SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 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 Street, Mt. Pleasant, Michigan 48858
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (989) 772-9471
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------------------- --------------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - No Par Value
(Title of Class)
Indicated by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
Indicated by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [X] No
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated file, a non-accelerated filer, or a smaller reporting company. See
definition of "accelerated filer," "large accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act (Check One).
[ ] Large accelerated filer [X] Accelerated Filer
[ ] Non-accelerated filer [ ] Smaller reporting company
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $278,888,000 as of the last business day of the registrant's most
recently completed second fiscal quarter.
The number of shares outstanding of the registrant's Common Stock (no par value)
was 7,566,413 as of March 5, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
(Such documents are incorporated herein only to the extent specifically set
forth in response to an item herein.)
Documents Part of Form 10-K Incorporated into
--------- ---------------------------------------
IBT Bancorp, Inc. Proxy Statement
for its Annual Meeting of Shareholders Part III
to be held May 13, 2008
1
PART I
ITEM 1. BUSINESS (ALL DOLLARS IN THOUSANDS)
GENERAL
IBT Bancorp, Inc. (the "Corporation") is a registered financial services holding
company incorporated in September 1988 under Michigan law. The Corporation has
five subsidiaries: Isabella Bank and Trust (the "Bank"), IBT Title and Insurance
Agency, Inc. ("IBT Title"), IBT Personnel, LLC, IB&T Employee Leasing, LLC, and
Financial Group Information Services. In April 2007, the Corporation
consolidated the charters of FSB Bank and Isabella Bank and Trust into one
charter as Isabella Bank and Trust. Isabella Bank and Trust has twenty four
banking offices located throughout Clare, Gratiot, Isabella, Mecosta, Montcalm,
and Saginaw Counties, all of which are located in central Michigan. IBT Title
provides title insurance, abstract searches, and closes loans in Isabella,
Montcalm, Clare, Mecosta, Roscommon, and Newaygo Counties. IBT Personnel, LLC
and IB & T Employee Leasing, LLC, are employee leasing companies. Financial
Group Information Services renders computer services to the Corporation and its
subsidiaries. All employees of the Corporation are employed by IBT Personnel and
IB&T Employee Leasing and are leased to each individual subsidiary. The
principal city in which the Corporation operates is Mount Pleasant, which has a
population of approximately 26,000. Markets served include Isabella, Gratiot,
Mecosta, southwestern Midland, western Saginaw, northern Montcalm, and southern
Clare counties. The area includes significant agricultural production, light
manufacturing, retail, gaming and tourism, and two universities with combined
enrollment of approximately 30,000 students. The area unemployment rate is
approximately 5.7% and average household income is $38.
On January 1, 2008, the Corporation acquired 100 percent of Greenville Community
Financial Corporation ("GCFC"). As a result of this acquisition, Greenville
Community Bank, a wholly-owed subsidiary of GCFC, merged with and into the Bank.
As of December 31, 2007 GCFC had assets of $107,986. For further discussion, see
"Note 24 - Subsequent Events" of Notes to Consolidated Financial Statements.
The Bank 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 the Bank. The
Bank periodically makes charitable contributions in the form of cash transfers
to the Foundation. The Foundation is administered by members of the
Corporation's Board of Directors. The assets and transactions of the Foundation
are not included in the consolidated financial statements of IBT Bancorp, Inc.
The assets of the Foundation as of December 31, 2007 were $1,069.
COMPETITION
The Corporation competes with other commercial banks, many of which are
subsidiaries of other bank holding companies, savings and loan associations,
mortgage brokers, finance companies, credit unions, and retail brokerage firms.
The Bank is a community bank with a focus on providing high-quality,
personalized service at a fair price. The Bank offers a broad array of banking
services to businesses, institutions, and individuals. Deposit services offered
include checking accounts, savings accounts, certificates of deposit, and direct
deposits. Lending activity includes loans made pursuant to lines of credit, real
estate loans, consumer loans, student loans, and credit card loans. Other
financial related products include trust services, title insurance, stocks,
investment securities, bonds, mutual fund sales, 24 hour banking service locally
and nationally through shared automatic teller machines, 24 hour online banking,
and safe deposit box rentals.
LENDING
The Bank limits lending activities to local markets and has not purchased any
loans from the secondary market. The Bank does not make loans to fund leveraged
buyouts, has no foreign corporate or government loans, and has limited holdings
of corporate debt securities. The general lending philosophy is to avoid
concentrations to individuals and business segments. The following table sets
forth the composition of the Corporation's loan portfolio as of December 31,
2007.
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LOANS BY MAJOR LENDING CATEGORY
(in thousands)
Amount %
-------- -------
Residential real estate
1 to 4 family residential $282,877 46.17%
Construction and land development 15,060 2.46%
-------- -------
Total 297,937 48.63%
Commercial
Real estate 158,982 25.95%
Farmland 19,951 3.26%
Agricultural production 27,456 4.48%
Commercial operating and other 79,324 12.95%
-------- -------
Total 285,713 46.63%
Other consumer installment 29,037 4.74%
-------- -------
TOTAL $612,687 100.00%
======== =======
There has been no significant changes in loan concentrations or underwriting
standards in 2007.
First and second residential real estate mortgages are the single largest
category of loans. The Corporation, through its Bank, offers 3 and 5 year fixed
rate balloon mortgages with a maximum 30 year amortization, and 15 and 30 year
amortized fixed rate loans. Fixed rate loans with an amortization of greater
than 15 years are generally sold upon origination to the Federal Home Loan
Mortgage Association. Fixed rate residential mortgage loans with an amortization
of 15 years or less may be held in the Bank's portfolio, held for future sale,
or sold upon origination. Factors used in determining when to sell these
mortgages include management's judgment about the direction of interest rates,
the Corporation's need for fixed rate assets in the management of its interest
rate sensitivity, and overall loan demand.
Lending policies generally limit the maximum loan-to-value ratio on residential
mortgages to 95% of the lower of the appraised value of the property or the
purchase price, with the condition that private mortgage insurance is required
on loans with loan-to-value ratios in excess of 80%. Substantially all loans
upon origination have a loan-to-value ratio of less than 80%. Underwriting
criteria for residential real estate loans include: evaluation of the borrower's
ability to make monthly payments, the value of the property securing the loan,
the payment of principal, interest, taxes, and hazard insurance does not exceed
28% of a borrower's gross income, all debt servicing does not exceed 36% of
income, acceptable credit reports, verification of employment, income, and
financial information. Appraisals are performed by independent appraisers.
Escrow accounts for taxes and insurance are required on all loans with
loan-to-value ratio in excess of 80%. All mortgage loan requests are reviewed by
a mortgage loan committee; loans in excess of $400 require the approval of the
Bank's Internal Loan Committee, Board of Directors, or its loan committee.
Construction and land development loans consist primarily of 1 to 4 family
residential properties. These loans primarily have a 6 to 9 month maturity and
are made using the same underwriting criteria as residential mortgages. Loan
proceeds are disbursed in increments as construction progresses and inspections
warrant. Construction loans are either converted to permanent loans at the
completion of construction or are paid off from financing provided through
another financial institution.
Commercial loans include loans for commercial real estate, farmland and
agricultural production, state and political subdivisions, and commercial
operating loans. Repayment of commercial loans is often dependent upon the
successful operation and management of a business; thus, these loans generally
involve greater risk than other types of lending. The Corporation minimizes its
risk by generally limiting the amount of loans to any one borrower to $12,557.
Borrowers with credit needs of more than $12,557 are serviced through the use of
loan participations with other commercial banks. All commercial real estate
loans require loan-to-value limits of less than 80%. Depending upon the type of
loan, past credit history, and current operating results, the Corporation may
require the borrower to pledge accounts receivable, inventory, and fixed assets.
Personal guarantees are generally required from the owners of closely held
corporations, partnerships, and proprietorships. In addition, the Corporation
requires annual financial statements, prepares cash flow analyses, and reviews
credit reports.
Consumer loans granted include automobile loans, secured and unsecured personal
loans, credit cards, student loans, and overdraft protection. Loans are
amortized generally for a period of up to 6 years. The underwriting emphasis is
on a borrower's ability to pay rather than collateral value. No consumer loans
are sold to the secondary market.
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In summary, because approximately 78% of the Corporation's loan portfolio is
secured by real estate, a significant decline in real estate values driven by
deteriorating state economic conditions could have an adverse impact on
financial results from operations of the Corporation.
SUPERVISION AND REGULATION
The Corporation is subject to supervision and regulation by the Securities and
Exchange Commission under the Securities Act of 1933 and the Securities Exchange
Act of 1934 and by the Federal Reserve Board under the Bank Holding Company Act
of 1956 as amended ("BHC Act") and Financial Services Holding Company Act of
2000. A bank holding company and its subsidiaries are able to conduct only the
business of commercial banking and activities closely related or incidental to
it. (See Regulation below.)
Isabella Bank and Trust is chartered by the State of Michigan and is a member of
the Federal Reserve System. The Bank's deposits are insured by the FDIC to the
extent provided by law. The Bank is a member of the Federal Home Loan Bank of
Indianapolis. The Bank is supervised and regulated by the Michigan Office of
Financial and Insurance Services (OFIS), the Federal Reserve Board, and the
FDIC. (See Regulation below.)
IBT Title, a non-banking subsidiary of IBT Bancorp, Inc., is a licensed title
insurance agency and is subject to regulation by the OFIS, as well as the
Federal Real Estate Settlement Procedures Act. IBT Title owns a membership
interest in two similar title insurance agencies, LTi Title, LLC and Pere
Marquette Abstract and Title Agency, LLC.
PERSONNEL
As of December 31, 2007, the Corporation and its subsidiaries had 310 full-time
leased employees. The Corporation provides group life, health, accident,
disability and other insurance programs for employees and a number of other
employee benefit programs. The Corporation believes its relationship with its
employees to be good.
LEGAL PROCEEDINGS
There are various claims and lawsuits in which the Corporation and its
subsidiaries are periodically involved, such as claims to enforce liens,
condemnation proceedings on making and servicing of real property loans and
other issues incidental to the Corporation's business. However, the Corporation
and its subsidiaries are not involved in any material pending litigation.
AVAILABLE INFORMATION
The Corporation does not maintain a website. Consequently, the Corporation's
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy
Statements, Current Reports on Form 8-K and amendments to those reports are not
available on a corporate website. The Corporation will provide paper copies of
its SEC reports free of charge upon request of a shareholder.
The SEC maintains an internet site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding the Corporation
(CIK #0000842517) and other issuers.
REGULATION
The earnings and growth of the banking industry and therefore the earnings of
the Corporation and of the Bank are affected by the credit policies of monetary
authorities, including the Federal Reserve System. An important function of the
Federal Reserve System is to regulate the national supply of bank credit in
order to combat recession and curb inflationary pressures. Among the instruments
of monetary policy used by the Federal Reserve System to implement these
objectives are open market operations in U.S. Treasury and U.S. Government
Agency securities, changes in the discount rate on member bank borrowing, and
changes in reserve requirements against member bank deposits. These methods are
used in varying combinations to influence overall growth of bank loans,
investments and deposits and may also affect interest rates charged on loans or
paid for deposits. The monetary policies of the Federal Reserve System have had
a significant effect on the operating results of commercial banks and related
financial service providers in the past and are expected to continue to do so in
the future. The effect of such policies upon the future business and earnings of
the Corporation and the Bank cannot be predicted.
THE CORPORATION
The Corporation, as a financial services holding company, is regulated under the
BHC Act, and is subject to the supervision of the Board of Governors of the
Federal Reserve System ("Federal Reserve Board"). The Corporation is registered
as a financial services holding company with the Federal Reserve Board and is
required to file with the Federal Reserve Board an annual report and such
additional information as the
4
Federal Reserve Board requires. The Federal Reserve Board may also make
inspections and examinations of the Corporation and its subsidiaries.
Prior to March 13, 2000, a bank holding company generally was prohibited under
the BHC Act from acquiring the beneficial ownership or control of more than 5%
of the voting shares or substantially all the assets of any company, including a
bank, without the Federal Reserve Board's prior approval. Also, prior to March
13, 2000, a bank holding company generally was limited to engaging in banking
and such other activities as determined by the Federal Reserve Board to be
closely related to banking.
Under the Gramm-Leach-Bliley Act of 1999 ("GLB Act"), beginning March 13, 2000,
an eligible bank holding company was able to elect to become a financial holding
company and thereafter affiliate with securities firms and insurance companies
and engage in other activities that are financial in nature. The GLB Act defines
"financial in nature" to include securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; activities that the Federal Reserve
Board has determined to be closely related to banking; and other activities that
the Federal Reserve Board, after consultation with the Secretary of the
Treasury, determines by regulation or order to be financial in nature or
incidental to a financial activity. No Federal Reserve Board approval is
required for a financial holding company to acquire a company, other than a bank
holding company, bank or savings association, engaged in activities that are
financial in nature or incidental to activities that are financial in nature, as
defined in the GLB Act or as determined by the Federal Reserve Board.
A bank holding company is eligible to become a financial holding company if each
of its subsidiary banks and savings associations is well capitalized under the
prompt corrective action provisions of the Federal Deposit Insurance Act ("FDI
Act"), is well managed and has a rating under the Community Reinvestment Act
(CRA) of satisfactory or better. If any bank or savings association subsidiary
of a financial holding company ceases to be well capitalized or well managed,
the Federal Reserve Board may require the financial holding company to divest
the subsidiary. Alternatively, the financial holding company may elect to
conform its activities to those permissible for bank holding companies that do
not elect to become financial holding companies. If any bank or savings
association subsidiary of a financial holding company receives a CRA rating of
less than satisfactory, the financial holding company will be prohibited from
engaging in new activities or acquiring companies other than bank holding
companies, banks or savings associations.
The Corporation became a financial holding company effective March 13, 2000. It
continues to maintain its status as a bank holding company for purposes of other
Federal Reserve Board regulations.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to its subsidiary Bank and to commit resources to
support its subsidiaries. This support may be required at times when, in the
absence of such Federal Reserve Board policy, the Corporation would not
otherwise be required to provide it.
Under Michigan law, if the capital of a Michigan state chartered bank (such as
the Bank) has become impaired by losses or otherwise, the Commissioner of the
OFIS may require that the deficiency in capital be met by assessment upon the
bank's shareholders pro rata on the amount of capital stock held by each, and if
any such assessment is not paid by any shareholder within 30 days of the date of
mailing of notice thereof to such shareholder, cause the sale of the stock of
such shareholder to pay such assessment and the costs of sale of such stock.
Any capital loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment. This priority would apply to
guarantees of capital plans under the Federal Deposit Insurance Corporation
Improvement Act of 1991.
The Sarbanes-Oxley Act of 2002 ("SOX") contains important requirements for
public companies in the area of financial disclosure and corporate governance.
In accordance with Section 302(a) of SOX, a written certification by the
Corporation's principal executive and financial officer is required. This
certification attests that the Corporation's quarterly and annual reports filed
with the SEC do not contain any untrue statement of a material fact. See the
Certifications filed as Exhibits 31 (a) and (b) to this Form 10-K for such
certification of the financial statements and other information for this 2007
Form 10-K. The Corporation has also implemented a program designed to comply
with Section 404 of SOX, which included the identification of significant
processes and accounts, documentation of the design of control effectiveness
over process and entity level controls, and testing of the operating
effectiveness of key controls. See Item 9A, "Controls and Procedures" for the
Corporation's evaluation of its disclosure controls and procedures.
Certain additional information concerning regulatory guidelines for capital
adequacy and other regulatory matters is presented herein under the caption
"Capital" on page 28 and in the notes to the consolidated financial statements
"Note 16 - Commitments and Other Matters" and "Note 17 - Minimum Regulatory
Capital Requirements".
5
SUBSIDIARY BANK
Effective April 16, 2007, Isabella Bank and Trust and FSB Bank, wholly owned
subsidiaries of the Corporation, were consolidated into one charter as Isabella
Bank and Trust.
The Bank is subject to regulation and examination primarily by OFIS and is also
subject to regulation and examination by the Federal Reserve Board.
The agencies and federal and state laws extensively regulate various aspects of
the banking business including, among other things, permissible types and
amounts of loans, investments and other activities, capital adequacy, branching,
interest rates on loans and on deposits and the safety and soundness of banking
practices.
Banking laws and regulations also restrict transactions by insured banks owned
by a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal shareholders, officers, directors and their affiliates, and
investments by the subsidiary bank in the shares or securities of the parent
holding company (or any of the other non-bank or bank affiliates), acceptance of
such shares or securities as collateral security for loans to any borrower.
The Bank is also subject to legal limitations on the frequency and amount of
dividends that can be paid to the Corporation. For example, a Michigan state
chartered bank may not declare a cash dividend or a dividend in kind except out
of net profits then on hand after deducting all losses and bad debts, and then
only if it will have a surplus amounting to not less than 20% of its capital
after the payment of the dividend. Moreover, a Michigan state chartered bank may
not declare or pay any cash dividend or dividend in kind until the cumulative
dividends on its preferred stock, if any, have been paid in full. Further, if
the surplus of a Michigan state chartered bank is at any time less than the
amount of its capital, before the declaration of a cash dividend or dividend in
kind, it must transfer to surplus not less than 10% of its net profits for the
preceding half-year (in the case of quarterly or semi-annual dividends) or the
preceding two consecutive half-year periods (in the case of annual dividends).
The payment of dividends by the Corporation and the Bank is also affected by
various regulatory requirements and policies, such as the requirement to
maintain adequate capital above regulatory guidelines. Federal laws impose
further restrictions on the payment of dividends by insured banks that fail to
meet specified capital levels. The FDIC may prevent an insured bank from paying
dividends if the bank is in default of payment of any assessment due to the
FDIC. In addition, payment of dividends by a bank may be prevented by the
applicable federal regulatory authority if such payment is determined, by reason
of the financial condition of such bank, to be an unsafe and unsound banking
practice. The Federal Reserve Board and the FDIC have issued policy statements
providing that bank holding companies and insured banks should generally pay
dividends only out of current operating earnings.
The aforementioned regulations and restrictions may limit the Corporation's
ability to obtain funds from its subsidiary bank for its cash needs, including
payment of dividends and operating expenses.
The activities and operations of the Bank are also subject to other federal and
state laws and regulations, including usury and consumer credit laws, the
Federal Truth-in-Lending Act, Truth-in-Saving and Regulation Z of the Federal
Reserve Board, the Federal Bank Merger Act, and the Bank Secrecy Act.
ITEM 1A. RISK FACTORS
In the normal course of business the Corporation is exposed to various risks.
