporation. The compensation for the President of IBT
Bancorp, Inc. and its subsidiaries is reviewed by the Corporation's Human
Resource Committee and approved by the Corporation's Board of Directors based on
recommendations from the Human Resource Committee.
The Committee's approach to determining the annual salary of executive
officers is to offer competitive salaries in comparison with other comparable
financial institutions. The Committee utilizes regional and national
compensation surveys which provide salary ranges for banks of similar size.
Based on these surveys, the Committee establishes salary ranges for all job
classifications. In setting salaries, the Corporation seeks to assure relative
fairness in the compensation of officers and to recognize the value of their
contribution to the Corporation's overall success. Specific factors used to
decide where an executive officer salary should be within the established range
include the historical financial performance, financial performance outlook,
years of service, and job performance. The salary paid to Dennis P. Angner,
President and Chief Executive Officer of the Corporation, was in the 25th to
50th percentile in 2005. The Board's primary consideration in where Angner's
salary fits within the defined range was based on a discretionary evaluation of
his personal performance and years of service as President and CEO.
Respectfully submitted,
William J. Strickler, Chairperson
Dennis P. Angner
Richard J. Barz
Sandra L. Caul
James C. Fabiano
David W. Hole
Ronald E. Schumacher
THE DEFINED BENEFIT PENSION PLAN
The Corporation sponsors a defined benefit pension plan. This plan was
originally adopted in 1973 and was substantially revised in 1989. Only
employees, including leased employees, who have attained the age of 21 and who
have worked more than 1,000 hours in the current plan year are eligible to
participate.
Annual contributions are made to the plan as required by accepted actuarial
principles, applicable federal tax law, and expenses of operating and
maintaining the plan. The amount of contributions on behalf of any one
participant cannot be separately or individually computed.
Pension plan benefits are based on an average of a participant's five
highest years of compensation. A participant may earn a benefit for up to 35
years of accredited service. Earned benefits are 100 percent vested after five
years of service. Benefit payments normally start when a participant reaches age
65. A participant with more than five years of service may elect to take early
retirement benefits anytime after reaching age 55. Benefits payable under early
retirement are reduced actuarially for each month prior to age 65 in which
benefits begin.
7
The following table indicates estimated annual benefits payable upon normal
retirement for various compensation levels and years of service. Additional
benefits may be earned due to integration of social security benefits. The
amounts that may be earned are undeterminable until retirement.
FIVE YEAR
AVERAGE YEARS OF ACCREDITED SERVICE
OF HIGHEST -------------------------------------------------------------------- ---------
COMPENSATION 5 15 25 35
------------ ------ ------- ------- -------
$ 20,000 $ 900 $ 2,700 $ 4,500 $ 6,300
50,000 2,250 6,750 11,250 15,750
75,000 3,375 10,125 16,875 23,625
100,000 4,500 13,500 22,500 31,500
125,000 5,625 16,875 28,125 39,375
150,000 6,750 20,250 33,750 47,750
200,000 7,875 23,625 39,375 56,125
The amounts calculated under the plan's benefit formula assume a monthly
payment for life. A married participant will generally receive an actuarially
reduced monthly payment because the participant's surviving spouse will also
receive monthly payments for life after the participant's death. As of December
31, 2005, Richard J. Barz had 33 years, Dennis P. Angner had 22 years, and
Timothy M. Miller had 5 years of credited service under the plan.
HUMAN RESOURCE COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Human Resource Committee of the Corporation is responsible for
reviewing and recommending to the Corporation's Board of Directors the
compensation of the Corporation's President and its subsidiaries, benefit plans
and the overall percentage increase in salaries. The committee consists of
directors Strickler, Angner, Barz, Caul, Fabiano, Hole, and Schumacher. Director
Barz did not participate in any of the procedures which pertain to executive
officers compensation and was excused from the meetings at such times. Director
Angner participated in deliberations concerning compensation of other executive
officers, however, was excused from the meeting at which his compensation was
set.
REMUNERATION OF DIRECTORS
The Corporation paid a $4,000 retainer, and $750 per board meeting to its
directors during 2005 and $225 per committee meeting attended. Directors of
Isabella Bank and Trust were paid a $2,800 retainer, $700 per board meeting and
$200 per committee meeting attended. Farmers State Bank of Breckenridge paid a
retainer of $2,000, $500 per board meeting, and $120 per committee meeting
attended (provided the committee meeting was on a non-board meeting day).
Directors who are officers of a subsidiary are not paid for attendance at
committee meetings.
The Corporation sponsors a deferred compensation plan for directors (the
Directors' Plan). The Directors' Plan was adopted in 1984 and was substantially
revised in 1989 and 1996 and was amended and frozen as of December 31, 2005.
Under the Directors' Plan, deferred directors' fees are converted on a quarterly
basis into stock units of the Corporation's common stock. The fees are converted
based on the purchase price for a share of the Corporation's common stock under
the Corporation's Dividend Reinvestment Plan. The board of directors adopted the
new Plan on January 1, 2006 to comply with the American Jobs Creation Act of
2004.
Pursuant to the terms of the Directors' Plan, directors of the Corporation
and its subsidiaries were required to defer at least 25% of their earned board
fees. The amount deferred under the terms of the Directors' Plan in 2005 was
$303,000, resulting in 13,715 stock units being credited to participants'
accounts. As of December 31, 2005, there were 161,571 stock units credited to
participants' accounts. Stock units credited to a participant's account are
eligible for cash and stock dividends as payable. All amounts deferred are
unsecured claims against the Corporation's general assets. The net cost of this
benefit to the Corporation was $98,000 in 2005.
Distribution from the Directors' Plan occurs when the participant
terminates service with the Corporation and/or attains age 65. Distributions
must take the form of shares of Corporation common stock equal to the number
8
of stock units credited to the participant's account. Any Corporation common
stock issued under the Directors' Plan will be considered restricted stock under
the Securities Act of 1933, as amended.
Inside directors Angner, Barz, and Miller deferred stock units were issued
in 2005, pursuant to the Corporation's understanding of the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment" (SFAS No. 123R). Under this standard their
stock units would have been required to be marked to market quarterly, resulting
in additional compensation expense. The IBT Bancorp Board of Directors amended
its deferred compensation plan on December 31, 2005. Prior to December 31, 2005,
the Plan contained a cash payout option, and a liability was recorded in the
consolidated financial statements. The Plan as modified does not allow for cash
settlement, and therefore such share-based payment awards qualify for
classification as equity. The number of equivalent stock units outstanding will
be included when calculating fully dilutive earnings per share.
SHARES IN DEFERRED DIRECTOR PLAN BY DIRECTOR
DIRECTOR SHARES
-------- -------
Sandra Caul.................................................... 8,705
James Fabiano.................................................. 27,393
David Hole..................................................... 19,056
Thomas L. Kleinhardt........................................... 4,825
Ronald Schumacher.............................................. 11,147
William Strickler.............................................. 11,190
Dale Weburg.................................................... 4,829
Diane Morey.................................................... 2,422
Wilson Lauer................................................... 425
Larry Sensabaugh............................................... 467
Bernard Siler.................................................. 532
Nancy Shankel.................................................. 425
Dave Maness.................................................... 2,442
Joe Manifold................................................... 1,780
Greg Varner.................................................... 349
G. Charles Hubscher............................................ 758
Total for Retired Directors.................................... 64,826
-------
TOTAL SHARES................................................. 161,571
=======
INDEBTEDNESS OF AND TRANSACTIONS WITH MANAGEMENT
Certain directors and officers of the Corporation and members of their
families were loan customers of the subsidiary Banks, or have been directors or
officers of corporations, or partners of partnerships which have had
transactions with the subsidiary Banks. In management's opinion, all such
transactions are made in the ordinary course of business and are substantially
on the same terms, including collateral and interest rates, as those prevailing
at the same time for comparable transactions with other customers. These
transactions do not involve more than normal risk of collectibility or present
other unfavorable features. Total loans to these customers were approximately
$9,679,000 as of December 31, 2005.
9
STOCK PERFORMANCE
The graph below compares the cumulative total shareholder return on
Corporation common stock for the last five years with the cumulative total
return on (1) the NASDAQ Stock Market Index, which is comprised of all United
States common shares traded on the NASDAQ and (2) the NASDAQ Bank Stock Index,
which is comprised of bank and bank holding company common shares traded on the
NASDAQ over the same period. The graph assumes the value of an investment in the
Corporation and each index was $100 at December 31, 2000, and all dividends are
reinvested.
STOCK PERFORMANCE
FIVE-YEAR TOTAL RETURN
(PERFORMANCE CHART)
The dollar values for total shareholder return plotted in the graph above
are shown in the table below:
COMPARISON OF FIVE YEAR CUMULATIVE
AMONG IBT BANCORP, NASDAQ STOCK MARKET,
AND NASDAQ BANK STOCK
NASDAQ
YEAR IBT BANCORP NASDAQ BANKS
---- ----------- ------ ------
12/31/2000 100.0 100.0 100.0
12/31/2001 113.7 85.4 112.5
12/31/2002 133.0 58.7 110.6
12/31/2003 154.6 88.5 145.1
12/31/2004 181.3 97.1 162.9
12/31/2005 192.8 99.2 166.7
10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 1, 2006 as
to the common stock of the Corporation owned of record or beneficially by any
person who is known to the Corporation to be the beneficial owner of more than
5% of the common stock of the Corporation.
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP
---------------------------------------------
SOLE VOTING SHARED VOTING PERCENTAGE OF
AND INVESTMENT AND INVESTMENT COMMON STOCK
NAME AND ADDRESS OF OWNER POWERS POWERS OUTSTANDING
------------------------- -------------- -------------- -------------
James J. McGuirk........................ 365,402 -- 6.68%
P.O. Box 222
Mt. Pleasant, MI
The following table sets forth certain information as of March 1, 2006 as
to the common stock of the Corporation owned beneficially by each director and
director nominee, by each named executive officer, and by all directors,
director nominees and executive officers of the Corporation as a group.
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP
---------------------------------------------------------
SOLE VOTING SHARED VOTING TOTAL PERCENTAGE OF
AND INVESTMENT AND INVESTMENT BENEFICIAL COMMON STOCK
NAME OF OWNER POWERS POWERS OWNERSHIP OUTSTANDING
------------- -------------- -------------- ---------- -------------
Dennis P. Angner*............. 15,890 90 15,980 0.29%
Richard J Barz*............... 16,897 16,897 0.31%
Sandra L. Caul................ 8,713 8,713 0.16%
James C. Fabiano.............. 229,032 229,032 4.19%
David W. Hole................. 15,886 15,886 0.29%
W. Joseph Manifold............ 284 284 0.01%
Timothy M. Miller............. 39 3,059 3,098 0.06%
Ronald E. Schumacher.......... 13,463 13,463 0.25%
William J. Strickler.......... 68,247 5,055 73,302 1.34%
Dale D. Weburg................ 52,323 812 53,135 0.97%
David J. Maness............... 431 431 0.01%
All Directors, nominees and
Executive Officers as a
Group (11 persons).......... 383,143 47,078 430,221 7.88%
--------
* Trustees of the ESOP who vote ESOP stock.
AS TO OTHER BUSINESS WHICH MAY COME BEFORE THE MEETING
Management of the Corporation does not intend to bring any other business
before the meeting for action. However, if any other business should be
presented for action, it is the intention of the persons named in the enclosed
form of proxy to vote in accordance with their judgment on such business.
RELATIONSHIP WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee has appointed Rehmann Robson, P.C. as the independent
auditors of the Corporation for the year ending December 31, 2006.
A representative of Rehmann Robson, P.C., is expected to be present at the
Annual Meeting of Shareholders to respond to appropriate questions from
shareholders and to make any comments they believe appropriate.
11
FEES FOR PROFESSIONAL SERVICES PROVIDED BY REHMANN ROBSON P.C.
The following table shows the aggregate fees billed by Rehmann Robson P.C.
for audit and other services provided to the Corporation for 2005 and 2004.
2005 2004
-------- --------
Audit Fee.............................................. $544,648 $112,650
Audit Related Fees..................................... 3,600 5,750
Tax Fees............................................... 31,224 24,150
Other Professional Services Fees....................... 21,184 19,079
-------- --------
Total................................................ $600,656 $161,629
======== ========
The audit fees were for performing the audit of the Corporation's
consolidated annual financial statements, audit of managements assessment of
internal controls over financial reporting, review of interim quarterly
financial statements included in the Corporation's Forms 10-Q, and services that
are normally provided by Rehmann Robson P.C. in connection with statutory and
regulatory filings or engagements.
The audit related fees were for professional services in conjunction with
FDICIA reporting in 2004 and consultation of technical issues in 2005.
The tax fees were for the preparation of the Corporation and its
subsidiaries' state and federal tax returns and for consultation with the
Corporation on various tax matters.
Other professional service fees were for, training, Federal Home Loan Bank
required procedures, and out of pocket costs. The Audit Committee has considered
whether the services provided by Rehmann Robson P.C., other than the audit fees,
is compatible with maintaining Rehmann Robson P.C. independence and believes
that the other services provided are compatible.
PRE-APPROVAL POLICIES AND PROCEDURES
All audit and non-audit services to be performed by Rehmann Robson P.C.
must be approved in advance by the Audit Committee. As permitted by the SEC's
rules, the Audit Committee has authorized its Chairperson to pre-approve audit,
audit-related, tax and non-audit services, provided that such approved service
is reported to the full Audit Committee at its next meeting.
As early as practicable in each calendar year, the independent auditor
provides to the Audit Committee a schedule of the audit and other services that
the independent auditor expects to provide or may provide during the next twelve
months. The schedule will be specific as to the nature of the proposed services,
the proposed fees, and other details that the Audit Committee may request. The
Audit Committee will by resolution authorize or decline the proposed services.
Upon approval, this schedule will serve as the budget for fees by specific
activity or service for the next twelve months.
A schedule of additional services proposed to be provided by the
independent auditor, or proposed revisions to services already approved, along
with associated proposed fees, may be presented to the Audit Committee for their
consideration and approval at any time. The schedule will be specific as to the
nature of the proposed service, the proposed fee, and other details that the
Audit Committee may request. The Audit Committee will by resolution authorize or
decline authorization for each proposed new service.
Applicable SEC rules and regulations permit waiver of the pre-approval
requirements for services other than audit, review or attest services if certain
conditions are met. Out of the services characterized above as Audit-Related,
Tax and Professional Services, none were billed pursuant to these provisions in
2005 and 2004 without pre-approval.
SHAREHOLDER PROPOSALS
Any proposals which shareholders of the Corporation intend to present at
the next annual meeting of the Corporation must be received before November 28,
2006 to be considered for inclusion in the Corporation's proxy
12
statement and proxy for that meeting. Proposals should be made in accordance
with Securities and Exchange Commission Rule 14a-8.
COMMUNICATIONS WITH THE BOARD
Shareholders may communicate with the Corporation's Board of Directors by
sending written communications to the Corporation's Secretary, IBT Bancorp,
Inc., 200 East Broadway, Mount Pleasant, Michigan 48858. Communications will be
forwarded to the Board of Directors or the appropriate committee, as soon as
practicable.
CODE OF ETHICS
The Corporation has adopted a Code of Business Conduct and Ethics that is
applicable to the Corporation's principal executive officer, the principal
financial officer and controller. The Corporation's Code of Business Conduct and
Ethics may be obtained free of charge by sending a request to Debra Campbell,
Secretary, IBT Bancorp, Inc., 200 East Broadway, Mount Pleasant, Michigan 48858.
DIRECTORS' ATTENDANCE AT THE ANNUAL MEETING OF SHAREHOLDERS
The Corporation's directors are encouraged to attend the annual meeting of
shareholders. At the 2005 annual meeting, all directors were in attendance.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors and certain officers and persons who own more than ten
percent of the Corporation's common stock, to file with the SEC initial reports
of ownership and reports of changes in ownership of the Corporation's common
stock. These officers, directors, and greater than ten percent shareholders are
required by SEC regulation to furnish the Corporation with copies of these
reports.
