UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended June 30, 2007
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ____________ to ____________
Commission File Number: 0-18415
IBT Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Michigan 38-2830092
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway, Mt. Pleasant, MI 48858
(Address of principal executive offices) (Zip code)
(989) 772-9471
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated file, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
One).
Large accelerated filer [ ] Accelerated Filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock no par value, 6,338,368 as of July 13, 2007
1
IBT BANCORP, INC.
Index to Form 10-Q
Page
Numbers
-------
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3-13
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-28
Item 3 Quantitative and Qualitative Disclosures About Market Risk 29-30
Item 4 Controls and Procedures 31
PART II OTHER INFORMATION
Item 1A Risk Factors 32
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 32
Item 4 Submission of Matters to a Vote of Securities Holders 32
Item 6 Exhibits 33
Signatures 34
Exhibit 31(a) 35
Exhibit 31(b) 36
Exhibit 32 37
2
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
June 30 December 31
2007 2006
-------- -----------
ASSETS
Cash and demand deposits due from banks $ 23,602 $ 31,359
Federal funds sold 6,240 --
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 29,842 31,359
Trading securities 41,777 --
Securities available for sale (amortized
cost of $165,987 in 2007 and $214,600 in 2006) 164,201 213,450
Mortgage loans available for sale 850 2,734
Loans
Agricultural 48,959 47,302
Commercial 227,674 212,701
Installment 30,485 30,389
Residential real estate mortgage 300,101 300,650
-------- --------
TOTAL LOANS 607,219 591,042
Less allowance for loan losses 7,744 7,605
-------- --------
NET LOANS 599,475 583,437
Premises and equipment 21,392 20,754
Corporate-owned life insurance policies 12,971 12,763
Accrued interest receivable 5,443 5,765
Acquisition intangibles and goodwill, net 27,146 27,288
Other assets 15,168 12,577
-------- --------
TOTAL ASSETS $918,265 $910,127
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 82,919 $ 83,902
NOW accounts 100,972 111,406
Certificates of deposit and other savings 408,353 388,176
Certificates of deposit over $100,000 131,913 142,356
-------- --------
TOTAL DEPOSITS 724,157 725,840
Other borrowed funds ($7,405 carried at fair value in 2007) 67,376 58,303
Escrow funds payable 3,545 2,416
Accrued interest and other liabilities 4,397 7,819
-------- --------
TOTAL LIABILITIES 799,475 794,378
Shareholders' Equity
Common stock -- no par value 10,000,000 shares
authorized; outstanding--
6,338,368 in 2007 (6,335,861 in 2006) 115,249 114,785
Retained earnings 5,449 4,451
Accumulated other comprehensive loss (1,908) (3,487)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 118,790 115,749
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $918,265 $910,127
======== ========
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(Dollars in thousands except per share data)
Six Months Ended
June 30
-----------------------
2007 2006
---------- ----------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year 6,335,861 4,974,715
Common stock dividends -- 497,299
Issuance of common stock 25,241 19,238
Common stock repurchased (22,734) --
---------- ----------
BALANCE END OF PERIOD 6,338,368 5,491,252
========== ==========
COMMON STOCK
Balance at beginning of year $ 114,785 $ 72,296
Common stock dividends -- 20,887
Transfer -- (12,000)
Issuance of common stock 990 1,093
Share-based payment awards under equity compensation plan 452 231
Common stock repurchased (978) --
---------- ----------
BALANCE END OF PERIOD 115,249 82,507
RETAINED EARNINGS
Balance at beginning of year 4,451 10,112
Net income 3,566 3,008
Common stock dividends -- (20,887)
Transfer -- 12,000
Adjustment to initially apply FASB Statement No. 159,
net of tax (1,050) --
Cash dividends ($0.24 per share in 2007 and $0.22 per share
in 2006) (1,518) (1,213)
---------- ----------
BALANCE END OF PERIOD 5,449 3,020
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (3,487) (1,506)
Adjustment to initially apply fair value provisions of FASB
Statement No. 159, net of tax 897 --
Other comprehensive income (loss) 682 (895)
---------- ----------
BALANCE END OF PERIOD (1,908) (2,401)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY END OF PERIOD $ 118,790 $ 83,126
========== ==========
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands except per share data)
Three Months Six Months Ended
Ended June 30 June 30
----------------- -----------------
2007 2006 2007 2006
------- ------- ------- -------
INTEREST INCOME
Loans, including fees $10,875 $ 8,693 $21,398 $16,860
Investment securities
Taxable 897 1,242 1,642 2,320
Nontaxable 919 676 1,705 1,325
Trading account securities 720 -- 1,420 --
Federal funds sold and other 128 64 266 138
------- ------- ------- -------
TOTAL INTEREST INCOME 13,539 10,675 26,431 20,643
INTEREST EXPENSE
Deposits 5,661 3,893 11,247 7,449
Borrowings 893 633 1,556 1,139
------- ------- ------- -------
TOTAL INTEREST EXPENSE 6,554 4,526 12,803 8,588
------- ------- ------- -------
NET INTEREST INCOME 6,985 6,149 13,628 12,055
Provision for loan losses 224 216 350 383
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 6,761 5,933 13,278 11,672
NONINTEREST INCOME
Service charges and fees 1,217 1,159 2,349 2,189
Title insurance revenue 653 673 1,127 1,147
Trust fees 228 217 446 431
Gain on sale of mortgage loans 46 54 99 111
Net (loss) gain on trading activities (201) -- 26 --
Other 284 233 591 459
------- ------- ------- -------
TOTAL NONINTEREST INCOME 2,227 2,336 4,638 4,337
NONINTEREST EXPENSES
Compensation and benefits 3,920 3,484 7,817 7,013
Occupancy 431 412 889 868
Furniture and equipment 847 723 1,663 1,436
Other 1,635 1,350 3,268 2,960
------- ------- ------- -------
TOTAL NONINTEREST EXPENSES 6,833 5,969 13,637 12,277
INCOME BEFORE FEDERAL INCOME
TAXES 2,155 2,300 4,279 3,732
Federal income taxes 399 506 713 724
------- ------- ------- -------
NET INCOME $ 1,756 $ 1,794 $ 3,566 $ 3,008
======= ======= ======= =======
EARNINGS PER SHARE
Basic $ 0.28 $ 0.33 $ 0.56 $ 0.55
======= ======= ======= =======
Diluted $ 0.27 $ 0.32 $ 0.55 $ 0.53
======= ======= ======= =======
CASH DIVIDENDS PER BASIC SHARE $ 0.12 $ 0.11 $ 0.24 $ 0.22
======= ======= ======= =======
See notes to condensed consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)
Three Months Six months Ended
Ended June 30 June 30
-------------------------------------
2007 2006 2007 2006
------- ------- ------- -------
NET INCOME $ 1,756 $ 1,794 $ 3,566 $ 3,008
------- ------- ------- -------
Unrealized losses on available-for-
sale securities:
Unrealized holding losses arising
during period (2,222) (1,076) (2,025) (1,459)
Reclassification adjustment for net
realized losses included in net
income -- 103 30 103
------- ------- ------- -------
Net unrealized losses (2,222) (973) (1,995) (1,356)
Tax effect 754 331 678 461
------- ------- ------- -------
Unrealized losses, net of tax (1,468) (642) (1,317) (895)
------- ------- ------- -------
Change in unrecognized actuarial loss
of defined benefit pension plan,
principally due to curtailment 3,029 -- 3,029 --
Tax effect (1,030) -- (1,030) --
------- ------- ------- -------
Change in unrecognized
actuarial loss of defined
benefit pension plan,
principally due to
curtailment, net of tax 1,999 -- 1,999 --
------- ------- ------- -------
Adjustment to initially apply FASB
Statement No. 159 -- -- 1,359 --
Tax effect -- -- (462) --
------- ------- ------- -------
FASB Statement No. 159 adjustment,
net of tax -- -- 897 --
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS),
NET OF TAX 531 (642) 1,579 (895)
------- ------- ------- -------
COMPREHENSIVE INCOME $ 2,287 $ 1,152 $ 5,145 $ 2,113
======= ======= ======= =======
See notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six months ended
June 30
-------------------
2007 2006
-------- --------
OPERATING ACTIVITIES
Net income $ 3,566 $ 3,008
Reconciliation of net income to cash provided by operations:
Provision for loan losses 350 383
Depreciation 977 920
Net amortization of investment securities 77 404
Realized loss on sale of investment securities 30 103
Amortization and impairment of mortgage servicing rights 105 81
Earnings on corporate owned life insurance policies (208) (204)
Amortization of acquisition intangibles 142 47
Deferred income tax benefit 23 --
Share-based payment awards 452 231
Changes in operating assets and liabilities which provided
(used) cash:
Trading securities (including unrealized depreciation of
$57 in 2007) 36,062 --
Loans held for sale 1,884 (881)
Accrued interest receivable 322 162
Other assets (3,236) (422)
Escrow funds payable 1,129 (5,282)
Accrued interest and other liabilities (228) (572)
-------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 41,447 (2,022)
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 34,666 28,654
Purchases (65,358) (43,648)
Net increase in loans (16,388) (23,297)
Purchases of premises and equipment (1,615) (1,225)
Purchase of corporate owned life insurance policies -- (499)
Acquisition of title office -- (400)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (48,695) (40,415)
FINANCING ACTIVITIES
Net (decrease) increase in noninterest bearing deposits (983) 609
Net (decrease) increase in interest bearing deposits (700) 22,670
Net increase in other borrowed funds 8,920 18,846
Cash dividends paid on common stock (1,518) (1,213)
Proceeds from the issuance of common stock 990 868
Common stock repurchased (978) --
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 5,731 41,780
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (1,517) (657)
Cash and cash equivalents at beginning of year 31,359 30,825
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 29,842 $ 30,168
======== ========
See notes to condensed consolidated financial statements.