These risks include credit risk, interest rate risk, liquidity risk, operational
risk, compliance risk, economic risk, accounting risk, and disruption of
infrastructure. These risks, if not managed correctly, could have a significant
impact on earnings and capital. Management balances the Corporation's strategic
goals, including revenue and profitability objectives, with associated risks
through the use of policies, systems and procedures which have been adopted to
identify, assess, control, monitor, and manage in each risk area. Senior
management continually reviews the adequacy and effectiveness of these policies,
systems, and procedures.
CREDIT RISK
Credit risk is defined as the risk impacting earnings or capital due to an
obligor's failure to meet the terms of a loan or an investment, or otherwise
failing to perform as agreed. Credit risk occurs any time an institution relies
on another party, issuer, or borrower's performance.
To manage the credit risk arising from lending activities, the Corporation's
most significant source of credit risk, management maintains what it believes
are sound underwriting policies and procedures. Management continuously monitors
asset quality in order to manage the Corporation's credit risk to determine the
appropriateness of valuation allowances. These valuation allowances take into
consideration various factors including, but not limited to, local, regional,
and national economic conditions.
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The Corporation maintains an allowance for possible loan losses, which is a
reserve established through a provision for possible loan losses charged to
expense, that represents management's best estimate of probable losses that may
be incurred within the existing portfolio of loans. The allowance, in the
judgment of management, is necessary to reserve for estimated loan losses and
risks inherent in the loan portfolio. The level of the allowance reflects
management's continuing evaluation of industry concentrations; specific credit
risks; loan loss experience; current loan portfolio quality; present economic,
political and regulatory conditions and unidentified losses inherent in the
current loan portfolio. The determination of the appropriate level of the
allowance for possible loan losses inherently involves a high degree of
subjectivity and requires the Corporation to make significant estimates of
current credit risks and future trends, all of which may undergo material
changes. Changes in economic conditions affecting borrowers, new information
regarding existing loans, identification of additional problem loans and other
factors, both within and outside of the Corporation's control, may require an
increase in the allowance for possible loan losses. In addition, bank regulatory
agencies periodically review the Corporation's allowance for loan losses and may
require an increase in the provision for possible loan losses or the recognition
of further loan charge-offs, based on judgments different than those of
management. Any increases in the allowance for possible loan losses will result
in a decrease in net income and, possibly, capital, and may have a material
adverse effect on the Corporation's financial condition and results of
operations.
INTEREST RATE RISK
Interest rate risk is the timing differences in the maturity or repricing
frequency of a financial institution's interest earning assets and its interest
bearing liabilities. Management monitors the potential effects of changes in
interest rates through rate shock and gap analyses. To help mitigate the effects
of interest rate risk, management makes significant efforts to stagger projected
cash flows and maturities of interest sensitive assets and liabilities.
LIQUIDITY RISK
Liquidity risk is the risk to earnings or capital arising from the Bank's
inability to meet its obligations when they come due without incurring
unacceptable losses. Liquidity risk includes the inability to manage unplanned
decreases or changes in funding sources, or failure to recognize or address
changes in market conditions that affect the ability to liquidate assets quickly
and with minimal loss in value. The Corporation has significant borrowing
capacity through correspondent banks as well as the ability to sell investments
to fund potential cash shortages.
OPERATIONAL RISK
Operational risk is the risk of loss resulting from inadequate or failed
internal processes, people, and systems, or external events. The Corporation is
exposed to operational risk which includes reputation risk and transaction risk.
Reputation risk is developing and retaining marketplace confidence in handling
customers' financial transactions in an appropriate manner as well as protecting
the safety and soundness of the institution. Transaction risk includes losses
from fraud, error, the inability to deliver products or services, and loss or
theft of information. Transaction risk also encompasses product development and
delivery, transaction processing, information technology systems, and the
internal control environment.
To help minimize the potential losses due to operational risks, management has
established an internal audit department and has retained the services of a
certified public accounting firm to assist in performing such internal audit
work. The focus of these internal audit procedures is to verify the validity and
appropriateness of various transactions and processes. The results of these
procedures are reported to the Corporation's or Bank Audit Committee.
COMPLIANCE RISK
Compliance risk is the risk of loss from violations of, or nonconformance with
laws, rules, regulations, prescribed practices, or ethical standards. This
includes new or revised tax, accounting, and other laws, regulations, rules and
standards that could significantly impact strategic initiatives, results of
operations, and financial condition. The financial services industry is
extensively regulated and must meet regulatory standards set by the FDIC, OFIS,
the Federal Reserve Board, FASB, SEC and other regulatory bodies. Federal and
state laws and regulations are designed primarily to protect the deposit
insurance funds and consumers, and not necessarily to benefit the Corporation's
shareholders. The nature, extent, and timing of the adoption of significant new
laws, changes in existing laws, or repeal of existing laws may have a material
impact on the Corporation's business, results of operations, and financial
condition, the effect of which is impossible to predict at this time.
The Corporation's compliance department periodically assesses the adequacy and
effectiveness of the Corporation's processes for controlling and managing its
principal compliance risks.
ECONOMIC CONDITIONS
An economic downturn within the Corporation's local markets, as well as
downturns in the state or national markets, could negatively impact household
and corporate incomes. This could lead to decreased demand for both loan and
deposit products and lead to an increase of customers who fail to pay interest
or principal on their loans. Management continually monitors key economic
indicators in an effort to anticipate the
7
possible effects of downturns in the local, regional, and national economies.
The Corporation's success depends primarily on the general economic conditions
of the State of Michigan and the specific local markets in which the Corporation
operates. Unlike larger national or other regional banks that are more
geographically diversified, the Corporation provides banking and financial
services to customers primarily in the Clare, Gratiot, Isabella, Mecosta,
Montcalm, and Saginaw Counties in Michigan. The local economic conditions in
these areas have a significant impact on the demand for the Corporation's
products and services as well as the ability of the Corporation's customers to
repay loans, the value of the collateral securing loans and the stability of the
Corporation's deposit funding sources. A significant decline in general economic
conditions, caused by inflation, recession, acts of terrorism, outbreak of
hostilities or other international or domestic occurrences, unemployment,
changes in securities markets or other factors could impact these local economic
conditions and, in turn, have a material adverse effect on the Corporation's
financial condition and results of operations.
ACCOUNTING RISK
The Corporation's consolidated financial statements conform with generally
accepted accounting principles, which require management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements. These estimates are based on information available to management at
the time the estimates are made. Actual results could differ from those
estimates. For further discussion regarding significant accounting estimates,
see "Note 1- Summary of Significant Accounting Policies" in the attached Notes
to the Consolidated Financial Statements.
DISRUPTION OF INFRASTRUCTURE
The Corporation's operations depend upon its technological and physical
infrastructure, including its equipment and facilities. Extended disruption of
its vital infrastructure by fire, power loss, natural disaster,
telecommunications failure, computer hacking and viruses, or other events
outside of the Corporation's control, could affect the financial outcome of the
Corporation or the financial services industry as a whole. The Corporation has
developed disaster recovery plans, which provide detailed instructions to cover
all significant aspects of the Corporation's operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Corporation's executive offices are located at 200 East Broadway, Mt.
Pleasant, Michigan 48858. Isabella Bank and Trust owns 24 branches and an
operations center. IBT Title owns one office, and leases six. The Corporation's
facilities current, planned, and best use is for conducting its current
activities with the exception of approximately 8% of the main office, and 25% of
the Lake Isabella office, which is leased to tenants. Management continually
monitors and assesses the need for expansion and / or improvement for all
facilities. In management's opinion, each facility has sufficient capacity and
is in good condition.
8
ITEM 3. LEGAL PROCEEDINGS
The Corporation and its subsidiaries are not involved in any material pending
legal proceedings. The Corporation, because of the nature of its business, is at
times subject to numerous pending and threatened legal actions that arise out of
the normal course of operating their business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 2007 to a vote of
security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDERS' MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
COMMON STOCK AND DIVIDEND INFORMATION
There is no established market for the Corporation's common stock or public
information with respect to its market price. There are occasional sales by
shareholders of which management of the Corporation is aware. The prices were
reported to management in only some of the transactions and management cannot
confirm the prices that were reported during this period. All of the information
has been adjusted to reflect the 10% stock dividend, paid February 29, 2008.
Sale Price
Number of Number of ---------------
Period Sales Shares Low High
-------------- --------- --------- ------ ------
2007
First Quarter 52 43,366 $40.00 $40.00
Second Quarter 70 34,189 40.00 40.00
Third Quarter 53 37,491 40.00 40.00
Fourth Quarter 60 19,114 40.00 40.00
--- -------
235 134,160
=== =======
2006
First Quarter 27 20,903 40.00 40.00
Second Quarter 46 33,663 40.00 40.00
Third Quarter 45 14,876 40.00 40.00
Fourth Quarter 46 22,359 40.00 40.00
--- -------
164 91,801
=== =======
9
The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10% stock dividend paid on February 29, 2008.
Per Share
-------------
2007 2006
----- -----
First Quarter $0.11 $0.10
Second Quarter 0.11 0.10
Third Quarter 0.11 0.10
Fourth Quarter 0.29 0.28
----- -----
Total $0.62 $0.58
===== =====
IBT Bancorp's authorized common stock consists of 10,000,000 shares, of which
6,364,120 shares are issued and outstanding as of December 31, 2007. As of that
date, there were 2,715 shareholders of record.
On March 22, 2007, the Board of Directors amended its repurchase plan to allow
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 as of December 31, 2007, with respect to this plan, and has
not been adjusted for the 10% stock dividend paid February 29, 2008:
Total Number of
Shares Repurchased Shares Purchased Maximum Number of
---------------------- as Part of Publicly Shares That May Yet Be
Average Price Announced Plan Purchased Under the
Number Per Share or Program Plans or Programs
------ ------------- ------------------- ----------------------
Balance, September 30, 2007 121,172
October 1 - 31, 2007 1,792 $44.00 1,792 119,380
November 1 - 30, 2007 -- -- -- 119,380
December 1 - 31, 2007 -- -- -- 119,380
----- ------ ----- -------
Balance, December 31, 2007 1,792 $44.00 1,792 119,380
===== ====== ===== =======
Information concerning Securities Authorized for Issuance Under Equity
Compensation Plans appears under "Item 12. Security Ownership of Certain
Beneficial Owners and Management and Related Shareholder Matters" included
elsewhere in this annual report on Form 10-K.
10
STOCK PERFORMANCE
The following graph compares the cumulative total shareholder return on
Corporation common stock for the last five years with the cumulative total
return on (1) the NASDAQ Stock Market Index, which is comprised of all United
States common shares traded on the NASDAQ and (2) the NASDAQ Bank Stock Index,
which is comprised of bank and bank holding company common shares traded on the
NASDAQ over the same period. The graph assumes the value of an investment in the
Corporation and each index was $100 at December 31, 2002 and all dividends are
reinvested.
STOCK PERFORMANCE FIVE-YEAR TOTAL RETURN
(PERFORMANCE GRAPH)
The dollar values for total shareholder return plotted in the graph above are
shown in the table below:
COMPARISON OF FIVE YEAR CUMULATIVE
AMONG IBT BANCORP, NASDAQ STOCK MARKET,
AND NASDAQ BANK STOCK
YEAR IBT BANCORP NASDAQ NASDAQ BANKS
---------- ----------- ------ ------------
12/31/2002 100.0 100.0 100.0
12/31/2003 116.2 150.5 133.0
12/31/2004 136.3 164.6 151.2
12/31/2005 145.0 168.1 148.3
12/31/2006 161.8 185.5 168.7
12/31/2007 164.3 205.3 135.2
11
ITEM 6. SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS
Two key measures of earnings performance commonly used in the banking industry
are return on average assets and return on average shareholders' equity. Return
on average assets measures the ability of a corporation to profitably and
efficiently employ its resources. Return on average equity indicates how
effectively the Corporation is able to generate earnings on shareholder invested
capital.
SUMMARY OF SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
INCOME STATEMENT DATA
Total interest income $ 53,972 $ 44,709 $ 36,882 $ 33,821 $ 35,978
Net interest income 28,013 24,977 23,909 23,364 23,528
Provision for loan losses 1,211 682 777 735 1,455
Net income 7,930 7,001 6,776 6,645 7,205
BALANCE SHEET DATA
End of year assets $957,282 $910,127 $741,654 $678,034 $664,079
Daily average assets 925,631 800,174 700,624 675,157 659,323
Daily average deposits 727,762 639,046 576,091 567,145 563,600
Daily average loans/net 596,739 515,539 459,310 430,854 399,008
Daily average equity 119,246 91,964 74,682 70,787 65,770
PER SHARE DATA (1)
Earnings per share
Basic $ 1.14 $ 1.12 $ 1.14 $ 1.13 $ 1.24
Diluted 1.11 1.08 1.14 1.13 1.24
Cash dividends 0.62 0.58 0.55 0.52 0.50
Book value (at year end) 17.58 16.61 13.44 12.25 11.76
FINANCIAL RATIOS
Shareholders' equity to assets (at year end) 12.86% 12.72% 10.91% 10.71% 10.38%
Return on average equity 6.65 7.61 9.07 9.39 10.95
Return on average tangible equity 8.54% 8.31% 9.12% 10.01% 11.99%
Cash dividend payout to net income 54.27 53.89 48.02 46.20 39.99
Return on average assets 0.86 0.87 0.97 0.98 1.09
2007 2006
------------------------------------- ------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
------- ------- ------- ------- ------- ------- ------- ------
Quarterly Operating Results:
Total interest income $13,747 $13,794 $13,539 $12,892 $12,754 $11,312 $10,675 $9,968
Interest expense 6,466 6,690 6,554 6,249 5,980 5,164 4,526 4,062
------- ------- ------- ------- ------- ------- ------- ------
Net interest income 7,281 7,104 6,985 6,643 6,774 6,148 6,149 5,906
Provision for loan losses 593 268 224 126 54 245 216 167
Noninterest income 2,605 2,719 2,227 2,411 2,355 2,406 2,336 2,001
Noninterest expenses 6,597 6,995 6,833 6,804 6,537 5,659 5,969 6,308
Net income 2,268 2,096 1,756 1,810 1,962 2,031 1,794 1,214
Per Share of Common Stock: (1)
Earnings per share
Net income $ 0.33 $ 0.30 $ 0.25 $ 0.26 $ 0.28 $ 0.34 $ 0.30 $ 0.20
Diluted 0.32 0.29 0.25 0.25 0.27 0.33 0.29 0.19
Cash dividends 0.29 0.11 0.11 0.11 0.28 0.10 0.10 0.10
Book value (at quarter end) 17.58 17.38 17.04 16.77 16.61 14.26 13.76 13.56
(1) Retroactively restated for the 10% stock dividend, paid on February 29,
2008.
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
IBT BANCORP FINANCIAL REVIEW
(All dollars in thousands)
The following is management's discussion and analysis of the financial condition
and results of operations for IBT Bancorp, Inc. (the "Corporation"). This
discussion and analysis is intended to provide a better understanding of the
consolidated financial statements and statistical data included elsewhere in the
Annual Report. The Corporation's significant acquisition of Farwell State
Savings Bank during 2006 was accounted for as a purchase transaction, and as
such, the related results of Farwell's operations are included from the date of
acquisition of Farwell State Savings Bank. See "Note 2 - Business and
Acquisition" in the accompanying Notes to the Consolidated Financial Statements
included elsewhere in the report.
CRITICAL ACCOUNTING POLICIES: The Corporation's significant accounting policies
are set forth in Note 1 of the Consolidated Financial Statements. Of these
significant accounting policies, the Corporation considers its policies
regarding the allowance for loan losses and acquisition intangibles to be its
most critical accounting policies.
The allowance for loan losses requires management's most subjective and complex
judgment. Changes in economic conditions can have a significant impact on the
allowance for loan losses and, therefore, the provision for loan losses and
results of operations. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Corporation's assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers that is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see Provision for
Loan Losses and Allocation of the Allowance for Loan Losses.
Generally accepted accounting principles require the Corporation to determine
the fair value of all of the assets and liabilities of an acquired entity, and
record their fair value on the date of acquisition. The Corporation employs a
variety of means in determination of the fair value, including the use of
discounted cash flow analysis, market comparisons, and projected future revenue
streams. For certain items that management believes it has the appropriate
expertise to determine the fair value, management may choose to use its own
calculations of the value. In other cases, where the value is not easily
determined, the Corporation consults with outside parties to determine the fair
value of the asset or liability. Once valuations have been adjusted, the net
difference between the price paid for the acquired company and the value of its
balance sheet is recorded as goodwill. This goodwill is not amortized, but is
tested for impairment on at least an annual basis.
13
DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY
INTEREST RATE AND INTEREST DIFFERENTIAL
The following schedules present the daily average amount outstanding for each
major category of interest earning assets, nonearning assets, interest bearing
liabilities, and noninterest bearing liabilities for the last three years. This
schedule also presents an analysis of interest income and interest expense for
the periods indicated. All interest income is reported on a fully taxable
equivalent (FTE) basis using a 34% federal income tax rate. Nonaccruing loans,
for the purpose of the following computations, are included in the average loan
amounts outstanding. Federal Reserve and Federal Home Loan Bank Equity holdings
which are restricted are included in Other Assets.
2007 2006
------------------------------- -------------------------------
Tax Average Tax Average
Average Equivalent Yield / Average Equivalent Yield /
Balance Interest Rate Balance Interest Rate
-------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans $604,342 $43,808 7.25% $522,726 $36,575 7.00%
Taxable investment securities 68,398 3,751 5.48% 123,316 4,948 4.01%
Nontaxable investment securities 96,789 5,726 5.92% 75,712 4,423 5.84%
Trading account securities 50,904 2,298 4.51% -- -- --
Federal funds sold 6,758 342 5.06% 2,762 139 5.03%
Other 7,143 317 4.44% 5,012 250 4.99%
-------- ------- ---- -------- ------- ----
Total earning assets 834,334 56,242 6.74% 729,528 46,335 6.35%
NON EARNING ASSETS:
Allowance for loan losses (7,603) (7,187)
Cash and due from banks 20,588 24,351
Premises and equipment 21,507 17,690
Accrued income and other assets 56,805 35,792
-------- --------
Total assets $925,631 $800,174
======== ========
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits $109,370 $ 1,880 1.72% $105,476 $ 1,664 1.58%
Savings deposits 188,323 4,232 2.25% 158,327 2,675 1.69%
Time deposits 349,941 16,493 4.71% 301,593 12,825 4.25%
Other borrowed funds 68,586 3,354 4.89% 53,256 2,568 4.82%
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities 716,220 25,959 3.62% 618,652 19,732 3.19%
NONINTEREST BEARING LIABILITIES:
Demand deposits 80,128 73,650
Other 10,037 15,908
Shareholders' equity 119,246 91,964
-------- --------
Total liabilities and equity $925,631 $800,174
======== ========
Net interest income (FTE) $30,283 $26,603
======= =======
---- ----
Net yield on interest earning
assets (FTE) 3.63% 3.65%
==== ====
2005
-------------------------------
Tax Average
Average Equivalent Yield /
Balance Interest Rate
-------- ---------- -------
INTEREST EARNING ASSETS:
Loans $466,001 $30,682 6.58%
Taxable investment securities 106,025 3,487 3.29%
Nontaxable investment securities 63,271 3,818 6.03%
Trading account securities -- -- --
Federal funds sold 3,882 116 2.99%
Other 5,060 199 3.93%
-------- ------- ----
Total earning assets 644,239 38,302 5.95%
NON EARNING ASSETS:
Allowance for loan losses (6,691)
Cash and due from banks 19,955
Premises and equipment 17,544
Accrued income and other assets 25,577
--------
Total assets $700,624
========
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits $103,684 $ 1,001 0.97%
Savings deposits 157,238 1,571 1.00%
Time deposits 245,559 8,802 3.58%
Other borrowed funds 37,209 1,599 4.30%
-------- ------- ----
Total interest bearing liabilities 543,690 12,973 2.39%
NONINTEREST BEARING LIABILITIES:
Demand deposits 69,610
Other 12,642
Shareholders' equity 74,682
--------
Total liabilities and equity $700,624
========
Net interest income (FTE) $25,329
=======
----
Net yield on interest earning
assets (FTE) 3.93%
====
14
NET INTEREST INCOME
The Corporation derives the majority of its gross income from interest earned on
loans and investments, while its most significant expense is the interest cost
incurred for funds used. Net interest income is the amount by which interest
income on earning assets exceeds the interest cost of deposits and borrowings.