To the Corporation's knowledge, based solely on review of the copies of
such reports furnished to the Corporation, during the year ended December 31,
2005 all Section 16(a) filing requirements were satisfied, with respect to the
applicable officers, directors, and greater than 10 percent beneficial owners,
except Sandra Caul did not file her Form 3, which was due May 6, 2005, until
February 27, 2006.
OTHER MATTERS
The cost of soliciting proxies will be borne by the Corporation. In
addition to solicitation by mail, officers and other employees of the
Corporation may solicit proxies by telephone or in person, without compensation
other than their regular compensation.
By order of the Board of Directors
-s- DEBRA CAMPBELL
Debra Campbell, Secretary
13
IBT BANCORP, INC.
FINANCIAL INFORMATION INDEX
PAGE DESCRIPTION
---- -----------
15 Summary of Selected Financial Data
16 - 17 Report of Independent Registered Public Accounting Firm
18 - 22 Consolidated Financial Statements
23 - 46 Notes to Consolidated Financial Statements
47 - 61 IBT Financial Review
61 - 63 Common Stock and Dividend Information
14
SUMMARY OF SELECTED FINANCIAL DATA
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Total interest income................. $ 36,882 $ 33,821 $ 35,978 $ 38,161 $ 40,798
Net interest income................... 23,909 23,364 23,528 22,905 21,538
Provision for loan losses............. 777 735 1,455 1,025 770
Net income............................ 6,776 6,645 7,205 6,925 6,066
BALANCE SHEET DATA
End of year assets.................... $741,654 $678,034 $664,079 $652,717 $592,143
Daily average assets.................. 700,624 675,157 659,323 623,507 566,547
Daily average deposits................ 576,091 567,145 563,600 549,970 494,847
Daily average loans/net............... 459,310 430,854 399,008 390,613 399,239
Daily average equity.................. 74,682 70,787 65,770 59,540 54,787
PER SHARE DATA(1)
Net income............................ $ 1.25 $ 1.24 $ 1.36 $ 1.33 $ 1.17
Cash dividends........................ 0.60 0.57 0.55 0.50 0.45
Book value (at year end).............. 14.78 13.48 12.94 12.09 10.99
FINANCIAL RATIOS
Shareholders' equity to assets (year
end)............................... 10.91% 10.71% 10.38% 9.71% 9.60%
Net income to average equity.......... 9.07 9.39 10.95 11.63 11.07
Cash dividend payout to net income.... 48.02 46.20 39.99 37.33 38.36
Net income to average assets.......... 0.97 0.98 1.09 1.11 1.07
2005 2004
--------------------------------- ---------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
------ ------ ------ ------ ------ ------ ------ ------
Quarterly Operating Results:
Total interest income......... $9,832 $9,439 $8,983 $8,628 $8,563 $8,415 $8,393 $8,450
Interest expense.............. 3,719 3,425 3,064 2,765 2,659 2,562 2,566 2,670
Net interest income........... 6,113 6,014 5,919 5,863 5,904 5,853 5,827 5,780
Provision for loan losses..... 262 196 109 210 150 120 225 240
Noninterest income............ 2,192 2,328 2,099 1,857 1,963 2,063 2,199 1,940
Noninterest expenses.......... 5,514 5,891 5,622 5,857 5,724 5,502 5,477 5,568
Net income.................... 1,924 1,744 1,765 1,343 1,663 1,749 1,756 1,477
Per Share of Common Stock:(1)
Net income.................... $ 0.35 $ 0.32 $ 0.33 $ 0.25 $ 0.31 $ 0.33 $ 0.33 $ 0.27
Cash dividends................ 0.30 0.10 0.10 0.10 0.27 0.10 0.10 0.10
Book value (at quarter end)... 14.78 14.02 13.85 13.42 13.48 13.46 12.94 13.26
--------
(1) Retroactively restated for the 10% stock dividend paid February 15, 2006.
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
IBT Bancorp, Inc.
Mt. Pleasant, Michigan
We have audited the accompanying consolidated balance sheets of IBT
BANCORP, INC. as of December 31, 2005 and 2004, and the related consolidated
statements of changes in shareholders' equity, income, comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2005. We also have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that IBT
BANCORP, INC. maintained effective internal control over financial reporting as
of December 31, 2005, based on criteria established in the Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). IBT BANCORP, INC.'S management is responsible for
these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on these consolidated financial statements, an opinion on management's
assessment, and an opinion on the effectiveness of the IBT BANCORP, INC.'S
internal control over financial reporting, based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
A corporation's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles. A
corporation's internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the corporation; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
consolidated financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the corporation are
being made only in accordance with authorizations of management and directors of
the corporation; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
corporation's assets that could have a material effect on the consolidated
financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
IBT BANCORP, INC. as of December 31, 2005 and 2004, and the consolidated results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005 in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, management's
assessment that IBT BANCORP, INC. maintained effective internal control over
financial reporting as of December 31, 2005 is fairly stated, in all material
respects, based on criteria established in the Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission
16
(COSO). Furthermore, in our opinion, IBT BANCORP, INC. maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2005, based on criteria established in the Internal Control-
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
-s- Rehmann Robson P.C.
Rehmann Robson P.C.
Saginaw, Michigan
March 3, 2006
17
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
------------------
2005 2004
-------- --------
(DOLLARS IN
THOUSANDS)
ASSETS
Cash and demand deposits due from banks...................... $ 30,825 $ 20,760
Investment securities
Securities available for sale (amortized cost of $185,688
in 2005 and $161,561 in 2004)........................... 183,406 162,030
Securities held to maturity (fair value -- $537 in 2004)... -- 523
-------- --------
TOTAL INVESTMENT SECURITIES............................. 183,406 162,553
Mortgage loans available for sale............................ 744 2,339
Loans (net of the allowance for loan losses)................. 476,343 446,451
Premises and equipment....................................... 19,172 18,533
Bank-owned life insurance.................................... 10,533 10,168
Accrued interest receivable.................................. 4,786 4,315
Acquisition intangibles and goodwill, net.................... 3,253 3,347
Other assets................................................. 12,592 9,568
-------- --------
TOTAL ASSETS............................................ $741,654 $678,034
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing........................................ $ 73,839 $ 65,736
NOW accounts............................................... 104,251 101,362
Certificates of deposit and other savings.................. 328,780 323,954
Certificates of deposit over $100,000...................... 85,608 72,824
-------- --------
TOTAL DEPOSITS.......................................... 592,478 563,876
Other borrowed funds......................................... 52,165 30,982
Escrow funds payable......................................... 9,823 1,725
Accrued interest and other liabilities....................... 6,286 8,857
-------- --------
TOTAL LIABILITIES....................................... 660,752 605,440
Shareholders' Equity
Common stock -- no par value 10,000,000 shares authorized;
outstanding -- 4,974,715 in 2005 (4,896,412 in 2004).... 72,296 66,908
Retained earnings.......................................... 10,112 6,590
Accumulated other comprehensive loss....................... (1,506) (904)
-------- --------
TOTAL SHAREHOLDERS' EQUITY.............................. 80,902 72,594
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $741,654 $678,034
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
18
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31
----------------------------------
2005 2004 2003
---------- ---------- ----------
(DOLLARS IN THOUSANDS)
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year.................... 4,896,412 4,403,404 4,336,283
Common stock dividends.......................... -- 440,191 --
Issuance of common stock........................ 78,303 57,388 70,340
Common stock repurchased........................ -- (4,571) (3,219)
---------- ---------- ----------
BALANCE END OF YEAR........................ 4,974,715 4,896,412 4,403,404
========== ========== ==========
COMMON STOCK
Balance at beginning of year.................... $ 66,908 $ 47,491 $ 45,610
Common stock dividends.......................... -- 17,608 --
Issuance of common stock........................ 2,684 2,001 2,008
Share based payment awards under equity
compensation plan............................ 2,704 -- --
Common stock repurchased........................ -- (192) (127)
---------- ---------- ----------
BALANCE END OF YEAR........................ 72,296 66,908 47,491
RETAINED EARNINGS
Balance at beginning of year.................... 6,590 20,623 16,299
Net income...................................... 6,776 6,645 7,205
Common stock dividends.......................... -- (17,608) --
Cash dividends ($0.60 per share in 2005, $0.57
per share in 2004, $0.55 per share in 2003).. (3,254) (3,070) (2,881)
---------- ---------- ----------
BALANCE END OF YEAR........................ 10,112 6,590 20,623
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year.................... (904) 822 1,548
Other comprehensive loss........................ (602) (1,726) (726)
---------- ---------- ----------
BALANCE END OF YEAR........................ (1,506) (904) 822
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY END OF YEAR....... $ 80,902 $ 72,594 $ 68,936
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
19
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
-------------------------
2005 2004 2003
------- ------- -------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
INTEREST INCOME
Loans, including fees................................ $30,682 $27,801 $29,193
Investment securities
Taxable........................................... 3,487 3,696 4,437
Nontaxable........................................ 2,398 2,116 2,004
Federal funds sold and other......................... 315 208 344
------- ------- -------
TOTAL INTEREST INCOME........................... 36,882 33,821 35,978
------- ------- -------
INTEREST EXPENSE
Deposits............................................. 11,374 9,391 11,610
Borrowings........................................... 1,599 1,066 840
------- ------- -------
TOTAL INTEREST EXPENSE.......................... 12,973 10,457 12,450
------- ------- -------
NET INTEREST INCOME............................. 23,909 23,364 23,528
Provision for loan losses.............................. 777 735 1,455
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES....................................... 23,132 22,629 22,073
NONINTEREST INCOME
Service charges and fees............................. 4,928 4,735 5,141
Title insurance revenue.............................. 2,351 1,957 2,340
Gain on sale of mortgage loans....................... 270 477 2,091
Other................................................ 927 996 1,173
------- ------- -------
TOTAL NONINTEREST INCOME........................ 8,476 8,165 10,745
NONINTEREST EXPENSES
Compensation and benefits............................ 13,548 12,685 13,345
Occupancy............................................ 1,553 1,504 1,471
Furniture and equipment.............................. 2,657 2,484 2,560
Charitable donations................................. 79 109 1,158
Other................................................ 5,047 5,489 5,044
------- ------- -------
TOTAL NONINTEREST EXPENSES...................... 22,884 22,271 23,578
------- ------- -------
INCOME BEFORE FEDERAL INCOME TAXES.............. 8,724 8,523 9,240
Federal income taxes................................... 1,948 1,878 2,035
------- ------- -------
NET INCOME................................... $ 6,776 $ 6,645 $ 7,205
======= ======= =======
Net income per basic share of common stock............. $ 1.25 $ 1.24 $ 1.36
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
20
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDING DECEMBER 31
-------------------------
2005 2004 2003
------- ------- -------
(DOLLARS IN THOUSANDS)
NET INCOME.............................................. $ 6,776 $ 6,645 $ 7,205
------- ------- -------
Other comprehensive loss before income taxes:
Unrealized losses on available-for-sale securities:
Unrealized holding losses arising during period.... (2,749) (2,527) (1,223)
Reclassification adjustment for net realized gains
included in net income........................... (2) (106) (85)
Reversal of minimum pension liability adjustment... 1,839 18 208
------- ------- -------
Other comprehensive loss before income tax benefit...... (912) (2,615) (1,100)
Income tax benefit related to other comprehensive loss.. 310 889 374
------- ------- -------
OTHER COMPREHENSIVE LOSS................................ (602) (1,726) (726)
------- ------- -------
COMPREHENSIVE INCOME............................... $ 6,174 $ 4,919 $ 6,479
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------
2005 2004 2003
-------- -------- --------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income.......................................... $ 6,776 $ 6,645 $ 7,205
Reconciliation of net income to cash provided by
operations:
Provision for loan losses........................ 777 735 1,455
Depreciation..................................... 1,735 1,552 1,703
Net amortization of investment securities........ 957 1,558 1,592
Realized gain on sale of investment securities... (2) (106) (85)
Amortization and impairment of mortgage servicing
rights......................................... 140 135 643
Increase in cash value of life insurance......... (365) (427) (608)
Amortization of acquisition intangibles.......... 94 93 94
Deferred income taxes (benefit).................. 263 305 (41)
Changes in operating assets and liabilities which
provided (used) cash
Loans held for sale.............................. 1,595 1,976 9,077
Interest receivable.............................. (471) 219 363
Other assets..................................... (1,443) (1,235) (1,008)
Escrow funds payable............................. 8,098 (1,033) (328)
Accrued interest and other liabilities........... 298 2,325 (198)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES...... 18,452 12,742 19,864
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales..................... 31,962 72,633 49,776
Purchases........................................ (57,044) (68,892) (64,710)
Activity in held to maturity securities Maturities,
calls, and sales................................. 523 765 620
Net increase in loans............................ (30,669) (31,531) (31,615)
Purchases of premises and equipment................. (2,374) (4,300) (3,018)
Acquisition of title office......................... -- -- (36)
Redemption of cash value life insurance............. -- 288 389
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES....... (57,602) (31,037) (48,594)
FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing
deposits......................................... 8,103 (2,024) 4,654
Net increase (decrease) in interest bearing
deposits......................................... 20,499 (1,807) 1,597
Net increase in other borrowed funds................ 21,183 12,929 260
Cash dividends paid on common stock................. (3,254) (3,070) (2,881)
Proceeds from the issuance of common stock.......... 2,684 2,001 2,008
Common stock repurchased............................ -- (192) (127)
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES...... 49,215 7,837 5,511
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...... 10,065 (10,458) (23,219)
Cash and cash equivalents at beginning of year........ 20,760 31,218 54,437
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR.... $ 30,825 $ 20,760 $ 31,218
======== ======== ========
Supplemental cash flows information:
Interest paid......................................... $ 12,814 $ 10,420 $ 12,450
Federal income taxes paid............................. 1,000 2,569 2,034
The accompanying notes are an integral part of these consolidated financial
statements.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION:
The consolidated financial statements include the accounts of IBT Bancorp,
Inc. (the "Corporation"), a financial services holding company, and its wholly
owned subsidiaries, Isabella Bank and Trust, Farmers State Bank of Breckenridge,
IBT Title and Insurance Agency, Inc., Financial Group Information Services, and
its majority owned subsidiaries, IBT Personnel, LLC (79%), and IB&T Employee
Leasing, LLC (79%). All intercompany balances and accounts have been eliminated
in consolidation.
NATURE OF OPERATIONS:
IBT Bancorp, Inc. is a financial services holding company offering a wide
array of financial products and services in mid-Michigan. Its banking
subsidiaries, Isabella Bank and Trust and Farmers State Bank of Breckenridge,
offer banking services through 21 locations, 24-hour banking services locally
and nationally through shared automatic teller machines, and direct deposits to
businesses, institutions, and individuals. Lending services offered include
commercial real estate loans and lines of credit, agricultural loans,
residential real estate loans, consumer loans, student loans, and credit cards.
Deposit services include interest and noninterest bearing checking accounts,
savings accounts, money market accounts, and certificates of deposit. Other
related financial products include trust services, safe deposit box rentals, and
credit life insurance. Active competition, principally from other commercial
banks, savings banks and credit unions, exists in all of the Banks' principal
markets. The Corporation's results of operations can be significantly affected
by changes in interest rates or changes in the local economic environment.
IBT Title and Insurance Agency, Inc. (IBT Title) does business under the
names Isabella County Abstract and Title, Mecosta County Abstract and Title, IBT
Title Clare, and Benchmark Title of Greenville. IBT Title provides title
insurance and abstract searches, and closes real estate loans.
Financial Group Information Services provides information technology
services for all of IBT Bancorp's subsidiaries.
IBT Personnel and IB&T Employee Leasing provide payroll services, benefit
administration, and other human resource services to IBT Bancorp's subsidiaries.
USE OF ESTIMATES:
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the consolidated balance sheet and reported amounts of revenues and
expenses during the reporting year. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
in the near term relate to the determination of the allowance for loan losses,
the valuation of mortgage servicing rights, the valuation of real estate
acquired in connection with foreclosures or in satisfaction of loans. In
connection with the determination of the allowance for loan losses and the
carrying value of foreclosed real estate, management obtains independent
appraisals for significant properties.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
Most of the Corporation's activities conducted are with customers located
within the central Michigan area. A significant amount of its outstanding loans
are secured by real estate or are made to finance agricultural production. Other
than these types of loans, there is no significant concentration to any other
industry or customer.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS:
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and balances due from banks, federal funds sold, and
other deposit accounts, all of which mature within ninety days.
