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, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________ to __________
Commission File Number: 0-18415
IBT Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Michigan 38-2830092
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway 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, 5,491,252 as of July 18, 2006
IBT BANCORP, INC.
Index to Form 10-Q
Page Numbers
------------
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3-11
Item 2 Management's Discussion and
Analysis of Financial Condition
and Results of Operations 11-21
Item 3 Quantitative and Qualitative
Disclosures About Market Risk 22-23
Item 4 Controls and Procedures 24
PART II OTHER INFORMATION
Item 1A Risk Factors 25
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 25
Item 4 Submission of Matters to a Vote of
Security Holders 25
Item 6 Exhibits 26
Signatures 27
Exhibit 31(a)
Exhibit 31(b)
Exhibit 32
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IBT BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30 December 31
(dollars in thousands) 2006 2005
--------- -----------
ASSETS
Cash and demand deposits due from banks $ 30,168 $ 30,825
-------- --------
Securities available for sale (amortized cost of
$200,175 in 2006 and $185,688 in 2005) 196,537 183,406
Mortgage loans available for sale 1,625 744
Loans
Agricultural 49,243 49,424
Commercial 197,189 179,541
Personal 27,055 28,026
Residential real estate mortgage 232,811 226,251
-------- --------
TOTAL LOANS 506,298 483,242
Less allowance for loan losses 7,041 6,899
-------- --------
NET LOANS 499,257 476,343
Other assets 52,562 50,336
-------- --------
TOTAL ASSETS $780,149 $741,654
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 74,448 $ 73,839
NOW accounts 101,182 104,251
Certificates of deposit and other savings 329,820 328,780
Certificates of deposit over $100,000 110,307 85,608
-------- --------
TOTAL DEPOSITS 615,757 592,478
Other borrowed funds 71,011 52,165
Escrow funds payable 4,541 9,823
Accrued interest and other liabilities 5,714 6,286
-------- --------
TOTAL LIABILITIES 697,023 660,752
Shareholders' Equity
Common stock -- no par value
10,000,000 shares authorized; outstanding--
5,491,252 in 2006 (4,974,715 in 2005) 82,507 72,296
Retained earnings 3,020 10,112
Accumulated other comprehensive loss (2,401) (1,506)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 83,126 80,902
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $780,149 $741,654
======== ========
See notes to condensed consolidated financial statements.
3
IBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Six Months Ended
June 30
-----------------------
(dollars in thousands) 2006 2005
---------- ----------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 4,974,715 4,896,412
10% common stock dividend 497,299 --
Issuance of common stock 19,238 23,114
---------- ----------
BALANCE END OF PERIOD 5,491,252 4,919,526
========== ==========
COMMON STOCK
Balance at beginning of period $ 72,296 $ 66,908
10% common stock dividend 8,887 --
Issuance of common stock 1,093 790
Share-based payment awards under
equity compensation plan 231 --
---------- ----------
BALANCE END OF PERIOD 82,507 67,698
========== ==========
RETAINED EARNINGS
Balance at beginning of period 10,112 6,590
Net income 3,008 3,108
10% common stock dividend (8,887) --
Cash dividends ($0.22 per share in 2006 and $0.20 in 2005) (1,213) (1,080)
---------- ----------
BALANCE END OF PERIOD 3,020 8,618
========== ==========
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period (1,506) (904)
Other comprehensive loss (895) (425)
---------- ----------
BALANCE END OF PERIOD (2,401) (1,329)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY END OF PERIOD $ 83,126 $ 74,987
========== ==========
See notes to condensed consolidated financial statements.
4
IBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------ ------------------
(dollars in thousands) 2006 2005 2006 2005
------- ------ -------- -------
INTEREST INCOME
Loans, including fees $ 8,693 $7,464 $16,860 $14,623
Investment securities
Taxable 1,242 852 2,320 1,683
Nontaxable 676 599 1,325 1,175
Federal funds sold and other 64 68 138 130
------- ------ ------- -------
TOTAL INTEREST INCOME 10,675 8,983 20,643 17,611
INTEREST EXPENSE
Deposits 3,893 2,699 7,449 5,171
Borrowings 633 365 1,139 658
------- ------ ------- -------
TOTAL INTEREST EXPENSE 4,526 3,064 8,588 5,829
------- ------ ------- -------
NET INTEREST INCOME 6,149 5,919 12,055 11,782
Provision for loan losses 216 109 383 319
------- ------ ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,933 5,810 11,672 11,463
NONINTEREST INCOME
Trust fees 217 199 431 382
Service charges on deposit accounts 75 83 152 117
Other service charges and fees 1,084 911 2,037 1,762
Gain on sale of mortgage loans 54 60 111 136
Title insurance revenue 673 592 1,147 1,095
Other 233 254 459 464
------- ------ ------- -------
TOTAL NONINTEREST INCOME 2,336 2,099 4,337 3,956
NONINTEREST EXPENSES
Compensation 3,484 3,413 7,013 6,751
Occupancy 412 375 868 795
Furniture and equipment 723 666 1,436 1,311
Other 1,350 1,168 2,960 2,622
------- ------ ------- -------
TOTAL NONINTEREST EXPENSES 5,969 5,622 12,277 11,479
INCOME BEFORE FEDERAL INCOME TAXES 2,300 2,287 3,732 3,940
Federal income taxes 506 522 724 832
------- ------ ------- -------
NET INCOME $ 1,794 $1,765 $ 3,008 $ 3,108
======= ====== ======= =======
EARNINGS PER SHARE
Basic $ 0.33 $ 0.33 $ 0.55 $ 0.58
======= ====== ======= =======
Diluted $ 0.32 $ 0.33 $ 0.53 $ 0.58
======= ====== ======= =======
Cash dividends per share $ 0.11 $ 0.10 $ 0.22 $ 0.20
======= ====== ======= =======
See notes to condensed consolidated financial statements.