Net interest income is influenced by changes in the balance and mix of assets
and liabilities and market interest rates. Management exerts some control over
these factors; however, Federal Reserve monetary policy and competition have a
significant impact. Interest income includes loan fees of $1,330 in 2007, $1,172
in 2006, and $1,142 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.
VOLUME AND RATE VARIANCE ANALYSIS
The following table details the dollar amount of changes in FTE net interest
income for each major category of interest earning assets and interest bearing
liabilities and the amount of change attributable to changes in average balances
(volume) or average rates. The change in interest due to both volume and rate
has been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
2007 Compared to 2006 2006 Compared to 2005
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Volume Rate Net Volume Rate Net
------- ------ ------- -------- ------ ------
CHANGES IN INTEREST INCOME:
Loans $ 5,878 $1,355 $ 7,233 $3,889 $2,004 $5,893
Taxable investment securities (2,647) 1,450 (1,197) 622 839 1,461
Nontaxable investment securities 1,246 57 1,303 730 (125) 605
Trading account securities 2,298 -- 2,298 -- -- --
Federal funds sold 202 1 203 (40) 63 23
Other 97 (30) 67 (2) 53 51
------- ------ ------- ------ ------ ------
Total changes in interest income 7,074 2,833 9,907 5,199 2,834 8,033
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits 63 153 216 18 645 663
Savings deposits 568 989 1,557 11 1,093 1,104
Time deposits 2,189 1,479 3,668 2,215 1,808 4,023
Other Borrowings 749 37 786 755 214 969
------- ------ ------- ------ ------ ------
Total changes in interest expense 3,569 2,658 6,227 2,999 3,760 6,759
------- ------ ------- ------ ------ ------
Net Change in interest margin(FTE) $ 3,505 $ 175 $ 3,680 $2,200 $ (926) $1,274
======= ====== ======= ====== ====== ======
The Corporation has experienced a decline in the net yield on interest earning
assets since 2005. The main contributing factors are:
- An inverted or essentially flat yield curve for much of the period.
- Rates paid on interest bearing liabilities have increased at a faster
rate than those earned on interest earning assets.
- The Corporation's increased reliance on higher cost time deposits and
other borrowed funds.
The Corporation, as well as all other financial institutions, has been coping
with an essentially flat or inverted yield curve since the third quarter of
2005. A flat yield curve results when short term interest rates are essentially
the same as long term rates (over two years), and an inverted yield curve is
where short term rates are higher than long term rates. In either case, the
yield curve 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. This yield
curve, however, has provided the
15
Corporation with little opportunity to do this effectively. Over the past two
years, the yield curve has also been the main reason why the rates paid on
interest bearing liabilities have been rising faster than those earned on
interest earning assets.
Overall FTE net interest income increased $3,680 for the year ended December 31,
2007 when compared to the same period in 2006. The net increase from the change
in volume of interest earning assets and interest bearing liabilities was $3,505
in 2007. Net interest income increased $175 as a result of interest rate
changes. During 2007, the rates paid on interest bearing liabilities increased
0.43%, while those earned on interest earning assets increased 0.39%. The
decline in interest rate spread is a direct result of the continued use of high
cost funding sources such as certificates of deposit and other borrowed funds.
The increase in the cost of these deposits in relation to other sources is a
result of continued competition for retail deposits.
To offset the decreases in interest spreads from the unfavorable rate
environment, the Corporation has taken a measured growth posture. Most of this
growth has come in the form of commercial loans and investments. This growth has
allowed the Corporation to increase net interest income through volume. During
the third and fourth quarters of 2007, the Corporation earned an additional
$1,254 in FTE interest income when compared to the first and second quarters of
2007.
The Corporation 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 Corporation's Audit Committee,
Board of Directors, management, and investment advisors reviewed the
Corporation's assets and liabilities to determine which fluctuate in value based
on changes in market interest rates to determine the potential impact of the new
standard. As a result of these considerations, IBT elected early adoption of the
new accounting standard effective January 1, 2007. The purpose of the early
adoption of this standard was to provide IBT an opportunity to accelerate the
restructuring of its balance sheet to better manage interest rate risk now and
in the future.
The impact of the Corporation's balance sheet restructuring plan implemented
during 2007 increased FTE net interest margin by 0.31% when the quarter ended
December 31, 2007 is compared to the quarter ended March 31, 2007. Management
does anticipate that interest margins will increase during 2008 when compared to
2007.
Since July 2007, the Federal Reserve Bank ("The Fed") lowered its target Fed
Funds rate by 2.00%, which included a 1.25% decrease in January 2008. The Fed's
actions are a result of turbulence in the financial markets resulting from the
collapse of the sub-prime residential market and investments, derivatives, and
other financial products using these mortgages as collateral. The Fed's actions
are an attempt to avoid or lessen the likelihood of a severe economic downturn.
As of December 31, 2007, the Corporation's balance sheet was well positioned to
protect interest margins in a decreasing rate environment. The overall impact on
financial performance could be negative if economic conditions in its principal
market deteriorate significantly as a result of a material economic downturn.
As shown in the above tables, when comparing year ending December 31, 2006 to
2005, fully taxable equivalent (FTE) net interest income increased $1,274 or
5.03%. An increase of 13.24% in average interest earning assets provided $5,199
of FTE interest income. The majority of this growth was funded by a 13.79%
increase in interest bearing liabilities, resulting in $2,999 of additional
interest expense. Overall, changes in volume resulted in $2,200 in additional
FTE interest income. The average FTE interest rate earned on assets increased by
0.40%, increasing FTE interest income by $2,834, and the average rate paid on
deposits and borrowings increased by 0.80%, increasing interest expense by
$3,760.
PROVISION FOR LOAN LOSSES
The provision for loan losses represents the current period loan cost associated
with maintaining an appropriate allowance for loan losses as determined by
management. Periodic fluctuations in the provision for loan losses result from
management's best estimates as to the adequacy of the allowance for loan losses
to absorb probable losses within the existing loan portfolio. The provision for
loan losses for each period is further dependent upon many factors, including
loan growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, assessment by management, third parties and banking regulators of
the quality of the loan portfolio, the value of the underlying collateral on
problem loans and the general economic conditions in the market areas.
16
The following schedule shows the composition of the provision for loan losses
and the allowance for loan losses.
Year Ended December 31
----------------------------------------------------
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Allowance for loan losses - January 1 $ 7,605 $ 6,899 $ 6,444 $ 6,204 $ 5,593
Allowance of acquired bank -- 726 -- -- --
Loans charged off
Commercial and agricultural 905 368 101 561 578
Real estate mortgage 659 252 166 -- 117
Consumer 582 529 376 374 445
-------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF 2,146 1,149 643 935 1,140
Recoveries
Commercial and agricultural 297 136 105 191 93
Real estate mortgage 49 53 -- 62 29
Consumer 285 258 216 187 174
-------- -------- -------- -------- --------
TOTAL RECOVERIES 631 447 321 440 296
-------- -------- -------- -------- --------
Net loans charged off 1,515 702 322 495 844
Provision charged to income 1,211 682 777 735 1,455
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES - DECEMBER 31 $ 7,301 $ 7,605 $ 6,899 $ 6,444 $ 6,204
======== ======== ======== ======== ========
YTD AVERAGE LOANS $604,342 $522,726 $466,001 $437,438 $404,453
======== ======== ======== ======== ========
NET LOANS CHARGED OFF TO AVERAGE LOANS OUTSTANDING 0.25% 0.13% 0.07% 0.11% 0.21%
======== ======== ======== ======== ========
YEAR END LOANS $612,687 $591,042 $483,242 $452,895 $421,860
======== ======== ======== ======== ========
ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.19% 1.29% 1.43% 1.42% 1.47%
======== ======== ======== ======== ========
The nationwide increase in residential mortgage loans past due and in
foreclosures has received considerable attention by both the press and
regulatory agencies. 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 6 months. As a result of the rate resetting on these
mortgages, it is expected that troubled sub-prime loans nationally will increase
substantially through the end of 2008. The increase in troubled residential
mortgage loans and a tightening of underwriting standards will most likely
result in a further increased inventory of unsold homes from its current level
of over 10 months. The inventory of unsold homes has not reached these levels
since the 1991 recession. The combination of all of these factors will most
likely further reduce average home values and thus homeowner's equity on a
national level.
The Corporation originates and sells fixed rate residential real estate
mortgages to the Federal Home Loan Mortgage Corporation. The Corporation has not
originated loans for either trading or its own portfolio that would be
classified as sub prime, nor has it originated adjustable rate mortgages or
finance loans for more than 80% of market value unless insured by private third
party insurance.
While the Corporation does not originate variable rate mortgages (other than
home equity lines of credit), nor does it hold sub-prime mortgage loans, the
difficulties experienced in the sub-prime market has the potential to adversely
impact the entire market, and thus the overall credit quality of the IBT
residential real estate mortgage portfolio.
With increases in the net loans charged off to average loans, nonperforming
loans as a percentage of total loans, and continued growth in the loan
portfolio, the Corporation increased its provision charged to income in 2007.
Overall, the allowance for loan losses as a percentage of loans declined in
2007. The primary factors affecting the decline in the allowance as a percentage
of loans in 2006 was the acquisition of Farwell State Savings Bank in the fourth
quarter of 2006 and the mix of the loan portfolio that was purchased combined
with strong loan growth in 2006. Management also believes its conservative
credit underwriting standards have allowed the Corporation, to date, to avoid
significant credit losses. Management will continue to closely monitor its
overall credit quality during 2008.
Based on management's analysis of the allowance for loan losses, the calculated
range for the required allowance was $3,684 to $10,215. As such, the allowance
for loan losses of $7,301 is considered adequate as of December 31, 2007.
17
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated according to the amount deemed
to be reasonably necessary to reflect for the probability of losses being
incurred within the following categories as of December 31:
2007 2006 2005 2004 2003
-------------------- -------------------- -------------------- -------------------- --------------------
% of Each % of Each % of Each % of Each % of Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Commercial and
agricultural $2,458 46.0% $2,687 43.3% $2,771 46.9% $2,634 42.3% $2,140 41.5%
Real estate mortgage 1,341 48.6% 1,367 50.9% 1,192 46.8% 1,463 50.5% 1,584 47.8%
Consumer installment 2,195 4.8% 2,434 5.1% 2,286 5.8% 1,606 6.6% 1,614 9.6%
Impaired loans 703 0.6% 594 0.7% 184 0.5% 304 0.6% 622 1.1%
Unallocated 604 0.0% 523 0.0% 466 0.0% 437 0.0% 244 0.0%
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Total $7,301 100.0% $7,605 100.0% $6,899 100.0% $6,444 100.0% $6,204 100.0%
====== ===== ====== ===== ====== ===== ====== ===== ====== =====
Management has evaluated impaired loans and believes the valuation allowance
related to these loans to be adequate.
NONPERFORMING ASSETS
Loans are generally placed on nonaccrual status when they become 90 days past
due, unless they are well secured and in the process of collection. When a loan
is placed on nonaccrual status, any interest previously accrued and not
collected is generally reversed from income or charged off against the allowance
for loan losses. Loans are charged off when management determines that
collection has become unlikely. Restructured loans are those where a concession
has been granted on either principal or interest paid due to financial
difficulties of the borrower. Other real estate owned (OREO) consists of real
property acquired through foreclosure on the related collateral underlying
defaulted loans.
The following table presents nonperforming assets for the past five years:
Year Ended December 31
------------------------------------------
2007 2006 2005 2004 2003
------ ------ ------ ------ ------
Nonaccrual loans $4,156 $3,444 $1,375 $1,900 $4,121
Accruing loans past due 90 days or more 1,727 1,185 1,058 702 1,380
Restructured loans 685 697 725 686 --
------ ------ ------ ------ ------
TOTAL NONPERFORMING LOANS 6,568 5,326 3,158 3,288 5,501
Other real estate owned 1,376 562 122 40 552
------ ------ ------ ------ ------
TOTAL NONPERFORMING ASSETS $7,944 $5,888 $3,280 $3,328 $6,053
====== ====== ====== ====== ======
NONPERFORMING LOANS AS A % OF TOTAL LOANS 1.07% 0.90% 0.65% 0.73% 1.30%
====== ====== ====== ====== ======
NONPERFORMING ASSETS AS A % OF TOTAL ASSETS 0.83% 0.65% 0.44% 0.49% 0.91%
====== ====== ====== ====== ======
Since September 2006, the Corporation has experienced an increase in the percent
of loans classified as nonperforming. While the Corporation has seen increases
in its nonperforming loans, net loans charged off as a percentage of loans have
remained relatively stable. Management does not anticipate the level of net
chargeoffs to change significantly during 2008. Management has evaluated the
properties held as other real estate owned and has adjusted the carrying value
of each property to the lower of the cost or fair value less costs to sell, as
necessary.
As of December 31, 2007, there were no other interest bearing assets which
required classification. Management is not aware of any recommendations by
regulatory agencies that, if implemented, would have a material impact on the
Corporation's liquidity, capital, or operations.
18
NONINTEREST INCOME
The following table shows the changes in noninterest income between the years
ended December 31, 2007, 2006, and 2005 respectively.
Year Ended December 31
----------------------------------------------------------
Change Change
------------- ---------------
2007 2006 $ % 2005 $ %
------ ------ ----- ----- ------ ----- -------
Service charges and fee income
NSF and overdraft fees $2,961 $2,950 $ 11 0.4% $2,586 $ 364 14.1%
Trust fees 1,035 866 169 19.5% 828 38 4.6%
Freddie Mac servicing fee 635 635 -- 0.0% 619 16 2.6%
ATM and debit card fees 737 545 192 35.2% 452 93 20.6%
Service charges on deposit accounts 328 315 13 4.1% 247 68 27.5%
All other 198 179 19 10.6% 196 (17) -8.7%
------ ------ ----- ---- ------ ----- -------
Total service charges and fees 5,894 5,490 404 7.4% 4,928 562 11.4%
Title insurance revenue 2,192 2,389 (197) -8.2% 2,351 38 1.6%
Gain on sale of mortgage loans 209 207 2 1.0% 270 (63) -23.3%
Net gain on trading securities 460 -- 460 N/A -- -- N/A
Other
Increase in cash value of corporate
owned life insurance policies 432 404 28 6.9% 364 40 11.0%
Brokerage and advisory fees 276 213 63 29.6% 187 26 13.9%
(Loss) gain on sale of investment securities (19) (112) 93 -83.0% 2 (114) -5700.0%
Net decrease in the fair market value of
borrowings measured at their fair value (66) -- (66) N/A -- -- N/A
All other 584 507 77 15.2% 374 133 35.6%
------ ------ ----- ---- ------ ----- -------
Total other 1,207 1,012 195 19.3% 927 85 9.2%
------ ------ ----- ---- ------ ----- -------
TOTAL NONINTEREST INCOME $9,962 $9,098 $ 864 9.5% $8,476 $ 622 7.3%
====== ====== ===== ==== ====== ===== =======
As shown in the above table, noninterest income increased 9.5% when the year
ended December 31, 2007 is compared to 2006 and 7.3% when 2006 is compared to
2005. However, to make the information more comparable, the following table
outlines the changes in non interest income excluding the effects of the
acquisition of Farwell State Savings Bank in October 2006.
19
NONINTEREST INCOME (EXCLUDING THE EFFECTS OF THE ACQUISITION OF THE FARWELL
STATE SAVINGS BANK IN 2006)
Year Ended December 31
-----------------------------------------------------------
Change Change
------------- ----------------
2007 2006 $ % 2005 $ %
------ ------ ----- ----- ------ ----- --------
Service charges and fee income
NSF and overdraft fees $2,761 $2,914 $(153) -5.3% $2,586 $ 328 12.7%
Trust fees 1,035 866 169 19.5% 828 38 4.6%
Freddie Mac servicing fee 635 635 -- 0.0% 619 16 2.6%
ATM and debit card fees 730 545 185 33.9% 452 93 20.6%
Service charges on deposit accounts 276 302 (26) -8.6% 247 55 22.3%
All other 158 215 (57) -26.5% 196 19 9.7%
------ ------ ----- ----- ------ ----- -------
Total service charges and fees 5,595 5,477 118 2.2% 4,928 549 11.1%
Title insurance revenue 2,192 2,389 (197) -8.2% 2,351 38 1.6%
Gain on sale of mortgage loans 207 207 -- 0.0% 270 (63) -23.3%
Net gain on trading securities 460 -- 460 N/A -- -- N/A
Other
Increase in cash value of corporate
owned life insurance policies 428 404 24 5.9% 364 40 11.0%
Brokerage and advisory fees 276 213 63 29.6% 187 26 13.9%
(Loss) gain on sale of investment securities (19) (112) 93 -83.0% 2 (114) -5700.0%
Net decrease in the fair market value of
borrowings measured at their fair value (66) -- (66) N/A -- -- N/A
All other 562 495 67 13.5% 374 121 32.4%
------ ------ ----- ----- ------ ----- -------
Total other 1,181 1,000 181 18.1% 927 73 7.9%
------ ------ ----- ----- ------ ----- -------
TOTAL NONINTEREST INCOME $9,635 $9,073 $ 562 6.2% $8,476 $ 597 7.0%
====== ====== ===== ===== ====== ===== =======
There were no significant changes to service charges during 2007. Total service
charges and fees increased by $118 in 2007, compared to an increase of $549 in
2006. Trust fee income did increase as a result of increased marketing efforts
by the trust department. During 2006, the Corporation observed substantial
increases in service charges and fee income. The 2006 increases were driven by
increases in NSF and overdraft fees which were the result of the Bank increasing
the per item overdraft fees that they charge their customers, to align the
Bank's fees with its competitors. However, during 2007, the Corporation observed
a decrease in NSF and overdraft fees income when compared to 2006. This decrease
was a result of decreased customer overdraft items. Management does not expect
service charges and fees to increase substantially in 2008 as management does
not anticipate raising the NSF per item fee, which is the largest component of
service charges and fees.