SECURITIES:
Debt securities that management has the positive intent and ability to hold
to maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity are classified as "available for
sale" and recorded at fair value, with unrealized gains and losses, net of the
effect of deferred income taxes, excluded from earnings and reported in other
comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
In estimating other-then-temporary impairment losses, management considers (1)
the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near-term prospects of the issuer, and (3)
the intent and ability of the Corporation to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in fair
value. Gains and losses on the sale of securities are recorded on the trade date
and are determined using the specific identification method.
LOANS:
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
principal balance adjusted for any charge offs, the allowance for loans losses,
and any deferred fees or costs on originated loans. Interest income on loans is
accrued over the term of the loan based on the principal amount outstanding.
Loan origination fees and certain direct loan origination costs are capitalized
and recognized as a component of interest income over the term of the loan using
the constant yield method.
The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days or more past due unless the credit is well-secured
and in the process of collection. Credit card loans and other personal loans are
typically charged off no later than 180 days past due. Past due status is based
on contractual terms of the loan. In all cases, loans are placed on nonaccrual
or charged off at an earlier date if collection of principal or interest is
considered doubtful.
For loans that are placed on non-accrual status or charged-off, all
interest accrued in the current calendar year, but not collected, is reversed
against interest income while interest accrued in prior calendar years, but not
collected is charged against the allowance for loan losses. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of the loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
management believes affect its estimate of probable losses. The unallocated
component of the allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio.
A loan is considered impaired when, based on current information and
events, it is probable that the Banks will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstance surrounding the loan and the borrower, including the length of the
delay, the reason for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans by either the present value of expected future cash flows discounted at
the loan's effective interest rate, the loan's obtainable market price, or the
fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for impairment disclosures,
unless such loans are the subject of a restructuring agreement.
LOANS HELD FOR SALE:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of aggregate cost or fair value as determined by
aggregating outstanding commitments from investors or current investor yield
requirements. Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Banks. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights. Gains
or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans
sold.
TRANSFERS OF FINANCIAL ASSETS:
Transfers of financial assets, including held for sale mortgage loans, as
described above, and participation loans are accounted for as sales when control
over the assets has been surrendered. Control over transferred assets is
determined to be surrendered when 1) the assets have been isolated from the
Banks, 2) the transferee obtains the right (free of conditions that constrain it
from taking advantage of the right) to pledge or exchange the transferred assets
and 3) the Banks do not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.
SERVICING:
Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Generally, purchased
servicing rights are capitalized at the cost to acquire the rights. For sales of
mortgage loans, a portion of the cost of originating the loan is allocated to
the servicing right based on relative fair value. Fair value is based on market
prices for comparable mortgage servicing contracts, when available, or
alternatively, is based on a valuation model that calculates the present value
of estimated future net servicing income. The valuation model incorporates
assumptions that market participants would use in estimating future net
servicing income, such as the cost to service, the discount rate, the custodial
earnings rate, an inflation rate, ancillary income, prepayment speeds and
default rates and losses. Capitalized servicing rights are reported in other
assets and
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are amortized into non-interest income in proportion to, and over the period of,
the estimated future net servicing income of the underlying financial assets.
Servicing assets are evaluated for impairment based upon the fair value of
the rights as compared to amortized cost. Impairment is determined by
stratifying rights into tranches based on predominant risk characteristics, such
as interest rate, loan type, and investor type. Impairment is recognized through
a valuation allowance for an individual tranche, to the extent that fair value
is less than the capitalized amount for the tranche. If the Corporation later
determines that all or a portion of the impairment no longer exists for a
particular tranche, a reduction of the allowance may be recorded as an increase
to income.
Servicing fee income is recorded for fees earned for servicing loans. The
fees are based on a contractual percentage of the outstanding principal; or a
fixed amount per loan and are recorded as income when earned. The amortization
of mortgage servicing rights is netted against loan servicing fee income, a
component of noninterest income.
OFF-BALANCE-SHEET CREDIT RELATED FINANCIAL INSTRUMENTS:
In the ordinary course of business, the Corporation has entered into
commitments to extend credit, including commitments under credit card
arrangements, home equity lines of credit, commercial letters of credit, and
standby letters of credit. Such financial instruments are recorded only when
funded.
FORECLOSED ASSETS:
Assets acquired through, or in lieu, of loan foreclosure are initially
recorded at the lower of the Bank's carrying amount or fair value less estimated
selling costs at the date of transfer, establishing a new cost basis. Any write-
downs based on the asset's fair value at the date of acquisition are charged to
the allowance for loan losses. After foreclosure, property held for sale is
carried at the lower of the new cost basis or fair value less costs to sell.
Impairment losses on property to be held and used are measured at the amount by
which the carrying amount of property exceeds its fair value. Costs of
significant property improvements are capitalized, whereas costs relating to
holding property are expensed. The portion of interest costs relating to
development of real estate is capitalized. Valuations are periodically performed
by management, and any subsequent write-downs are recorded as a charge to
operations, if necessary, to reduce the carrying value of a property to the
lower of its cost or fair value less costs to sell.
PREMISES AND EQUIPMENT:
Land is carried at cost. Buildings and equipment are carried at cost less
accumulated depreciation. Depreciation is computed principally by the straight
line method based upon the useful lives of the assets which generally range from
5 to 30 years. Maintenance, repairs and minor alterations are charged to current
operations as expenditures occur and major improvements are capitalized.
RESTRICTED INVESTMENTS:
Included in other assets are restricted securities of $3,080 in 2005 and
$2,910 in 2004. Restricted securities include the stock of the Federal Reserve
Bank and the Federal Home Loan Bank and have no contractual maturity.
BANK OWNED LIFE INSURANCE:
The Corporation has purchased life insurance policies on key members of
management. In the event of death of one of these individuals, the Corporation
would receive a specified cash payment equal to the face value of the policy.
Such policies are recorded at their cash surrender value, or the amount that can
be realized. Increases in cash surrender value in excess of premiums paid are
reported as other noninterest income.
26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITION INTANGIBLES AND GOODWILL:
Isabella Bank and Trust previously acquired branch facilities and related
deposits in a business combination accounted for as a purchase. The acquisition
of the branches included amounts related to the valuation of customer deposit
relationships (core deposit intangibles). The core deposit intangible is
included in other assets and is being amortized on the straight line basis over
nine years, the expected life of the acquired relationship. Goodwill is included
in other assets and is not amortized but is evaluated for impairment at least
annually.
FEDERAL INCOME TAXES:
Federal income taxes are provided for the tax effects of transactions
reported in the consolidated financial statements and consist of taxes currently
due plus deferred income taxes. Deferred income taxes are recognized for
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Deferred income tax assets and liabilities represent the future tax return
consequences of those differences, which will either be taxable or deductible
when the assets or liabilities are recorded or settled. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. As changes in income tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income taxes.
EARNINGS PER COMMON SHARE:
Net income per share amounts are computed by dividing net income by the
weighted average number of shares outstanding. All per share amounts have been
adjusted for the stock dividend paid February 15, 2006. The weighted average
numbers of common shares outstanding were 5,416,961 in 2005; 5,344,585 in 2004;
and 5,270,085 in 2003, as adjusted for the 10% stock dividend paid February 15,
2006.
RECLASSIFICATIONS:
Certain amounts reported in the 2004 and 2003 consolidated financial
statements have been reclassified to conform with the 2005 presentation.
RECENT ACCOUNTING PRONOUNCEMENTS:
In April 2005, the Securities and Exchange Commission adopted a new rule
that amends the compliance dates for implementation of Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards No. 123
(revised 2004), "Share-Based Payment' (SFAS No. 123R). The Statement requires
that compensation cost relating to share-based payment transactions be
recognized in financial statements and that this cost be measured based on the
fair value of the equity or liability instruments issued. SFAS No. 123R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. The Corporation will adopt SFAS No. 123R on
January 1, 2006 and due to the Plan amendment discussed in Note 16, does not
believe the impact the adoption of the standard will have a material impact on
the Corporation's results of operations.
NOTE 2 -- RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
Banking regulations require banks to maintain cash reserve balances in
currency or as deposits with the Federal Reserve Bank. At December 31, 2005 and
2004, the reserve balances amounted to $711 and $849, respectively.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- INVESTMENT SECURITIES
The amortized cost and fair value of securities, with gross unrealized
gains and losses, are as follows as of December 31:
2005
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
Securities available-for-sale
U.S. Government and federal agencies.. $ 53,953 $-- $1,040 $ 52,913
States and political subdivisions..... 95,976 532 1,073 95,435
Corporate............................. 13,294 3 77 13,220
Mortgage-backed....................... 22,465 22 649 21,838
-------- ---- ------ --------
TOTAL.............................. $185,688 $557 $2,839 $183,406
======== ==== ====== ========
2004
-------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
Securities available-for-sale
U.S. Government and federal agencies.. $ 51,704 $ 38 $ 463 $ 51,279
States and political subdivisions..... 83,619 1,433 420 84,632
Corporate............................. 4,766 31 43 4,754
Mortgage-backed....................... 21,472 111 218 21,365
-------- ------ ------ --------
TOTAL.............................. $161,561 $1,613 $1,144 $162,030
======== ====== ====== ========
Securities held-to-maturity
Mortgage-backed....................... $ 3 $ -- $ -- $ 3
States and political subdivisions..... 520 18 4 534
-------- ------ ------ --------
TOTAL.............................. $ 523 $ 18 $ 4 $ 537
======== ====== ====== ========
At December 31, 2005 and 2004 investment securities with carrying values of
approximately $10,516 and $18,972 were pledged to secure public deposits and for
other purposes as necessary or required by law. At December 31, 2005 and 2004,
the carrying amount of securities pledged to secure repurchase agreements was
$8,832 and $1,017, respectively.
The amortized cost and fair value of available-for-sale securities by
contractual maturity at December 31, 2005 are as follows:
AVAILABLE FOR SALE
-------------------
AMORTIZED FAIR
COST VALUE
--------- --------
Within 1 year.......................................... $ 51,883 $ 51,498
Over 1 year through 5 years............................ 82,534 81,403
After 5 years through 10 years......................... 27,044 26,902
Over 10 years.......................................... 1,762 1,765
-------- --------
163,223 161,568
Mortgage-backed securities............................. 22,465 21,838
-------- --------
$185,688 $183,406
======== ========
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 2005, 2004, and 2003, proceeds from sale of securities available for
sale amounted to $4,588, $45,044, and $16,874, respectively. Gross realized
gains amounted to $9, $129, and $85, respectively. Gross realized losses
amounted to $7, $23, and $0, respectively. The tax provision applicable to these
net realized gains and losses amounted to $0, $36, and $31, respectively.
Information pertaining to securities with gross unrealized losses at
December 31, 2005, aggregated by investment category and length of time that
individual securities have been in continuous loss position, follows:
LESS THAN
TWELVE MONTHS OVER TWELVE MONTHS
------------------- -------------------
GROSS GROSS
UNREALIZED FAIR UNREALIZED FAIR
LOSSES VALUE LOSSES VALUE
---------- ------- ---------- -------
Securities available-for-sale
U.S. Government and federal agency..... $157 $17,155 $ 883 $35,171
States and political subdivisions...... 397 27,687 676 26,633
Corporate.............................. 1 931 76 3,563
Mortgage-backed........................ 106 7,053 543 13,169
---- ------- ------ -------
TOTAL SECURITIES AVAILABLE-FOR-
SALE.............................. $661 $52,826 $2,178 $78,536
==== ======= ====== =======
Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to (1) the length of time and
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) the intent and ability
of the Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
In analyzing an issuer's financial condition, management considers whether
the securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and industry analysts'
reports. As management has the ability to hold debt securities until maturity,
or for the foreseeable future if classified as available for sale, no declines
are deemed to be other than temporary.
NOTE 4 -- LOANS
The Banks grant commercial, agricultural, consumer and residential loans to
customers situated primarily in Isabella, Gratiot, Mecosta, Southwestern
Midland, Western Saginaw, Northern Montcalm and Southern Clare counties in mid-
Michigan. The ability of the borrowers to honor their repayment obligations is
often dependent upon the real estate, agricultural, and general economic
conditions of this region. Substantially all of the consumer and residential
mortgage loans are secured by various items of property, while commercial loans
are secured primarily by real estate, business assets and personal guarantees; a
portion of loans are unsecured.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the major classifications of loans is as follows:
DECEMBER 31
------------------
2005 2004
-------- --------
Mortgage loans on real estate
Residential 1-4 family............................... $160,542 $152,706
Commercial........................................... 111,997 96,739
Agricultural......................................... 29,575 32,383
Construction......................................... 17,871 35,384
Second mortgages..................................... 24,560 17,143
Equity lines of credit............................... 23,278 22,188
-------- --------
Total mortgage loans.............................. 367,823 356,543
Commercial and agricultural loans
Commercial........................................... 67,544 49,413
Agricultural production.............................. 19,849 16,796
-------- --------
Total commercial and agricultural loans........... 87,393 66,209
Consumer installment loans
Personal............................................. 26,304 28,463
Credit cards......................................... 1,722 1,680
-------- --------
Total consumer installment loans.................. 28,026 30,143
Total Loans............................................ 483,242 452,895
Less: Allowance for loan losses...................... 6,899 6,444
-------- --------
Loans, net........................................ $476,343 $446,451
======== ========
A summary of changes in the allowance for loan losses follows:
YEAR ENDED DECEMBER 31:
-----------------------
2005 2004 2003
------ ------ -------
Balance at beginning of year....................... $6,444 $6,204 $ 5,593
Loans charged off................................ (643) (935) (1,140)
Recoveries....................................... 321 440 296
Provision charged to income...................... 777 735 1,455
------ ------ -------
BALANCE AT END OF YEAR........................ $6,899 $6,444 $ 6,204
====== ====== =======
The following is a summary of information pertaining to impaired loans at
December 31:
2005 2004 2003
------ ------ ------
Impaired loans without a valuation allowance........ $2,211 $1,786 $1,836
Impaired loans with a valuation allowance........... 314 448 2,787
------ ------ ------
Total impaired loans................................ $2,525 $2,234 $4,623
====== ====== ======
Valuation allowance related to impaired loans....... $ 184 $ 304 $ 622
====== ====== ======
Total nonaccrual loans.............................. $1,375 $1,900 $4,121
====== ====== ======
Accruing loans past due 90 days or more............. $1,058 $ 702 $1,380
====== ====== ======
Average investment in impaired loans................ $2,531 $2,949 $5,155
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest income recognized on impaired loans was not significant during any
of the three years in the period ended December 31, 2005. No additional funds
are committed to be advanced in connection with impaired loans.
NOTE 5 -- SERVICING
Residential mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
mortgages serviced for others was $256,358, $253,282 and $245,709 at December
31, 2005, 2004, and 2003 respectively. Servicing loans for others generally
consists of collecting mortgage payments, maintaining escrow accounts,
disbursing payments to investors and taxing authorities, and foreclosure
processing.
The following table summarizes the changes in each year of the carrying
value of mortgage servicing rights included in other assets as of December 31:
2005 2004 2003
------- ------- -------
Balance at beginning of year...................... $ 2,046 $ 1,714 $ 511
Mortgage servicing rights capitalized............. 2,520 2,633 3,369
Accumulated amortization.......................... (2,429) (2,279) (1,955)
Impairment valuation allowance.................... (12) (22) (211)
------- ------- -------
BALANCE AT END OF YEAR.......................... $ 2,125 $ 2,046 $ 1,714
======= ======= =======
Activity in the impairment valuation allowance consisted of reductions of
$10, $189, and $427 for the years ended December 31, 2005, 2004, and 2003.
NOTE 6 -- PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
2005 2004
------- -------
Land.................................................... $ 3,027 $ 3,027
Buildings and improvements.............................. 12,528 11,054
Furniture and equipment................................. 21,003 20,614
------- -------
Total................................................... 36,558 34,695
Less accumulated depreciation........................... 17,386 16,162
------- -------
PREMISES AND EQUIPMENT, NET........................... $19,172 $18,533
======= =======
Depreciation expense amounted to $1,735, $1,552 and $1,703 in 2005, 2004,
and 2003, respectively.