5
IBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
(dollars in thousands) 2006 2005 2006 2005
------- -------- ------- -------
NET INCOME $ 1,794 $1,765 $ 3,008 $3,108
Other comprehensive (loss) income before income taxes:
Unrealized holding (losses) gains on available-for-sale
investment securities arising during the period (1,076) 1,449 (1,459) (641)
Reclassification adjustment for net realized losses (gains)
included in net income 103 (2) 103 (2)
------- ------ ------- ------
Other comprehensive (loss) income before income taxes (973) 1,447 (1,356) (643)
Income tax benefit (expense) related to other comprehensive
(loss) income 331 (493) 461 218
------- ------ ------- ------
OTHER COMPREHENSIVE (LOSS) INCOME (642) 954 (895) (425)
------- ------ ------- ------
COMPREHENSIVE INCOME $ 1,152 $2,719 $ 2,113 $2,683
======= ====== ======= =====
See notes to condensed consolidated financial statements.
6
IBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
June 30
-------------------
(dollars in thousands) 2006 2005
-------- --------
OPERATING ACTIVITIES
Net income $ 3,008 $ 3,108
Reconciliation of net income to cash (used in) provided by operations:
Provision for loan losses 383 319
Depreciation 920 860
Net amortization of investment securities 404 523
Realized loss (gain) on sale of investment securities 103 (2)
Amortization and impairment of mortgage servicing rights 81 70
Increase in cash value of life insurance (204) (180)
Amortization of acquisition intangibles 47 47
Equity shares granted 231 --
Changes in operating assets and liabilities which (used) provided cash
Mortgage loans available for sale (881) 559
Interest receivable 162 278
Other assets (422) (288)
Escrow funds payable (5,282) 1,582
Accrued interest and other liabilities (572) 478
-------- --------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,022) 7,354
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 28,654 23,876
Purchases (43,648) (32,219)
Net increase in loans (23,297) (10,780)
Purchases of premises and equipment (1,225) (1,235)
Purchases of corporate owned life insurance policies (499) --
Acquisition of title office (400) --
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (40,415) (20,358)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits 609 3,162
Net increase in interest bearing deposits 22,670 3,408
Net increase in other borrowed funds 18,846 6,969
Cash dividends paid on common stock (1,213) (1,080)
Proceeds from the issuance of common stock 868 790
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 41,780 13,249
-------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVELANTS (657) 245
Cash and cash equivelants at beginning of period 30,825 20,760
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,168 $ 21,005
======== ========
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) considered necessary for a fair presentation
have been included. Operating results for the three and six month periods ended
June 30, 2006 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2006. 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, 2005.
NOTE 2 - IMPLEMENTATION OF NEW ACCOUNTING STANDARD
On January 1, 2006, the Corporation adopted Financial Accounting Standards No.
123R (revised 2004), "Share-Based Payment" (SFAS No. 123R). This statement
requires that compensation cost relating to share-based payment transactions be
recognized in financial statements and that this cost be measured based on the
fair value of the equity instruments issued. The adoption of this standard
decreased earnings per share by $.01 and $.02 for the three month and six month
periods ended June 30, 2006, respectively.
NOTE 3 - 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
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Average number of common shares outstanding* 5,489,968 5,393,300 5,487,677 5,400,188
Effect of shares in the Deferred Director fee plan* 164,398 -- 161,390 --
--------- --------- --------- ---------
Average number of common shares outstanding used to
calculate diluted earnings per common share 5,654,366 5,393,300 5,649,067 5,400,188
========= ========= ========= =========
* As adjusted for the 10% stock dividend paid February 15, 2006
8
NOTE 4 - OPERATING SEGMENTS
The Corporation's reportable segments are based on legal entities that account
for at least 10% of operating results. The accounting policies are the same as
those discussed in Note 1 to the Consolidated Financial Statements in the
Corporation's annual report for the year ended December 31, 2005. The
Corporation evaluates performance based principally on net income and asset
quality of the respective segments. Summaries of selected financial information
for the Corporation's reportable segments as of and for the three and six month
periods ended June 30 follow:
(dollars in thousands)
All Others
Isabella Bank Farmers (Including
Three Months Ended and Trust State Bank Parent) Total
------------------ ------------- ---------- ---------- --------
JUNE 30, 2006
Total assets $628,930 $137,669 $13,550 $780,149
Interest income 8,453 2,192 30 10,675
Net interest income 4,735 1,350 64 6,149
Provision for loan losses 169 47 -- 216
Net income (loss) 1,579 387 (172) 1,794
JUNE 30, 2005
Total assets 555,424 127,177 13,425 696,026
Interest income 7,007 1,934 42 8,983
Net interest income 4,556 1,316 47 5,919
Provision for loan losses 64 45 -- 109
Net income (loss) 1,463 363 (61) 1,765
All Others
Isabella Bank Farmers (Including
Six Months Ended and Trust State Bank Parent) Total
---------------- ------------- ---------- ---------- --------
JUNE 30, 2006
Total assets $628,930 $137,669 $13,550 $780,149
Interest income 16,308 4,275 60 20,643
Net interest income 9,276 2,656 123 12,055
Provision for loan losses 287 96 -- 383
Net income (loss) 2,910 721 (623) 3,008
JUNE 30, 2005
Total assets 555,424 127,177 13,425 696,026
Interest income 13,771 3,790 50 17,611
Net interest income 9,102 2,598 82 11,782
Provision for loan losses 229 90 -- 319
Net income (loss) 2,726 703 (321) 3,108
9
NOTE 5 - 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. The Corporation used a January 1, 2006 measurement
date for this pension plan.