In 2007, title insurance revenues decreased by 8.2% as compared to an increase
of 1.6% in 2006. The small growth in 2006 and the decline in 2007 is a result of
the continued slow demand in residential mortgage activity. Management
anticipates that the mortgage market will continue to be soft throughout much of
2008, and as such does not anticipate significant increases during the upcoming
year.
The gains recognized on trading securities as well as the decrease in the fair
value of borrowings measured at their fair value during 2007 are the result of
the Corporation electing to early adopt SFAS No. 159 (see Note 3 of the
consolidated financial statements). As a result of decreases in interest rates,
the Corporation recognized gains from trading securities, as there is an inverse
relationship between the value of the trading portfolio and changes in interest
rates. These gains were offset by losses associated with the changes in fair
value of borrowings as there is a direct relationship between the value of these
borrowings and changes in interest rates. Management does expect the gains and
losses associated with assets carried at fair value to stabilize throughout
2008.
The years ended December 31, 2007 and 2006 have been some of most productive
years 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 during 2008.
The losses from the sale of investment securities were a result of the
Corporation selling investments nearing maturity at low interest rates and
reinvesting the proceeds in higher yielding, longer term securities as part of
asset and liability management.
20
The increases in all other noninterest income between 2006 and 2005 are mainly
related to the fact that in 2006, the Bank started collecting monthly
commissions related to its sold credit card portfolio.
NONINTEREST EXPENSES
The following table shows the changes in noninterest expenses between the years
ended December 31, 2007, 2006, and 2005 respectively.
Year Ended December 31
-------------------------------------------------------------
Change Change
-------------- --------------
2007 2006 $ % 2005 $ %
------- ------- ------ ----- ------- ------ -----
Compensation
Leased employee salaries $11,362 $10,105 $1,257 12.4% $ 9,610 $ 495 5.2%
Leased employee benefits 4,096 3,608 488 13.5% 3,846 (238) -6.2%
All other 160 156 4 2.6% 92 64 69.6%
------- ------- ------ ----- ------- ------ -----
Total compensation 15,618 13,869 1,749 12.6% 13,548 321 2.4%
------- ------- ------ ----- ------- ------ -----
Occupancy
Depreciation 448 412 36 8.7% 363 49 13.5%
Outside services 332 334 (2) -0.6% 306 28 9.2%
Property taxes 384 322 62 19.3% 308 14 4.5%
Utilities 344 320 24 7.5% 289 31 10.7%
Building rent 72 163 (91) -55.8% 125 38 30.4%
Building repairs 147 129 18 14.0% 114 15 13.2%
All other 39 50 (11) -22.0% 48 2 4.2%
------- ------- ------ ----- ------- ------ -----
Total occupancy 1,766 1,730 36 2.1% 1,553 177 11.4%
------- ------- ------ ----- ------- ------ -----
Furniture and equipment
Depreciation 1,512 1,440 72 5.0% 1,372 68 5.0%
Computer / Service Contracts 1,254 1,101 153 13.9% 973 128 13.2%
ATM and debit card fees 433 263 170 64.6% 247 16 6.5%
All other 98 64 34 53.1% 65 (1) -1.5%
------- ------- ------ ----- ------- ------ -----
Total furniture and equipment 3,297 2,868 429 15.0% 2,657 211 7.9%
------- ------- ------ ----- ------- ------ -----
Other
Audit and SOX compliance fees 583 1,010 (427) -42.3% 606 404 66.7%
Marketing 642 697 (55) -7.9% 624 73 11.7%
Directors fees 796 584 212 36.3% 604 (20) -3.3%
Printing and supplies 462 377 85 22.5% 431 (54) -12.5%
Education and travel 412 360 52 14.4% 258 102 39.5%
Postage and freight 459 445 14 3.1% 400 45 11.3%
Legal 296 229 67 29.3% 198 31 15.7%
Amortization of deposit premium 278 160 118 73.8% 94 66 70.2%
Consulting 176 208 (32) -15.4% 172 36 20.9%
All other 2,444 1,936 508 26.2% 1,739 197 11.3%
------- ------- ------ ----- ------- ------ -----
Total other 6,548 6,006 542 9.0% 5,126 880 17.2%
------- ------- ------ ----- ------- ------ -----
TOTAL NONINTEREST EXPENSES $27,229 $24,473 $2,756 11.3% $22,884 $1,589 6.9%
======= ======= ====== ===== ======= ====== =====
As shown in the above table, noninterest expenses increased 11.3% when the year
ended December 31, 2007 is compared to 2006 and 6.9% when 2006 is compared to
2005. However, to make the information more comparable, the following table
outlines the changes in noninterest expenses excluding the effects of the
acquisition of Farwell State Savings Bank in October 2006.
21
NONINTEREST EXPENSES (EXCLUDING THE EFFECTS OF THE ACQUISITION OF THE FARWELL
STATE SAVINGS BANK IN 2006)
Year Ended December 31
-------------------------------------------------------------
Change Change
-------------- --------------
2007 2006 $ % 2005 $ %
------- ------- ------ ----- ------- ------ -----
Compensation
Leased employee salaries $10,613 $ 9,935 $ 678 6.8% $ 9,610 $ 325 3.4%
Leased employee benefits 3,781 3,563 218 6.1% 3,846 (283) -7.4%
All other 128 156 (28) -17.9% 92 64 69.6%
------- ------- ------ ----- ------- ------ -----
Total compensation 14,522 13,654 868 6.4% 13,548 106 0.8%
------- ------- ------ ----- ------- ------ -----
Occupancy
Depreciation 433 412 21 5.1% 363 49 13.5%
Outside services 328 334 (6) -1.8% 306 28 9.2%
Property taxes 368 322 46 14.3% 308 14 4.5%
Utilities 323 316 7 2.2% 289 27 9.3%
Building rent 72 163 (91) -55.8% 125 38 30.4%
Building repairs 126 117 9 7.7% 114 3 2.6%
All other 39 50 (11) -22.0% 48 2 4.2%
------- ------- ------ ----- ------- ------ -----
Total occupancy 1,689 1,714 (25) -1.5% 1,553 161 10.4%
------- ------- ------ ----- ------- ------ -----
Furniture and equipment
Depreciation 1,479 1,440 39 2.7% 1,372 68 5.0%
Computer / Service Contracts 1,081 1,081 -- 0.0% 973 108 11.1%
ATM and debit card fees 417 258 159 61.6% 247 11 4.5%
All other 72 51 21 41.2% 65 (14) -21.5%
------- ------- ------ ----- ------- ------ -----
Total furniture and equipment 3,049 2,830 219 7.7% 2,657 173 6.5%
------- ------- ------ ----- ------- ------ -----
Other
Audit and SOX compliance fees 570 1,006 (436) -43.3% 606 400 66.0%
Marketing 624 694 (70) -10.1% 624 70 11.2%
Directors fees 720 577 143 24.8% 604 (27) -4.5%
Printing and supplies 446 371 75 20.2% 431 (60) -13.9%
Education and travel 402 359 43 12.0% 258 101 39.1%
Postage and freight 420 434 (14) -3.2% 400 34 8.5%
Legal 282 221 61 27.6% 198 23 11.6%
Amortization of deposit premium 278 160 118 73.8% 94 66 70.2%
Consulting 174 208 (34) -16.3% 172 36 20.9%
All other 2,114 1,892 222 11.7% 1,739 153 8.8%
------- ------- ------ ----- ------- ------ -----
Total other 6,030 5,922 108 1.8% 5,126 796 15.5%
------- ------- ------ ----- ------- ------ -----
TOTAL NONINTEREST EXPENSES $25,290 $24,120 $1,170 4.9% $22,884 $1,236 5.4%
======= ======= ====== ===== ======= ====== =====
Leased employee salaries continue to increase as a result of annual merit
increases and the continued growth of the Corporation. In 2006, the Corporation
changed its health insurance administrators, and as a result recognized a
significant decrease in health insurance related costs when compared to prior
years. The 2007 increases were the result of increases in both the cost to
provide health care to its employees as well as due to increases in the size of
the Corporation.
Upon completion of a new Canadian Lakes branch location in 2006, the building
lease for the facility that had previously housed the Canadian Lakes office was
terminated. This lease termination resulted in a one time penalty of $37, which
was included in rent expense in 2006. The completion of the project also
resulted in an increase in building depreciation expense beginning in June 2006.
Management has been diligently working to decrease audit and (Sarbanes Oxley)
SOX compliance fees. In 2007, this became a reality. These fees decreased as a
result of the following factors:
- 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.
22
The reasons for the high level of audit and SOX compliance fees in 2006 was the
fact that a significant portion of the 2005 year end audit procedures were
performed in 2006 coupled with the fact that a large portion of the 2006 year
end audit procedures were performed prior to December 31, 2006.
The increases in director fees are a result of additional meetings related to
ongoing strategic planning.
The Corporation places a strong emphasis on continuing education. These
educational programs help provide team members with a competitive edge in the
market place. In the third and fourth quarters of 2006 and during the first six
months of 2007, the Corporation offered structured leadership training to its
employees. This program is designed to help develop and optimize the
communication skills of its participants. Management feels that this investment
in its employees today will pay dividends for years to come.
The increase in the amortization of deposit premium is related to the October
2006 acquisition of Farwell.
Consulting fees increased in 2006 as a result of the Corporation hiring an
outside marketing consultant.
All other expenses include title insurance expenses as well as other
miscellaneous expenses. The main reasons for the increases in this line item
were related to expenses of approximately $130 incurred to convert the Farwell
Division to Isabella Bank and Trust's core banking platform in August of 2007.
The other expenses are not individually significant.
FEDERAL INCOME TAXES
Federal income tax expense for 2007 was $1,605 or 16.8% of pre-tax income
compared to $1,919 or 21.5% of pre-tax income in 2006 and $1,948 or 22.3% in
2005. The decrease in the 2007 effective rate is a result of a substantial
increase in the Corporation's municipal bond portfolio and the tax free income
earned on these investments. A reconcilement of actual federal income tax
expense reported and the amount computed at the federal statutory rate of 34% is
found in Note 13, "Federal Income Taxes", in the Notes to the accompanying
Consolidated Financial Statements.
23
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
As shown in the following tables, the Corporation experienced another year of
solid asset growth. This growth has been the result of the Corporation's
continued growth strategies.
December 31
-------------------
2007 2006 $ Change % Change
-------- -------- -------- --------
ASSETS
Cash and cash equivalents $ 25,583 $ 31,359 $(5,776) -18.42%
Trading account securities 25,064 -- 25,064 100.00%
Securities available for sale 213,127 213,450 (323) -0.15%
Mortgage loans available for sale 2,214 2,734 (520) -19.02%
Loans 612,687 591,042 21,645 3.66%
Allowance for loan losses (7,301) (7,605) 304 -4.00%
Bank premises and equipment 22,516 20,754 1,762 8.49%
Equity securities without readily determinable fair values 7,353 3,480 3,873 111.29%
Other assets 56,039 54,913 1,126 2.05%
-------- -------- ------- ------
TOTAL ASSETS $957,282 $910,127 $47,155 5.18%
======== ======== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $733,473 $725,840 $ 7,633 1.05%
Other borrowed funds 92,887 58,303 34,584 59.32%
Escrow funds payable 1,912 2,416 (504) -20.86%
Accrued interest and other liabilities 5,930 7,819 (1,889) -24.16%
-------- -------- ------- ------
TOTAL LIABILITIES 834,202 794,378 39,824 5.01%
SHAREHOLDERS' EQUITY 123,080 115,749 7,331 6.33%
-------- -------- ------- ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $957,282 $910,127 $47,155 5.18%
======== ======== ======= ======
A discussion of changes in balance sheet amounts by major categories follows.
TRADING ACCOUNT SECURITIES
As previously mentioned, the Corporation commenced a balance sheet
reorganization strategy in 2007 which resulted in a transfer of
available-for-sale securities to trading securities. The Corporation's overall
intent was to maintain a trading portfolio to enhance the ongoing restructuring
of assets and liabilities as part of our interest rate risk management
objectives (See Note 3 of the Consolidated Financial Statements).
Since January 1, 2007, the Corporation has reduced its trading securities by
$52,775 primarily as a result of sales, calls, and maturities. Management has
used these proceeds to help fund loan growth. Deposits have remained essentially
unchanged since December 31, 2006.
In addition to the balance sheet restructuring resulting from the sales of
trading securities, as investments securities are sold, called, or matured, IBT
implemented a strategy to purchase high quality tax exempt municipal bonds
funded by fixed rate Federal Home Loan Bank advances.
24
INVESTMENT SECURITIES
The primary objective of the Corporation's investing activities is to provide
for safety of the principal invested. Secondary considerations include the need
for earnings, liquidity, and the Corporation's overall exposure to changes in
interest rates. Securities are currently classified as available-for-sale or
trading and are stated at fair value.
The following is a schedule of the carrying value of investment securities
available for sale:
December 31
2007 2006 2005
-------- ----------- --------
Available for sale
U.S. Government and federal agencies $ 54,239 $ 69,020 $ 52,913
States and political subdivisions 130,956 112,754 95,435
Corporate 24,300 11,053 13,220
Mortgage-backed 3,632 20,623 21,838
-------- -------- --------
TOTAL $213,127 $213,450 $183,406
======== ======== ========
The following is a schedule of the carrying value of trading securities:
December 31
2007
-----------
Trading Securities
U.S. Government and federal agencies $ 4,024
States and political subdivisions 10,324
Corporate 1,004
Mortgage-backed 9,712
-------
TOTAL $25,064
=======
Excluding those holdings of the investment portfolio in U.S. Government and
federal agencies, there were no investments in securities of any one issuer that
exceeded 10% of shareholders' equity. The Corporation has a policy prohibiting
investments in securities that it deems are unsuitable due to their inherent
credit or market risks. Prohibited investments include stripped mortgage backed
securities, zero coupon bonds, nongovernment agency asset backed securities, and
structured notes.
The following is a schedule of maturities of available for sale investment
securities (at carrying value) and their weighted average yield as of December
31, 2007. Weighted average yields have been computed on a fully
taxable-equivalent basis using a tax rate of 34%. Mortgage-backed securities and
collateralized mortgage obligations are included in maturity categories based on
their stated maturity date. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations.
Trading securities have been excluded as they are not expected to be held to
maturity.
Maturing
------------------------------------------------------------------------
After After Five
One Year But Years But
Within One Year Within Five Years Within Ten Years After Ten Years
--------------- ----------------- ---------------- ---------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ----- -------- ------ ------- ----- ------- -----
Available for Sale
U.S. Government and federal agencies $ 3,509 5.04 $20,385 5.48 $30,345 5.53 $ -- --
States and political subdivisions 4,401 5.74 26,149 5.86 42,526 5.52 57,880 5.87
Mortgage-backed -- -- 384 5.20 3,248 37.5 -- --
Corporate 12,000 6.10 -- -- -- -- 12,300 6.08
------- ---- ------- ---- ------- ---- ------- ----
TOTAL $19,910 5.83 $46,918 5.69 $76,119 5.52 $70,180 5.91
======= ==== ======= ==== ======= ==== ======= ====
25
LOANS
The largest component of earning assets is loans. The proper management of
credit and market risk inherent in the loan portfolio is critical to the
financial well-being of the Corporation. To control these risks, the Corporation
has adopted strict underwriting standards. The standards include prohibitions
against lending outside the Corporation's defined market areas, lending limits
to a single borrower, and strict loan to collateral value limits. The
Corporation also monitors and limits loan concentrations extended to volatile
industries. The Corporation has no foreign loans and there were no
concentrations greater than 10% of total loans that are not disclosed as a
separate category in the following table.
The following table presents the composition of the loan portfolio for the years
ended December 31:
2007 2006 2005 2004 2003
-------- -------- -------- -------- --------
Commercial $238,306 $212,701 $179,541 $146,152 $129,392
Agricultural 47,407 47,302 49,424 49,179 52,044
Residential real estate mortgage 297,937 300,650 226,251 227,421 199,455
Installment 29,037 30,389 28,026 30,143 40,969
-------- -------- -------- -------- --------
$612,687 $591,042 $483,242 $452,895 $421,860
======== ======== ======== ======== ========
The following table presents the change in the loan categories for the years
ended December 31:
2007 2006 2005
------------------- ------------------- -------------------
$ Change % Change $ Change % Change $ Change % Change
-------- -------- -------- -------- -------- --------
Commercial $25,605 12.0% $ 33,160 18.5% $33,389 22.8%
Agricultural 105 0.2% (2,122) -4.3% 245 0.5%
Residential real estate mortgage (2,713) -0.9% 74,399 32.9% (1,170) -0.5%
Installment (1,352) -4.4% 2,363 8.4% (2,117) -7.0%
------- ---- -------- ---- ------- ----
$21,645 3.7% $107,800 22.3% $30,347 6.7%
======= ==== ======== ==== ======= ====
The following table presents the change in loan categories between December 31,
2006 and December 31, 2005, excluding the loans acquired from Farwell:
Less
loans Adjusted Consolidated
Consolidated acquired Consolidated ------------------------------
12/31/06 from Farwell 12/31/06 12/31/05 $ Change % Change
------------ ------------ ------------ -------- -------- --------
Commercial $212,701 $ 1,361 $211,340 $179,541 $31,799 17.7%
Agricultural 47,302 -- 47,302 49,424 (2,122) -4.3%
Residential real estate mortgage 300,650 59,040 241,610 226,251 15,359 6.8%
Installment 30,389 3,729 26,660 28,026 (1,366) -4.9%
-------- ------- -------- -------- ------- ----
$591,042 $64,130 $526,912 $483,242 $43,670 9.0%
======== ======= ======== ======== ======= ====
The growth in commercial loans is a result of the Corporation's efforts to
increase the commercial loan portfolio as a percentage of total loans. A
significant portion of this growth has been driven by the Corporation's new
business development team. Management expects to see continued growth in the
commercial loan portfolio in 2008.
Agricultural and residential real estate mortgages loans have remained
essentially unchanged since December 31, 2006. Management does anticipate,
however, that these groups will increase slightly during 2008.
Excluding the effects of the Farwell acquisition, installment loans have been
steadily decreasing over the past few years. This is a result of the increased
competition from credit unions and financing offered from other non-financial
institutions. Management does expect the current declining trend to continue in
the future.