7
IBT BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals with the exception of the fair value election
described in Note 5) considered necessary for a fair presentation have been
included. Operating results for the three and six month periods ended June 30,
2007 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2007. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Corporation's annual report for the year ended December 31, 2006.
All amounts other than share and per share amounts have been rounded to the
nearest thousand ($000) in this report.
Effective October 3, 2006, FSB Bank, a subsidiary of the Corporation, acquired
Farwell State Savings Bank. The consolidated financial statements include the
results of operations of Farwell State Savings Bank from that time. Refer to
Management's Discussion and Analysis for further consideration of the impact of
this transaction on the consolidated financial statements.
NOTE 2 - COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustments to income that would result from the assumed issuance.
Potential common shares that may be issued by the Corporation relate solely to
outstanding shares in the Corporation's Deferred Director fee plan.
Earnings per common share have been computed based on the following:
Three Months Ended Six Months Ended
June 30 June 30
--------------------- ---------------------
2007 2006 2007 2006
--------- --------- --------- ---------
Average number of common shares outstanding
for basic calculation* 6,334,752 5,489,968 6,336,898 5,487,677
Potential effect of shares in the Deferred
Director fee plan* 179,067 164,398 178,329 161,390
--------- --------- --------- ---------
Average number of common shares outstanding
used to calculate diluted earnings per
common share 6,513,819 5,654,366 6,515,227 5,649,067
========= ========= ========= =========
* As adjusted for the 10% stock dividend paid February 15, 2006
8
NOTE 3 - OPERATING SEGMENTS
The Corporation's reportable segments are based on legal entities that account
for at least 10% of net operating results. The accounting policies are the same
as those discussed in Note 1 to the Consolidated Financial Statements included
in the Corporation's annual report for the year ended December 31, 2006 with the
exception of those new pronouncements adopted during 2007 (see Notes 5 and 6).
The Corporation evaluates performance based principally on net income and asset
quality of the respective segments. In April 2007, the individual bank charters
of Isabella Bank and Trust and FSB Bank were consolidated into one bank charter
as a part of the Corporation's strategy to increase efficiency. Retail banking
operations now represent over 90% of the Corporation's total operating results.
As such, no segment reporting is presented.
NOTE 4 - DEFINED BENEFIT PENSION PLAN
The Corporation has a defined benefit pension plan covering substantially all of
its employees. Benefits are based on years of service and the employees' five
highest consecutive years of compensation out of the last ten years of service.
The funding policy is to contribute annually the maximum amount that can be
deducted for federal income tax purposes. Contributions are intended to provide
not only for benefits attributed to services to date but also for those expected
to be earned in the future.
In December 2006, the Board of Directors voted to curtail the defined benefit
plan effective March 1, 2007. The effect of the curtailment is to freeze the
current participant's accrued benefits as of March 1, 2007 and to limit
participation in the plan only to eligible employees as of December 31, 2006.
Subsequent to the decision to curtail the defined benefit plan, the Corporation
elected to increase its level of contributions to the Corporation's 401(k) plan
effective January 1, 2007.
The sum of the effects resulting from the plan curtailment was a loss of $37 for
the six months ended June 30, 2007, determined as follows:
Before Effect of After
Curtailment Curtailment Curtailment
----------- ----------- -----------
Accumulated benefit obligation $ (8,197) $ -- $(8,197)
Effect of future salary increases (2,956) (2,956) --
-------- ------- -------
Projected benefit obligation (11,153) (2,956) (8,197)
Plan assets at fair value 9,244 -- 9,244
-------- ------- -------
Funded status (1,909) (2,956) 1,047
Items not yet recognized in earnings:
Unrecognized prior service cost 37 37 --
Unrecognized net loss 4,061 2,956 1,105
-------- ------- -------
Prepaid pension cost (net amount
recognized) $ 2,189 $ 37 $ 2,152
======== ======= =======
On December 31, 2006 the Corporation adopted Statement of Financial Accounting
Standards (SFAS) No. 158, "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans" (SFAS No. 158). SFAS No. 158 required the
Corporation to recognize on a prospective basis the funded status of the defined
benefit pension plan on the Corporation's consolidated balance sheet and
recognize as a component of other comprehensive income, net of tax, actuarial
gains or losses and prior service costs that arise during each reporting period
but are not included as components of net periodic benefit cost.
9
The components of net periodic benefit cost for the three and six month periods
ended June 30 are as follows:
Pension Benefits
-----------------------------
Three months Six months
ended June 30 ended June 30
------------- -------------
2007 2006 2007 2006
----- ----- ----- -----
NET PERIODIC BENEFIT COST
Service cost on benefits earned for services
rendered during the period $ 27 $ 159 $ 55 $ 319
Interest cost on projected benefit obligation 131 152 253 304
Expected return on plan assets (159) (139) (318) (278)
Amortization of unrecognized prior service cost 2 5 2 9
Amortization of unrecognized actuarial net loss 14 58 22 116
----- ----- ----- -----
NET PERIODIC BENEFIT COST 15 235 14 470
Loss on plan curtailment (3) -- 37 --
----- ----- ----- -----
TOTAL PERIODIC BENEFIT COST $ 12 $ 235 $ 51 $ 470
===== ===== ===== =====
The Corporation contributed $350 and $1,128 to the pension plan during the six
month periods ended June 30, 2007 and 2006, respectively.
NOTE 5 - FINANCIAL INSTRUMENTS RECORDED AT FAIR VALUE
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159
expands the use of fair value accounting but does not affect existing standards
which require assets or liabilities to be carried at fair value. Under SFAS No.
159, a company may elect to measure many financial instruments and certain other
assets and liabilities at fair value. The fair value measurement option is not
allowable for deposit or withdrawable on demand liabilities. If the use of fair
value is elected, any upfront costs and fees related to the item must be
recognized in earnings and cannot be deferred, e.g., debt issue costs. The fair
value election is irrevocable and is generally made on an
instrument-by-instrument basis, even if an entity has similar instruments that
it elects not to measure based on fair value. At the adoption date, unrealized
gains and losses on existing items for which fair value has been elected are
reported as a cumulative adjustment to beginning retained earnings as of January
1, 2007. Subsequent to the adoption of SFAS No. 159, changes in fair value are
recognized in earnings. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007 and is required to be adopted by IBT Bancorp in the
first quarter of fiscal 2008. IBT Bancorp elected to early adopt SFAS No. 159
effective January 1, 2007, the impact of which is detailed in the table below.
For further discussion on the financial statement impact of adopting this
standard, see Management's Discussion and Analysis in Item 2 of this report and
the information presented.
As shown in the following table, the Corporation elected to transfer $77,839 of
its $213,450 available for sale securities to trading status to facilitate more
active trading of these securities. In determining which available for sale
securities to transfer, the Corporation considered interest rates, duration,
marketability, and balance sheet management strategies. The securities
transferred included US Government Agencies, variable rate mortgage backed
securities, taxable municipal bonds, and a limited number of tax exempt bonds.
During the second quarter of 2007, the Corporation sold $34,290 of trading
securities, purchased $3,677, and repositioned its funding position from a net
fed funds purchased position of $6,675 to a fed funds sold position of $6,240 at
June 30, 2007. During the remainder of 2007, the Corporation plans to reduce its
overall trading securities position to approximately 2.0% tp 3.0% of total
assets. Management believes this level to be the optimum amount needed to
provide liquidity and interest margin protection.
The Corporation also elected to transfer $7,526 of long term, relatively high
interest rate, Federal Home Loan Bank advances to trading status upon the
adoption of SFAS No. 159 to provide a hedge against significant movement in
interest rates. During the second quarter there were no changes in trading
borrowings.
10
Balance Sheet Net Gain / Balance Sheet
1/1/2007 Prior to (Loss) 1/1/2007 After
Adoption Upon Adoption Adoption of FVO
----------------- ------------- ---------------
Investment securities $79,198 $(1,359) $77,839
FHLB borrowings included in other borrowed funds (7,256) (232) (7,488)
-------
Pretax cumulative effect of adoption
of the fair value option (1,591)
Increase in deferred tax asset 541
-------
Cumulative effect of adoption of the
fair value option (charged as a reduction to
retained earnings) $(1,050)
=======
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value to be
applied to GAAP guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007. As the Corporation has elected early adoption of SFAS No. 159, it has
also early adopted SFAS No. 157, as required by SFAS No. 159.
Fair value is the price that would be received to sell an asset or transfer a
liability in an orderly transaction between market participants at the
measurement date. To increase consistency and comparability in fair value
measurements and related disclosures, the fair value hierarchy prioritizes the
inputs to valuation techniques used to measure fair value into three broad
levels. The fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). In some cases, the inputs
used to measure fair value might fall in different levels of the fair value
hierarchy. The level in the fair value hierarchy within which the fair value
measurement in its entirety falls shall be determined based on the lowest level
input that is significant to the fair value measurement in its entirety.
Level 1 instruments are those assets for which the identical item is traded on
an active exchange, such as publicly-traded instruments. The majority of the
fair value amounts included in current period earnings resulted from Level 2
fair value methodologies; that is, the Corporation is able to value the assets
and liabilities based on observable market data for similar instruments.
For further discussion on the financial statement impact of adopting these
standards, see Management's Discussion and Analysis in Item 2 of this report.