NOTE 7 -- GOODWILL AND OTHER INTANGIBLE ASSETS
Included in other assets on the accompanying consolidated balance sheets
are the following amounts as of December 31:
2005 2004
------ ------
Branch acquisition goodwill............................... $2,036 $2,036
Title company goodwill.................................... 1,100 1,100
------ ------
Total goodwill............................................ 3,136 3,136
Core deposit intangibles, net............................. 117 211
------ ------
$3,253 $3,347
====== ======
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The core deposit intangibles are being amortized on a straight-line basis
over nine years. Management periodically reviews these assets to determine
whether the carrying values have been impaired.
NOTE 8 -- DEPOSITS
Scheduled maturities of time deposits for the years succeeding December 31,
2005 are as follows:
YEAR AMOUNT
---- --------
2006......................................................... $145,612
2007......................................................... 49,368
2008......................................................... 27,863
2009......................................................... 17,451
2010......................................................... 20,316
Thereafter..................................................... 381
Interest expense on time deposits greater than $100 was $2,751 in 2005,
$2,140 in 2004, and $2,127 in 2003.
NOTE 9 -- SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, which are classified as
secured borrowings, generally mature within one to four days from the
transaction date. Securities sold under agreements to repurchase are reflected
at the amount of cash received in connection with the transaction. The U.S.
government agency securities underlying the agreements have a carrying value and
a fair value of approximately $8,832 and $1,017 at December 31, 2005 and 2004,
respectively. Such securities remain under the control of the Corporation. The
Corporation may be required to pledge additional collateral based on the fair
value of the underlying securities.
NOTE 10 -- BORROWED FUNDS
Borrowed funds consist of the following obligations at December 31:
2005 2004
------- -------
Federal Home Loan Bank advances......................... $45,286 $27,312
Federal Funds purchased................................. 6,500 2,974
Securities sold under agreements to repurchase.......... 266 530
Unsecured note payable.................................. 113 166
------- -------
$52,165 $30,982
======= =======
The Federal Home Loan Bank borrowings are collateralized by a blanket lien
on all qualified 1-to-4 family whole mortgage loans and U.S. government and
federal agency securities. Advances are also secured by FHLB stock owned by the
Banks.
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The maturity and weighted average interest rates of FHLB advances follows
at December 31:
2005
-------------
AMOUNT RATE
------- ----
Fixed rate advances due 2006............................... $ 5,500 2.76%
Two Year putable advance due 2006.......................... 5,000 5.08%
Fixed rate advances due 2007............................... 5,000 3.72%
Fixed rate advances due 2008............................... 6,000 4.79%
Fixed rate advances due 2009............................... 3,500 3.66%
Fixed rate advances due 2010............................... 5,286 5.18%
One Year putable advance due 2010.......................... 3,000 4.98%
Fixed rate advances due 2012............................... 2,000 4.90%
Fixed rate advances due 2015............................... 10,000 4.84%
------- ----
$45,286 4.44%
======= ====
2004
-------------
AMOUNT RATE
------- ----
Fixed rate advances due 2006............................... $ 5,500 2.76%
Two Year putable advance due 2006.......................... 5,000 5.08%
Fixed rate advances due 2007............................... 4,000 3.64%
Fixed rate advances due 2009............................... 3,500 3.66%
Fixed rate advances due 2010............................... 4,312 5.39%
One Year putable advance due 2010.......................... 3,000 4.98%
Fixed rate advances due 2012............................... 2,000 4.90%
------- ----
$27,312 4.24%
======= ====
The unsecured note payable has an imputed interest rate of 4.16% and is
payable in annual installments of $60,000, including interest, through July
2007.
NOTE 11 -- OTHER NON-INTEREST EXPENSES
A summary of expenses included in Other Non-Interest Expenses for the year
ended December 31:
2005 2004 2003
------ ------ ------
Director fees....................................... $ 503 $ 496 $ 459
Marketing and advertising........................... 624 522 538
SOX 404 compliance.................................. 398 734 --
Other, not individually significant................. 3,522 3,737 4,047
------ ------ ------
$5,047 $5,489 $5,044
====== ====== ======
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 12 -- FEDERAL INCOME TAXES
Components of the consolidated provision for income taxes are as follows
for the year ended December 31:
2005 2004 2003
------ ------ ------
Currently payable................................... $1,685 $1,573 $2,076
Deferred taxes / (benefit).......................... 263 305 (41)
------ ------ ------
FEDERAL INCOME TAXES.............................. $1,948 $1,878 $2,035
====== ====== ======
The reconciliation of the provision for federal income taxes and the amount
computed at the federal statutory tax rate of 34% of income before federal
income taxes is as follows for the year ended December 31:
2005 2004 2003
------- ------- -------
Income at statutory rate.......................... $ 2,966 $ 2,898 $ 3,142
Effect of nontaxable income and nondeductible
expenses........................................ (1,018) (1,020) (1,107)
------- ------- -------
PROVISION FOR FEDERAL INCOME TAXES.............. $ 1,948 $ 1,878 $ 2,035
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities, included in other assets,
as of December 31 are as follows:
2005 2004
------ ------
DEFERRED TAX ASSETS
Allowance for loan losses............................... $1,550 $1,411
Deferred directors' fees................................ 919 886
Employee benefit plans.................................. 531 756
Core deposit premium and acquisition expenses........... 23 107
Net unrealized loss on minimum pension liability........ -- 625
Net unrealized loss on available-for-sale securities.... 776 --
Other................................................... 51 63
------ ------
TOTAL DEFERRED TAX ASSETS............................ 3,850 3,848
------ ------
DEFERRED TAX LIABILITIES
Prepaid pension asset................................... $ 730 $ 595
Premises and equipment.................................. 663 745
Accretion on securities................................. 35 19
Net unrealized gain on available-for-sale securities.... -- 160
Other................................................... 226 181
------ ------
TOTAL DEFERRED TAX LIABILITIES....................... 1,654 1,700
------ ------
NET DEFERRED TAX ASSETS............................ $2,196 $2,148
====== ======
NOTE 13 -- OFF-BALANCE-SHEET ACTIVITIES
CREDIT-RELATED FINANCIAL INSTRUMENTS
The Corporation is party to credit related financial instruments with off-
balance-sheet risk. These instruments are entered into in the normal course of
business to meet the financing needs of its customers. These financial
instruments, which include commitments to extend credit and standby letters of
credit, involve, to varying degrees, elements of credit and interest rate risk
in excess of the amounts recognized in the consolidated balance sheets. The
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
contract or notional amounts of these instruments reflect the extent of
involvement the Corporation has in a particular class of financial instrument.
The Corporation is exposed to credit-related loss in the event of
nonperformance by the counter parties to the financial instruments for
commitments to extend credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The Corporation uses the same
credit policies in deciding to make these commitments as it does for extending
loans to customers.
Commitments to extend credit, which totaled $69,591 and $67,590 at December
31, 2005 and 2004, respectively, are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have variable interest rates, fixed expiration dates, or other
termination clauses and may require the payment of a fee.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to support private borrowing arrangements,
including commercial paper, bond financing, and similar transactions. At
December 31, 2005 and 2004 the Corporation had a total of $1,565 and $991,
respectively, in outstanding standby letters of credit.
Generally, these commitments to extend credit and letters of credit mature
within one year. The credit risk involved in these transactions is essentially
the same as that involved in extending loans to customers. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation upon the
extension of credit, is based on management's credit evaluation of the borrower.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and other income producing commercial properties.
INTEREST RATE RISK MANAGEMENT -- DERIVATIVE LOAN INSTRUMENTS
The Corporation enters into rate lock commitments to extend credit to
borrowers for generally a 30-day or 60-day period for the origination of loans.
Unfunded loans for which commitments have been entered into are called "pipeline
loans". Some of these rate lock commitments will ultimately expire without being
completed. To the extent that a loan is ultimately granted and the borrower
ultimately accepts the terms of the loan, these rate lock commitments expose the
Corporation to variability in the fair value due to changes in interest rates.
If interest rates increase, the value of these rate lock commitments decreases.
Conversely, if interest rates decrease, the value of these rate lock commitments
increases.
To mitigate the effect of this interest rate risk, the Banks enter into
offsetting derivative contracts, primarily forward loan sale commitments. The
contracts allow for cash settlement. The forward loan sale commitments lock in
an interest rate and price for the sale of loans, similar to the specific rate
lock loan commitments classified as derivatives. Such commitments, along with
any related fees received from potential borrowers, are considered derivatives.
The notional amount of undesignated interest rate lock commitments was $234
and $1,618 at December 31, 2005 and 2004, respectively.
The fair value of the rate lock loan commitments related to the origination
or acquisition of mortgage loans that will be held for sale and the forward loan
sale commitments are deemed insignificant by management and, accordingly, are
not recorded in these consolidated financial statements.
NOTE 14 -- COMMITMENTS AND OTHER MATTERS
Isabella Bank and Trust sponsors the IBT Foundation (the "Foundation"),
which is a nonprofit entity formed for the purpose of distributing charitable
donations to recipient organizations generally located in the communities
serviced by Isabella Bank and Trust. The Bank periodically makes charitable
contributions in the form of cash transfers to the Foundation. The Foundation is
administered by members of the Isabella Bank and Trust Board of Directors. The
assets and transactions of the Foundation are not included in the consolidated
financial statements of
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IBT Bancorp, Inc. Donations made to the Foundation by Isabella Bank and Trust
included in charitable donations reported in noninterest expense were $0, $27
and $870 in 2005, 2004 and 2003, respectively. The assets of the Foundation as
of December 31, 2005 approximated $1.6 million.
Banking regulations limit the transfer of assets in the form of dividends,
loans, or advances from the subsidiary Banks to the Corporation. At December 31,
2005, substantially all of the subsidiary Banks' assets were restricted from
transfer to the Corporation in the form of loans or advances. Consequently, bank
dividends are the principal source of funds for the Corporation. Payment of
dividends without regulatory approval is limited to the current years retained
net income plus retained net income for the preceding two years, less any
required transfers to capital surplus. At January 1, 2006, the amount available
for dividends without regulatory approval was approximately $700.
The Corporation maintains a self-funded medical plan under which the
Corporation is responsible for the first $50 per year of claims made by a
covered individual. Medical claims are subject to a lifetime maximum of $3,000
per covered individual. Expenses are accrued based on estimates of the aggregate
liability for claims incurred and the Corporation's experience. Expenses were
$1,650 in 2005, $1,184 in 2004 and $1,532 in 2003.
The Corporation offers dividend reinvestment and employee and director
stock purchase plans. The dividend reinvestment plan allows shareholders to
purchase previously unissued IBT Bancorp common shares. The stock purchase plan
allows employees and directors to purchase IBT Bancorp common stock through
payroll deduction. The number of shares authorized for issuance under these
plans are 280,000 with 145,282 shares unissued at December 31, 2005. During
2005, 2004 and 2003, 58,019 shares were issued for $2,180, 57,388 shares were
issued for $2,001, and 70,340 shares were issued for $2,008, respectively, in
cash pursuant to these plans.
The subsidiary Banks of the Corporation have obtained approval to borrow up
to $64,000 from the Federal Home Loan Bank (FHLB) of Indianapolis. Under the
terms of the agreement, the Banks may obtain advances at the stated rate at the
time of the borrowings. The Banks have agreed to pledge eligible mortgage loans
and U.S. Treasury and governmental agencies as collateral for any such
borrowings.
NOTE 15 -- MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Corporation (on a consolidated basis) and its subsidiary banks,
Isabella Bank and Trust and Farmers State Bank of Breckenridge ("Banks") are
subject to various regulatory capital requirements administered by their primary
regulator, the Federal Reserve Bank. Failure to meet minimum capital
requirements can initiate mandatory and possibly additional discretionary
actions by the Federal Reserve, that if undertaken, could have a material effect
on the Corporation's and Banks' financial statements. Under the Federal
Reserve's capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Banks must meet specific capital
guidelines that include quantitative measures of their assets, liabilities,
capital, and certain off-balance-sheet items, as calculated under regulatory
accounting standards. The Banks' capital amounts and classifications are also
subject to qualitative judgments by the Federal Reserve about components, risk
weightings, and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the following table) of total and Tier capital (as defined in the
regulations) to risk-weighted assets (as defined) and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2005 and 2004, that the Corporation and the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 2005, the most recent notifications from the Federal
Reserve Bank categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
an institution must maintain total risk based, Tier 1 risk-based, and Tier 1
leverage ratios as set forth in
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the following tables. There are no conditions or events since the notifications
that management believes has changed the Banks' categories.
The Corporation's and each Bank's actual capital amounts (in thousands) and
ratios are also presented in the table.
MINIMUM TO BE
WELL
CAPITALIZED
UNDER PROMPT
MINIMUM CORRECTIVE
CAPITAL ACTION
ACTUAL REQUIREMENT PROVISIONS
-------------- -------------- --------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------- ----- ------- -----
DECEMBER 31, 2005
Total capital to risk weighted assets
Isabella Bank & Trust.............. $48,092 12.4% $31,040 8.0% $38,800 10.0%
Farmers State Bank of
Breckenridge..................... 14,162 14.7 7,733 8.0 9,667 10.0
Consolidated....................... 85,184 17.1 39,761 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank & Trust.............. 43,458 11.2 15,520 4.0 23,280 6.0
Farmers State Bank of
Breckenridge..................... 12,941 13.4 3,867 4.0 5,800 6.0
Consolidated....................... 78,963 15.9 19,881 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank & Trust.............. 43,458 7.6 23,011 4.0 28,763 5.0
Farmers State Bank of
Breckenridge..................... 12,941 9.5 5,426 4.0 6,783 5.0
Consolidated....................... 78,963 11.3 27,886 4.0 N/A N/A
DECEMBER 31, 2004
Total capital to risk weighted assets
Isabella Bank & Trust.............. $47,720 13.1% $29,042 8.0% $36,303 10.0%
Farmers State Bank of
Breckenridge..................... 14,033 15.5 7,242 8.0 9,052 10.0
Consolidated....................... 75,340 16.4 36,764 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank & Trust.............. 43,351 11.9 14,521 4.0 21,782 6.0
Farmers State Bank of
Breckenridge..................... 12,890 14.2 3,621 4.0 5,431 6.0
Consolidated....................... 69,587 15.1 18,382 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank & Trust.............. 43,351 8.1 21,536 4.0 26,920 5.0
Farmers State Bank of
Breckenridge..................... 12,890 10.4 4,970 4.0 6,213 5.0
Consolidated....................... 69,587 10.4 26,866 4.0 N/A N/A
NOTE 16 -- BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN
The Corporation has a defined benefit pension plan covering substantially
all of its employees. The benefits are based on years of service and the
employees' five highest consecutive years of compensation out of the last ten
years of service. The funding policy is to contribute annually the maximum
amount that can be deducted for federal income tax purposes. Contributions are
intended to provide not only for benefits attributed to services to date but
also for those expected to be earned in the future.
The Corporation uses a January 1, 2005 measurement date for this pension
plan.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Changes in the projected benefit obligation and plan assets during each
year, the funded status of the plan and a reconciliation to the amount
recognized in the Corporation's consolidated balance sheets are summarized as
follows at December 31:
2005 2004 2003
------- ------- -------
Change in projected benefit obligation
Benefit obligation, January 1......................... $ 8,783 $ 8,083 $ 6,949
Service cost....................................... 513 410 391
Interest cost...................................... 540 518 463
Actuarial loss..................................... 25 144 687
Benefits paid...................................... (304) (372) (407)
------- ------- -------
BENEFIT OBLIGATION, DECEMBER 31.................. $ 9,557 $ 8,783 $ 8,083
======= ======= =======
Change in plan assets
Fair value of plan assets, January 1.................. $ 6,311 $ 5,427 $ 4,830
Investment return.................................. 351 348 479
Corporation contribution........................... 1,251 908 525
Benefits paid...................................... (304) (372) (407)
------- ------- -------
FAIR VALUE OF PLAN ASSETS, DECEMBER 31........... $ 7,609 $ 6,311 $ 5,427
======= ======= =======
Reconciliation of funded status
Funded status......................................... $(1,948) $(2,472) $(2,656)
Unrecognized prior service cost....................... 58 76 94
Unrecognized net loss from experience different than
that assumed and effects and changes in
assumptions........................................ 4,037 4,146 4,254
Additional minimum pension liability.................. -- (1,915) (1,951)
------- ------- -------
PREPAID (ACCRUED) BENEFIT COST................... $ 2,147 $ (165) $ (259)
======= ======= =======
The accumulated benefit obligation was $7,079, and $6,476 at December 31,
2005 and 2004, respectively, resulting in a prepaid pension of $2,147 in 2005
and a pension liability of $165 in 2004.