26
EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES
The largest components of equity securities without readily determinable fair
values are Federal Home Loan Bank Stock and Federal Reserve Bank Stock. The
Corporation has purchased additional shares of stock as a result of the
consolidation of the Bank's charter as well as to fulfill stock requirements to
borrow additional funds from the Federal Home Loan Bank.
DEPOSITS
The main source of funds for the Corporation is deposits. The deposit portfolio
represents various types of non transaction accounts as well as savings accounts
and time deposits.
The following table presents the composition of our deposit portfolio as of
December 31:
2007 2006 2005
-------- -------- --------
Noninterest bearing demand deposits $ 84,846 $ 83,902 $ 73,839
Interest bearing demand deposits 105,526 111,406 104,251
Savings deposits 196,682 178,001 153,397
Certificates of deposit 311,976 320,226 250,246
Brokered certificates of deposit 28,197 27,446 7,076
Internet certificates of deposit 6,246 4,859 3,669
-------- -------- --------
Total $733,473 $725,840 $592,478
======== ======== ========
The following table presents the change in the deposit categories for the years
ended December 31:
2007 2006 2005
------------------- ------------------- -------------------
$ Change % Change $ Change % Change $ Change % Change
-------- -------- -------- -------- -------- --------
Noninterest bearing demand deposits $ 944 1.1% $ 10,063 13.6% $ 8,103 12.3%
Interest bearing demand deposits (5,880) -5.3% 7,155 6.9% 2,889 2.9%
Savings deposits 18,681 10.5% 24,604 16.0% (9,119) -5.6%
Certificates of deposit (8,250) -2.6% 69,980 28.0% 15,984 6.8%
Brokered certificates of deposit 751 2.7% 20,370 287.9% 7,076 100.0%
Internet certificates of deposit 1,387 28.5% 1,190 32.4% 3,669 100.0%
------- ---- -------- ----- ------- -----
Total $ 7,633 1.1% $133,362 22.5% $28,602 5.1%
------- ---- -------- ----- ------- -----
The following table presents the change in deposit categories for the year ended
December 31, 2006, excluding the deposits acquired from The Farwell State
Savings Bank:
Less
deposits Adjusted Consolidated
Consolidated acquired Consolidated ------------------------------
12/31/06 from Farwell 12/31/06 12/31/05 $ Change % Change
------------ ------------ ------------ -------- -------- --------
Noninterest bearing demand deposits $ 83,902 $10,472 $ 73,430 $ 73,839 $ (409) -0.6%
Interest bearing demand deposits 111,406 8,660 102,746 104,251 (1,505) -1.4%
Savings deposits 178,001 17,704 160,297 153,397 6,900 4.5%
Certificates of deposit 320,226 35,507 284,719 250,246 34,473 13.8%
Brokered certificates of deposit 27,446 995 26,451 7,076 19,375 273.8%
Internet certificates of deposit 4,859 -- 4,859 3,669 1,190 32.4%
-------- ------- -------- -------- ------- -----
Total $725,840 $73,338 $652,502 $592,478 $60,024 10.1%
======== ======= ======== ======== ======= =====
As shown in the preceding tables, the Corporation has observed consistent
deposit growth over the past two years. In 2006, much of this growth came in the
form of time sensitive deposits, including brokered and internet certificates of
deposit. The majority of the 2007 growth was in savings deposits, which includes
money market accounts. This change in mix is a direct result of the current
interest rate environment. The rates paid on money market accounts have
increased significantly during 2007 due to the increased competition for these
deposits.
27
Within the banking industry there is agreement that competition from mutual
funds and annuities has had a significant impact on deposit growth. In response,
the Corporation now offers mutual funds and annuities to its customers. The
Corporation's trust department also offers a variety of financial products in
addition to traditional estate services.
The following table shows the average balances and corresponding interest rates
paid on deposit accounts as of December 31:
2007 2006 2005
--------------- --------------- ---------------
Amount Rate Amount Rate Amount Rate
-------- ---- -------- ---- -------- ----
Noninterest bearing demand deposits $ 80,128 $ 73,650 $ 69,610
Interest bearing demand deposits 109,370 1.72% 105,476 1.58% 103,684 0.97%
Savings deposits 188,323 2.25% 158,327 1.69% 157,238 1.00%
Time deposits 349,941 4.71% 301,593 4.25% 245,559 3.58%
-------- -------- --------
Total $727,762 $639,046 $576,091
======== ======== ========
The time remaining until maturity of time certificates and other time deposits
of $100 or more at December 31, 2007 was as follows:
Maturity
Within 3 months $ 37,363
Within 3 to 6 months 29,011
Within 6 to 12 months 25,363
Over 12 months 40,582
--------
TOTAL $132,319
========
BORROWED FUNDS
As a result of the Corporation's recent loan growth, desire to increase its
investment in high quality tax exempt municipal bonds, and the increased level
of competition for deposits, the Corporation has increased its other borrowings
significantly over the past year. Management does anticipate that the
Corporation will continue to increase its borrowings throughout 2008 (See Note
11 of the Consolidated Financial Statements).
ESCROW FUNDS PAYABLE
The Corporation observed a decrease in escrow funds payable during 2007. This
decrease can be attributed to Internal Revenue Code Section ("IRC") 1031
exchange account balances being reinvested by customers of IBT Title and
Insurance Agency, Inc. ("IBT Title"). These IRC 1031 accounts allow owners of
business or investment property to defer realized gains from the sale of
business or investment property if the funds are reinvested in another property.
As such, these balances can fluctuate significantly between periods as the funds
are reinvested. The Corporation does not anticipate escrow funds payable to
fluctuate significantly from current levels in 2008.
ACCRUED INTEREST AND OTHER LIABILITIES
The Corporation observed a significant decline in accrued interest and other
liabilities during 2007. This decrease can primarily be attributed to a decrease
of $2,890 in the net amount recognized for the Corporation's defined benefit
pension plan primarily as a result of the plan curtailment (See Note 18 of the
Consolidated Financial Statements).
CAPITAL
The capital of the Corporation consists solely of common stock, capital surplus,
retained earnings, and accumulated other comprehensive income / (loss). The
Corporation offers dividend reinvestment and employee and director stock
purchase plans. Under the provisions of these Plans, the Corporation issued
63,233 shares of common stock generating $2,657 of capital during 2007, and
61,258 shares of common stock generating $2,459 of capital in 2006. The
Corporation also offers share based payment awards through its equity
compensation plan (See Note 18 of the consolidated financial statements).
Pursuant to this plan, the Corporation generated $758 and $470 of capital in
2007 and 2006, respectively. On March 22, 2007 the Board of Directors amended
its repurchase plan to allow management to repurchase up to 150,000 shares of
the Corporation's common stock. Subsequent to this amendment, the Corporation
repurchased 30,620 shares of stock. The Corporation also repurchased 12,600
shares of common stock during the first quarter of 2007 under the plan's
previous provisions. During 2007, a total of 43,220 shares were repurchased at
an average price of $43.51 per share, without being adjusted for the 10% stock
dividend paid February 29,
28
2008. There were no shares repurchased in 2006 or 2005. Accumulated other
comprehensive loss decreased $3,221 and consists of a $417 increase in
unrealized gain on available-for-sale investment securities, a $1,907 reduction
in unrecognized actuarial losses of the defined benefit pension plan,
principally attributable to a plan curtailment in March, 2007, and an $897
implementation adjustment related to the early adoption on January 1, 2007 of
FASB Statement No. 159 (See Note 3 of the Consolidated Financial Statements).
All of these adjustments are net of tax.
The Federal Reserve Board's current recommended minimum primary capital to
assets requirement is 6.0%. The Corporation's primary capital to average assets,
which consists of shareholders' equity plus the allowance for loan losses less
acquisition intangibles, was 11.50% at year end 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 December 31, 2007:
Percentage of Capital to Risk Adjusted Assets:
IBT Bancorp
December 31, 2007
-----------------
Required Actual
-------- ------
Equity Capital 4.00% 15.81%
Secondary Capital 4.00% 1.20%
----- -----
Total Capital 8.00% 17.01%
===== =====
IBT Bancorp's secondary capital includes only the allowance for loan losses. The
percentage for the secondary capital under the required column is the maximum
amount allowed from all sources.
The Federal Reserve also prescribes minimum capital requirements for the
Corporation's subsidiary Bank. At December 31, 2007, the Bank exceeded these
minimums. For further information regarding the Bank's capital requirements,
refer to Note 17 of the Notes to the accompanying Consolidated Financial
Statements, "Minimum Regulatory Capital Requirements".
LIQUIDITY
The primary sources of the Corporation's liquidity are cash and cash
equivalents, trading securities, and available-for-sale investment securities.
These categories totaled $263,774 or 27.6% of assets as of December 31, 2007 as
compared to $244,809 or 26.9% in 2006. Liquidity is important for financial
institutions because of their need to meet loan funding commitments, depositor
withdrawal requests and various other commitments discussed in the accompanying
notes to consolidated financial statements. Liquidity varies significantly
daily, based on customer activity.
Operating activities provided $60,387 of cash in 2007 as compared to using
$1,789 in 2006. Net cash provided by financing activities equaled $38,470 in
2007 and $64,846 in 2006. The Corporation's investing activities used cash
amounting to $104,633 in 2007 and $62,533 in 2006. The accumulated effect of the
Corporation's operating, investing, and financing activities used $5,776 of cash
in 2007 and provided $534 of cash in 2006.
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. As a result of this increased
competition, the Corporation (as discussed above) has begun to rely more and
more on brokered, internet deposits, and other borrowed funds as a key funding
source.
29
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 Bank has over $100,000 of available
credit from these secondary sources. The Corporation's liquidity is considered
adequate by the management of the Corporation.
INTEREST RATE SENSITIVITY
Interest rate sensitivity is determined by the amount of earning assets and
interest bearing liabilities repricing within a specific time period, and their
relative sensitivity to a change in interest rates. Management also strives to
achieve reasonable stability in the net interest margin through periods of
changing interest rates. One tool used by management to measure interest rate
sensitivity is gap analysis. As shown in the following table, the gap analysis
depicts the Corporation's position for specific time periods and the cumulative
gap as a percentage of total assets.
Investment securities and other investments are scheduled according to their
contractual maturity. Fixed rate loans are included in the appropriate time
frame based on their scheduled amortization. Variable rate loans are included in
the time frame of their earliest repricing. Of the $612,687 in total loans,
$90,687 are variable rate loans. Time deposit liabilities are scheduled based on
their contractual maturity except for variable rate time deposits in the amount
of $1,960 that are included in the 0 to 3 month time frame.
Savings, NOW accounts, and money market accounts have no contractual maturity
date and are believed to be predominantly noninterest rate sensitive by
management. These accounts have been classified in the gap table according to
their estimated withdrawal rates based upon management's analysis of deposit
runoff over the past five years. Management believes this runoff experience is
consistent with its expectation for the future. As of December 31, 2007, the
Corporation had $75,297 more liabilities than assets maturing within one year. A
negative gap position results when more liabilities, within a specified time
frame, mature or reprice than assets.
INTEREST RATE SENSITIVITY
The following table shows the time periods and the amount of assets and
liabilities available for interest rate repricing as of December 31, 2007. The
interest rate sensitivity information for investment securities is based on the
expected prepayments and call dates verses stated maturities. For purposes of
this analysis, nonaccrual loans and the allowance for loan losses are excluded.
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years
-------- -------- -------- --------
Interest Sensitive Assets
Trading securities $ 25,064 $ -- $ -- $ --
Investment securities 34,580 40,370 43,480 94,697
Loans 126,723 88,411 335,360 58,037
-------- -------- -------- --------
TOTAL $186,367 $128,781 $378,840 $152,734
======== ======== ======== ========
Interest Sensitive Liabilities
Borrowed funds $ 24,387 $ 6,000 $ 47,500 $ 15,000
Time deposits 73,266 154,784 118,232 137
Savings 63,017 25,715 107,950 --
Interest bearing demand 39,332 3,944 62,250 --
-------- -------- -------- --------
TOTAL $200,002 $190,443 $335,932 $ 15,137
======== ======== ======== ========
Cumulative gap (deficiency) $(13,635) $(75,297) $(32,389) $105,208
Cumulative gap (deficiency) as a % of assets (1.43)% (7.87)% (3.39)% 11.00%
30
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 2007. Also provided are the amounts due after one
year, classified according to the sensitivity to changes in interest rates.
Due in
---------------------------------------
1 Year 1 to 5 Over 5
or Less Years Years Total
------- -------- ------- --------
Commercial and agricultural $65,822 $189,964 $29,927 $285,713
======= ======== ======= ========
Interest Sensitivity
Loans maturing after one year that have:
Fixed interest rates $172,200 $28,530
Variable interest rates 17,764 1,397
-------- -------
TOTAL $189,964 $29,927
======== =======
ITEM 7 A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has no significant foreign exchange
risk, holds limited loans outstanding to oil and gas concerns, and does not
utilize interest rate swaps or derivatives, except for interest rate locks, in
the management of its interest rate risk. Any changes in foreign exchange rates
or commodity prices would have an insignificant impact, if any, on the
Corporation's interest income and cash flows. The Corporation does have a
significant amount of loans extended to borrowers in agricultural production.
The cash flow of such borrowers and ability to service debt is largely dependent
on the commodity prices for corn, soybeans, sugar beets, milk, beef, and a
variety of dry beans. The Corporation mitigates these risks by using
conservative price and production yields when calculating a borrower's available
cash flow to service their debt.
Interest rate risk ("IRR") is the exposure of the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities. IRR
is the fundamental method in which financial institutions earn income and create
shareholder value. Excessive exposure to IRR could pose a significant risk to
the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors and senior management to effectively
manage the various risks that can have a material impact on the safety and
soundness of the Corporation. The risks include credit, interest rate,
liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
The Corporation uses several techniques to manage IRR. The first method is gap
analysis. Gap analysis measures the cash flows and/or the earliest repricing of
the Corporation's interest bearing assets and liabilities. This analysis is
useful for measuring trends in the repricing characteristics of the balance
sheet. Significant assumptions are required in this process because of the
imbedded repricing options contained in assets and liabilities. A substantial
portion of the Corporation's assets are invested in loans and investment
securities with issuer call options. Loans have imbedded options that allow the
borrower to repay the balance prior to maturity without penalty. The amount of
prepayments is dependent upon many factors, including the interest rate of a
given loan in comparison to the current interest rate for residential mortgages,
the level of sales of used homes, and the overall availability of credit in the
market place. Generally, a decrease in interest rates will result in an increase
in the Corporation's cash flows from these assets. A significant portion of the
Corporation's securities are callable. The call option is more likely to be
exercised in a period of decreasing interest rates. Investment securities, other
than those that are callable, do not have any significant imbedded options.
Savings and checking deposits may generally be withdrawn on request without
prior notice. The timing of cash flows from these deposits is estimated based on
historical experience. Time deposits have penalties that discourage early
withdrawals.
The second technique used in the management of IRR is to combine the projected
cash flows and repricing characteristics generated by the gap analysis and the
interest rates associated with those cash flows to project future interest
income. By changing the amount and timing of the cash flows and the repricing
interest rates of those cash flows, the Corporation can project the effect of
changing interest rates on its interest income. Based on the projections
prepared for the year ended December 31, 2007 the Corporation's net interest
income would increase during a period of decreasing interest rates.
31
The following tables provide information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of December 31,
2007 and 2006. The Corporation has no interest rate swaps, futures contracts, or
other derivative financial options. The principal amounts of assets and time
deposits maturing were calculated based on the contractual maturity dates.
Savings and NOW accounts are based on management's estimate of their future cash
flows.
December 31, 2007 Fair Value
------------------------------------------------------------------------ ----------
(dollars in thousands) 2008 2009 2010 2011 2012 Thereafter Total 12/31/07
-------- ------- ------- ------- ------- ---------- -------- ----------
Rate sensitive assets
Other interest bearing assets $ 1,457 $ -- $ -- $ -- $ -- $ -- $ 1,457 $ 1,457
Average interest rates 3.21% -- -- -- -- -- 3.21%
Trading securities $ 9,342 $ 2,213 $ 3,269 $ 2,750 $ 2,820 $ 4,670 $ 25,064 $ 25,064
Average interest rates 4.86% 4.86% 4.20% 4.34% 3.50% 6.98% 4.96%
Fixed interest rate securities $ 74,950 $24,122 $ 8,450 $ 8,082 $ 2,826 $94,697 $213,127 $213,127
Average interest rates 5.54% 4.98% 4.57% 3.99% 4.13% 3.94% 4.65%
Fixed interest rate loans $124,447 $99,132 $98,275 $78,152 $63,957 $58,037 $522,000 $523,454
Average interest rates 6.72% 6.65% 6.87% 7.25% 7.28% 6.50% 6.86%
Variable interest rate loans $ 41,596 $14,613 $18,792 $ 4,796 $ 6,435 $ 4,455 $ 90,687 $ 90,687
Average interest rates 7.94% 7.67% 7.66% 7.52% 7.31% 7.56% 7.75%
Rate sensitive liabilities
Borrowed funds $ 30,387 $ 6,500 $24,000 $ -- $17,000 $15,000 $ 92,887 $ 91,897
Average interest rates 4.77% 4.34% 4.69% -- 4.19% 4.73% 4.61%
Savings and NOW accounts $132,008 $71,320 $69,183 $23,972 $ 5,725 $ -- $302,208 $302,208
Average interest rates 2.61% 1.15% 0.62% 0.59% 0.86% 0.00% 1.62%
Fixed interest rate time deposits $226,090 $33,477 $42,835 $23,067 $18,853 $ 137 $344,459 $346,528
Average interest rates 4.61% 4.42% 4.53% 4.81% 4.63% 4.40% 4.60%
Variable interest rate time
deposits $ 1,375 $ 585 $ -- $ -- $ -- $ -- $ 1,960 $ 1,960
Average interest rates 4.09% 4.10% -- -- -- -- 4.09%
December 31, 2006 Fair Value
--------------------------------------------------------------------------- ----------
2007 2008 2009 2010 2011 Thereafter Total 12/31/06
-------- -------- ------- ------- ------- ---------- ---------- ----------
Rate sensitive assets
Other interest bearing assets $ 2,992 $ -- $ -- $ -- $ -- $ -- $ 2,992 $ 2,992
Average interest rates 4.63% -- -- -- -- -- 4.63%
Fixed interest rate securities $ 76,761 $ 48,239 $21,380 $15,064 $12,983 $39,023 $ 213,450 $213,450
Average interest rates 3.87% 4.41% 4.14% 4.04% 3.75% 3.88% 4.03%
Fixed interest rate loans $108,771 $100,331 $95,442 $75,359 $74,773 $37,267 $ 491,943 $494,209
Average interest rates 6.45% 6.41% 6.47% 6.55% 7.17% 6.25% 6.56%
Variable interest rate loans $ 66,850 $ 12,598 $13,118 $ 4,301 $ 1,425 $ 807 $ 99,099 $ 99,099
Average interest rates 5.93% 8.81% 8.63% 8.76% 8.26% 9.21% 6.84%
Rate sensitive liabilities
Borrowed funds $ 23,489 $ 6,058 $ 8,500 $ 8,256 $ -- $12,000 $ 58,303 $ 58,390
Average interest rates 5.01% 4.78% 4.88% 5.10% -- 4.85% 4.95%
Savings and NOW accounts $114,322 $ 78,084 $68,816 $22,601 $ 5,584 $ -- $ 289,407 $289,407
Average interest rates 3.14% 1.37% 0.70% 0.73% 0.92% -- 1.85%
Fixed interest rate time deposits $231,238 $ 43,789 $22,518 $31,822 $16,433 $ 531 $ 346,331 $346,395
Average interest rates 4.63% 4.21% 4.17% 4.47% 4.79% 5.27% 4.54%
Variable interest rate time
deposits $ 5,771 $ 424 $ 5 $ -- $ -- $ -- $ 6,200 $ 6,200
Average interest rates 4.16% 4.28% 4.34% -- -- -- 4.17%
32
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the registrant accompanied by
the report of our independent registered public accounting firm are set forth on
pages 34 through 71 of this report:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The supplementary data regarding quarterly results of operations are set forth
under the table headed "Summary of Selected Financial Data" under Item 6 on 12
of this report.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
IBT Bancorp, Inc.