Fair Value Measurements
at June 30, 2007 Using
-------------------------
Quoted
Prices in
Active Significant
Markets for Other
Fair Value Identical Observable
Measurements Assets Inputs
Description 6/30/2007 (Level 1) (Level 2)
----------- ------------ ----------- ----------
Recurring Items
Trading securities $ 41,777 $2,985 $ 38,792
Investment securities
available for sale 164,201 3,977 160,224
Mortgage loans
available for sale 850 850 --
Other borrowed funds 7,405 -- 7,405
Nonrecuring Items
Mortgage servicing rights 2,191 -- 2,191
Other real estate owned 633 -- 633
11
Changes in Fair Value for the 3-month Changes in Fair Value for the 6-month
Period Ended June 30, 2007 for Items Period Ended June 30, 2007 for Items
Measured at Fair Value Pursuant to Measured at Fair Value Pursuant to
Election of the Fair Value Option Election of the Fair Value Option
------------------------------------- --------------------------------------
Total Changes Total Changes
Other in Fair Values Trading Other in Fair Values
Trading Gains Included in Gains Gains Included in
Gains and and Current Period and and Current Period
Description (Losses) (Losses) Earnings (Losses) (Losses) Earnings
----------- --------- -------- -------------- --------- -------- ---------------
RECURRING ITEMS
Trading securities $(282) $-- $(282) $(57) $ -- $(57)
Other borrowed funds 81 -- 81 83 -- 83
NONRECURING ITEMS
Mortgage servicing rights -- 1 1 -- -- --
Other real estate owned -- -- -- -- (26) (26)
During the three month period ended March 31, 2007, in accordance with the
provisions of SFAS 156, mortgage servicing rights with a carrying amount of
$2,187 were written down to their fair value of $2,186, resulting in an
impairment charge of $1, while during the three month period ended June 30,
2007, mortgage servicing rights with a carrying amount of $2,190 were written up
to their fair value of $2,191, resulting in a decrease in the impairment of $1.
Such adjustments were included in earnings for the six month period ended June
30, 2007.
During the three month period ended March 31, 2007, in accordance with the
provisions of SFAS 144, other real estate owned with a carrying amount of $643
was written down to its fair value of $617, resulting in an impairment charge of
$26, which was included in earnings for the six month period ended June 30,
2007.
NOTE 6 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued Financial
Accounting Standards Interpretation No. 48 ("FIN 48"), "Accounting for
Uncertainty in Income Taxes". FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with FASB Statement No. 109, "Accounting for Income Taxes". FIN 48 prescribes a
recognition threshold and measurement attributable for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. On January 1, 2007, the Corporation adopted FIN 48. The adoption of
this standard did not impact the Corporation's consolidated financial
statements.
In June 2006, the Emerging Issues Task Force ("EITF") reached a tentative
conclusion reflected in the draft abstract for EITF Issue No. 06-5, "Accounting
for Purchases of Life Insurance-Determining the Amount That Could Be Realized in
Accordance with FASB Technical Bulletin No. 85-4." The Task Force's tentative
conclusion states that a policyholder should consider certain additional amounts
included in the contractual terms of the policy in determining the amount that
could be realized under the insurance contract. This issue is effective for
fiscal years beginning after December 15, 2006. The provisions of EITF 06-5 did
not have an impact on the Corporation's consolidated financial statements.
In February 2006 the FASB issued SFAS No. 155 " Accounting for Certain Hybrid
Instruments," which allows financial instruments that have embedded derivatives
to be accounted for as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole instrument on a
fair value basis. The issuance of Statement 155 provides the following: 1.
Clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement 133; 2. Establishes a requirement to evaluate
interests in securitized financial assets to identify interests that are
freestanding derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation; 3. Clarifies that concentrations
of credit risk in the form of subordination are not embedded derivatives; and 4.
Amends Statement 140 to eliminate the prohibition on a qualifying special
purpose entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial instrument. SFAS 155
is effective for all financial instruments acquired or issued after the
beginning of the first fiscal year beginning after September 15, 2006. The
Corporation adopted SFAS No.155 on January 1, 2007 and it did not have a
material impact on the Corporation's consolidated financial statements.
In March 2006 the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets," which affects the accounting for servicing rights, which
includes mortgage servicing rights and those associated with other types of
financial assets transferred in
12
securitizations such as auto loans, student loans, credit cards, commercial real
estate and equipment financing. Specifically, Statement No. 156 requires that
all separately recognized servicing rights be initially measured at fair value,
if practicable. For subsequent accounting for servicing assets and liabilities,
entities would choose either to amortize and recognize over a period of
estimated net servicing income or net servicing loss (currently required under
Statement 140) or remeasure at fair value at each subsequent reporting date. The
choice to measure at fair value would make it easier to account for hedges of
servicing rights, which currently are difficult to apply under Statement No.
133. Statement No. 156 is effective for all servicing assets or liabilities
acquired or assumed after the beginning of the first fiscal year beginning after
September 15, 2006. In addition, an entity may elect to apply fair value
measurement to existing servicing rights upon adoption. The Corporation adopted
SFAS No.156 on January 1, 2007 and it did not have a material impact on the
Corporation's consolidated financial statements.
In July of 2006, the Emerging Issues Task Force ("EITF") of FASB issued a draft
abstract for EITF Issue No. 06-4, "Accounting for Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements." The EITF reached a consensus that for an endorsement split-dollar
life insurance arrangement within the scope of this Issue, an employer should
recognize a liability for future benefits. IBT Bancorp has purchased
corporation-owned life insurance on certain of its employees. The cash surrender
value of these policies is carried as an asset on the consolidated balance
sheets in accrued interest and other assets. The carrying value was $12,971 at
June 30, 2007. These life insurance policies are generally subject to
endorsement split-dollar life insurance arrangements. These arrangements were
designed to provide a pre-and postretirement benefit for senior officers of the
Corporation. The Corporation is required to apply EITF Issue No. 06-4 beginning
January 1, 2008, and is currently evaluating the effect the implementation of
EITF Issue No. 06-4 will have on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157 "Fair Value Measurements" (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value to be
applied to GAAP guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007 unless SFAS No. 159 is adopted, in which case SFAS No. 157 would need
to be adopted concurrently. The results of the adoption of this standard are
disclosed in Note 5.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" which provides entities with an
option to report selected financial assets and liabilities at fair value, with
the objective to reduce both the complexity in accounting for financial
instruments and the volatility in earnings caused by measuring related assets
and liabilities differently. SFAS No. 159 permits fair value to be used for both
the initial and subsequent measurements on a contract-by-contract election, with
changes in fair value to be recognized in earnings as those changes occur. SFAS
No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale
and trading securities. This statement is effective for fiscal years beginning
after November 15, 2007, with an option to early adopt effective January 1,
2007. After review of the standard, the Corporation has early adopted the
standard. The impact of the adoption is presented in Note 5.
In September 2006, the Securities and Exchange Commission (SEC) released Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108), which is effective for fiscal years ending on or after
November 15, 2006. SAB 108 provides guidance on how the effects of prior-year
uncorrected financial statement misstatements should be considered in
quantifying a current year misstatement. SAB 108 requires public companies to
quantify misstatements using both an income statement (rollover) and balance
sheet (iron curtain) approach and evaluate whether either approach results in a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material. If prior year errors that had been previously
considered immaterial now are considered material based on either approach, no
restatement is required so long as management properly applied its previous
approach and all relevant facts and circumstances were considered. Adjustments
considered immaterial in prior years under the method previously used, but now
considered material under the dual approach required by SAB 108, are to be
recorded upon initial adoption of SAB 108. The adoption of this standard did not
have a material effect on the Corporation's consolidated financial statements.
NOTE 7 - COMMON STOCK REPURCHASES
On March 22, 2007, the Board of Directors adopted a repurchase plan which
provides for repurchase of up to 150,000 shares of the Corporation's common
stock. Any shares repurchased under this plan are reverted to authorized but
unissued shares. During the six months ended June 30, 2007, a total of 22,734
shares were repurchased for cash of $978, including 9,734 shares pursuant to
this plan during the second quarter.
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major factors that
influenced IBT Bancorp's financial performance. This analysis should be read in
conjunction with the Corporation's 2006 annual report and with the unaudited
condensed consolidated financial statements and notes, as set forth on pages 3
through 13 of this report.
CRITICAL ACCOUNTING POLICIES: A summary of the Corporation's significant
accounting policies is set forth in Note 1 of the Consolidated Financial
Statements included in the Corporation's Annual Report for the year ended
December 31, 2006. Of these significant accounting policies, the Corporation
considers its policies regarding the allowance for loan losses to be its most
critical accounting policy.
The allowance for loan losses requires management's most subjective and complex
judgment. Changes in economic conditions can have a significant impact on the
allowance for loan losses and, therefore, the provision for loan losses and
results of operations. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Corporation's assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers which is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see Provision for
Loan Losses and Allowance for Loan Losses in the Corporation's 2006 Annual
Report and herein.
RESULTS OF OPERATIONS
The following table outlines the results of operations for the periods ended
June 30, 2007 and 2006. Return on average assets measures the ability of the
Corporation to profitably and efficiently employ its resources. Return on
average equity indicates how effectively the Corporation is able to generate
earnings on shareholder invested capital.
SUMMARY OF SELECTED FINANCIAL DATA
Three Months
Ended Six Months Ended
June 30 June 30
--------------- -----------------
2007 2006 2007 2006
------ ------ ------- -------
INCOME STATEMENT DATA
Net interest income $6,985 $6,149 $13,628 $12,055
Provision for loan losses 224 216 350 383
Net income 1,756 1,794 3,566 3,008
PER SHARE DATA
Earnings per share:
Basic $ 0.28 $ 0.33 $ 0.56 $ 0.55
Diluted 0.27 0.32 0.55 0.53
Cash dividends per common share 0.12 0.11 0.24 0.22
RATIOS
Average primary capital to average assets 13.43% 11.70% 13.43% 11.69%
Net income to average assets 0.76 0.94 0.77 0.80
Net income to average equity 5.95 8.62 6.08 7.31
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is the
primary source of income for IBT Bancorp. Interest income includes loan fees of
$345 and $576 in 2007, for the three and six month periods ended June 30, 2007,
respectively, as compared to $318 and $556 during the same periods in 2006. For
analytical purposes, net interest income is adjusted to a "taxable equivalent"
basis by adding the income tax savings from interest on tax-exempt loans and
securities, thus making year-to-year comparisons more meaningful.