The components of net periodic benefit cost related to the Corporation's
administered plan for the three-month period ended June 30 were as follows:
Pension Benefits
-------------------------------------
Three months ended Six months ended
June 30 June 30
------------------ ----------------
2006 2005 2006 2005
-------- ------- ------- ------
(thousands)
Components of net periodic benefit cost
Service cost $ 159 $ 137 $ 319 $ 274
Interest cost 152 135 304 270
Expected return on plan assets (139) (116) (278) (232)
Amortization of prior service cost 5 5 9 9
Amortization of net actuarial loss 58 50 116 101
----- ----- ----- -----
Net periodic benefit cost $ 235 $ 211 $ 470 $ 422
===== ===== ===== =====
The Corporation contributed $1,128 and $232 to the pension plan during the six
month periods ended June 30, 2006 and 2005, respectively. The Corporation does
not expect to make additional contributions to the plan during 2006.
NOTE 6 - BUSINESS COMBINATION
On June 30, 2006, the Corporation's subsidiary IBT Title and Insurance Agency,
Inc. completed the purchase of the Grayling, Michigan assets of Heart of the
North, Inc. through the Agency's wholly-owned subsidiary, Milltown Title, LLC.
The acquisition was accounted for as a purchase according to the provisions of
SFAS No. 141. The purchase price was $625, which was funded through the issuance
of $225 (5,114 shares) of IBT Bancorp stock and $400 cash. The purchase price
was allocated $10 to premises and equipment, $475 to goodwill, $15 to title
files, and $125 to other assets. This purchase is part of the Corporation's
strategic intent to expand its title services to new markets.
NOTE 7 - POTENTIAL BUSINESS ACQUISITION
On December 22, 2005, IBT Bancorp, Inc. signed a definitive agreement (the
"Agreement") to acquire The Farwell State Savings Bank ("Farwell"). Farwell
operates two banking offices in Clare County, Michigan and had total assets and
stockholders' equity of approximately $89,100 and $13,600 as of December 31,
2005. The Agreement was amended and restated effective May 2, 2006 to provide
for the merger of Farwell with and into Farmers State Bank of Breckenridge, a
wholly owned subsidiary of IBT. The acquisition is expected to be completed by
the issuance of a combination of IBT Bancorp, Inc. common stock and cash valued
at approximately $38,063. Completion of the acquisition is subject to a number
of contingencies including but not limited to regulatory approval.
10
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2006, the Financial Accounting Standards Board issued an exposure draft
that seeks to make improvements to Statement of Financial Accounting Standards
No. 132R (SFAS No. 132R), "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans". The proposed amendment would not alter the basic
approach to measuring plan assets, benefit obligations, or net periodic benefit
cost (expense). Major changes to SFAS No. 132R proposed in the amendment include
1) the recognition of an asset or liability for the overfunded or underfunded
status of a defined benefit plan, 2) the recognition of actuarial gains and
losses and prior service costs and credits in other comprehensive income, 3)
measurement of plan assets and benefit obligations as of the employer's balance
sheet date, rather than at interim measurement dates as currently allowed, and
4) disclosure of additional information concerning actuarial gains and losses
and prior service costs and credits recognized in other comprehensive income.
The amendment's requirement for public companies to recognize on their balance
sheet the asset or liability associated with the overfunded or underfunded
status of a defined benefit pension plan would take effect for the years ending
after December 15, 2006. Companies would be required to synchronize their
measurement dates to the end of their fiscal years beginning after December 31,
2006. The Corporation is monitoring the proposed effects of SFAS No. 132R,
which, if issued in its present form, is expected to reduce shareholders' equity
in recognition of the underfunded status of our plan by approximately $1,300,
based on the December 31, 2005 valuation date.
In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertain
Tax Positions, which seeks to reduce the significant diversity in practice
associated with recognition and measurement in the accounting for income taxes.
It would apply to all tax positions accounted for in accordance with FASB
Statement No. 109, Accounting for Income Taxes. Specifically, the Interpretation
requires that a tax position meet a "more likely than not recognition threshold"
for the benefit of the uncertain tax position to be recognized in the financial
statements. This threshold is to be met assuming that the tax authorities will
examine the uncertain tax position. The Interpretation also contains guidance
with respect to the measurement of the benefit that is recognized for an
uncertain tax position, when that benefit should be derecognized, and other
matters. The effective date of the Interpretation is the quarter beginning
January 1, 2007. The Corporation has not began to assess the impact of the new
pronouncement.
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 2005 annual report and with the unaudited
condensed consolidated financial statements and notes, as set forth on pages 3
through 10 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, 2005. Of these significant accounting policies, the Corporation
considers its policies regarding the allowance for loan losses and carrying
value of servicing assets to be its most critical accounting policies.
The allowance for loan losses requires management's most subjective and complex
judgment. Changes in economic conditions can have a significant impact on the
allowance for loan losses and therefore the provision for loan losses and
results of operations. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Corporation's assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers 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 2005 Annual
Report and herein.
11
RESULTS OF OPERATIONS
The following table outlines the results of operations for the periods ended
June 30, 2006 and 2005. 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 Six Months
Ended June 30 Ended June 30
--------------- -----------------
(Dollars in thousands except per share data) 2006 2005 2006 2005
------ ------ ------- -------
INCOME STATEMENT DATA
Net interest income $6,149 $5,919 $12,055 $11,782
Provision for loan losses 216 109 383 319
Net income 1,794 1,765 3,008 3,108
PER SHARE DATA
Earnings per share
Basic $ 0.33 $ 0.33 $ 0.55 $ 0.58
Diluted 0.32 0.33 0.53 0.58
Cash dividends per common share 0.11 0.10 0.22 0.20
RATIOS
Average primary capital to average assets 11.70% 11.62% 11.69% 11.60%
Net income to average assets 0.94 1.02 0.80 0.90
Net income to average equity 8.62 9.48 7.31 8.40
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
$318 and $556 in the three and six month periods ended June 30, 2006,
respectively, as compared to $305 and $567 during the same periods in 2005. 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 15)
12
TABLE 1 - AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
Results for the three months ended June 30, 2006 and June 30, 2005.
(Dollars in Thousands)
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.