Mt. Pleasant, Michigan
We have audited the accompanying consolidated balance sheets of IBT BANCORP,
INC. as of December 31, 2007 and 2006, and the related consolidated statements
of changes in shareholders' equity, income, comprehensive income, and cash flows
for each of the years in the three-year period ended December 31, 2007. We also
have audited IBT BANCORP, INC'S internal control over financial reporting as of
December 31, 2007, based on criteria established in the Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). IBT BANCORP, INC.'S management is responsible
for these consolidated financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on these consolidated financial statements and an opinion on the
effectiveness of the IBT BANCORP, INC.'S internal control over financial
reporting, based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement and whether
effective internal control over financial reporting was maintained in all
material respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material misstatement exists, and testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk. We believe that our audits provide a reasonable basis for
our opinions.
A corporation's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of consolidated financial statements for external purposes
in accordance with generally accepted accounting principles. A corporation's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the corporation; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of consolidated financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the corporation are being made only in accordance with
authorizations of management and directors of the corporation; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the corporation's assets that could have a
material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in Notes 3 and 18 to the consolidated financial statements,
effective January 1, 2007 the Corporation elected the early adoption of
Statements of Financial Accounting Standards (SFAS) No.'s 159, The Fair Value
Option for Financial Assets and Financial Liabilities, and 157, Fair Value
Measurements, and effective December 31, 2006 changed its method of accounting
for defined benefit pension and other postretirement plans in accordance with
SFAS No. 158, Employer's Accounting for Defined Benefit Pension and Other
Postretirement Plans.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IBT
BANCORP, INC. as of December 31, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion IBT
BANCORP, INC. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2007, based on criteria established
in the Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
REHMANN ROBSON P.C.
Saginaw, Michigan
February 29, 2008
34
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31
-------------------
2007 2006
-------- --------
ASSETS
Cash and demand deposits due from banks $ 25,583 $ 31,359
Trading securities 25,064 --
Investment securities available for sale (amortized
cost of $212,285 in 2007 and $214,600 in 2006) 213,127 213,450
Mortgage loans available for sale 2,214 2,734
Net loans
Loans 612,687 591,042
Less allowance for loan losses 7,301 7,605
-------- --------
TOTAL NET LOANS 605,386 583,437
Premises and equipment 22,516 20,754
Corporate-owned life insurance policies 13,195 12,763
Accrued interest receivable 5,948 5,765
Acquisition intangibles and goodwill, net 27,010 27,288
Equity securities without readily determinable fair values 7,353 3,480
Other assets 9,886 9,097
-------- --------
TOTAL ASSETS $957,282 $910,127
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 84,846 $ 83,902
NOW accounts 105,526 111,406
Certificates of deposit and other savings 410,782 388,176
Certificates of deposit over $100,000 132,319 142,356
-------- --------
TOTAL DEPOSITS 733,473 725,840
Other borrowed funds ($7,523 at fair value in 2007) 92,887 58,303
Escrow funds payable 1,912 2,416
Accrued interest and other liabilities 5,930 7,819
-------- --------
TOTAL LIABILITIES 834,202 794,378
-------- --------
Shareholders' Equity
Common stock -- no par value 10,000,000 shares authorized;
outstanding--6,364,120 in 2007 (6,335,861 in 2006) 116,319 114,785
Retained earnings 7,027 4,451
Accumulated other comprehensive loss (266) (3,487)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 123,080 115,749
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $957,282 $910,127
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
35
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
Year Ended December 31
------------------------------------
2007 2006 2005
---------- ---------- ----------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year 6,335,861 4,974,715 4,896,412
Common stock dividends -- 497,299 --
Issuance of common stock 71,479 66,372 78,303
Shares issued in exchange for bank acquisition -- 797,475 --
Common stock repurchased (43,220) -- --
---------- ---------- ----------
BALANCE END OF YEAR 6,364,120 6,335,861 4,974,715
========== ========== ==========
COMMON STOCK
Balance at beginning of year $ 114,785 $ 72,296 $ 66,908
Common stock dividends -- 20,887 --
Transfer -- (12,000) --
Issuance of common stock 2,657 33,132 2,684
Share-based payment awards under equity compensation plan 758 470 2,704
Common stock repurchased (1,881) -- --
---------- ---------- ----------
BALANCE END OF YEAR 116,319 114,785 72,296
RETAINED EARNINGS
Balance at beginning of year 4,451 10,112 6,590
Cumulative adjustment to initially apply the fair
value option of FASB Statement No. 159, net of tax (1,050)
Net income 7,930 7,001 6,776
Common stock dividends -- (20,887) --
Transfer -- 12,000 --
Cash dividends ($0.62 per share in 2007,
$0.58 per share in 2006, $0.55 per share in 2005) (4,304) (3,775) (3,254)
---------- ---------- ----------
BALANCE END OF YEAR 7,027 4,451 10,112
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of year (3,487) (1,506) (904)
Cumulative adjustment to initially apply the fair value
option of FASB Statement No. 159, net of tax 897
Cumulative adjustment to intially apply
FASB Statement No. 158, net of tax -- (2,728) --
Other comprehensive income (loss) 2,324 747 (602)
---------- ---------- ----------
BALANCE END OF YEAR (266) (3,487) (1,506)
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY END OF YEAR $ 123,080 $ 115,749 $ 80,902
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
36
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31
---------------------------
2007 2006 2005
------- ------- -------
INTEREST INCOME
Loans, including fees $43,808 $36,575 $30,682
Investment securities
Taxable 3,751 4,948 3,487
Nontaxable 3,657 2,797 2,398
Trading account securities 2,097 -- --
Federal funds sold and other 659 389 315
------- ------- -------
TOTAL INTEREST INCOME 53,972 44,709 36,882
INTEREST EXPENSE
Deposits 22,605 17,164 11,374
Borrowings 3,354 2,568 1,599
------- ------- -------
TOTAL INTEREST EXPENSE 25,959 19,732 12,973
------- ------- -------
NET INTEREST INCOME 28,013 24,977 23,909
Provision for loan losses 1,211 682 777
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 26,802 24,295 23,132
NONINTEREST INCOME
Service charges and fees 5,894 5,490 4,928
Title insurance revenue 2,192 2,389 2,351
Gain on sale of mortgage loans 209 207 270
Net gain on trading securities 460 -- --
Other 1,207 1,012 927
------- ------- -------
TOTAL NONINTEREST INCOME 9,962 9,098 8,476
NONINTEREST EXPENSES
Compensation and benefits 15,618 13,869 13,548
Occupancy 1,766 1,730 1,553
Furniture and equipment 3,297 2,868 2,657
Other 6,548 6,006 5,126
------- ------- -------
TOTAL NONINTEREST EXPENSES 27,229 24,473 22,884
INCOME BEFORE FEDERAL INCOME TAXES 9,535 8,920 8,724
Federal income taxes 1,605 1,919 1,948
------- ------- -------
NET INCOME $ 7,930 $ 7,001 $ 6,776
======= ======= =======
EARNINGS PER SHARE
Basic $ 1.14 $ 1.12 $ 1.14
======= ======= =======
Diluted $ 1.11 $ 1.08 $ 1.14
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
37
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Year Ending December 31
--------------------------
2007 2006 2005
------- ------ -------
NET INCOME $ 7,930 $7,001 $ 6,776
------- ------ -------
Unrealized holding gains (losses) on available-for-sale
securities:
Unrealized gains (losses) arising during period 614 1,020 (2,749)
Reclassification adjustment for net realized losses
(gains) included in net income 19 112 (2)
------- ------ -------
Net unrealized gains (losses) 633 1,132 (2,751)
Tax effect (216) (385) 935
------- ------ -------
Unrealized gains (losses), net of tax 417 747 (1,816)
------- ------ -------
Reduction of unrecognized pension cost, primarily as a
result of plan curtailment 2,890 -- --
Tax effect (983) -- --
------- ------ -------
Net gain on defined benefit pension plan 1,907 -- --
------- ------ -------
Reduction in unrecognized actuarial loss of defined
benefit pension plan -- -- 1,839
Tax effect -- -- (625)
------- ------ -------
Reduction in unrecognized actuarial loss of defined
benefit pension plan -- -- 1,214
------- ------ -------
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX 2,324 747 (602)
------- ------ -------
COMPREHENSIVE INCOME $10,254 $7,748 $ 6,174
======= ====== =======
The accompanying notes are an integral part of these consolidated financial
statements.
38
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Year Ended December 31
-------------------------------
2007 2006 2005
--------- -------- --------
OPERATING ACTIVITIES
Net income $ 7,930 $ 7,001 $ 6,776
Reconciliation of net income to cash provided by (used in) operations:
Provision for loan losses 1,211 682 777
Provision for foreclosed asset losses 109 -- --
Depreciation 1,960 1,852 1,735
Net amortization of investment securities 216 705 957
Realized loss (gain) on sale of investment securities 19 112 (2)
Unrealized gains on trading securities (460) -- --
Unrealized losses on borrowings measured at their fair market value 66 -- --
Amortization and impairment of mortgage servicing rights 201 184 140
Earnings on corporate owned life insurance policies (432) (404) (365)
Amortization of acquisition intangibles 278 160 94
Deferred income taxes 301 274 263
Share-based payment awards 758 470 2,704
Net changes in operating assets and liabilities which provided (used) cash:
Trading securities 53,235 -- --
Loans held for sale 520 (1,990) 1,595
Accrued interest receivable (183) (626) (471)
Other assets (4,667) (1,424) (1,787)
Escrow funds payable (504) (7,407) 8,098
Accrued interest and other liabilities (171) (1,378) (2,406)
--------- -------- --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 60,387 (1,789) 18,108
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 54,997 57,577 31,962
Purchases (132,115) (70,140) (57,044)
Activity in held to maturity securities
Maturities, calls, and sales -- -- 523
Loan principal originations, net (24,455) (44,805) (31,597)
Proceeds from sales of foreclosed assets 662 524 1,272
Purchases of premises and equipment (3,722) (2,467) (2,374)
Acquisition of Farwell State Savings Bank, net of cash acquired -- (2,713) --
Purchase of corporate owned life insurance policies -- (499) --
--------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (104,633) (62,523) (57,258)
FINANCING ACTIVITIES
Net increase (decrease) in noninterest bearing deposits 944 (409) 8,103
Net increase in interest bearing deposits 6,689 60,433 20,499
Net increase in other borrowed funds 34,365 6,138 21,183
Cash dividends paid on common stock (4,304) (3,775) (3,254)
Proceeds from the issuance of common stock 2,657 2,459 2,684
Common stock repurchased (1,881) -- --
--------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 38,470 64,846 49,215
--------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,776) 534 10,065
Cash and cash equivalents at beginning of year 31,359 30,825 20,760
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 25,583 $ 31,359 $ 30,825
========= ======== ========
Supplemental cash flows information:
Interest paid $ 25,872 $ 19,392 $ 12,814
Federal income taxes paid 1,776 1,516 1,000
Transfer of loans to foreclosed assets 1,295 433 928
See notes to consolidated financial statements.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements
include the accounts of IBT Bancorp, Inc. (the "Corporation"), a financial
services holding company, and its wholly owned subsidiaries, Isabella Bank and
Trust, IBT Title and Insurance Agency, Inc., Financial Group Information
Services, and its majority owned subsidiaries, IBT Personnel, LLC (79%), and
IB&T Employee Leasing, LLC (79%). All intercompany balances and accounts have
been eliminated in consolidation.
NATURE OF OPERATIONS: IBT Bancorp, Inc. is a financial services holding company
offering a wide array of financial products and services in mid-Michigan. Its
banking subsidiary, Isabella Bank and Trust, offers banking services through 24
locations, 24-hour banking services locally and nationally through shared
automatic teller machines, 24- hour online banking, and direct deposits to
businesses, institutions, and individuals. Lending services offered include
commercial real estate loans and lines of credit, agricultural loans,
residential real estate loans, consumer loans, student loans, and credit cards.
Deposit services include interest and noninterest bearing checking accounts,
savings accounts, money market accounts, and certificates of deposit. Other
related financial products include trust services, safe deposit box rentals, and
credit life insurance. Active competition, principally from other commercial
banks, savings banks and credit unions, exists in all of the Bank's principal
markets. The Corporation's results of operations can be significantly affected
by changes in interest rates or changes in the local economic environment.
In April 2007, the Corporation consolidated the charters of FSB Bank and
Isabella Bank and Trust. The consolidation into a single charter helped to
further reduce operating expenses through the elimination of duplications in
memberships, licensing, service contracts, compliance, computer platforms, and
computer processing. The legal reorganization had no significant effect on the
Corporation's consolidated financial statements (See "Note 23 - Operating
Segments").
On January 1, 2008, the Corporation acquired 100 percent of Greenville Community
Financial Corporation (GCFC). As a result of this acquisition, Greenville
Community Bank, a wholly-owned subsidiary of GCFC, merged with and into the
Bank. As of December 31, 2007 GCFC had assets of $107,986.
(See "Note 24 - Subsequent Events").
IBT Title and Insurance Agency, Inc. (IBT Title) does business under the names
Isabella County Abstract and Title, Mecosta County Abstract and Title, IBT Title
Clare, Benchmark Title of Greenville, Milltown Title, and Pere Marquette
Abstract and Title Agency, LLC. IBT Title provides title insurance and abstract
searches, and closes real estate loans.
Financial Group Information Services provides information technology services to
IBT Bancorp and its subsidiaries.
IBT Personnel and IB&T Employee Leasing provide payroll services, benefit
administration, and other human resource services to IBT Bancorp and
subsidiaries.
USE OF ESTIMATES: In preparing consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the consolidated
balance sheet and reported amounts of revenues and expenses during the reporting
year. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans, valuation of goodwill and intangible assets,
determinations of assumptions in accounting for the defined benefit pension
plans, and other post-retirement liabilities. In connection with the
determination of the allowance for loan losses and the carrying value of
foreclosed real estate, management obtains independent appraisals for
significant properties.
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK: Most of the Corporation's
activities conducted are with customers located within the central Michigan
area. A significant amount of its outstanding loans are secured by real estate
or are made to finance agricultural production. Other than these types of loans,
there is no significant concentration to any other industry or customer.
CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash
flows, cash and cash equivalents include cash and balances due from banks,
federal funds sold, and other deposit accounts, all of which have original
maturity dates within ninety days. Generally, federal funds sold are for a one
day period. The Corporation maintains deposit accounts in various financial
institutions which generally exceed federally insured limits or are not insured.
40
TRADING SECURITIES: Effective January 1, 2007, in conjunction with the early
adoption of the fair value option of SFAS No. 159 (Note 3), the Corporation
engages in trading activities for its own account. Securities that are held
principally for resale in the near term are recorded in the trading assets
account at fair value with unrealized changes in fair value recorded in
earnings. Interest and dividends are included in net interest income.
AVAILABLE-FOR-SALE INVESTMENT SECURITIES: Securities classified as
"available-for-sale" are recorded at fair value, with unrealized gains and
losses, net of the effect of deferred income taxes, excluded from earnings and
reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held-to-maturity and available-for-sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
In determining whether other-then-temporary impairment losses impairments exist,
management considers (1) the length of time and the extent to which the fair
value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Corporation to
retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value. Gains and losses on the sale of
securities are recorded on the trade date and are determined using the specific
identification method.
LOANS: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at their outstanding
principal balance adjusted for any charge offs, the allowance for loans losses,
and any deferred fees or costs on originated loans. Interest income on loans is
accrued over the term of the loan based on the principal amount outstanding.
Loan origination fees and certain direct loan origination costs are capitalized
and recognized as a component of interest income over the term of the loan using
the constant yield method.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days or more past due unless the credit is well-secured and
in the process of collection. Credit card loans and other personal loans are
typically charged off no later than 180 days past due. Past due status is based
on contractual terms of the loan. In all cases, loans are placed on nonaccrual
or charged off at an earlier date if collection of principal or interest is
considered doubtful.
For loans that are placed on non-accrual status or charged-off, all interest
accrued in the current calendar year, but not collected, is reversed against
interest income while interest accrued in prior calendar years, but not
collected is charged against the allowance for loan losses. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual status. Loans are returned to accrual status
when all principal and interest amounts contractually due are brought current
and future payments are reasonably assured. For impaired loans not classified as
nonaccrual, interest income continues to be accrued over the term of the loan
based on the principal amount outstanding.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is established as
losses are estimated to have occurred through a provision for loan losses
charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of the loan balance is confirmed.
Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower than
the carrying value of that loan. The general component covers non-classified
loans and is based on historical loss experience adjusted for qualitative
factors. An unallocated component is maintained to cover uncertainties that
management believes affect its estimate of probable losses. The unallocated
component of the allowance reflects the margin of imprecision inherent in the
underlying assumptions used in the methodologies for estimating specific and
general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into
41
consideration all of the circumstance surrounding the loan and the borrower,
including the length of the delay, the reason for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately identify individual
consumer and residential loans for impairment disclosures.
LOANS HELD FOR SALE: Mortgage loans originated and intended for sale in the
secondary market are carried at fair value as determined by aggregating
outstanding commitments from investors or current investor yield requirements.
Net unrealized losses, if any, are recognized through a valuation allowance by
charges to income.