(Continued on page 17)
14
AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
The following schedules present the daily average amount outstanding for each
major category of interest earning assets, nonearning assets, interest bearing
liabilities, and noninterest bearing liabilities. This schedule also presents an
analysis of interest income and interest expense for the periods indicated. All
interest income is reported on a fully taxable equivalent (FTE) basis using a
34% tax rate. Nonaccruing loans, for the purpose of the following computations,
are included in the average loan amounts outstanding. Federal Reserve and
Federal Home Loan Bank restricted equity holdings are included in Other.
Results for the three and six month periods ended June 30, 2007 and June 30,
2006 are as follows:
Three Months Ended
-----------------------------------------------------------------
June 30, 2007 June 30, 2006
------------------------------- -------------------------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Balance Interest Rate Balance Interest Rate
-------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans $601,805 $10,875 7.23% $495,276 $ 8,693 7.02%
Taxable investment securities 64,899 897 5.53% 124,605 1,242 3.99%
Nontaxable investment securities 96,947 1,438 5.93% 74,617 1,070 5.74%
Trading account securities 63,939 767 4.80% -- -- --
Federal funds sold 4,400 59 5.36% 392 5 5.10%
Other 6,248 69 4.42% 4,921 59 4.80%
-------- ------- ---- -------- ------- ----
Total earning assets 838,238 14,105 6.73% 699,811 11,069 6.33%
NON EARNING ASSETS:
Allowance for loan losses (7,660) (6,942)
Cash and due from banks 20,155 25,512
Premises and equipment 21,364 17,292
Accrued income and other assets 56,015 28,492
-------- --------
Total assets $928,112 $764,165
======== ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $110,883 556 2.01% $101,157 366 1.45%
Savings deposits 187,462 1,057 2.26% 155,204 630 1.62%
Time deposits 344,549 4,048 4.70% 283,918 2,897 4.08%
Other borrowed funds 76,351 893 4.68% 53,629 633 4.72%
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities 719,245 6,554 3.64% 593,908 4,526 3.05%
NONINTEREST BEARING LIABILITIES:
Demand deposits 80,366 69,902
Other 10,450 17,071
Shareholders' equity 118,051 83,284
-------- --------
Total liabilities and equity $928,112 $764,165
======== ========
Net interest income (FTE) $ 7,551 $ 6,543
======= =======
Net yield on interest earning
---- ----
assets (FTE) 3.60% 3.74%
==== ====
15
Six Months Ended
------------------------------------------------------------------
June 30, 2007 June 30, 2006
-------------------------------- -------------------------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Balance Interest Rate Balance Interest Rate
-------- ---------- -------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans $600,444 $21,398 7.13% $490,078 $16,860 6.88%
Taxable investment securities 60,685 1,642 5.41% 120,683 2,320 3.84%
Nontaxable investment securities 90,593 2,676 5.91% 73,138 2,100 5.74%
Trading account securities 70,732 1,512 4.28% -- -- --
Federal funds sold 5,209 139 5.34% 942 21 4.46%
Other 5,674 127 4.48% 5,053 117 4.63%
-------- ------- ----- -------- ------- ----
Total earning assets 833,337 27,494 6.60% 689,894 21,418 6.21%
NON EARNING ASSETS:
Allowance for loan losses (7,655) (6,935)
Cash and due from banks 19,962 27,402
Premises and equipment 21,160 17,302
Accrued income and other assets 55,822 28,648
-------- --------
Total assets $922,626 $756,311
======== ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $114,705 1,109 1.93% $103,954 742 1.43%
Savings deposits 182,689 1,941 2.12% 156,108 1,223 1.57%
Time deposits 352,093 8,197 4.66% 276,565 5,484 3.97%
Other borrowed funds 65,199 1,556 4.77% 49,218 1,139 4.63%
-------- ------- ----- -------- ------- ----
Total interest bearing liabilities 714,686 12,803 3.58% 585,845 8,588 2.93%
NONINTEREST BEARING LIABILITIES:
Demand deposits 79,853 69,664
Other 10,849 18,477
Shareholders' equity 117,238 82,325
-------- --------
Total liabilities and equity $922,626 $756,311
======== ========
Net interest income (FTE) $14,691 $12,830
======= =======
----- ----
Net yield on interest earning
assets (FTE) 3.53% 3.72%
===== ====
16
VOLUME AND RATE VARIANCE ANALYSIS
The following table sets forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For the purpose of this
table, changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Three Months Ended Six Months Ended
June 30, 2007 June 30, 2007
compared to compared to
June 30, 2006 June 30, 2006
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------- -------------------------
Volume Rate Net Volume Rate Net
------ ----- ------ ------- ------ ------
CHANGES IN INTEREST INCOME:
Loans $1,918 $ 264 $2,182 $ 3,914 $ 624 $4,538
Taxable investment securities (722) 377 (345) (1,412) 734 (678)
Nontaxable investment securities 330 38 368 514 62 576
Trading account securities 767 -- 767 1,512 -- 1,512
Federal funds sold 54 -- 54 113 5 118
Other 15 (5) 10 14 (4) 10
------ ----- ------ ------- ------ ------
Total changes in interest income 2,362 674 3,036 4,655 1,421 6,076
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits 38 152 190 83 284 367
Savings deposits 149 278 427 232 486 718
Time deposits 673 478 1,151 1,657 1,056 2,713
Other borrowings 266 (6) 260 380 37 417
------ ----- ------ ------- ------ ------
Total changes in interest expense 1,126 902 2,028 2,352 1,863 4,215
------ ----- ------ ------- ------ ------
Net change in interest margin (FTE) $1,236 $(228) $1,008 $ 2,303 $ (442) $1,861
====== ===== ====== ======= ====== ======
NET INTEREST INCOME, CONTINUED
As shown in the preceding tables, the Corporation has experienced steady
decreases in the net yield on interest earning assets since 2006. The main
contributing factors to this decrease are the following:
- The inverted yield curve during the first six months of 2007.
- Rates paid on interest bearing liabilities have increased at a faster
rate than those earned on interest earning assets.
- The Corporation's increased reliance on higher cost time deposits and
other borrowed funds.
During much of 2006 and throughout the first six months of 2007, the yield curve
was inverted, which means that short term rates were higher than long term
rates. This yield curve has encouraged customers to invest their funds in short
term deposits and to borrow long term with fixed rate loans. Banks typically
make money through the assumption of credit and interest rate risk. Interest
rate risk is related to borrowing funds short term and investing them long term.
The current yield curve has provided the Corporation with little opportunity to
do this effectively. The table above shows a negative impact on net interest
margin due to rate of $228 and $442 when the three and six month periods ended
June 30, 2007 are compared to the same periods in 2006. These decreases were
offset by increases related to volume of $1,236 and $2,303, in the three and six
month periods ended June 30, 2007, respectively. The total volume and rate
variances resulted in net increases in net FTE interest margin of $1,008 and
$1,861, when the three and six month periods ended June 30, 2007 are compared to
the same periods in 2006.
17
To offset the decreases in net yield on interest earning assets from the
unfavorable rate environment, the Corporation has taken a measured growth
posture, which has resulted in a substantial increase in commercial loans. This
commercial loan growth coupled with the acquisition of the Farwell State Savings
Bank has allowed the Corporation to increase net interest income through volume.
When management looks forward to the remainder of 2007, the net interest
position will continue to be challenging with respect to interest rates. The
driving force behind this challenge continues to be the yield curve. During the
quarter ended June 30, 2007, long term rates have increased slightly, resulting
in a shift in the yield curve, which is now essentially flat. Management
anticipates that the yield curve will continue to normalize throughout the
remainder of 2007; however, this correction is expected to be slow. As a result,
the Corporation does not anticipate any significant relief in interest rate
pressure in the near future. To help offset the decline in income due to rates,
the Corporation will continue to grow its balance sheet, while accepting smaller
interest rate margins.
IBT Bancorp, Inc. (IBT) elected early adoption of Statement of Financial
Accounting Standards ("SFAS") No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, and SFAS No. 157, Fair Value Measurements.
SFAS No. 159, which was issued in February 2007, generally permits the
measurement of selected eligible financial instruments at fair value at
specified election dates. Subsequent to the issuance of SFAS No. 159 the IBT
Audit Committee, Board of Directors, management, and investment advisors
reviewed the Corporation's assets and liabilities to determine which fluctuate
in value based on changes in market interest rates to determine the potential
impact of the new standard. As a result of their considerations, IBT elected
early adoption of the new accounting standard effective January 1, 2007. The
purpose of the early adoption of this standard was to provide IBT an opportunity
to accelerate the restructuring of its balance sheet to better manage interest
rate risk now and in the future.
The impact of the Corporation's restructuring plan implemented during the second
quarter of 2007 was a 0.15% increase in FTE net interest margin when the quarter
ended June 30, 2007 is compared to the quarter ended March 31, 2007. The
restructuring strategies pursued are discussed in the analysis of changes in
financial condition beginning on page 25.