Three Months Ended
-----------------------------------------------------------------
June 30, 2006 June 30, 2005
------------------------------- -------------------------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Balance Interest Rate Balance Interest Rate
-------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans $495,276 $ 8,693 7.02% $457,257 $7,464 6.53%
Taxable investment securities 124,605 1,242 3.99% 106,189 852 3.21%
Non-taxable investment securities 74,617 1,070 5.74% 62,693 954 6.09%
Federal funds sold 392 5 5.10% 3,786 25 2.64%
Other 4,921 59 4.80% 3,538 43 4.86%
-------- ------- ---- -------- ------ ----
Total earning assets 699,811 11,069 6.33% 633,463 9,338 5.90%
NON EARNING ASSETS:
Allowance for loan losses (6,942) (6,654)
Cash and due from banks 25,512 21,297
Premises and equipment 17,292 18,985
Accrued income and other assets 28,492 24,698
-------- --------
Total assets $764,165 $691,789
======== ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $101,157 366 1.45% $102,876 217 0.84%
Savings deposits 155,204 630 1.62% 157,383 361 0.92%
Time deposits 283,918 2,897 4.08% 240,312 2,121 3.53%
Other borrowed funds 53,629 633 4.72% 35,179 365 4.15%
-------- ------- ---- -------- ------ ----
Total interest bearing liabilities 593,908 4,526 3.05% 535,750 3,064 2.29%
NONINTEREST BEARING LIABILITIES:
Demand deposits 69,902 69,810
Other 17,071 11,735
Shareholders' equity 83,284 74,494
-------- --------
Total liabilities and equity $764,165 $691,789
======== ========
Net interest income (FTE) $ 6,543 $6,274
======= ======
---- ----
Net yield on interest earning assets (FTE) 3.74% 3.96%
==== ====
13
TABLE 2 - AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
Results for the six months ended June 30, 2006 and June 30, 2005.
(Dollars in Thousands)
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.
Six Months Ended
-----------------------------------------------------------------
June 30, 2006 June 30, 2005
------------------------------- -------------------------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Balance Interest Rate Balance Interest Rate
-------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans $490,078 $16,860 6.88% $454,619 $14,623 6.43%
Taxable investment securities 120,683 2,320 3.84% 105,494 1,683 3.19%
Non-taxable investment securities 73,138 2,100 5.74% 61,415 1,873 6.10%
Federal funds sold 942 21 4.46% 4,254 53 2.49%
Other 5,053 117 4.63% 3,486 77 4.42%
-------- ------- ---- -------- ------- ----
Total earning assets 689,894 21,418 6.21% 629,268 18,309 5.82%
NON EARNING ASSETS:
Allowance for loan losses (6,935) (6,576)
Cash and due from banks 27,402 21,676
Premises and equipment 17,302 18,850
Accrued income and other assets 28,648 24,819
-------- --------
Total assets $756,311 $688,037
======== ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $103,954 742 1.43% $104,594 419 0.80%
Savings deposits 156,108 1,223 1.57% 160,964 651 0.81%
Time deposits 276,565 5,484 3.97% 238,195 4,101 3.44%
Other borrowed funds 49,218 1,139 4.63% 31,613 658 4.16%
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities 585,845 8,588 2.93% 535,366 5,829 2.18%
NONINTEREST BEARING LIABILITIES:
Demand deposits 69,664 67,425
Other 18,477 11,247
Shareholders' equity 82,325 73,999
-------- --------
Total liabilities and equity $756,311 $688,037
======== ========
Net interest income (FTE) $12,830 $12,480
======= =======
Net yield on interest earning ---- ----
assets (FTE) 3.72% 3.97%
==== ====
14
TABLE 3 - VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
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, 2006 compared to June 30, 2006 compared to
June 30, 2005 June 30, 2005
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
------ ---- ------- ------ ------ ------
CHANGES IN INTEREST INCOME:
Loans $645 $584 $1,229 $1,182 $1,055 $2,237
Taxable investment securities 163 227 390 263 374 637
Nontaxable investment securities 174 (58) 116 342 (115) 227
Federal funds sold (33) 13 (20) (57) 25 (32)
Other 17 (1) 16 36 4 40
---- ---- ------ ------ ------ ------
Total changes in interest income 966 765 1,731 1,766 1,343 3,109
Interest bearing demand deposits (4) 153 149 (3) 326 323
Savings deposits (5) 274 269 (20) 592 572
Time deposits 417 359 776 712 671 1,383
Other borrowings 212 56 268 401 80 481
---- ---- ------ ------ ------ ------
Total changes in interest expense 620 842 1,462 1,090 1,669 2,759
---- ---- ------ ------ ------ ------
Net change in interest margin (FTE) $346 $(77) $ 269 $ 676 $ (326) $ 350
==== ==== ====== ====== ====== ======
NET INTEREST INCOME, CONTINUED
As shown in Table 1, net interest income, on a fully taxable equivalent (FTE)
basis, was $6,543 for the three months ended June 30, 2006 compared to $6,274
for the same period in 2005, an increase of $269 or 4.29%. This increase was
primarily the result of a 10.47% increase in earning assets, which was funded by
a 10.86% increase in interest bearing liabilities. As shown in Table 3, these
changes in volume provided the Corporation with an additional $346 of FTE net
interest income. This $346 increase, however, was offset by a 0.22% decrease in
the FTE net yield on interest earning assets, which resulted in a $77 decrease
in FTE net interest income. This 0.22% decrease in FTE rate was a result of the
average rate earned on interest earning assets rising slower than those paid on
interest bearing liabilities.
As shown in Table 2, net interest income, on a fully taxable equivalent (FTE)
basis, was $12,830 for the six months ended June 30, 2006 compared to $12,480
for the same period in 2005, an increase of $350 or 2.80%. This increase was
primarily the result of a 9.63% increase in earning assets, which was funded by
a 9.43% increase in interest bearing liabilities. As shown in Table 3, these
changes in volume provided the Corporation with an additional $676 of FTE net
interest income. This $676 increase, however, was offset by a 0.25% decrease in
the FTE net yield on interest earning assets, which resulted in a $326 decrease
in FTE net interest income. This 0.25% decrease in FTE rate was a result of the
average rate earned on interest earning assets rising slower than those paid on
interest bearing liabilities.