An adjustment to record the additional minimum pension liability as of
December 31, 2004 was established by the recording of an intangible pension
asset of $76, and a reduction to other comprehensive loss of $1,839 and $18 in
2005 and 2004, respectively.
The net amount recognized in the consolidated balance sheets consists of
the following accounts at December 31:
PENSION
BENEFITS
--------------
2005 2004
------ ------
Prepaid (accrued) benefit cost............................ $2,147 $ (165)
Intangible asset.......................................... -- 76
Accumulated other comprehensive loss...................... -- 1,839
------ ------
Net amount recognized..................................... $2,147 $1,750
====== ======
2005 2004
------ ----
Reversal of minimum pension liability included as a
reduction of other comprehensive loss..................... $1,839 $18
====== ===
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net pension expense consists of the following components for the year ended
December 31:
2005 2004 2003
----- ----- -----
Service cost on benefits earned for serviced rendered
during the year.................................... $ 558 $ 518 $ 391
Interest cost on projected benefit obligation........ 540 501 463
Expected return on plan assets....................... (463) (430) (390)
Amortization of unrecognized transition asset........ -- -- (22)
Amortization of unrecognized prior service cost...... 18 18 18
Amortization of unrecognized actuarial net loss...... 201 213 188
----- ----- -----
NET PENSION EXPENSE................................ $ 854 $ 820 $ 648
===== ===== =====
Actuarial assumptions used in determining the projected benefit obligation
are as follows for the year ended December 31:
2005 2004 2003
---- ---- ----
Weighted average discount rate.......................... 6.25% 6.25% 6.25%
Rate of increase in future compensation................. 4.50% 4.50% 4.50%
Expected long-term rate of return....................... 7.50% 8.00% 8.00%
The actual weighted average assumptions used in determining the net
periodic pension costs are as follows for the year ended December 31:
2005 2004 2003
---- ---- ----
Discount rate........................................... 6.25% 6.75% 6.75%
Rate of compensation increase........................... 4.50% 4.50% 4.50%
Expected long-term return on plan assets................ 7.50% 8.00% 8.00%
The weighted average discount rate has remained unchanged at 6.25%. The
discount rate decreased to 6.25% in 2005 from 6.75% in 2004. The expected long
term rate of return is based on the Corporation's actual recommended rate. The
factors used to establish the rate include historical plan performance,
comparison of rates used by similar plans with similar asset allocations, and
historical performance of long-term investments.
The Corporation's pension plan weighted-average asset allocations by asset
category are as follows at December 31:
ASSET CATEGORY 2005 2004
-------------- ------ ------
Equity securities......................................... 64.2% 51.5%
Debt securities........................................... 28.7% 33.9%
Other..................................................... 7.1% 14.6%
------ ------
TOTAL................................................... 100.00% 100.00%
====== ======
Debt securities include certificates of deposit with the Banks in the
amounts of $1,173 (15% of total plan assets) and $1,082 (17% of total plan
assets) at December 31, 2005 and 2004, respectively. Also included in other is
$537 (7% of total plan assets) and $881 (14% of total plan assets) of funds in a
money market account with Isabella Bank and Trust as of December 31, 2005 and
2004, respectively.
The Corporation's investment policy for the benefit plan includes asset
holdings in publicly traded equities, U.S. Government agency obligations and
investment grade corporate and municipal bonds. The policy restricts
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equity investment to less than 20% of equity investments in any sector and to
less than 4% of plans assets in any one company. The Corporation's weighted
asset allocations in 2005 and 2004 were as follows:
Equity securities............................................ 55% to 65%
Debt securities.............................................. 25% to 35%
Real estate.................................................. 0.00%
Other........................................................ 15.00%
The plan's investment in equity securities in 2004 were less than the 55%
minimum established in the Corporation's investment policy as a result of a $640
contribution to the plan on December 29, 2004. The contribution was in a money
market fund, which is included in other; these funds were substantially re-
invested by January 15, 2005.
The asset mix, the sector weighting of equity investments, and debt issues
to hold are based on a third party investment advisor retained by the
Corporation to manage the plan. The Corporation reviews the performance of the
advisor no less than annually.
The Corporation expects to contribute approximately $900 to the pension
plan in 2006.
Estimated future benefit payments, which reflect expected future service,
as appropriate, are as follows for the next ten years:
YEAR AMOUNT
---- ------
2006.......................................................... $ 313
2007.......................................................... 315
2008.......................................................... 321
2009.......................................................... 328
2010.......................................................... 358
Years 2011 -- 2015.............................................. 2,594
OTHER EMPLOYEE BENEFIT PLANS
The Corporation maintains a nonqualified supplementary retirement plan for
officers to provide supplemental retirement benefits and death benefits to each
participant. Insurance policies, designed primarily to fund death benefits, have
been purchased on the life of each participant with the Corporation as the sole
owner and beneficiary of the policies. Expenses related to this program for
2005, 2004, and 2003 were $85, $65, and $388, respectively, and are being
recognized over the participants' expected years of service.
The Corporation maintains a non-leveraged employee stock ownership plan
(ESOP) and a profit sharing plan which cover substantially all of its employees.
Contributions to the Plans are discretionary and are approved by the Board of
Directors and recorded as compensation expense. Compensation expense related to
the plans for 2005, 2004, and 2003 was $11, $11, and $122, respectively. Total
shares outstanding related to the ESOP at December 31, 2005 and 2004 were
159,987 and 166,155, respectively, and were included in the computation of
dividends and earnings per share in each of the respective years.
401(k) PLAN
The Corporation has a 401(k) plan in which substantially all employees are
eligible to participate. Employees may contribute up to 15% of their
compensation subject to certain limits based on federal tax laws. The
Corporation began making matching contributions equal to 25% of the first 3% of
an employee's compensation contributed to the plan in 2005. Employees are 0%
vested through their first three years of employment and are 100% vested after 3
years of service. For the year ended December 31, 2005, expense attributable to
the Plan amounted to $49.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EQUITY COMPENSATION PLAN
Pursuant to the terms of a Deferred Director fee plan, which was amended
effective December 31, 2005, directors of the Corporation and its subsidiaries
are required to defer at least 25% of their earned board fees. Deferred fees are
converted on a quarterly basis into stock units of the Corporation's common
stock. The fees are converted to stock units based on the purchase price for a
share of common stock under the Corporation's Dividend Reinvestment Plan. Stock
units credited to a participant's account are eligible for stock and cash
dividends as declared. Upon retirement from the board, a participant is eligible
to receive one share of common stock for each one stock unit. Prior to December
31, 2005, the Plan contained a cash payout option, and a liability was recorded
in the consolidated financial statements. The Plan as modified does not allow
for cash settlement, and therefore such share-based payment awards qualify for
classification as equity. In connection with the amendment, $2,704 was
reclassified from other liabilities and recorded as an addition to the common
stock account All authorized but unissued shares of common stock are eligible
for issuance under this Plan. As of December 31, 2005 and 2004, 161,571 and
163,871 shares respectively were to be issued under this plan, as adjusted for
the 10% stock dividend.
NOTE 17 -- RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Banks have granted loans to
principal officers and directors and their affiliates (including their families
and companies in which they have 10% or more ownership) amounting to $9,679 and
$9,505 at December 31, 2005 and 2004, respectively. During 2005, total principal
additions were $7,718 and total principal payments were $7,544.
Total deposits of these principal officers and directors and their
affiliates amounted to $6,685 and $5,629 at December 31, 2005 and 2004,
respectively. In addition, the IBT Bancorp's defined benefit plan and the
Employee Stock Ownership Plan (Note 16) held deposits with the Banks aggregating
$1,710 and $497, and $1,963 and $475 respectively at December 31, 2005 and 2004.
NOTE 18 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all non-
financial instruments from its disclosure requirements. These include, among
other elements, the estimated earning power of core deposit accounts, the
trained work force, customer goodwill and similar items. Accordingly, the
aggregate of the fair value amounts presented are not necessarily indicative of
the underlying fair value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS:
The carrying amounts of cash and short-term instruments approximate fair
values.
INVESTMENT SECURITIES:
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are unavailable, fair values are based
on quoted market prices of comparable instruments.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MORTGAGE LOANS HELD FOR SALE:
Fair values of mortgage loans held for sale are based on commitments on
hand from investors or prevailing market prices.
LOANS RECEIVABLE:
Fair values for variable rate loans that reprice frequently with, fair
values are based on carrying values. Fixed rate loans are valued using present
value discounted cash flow techniques. The discount rate used in these
calculations was the U.S. government bond rate for securities with similar
maturities adjusted for servicing costs, credit loss, and prepayment risk.
DEPOSIT LIABILITIES:
Demand, savings, and money market deposits are, by definition, equal to the
amount payable on demand at the reporting date (i.e., their carrying amounts).
Fair values for variable rate certificates of deposit approximate their recorded
book balance. Fair values for fixed-rate certificates of deposit are estimated
using discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on time deposits.
BORROWED FUNDS:
The carrying amounts of federal funds purchased and borrowings under
repurchase agreements approximate their fair value. The fair values of other
borrowings are estimated using discounted cash flow analyses based on the
Corporation's current incremental borrowing rates for similar types of borrowing
arrangements.
ACCRUED INTEREST:
The carrying amounts of accrued interest approximate fair value.
OFF-BALANCE-SHEET CREDIT-RELATED INSTRUMENTS:
Fair values for off-balance-sheet lending commitments are based on fees
currently charged to enter into similar agreements, taking into consideration
the remaining terms of the agreements and the counterparties' credit standings.
The Corporation does not charge fees for lending commitments; thus it is not
practicable to estimate the fair value of these instruments.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following sets forth the estimated fair value and recorded carrying
values of the Corporation's financial instruments as of December 31:
2005 2004
-------------------- --------------------
ESTIMATED CARRYING ESTIMATED CARRYING
FAIR VALUE VALUE FAIR VALUE VALUE
---------- -------- ---------- --------
ASSETS
Cash and demand deposits due from banks...... $ 30,825 $ 30,825 $ 20,760 $ 20,760
Investment securities........................ 183,406 183,406 162,567 162,553
Mortgage loans available for sale............ 757 744 2,334 2,339
Net loans.................................... 479,765 476,343 412,175 446,451
Accrued interest receivable.................. 4,786 4,786 4,315 4,315
Mortgage servicing rights.................... 2,125 2,125 2,046 2,046
LIABILITIES
Deposits with no stated maturities........... $331,487 $331,487 $329,612 $329,612
Deposits with stated maturities.............. 260,615 260,991 220,533 234,264
Borrowed funds............................... 52,216 52,165 26,466 30,982
Accrued interest payable..................... 857 857 702 702
NOTE 19 -- PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
DECEMBER 31
----------------
2005 2004
------- -------
Cash on deposit at subsidiary Banks..................... $ 8,749 $ 7,219
Securities available for sale........................... 4,789 3,703
Investments in subsidiaries............................. 61,841 63,999
Premises and equipment.................................. 3,025 103
Other assets............................................ 3,576 2,411
------- -------
TOTAL ASSETS.......................................... $81,980 $77,435
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities....................................... $ 1,078 $ 4,841
Shareholders' equity.................................... 80,902 72,594
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............ $81,980 $77,435
======= =======
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
----------------------
2005 2004 2003
------ ------ ------
Income
Dividends from subsidiaries....................... $7,275 $3,500 $3,825
Interest income................................... 182 139 128
Management fee and other.......................... 1,384 643 423
------ ------ ------
TOTAL INCOME................................... 8,841 4,282 4,376
Expenses............................................ 2,808 2,065 1,114
------ ------ ------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries......... 6,033 2,217 3,262
Federal income tax benefit........................ 478 470 218
------ ------ ------
6,511 2,687 3,480
Undistributed earnings of subsidiaries.............. 265 3,958 3,725
------ ------ ------
NET INCOME..................................... $6,776 $6,645 $7,205
====== ====== ======
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-------------------------
2005 2004 2003
------- ------- -------
OPERATING ACTIVITIES
Net income............................................ $ 6,776 $ 6,645 $ 7,205
Adjustments to reconcile net income to cash
provided by operations
Undistributed earnings of subsidiaries........... (265) (3,958) (3,725)
Provision for depreciation....................... 533 21 19
Net amortization of securities................... 27 12 --
Deferred income taxes (benefit).................. 680 (13) (348)
Changes in operating assets and liabilities which
(used) provided cash
Interest receivable................................ (29) (4) (2)
Other assets....................................... (746) (1,031) 717
Accrued interest and other expenses................ (894) 809 675
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES..... 6,082 2,481 4,541
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales....................... 344 260 185
Purchases.......................................... (1,523) (1,846) (820)
Purchases of equipment and premises................... (3,455) (7) (38)
Repayment of investment in subsidiaries............... 652 -- 34
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES......... (3,982) (1,593) (639)
FINANCING ACTIVITIES
Cash dividends paid on common stock................... (3,254) (3,070) (2,881)
Proceeds from the issuance of common stock............ 2,684 2,001 2,008
Common stock repurchased.............................. -- (192) (127)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES......... (570) (1,261) (1,000)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,530 (373) 2,902
Cash and cash equivalents at beginning of year.......... 7,219 7,592 4,690
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR...... $ 8,749 $ 7,219 $ 7,592
======= ======= =======
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 20 -- OPERATING SEGMENTS
The Corporation's reportable segments are based on legal entities that
account for at least 10% of operating results. The accounting policies are the
same as those discussed in Note 1 to the Consolidated Financial Statements. The
Corporation evaluates performance based principally on net income and asset
quality of the respective segments. A summary of selected financial information
for the Corporation's reportable segments follows:
ALL OTHERS
ISABELLA BANK FARMERS (INCLUDING
AND TRUST STATE BANK PARENT) TOTAL
------------- ---------- ---------- --------
2005
Total assets........................ $583,505 $136,853 $21,296 $741,654
Interest income..................... 28,867 7,939 76 36,882
Net interest income................. 18,436 5,289 184 23,909
Provision for loan losses........... 585 192 -- 777
Net income (loss)................... 5,900 1,456 (580) 6,776
2004
Total assets........................ $542,759 $125,350 $ 9,925 $678,034
Interest income..................... 26,436 7,258 127 33,821
Net interest income................. 18,247 4,919 198 23,364
Provision for loan losses........... 550 185 -- 735
Net income (loss)................... 6,073 1,345 (773) 6,645
2003
Total assets........................ $527,805 $127,124 $ 9,150 $664,079
Interest income..................... 28,013 7,797 168 35,978
Net interest income................. 18,295 5,005 228 23,528
Provision for loan losses........... 570 885 -- 1,455
Net income (loss)................... 6,415 1,008 (218) 7,205
NOTE 21 -- POTENTIAL ACQUISITION
On December 22, 2005, IBT Bancorp, Inc. signed a definitive agreement to
acquire Farwell State Savings Bank. The acquisition is subject to a number of
contingencies including but not limited to regulatory approval.
46
IBT BANCORP FINANCIAL REVIEW
(ALL DOLLARS IN THOUSANDS)
The following is management's discussion and analysis of the financial
condition and results of operations for IBT Bancorp (the Corporation). This
discussion and analysis is intended to provide a better understanding of the
financial statements and statistical data included elsewhere in the Annual
Report.
CRITICAL ACCOUNTING POLICIES:
The Corporation's significant accounting policies are set forth in Note 1
of the Consolidated Financial Statements. Of these significant accounting
policies, the Corporation considers its policies regarding the allowance for
loan losses and servicing assets to be its most critical accounting policies.