ALLOWANCE FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Total loans outstanding represent 66.1% of the
Corporation's total assets and is the Corporation's single largest concentration
of risk. The allowance for loan losses is management's estimation of potential
future losses inherent in the existing loan portfolio. Factors used to evaluate
the loan portfolio, and thus to determine the current charge to expense, include
recent loan loss history, financial condition of borrowers, amount of
nonperforming and impaired loans, overall economic conditions, and other
factors. The following table summarizes the Corporation's charge off and
recovery activity for the six month periods ended June 30, 2007 and 2006.
18
Six Months Ended
June 30
-------------------
2007 2006
-------- --------
Allowance for loan losses - January 1 $ 7,605 $ 6,899
Loans charged off
Commercial and agricultural 26 103
Real estate mortgage 125 181
Consumer 301 171
-------- --------
TOTAL LOANS CHARGED OFF 452 455
Recoveries
Commercial and agricultural 79 76
Real estate mortgage 3 15
Consumer 159 123
-------- --------
TOTAL RECOVERIES 241 214
-------- --------
Net loans charged off 211 241
Provision charged to income 350 383
-------- --------
ALLOWANCE FOR LOAN LOSSES - JUNE 30 $ 7,744 7,041
======== ========
YEAR TO DATE AVERAGE LOANS $600,444 $490,078
======== ========
NET LOANS CHARGED OFF TO AVERAGE LOANS OUTSTANDING 0.04% 0.05%
======== ========
TOTAL AMOUNT OF LOANS OUTSTANDING AT JUNE 30 $607,219 $506,298
======== ========
ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.28% 1.39%
======== ========
Since June 2006, the Corporation has experienced an increase in the percent of
loans classified as nonperforming. While the Corporation has seen increases in
its nonperforming loans, net loans charged off as a percentage of loans has
declined. The majority of the increase in non-accrual loans is related to two
credits. These credits are both well collateralized and management believes the
principal will be recovered in full. As shown in the following table, a
substantial portion of the increase in accruing loans past due 90 days or more
is related to the addition of Farwell loan portfolio in the fourth quarter of
2006. Based on management's analysis of the allowance for loan losses, the
current allowance falls within the acceptable range and, therefore, the
allowance for loan losses is considered adequate as of June 30, 2007.
The nationwide increase in residential mortgage loans past due and in
foreclosures has received considerable attention by both the press and
regulators. Based on information provided by The Mortgage Bankers Association,
the increases in both past dues and foreclosures are related to fixed and
adjustable rate sub-prime mortgages. Additionally, a substantial portion of
sub-prime adjustable rate mortgages are scheduled to reset at higher rates in
the next 12 months. As a result of the rate resetting on these mortgages, it is
expected that troubled sub-prime loans will increase substantially through the
end of 2008. The increase in troubled residential mortgage loans, higher fixed
and variable interest rates, and a tightening of underwriting standards will
most likely result in a further increased inventory of unsold homes from its
current level of 8.9 months. The inventory of unsold homes has not reached these
levels since the 1991 recession. The combination of all of these factors will
most likely further reduce average home values and thus homeowner's equity.
While IBT does not originate variable rate mortgages, nor does it hold mortgage
loans, which when made were sub-prime, the difficulties experienced in the
sub-prime market has the potential to adversely impact the entire market, and
thus the overall credit quality of the IBT residential mortgage portfolio.
19
NONPERFORMING ASSETS
June 30
------------------------------------------------------------
2007 2006
--------------------------------------------- ------------
Consolidated Farwell Adjusted w/o Farwell Consolidated
------------ ------- -------------------- ------------
Nonaccrual loans $4,409 $ 186 $4,223 $1,874
Accruing loans past due 90 days or more 2,212 1,374 838 1,053
Restructured loans 688 -- 688 713
------ ------ ------ ------
TOTAL NONPERFORMING LOANS 7,309 1,560 5,749 3,640
Other real estate owned 633 298 335 350
------ ------ ------ ------
TOTAL NONPERPERFORMING ASSETS $7,942 $1,858 $6,084 $3,990
====== ====== ====== ======
NONPERFORMING LOANS AS A % OF TOTAL LOANS 1.20% 2.47% 1.06% 0.72%
====== ====== ====== ======
NONPERFORMING ASSETS AS A % OF TOTAL ASSETS 0.86% 2.04% 0.74% 0.51%
====== ====== ====== ======
To management's knowledge, there are no other loans which cause management to
have serious doubts as to the ability of a borrower to comply with their loan
repayment terms.
NONINTEREST INCOME AND EXPENSES
The following discussions of noninterest income and noninterest expenses have
been adjusted for the acquisition of the Farwell State Savings Bank in October
2006 to make them comparable with the prior period numbers.
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, fees for
other financial services, gains on the sale of mortgage loans, title insurance
revenue, and other. Significant account balances are highlighted in the
accompanying tables with additional descriptions of significant fluctuations of
both quarter to date and year to date variances following:
Three Months Ended
------------------------------------------------------------------------------
June 30
------------------------------------------------------------
2007 2006 Adjusted Change
--------------------------------------------- ------------ ---------------
Consolidated Farwell Adjusted w/o Farwell Consolidated $ %
------------ ------- -------------------- ------------ ------ ------
Service charges and fee income
NSF and overdraft fees $ 731 $41 $ 690 $ 752 $ (62) -8.2%
Freddie Mac servicing fee 158 -- 158 161 (3) -1.9%
ATM and debit card fees 199 -- 199 134 65 48.5%
Service charges on depos it accounts 83 15 68 75 (7) -9.3%
All other 46 14 32 37 (5) -13.5%
------ --- ------ ------ ----- -----
Total service charges and fees 1,217 70 1,147 1,159 (12) -1.0%
Title insurance revenue 653 -- 653 673 (20) -3.0%
Trust fees 228 -- 228 217 11 5.1%
Gain on sale of mortgage loans 46 -- 46 54 (8) -14.8%
Net loss on trading activities (201) -- (201) -- (201) N/A
Other
Increase in cash value of corporate
owned life insurance policies 105 -- 105 103 2 1.9%
Brokerage and advisory fees 61 -- 61 51 10 19.6%
Loss on sale of investment securities -- -- -- (103) 103 N/A
All other 118 6 112 182 (70) -38.5%
------ --- ------ ------ ----- -----
Total other 284 6 278 233 45 19.3%
------ --- ------ ------ ----- -----
TOTAL NONINTEREST INCOME $2,227 $76 $2,151 $2,336 $(185) -7.9%
====== === ====== ====== ===== =====
20
Six Months Ended
------------------------------------------------------------------------------
June 30
------------------------------------------------------------
2007 2006 Adjusted Change
--------------------------------------------- ------------ ---------------
Consolidated Farwell Adjusted w/o Farwell Consolidated $ %
------------ ------- -------------------- ------------ ------ ------
Service charges and fee income
NSF and overdraft fees $1,409 $ 73 $1,336 $1,377 $(41) -3.0%
Freddie Mac servicing fee 314 -- 314 317 (3) -0.9%
ATM and debit card fees 340 -- 340 256 84 32.8%
Service charges on deposit accounts 166 28 138 152 (14) -9.2%
All other 120 27 93 87 6 6.9%
------ ---- ------ ------ ---- -----
Total service charges and fees 2,349 128 2,221 2,189 32 1.5%
Title insurance revenue 1,127 -- 1,127 1,147 (20) -1.7%
Trust fees 446 -- 446 431 15 3.5%
Gain on sale of mortgage loans 99 -- 99 111 (12) -10.8%
Net gain on trading activities 26 -- 26 -- 26 N/A
Other
Increase in cash value of corporate
owned life ins urance policies 210 -- 210 203 7 3.4%
Brokerage and advisory fees 125 -- 125 105 20 19.0%
Loss on sale of investment securities (30) -- (30) (103) 73 -70.9%
All other 286 6 280 254 26 10.2%
------ ---- ------ ------ ---- -----
Total other 591 6 585 459 126 27.5%
------ ---- ------ ------ ---- -----
TOTAL NONINTEREST INCOME $4,638 $134 $4,504 $4,337 $167 3.9%
====== ==== ====== ====== ==== =====
As a result of the persistent compression on interest margins, management
continuously analyzes various fees related to deposit accounts, including
service charges, NSF and overdraft fees, and ATM and debit card fees. Based on
these analyses, the Corporation makes any necessary adjustments to ensure that
its fee structure is within a range of its competitors, while at the same time
making sure that the fees remain fair to deposit customers. Management does not
expect significant changes to its deposit fee structure in 2007.
The decline from the gain on sale of mortgage loans and title insurance revenue
is a result of the continued slow demand in residential mortgages. Management
does not anticipate the demand for residential mortgages to significantly
fluctuate for the remainder of 2007.
The losses incurred on trading activities during the second quarter of 2007 are
a result of the increase in long term investment rates. While the Corporation
did incur net trading losses during this period, it is still in a net gain
position for the six month period ended June 30, 2007. Management does expect
trading losses to continue to increase based on the fact that it is anticipated
that long term rates will continue to increase throughout 2007. However, the
increases in long term rates provide the Corporation with the ability to sell
lower yielding investments and replace them with higher yielding ones.
The first six months of 2007 have been some of the most productive months in the
Corporation's history for brokerage and advisory services. These results are due
to the increased confidence of consumers in the stock market as well as an
increase in customer base and a conscious effort by management to expand the
Bank's presence in the local market. The Corporation anticipates this trend to
continue throughout 2007.
The losses on sales of available for sale investment securities incurred by the
Corporation in the first quarter resulted from selling investments nearing
maturity at low interest rates and reinvesting the proceeds in higher yielding
longer term securities as part of asset and liability management. Management
expects that the additional interest income earned upon the reinvestment of the
proceeds will exceed the losses recognized by the fourth quarter of 2007.