Management expects the high level of competition for funding to continue for the
remainder of the year, which will result in further tightening of the
Corporation's interest rate margins. However, the Corporation does anticipate
that projected increases in interest earning assets will continue to be strong
enough to overshadow the tightening interest rate margins and result in
continued increases in net interest margin.
15
ALLOWANCE FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 64.0% 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, 2006 and 2005.
The table also compares the Corporation's allowance for loan loss as a percent
of loans and loans classified as nonperforming as a percent of outstanding loans
to its peer group. The Corporation's peer group includes 406 holding companies
with assets between $500 million and $1.0 billion. In management's opinion, the
allowance for loan losses is adequate as of June 30, 2006.
Six Months Ended
June 30
-------------------
2006 2005
-------- --------
Allowance for loan losses - January 1 $6,899 $6,444
Loans charged off
Commercial and agricultural 103 8
Real estate mortgage 181 22
Personal 171 170
------ ------
TOTAL LOANS CHARGED OFF 455 200
Recoveries
Commercial and agricultural 76 18
Real estate mortgage 15 65
Personal 123 94
------ ------
TOTAL RECOVERIES 214 177
------ ------
Net loans charged off 241 23
Provision charged to income 383 319
------ ------
ALLOWANCE FOR LOAN LOSSES - JUNE 30 $7,041 $6,740
====== ======
ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.39% 1.45%
====== ======
PEER GROUP (AS OF MARCH 31, 2006 AND 2005) 1.21% 1.26%
====== ======
June 30
-------------------
2006 2005
-------- --------
NONPERFORMING LOANS
Total amount of loans outstanding at June 30 $506,298 $463,652
Nonaccrual loans 1,874 1,168
Accruing loans past due 90 days or more 1,053 1,318
Restructured loans 713 808
-------- --------
TOTAL $ 3,640 $ 3,294
======== ========
LOANS CLASSIFIED AS NONPERFORMING AS A
% OF OUTSTANDING LOANS 0.72% 0.71%
======== ========
PEER GROUP (AS OF MARCH 31, 2006 AND 2005) 0.48% 0.55%
======== ========
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.
16
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
following table:
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30 Change June 30 Change
--------------- ------------ --------------- ------------
2006 2005 $ % 2006 2005 $ %
------ ------ ---- ----- ------ ------ ---- -----
Trust fees $ 217 $ 199 $ 18 9.0% $ 431 $ 382 $ 49 12.8%
Service charges on deposit accounts 75 83 (8) -9.6% 152 117 35 29.9%
Other service charges and fees
NSF and overdraft fees 752 639 113 17.7% 1,377 1,163 214 18.4%
ATM and debit card fees 134 109 25 22.9% 256 208 48 23.1%
Freddie Mac servicing fee 161 153 8 5.2% 317 307 10 3.3%
All other 37 10 27 270.0% 87 84 3 3.6%
------ ------ ---- ----- ------ ------ ---- -----
Total other service charges and fees 1,084 911 173 19.0% 2,037 1,762 275 15.6%
------ ------ ---- ----- ------ ------ ---- -----
Gain on sale of mortgage loans 54 60 (6) -10.0% 111 136 (25) -18.4%
Title insurance revenue 673 592 81 13.7% 1,147 1,095 52 4.7%
Other
Increase in cash value of corporate
owned life insurance policies 103 90 13 14.4% 203 181 22 12.2%
Brokerage and advisory fees 51 51 -- 0.0% 105 95 10 10.5%
All other 79 113 (34) -30.1% 151 188 (37) -19.7%
------ ------ ---- ----- ------ ------ ---- -----
Total other 233 254 (21) -8.3% 459 464 (5) -1.1%
------ ------ ---- ----- ------ ------ ---- -----
TOTAL NONINTEREST INCOME $2,336 $2,099 $237 11.3% $4,337 $3,956 $381 9.6%
====== ====== ==== ===== ====== ====== ==== =====
Trust fees have steadily increased over the past few years. These increases have
been driven by continued growth in the portfolio managed as well as the
appreciation of trust assets. Management expects these increases to continue in
the future.
Since the first quarter of 2005, the Corporation has made substantial efforts to
increase noninterest income. To help achieve this goal, management analyzed
various fees related to deposit accounts, including service charges, NSF and
overdraft fees, and ATM and debit card fees. Based on this analysis, the
Corporation made any necessary adjustments to ensure that its fee structure fell
within a range of its competitors, while at the same time making sure that the
fees remained fair to deposit customers. Management does not anticipate any
significant changes to its deposit fee structure for the remainder of 2006,
however due to the overall increase in fees being charged, it expects 2006 fees
to be greater than those earned in 2005.
Title insurance revenues have grown as a result of changes in the competitive
landscape in the Michigan title insurance industry. Due to the continued
struggling Michigan economy and the decrease in volume in mortgage activity,
some title insurance companies are closing offices around the state. These
closures have provided the Corporation with an opportunity to take advantage of
the decreased level of competition for business. Management believes that this
decreased level of competition for business, coupled with the acquisition of
Milltown Title, LLC will continue to provide solid increases in title insurance
revenues for the rest of 2006.
The increase in the cash value from corporate owned life insurance policies
relates to policies that had a carrying value of $11,236 as of June 30, 2006,
and were included in other assets. These policies earned an average rate of
3.61% and 3.50% during the six month periods ended June 30, 2006 and 2005,
respectively. Due to their preferential tax treatment, these policies have a
taxable equivalent rate of 5.47% and 5.30% as of June 30, 2006 and 2005,
respectively. These policies are placed with five different insurance companies
with an S & P rating of A- or better. The increase in income related to the
change of the cash surrender value of the policies can be attributed to both the
increases in rates and the purchase of additional policies in January 2006.