The allowance for loan losses requires management's most subjective and
complex judgment. Changes in economic conditions can have a significant impact
on the allowance for loan losses and therefore the provision for loan losses and
results of operations. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Corporation's assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers that is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see Provision for
Loan Losses and Allowance for Loan Losses.
Servicing assets are evaluated for impairment based upon the fair value of
the rights as compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such as interest rates and
terms. Fair value is determined using prices for similar assets with similar
characteristics, when available, or based upon discounted cash flows using
market-based assumptions. Impairment is recognized through a valuation allowance
for an individual stratum, to the extent that fair value is less than the
capitalized amount for the stratum.
47
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY
INTEREST RATE AND INTEREST DIFFERENTIAL
The following schedules present the daily average amount outstanding for
each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% federal income tax rate. Nonaccruing loans, for the purpose of
the following computations, are included in the average loan amounts
outstanding. Federal Reserve and Federal Home Loan Bank Equity holdings are
included in Other Investments.
2005 2004 2003
----------------------------- ----------------------------- -----------------------------
TAX AVERAGE TAX AVERAGE TAX AVERAGE
AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- ---------- ------- -------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans..................... $466,001 $30,682 6.58% $437,438 $27,801 6.36% $404,953 $29,196 7.21%
Taxable investment
securities............. 106,025 3,487 3.29 114,806 3,696 3.22 123,927 4,437 3.58
Non-taxable investment
securities............. 63,271 3,818 6.03 55,882 3,206 5.74 49,531 3,099 6.26
Federal funds sold........ 3,882 116 2.99 4,516 30 0.66 16,311 193 1.18
Other..................... 5,060 199 3.93 2,978 178 5.98 2,857 151 5.29
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL EARNING ASSETS... 644,239 38,302 5.95 615,620 34,911 5.67 597,579 37,076 6.20
NON EARNING ASSETS:
Allowance for loan
losses................. (6,691) (6,584) (5,946)
Cash and due from banks... 19,955 23,831 26,840
Premises and equipment.... 17,544 18,147 15,646
Accrued income and other
assets................. 25,577 24,143 25,204
-------- -------- --------
TOTAL ASSETS........... $700,624 $675,157 $659,323
======== ======== ========
INTEREST BEARING
LIABILITIES:
Interest-bearing demand
deposits............... $103,684 1,001 0.97 $106,471 569 0.53 $113,206 1,057 0.93
Savings deposits.......... 157,238 1,571 1.00 157,819 872 0.55 141,227 1,325 0.94
Time deposits............. 245,559 8,802 3.58 238,323 7,950 3.34 247,516 9,228 3.73
Other borrowed funds...... 37,209 1,599 4.30 27,328 1,066 3.90 18,812 840 4.47
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL INTEREST BEARING
LIABILITIES.......... 543,690 12,973 2.39 529,941 10,457 1.97 520,761 12,450 2.39
NONINTEREST BEARING
LIABILITIES:
Demand deposits........... 69,610 64,531 61,651
Other..................... 12,642 9,898 11,141
Shareholders' equity...... 74,682 70,787 65,770
-------- -------- --------
TOTAL LIABILITIES AND
EQUITY............ $700,624 $675,157 $659,323
======== ======== ========
NET INTEREST INCOME (FTE)... $25,329 $24,454 $24,626
======= ======= =======
NET YIELD ON INTEREST
EARNING ASSETS (FTE)...... 3.93% 3.97% 4.12%
==== ==== ====
NET INTEREST INCOME
The Corporation derives the majority of its gross income from interest
earned on loans and investments, while its most significant expense is the
interest cost incurred for funds used. Net interest income is the amount by
which interest income on earning assets exceeds the interest cost of deposits
and borrowings. Net interest income is influenced by changes in the balance and
mix of assets and liabilities and market interest rates. Management exerts
48
some control over these factors, however, Federal Reserve monetary policy and
competition have a significant impact. Interest income includes loan fees of
$1,142 in 2005, $1,102 in 2004, and $1,752 in 2003. For analytical purposes, net
interest income is adjusted to a "taxable equivalent" basis by adding the income
tax savings from interest on tax-exempt loans and securities, thus making year-
to-year comparisons more meaningful.
TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS
The following table details the dollar amount of changes in FTE net
interest income for each major category of interest earning assets and interest
bearing liabilities and the amount of change attributable to changes in average
balances (volume) or average rates. The change in interest due to both volume
and rate has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
2005 COMPARED TO 2004 2004 COMPARED TO 2003
INCREASE (DECREASE) INCREASE (DECREASE) DUE
DUE TO TO
---------------------- ------------------------
VOLUME RATE NET VOLUME RATE NET
------ ------ ------ ------ ------- -------
CHANGES IN INTEREST INCOME:
Loans............................... $1,857 $1,024 $2,881 $2,231 $(3,626) $(1,395)
Taxable investment securities....... (287) 78 (209) (313) (428) (741)
Nontaxable investment securities.... 440 172 612 378 (271) 107
Federal funds sold.................. (5) 91 86 (101) (62) (163)
Other............................... 96 (75) 21 7 20 27
------ ------ ------ ------ ------- -------
TOTAL CHANGES IN INTEREST
INCOME......................... 2,101 1,290 3,391 2,202 (4,367) (2,165)
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits.... (15) 447 432 (60) (428) (488)
Savings deposits.................... (3) 702 699 141 (594) (453)
Time deposits....................... 247 605 852 (333) (945) (1,278)
Federal funds purchased............. 416 117 533 343 (117) 226
------ ------ ------ ------ ------- -------
TOTAL CHANGES IN INTEREST
EXPENSE........................ 645 1,871 2,516 91 (2,084) (1,993)
------ ------ ------ ------ ------- -------
NET CHANGE IN INTEREST MARGIN
(FTE).......................... $1,456 $ (581) $ 875 $2,111 $(2,283) $ (172)
====== ====== ====== ====== ======= =======
As shown in Tables 1 and 2, when comparing year ending December 31, 2005 to
2004, fully taxable equivalent (FTE) net interest income increased $875 or
3.58%. An increase of 4.65% in average interest earning assets provided $2,101
of FTE interest income. The majority of this growth was funded by a 2.59%
increase in interest bearing liabilities, resulting in $645 of additional
interest expense. Overall, changes in volume resulted in $1,456 in additional
FTE interest income. The average FTE interest rate earned on assets increased by
0.28%, increasing FTE interest income by $1,290, and the average rate paid on
deposits and borrowings increased by 0.42%, increasing interest expense by
$1,871. The net change related to interest rates earned and paid was a $581
decrease in FTE net interest income.
The Corporation's FTE net yield as a percentage of average earning assets
decreased 0.04% to 3.93%. The narrowing of the spread between interest bearing
assets and liabilities is a result of the steep increase in short term interest
rates, while long term rates have remained essentially unchanged. The ten year
yield curve as of December 31, 2005 was nearly flat. The increasing short term
interest rates have raised the cost of funding as a large portion of interest
bearing liabilities reprice with short term rates. Net interest margins have
also been adversely impacted by a continuing increase in the reliance on
interest bearing liabilities to fund interest earning assets.
As shown in Tables 1 and 2, when comparing year ending December 31, 2004 to
2003, fully taxable equivalent (FTE) net interest income decreased $172 or
0.70%. An increase of 3.02% in average interest earning assets provided $2,202
of FTE interest income. The majority of this growth was funded by a 1.76%
increase in interest bearing liabilities, resulting in $91 of additional
interest expense. Overall, changes in volume resulted in $2,111 in additional
FTE interest income. The average FTE interest rate earned on assets decreased by
0.53%, decreasing FTE interest income by $4,367, and the average rate paid on
deposits decreased by 0.42%, decreasing interest
49
expense by $2,084. The net change related to interest rates earned and paid was
a $2,283 decrease in FTE net interest income.
The Corporation's FTE net yield as a percentage of average earning assets
decreased 0.15%. A $650 decline in loan fees in 2004 from 2003 accounted for
0.10% of the decline. The decline in these fees was a result of a $140.1 million
decline in the origination and sales of residential mortgages to the secondary
market as the refinancing boom has slowed. The remaining decline was a result of
the average rate earned on earning assets declining faster than the average rate
paid on interest bearing liabilities.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 64.8% of the
Corporation's total year end assets and is the Corporation's single largest
concentration of risk. Poor operating performance may result from the failure to
control credit risk. Given the importance of maintaining sound underwriting
practices, the Banks' Boards of Directors and senior management teams spend a
large portion of their time and effort in loan review. The provision for loan
losses is the amount added to the allowance for loan losses on a monthly basis.
The allowance for loan losses is management's estimation of potential losses
inherent in the loan portfolio, and is maintained at a level considered by
management to be adequate to absorb potential losses. Evaluation of the
allowance for loan losses and the provision for loan losses is based on a review
of the changes in the type and volume of the loan portfolio, reviews of specific
loans to evaluate their collectibility, past and recent loan loss history,
financial condition of borrowers, the amount of impaired loans, overall economic
conditions, and other factors. This evaluation is inherently subjective as it
requires material estimates, including the amounts and timing of future cash
flows expected to be received on impaired loans that may be subject to
significant change.
As shown in Table 3, total loans outstanding increased 6.7% in 2005 and
increased 7.4% in 2004. The provision for loan losses in 2005 was $777, a $42
increase from 2004 and a $678 decrease from 2003. Net charge offs to average
loans was 0.07% in 2005 and 0.11% in 2004, and have averaged 0.15% during the
past 5 years versus the average of 0.19% for all commercial banks in the State
of Michigan.
Despite a decrease of .04% in net charge offs to total loans, and a decline
in substandard loans, the Corporation increased its provision by $42 in 2005.
The primary factor affecting the 2005 provision is an increase in the average
amount of loans past due less than 90 days. It is management's judgment that the
weaknesses in Michigan's economy as seen by an unemployment rate 40% higher than
the national average, a decline in the State's gross domestic product, and a
decline in real estate activity warrants a cautious approach in determining its
necessary loan loss reserves. This cautious approach is further enhanced by
management's internal analysis of its loans showing a slight decrease in overall
loan quality.
The 2003 provision for loan losses was increased as a result of a
combination of factors. During the last quarter of 2003 the Corporation
experienced a decline in the overall credit quality of its outstanding
agricultural loans. The Corporation undertook a detailed review of the credit
quality of all significant agricultural lending relationships, and identified
the most significant troubled loans. The primary factor for the decline in the
credit quality was a result of three consecutive years of weak cash flows due to
both low farm commodity prices and unfavorable growing conditions in mid-
Michigan. The Corporation tightened its credit granting standards during 2003
and continues to monitor existing relationships for further deterioration.
The allowance to loan losses as a percentage of loans increased from 1.42%
as of December 31, 2004 to 1.43% as of December 31, 2005. Management believes
that the allowance for loans is adequate as of December 31, 2005.
50
TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE
The following is a summary of loan balances at the end of each year and
their daily average balances, changes in the allowance for loan losses arising
from loans charged off and recoveries on loans previously charged off, and
additions to the allowance that have been expensed.
YEAR ENDED DECEMBER 31
------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Amount of loans outstanding at the end
of year............................. $483,242 $452,895 $421,860 $390,860 $389,712
======== ======== ======== ======== ========
Average gross loans outstanding for
the year............................ $466,001 $437,438 $404,953 $396,234 $404,586
======== ======== ======== ======== ========
Allowance for loan losses -- January
1................................... $ 6,444 $ 6,204 $ 5,593 $ 5,471 $ 5,162
Loans charged off
Commercial and agricultural...... 101 561 578 506 271
Real estate mortgage............. 166 -- 117 236 70
Personal......................... 376 374 445 460 351
-------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF........ 643 935 1,140 1,202 692
Recoveries
Commercial and agricultural...... 105 191 93 140 35
Real estate mortgage............. -- 62 29 18 41
Personal......................... 216 187 174 141 155
-------- -------- -------- -------- --------
TOTAL RECOVERIES............... 321 440 296 299 231
-------- -------- -------- -------- --------
Net chargeoffs...................... 322 495 844 903 461
Provision charged to income......... 777 735 1,455 1,025 770
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES -- DECEMBER
31.................................. $ 6,899 $ 6,444 $ 6,204 $ 5,593 $ 5,471
======== ======== ======== ======== ========
Ratio of net charge offs during the
year to average loans outstanding... 0.07% 0.11% 0.21% 0.23% 0.11%
======== ======== ======== ======== ========
Ratio of allowance for loan losses to
loans outstanding at year end....... 1.43% 1.42% 1.47% 1.43% 1.40%
======== ======== ======== ======== ========
As shown in Table 4, the percentage of loans classified as nonperforming by
the Corporation as of December 31, 2005 and 2004 was 0.65% and 0.73% of total
loans, respectively and was below the September 30, 2005 ratio of 0.79% for all
commercial banks in the State of Michigan. Average nonperforming loans for the
peer group were 0.49%. The peer group is a composite of financial information of
all bank holding companies with assets between $500 million and $1 billion;
there were 393 bank holding companies in the Corporation's peer group nationwide
for the period indicated. The Banks' policies, including a loan considered
impaired under Statement of Financial Accounting Standards No. 118, are to
transfer a loan to nonaccrual status whenever it is determined that interest
should be recorded on the cash basis instead of the accrual basis because of a
deterioration in the financial position of the borrower, or a determination that
payment in full, including all interest and principal contractually due cannot
be expected, or the loan has been in default for a period of 90 days or more,
unless it is both well secured and in the process of collection.
51
TABLE 4. NONPERFORMING LOANS
The following loans are all the credits which require classification for
state or federal regulatory purposes:
DECEMBER 31
--------------------------------------
2005 2004 2003 2002 2001
------ ------ ------ ------ ------
Nonaccrual loans....................... $1,375 $1,900 $4,121 $2,484 $1,346
Accruing loans past due 90 days or
more................................. 1,058 702 1,380 1,840 1,219
Restructured loans..................... 725 686 -- 479
------ ------ ------ ------ ------
TOTAL NONPERFORMING LOANS............ $3,158 $3,288 $5,501 $4,803 $2,565
====== ====== ====== ====== ======
NONPERFORMING LOANS AS A % OF LOANS.... 0.65% 0.73% 1.30% 1.23% 0.66%
====== ====== ====== ====== ======
As of December 31, 2005, there were no other interest bearing assets which
required classification. Management is not aware of any recommendations by
regulatory agencies that, if implemented, would have a material impact on the
Corporation's liquidity, capital, or operations.
Management's internal analysis of the estimated range for the allowance was
$3,310 to $7,875 as of December 31, 2005. In management's opinion, the allowance
for loan losses of $6,899 is adequate as of December 31, 2005. Management has
allocated, as reflected in Table 5, the allowance for loan losses to the
following categories: 46.9% to commercial and agricultural loans; 46.8% to real
estate loans; 5.8% to installment loans; 0.5% to impaired loans. The above
allocation is not intended to imply limitations on usage of the allowance. The
entire allowance is available to fund loan losses without regard to loan type.
TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated according to the amount
deemed to be reasonably necessary to provide for the probability of losses being
incurred within the following categories:
2004 2003 2002 2001
-------------------- -------------------- -------------------- --------------------
2005
--------------------
% OF EACH % OF EACH % OF EACH % OF EACH % OF EACH
CATEGORY CATEGORY CATEGORY CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Commercial and
agricultural..... $2,771 46.9% $2,634 42.3% $2,140 41.5% $1,868 44.1% $2,081 41.6%
Real estate
mortgage......... 1,192 46.8 1,463 50.5 1,584 47.8 1,649 45.5 1,408 47.8
Installment........ 2,286 5.8 1,606 6.6 1,614 9.6 1,679 9.7 1,577 10.5
Impaired loans..... 184 0.5 304 0.6 622 1.1 103 0.7 56 0.1
Unallocated........ 466 -- 437 -- 244 -- 294 -- 349 --
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
TOTAL............ $6,899 100.0% $6,444 100.0% $6,204 100.0% $5,593 100.0% $5,471 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
NONINTEREST INCOME
Noninterest income consists of trust fees, service charges on deposit
accounts, fees for other financial services, gain on the sale of mortgage loans,
title insurance revenue, and other insignificant categories. As is the case for
many financial institutions, management believes fee income is increasingly
important as a source of net earnings and expects this trend to continue. There
was a $311 or 3.81% increase in noninterest income from these sources during
2005. Significant changes during 2005 include a $193 increase in service charges
and fees, a $394 increase from the sale of title insurance and related services,
a $207 decrease from the gain on sale of mortgage loans, and a $69 decrease in
other income.