Mortgage loans held for sale are generally sold with the mortgage servicing
rights retained by the Bank. The carrying value of mortgage loans sold is
reduced by the cost allocated to the associated mortgage servicing rights. Gains
or losses on sales of mortgage loans are recognized based on the difference
between the selling price and the carrying value of the related mortgage loans
sold.
TRANSFERS OF FINANCIAL ASSETS: Transfers of financial assets, including held for
sale mortgage loans, as described above, and participation loans are accounted
for as sales when control over the assets has been surrendered. Control over
transferred assets is determined to be surrendered when 1) the assets have been
isolated from the Bank, 2) the transferee obtains the right (free of conditions
that constrain it from taking advantage of the right) to pledge or exchange the
transferred assets and 3) the Bank does not maintain effective control over the
transferred assets through an agreement to repurchase them before their
maturity.
SERVICING: Servicing assets are recognized as separate assets when rights are
acquired through purchase or through sale of financial assets. The Corporation
has no purchased servicing rights. For sales of mortgage loans, a portion of the
cost of originating the loan is allocated to the servicing right based on
relative fair value. Fair value is based on market prices for comparable
mortgage servicing contracts, when available, or alternatively, is based on a
valuation model that calculates the present value of estimated future net
servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income, such as the
cost to service, the discount rate, the custodial earnings rate, an inflation
rate, ancillary income, prepayment speeds and default rates and losses.
Servicing assets are evaluated for impairment based upon the fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights into tranches based on predominant risk characteristics, such as interest
rate, loan type, and investor type. Impairment is recognized through a valuation
allowance for an individual tranche, to the extent that fair value is less than
the capitalized amount for the tranche. If the Corporation later determines that
all or a portion of the impairment no longer exists for a particular tranche, a
reduction of the allowance may be recorded as an increase to income. Capitalized
servicing rights are reported in other assets and are amortized into
non-interest income in proportion to, and over the period of, the estimated
future net servicing income of the underlying financial assets.
Servicing fee income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal; or a fixed
amount per loan and are recorded as income when earned. The amortization of
mortgage servicing rights is netted against loan servicing fee income, a
component of noninterest income.
LOANS ACQUIRED THROUGH TRANSFER: American Institute of Certified Public
Accountants' Statement of Position (SOP) 03-3 requires that a valuation
allowance for loans acquired in a transfer, including in a business combination,
reflect only losses incurred after acquisition, and should not be recorded at
acquisition. It applies to any loan acquired in a transfer that shows evidence
of credit quality deterioration since it was originated. The effect on results
of operations and financial position of the Corporation's acquisition of the
allowance for loan losses carried over from Farwell State Savings Bank
("Farwell") (see Note 2) was not material in 2006 due to the limited number of
troubled loans held by Farwell.
FORECLOSED ASSETS: Assets acquired through, or in lieu, of loan foreclosure are
initially recorded at the lower of the Bank's carrying amount or fair value less
estimated selling costs at the date of transfer, establishing a new cost basis.
Any write-downs based on the asset's fair value at the date of acquisition are
charged to the allowance for loan losses. After foreclosure, property held for
sale is carried at the lower of the new cost basis or fair value less costs to
sell. Impairment losses on property to be held and used are measured at the
amount by which the carrying amount of property exceeds its fair value. Costs
relating to holding these assets are expensed as incurred. Valuations are
periodically performed by management, and any subsequent write-downs are
recorded as a charge to operations, if necessary, to reduce the carrying value
of a property to the lower of its cost or fair value less costs to sell.
42
OFF-BALANCE-SHEET CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course
of business, the Corporation has entered into commitments to extend credit,
including commitments under credit card arrangements, home equity lines of
credit, commercial letters of credit, and standby letters of credit. Such
financial instruments are recorded only when funded.
PREMISES AND EQUIPMENT: Land is carried at cost. Buildings and equipment are
carried at cost less accumulated depreciation. Depreciation is computed
principally by the straight line method based upon the useful lives of the
assets which generally range from 5 to 30 years. Maintenance, repairs and minor
alterations are charged to current operations as expenditures occur and major
improvements are capitalized.
EQUITY SECURITIES WITHOUT READILY DETERMINABLE FAIR VALUES: Included in equity
securities without readily determinable fair values are restricted securities of
$6,253 in 2007 and $3,480 in 2006. Restricted securities include stock of the
Federal Reserve Bank and the Federal Home Loan Bank, which are carried at cost
and have no contractual maturity.
STOCK COMPENSATION PLANS: In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment. SFAS No. 123(R) requires that the
compensation costs relating to share-based payment transactions be recognized in
the financial statements and that this cost be measured based on the fair value
of the equity or liability instruments issued. SFAS No. 123(R) covers a wide
range of share-based compensation arrangements including stock options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS 123(R) applies to new awards and awards
modified, repurchased, or cancelled after January 1, 2006. Compensation expense
is based on the fair value of the awards, which is generally the market price of
the stock on the measurement date and is recognized ratably over the service
period of the award.
The Corporation adopted SFAS No. 123(R) on December 31, 2005, and elected the
modified prospective method. Compensation cost has been measured using the fair
value of an award on the grant dates and is recognized over the service period,
which is usually the vesting period. Compensation cost related to the non-vested
portion of the awards outstanding as of the date was based on the grant date
fair value of those awards as calculated under the original provisions of SFAS
No. 123; that is, the Corporation was not required to re-measure the grant date
fair value estimate of the unvested portion of awards granted prior to the
effective date of SFAS No. 123(R).
CORPORATE OWNED LIFE INSURANCE: The Corporation has purchased life insurance
policies on key members of management. In the event of death of one of these
individuals, the Corporation would receive a specified cash payment equal to the
face value of the policy. Such policies are recorded at their cash surrender
value, or the amount that can be realized. Increases in cash surrender value in
excess of premiums paid are reported as other noninterest income.
To date, no compensation expense has been required to be recognized in the
Corporation's financial statements to accrue for the mortality and related costs
of maintaining the life insurance policies in effect during the covered
officers' postretirement periods.
Emerging Issues Task Force ("EITF") Issue No. 06-4, Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements, ratified by the FASB in September, 2006, requires that
policyholders recognize a liability for any postretirement benefits provided
through the Corporation's program. As of December 31, 2007, the nature and
amount of benefits promised by the Corporation to the covered employees is
estimated to be $1,561, net of tax. An accrued liability will begin to be
recorded by the Corporation effective January 1, 2008 to recognize the initial
and ongoing costs of maintaining these policies.
ACQUISITION INTANGIBLES AND GOODWILL: Isabella Bank and Trust previously
acquired branch facilities and related deposits in a business combination
accounted for as a purchase. During October 2006, Isabella Bank acquired Farwell
State Savings Bank ("Farwell") resulting in identified core deposit intangibles
and goodwill (see Note 2). The acquisition of the branches included amounts
related to the valuation of customer deposit relationships (core deposit
intangibles). Such core deposit intangibles are included in other assets and are
being amortized on the straight line basis over nine years. Core deposit
intangibles arising from the acquisition of Farwell are being amortized on a 10
year sum-of-year's digits amortization schedule. Goodwill is included in other
assets and is not amortized but is evaluated for impairment at least annually,
or on an interim basis if an event occurs or circumstances change that would
more likely than not reduce the fair value of the reporting unit below the
carrying value.
FEDERAL INCOME TAXES: Deferred income tax assets and liabilities are determined
using the liability (or balance sheet) method. Under this method, the net
deferred tax assets or liability is determined based on the tax effects of the
temporary differences between the book and tax bases on the various balance
sheet assets and liabilities and gives current recognition to changes in tax
rates and laws.
ADVERTISING COSTS: Advertising costs are expensed as incurred (see Note 12).
43
EARNINGS PER COMMON SHARE: Basic earnings per share represents income available
to common stockholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects additional
common shares that would have been outstanding if dilutive potential common
shares had been issued, as well as any adjustments to income that would result
from the assumed issuance. Potential common shares that may be issued by the
Corporation relate solely to outstanding shares in the Corporation's Deferred
Director fee plan (see Note 18).
Earnings per common share have been computed based on the following:
December 31
---------------------------------
2007 2006 2005
--------- --------- ---------
Average number of common shares outstanding* 6,973,508 6,269,465 5,958,657
Effect of shares in the Deferred Director fee plan* 197,055 181,280 --
--------- --------- ---------
Average number of common shares outstanding used to
calculate diluted earnings per common share 7,170,563 6,450,745 5,958,657
========= ========= =========
* As adjusted for the 10% stock dividend paid February 29, 2008 (Note 24)
RECLASSIFICATIONS: Certain amounts reported in the 2006 and 2005 consolidated
financial statements have been reclassified to conform with the 2007
presentation.
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 had no significant impact on the Corporation's consolidated
financial statements.
In September 2006, Emerging Issues Task Force ("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, ratified by the
FASB, 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 was effective for
fiscal years beginning after December 15, 2006. The provisions of EITF 06-5 did
not have an impact on the Corporation's consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155 Accounting for Certain Hybrid
Instruments, which allows financial instruments that have embedded derivatives
to be accounted for as a whole (eliminating the need to bifurcate the derivative
from its host) if the holder elects to account for the whole instrument on a
fair value basis. The issuance of Statement No. 155 provides the following: 1.)
Clarifies which interest-only strips and principal-only strips are not subject
to the requirements of Statement No. 133; 2.) Establishes a requirement to
evaluate interests in securitized financial assets to identify interests that
are freestanding derivatives or that are hybrid financial instruments that
contain an embedded derivative requiring bifurcation; 3.) Clarifies that
concentrations of credit risk in the form of subordination are not embedded
derivatives; and 4.) Amends Statement No. 140 to eliminate the prohibition on a
qualifying special purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. SFAS No. 155 is effective for all financial instruments acquired or
issued after the beginning of the first fiscal year beginning after September
15, 2006. The Corporation adopted SFAS No.155 on January 1, 2007 and it did not
have a material impact on the Corporation's consolidated financial statements.
In March 2006 the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets, which affects the accounting for servicing rights, which
includes mortgage servicing rights and those associated with other types of
financial assets transferred in securitizations such as auto loans, student
loans, credit cards, commercial real estate and equipment financing.
Specifically, Statement No. 156 requires that all separately recognized
servicing rights be initially measured at fair value, if practicable. For
subsequent accounting for servicing assets and liabilities, entities would
choose either to amortize and recognize over a period of estimated net servicing
income or net servicing loss (currently required under Statement No. 140) or
remeasure at fair value at each subsequent reporting date. The choice to measure
at fair value would make it easier to account for hedges of servicing rights,
which currently are difficult to apply under Statement No. 133. Statement No.
156 is effective for all servicing assets or liabilities acquired or assumed
after the beginning of the first fiscal year beginning
44
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 September of 2006, EITF Issue No. 06-4, Accounting for Deferred Compensation
and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangement, was ratified by the FASB. The EITF reached a consensus that for an
endorsement split-dollar life insurance arrangement within the scope of this
Issue, an employer should recognize a liability for future benefits. IBT Bancorp
has purchased corporation-owned life insurance on certain of its employees. The
cash surrender value of these policies is carried as an asset on the
consolidated balance sheets. The carrying value was $13,195 at December 31,
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 while it is currently evaluating the effect the implementation of EITF
Issue No. 06-4 will have on the consolidated financial statements, management
expects to recognize an initial liability of approximately $1,561, net of tax,
with periodic policy maintenance costs not material in any one year.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. 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 SFAS No. 157 would need to be adopted concurrently. The
results of the adoption of this standard are disclosed in Note 3.
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 of this statement is presented in Note 3.
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.
In December 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141R (SFAS No 141R) Accounting for Business
Combinations. The objective of SFAS 141-R is to improve the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial reports about a business combination
and its effects. To accomplish that, this Statement establishes
principles and requirements for how the acquirer recognizes and measures the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest acquired, in its financial statements. The acquirer must also recognize
and measure the goodwill acquired in the business combination or a gain from a
bargain purchase, and determine what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. SFAS No. 141-R is effective January 1, 2009 and is
expected to have a significant impact on the Corporation's accounting for
business combinations closing on or after January 1, 2009.
In December, 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated
Financial Statements. The objective of SFAS No. 160 is to improve the relevance,
comparability, and transparency of the financial information that a reporting
entity provides in its consolidated financial statements by establishing
45
accounting and reporting standards for the noncontrolling interest in a
subsidiary. SFAS No. 160 is effective January 1, 2009 and is not expected to
have a significant impact on the Corporation's consolidated financial position
and results of operations.
On February 14, 2008, the Financial Accounting Standards Board issued Staff
Position FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No.
13 and Other Accounting Pronouncements that address Fair Value Measurements for
Purposes of Lease Classification or Measurement under Statement 13. This FSP
amends FASB Statement No. 157, Fair Value Measurements, to exclude FASB
Statement No. 13, Accounting for Leases, and other accounting pronouncements
that address fair value measurements for purposes of lease classification or
measurement under Statement No. 13. However, this scope exception does not apply
to assets acquired and liabilities assumed in a business combination that are
required to be measured at fair value under FASB Statement No. 141, Business
Combinations, or No. 141 (revised 2007), Business Combinations, regardless of
whether those assets and liabilities are related to leases. This FSP shall be
effective upon the initial adoption of Statement No. 157. An enterprise that
applied Statement No. 157 in a manner consistent with the provisions of this FSB
would continue to apply the provisions of this FSP from the date of the initial
adoption of Statement No. 157. However, an enterprise that did not apply
Statement No. 157 in a manner consistent with the provisions of this FSP shall
retrospectively apply the provisions in this FSP to the date of the initial
adoption of Statement No. 157. FAS 157-1 did not have a significant impact on
the Corporation's consolidated financial statements.
On February 20, 2008, the Financial Accounting Standards Board issued Staff
Position FAS 140 - 3, Accounting for Transfers of Financial Assets and
Repurchase Financing Transactions. The objective of this FSP is to provide
guidance on accounting for a transfer of a financial asset and a repurchase
financing. This FSP presumes that an initial transfer of a financial asset and a
repurchase financing are considered part of the same arrangement (linked
transaction) under Statement No. 140. However, if certain criteria are met, the
initial transfer and repurchase financing shall not be evaluated as a linked
transaction and shall be evaluated separately under Statement No. 140. This FSP
shall be effective for financial statements issued for fiscal years beginning
after November 15, 2008, and interim periods within those fiscal years. Earlier
application is not permitted. FAS 140-3 is not expected to have a significant
impact on the Corporation's consolidated financial statements.
NOTE 2 - BUSINESS COMBINATION
On October 3, 2006, the Bank acquired 100 percent of Farwell State Savings Bank
(Farwell). As a result of this acquisition, Farwell merged with and into the
Bank. Under the terms of the merger agreement, each share of Farwell common
stock was automatically converted into the right to receive 3.0382 shares of IBT
common stock and $29.00 in cash. As a result of this acquisition, the
Corporation issued 797,475 shares of IBT Bancorp, Inc. common stock valued at
$30,448 and paid a total of $7,612 in cash to Farwell shareholders. Included in
the purchase price was $382 of transaction costs. The total consideration
exchanged including the value of the common stock issued, cash paid to
shareholders, plus cash paid for transaction costs resulted in a total purchase
cost of $38,442. The acquisition of Farwell has increased the overall market
share for IBT Bancorp in furtherance of the Bank's strategic plan to pursue
certain acquisitions.
46
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of the acquisition.
Fair Value
Adjustments of
Nonintangible Fair Value
Farwell Net Assets of Net Assets
October 3, 2006 Acquired Acquired
--------------- -------------- -------------
ASSETS
Cash and cash equivelants $ 5,281 $ -- $ 5,281
Securities available for sale 17,166 -- 17,166
Loans, net 63,874 (470) 63,404
Bank premises and equipment 307 600 907
Other assets 2,416 15 2,431
------- ----- -------
TOTAL ASSETS ACQUIRED 89,044 145 89,189
------- ----- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits 73,731 (393) 73,338
Accrued interest and other liabilities 1,114 -- 1,114
------- ----- -------
TOTAL LIABILITIES ASSUMED 74,845 (393) 74,452
------- ----- -------
NET ASSETS ACQUIRED $14,199 $ 538 14,737
======= ===== =======
Core deposit intangible 1,442
Goodwill 22,263
-------
TOTAL CONSIDERATION PAID $38,442
=======
The fair value adjustments are being amortized over two years using the straight
line amortization method. The core deposit intangible is being amortized using a
10 year sum-of-the-years' digits amortization schedule. Goodwill, which is not
amortized, is tested for impairment at least annually. As the acquisition was
considered a stock transaction, goodwill is not deductible for federal income
tax purposes.
The 2007 and 2006 consolidated statements of income include operating results of
Farwell since the date of acquisition.
47
The unaudited pro forma information presented in the following table has been
prepared based on IBT Bancorp's historical results combined with Farwell. The
information has been combined to present the results of operations as if the
acquisition had occurred at the beginning of the periods presented. The pro
forma results are not necessarily indicative of the results which would have
actually been attained if the acquisition had been consummated in the past or
what may be attained in the future and have not been adjusted for the 10% stock
dividend paid February 29, 2008:
Year Ended
December 31
-----------------
2006 2005
------- -------
Net interest income $27,499 $27,371
======= =======
Net income $ 8,023 $ 8,288
======= =======
Basic earnings per share $ 1.28 $ 1.33
======= =======
NOTE 3 - 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, the Corporation may elect to measure many financial instruments and certain
other assets and liabilities at fair value ("fair value option" - FVO). 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 the Corporation has similar
instruments that it elects not to measure based on fair value. At the adoption
date, unrealized gains and losses on existing items for which fair value has
been elected are reported as a cumulative adjustment to beginning retained
earnings as of January 1, 2007. Subsequent to the adoption of SFAS No. 159,
changes in fair value are recognized in earnings. Although SFAS No. 159 is
effective for fiscal years beginning after November 15, 2007 and would have been
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.
As shown in the following table, the Corporation elected to transfer $77,839 of
its $213,450 available-for-sale securities investment portfolio to trading
status to facilitate more active trading of these securities. In determining
which available-for-sale securities to transfer, the Corporation considered
interest rates, duration, marketability, and balance sheet management
strategies. The securities transferred included obligations of US Government
Agencies, variable rate Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation mortgage backed securities, taxable municipal bonds,
and a limited number of tax exempt bonds. During 2007, the Corporation sold
$47,334 of trading securities and purchased $7,654 of trading securities. During
the year ended December 31, 2007, the Corporation had $14,914 of calls and
maturities in its trading portfolio. The Corporation's goal is to maintain an
overall trading securities position to approximately 2.0% to 3.0% of total
assets. Management believes this level to be the optimum amount needed to
provide liquidity and interest margin protection.