All other noninterest income includes a $103 loss on the sale of securities,
which occurred in the three month period ended June 30, 2006. Management has
determined that the additional interest income which will be earned from the
reinvestment of the proceeds of these sales will exceed the losses recognized by
approximately $25 by year end 2006.
17
NONINTEREST EXPENSES
Noninterest expenses include compensation, occupancy, furniture and equipment,
and other expenses. Significant account balances are outlined in the following
table:
Three Months Ended Six Months Ended
------------------------------ --------------------------------
June 30 Change June 30 Change
--------------- ------------ ----------------- ------------
2006 2005 $ % 2006 2005 $ %
------ ------ ---- ----- ------- ------- ---- -----
Compensation
Leased employee salaries $2,462 $2,358 $104 4.4% $ 4,925 $ 4,735 $190 4.0%
Leased employee benefits 988 1,042 (54) -5.2% 2,009 1,990 19 1.0%
All other 34 13 21 161.5% 79 26 53 203.8%
------ ------ ---- ----- ------- ------- ---- -----
Total compensation 3,484 3,413 71 2.1% 7,013 6,751 262 3.9%
------ ------ ---- ----- ------- ------- ---- -----
Occupancy
Depreciation 93 93 -- 0.0% 199 180 19 10.6%
Property taxes 83 87 (4) -4.6% 167 174 (7) -4.0%
Outside services 80 71 9 12.7% 165 154 11 7.1%
Utilities 70 63 7 11.1% 164 143 21 14.7%
Building rent 39 30 9 30.0% 78 56 22 39.3%
All other 47 31 16 51.6% 95 88 7 8.0%
------ ------ ---- ----- ------- ------- ---- -----
Total occupancy 412 375 37 9.9% 868 795 73 9.2%
------ ------ ---- ----- ------- ------- ---- -----
Furniture and equipment
Depreciation 347 344 3 0.9% 721 680 41 6.0%
Service contracts 187 157 30 19.1% 363 300 63 21.0%
Computer costs 106 92 14 15.2% 196 181 15 8.3%
ATM and debit card fees 68 60 8 13.3% 128 124 4 3.2%
All other 15 13 2 15.4% 28 26 2 7.7%
------ ------ ---- ----- ------- ------- ---- -----
Total furniture and equipment 723 666 57 8.6% 1,436 1,311 125 9.5%
------ ------ ---- ----- ------- ------- ---- -----
Other
SOX compliance fees 115 62 53 85.5% 452 294 158 53.7%
Audit fees 49 60 (11) -18.3% 123 125 (2) -1.6%
Marketing 152 144 8 5.6% 305 292 13 4.5%
All other 1,034 902 132 14.6% 2,080 1,911 169 8.8%
------ ------ ---- ----- ------- ------- ---- -----
Other 1,350 1,168 182 15.6% 2,960 2,622 338 12.9%
------ ------ ---- ----- ------- ------- ---- -----
TOTAL NONINTEREST EXPENSES $5,969 $5,622 $347 6.2% $12,277 $11,479 $798 7.0%
====== ====== ==== ===== ======= ======= ==== =====
Management is continuously analyzing noninterest expenses to determine where
expenditures can be decreased or held to modest increases. Management has been
fairly successful in stabilizing noninterest expenses as compared to the
percentage increase in total assets.
Leased employee salaries expense has increased due to normal merit increases,
and also due to the Corporation's growth in both size as well as complexity.
Management does not anticipate any significant changes in leased employees for
the remainder of 2006.
Leased employee benefits have decreased during the three months ended June 30,
2006, when compared to the same period in 2005. These decreases can be
attributed to the unusually high level of medical claims paid during the same
period in 2005. These claims have since decreased and employee benefits have
only risen slightly during the first six months of 2006 as compared to the same
period in 2005. Management does not anticipate medical claims to fluctuate
significantly from current levels and, therefore, expects leased employee
benefits to approximate current levels for the remaining six months of 2006.
In 2006, IBT Title entered into rental agreements with local realtors to perform
mortgage closings in the realtors' offices. These rent payments are expected to
continue for the rest of 2006.
Service contracts, computer expenses, and ATM and debit card fees continue to
increase significantly from year to year. These increases are a result of the
Corporation reinvesting 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 does
expect service contracts to be higher in the last six months of 2006 when
compared to the first six months of the year as a significant amount of the
service contracts are renewed in June and July, and it is anticipated that
increases will occur.
The Corporation continues to experience elevated costs associated with complying
with the Sarbanes-Oxley Act of 2002 (SOX). The costs associated with compliance
extend beyond the continued increases in SOX compliance fees and in other areas
including
18
compensation expense. Management is continually analyzing ways to minimize the
adverse financial statement impact of SOX compliance through the streamlining of
the Corporation's loan and deposit operations. The Corporation has also made
staff changes in the internal audit department which are expected to decrease
external auditing, including SOX related fees.
All other expenses includes consulting fees, director's fees, legal fees,
postage fees, printing and supplies, title insurance expenses, as well as other
miscellaneous expenses that are not individually significant. These increases
are a result of overall increases in the cost of doing business.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
June 30 December 31 % Change
2006 2005 $ Change (unannualized)
-------- ----------- -------- --------------
ASSETS
Cash and demand deposits due from banks $ 30,168 $ 30,825 $ (657) -2.13%
Securities available for sale 196,537 183,406 13,131 7.16%
Mortgage loans available for sale 1,625 744 881 118.41%
Loans 506,298 483,242 23,056 4.77%
Allowance for loan losses (7,041) (6,899) (142) 2.06%
Other assets 52,562 50,336 2,226 4.42%
-------- -------- ------- ------
TOTAL ASSETS $780,149 $741,654 $38,495 5.19%
======== ======== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $615,757 $592,478 $23,279 3.93%
Other borrowed funds 71,011 52,165 18,846 36.13%
Escrow funds payable 4,541 9,823 (5,282) -53.77%
Accrued interest and other liabilities 5,714 6,286 (572) -9.10%
-------- -------- ------- ------
TOTAL LIABILITIES 697,023 660,752 36,271 5.49%
SHAREHOLDERS' EQUITY 83,126 80,902 2,224 2.75%
-------- -------- ------- ------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $780,149 $741,654 $38,495 5.19%
======== ======== ======= ======
Since December 2005, the Corporation has experienced strong loan growth, with
the majority of the growth coming from commercial loans. Management does
anticipate that loan demand, particularly commercial loan demand, will remain
strong for the remainder of 2006.