Included in the $193 increase in other service charges and fees were
increases of $276 in NSF and overdraft fees, $114 in trust revenues, and $52 in
ATM and debit card fees. These increases were offset by a $252 decrease in
mortgage servicing income.
52
The $69 decrease in other income included decreases of $104 from the gain
on sale of securities, $63 in building rent, and $21 in other income. These
decreases were offset by an increase of $119 from income on bank owned life
insurance.
During 2005, the Corporation had an average investment of $10.3 million in
bank-owned life insurance, a $365 increase over 2004. The average net rate
earned on the investment was approximately 3.52% in 2005(versus 4.10% in 2004)
and, because of the instruments' tax free accumulation of earnings have a
taxable equivalent rate of 5.34%. The rates on these contracts are adjustable
annually on their anniversary date. These policies are placed with five
different insurance companies with an S&P rating of A- or better.
Included in noninterest income is a $270 gain from the sale of $38,624 of
mortgages during 2005 versus a $477 gain on the sale of $55,055 of mortgages
during 2004. The Corporation has established a policy that all fixed rate
mortgage loans with an amortization of greater than 15 years will be sold.
During 2005, most 15-year fixed rate mortgage loans originated were sold on the
secondary market. These loans were sold without recourse, with servicing rights
retained.
Noninterest income decreased $2,580 or 24.0% in 2004 when compared to 2003.
Significant changes during 2004 include a $383 decrease from the sale of title
insurance and related services, an $873 decrease in mortgage servicing income,
and a $1,614 decrease in gains on the sale of real estate mortgages, offset by a
$313 increase in overdraft fees. During 2004, the Corporation had an average
investment of $10.1 million in bank-owned life insurance, a $139 increase over
2003. The average net rate earned on the investment was approximately 4.10% in
2004 (versus 4.8% in 2003) and, had a taxable equivalent rate of 6.22%. The
rates on these contracts are adjustable annually on their anniversary date. The
investment was placed with five separate insurance companies with S&P ratings of
AA+ or better.
NONINTEREST EXPENSES
Noninterest expenses increased $613 or 2.75% during 2005. Compensation and
benefits increased $863 or 6.80%, occupancy and furniture and equipment expenses
increased $222 or 5.57%, and other expenses including charitable donations
decreased $472 or 8.43%. Noninterest expenses net of noninterest income divided
by average total assets equaled 2.06% in 2005, 2.09% in 2004, and 1.95% in 2003.
The $863 increase in compensation and benefits included a $247 or 2.62%
increase in salaries expense and a $616 or 18.95% increase in benefits expense.
The majority of the increase in benefit expense is related to a $466 increase in
medical expenses, which was the result of higher than normal medical claims in
2005, and a $96 increase in pension expenses and other retirement expenses. The
Corporation continues to evaluate medical costs and is researching alternatives
to minimize the effects of escalating health care costs.
The $222 increase in occupancy and furniture and equipment expenses
includes an increase of depreciation expense of $183, a $69 increase in ATM and
debit card fees, and a $36 increase in other expenses. These increases were
partially offset by a $66 decrease in computer costs. Of the $183 increase in
depreciation, $152 relates to an increase in furniture and equipment
depreciation, as a result of the Corporation investing in new computer software
in 2005 and 2004.
The $472 decrease in other expenses, including charitable donations, is
comprised of a decrease of $336 or 45.8% in SOX compliance costs and a $136
decrease in various other expense items.
Comparing 2004 to 2003, noninterest expenses decreased $1,307 or 5.5%
during 2004. Compensation and benefits expense, which is the largest component
of noninterest expenses, decreased $660 or 4.9%. Salaries decreased $459 and
employee benefits decreased $218. While there were normal merit and promotional
salary increases the net decrease is primarily related to the reduction in
compensation related to the decline in mortgage loan activity, as well as a
decrease related to a 22.7% decline in medical insurance expenses, both of which
were offset by a 13.8% increase in pension expense.
Occupancy and furniture and equipment expenses decreased $43 or 1.1% in
2004. The decrease is related to a reduction in depreciation expense. All other
operating expenses decreased $604. The most significant decreases are related to
donations, offset by an increase in professional services principally associated
with SOX mandated
53
compliance efforts. Isabella Bank and Trust contributed approximately $27 in
2004 to the IBT Foundation compared to a contribution of $870 made in 2003. (See
Note 14 to the accompanying Consolidated Financial Statements.)
FEDERAL INCOME TAXES
Federal income tax expense for 2005 was $1,948 or 22.3% of pre-tax income
compared to $1,878 or 22.0% of pre-tax income in 2004 and $2,035 or 22.0% in
2003. A reconcilement of actual federal income tax expense reported and the
amount computed at the federal statutory rate of 34% is found in Note 12,
Federal Income Taxes, in notes to the accompanying Consolidated Financial
Statements.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
Total assets were $741,654 at December 31, 2005, an increase of $63,620 or
9.4% over year end 2004. Asset growth was primarily funded by a $28,602 increase
in deposits and a $21,183 increase in other borrowed funds. A discussion of
changes in balance sheet amounts by major categories follows.
INVESTMENT SECURITIES
The primary objective of the Corporation's investing activities is to
provide for safety of the principal invested. Secondary considerations include
the need for earnings, liquidity, and the Corporation's overall exposure to
changes in interest rates. During 2005, the Corporation's net holdings of
investment securities increased $20,853. Table 6 shows the carrying value of
investment securities available for sale and held to maturity. Securities held
to maturity in 2004 and 2003, which are stated at amortized cost, consist mostly
of local municipal bond issues, and U.S. Agencies. Securities not classified by
management as held to maturity are classified as available-for-sale and are
stated at fair value.
TABLE 6. INVESTMENT PORTFOLIO
The following is a schedule of the carrying value of investment securities
available for sale and held to maturity:
DECEMBER 31
-----------------------------
2005 2004 2003
--------- -------- --------
Available for sale
U.S. Government and federal agencies......... $ 52,913 $ 51,279 $ 75,803
States and political subdivisions............ 95,435 84,632 76,656
Corporate.................................... 13,220 4,754 3,242
Mortgage-backed.............................. 21,838 21,365 14,131
--------- -------- --------
TOTAL..................................... $183,406 $162,030 $169,832
========= ======== ========
Held to maturity
Mortgage-backed.............................. $ -- $ 3 $ 9
States and political subdivisions............ -- 520 1,303
--------- -------- --------
TOTAL..................................... $ -- $ 523 $ 1,312
========= ======== ========
Excluding those holdings of the investment portfolio in U.S. Government and
federal agencies, there were no investments in securities of any one issuer that
exceeded 10% of shareholders' equity. The Corporation has a policy prohibiting
investments in securities that it deems are unsuitable due to their inherent
credit or market risks. Prohibited investments include stripped mortgage backed
securities, zero coupon bonds, nongovernment agency asset backed securities, and
structured notes.
54
The following is a schedule of maturities of each category of investment
securities (at carrying value) and their weighted average yield as of December
31, 2005:
TABLE 7. SCHEDULE OF MATURITIES OF INVESTMENT SECURITIES
AND WEIGHTED AVERAGE YIELDS
MATURING
-------------------------------------------------------------------
AFTER ONE YEAR
BUT AFTER FIVE YEARS
WITHIN FIVE BUT AFTER TEN
WITHIN ONE YEAR YEARS WITHIN TEN YEARS YEARS
--------------- ---------------- ---------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------- ----- -------- ----- ------- ----- ------ -----
Available for Sale
U.S. Government and federal
agencies.................. $24,268 3.22% $ 28,645 3.31% $ -- -- $ -- --
States and political
subdivisions.............. 16,535 4.78% 50,233 4.54% 26,902 4.92% 1,765 4.65%
Mortgage-backed.............. -- -- 21,838 3.98% -- -- -- --
Corporate.................... 10,695 5.30% 2,525 3.24% -- -- -- --
------- ---- -------- ---- ------- ---- ------ ----
TOTAL.......................... $51,498 4.16% $103,241 4.05% $26,902 4.92% $1,765 4.65%
======= ==== ======== ==== ======= ==== ====== ====
LOANS
The largest component of earning assets is loans. The proper management of
credit and market risk inherent in loans is critical to the financial well-being
of the Corporation. To control these risks, the Corporation has adopted strict
underwriting standards. The standards include prohibitions against lending
outside the Corporation's defined market area, lending limits to a single
borrower, and strict loan to collateral value limits. The Corporation also
monitors and limits loan concentrations extended to volatile industries. The
Corporation has no foreign loans and there were no concentrations greater than
10% of total loans that are not disclosed as a separate category in Table 8.
TABLE 8. LOAN PORTFOLIO
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
Commercial...................... $179,541 $146,152 $129,392 $126,591 $115,457
Agricultural.................... 49,424 49,179 52,044 54,788 50,524
Residential real estate
mortgage...................... 226,251 227,421 199,455 170,452 181,946
Installment..................... 28,026 30,143 40,969 39,029 41,785
-------- -------- -------- -------- --------
$483,242 $452,895 $421,860 $390,860 $389,712
======== ======== ======== ======== ========
Total loans increased $30,347 in 2005. The increase was primarily in
commercial loans due to a change in the focus related to lending products. As of
December 31, 2005, as a percentage of total loans, commercial loans were 37.2%,
agricultural were 10.2%, residential real estate mortgages were 46.8%, and
installments were 5.8%.
DEPOSITS
Total deposits increased $28,602 and were $592,478 at year end 2005, a 5.1%
increase from 2004. Average deposits increased 1.6% in 2005 and 0.6% in 2004.
During 2005, average noninterest bearing deposits increased 7.9%, interest
bearing demand deposits decreased 2.6%, savings deposits decreased 0.4%, and
time deposits increased 3.0%. Time deposits over $100 as a percentage of total
deposits equaled 14.4% and 12.9% as of December 31, 2005 and 2004, respectively.
55
TABLE 9. AVERAGE DEPOSITS
2005 2004 2003
--------------- --------------- ---------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ---- -------- ---- -------- ----
Noninterest bearing demand deposits.. $ 69,610 $ 64,532 $ 61,651
Interest bearing demand deposits..... 103,684 0.97% 106,471 0.53% 113,206 0.93%
Savings deposits..................... 157,238 1.00 157,819 0.55 141,227 0.94
Time deposits........................ 245,559 3.58 238,323 3.34 247,516 3.73
-------- -------- --------
TOTAL.............................. $576,091 $567,145 $563,600
======== ======== ========
TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000
DECEMBER 31
-------------------------
2005 2004 2003
------- ------- -------
Maturity
Within 3 months................................ $17,197 $14,415 $18,068
Within 3 to 6 months........................... 12,914 12,762 11,475
Within 6 to 12 months.......................... 24,708 14,216 8,184
Over 12 months................................. 30,789 31,431 31,746
------- ------- -------
TOTAL....................................... $85,608 $72,824 $69,473
======= ======= =======
Within the banking industry there is agreement that competition from mutual
funds and annuities has had a significant impact on deposit growth. In response,
the Corporation's subsidiaries now offer mutual funds and annuities to its
customers. The Corporation's trust department also offers a variety of financial
products in addition to traditional estate services.
CAPITAL
The capital of the Corporation consists solely of common stock, capital
surplus, retained earnings, and accumulated other comprehensive income / (loss).
Total capital increased $8,308 in 2005. The Corporation offers dividend
reinvestment and employee and director stock purchase plans. Under the
provisions of these Plans, the Corporation issued 78,303 shares of common stock
generating $2,684 of capital during 2005, and 57,388 shares of common stock
generating $2,001 of capital in 2004. The Corporation also offers share based
payment awards through its equity compensation plan (See Note 16). Pursuant to
this plan, the Corporation generated $2,704 of capital in 2005. In October 2002
the Board of Directors authorized management to repurchase up to $2.0 million of
the Corporation's common stock. A total of 4,571 shares were repurchased in 2004
at an average price of $42 per share. There were no shares repurchased in 2005.
Accumulated other comprehensive income decreased $602 and consists of a $1,816
decrease in unrealized gain on available-for-sale investment securities reduced
by a gain of $1,214 related to the recognition of a reduction in the additional
minimum pension liability.
The Federal Reserve Board's current recommended minimum primary capital to
assets requirement is 6.0%. The Corporation's primary capital to average assets,
which consists of shareholders' equity plus the allowance for loan losses less
acquisition intangibles, was 12.12% at year end 2005. There are no commitments
for significant capital expenditures.
The Federal Reserve Board has established a minimum risk based capital
standard. Under this standard, a framework has been established that assigns
risk weights to each category of on and off-balance-sheet items to arrive at
risk adjusted total assets. Regulatory capital is divided by the risk adjusted
assets with the resulting ratio compared to the minimum standard to determine
whether a corporation has adequate capital. The minimum
56
standard is 8%, of which at least 4% must consist of equity capital net of
goodwill. The following table sets forth the percentages required under the Risk
Based Capital guidelines and the Corporation's values at December 31, 2005:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS:
IBT BANCORP
DECEMBER 31,
2005
----------------
REQUIRED ACTUAL
-------- ------
Equity Capital............................................ 4.00% 15.89%
Secondary Capital......................................... 4.00 1.25
---- -----
TOTAL CAPITAL............................................. 8.00% 17.14%
==== =====
IBT Bancorp's secondary capital includes only the allowance for loan
losses. The percentage for the secondary capital under the required column is
the maximum amount allowed from all sources.
The Federal Reserve also prescribes minimum capital requirements for the
Corporation's subsidiary Banks. At December 31, 2005, the Banks exceeded these
minimums. For further information regarding the Banks' capital requirements,
refer to Note 15 of the Notes to the accompanying Consolidated Financial
Statements, Regulatory Capital Matters.
LIQUIDITY
Liquidity management is designed to have adequate resources available to
meet depositor and borrower discretionary demands for funds. Liquidity is also
required to fund expanding operations, investment opportunities, and payment of
cash dividends. The primary sources of the Corporation's liquidity are cash and
cash equivalents and available-for-sale investment securities.
As of December 31, 2005 and 2004, cash and cash equivalents equaled 4.2%
and 3.1%, respectively, of total assets. Net cash provided from operations was
$18,452 in 2005 and $12,742 in 2004. Net cash provided by financing activities
equaled $49,215 in 2005 and $7,837 in 2004. The Corporation's investing
activities used cash amounting to $57,602 in 2005 and $31,037 in 2004. The
accumulated effect of the Corporation's operating, investing, and financing
activities on cash and cash equivalents was a $10,065 increase in 2005 and a
$10,458 decrease in 2004.
In addition to cash and cash equivalents, available-for-sale investment
securities are another source of liquidity. Securities available for sale
equaled $183,406 as of December 31, 2005 and $162,030 as of December 31, 2004.
In addition to these primary sources of liquidity, the Corporation has the
ability to borrow in the federal funds market and at both the Federal Reserve
Bank and the Federal Home Loan Bank. The Corporation's liquidity is considered
adequate by the management of the Corporation.
INTEREST RATE SENSITIVITY
Interest rate sensitivity management aims at achieving reasonable stability
in the net interest margin through periods of changing interest rates. Interest
rate sensitivity is determined by the amount of earning assets and interest
bearing liabilities repricing within a specific time period, and their relative
sensitivity to a change in interest rates. One tool used by management to
measure interest rate sensitivity is gap analysis. As shown in Table 11, the gap
analysis depicts the Corporation's position for specific time periods and the
cumulative gap as a percentage of total assets.
Investment securities and other investments are scheduled according to
their contractual maturity. Fixed rate loans are included in the appropriate
time frame based on their scheduled amortization. Variable rate loans are
included in the time frame of their earliest repricing. Of the $483,242 in total
loans, $90,387 are variable rate loans. Time deposit liabilities are scheduled
based on their contractual maturity except for variable rate time deposits in
the amount of $1,370 that are included in the 0 to 3 month time frame.