When the three month period ended June 30, 2007 is compared to the same period
in 2006, there was a substantial decrease in other noninterest income. This
decrease can be attributed to the fact that Isabella Bank and Trust sold its
consumer credit card portfolio in May 2006 and recorded a gain on the sale of
the portfolio. The Bank is now collecting monthly commissions related to this
sold portfolio, which accounts for the increase in year to date income when the
six month period ended June 30, 2007 is compared to the same period in 2006.
21
NONINTEREST EXPENSES
Noninterest expenses include compensation, occupancy, furniture and equipment,
and other expenses. Significant account balances are highlighted in the
accompanying tables with additional descriptions of significant fluctuations of
both quarter to date and year to date variances following:
Three Months Ended
------------------------------------------------------------------------------
June 30
------------------------------------------------------------
2007 2006 Adjusted Change
--------------------------------------------- ------------ ---------------
Consolidated Farwell Adjusted w/o Farwell Consolidated $ %
------------ ------- -------------------- ------------ ------ ------
Compensation
Leased employee salaries $2,824 $177 $2,647 $2,462 $185 7.5%
Leased employee benefits 1,059 83 976 988 (12) -1.2%
All other 37 5 32 34 (2) -5.9%
------ ---- ------ ------ ---- -----
Total compensation 3,920 265 3,655 3,484 171 4.9%
------ ---- ------ ------ ---- -----
Occupancy
Depreciation 114 6 108 93 15 16.1%
Outside services 90 8 82 80 2 2.5%
Property taxes 90 4 86 83 3 3.6%
Utilities 80 5 75 70 5 7.1%
Building rent 15 -- 15 39 (24) -61.5%
Building repairs 31 -- 31 32 (1) -3.1%
All other 11 -- 11 15 (4) -26.7%
------ ---- ------ ------ ---- -----
Total occupancy 431 23 408 412 (4) -1.0%
------ ---- ------ ------ ---- -----
Furniture and equipment
Depreciation 381 7 374 347 27 7.8%
Service contracts 161 -- 161 187 (26) -13.9%
Computer costs 152 35 117 106 11 10.4%
ATM and debit card 126 6 120 68 52 76.5%
All other 27 9 18 15 3 20.0%
------ ---- ------ ------ ---- -----
Total furniture and equipment 847 57 790 723 67 9.3%
------ ---- ------ ------ ---- -----
Other
Audit and SOX compliance fees 97 3 94 164 (70) -42.7%
Marketing 182 4 178 152 26 17.1%
Directors fees 199 23 176 152 24 15.8%
Printing and supplies 96 3 93 97 (4) -4.1%
Education and travel 131 4 127 54 73 135.2%
Postage and freight 113 15 98 106 (8) -7.5%
All other 817 133 684 625 59 9.4%
------ ---- ------ ------ ---- -----
Total other 1,635 185 1,450 1,350 100 7.4%
------ ---- ------ ------ ---- -----
TOTAL NONINTEREST EXPENSES $6,833 $530 $6,303 $5,969 $334 5.6%
====== ==== ====== ====== ==== =====
22
Six Months Ended
------------------------------------------------------------------------------
June 30
------------------------------------------------------------
2007 2006 Adjusted Change
--------------------------------------------- ------------ ---------------
Consolidated Farwell Adjusted w/o Farwell Consolidated $ %
------------ ------- -------------------- ------------ ------ ------
Compensation
Leased employee s alaries $ 5,597 $ 359 $ 5,238 $ 4,925 $ 313 6.4%
Leased employee benefits 2,140 166 1,974 2,009 (35) -1.7%
All other 80 9 71 79 (8) -10.1%
------- ------ ------- ------- ----- -----
Total compensation 7,817 534 7,283 7,013 270 3.8%
------- ------ ------- ------- ----- -----
Occupancy
Depreciation 224 13 211 199 12 6.0%
Outside services 177 16 161 165 (4) -2.4%
Property taxes 183 8 175 167 8 4.8%
Utilities 180 9 171 164 7 4.3%
Building rent 35 -- 35 78 (43) -55.1%
Building repairs 68 -- 68 68 -- 0.0%
All other 22 -- 22 27 (5) -18.5%
------- ------ ------- ------- ----- -----
Total occupancy 889 46 843 868 (25) -2.9%
------- ------ ------- ------- ----- -----
Furniture and equipment
Depreciation 753 14 739 721 18 2.5%
Service contracts 334 -- 334 363 (29) -8.0%
Computer costs 312 74 238 196 42 21.4%
ATM and debit card 210 10 200 128 72 56.3%
All other 54 19 35 28 7 25.0%
------- ------ ------- ------- ----- -----
Total furniture and equipment 1,663 117 1,546 1,436 110 7.7%
------- ------ ------- ------- ----- -----
Other
Audit and SOX compliance fees 295 9 286 575 (289) -50.3%
Marketing 356 8 348 305 43 14.1%
Directors fees 393 48 345 298 47 15.8%
Printing and supplies 199 8 191 202 (11) -5.4%
Education and travel 239 4 235 132 103 78.0%
Postage and freight 226 25 201 211 (10) -4.7%
All other 1,560 266 1,294 1,237 57 4.6%
------- ------ ------- ------- ----- -----
Total other 3,268 368 2,900 2,960 (60) -2.0%
------- ------ ------- ------- ----- -----
TOTAL NONINTEREST EXPENSES $13,637 $1,065 $12,572 $12,277 $ 295 2.4%
======= ====== ======= ======= ===== =====
Leased employee salaries expense continues to increase as a result of annual
merit increases and the continued growth of the Corporation. The decrease in
leased employee benefits is primarily attributed to the Corporation changing
medical insurance administrators in the third quarter of 2006. One of the
advantages of the change was that the Corporation's premium payments would be
capped based on the current year's projected claims. This change in medical
insurance administrators along with the curtailment of the defined benefit
pension plan in March 2007 will allow the Corporation to decrease its employee
benefits expense for the remainder of 2007.
Upon completion of a new Canadian Lakes branch location, the building lease for
the facility that had previously housed the Canadian Lakes office was
terminated. This lease termination resulted in a one time penalty, which was
included in rent expense. The completion of the project also resulted in an
increase in building depreciation expense. The Corporation anticipates building
rent and building depreciation to approximate current levels for the remainder
of 2007.
The increases in computer costs are a result of the Corporation's continuous
investment in its technological infrastructure as well as increases in fees
charged by vendors. This constant reinvestment helps the Corporation maintain a
competitive edge in an ever changing marketplace. Management expects that
computer expenses will approximate current levels for the remainder of 2007.
23
ATM and debit card fees have increased as the result of both increases in
activity as well as increases in fees charged by vendors. This increase in fees
was offset by increases in ATM and debit card fee income. Management anticipates
these fees to continue at a similar level throughout the remainder of 2007.
Management has been diligently working to decrease audit and (Sarbanes Oxley)
SOX compliance fees. In the first six months of 2007, this became a reality.
These fees decreased as a result of the following factors:
- Many similar processes between subsidiaries have been centralized.
- Testing previously outsourced is now being performed internally as a
result of an expanded internal audit department.
- A substantial portion of the 2006 year end audit work was performed
prior to year end, where in prior years, most of it had been completed
after year end.
Management does anticipate that audit and SOX compliance fees will approximate
current levels throughout 2007 as a result of the continued centralization and
streamlining of back room functions.
The Corporation places a strong emphasis on continuing education. These
educational programs help provide team members with a competitive edge in the
market place. In the third quarter of 2006, the Corporation began offering Dale
Carnegie training to its employees. This program is designed to help develop and
optimize the communication skills of its participants. Management feels that
this investment in its employees today will pay dividends for years to come.
The increases in directors fees are a result of additional meeting during the
first six months of the year related to ongoing strategic planning.
All other expenses include consulting fees, legal fees, title insurance
expenses, as well as other miscellaneous expenses that are not individually
significant.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
June 30 December % Change
2007 31 2006 $ Change (unannualized)
-------- -------- -------- --------------
ASSETS
Cash and cash equivelants $ 29,842 $ 31,359 $ (1,517) -4.8%
Trading securities 41,777 -- 41,777 N/A
Securities available for sale 164,201 213,450 (49,249) -23.1%
Mortgage loans available for sale 850 2,734 (1,884) -68.9%
Loans 607,219 591,042 16,177 2.7%
Allowance for loan losses (7,744) (7,605) (139) 1.8%
Bank premises and equipment 21,392 20,754 638 3.1%
Other assets 60,728 58,393 2,335 4.0%
-------- -------- -------- -----
TOTAL ASSETS $918,265 $910,127 $ 8,138 0.9%
======== ======== ======== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $724,157 $725,840 $ (1,683) -0.2%
Other borrowed funds 67,376 58,303 9,073 15.6%
Escrow funds payable 3,545 2,416 1,129 46.7%
Accrued interest and other
liabilities 4,397 7,819 (3,422) -43.8%
-------- -------- -------- -----
TOTAL LIABILITIES 799,475 794,378 5,097 0.6%
SHAREHOLDERS' EQUITY 118,790 115,749 3,041 2.6%
-------- -------- -------- -----
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $918,265 $910,127 $ 8,138 0.9%
======== ======== ======== =====
24
The Corporation's management team has been given the goal to increase average
assets by 8.0% over 2006. For the period ending June 30, 2007 the Corporation is
below its balance sheet growth target; however, management does anticipate
continued growth throughout the remainder of 2007.
As previously mentioned, the Corporation commenced a balance sheet
reorganization strategy in 2007 which resulted in a transfer of securities
available for sale to trading securities. The Corporations overall intent was to
sell a portion of the trading securities to enhance the ongoing restructuring of
assets and liabilities as part of our interest rate risk management.