The Corporation, as part of its goal to increase 2006 average assets by 8.0%
over 2005, also increased securities during the six month period ended June 30,
2006. To achieve this growth, however, the Corporation was forced to accept
smaller interest margins than it would have in the past. Management anticipates
that the security portfolio will approximate current levels for the remainder of
2006.
The Corporation, through its Banks, has established a policy that all amortized
fixed rate mortgage loans with maturities greater than 15 years will be sold.
During the six month period ended June 30, 2006, the Corporation sold $14,873 of
mortgages as compared to $16,972 in mortgages for the same period in 2005.
Management does not expect the sale of mortgages to fluctuate significantly from
current levels based on current market trends and the current and projected
interest rate environment.
The Corporation enjoyed a solid increase in deposits during the first six months
of 2006. A significant portion of the deposit growth came in the form of
brokered and internet certificate of deposits. However, the increases in
deposits were not enough to fund the increases in loans and securities. To help
overcome this funding shortfall, the Corporation utilized wholesale borrowing
sources such as the Federal Home Loan Bank. Management is constantly monitoring
deposit account balances in an effort to maintain and increase the current
customer base, as deposit account rates are typically lower than those demanded
from internet and brokered deposits and wholesale borrowing sources and is
performing market analyses to help ensure that the Corporation's products remain
attractive to consumers.
19
The Corporation observed a substantial decrease in escrow funds payable during
the first six months of 2006. This decrease can be attributed to Internal
Revenue Code Section ( "IRC") 1031 exchange account balances being reinvested by
customers of IBT Title and Insurance Agency, Inc. ("IBT Title"). These IRC 1031
accounts allow owners of business or investment property to defer realized gains
from the sale of business or investment property if the funds are reinvested in
another property. As such, these balances can fluctuate significantly between
periods as the funds are reinvested. The Corporation does anticipate that these
1031 exchange accounts will continue to decrease through 2006 as the funds are
reinvested by IBT Title's customers.
LIQUIDITY
Liquidity management is designed to have adequate resources available to meet
depositor and borrower discretionary demands for funds. Liquidity is also
required to fund expanding operations, investment opportunities, and payment of
cash dividends. The primary sources of the Corporation's liquidity are cash,
cash equivalents, and available-for-sale investment securities.
As of June 30, 2006, cash and cash equivalents as a percentage of total assets
equaled 3.87%, versus 4.16% as of December 31, 2005. During the first six months
of 2006, $41,780 in net cash was provided from financing activities. Operating
activities used $2,022 in net cash and investing activities used $40,415. The
accumulated effect of the Corporation's operating, investing and financing
activities was a $657 decrease in cash and cash equivalents during the first six
months of 2006.
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale were
$196,537 as of June 30, 2006 and $183,406 as of December 31, 2005. In addition
to these primary sources of liquidity, the Corporation has the ability to borrow
in the federal funds market and at both the Federal Reserve Bank and the Federal
Home Loan Bank. The Corporation's liquidity is considered adequate by
management.
CAPITAL
The capital of the Corporation consists solely of common stock, surplus,
retained earnings, and accumulated other comprehensive loss. The overall capital
has increased $2,224 since December 31, 2005 primarily due to corporate
earnings. Accumulated other comprehensive loss increased $895 due to unrealized
losses in available-for-sale securities during 2006.
There are no significant regulatory constraints placed on the Corporation's
capital. The Federal Reserve Board's current recommended minimum tier 1 and tier
2 capital to average assets requirement is 6.0%. The Corporation's tier 1 and
tier 2 capital to adjusted average assets, which consists of shareholders'
equity plus the allowance for loan losses less unamortized acquisition
intangibles, was 11.6% as of June 30, 2006.
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 bank 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 ratios as of June 30, 2006:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
June 30, 2006
-----------------
Required Actual
-------- ------
Equity Capital 4.00% 15.99%
Secondary Capital* 4.00% 1.25%
---- -----
Total Capital 8.00% 17.24%
==== =====
* IBT Bancorp's secondary capital consists solely of the allowance for loan
losses. The percentage for the secondary capital under the required column
is the maximum allowed from all sources.
20
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET ARRANGEMENTS
The Corporation is party to financial instruments with off-balance-sheet risk.
These instruments are entered into in the normal course of business to meet the
financing needs of its customers. These financial instruments, which include
commitments to extend credit and standby letters of credit, involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The contract or notional amounts
of these instruments reflect the extent of involvement the Corporation has in a
particular class of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in deciding to
make these commitments as it does for extending loans to customers.
Commitments to extend credit, which totaled $81,521 at June 30, 2006, 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, 2006,
the Corporation had a total of $1,708 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, 2006 were $1,479.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission.
21
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 no foreign exchange risk, holds
limited loans outstanding to oil and gas concerns, and holds no trading account
assets, nor does it 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.
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, 2006.
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.