57
Savings, NOW accounts, and money market accounts have no contractual
maturity date and are believed to be predominantly noninterest rate sensitive by
management. These accounts have been classified in the gap table according to
their estimated withdrawal rates based upon management's analysis of deposit
runoff over the past five years. Management believes this runoff experience is
consistent with its expectation for the future. As of December 31, 2005, the
Corporation had $23,354 more assets than liabilities maturing within one year. A
positive gap position results when more assets, within a specified time frame,
mature or reprice than liabilities.
TABLE 11. INTEREST RATE SENSITIVITY
The following table shows the time periods and the amount of assets and
liabilities available for interest rate repricing as of December 31, 2005. For
purposes of this analysis, nonaccrual loans and the allowance for loan losses
are excluded.
0 TO 3 4 TO 12 1 TO 5 OVER 5
MONTHS MONTHS YEARS YEARS
-------- -------- -------- -------
Interest Sensitive Assets
Investment securities................. $ 3,124 $ 52,522 $ 94,921 $32,839
Loans................................. 120,733 68,566 262,154 30,414
-------- -------- -------- -------
TOTAL.............................. $ 23,857 $121,088 $357,075 $63,253
======== ======== ======== =======
Interest Sensitive Liabilities
Borrowed funds........................ $ 14,266 $ 3,000 $ 21,899 $13,000
Time deposits......................... 36,398 109,612 114,600 381
Savings............................... 10,404 12,517 130,476 --
Interest bearing demand............... 31,485 3,909 68,857 --
-------- -------- -------- -------
TOTAL.............................. $ 92,553 $129,038 $ 35,832 $ 3,381
======== ======== ======== =======
Cumulative gap (deficiency)............. $ 31,304 $ 23,354 $ 44,597 $94,469
Cumulative gap (deficiency as a % of
assets)............................... 4.22% 3.15% 6.01% 12.74%
TABLE 12. LOAN MATURITY AND INTEREST RATE SENSITIVITY
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 2005. Also provided are the amounts due after one
year, classified according to the sensitivity to changes in interest rates.
DUE IN
-----------------------------------
1 YEAR 1 TO 5 OVER 5
OR LESS YEARS YEARS TOTAL
------- -------- ------ --------
Commercial and agricultural............... $68,031 $154,661 $6,273 $228,965
======= ======== ====== ========
Interest Sensitivity
Loans maturing after one year that have:
Fixed interest rates................. $130,225 $4,918
Variable interest rates.............. 24,436 1,355
-------- ------
TOTAL.............................. $154,661 $6,273
======== ======
58
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a
lesser extent, liquidity risk. The Corporation has no foreign exchange risk,
holds limited loans outstanding to oil and gas concerns, holds no trading
account assets, nor does it utilize interest rate swaps or derivatives, except
for interest rate locks, in the management of its interest rate risk. Any
changes in foreign exchange rates or commodity prices would have an
insignificant impact, if any, on the Corporation's interest income and cash
flows. The Corporation does have a significant amount of loans extended to
borrowers in agricultural production. Their cash flow and their ability to
service their debt is largely dependent on the commodity prices for corn,
soybeans, sugar beets, milk, beef, and a variety of dry beans. The Corporation
mitigates these risks by using conservative price and production yields when
calculating a borrower's available cash flow to service their debt.
Interest rate risk ("IRR") is the exposure of the Corporation's net
interest income, its primary source of income, to changes in interest rates. IRR
results from the difference in the maturity or repricing frequency of a
financial institution's interest earning assets and its interest bearing
liabilities. IRR is the fundamental method in which financial institutions earn
income and create shareholder value. Excessive exposure to IRR could pose a
significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has
adopted a policy requiring the Board of Directors and senior management to
effectively manage the various risks that can have a material impact on the
safety and soundness of the Corporation. The risks include credit, interest
rate, liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
The Corporation uses several techniques to manage IRR. The first method is
gap analysis. Gap analysis measures the cash flows and/or the earliest repricing
of the Corporation's interest bearing assets and liabilities. This analysis is
useful for measuring trends in the repricing characteristics of the balance
sheet. Significant assumptions are required in this process because of the
imbedded repricing options contained in assets and liabilities. A substantial
portion of the Corporation's assets are invested in loans and mortgage backed
securities. These assets have imbedded options that allow the borrower to repay
the balance prior to maturity without penalty. The amount of prepayments is
dependent upon many factors, including the interest rate of a given loan in
comparison to the current interest rate for residential mortgages, the level of
sales of used homes, and the overall availability of credit in the market place.
Generally, a decrease in interest rates will result in an increase in the
Corporation's cash flows from these assets. Investment securities, other than
those that are callable, do not have any significant imbedded options. Savings
and checking deposits may generally be withdrawn on request without prior
notice. The timing of cash flow from these deposits is estimated based on
historical experience. Time deposits have penalties that discourage early
withdrawals.
The second technique used in the management of IRR is to combine the
projected cash flows and repricing characteristics generated by the gap analysis
and the interest rates associated with those cash flows to project future
interest income. By changing the amount and timing of the cash flows and the
repricing interest rates of those cash flows, the Corporation can project the
effect of changing interest rates on its interest income. Based on the
projections prepared for the year ended December 31, 2005 the Corporation's net
interest income would increase during a period of increasing long term interest
rates.
59
The following tables provide information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of December 31,
2005 and 2004. The Corporation has no interest rate swaps, futures contracts, or
other derivative financial options. The principal amounts of assets and time
deposits maturing were calculated based on the contractual maturity dates.
Savings and NOW accounts are based on management's estimate of their future cash
flows.
QUANTITATIVE DISCLOSURES OF MARKET RISK
DECEMBER 31
------------------------------------------------------------------ FAIR VALUE
2006 2007 2008 2009 2010 THEREAFTER TOTAL 12/31/05
-------- ------- ------- ------- ------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
Rate sensitive assets
Other interest
bearing assets.... $ 3,251 $ -- $ -- $ -- $ -- $ -- $ 3,251 $ 3,251
Average interest
rates........... 2.49% -- -- -- -- -- 2.49%
Fixed interest rate
securities........ $ 55,646 $41,790 $28,358 $14,484 $10,289 $32,839 $183,406 $183,406
Average interest
rates........... 4.02% 3.39% 3.53% 3.91% 3.83% 3.52% 3.60%
Fixed interest rate
loans............. $100,287 $72,422 $81,034 $52,992 $55,706 $30,414 $392,855 $396,277
Average interest
rates........... 6.24% 6.09% 6.22% 5.96% 6.41% 6.20% 6.19%
Variable interest
rate loans........ $ 48,475 $16,265 $16,143 $ 5,309 $ 4,121 $ 74 $ 90,387 $ 90,387
Average interest
rates........... 8.46% 7.95% 7.76% 7.74% 7.87% 6.42% 8.19%
Rate sensitive
liabilities
Borrowed funds....... $ 17,266 $ 5,000 $ 5,113 $ 3,500 $ 8,286 $13,000 $ 52,165 $ 52,216
Average interest
rates........... 4.02% 3.72% 4.77% 3.66% 5.11% 4.84% 4.42%
Savings and NOW
accounts.......... $ 58,315 $84,868 $83,657 $23,708 $ 7,100 $ -- $257,648 $257,648
Average interest
rates........... 2.97% 1.05% 0.88% 0.74% 0.93% -- 1.36%
Fixed interest rate
time deposits..... $144,640 $48,977 $27,856 $17,451 $20,316 $ 381 $259,621 $259,245
Average interest
rates........... 3.71% 3.99% 3.82% 3.76% 4.23% 5.29% 3.82%
Variable interest
rate time
deposits.......... $ 972 $ 391 $ 7 $ -- $ -- $ -- $ 1,370 $ 1,370
Average interest
rates........... 3.51% 3.54% 3.55% -- -- -- 3.52%
DECEMBER 31
------------------------------------------------------------------ FAIR VALUE
2005 2006 2007 2008 2009 THEREAFTER TOTAL 12/31/04
-------- ------- ------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest
bearing assets.... $ 199 $ -- $ -- $ -- $ -- $ -- $ 199 $ 199
Average interest
rates........... 3.79% -- -- -- -- -- 3.79%
Fixed interest rate
securities........ $ 15,039 $26,096 $32,359 $24,812 $ 8,024 $56,223 $162,553 $162,567
Average interest
rates........... 3.87% 3.17% 2.99% 3.25% 3.81% 3.72% 3.43%
Fixed interest rate
loans............. $ 67,089 $53,281 $69,581 $58,933 $68,047 $41,601 $358,532 $326,590
Average interest
rates........... 6.44% 6.31% 6.08% 6.10% 5.81% 5.25% 6.04%
Variable interest
rate loans........ $ 64,199 $ 4,434 $ 8,054 $ 8,481 $ 6,320 $ 2,875 $ 94,363 $ 94,363
Average interest
rates........... 6.22% 6.28% 6.30% 6.01% 6.32% 8.65% 6.29%
Rate sensitive
liabilities
Borrowed funds....... $ 3,504 $10,500 $ 4,166 $ -- $ 3,500 $ 9,312 $ 30,982 $ 26,466
Average interest
rates........... 2.19% 3.86% 3.49% 0.00% 3.66% 5.16% 3.99%
Savings and NOW
accounts.......... $ 63,549 $56,872 $73,117 $36,878 $28,915 $ 4,547 $263,878 $263,876
Average interest
rates........... 1.09% 0.56% 0.50% 0.35% 0.76% 0.55% 0.66%
Fixed interest rate
time deposits..... $118,333 $46,859 $34,415 $17,600 $12,805 $ 2,852 $232,864 $219,135
Average interest
rates........... 3.01% 3.87% 3.91% 3.43% 3.51% 4.11% 3.39%
Variable interest
rate time
deposits.......... $ 855 $ 543 $ -- $ -- $ -- $ -- $ 1,398 $ 1,398
Average interest
rates........... 2.02% 2.01% -- -- -- -- 2.02%
60
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission.
COMMON STOCK AND DIVIDEND INFORMATION
There is no established market for the Corporation's common stock or public
information with respect to its market price. There are occasional sales by
shareholders of which management of the Corporation is aware. From January 1,
2004 through December 31, 2005 there were, so far as management knows, 267 sales
of the Corporation's common stock. These sales involved 185,437 shares. The
prices were reported to management in only some of the transactions and
management cannot confirm the prices that were reported during this period. The
highest known price paid for the Corporation's stock was $40 per share in the
fourth quarter of 2005, and the lowest price was $36.36 per share in the first
quarter of 2004. The following is a summary of all known transfers since January
1, 2004. All of the information has been adjusted to reflect the 10% stock
dividend paid February 15, 2006.
SALE PRICE
NUMBER OF NUMBER OF --------------
PERIOD SALES SHARES LOW HIGH
------ --------- --------- ------ ------
2004
First Quarter........................... 13 6,651 $36.36 $38.18
Second Quarter.......................... 21 36,740 38.18 38.18
Third Quarter........................... 36 8,402 38.18 38.18
Fourth Quarter.......................... 9 3,951 38.18 38.18
2005
First Quarter........................... 34 19,429 $38.18 $38.18
Second Quarter.......................... 53 59,717 38.18 38.18
Third Quarter........................... 60 24,654 38.18 38.18
Fourth Quarter.......................... 41 25,893 38.18 40.00
61
The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10% stock dividend paid on February 15, 2006.
PER SHARE
------------
2005 2004
----- -----
First Quarter.............................................. $0.10 $0.10
Second Quarter............................................. 0.10 0.10
Third Quarter.............................................. 0.10 0.10
Fourth Quarter............................................. 0.30 0.27
----- -----
TOTAL.................................................... $0.60 $0.57
===== =====
IBT Bancorp's authorized common stock consists of 10,000,000 shares, of
which 4,974,715 shares are issued and outstanding as of December 31, 2005. As of
year end 2005, there were 2,238 shareholders of record.
In October 2002, the Corporation's Board of Directors authorized the
repurchase of up to $2 million of the Corporation's common stock. This
authorization does not have an expiration date. Based on repurchases since
October 2002, the Corporation is currently able to repurchase up to $1.7 million
of its common stock or 42,500 shares under the repurchase authorization. The
following table provides information as of December 31, 2005, with respect to
this plan:
SHARES REPURCHASED
--------------------- MAXIMUM SHARES THAT
AVERAGE PRICE MAY BE PURCHASED UNDER
NUMBER PER SHARE THE PLANS OR PROGRAMS
------ ------------- ----------------------
(DOLLARS IN THOUSANDS)
Balance, September 30, 2005............ 42,500
October 1 - 31, 2005................. -- $-- --
November 1 - 30, 2005................ -- -- --
December 1 - 31, 2005................ -- -- --
--- ---- ------
BALANCE DECEMBER 31, 2005.............. -- $ -- 42,500
=== ==== ======
SUPERVISION AND REGULATION
IBT Bancorp is subject to supervision and regulation by the Federal Reserve
Board, under the Bank Holding Company Act of 1956, as amended. A bank holding
company and its subsidiaries are able to conduct only the business of commercial
banking and activities closely related or incidental to it.
Isabella Bank and Trust and Farmers State Bank are chartered by the State
of Michigan and are supervised and regulated by the Michigan Office of Financial
and Insurance Services, Division of Financial Institutions. The Banks are
members of the Federal Reserve System and their deposits are insured by the
Federal Deposit Insurance Corporation to the extent provided by law. IBT Title
is licensed and supervised by the State of Michigan.
IMPACT OF INFLATION
The majority of assets and liabilities of financial institutions are
monetary in nature. Generally, changes in interest rates have a more significant
impact on earnings of the Corporation than inflation. Although influenced by
inflation, changes in rates do not necessarily move in either the same magnitude
or direction as changes in the price of goods and services. Inflation does
impact the growth of total assets, creating a need to increase equity capital at
a higher rate to maintain an adequate equity to assets ratio, which in turn
reduces the amount of earnings available for cash dividends.
62
SHAREHOLDERS' INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 7:00 p.m., Tuesday,
April 18, 2006, Holiday Inn, 5665 E. Pickard Street, Mt. Pleasant, Michigan.
FINANCIAL INFORMATION AND FORM 10-K
Copies of the 2005 Annual Report, IBT Bancorp Form 10-K, and other financial
information not contained herein may be obtained, without charge, by writing to:
Debra Campbell
Secretary
IBT Bancorp
200 East Broadway
Mt. Pleasant, Michigan 48858
MISSION STATEMENT
The mission of IBT Bancorp shall be:
To create an operating environment that will provide shareholders with
sustained growth in their investment while maintaining our independence and
subsidiaries' autonomy.
EQUAL EMPLOYMENT OPPORTUNITY
The equal employment opportunity clauses in Section 202 of the Executive
Order 11246, as amended; 38 USC 2012, Vietnam Era Veterans Readjustment Act of
1974; Section 503 of the Rehabilitation Act of 1973, as amended; relative to
equal employment opportunity and implementing rules and regulations of the
Secretary of Labor are adhered to and supported by IBT Bancorp, and its
subsidiaries.
63
IBT BANCORP PROXY
200 EAST BROADWAY
MT. PLEASANT, MI 48858
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints David W. Hole, Ronald E. Schumacher, and Dale D.
Weburg as Proxies, each with the power to appoint his substitute, and hereby
authorizes them to represent and to vote as designated below, all the shares of
Common Stock of IBT Bancorp held of record by the undersigned on March 1, 2006
at the annual meeting of shareholders to be held April 18, 2006 or any
adjournments thereof.
ELECTION OF DIRECTORS:
FOR ALL NOMINEES LISTED BELOW [ ] WITHHOLD AUTHORITY TO VOTE [ ]
EXCEPT AS MARKED TO THE FOR ALL NOMINEES LISTED
CONTRARY BELOW
(INSTRUCTION: To withhold authority to vote for any individual nominee, circle
the nominee's name in the list below.)
Dennis P. Angner David J. Maness W. Joseph Manifold William J. Strickler
(continued and to be signed on other side)
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED TO ELECT ALL NOMINEES. The shares represented by this proxy will be voted
in the discretion of the proxies on any other matters which may come before the
meeting.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign full corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated:__________________________, 2006 ___________________________
Please mark, sign, date and return Signature
Proxy card promptly using the
enclosed envelope. ___________________________
Signature (if held jointly)