Since January 1, 2007, the Corporation has reduced its trading securities by
$36,062 as a result of sales, calls, and maturities. Management has used these
proceeds to shift from a fed funds borrowing position of $6,765 as of December
31, 2006 to a fed funds sold position of $6,240 at June 30, 2007, resulting in a
position change of $13,005. Deposits have decreased $1,683 since December 31,
2006. The remainder of the proceeds from the sales, calls, and maturities of
trading account securities were used to fund a $16,177 increase in loans since
December 31, 2006.
The net result of the restructuring has reduced the difference between assets
and liabilities repricing within one year from a net liability repricing
position of 11.1% as of March 31, 2007 to 4.9% as of June 30, 2007. This
reduction in our net liability repricing position provides protection against
any dramatic change in our net interest margins if rates were to continue
increasing during the remainder of 2007.
In addition to the balance sheet restructuring resulting from the sales of
trading securities, IBT implemented a strategy to purchase high quality tax
exempt municipal bonds with funding in the form of fixed rate Federal Home Loan
Bank advances. This strategy has resulted in a $16,025 increase in tax exempt
available for sale securities since January 1, 2007.
The decline of mortgage loans available for sale is a result of the continued
softening of demand for residential mortgage loans. The residential real estate
mortgage loan market is expected to be consistent throughout the remainder of
2007.
The Corporation observed a substantial increase in escrow funds payable during
the first six months of 2007. This increase can be attributed to Internal
Revenue Code Section ("IRC") 1031 exchange account balances being deposited by
customers of IBT Title and Insurance Agency, Inc. ("IBT Title"). These IRC 1031
accounts allow owners of business or investment property to defer realized gains
from the sale of business or investment property if the funds are reinvested in
another property. As such, these balances can fluctuate significantly between
periods as the funds are deposited and reinvested.
The following table outlines the changes in the loan portfolio:
June 30 December % Change
2007 31 2006 $ Change (unannualized)
-------- -------- -------- ------------
Commercial $227,674 $212,701 $14,973 7.0%
Agricultural 48,959 47,302 1,657 3.5%
Residential real estate mortgage 300,101 300,650 (549) -0.2%
Installment 30,485 30,389 96 0.3%
-------- -------- ------- ----
TOTAL GROSS LOANS $607,219 $591,042 $16,177 2.7%
======== ======== ======= ====
As shown in the above table, management has been successful in increasing its
commercial loan portfolio and this trend is expected to continue. The
Corporation has also seen an increase in agricultural loans during the first six
months of 2007. Agricultural loans are not expected to vary significantly from
current levels for the remainder of 2007.
The decline in residential real estate mortgage loans is a result of the
continued soft mortgage market in Michigan. However, the Corporation does
anticipate that residential real estate mortgages will increase moderately
during 2007. The installment loan portfolio has been steadily decreasing over
the past few years as a result of increased competition as well as a result of
the sale of the consumer credit card portfolio in the second quarter of 2006.
Management anticipates the installment loan portfolio to remain stable
throughout the remainder of 2007.
The following table outlines the changes in the deposit portfolio:
25
June 30 December % Change
2007 31 2006 $ Change (unannualized)
-------- -------- -------- --------------
Noninterest bearing demand deposits $ 82,919 $ 83,902 $ (983) -1.2%
Interest bearing demand deposits 100,972 111,406 (10,434) -9.4%
Savings deposits 191,409 178,001 13,408 7.5%
Certificates of deposit 315,998 320,226 (4,228) -1.3%
Brokered certificates of deposit 26,116 27,446 (1,330) -4.8%
Internet certificates of deposit 6,743 4,859 1,884 38.8%
-------- -------- -------- ----
TOTAL $724,157 $725,840 $ (1,683) -0.2%
======== ======== ======== ====
As shown in the preceding table, the Corporation has been unable to fund the
loan growth with core deposits and instead it has been funded with the proceeds
from the sales of trading securities.
The increase in savings deposits is primarily in money market accounts.
Currently the rates on these accounts are attractive to our customers as the
Corporation strives to price these products competitively. The declines in
brokered certificates of deposits are the result of the maturity of these
products and the Corporation monitoring the cost of funding and replacing these
accounts with other funding sources including internet certificates of deposit,
which are typically less costly.
CAPITAL
The capital of the Corporation consists solely of common stock, capital surplus,
retained earnings, and accumulated other comprehensive loss. The Corporation
offers dividend reinvestment and employee and director stock purchase plans.
Under the provisions of these Plans, the Corporation issued 25,241 shares of
common stock generating $990 of capital during the first six months of 2007, as
compared to 19,238 shares of common stock generating $1,093 of capital in the
same period in 2006. The Corporation also offers share based payment awards
through its equity compensation plan. Pursuant to this plan, the Corporation
generated $452 and $231 of capital in 2007 and 2006, respectively.
In October 2002 the Board of Directors authorized management to repurchase up to
$2,000 in dollar value of the Corporation's common stock. In March 2007, the
Board of Directors adopted a new plan which allowed for the repurchase of up to
150,000 shares. During 2007, the Corporation has repurchased 22,734 shares of
common stock at an average price of $43.02 under the new and old plans. There
were no shares repurchased in 2006.
Accumulated other comprehensive loss decreased $1,579 and consists of a $1,317
increase in unrealized loss on available-for-sale investment securities, $1,999
of comprehensive income as a result of the curtailment of the Corporation's
defined benefit pension plan, and a $897 cumulative adjustment related to the
adoption of SFAS Statement No. 159.
There are no significant regulatory constraints placed on the Corporation's
capital. The Federal Reserve Board's current recommended minimum primary capital
to assets requirement is 6.0%. The Corporation's primary capital to adjusted
average assets, which consists of shareholders' equity plus the allowance for
loan losses less acquisition intangibles, was 11.1 % as of June 30, 2007. 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 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 June 30, 2007:
26
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
June 30, 2007
-----------------
Required Actual
-------- ------
Equity Capital 4.00% 15.8%
Secondary Capital 4.00% 1.3%
---- ----
Total Capital 8.00% 17.1%
==== ====
IBT Bancorp's secondary capital includes only the allowance for loan losses. The
percentage for the secondary capital under the required column is the maximum
amount allowed from all sources.
The Federal Reserve and FDIC also prescribe minimum capital requirements for the
Corporation's subsidiary Bank. At June 30, 2007, the Bank exceeded these minimum
capital requirements.
LIQUIDITY
The primary sources of the Corporation's liquidity are cash and cash
equivalents, trading securities, and available-for-sale securities. These
categories totaled $235,820 or 25.7% of assets as of June 30, 2007 as compared
to $244,809 or 26.9% as of December 31, 2006. Liquidity is important for
financial institutions because of their need to meet loan funding commitments,
depositor withdrawal requests and various other commitments including expansion
of operations, investment opportunities, and payment of cash dividends.
Liquidity varies significantly daily, based on customer activity.
Operating activities provided $41,447 of cash in the first six months of 2007 as
compared to using $2,022 in the same period in 2006. Net cash provided by
financing activities equaled $5,731 and $41,780 in the six month periods ended
June 30, 2007 and 2006, respectively. The Corporation's investing activities
used cash amounting to $48,695 in the first six months of 2007 and $40,415 in
the same period in 2006. The accumulated effect of the Corporation's operating,
investing, and financing activities used $1,517 and $657 in the six months ended
June 30, 2007 and 2006, respectively.
The primary source of funds for the Bank is deposits. The Bank emphasizes
interest-bearing time deposits as part of their funding strategy. The Bank also
seeks noninterest bearing deposits, or checking accounts, which reduce the
Bank's cost of funds in an effort to expand the customer base.
In recent periods, the Corporation has experienced some competitive challenges
in obtaining additional deposits to fuel growth. As depositors continue to have
wider access to the Internet and other real-time interest rate monitoring
resources, deposit sourcing and pricing has become more competitive. Deposit
growth is achievable, but at a competitive price, with tight net interest
margins, especially during these most recent periods of low interest rates.
In addition to these primary sources of liquidity, the Corporation has the
ability to borrow in the federal funds market and at both the Federal Reserve
Bank and the Federal Home Loan Bank, some of which have been classified as
trading liabilities to mitigate the Corporation's interest rate risk. The
Corporation's liquidity is considered adequate by the management of the
Corporation.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET ARRANGEMENTS
The Corporation is party to financial instruments with off-balance-sheet risk.
These instruments are entered into in the normal course of business to meet the
financing needs of its customers. These financial instruments, which include
commitments to extend credit and standby letters of credit, involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The contract or notional amounts
of these instruments reflect the extent of involvement the Corporation has in a
particular class of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in deciding to
make these commitments as it does for extending loans to customers.
27
Commitments to extend credit, which totaled $81,475 at June 30, 2007, are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have variable
interest rates, fixed expiration dates, or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. At June 30, 2007,
the Corporation had a total of $3,990 in outstanding standby letters of credit.
Generally, these commitments to extend credit and letters of credit mature
within one year. The credit risk involved in these transactions is essentially
the same as that involved in extending loans to customers. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation upon the
extension of credit, is based on management's credit evaluation of the borrower.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and other income producing commercial properties.
Isabella Bank and Trust (IB&T), a subsidiary of the Corporation, sponsors the
IBT Foundation (the "Foundation"), which is a nonprofit entity formed for the
purpose of distributing charitable donations to recipient organizations
generally located in the communities serviced by Isabella Bank and Trust. IB&T
periodically makes charitable contributions in the form of cash transfers to the
Foundation. The Foundation is administered by members of the Corporation's Board
of Directors. The assets and transactions of the Foundation are not included in
the consolidated financial statements of IBT Bancorp, Inc. The assets of the
Foundation as of June 30, 2007 were $1,227.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and its subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission.