22
Quantitative Disclosures of Market Risk
June 30, 2006
------------------------------------------------------------------ Fair Value
(dollars in thousands) 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% 8.46% 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%
Quantitative Disclosures of Market Risk
June 30, 2005
------------------------------------------------------------------ Fair Value
(dollars in thousands) 2006 2007 2008 2009 2010 Thereafter Total 06/30/05
-------- ------- ------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest bearing assets $ 810 $ -- $ -- $ -- $ -- $ -- $ 810 $ 810
Average interest rates 3.07% -- -- -- -- -- 3.07%
Fixed interest rate securities $ 24,402 $44,721 $38,314 $16,047 $11,316 $34,932 $169,732 $169,729
Average interest rates 3.32% 3.30% 3.30% 3.49% 3.90% 3.17% 3.33%
Fixed interest rate loans $ 89,308 $75,952 $73,547 $52,286 $53,195 $24,623 $368,911 $382,654
Average interest rates 6.52% 5.98% 6.12% 5.90% 6.22% 5.33% 6.12%
Variable interest rate loans $ 50,378 $15,173 $19,495 $ 6,741 $ 3,645 $ 1,089 $ 96,521 $ 96,521
Average interest rates 7.47% 6.90% 6.81% 6.95% 6.96% 7.40% 7.19%
Rate sensitive liabilities
Borrowed funds $ 15,973 $ 4,000 $ 4,166 $ 2,500 $ 6,312 $ 5,000 $ 37,951 $ 37,977
Average interest rates 3.62% 3.50% 3.65% 3.45% 5.03% 4.95% 4.01%
Savings and NOW accounts $ 51,847 $96,826 $78,705 $22,421 $ 6,117 $ -- $255,916 $255,916
Average interest rates 1.55% 1.28% 0.98% 1.25% 1.97% 0.00% 1.26%
Fixed interest rate time deposits $124,939 $52,390 $31,436 $16,315 $18,157 $ 1,010 $244,247 $244,345
Average interest rates 3.37% 3.94% 3.90% 3.42% 3.95% 4.62% 3.61%
Variable interest rate time deposits $ 936 $ 441 $ 8 $ -- $ -- $ -- $ 1,385 $ 1,385
Average interest rates 2.90% 2.90% 2.93% -- -- -- 2.90%
23
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, 2006, 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, 2006, 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, no change occurred in the Corporation's
internal control over financial reporting that materially affected, or is likely
to materially affect, the Corporation's internal control over financial
reporting.
24
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
There have been no material changes to the factors disclosed in Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(A) On June 30, 2006, pursuant to an exemption from registration provided by
Section 4(2) of the Securities Act of 1933, as amended, IBT Bancorp, Inc.
issued 5,114 shares of common stock, with a value of $225,000, to Heart of
the North, Inc. ("HIN") in connection with the acquisition by Milltown
Title, LLC, a wholly-owned subsidiary of IBT Title and Insurance Agency,
Inc. of HIN's Grayling, Michigan assets pursuant to the terms of an Asset
Purchase Agreement dated June 26, 2006.
(B) NONE
(C) REPURCHASES OF COMMON STOCK
In October 2002, the Corporation's Board of Directors authorized the repurchase
of up to $2 million of the Corporation's common stock. This authorization does
not have an expiration date. Based on repurchases since October 2002, the
Corporation is currently able to repurchase up to $1.7 million of its common
stock or 38,636 shares under the repurchase authorization. The following table
provides information as of June 30, 2006, with respect to this plan:
Shares Repurchased
---------------------- Maximum Shares That
Average Price May Be Purchased Under
(Dollars in thousands) Number Per Share the Plans or Programs
------ ------------- -----------------------
Balance, March 31, 2006 38,636
April 1 - 30, 2006 -- $-- --
May 1 - 31, 2006 -- -- --
June 1 - 30, 2006 -- -- --
--- --- ------
Balance June 30, 2006 -- $-- 38,636
=== === ======
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The registrant's annual meeting of shareholders was held on April 28, 2006. At
the meeting the shareholders voted upon the following matters:
Election of Directors to terms ending 2008:
For Witheld
--------- -------
Dennis P. Angner 3,624,742 2,202
David J. Maness 3,627,869 4,034
W. Joseph Manifold 3,629,701 7,161
William J. Strickler 3,629,667 2,236
The terms of the following directors continued after the meeting:
James C. Fabiano
David W. Hole
Dale Weburg
Ronald E. Schumacher
Richard J. Barz
Sanda L. Caul
Timothy M. Miller
25
ITEM 6 - EXHIBITS
(a) Exhibits
The following exhibits are filed as part of this report:
3(a) Amended Articles of Incorporation (1)
3(b) Amendment to the Articles of Incorporation (2)
3(c) Amendment to the Articles of Incorporation (4)
3(d) Amendment to the Articles of Incorporation (4)
3(e) Amended Bylaws (7)
10(a)* Isabella Bank & Trust Executive Supplemental Income
Agreement (2)
10(b)* Isabella Bank & Trust Deferred Compensation Plan (3)
10(c)* IBT Bancorp, Inc. and Related Companies Deferred Compensation
Plan for Directors (5)
10(d)* Isabella Bank and Trust Death Benefit Only Agreement (6)
10(e)* Amendment to the IBT Bancorp, Inc. and Related Companies
Deferred Compensation Plan for Directors (8)
10(f)* The IBT Bancorp, Inc. and Related Companies Deferred
Compensation Plan for Non-Employee Directors (9)
10(g)* First amendment to the IBT Bancorp, Inc. and Related
Companies Deferred Compensation Plan for Non-Employee
Directors (10)
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
1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 12, 1991, and incorporated herein by reference.
2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1994, and incorporated herein by reference.
3) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1996, and incorporated herein by reference.
4) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 22, 2000, and incorporated herein by reference.
5) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 27, 2001, and incorporated herein by reference.
6) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 25, 2002, and incorporated herein by reference.
7) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 16, 2005, and incorporated herein by reference.
8) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated
March 10, 2006, and incorporated herein by reference.
9) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated
December 19, 2005, and incorporated herein by reference.
10) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated
March 28, 2006, and incorporated herein by reference.
* Management contract or compensatory plan or arrangement.
26
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 27, 2006 /s/ Dennis P. Angner
----------------------------------------
Dennis P. Angner
Chief Executive Officer
/s/ Peggy L. Wheeler
----------------------------------------
Peggy L. Wheeler
Principal Financial Officer
27
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
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