28
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has very limited foreign exchange risk
and does not utilize interest rate swaps or derivatives in the management of its
interest rate risk. The Corporation does have a significant amount of loans
extended to borrowers involved in agricultural production. Cash flow and ability
to service debt of such customers is largely dependent on growing conditions and
the commodity prices for corn, soybeans, sugar beets, milk, beef and a variety
of dry beans. The Corporation mitigates these risks by using conservative price
and production yields when calculating a borrower's available cash flow to
service their debt.
Interest rate risk ("IRR") is the exposure to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors and senior management to effectively
manage the various risks that can have a material impact on the safety and
soundness of the Corporation. The risks include credit, interest rate,
liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
The Corporation uses several techniques to manage interest rate risk. The first
method is gap analysis. Gap analysis measures the cash flows and/or the earliest
repricing of the Corporation's interest bearing assets and liabilities. This
analysis is useful for measuring trends in the repricing characteristics of the
balance sheet. Significant assumptions are required in this process because of
the imbedded repricing options contained in assets and liabilities. A
substantial portion of the Corporation's assets are invested in loans and
investment securities. These assets have imbedded options that allow the
borrower to repay the balance prior to maturity without penalty. The amount of
prepayments is dependent upon many factors, including the interest rate of a
given loan in comparison to the current interest rates; for residential
mortgages the level of sales of used homes; and the overall availability of
credit in the market place. Generally, a decrease in interest rates will result
in an increase in the Corporation's cash flows from these assets. Investment
securities, other than those that are callable, do not have any significant
imbedded options. Saving and checking deposits may generally be withdrawn on
request without prior notice. The timing of cash flow from these deposits is
estimated based on historical experience. Time deposits have penalties which
discourage early withdrawals. Cash flows may vary based on current offering
rates, competition, customer need for deposits, and overall economic activity.
As noted above, the Corporation has reclassified a portion of its investment
portfolio and its borrowings into trading accounts. Management feels that these
practices help it mitigate the volatility of the current interest rate
environment.
The second technique used in the management of interest rate risk is to combine
the projected cash flows and repricing characteristics generated by the gap
analysis and the interest rates associated with those cash flows and projected
future interest income. By changing the amount and timing of the cash flows and
the repricing interest rates of those cash flows, the Corporation can project
the effect of changing interest rates on its interest income.
The following table provides information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of June 30, 2007.
The Corporation has no interest rate swaps, futures contracts, or other
derivative financial options, except for derivative loan commitments, which are
not significant. The principal amounts of assets and time deposits maturing were
calculated based on the contractual maturity dates. Savings and NOW accounts are
based on management's estimate of their future cash flows.
29
(dollars in thousands) June 30, 2007 Fair Value
-------------------------------------------------------------------------- ----------
2008 2009 2010 2011 2012 Thereafter Total 06/30/07
-------- -------- -------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest bearing
assets $ 7,516 $ -- $ -- $ -- $ -- $ -- $ 7,516 $ 7,516
Average interest rates 4.36% -- -- -- -- -- 4.36%
Trading securities $ 13,293 $ 4,391 $ 1,431 $ 3,910 $ 4,714 $14,038 $ 41,777 $ 41,777
Average interest rates 5.31% 5.83% 5.53% 5.03% 4.90% 4.68% 5.09%
Fixed interest rate
securities $ 47,925 $ 12,018 $ 13,337 $13,668 $12,562 $64,691 $164,201 $164,201
Average interest rates 4.81% 4.62% 4.79% 4.46% 4.82% 3.69% 4.32%
Fixed interest rate loans $114,424 $112,962 $107,153 $84,571 $67,582 $31,217 $517,909 $519,551
Average interest rates 6.74% 6.57% 6.71% 6.79% 7.31% 6.26% 6.75%
Variable interest rate
loans $ 52,710 $ 13,359 $ 16,478 $ 3,092 $ 2,356 $ 1,315 $ 89,310 $ 89,310
Average interest rates 8.13% 8.27% 8.57% 7.97% 7.50% 6.89% 8.19%
Rate sensitive liabilities
Borrowed funds $ 10,562 $ 17,558 $ 12,000 $ 3,256 $10,000 $14,000 $ 67,376 $ 66,222
Average interest rates 4.74% 5.13% 4.82% 5.94% 4.41% 4.84% 4.89%
Savings and NOW accounts $133,090 $ 73,898 $ 68,527 $16,866 $ -- $ -- $292,381 $292,381
Average interest rates 3.48% 1.17% 0.75% 0.67% 0.00% -- 2.09%
Fixed interest rate time
deposits $227,793 $ 58,661 $ 28,461 $14,873 $11,964 $ 263 $342,015 $349,020
Average interest rates 4.48% 4.36% 4.45% 4.57% 4.84% 4.84% 4.47%
Variable interest rate time
deposits $ 1,910 $ 4,932 $ -- $ -- $ -- $ -- $ 6,842 $ 6,842
Average interest rates 2.97% 4.36% -- -- -- -- 3.97%
June 30, 2006 Fair Value
------------------------------------------------------------------------ ----------
2007 2008 2009 2010 2011 Thereafter Total 06/30/06
-------- ------- ------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest bearing
assets $ 2,494 $ -- $ -- $ -- $ -- $ -- $ 2,494 $ 2,494
Average interest rates 1.75% -- -- -- -- -- 1.75%
Fixed interest rate
securities $ 55,057 $47,298 $22,288 $13,904 $23,220 $34,770 $196,537 $196,537
Average interest rates 4.42% 3.55% 3.76% 4.21% 4.43% 3.76% 4.01%
Fixed interest rate loans $117,514 $73,395 $76,869 $59,016 $62,798 $30,139 $419,731 $417,334
Average interest rates 6.29% 6.30% 6.32% 6.38% 6.77% 5.86% 6.35%
Variable interest rate loans $ 50,764 $15,411 $12,396 $ 4,594 $ 2,483 $ 919 $ 86,567 $ 86,567
Average interest rates 9.25% 8.71% 8.49% 8.42% 8.53% 9.18% 8.98%
Rate sensitive liabilities
Borrowed funds $ 32,112 $ 4,000 $12,613 $ 4,000 $ 5,286 $13,000 $ 71,011 $ 69,951
Average interest rates 4.95% 3.64% 4.89% 4.11% 5.69% 4.84% 4.85%
Savings and NOW accounts $ 90,398 $68,189 $64,721 $20,484 $ 5,522 $ -- $249,314 $249,314
Average interest rates 3.04% 1.06% 0.69% 0.64% 0.77% -- 1.64%
Fixed interest rate time
deposits $183,852 $44,487 $23,093 $24,592 $13,801 $ 823 $290,648 $289,268
Average interest rates 4.24% 4.21% 3.88% 4.28% 4.52% 4.92% 4.23%
Variable interest rate time
deposits $ 855 $ 492 $ -- $ -- $ -- $ -- $ 1,347 $ 1,347
Average interest rates 4.07% 4.09% -- -- -- -- 4.08%
30
ITEM 4 - CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Corporation's management carried out an evaluation, under the supervision
and with the participation of the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) as of June 30, 2007, pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Principal Executive Officer and Principal
Financial Officer concluded that the Corporation's disclosure controls and
procedures as of June 30, 2007, were effective to ensure that information
required to be disclosed by the Corporation in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter, although the Corporation has consolidated
its Banks' charters and various internal controls procedures, no changes have
occurred in the Corporation's key controls over financial reporting that
materially affected, or is likely to materially affect, the Corporation's
internal control over financial reporting.
31
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A in
our Annual Report on Form 10-K for the year ended December 31, 2006.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(A) NONE
(B) NONE
(C) REPURCHASES OF COMMON STOCK
On March 22, 2007, the Board of Directors adopted a repurchase plan which
allowed for the repurchase of up to 150,000 shares of the Corporation's common
stock. This authorization does not have an expiration date. The following table
provides information for the three month period ended June 30, 2007, with
respect to this plan:
Total Number of
Shares Repurchased Shares Purchased
---------------------- as Part of Publicly Maximum Shares That
Average Price Announced Plan May Be Purchased Under
(Dollars in thousands) Number Per Share or Program the Plans or Programs
---------------------- ------ ------------- ------------------- ---------------------
Balance, March 31 2007 150,000
April 1 - 30, 2007 3,663 $44.00 3,663 146,337
May 1 - 31, 2007 1,000 44.00 1,000 145,337
June 1 - 30, 2007 5,071 44.20 5,071 140,266
----- ------ ----- -------
Balance, June 30 2007 9,734 $44.10 9,734 140,266
===== ====== ===== =======
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The registrant's annual meeting of shareholders was held on May 15, 2007. At the
meeting the shareholders voted upon the following matters:
Election of Directors to terms ending 2010:
For Withheld
--------- --------
James C. Fabiano 4,018,755 53,101
David W. Hole 4,018,540 53,316
Dale Weburg 4,010,028 61,828
The terms of the following directors continued after the meeting:
Ronald E. Schumacher
Richard J. Barz
Sandra L. Caul
W. Michael McGuire
Dennis P. Angner
David J. Maness
W. Joseph Manifold
William J. Strickler
32
ITEM 6 - EXHIBITS
(a) Exhibits
31(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
by the Principal Executive Officer
31(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
by the Principal Financial Officer
32 Section 1350 Certification of Principal Executive Officer and Principal
Financial Officer
33
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IBT Bancorp, Inc.
Date: July 26, 2007 /s/ Dennis P. Angner
----------------------------------------
Dennis P. Angner
Chief Executive Officer
/s/ Peggy L. Wheeler
----------------------------------------
Peggy L. Wheeler
Principal Financial Officer
34