48
The Corporation also elected to report $7,256 of long-term, relatively high
interest rate, Federal Home Loan Bank advances at their fair value upon the
early adoption of SFAS No. 159 to provide a hedge against significant movement
in interest rates. These advances had an outstanding principal balance of $7,225
as of December 31, 2007. During 2007, there were no changes in borrowings
measured at fair value. During the year, the Corporation recognized losses of
$66 as a result of changes in the fair market value of these borrowings.
Balance Sheet Net Gain / Balance Sheet
1/1/2007 Prior to (Loss) Upon 1/1/2007 After
Early Adoption Early Adoption Early Adoption
of FVO of FVO of FVO
----------------- -------------- --------------
Investment securities $79,198 $(1,359) $77,839
FHLB borrowings included in other borrowed funds (7,256) (232) (7,488)
-------
Pretax cumulative loss effect of early
adoption of the fair value option (1,591)
Increase in deferred tax asset 541
Cumulative loss effect of early adoption of the
fair value option (charged as a reduction to -------
retained earnings as of January 1, 2007) $(1,050)
=======
In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS
No. 157). SFAS No. 157 establishes a common definition for fair value to be
applied to GAAP guidance requiring use of fair value, establishes a framework
for measuring fair value, and expands disclosure about such fair value
measurements. SFAS No. 157 clarifies the principle that fair value should be
based on the assumptions market participants would use when pricing an asset or
liability and establishes a fair value hierarchy that prioritizes the
information used to develop those assumptions. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. SFAS No. 157 is effective for fiscal years beginning after November
15, 2007. As the Corporation has elected early adoption of SFAS No. 159, it has
also early adopted SFAS No. 157, as required by SFAS No. 159.
Fair value is the price that would be received to sell an asset or transfer a
liability in an orderly transaction between market participants at the
measurement date. To increase consistency and comparability in fair value
measurements and related disclosures, the fair value hierarchy prioritizes the
inputs to valuation techniques used to measure fair value into three broad
levels. The fair value hierarchy gives the highest priority to quoted prices
(unadjusted) in active markets for identical assets or liabilities (Level 1) and
the lowest priority to unobservable inputs (Level 3). In some cases, the inputs
used to measure fair value might fall in different levels of the fair value
hierarchy. The level in the fair value hierarchy within which the fair value
measurement in its entirety falls shall be determined based on the lowest level
input that is significant to the fair value measurement in its entirety.
The adoption of SFAS No. 159 resulted in a cumulative effect adjustment, net of
tax, in the amount of $1,050 as a reduction to retained earnings. Of this
amount, $897 was essentially a reclassification within shareholders equity of
net unrealized losses on investments from accumulated other comprehensive loss
directly to retained earnings. The new standard resulted in the recognition of a
net pretax gain of $460 on trading activities which were offset by $66 of losses
related to changes in the fair value of borrowings measured at their fair value
for the year ended December 31, 2007 in the Consolidated Statements of Income.
49
Level 1 instruments are those assets for which the identical item is traded on
an active exchange, such as publicly-traded instruments. The majority of the
fair value amounts included in current period earnings resulted from Level 2
fair value methodologies; that is, the Corporation values the assets and
liabilities based on observable market data for similar instruments. The
Corporation has no instruments that meet the definition of Level 3, which is
unobservable inputs.
Changes in Fair Value for the Year Ended
December 31, 2007 for Items Measured at Fair
Fair Value Measurements at Value Pursuant to Election of the Fair
December 31, 2007 Using Value Option
------------------------------ ---------------------------------------------
Quoted Prices Significant
in Active Other Total Changes in Fair
Fair Value Markets for Observable Trading Other Values Included in
Measurements Identical Assets Inputs Gains and Gains and Current Period
Description 12/31/2007 (Level 1) (Level 2) (Losses) (Losses) Earnings
----------- ------------ ---------------- ----------- --------- --------- ---------------------
RECURRING ITEMS
Trading securities $ 25,064 $ -- $ 25,064 $460 $ -- $ 460
Investment securities
available for sale 213,127 3,984 209,143 -- -- --
Mortgage loans
available for sale 2,214 -- 2,214 -- -- --
Other borrowed funds 7,523 -- 7,523 -- (66) (66)
NONRECURRING ITEMS
Mortgage servicing rights 2,198 -- 2,198 -- (5) (5)
Other real estate owned 1,376 -- 1,376 -- (109) (109)
During 2007, in accordance with the provisions of SFAS No. 156, mortgage
servicing rights with a carrying amount of $2,203 were written down to their
fair value of $2,198, resulting in an impairment charge of $5. This adjustment
was included in earnings for 2007.
During 2007, in accordance with the provisions of SFAS No. 144, other real
estate owned with a carrying amount of $1,485 was written down to its fair value
of $1,376, resulting in an impairment charge of $109. This adjustment was
included in earnings for 2007.
50
NOTE 4 - TRADING SECURITIES
Trading securities, at fair value, consist of the following investments at
December 31, 2007:
Trading Securities
Government-sponsored enterprises $ 4,024
States and political subdivisions 10,324
Corporate 1,004
Mortgage-backed 9,712
-------
TOTAL TRADING SECURITIES $25,064
=======
During 2007, the Corporation sold $47,334 of trading securities. The net gain on
trading securities, which includes mark-to-market adjustments, totaled $460 in
2007, of which $246 relates to securities that were held in the Corporation's
trading portfolio as of December 31, 2007. There were no trading securities held
by the Corporation in 2006 or 2005.
NOTE 5 - INVESTMENT SECURITIES
The amortized cost and fair value of investment securities available for sale,
with gross unrealized gains and losses, are as follows as of December 31:
2007
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
----------------------------- --------- ---------- ---------- --------
U.S. Government and federal agencies $ 3,983 $ 75 $ -- $ 4,058
Government-sponsored enterprises 49,631 556 6 50,181
States and political subdivisions 130,772 611 427 130,956
Corporate 24,300 -- -- 24,300
Mortgage-backed 3,599 33 -- 3,632
-------- ------ ---- --------
TOTAL $212,285 $1,275 $433 $213,127
======== ====== ==== ========
2006
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
----------------------------- --------- ---------- ---------- --------
U.S. Government and federal agencies $ 7,014 $ -- $ 94 $ 6,920
Government-sponsored enterprises 62,472 54 426 62,100
States and political subdivisions 112,966 434 646 112,754
Corporate 11,089 1 37 11,053
Mortgage-backed 21,059 25 461 20,623
-------- ---- ------ --------
TOTAL $214,600 $514 $1,664 $213,450
======== ==== ====== ========
The Corporation had pledged investments in the following amounts as of December
31:
2007 2006
------- -------
Pledged for public deposits and for other
purposes necessary or requried by law $26,289 $24,990
Pledged to secure repurchase agreements 16,072 6,500
------- -------
TOTAL $42,361 $31,490
======= =======
51
The amortized cost and fair value of available-for-sale securities by
contractual maturity at December 31, 2007 are as follows:
Expected maturities may differ from contractual maturities because issuers have
the right to call or prepay obligations.
Available for Sale
---------------------
A mortized Fair
Cost Value
---------- --------
Within 1 year $ 19,885 $ 19,910
Over 1 year through 5 years 45,996 46,534
After 5 years through 10 years 72,477 72,871
Over 10 years 70,328 70,180
208,686 209,495
Mortgage-backed securities 3,599 3,632
-------- --------
$212,285 $213,127
======== ========
Because of their variable payments, mortgage-backed securities are not reported
by a specific maturity group.
A summary of the activity related to the sale of available-for-sale securities
during the years ended December 31 is as follows:
2007 2006 2005
------ ------- ------
Proceeds from sales of
securities $5,396 $15,257 $4,588
====== ======= ======
Gross realized gains $ 12 $ -- $ 9
Gross realized losses (31) (112) (7)
------ ------- ------
Net realized (losses) gains $ (19) $ (112) $ 2
====== ======= ======
Applicable income tax benefit $ 6 $ 38 $ --
====== ======= ======
Information pertaining to securities with gross unrealized losses at December
31, aggregated by investment category and length of time that individual
securities have been in continuous loss position, follows:
December 31, 2007
-----------------------------------------------------------
Less Than Twelve Months Over Twelve Months
----------------------- --------------------
Gross Gross Total
Unrealized Fair Unrealized Fair Unrealized
Securities Available-for-Sale Losses Value Losses Value Losses
----------------------------- ------------ -------- ---------- ------- ----------
Government-sponsored enterprises $ 6 $ 994 $ -- $ -- $ 6
States and political subdivisions 276 32,309 151 17,065 427
---- ------- ---- ------- ----
Total securities available-for-sale $282 $33,303 $151 $17,065 $433
==== ======= ==== ======= ====
52
December 31, 2006
-----------------------------------------------------------
Less Than Twelve Months Over Twelve Months
----------------------- --------------------
Gross Gross Total
Unrealized Fair Unrealized Fair Unrealized
Securities Available-for-Sale Losses Value Losses Value Losses
----------------------------- ------------ -------- ---------- ------- ----------
Government-sponsored enterprises $ -- $ -- $ 94 $ 6,920 $ 94
U.S. Government and federal agency 12 15,592 414 30,482 426
States and political subdivisions 80 20,688 566 40,472 646
Corporate 6 4,994 31 2,472 37
Mortgage-backed 3 1,960 458 16,431 461
---- ------- ------ ------- ------
Total securities available-for-sale $101 $43,234 $1,563 $96,777 $1,664
==== ======= ====== ======= ======
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, or more frequently when economic for market concerns warrant
such evaluation. Consideration is given to (1) length of time and the extent to
which the fair value has been less than cost, (2) the financial condition and
near term prospects of the issuer, and (3) the intent and ability of the
Corporation to retains its investments in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.
In analyzing an issuer's financial condition, management considers whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, and industry analysts'
reports. As the Corporation has the ability to hold debt securities until
maturity, or for the foreseeable future, no declines are deemed to be
other-than-temporary.
The unrealized losses are largely due to increases in market interest rates over
the yields available at the time the underlying securities were purchased. The
fair value is expected to recover as bonds approach their maturity date or
repricing date, or if market yields for such securities decline. Accordingly, as
of December 31, 2007 and 2006, management believes the impairments detailed
above are not other-than-temporary and, as such, no impairment loss has been
realized in the Corporation's consolidated income statements.
53
NOTE 6 - LOANS
The Bank grants commercial, agricultural, consumer and residential loans to
customers situated primarily in Isabella, Gratiot, Mecosta, Southwestern
Midland, Western Saginaw, Northern Montcalm and Southern Clare counties in
mid-Michigan. The ability of the borrowers to honor their repayment obligations
is often dependent upon the real estate, agricultural, and general economic
conditions of this region. Substantially all of the consumer and residential
mortgage loans are secured by various items of property, while commercial loans
are secured primarily by real estate, business assets and personal guarantees; a
portion of loans are unsecured.
A summary of the major classifications of loans is as follows:
DECEMBER 31
-------------------
2007 2006
-------- --------
Mortgage loans on real estate
Residential 1-4 family $227,304 $225,612
Commercial 158,982 142,464
Agricultural 19,951 29,223
Construction 15,060 24,412
Second mortgages 36,393 30,815
Equity lines of credit 19,180 19,811
-------- --------
Total mortgage loans 476,870 472,337
Commercial and agricultural loans
Commercial 79,324 70,237
Agricultural production 27,456 18,079
-------- --------
Total commercial and agricultural loans 106,780 88,316
Consumer installment loans 29,037 30,389
Total loans 612,687 591,042
Less: Allowance for loan losses 7,301 7,605
-------- --------
LOANS, NET $605,386 $583,437
======== ========
54
A summary of changes in the allowance for loan losses follows:
Year Ended December 31
--------------------------
2007 2006 2005
------- ------- ------
Balance at beginning of year $ 7,605 $ 6,899 $6,444
Allowance of acquired bank -- 726 --
Loans charged off (2,146) (1,149) (643)
Recoveries 631 447 321
Provision charged to income 1,211 682 777
------- ------- ------
Balance at end of year $ 7,301 $ 7,605 $6,899
======= ======= ======
The following is a summary of information pertaining to impaired loans at
December 31:
2007 2006
------ ------
Impaired loans with a valuation allowance
(equal to total impaired loans) $3,779 $3,928
Total impaired loans accruing interest $1,292 $1,059
Valuation allowance related to impaired loans $ 703 $ 594
Total nonaccrual loans $4,156 $3,444
Accruing loans past due 90 days or more $1,727 $1,185
Average investment in impaired loans $3,768 $3,043
Total restructured loans $ 685 $ 697
Interest income recognized on impaired loans was not significant during any of
the three years ended December 31, 2007. No additional funds are committed to be
advanced in connection with impaired loans.
NOTE 7 - SERVICING
Residential mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
mortgages serviced for others was $255,839, $255,577, and $256,358 at December
31, 2007, 2006, and 2005 respectively; such loans are not included in the
accompanying consolidated balance sheets. The fair value of servicing rights was
determined using a discount rate of 9.2%, prepayment speeds ranging from 6.0% to
24.3%, depending upon the stratification of the specific right and a weighted
average default rate of 0.0%. Servicing loans for others generally consists of
collecting mortgage payments, maintaining escrow accounts, disbursing payments
to investors and taxing authorities, and foreclosure processing.
The following table summarizes the changes in each year of the carrying value of
mortgage servicing rights included in other assets as of December 31:
2007 2006 2005
------- ------- -------
Balance at beginning of year $ 2,155 $ 2,125 $ 2,046
Mortgage servicing rights capitalized 2,869 2,655 2,520
Accumulated amortization (2,785) (2,589) (2,429)
Impairment valuation allowance (41) (36) (12)
------- ------- -------
BALANCE AT END OF YEAR $ 2,198 $ 2,155 $ 2,125
======= ======= =======
Impairment increases (reductions) $ 5 $ 24 $ (10)
======= ======= =======
55
NOTE 8 - PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
2007 2006
------- -------
Land $ 3,997 $ 3,089
Buildings and improvements 16,067 15,235
Furniture and equipment 23,226 21,501
------- -------
Total 43,290 39,825
Less: Accumulated depreciation 20,774 19,071
------- -------
PREMISES AND EQUIPMENT, NET $22,516 $20,754
======= =======
Depreciation expense amounted to $1,960, $1,852 and $1,735 in 2007, 2006, and
2005, respectively.
NOTE 9 - GOODWILL AND OTHER INTANGIBLE ASSETS
The change in the carrying amount of goodwill for the year is as follows:
2007 2006
------- -------
Balance January 1 $25,889 $ 3,136
Goodwill assigned to Farwell acquisition -- 22,263
Other acquisitions -- 490
------- -------
BALANCE AT DECEMBER 31 $25,889 $25,889
======= =======
Acquired intangible assets at year end were as follows:
2007
---------------------------------------
Gross Net
Intangible Accumulated Intangible
Assets Amortization Assets
---------- ------------ -----------
Amortizable intangible assets:
Core deposit premium resulting from
the Farwell acquisition in 2006 $1,442 $ 321 $1,121
Core deposit premium resulting from
previous acquisitions 2,451 2,451 --
------ ------ ------
TOTAL $3,893 $2,772 $1,121
====== ====== ======
2006
---------------------------------------
Gross Net
Intangible Accumulated Intangible
Assets Amortization Assets
---------- ------------ -----------
Amortizable intangible assets:
Core deposit premium resulting from
the Farwell acquisition in 2006 $1,442 $ 66 $1,376
Core deposit premium resulting from
previous acqupisitions 2,451 2,428 23
------ ------ ------
TOTAL $3,893 $2,494 $1,399
====== ====== ======
Amortization expense associated with identified intangible assets was $278,
$160, and $94 in 2007, 2006, and 2005, respectively.
56
Estimated amortization expense associated with identifiable intangibles for each
of the next five years is as follows:
Year Amount
---- ------
2008 $ 229
2009 203
2010 177
2011 151
2012 125
Thereafter 236
------
$1,121
======
NOTE 10 - DEPOSITS
Scheduled maturities of time deposits for the years succeeding December 31, 2007
are as follows:
Year Amount
---- --------
2008 $227,465
2009 34,062
2010 42,835
2011 23,067
2012 18,853
Thereafter 137
--------
$346,419
========
Interest expense on time deposits greater than $100 was $6,649 in 2007, $5,195
in 2006, and $2,751 in 2005.
NOTE 11 - BORROWED FUNDS
Borrowed funds consist of the following obligations at December 31:
2007 2006
------- -------
Federal Home Loan Bank advances $66,023 $50,756
Federal Funds purchased 15,883 6,765
Securities sold under agreements to repurchase
without stated maturity dates 981 724
Securities sold under agreements to repurchase
with stated maturity dates 10,000 --
Unsecured note payable -- 58
------- -------
$92,887 $58,303
======= =======
57
The Federal Home Loan Bank borrowings are collateralized by a blanket lien on
all qualified 1-to-4 family whole mortgage loans and U.S. government and federal
agency securities. Advances are also secured by FHLB stock owned by the Bank.
The maturity and weighted average interest rates of FHLB advances are as follows
at December 31:
2007 2006
-------------- --------------
Amount Rate Amount Rate
------- ---- ------- ----
Fixed rate advances due 2007 $ -- -- $16,000 4.79%
Fixed rate advances due 2008 6,131 4.79% 6,000 4.79%
Fixed rate advances due 2009 11,500 4.95% 8,500 4.88%
Fixed rate advances due 2010 18,392 5.08% 5,256 5.17%
One year putable advance due 2010 3,000 4.98% 3,000 4.98%
One year putable advances due 2012 15,000 4.10% -- --
Fixed rate advances due 2012 2,000 4.90% 2,000 4.90%
Fixed rate advances due 2015 10,000 4.84% 10,000 4.84%
------- ---- ------- ----
$66,023 4.76% $50,756 4.87%
======= ==== ======= ====
Securities sold under agreements to repurchase are classified as secured
borrowings. Securities sold under agreements to repurchase without stated
maturity dates generally mature within one to four days from the transaction
date. Securities sold under agreements to repurchase are reflected at the amount
of cash received in connection with the transaction. The U.S. government agency
securities underlying the agreements have a carrying value and a fair value of
$16,072 and $6,500 at December 31, 2007 and 2006, respectively. Such securities
remain under the control of the Corporation. The Corporation may be required to
pledge additional collateral based on the fair value of the underlying
securities.
The maturity and weighted average interest rates of securities sold under
agreements to repurchase with stated maturity dates are as follows at December
31, 2007:
Amount Rate
------- ----
Repurchase agreements due 2010 $ 5,000 4.00%
Repurchase agreements due 2013 5,000 4.51%
------- ----
$10,000 4.26%
======= ====
The Corporation had no securities sold under agreements to repurchase with
stated maturity dates in 2006.
NOTE 12 - OTHER NON-INTEREST EXPENSES
A summary of expenses included in Other Noninterest Expenses are as follows for
the year ended December 31:
2007 2006 2005
------ ------ ------
Director fees $ 796 $ 584 $ 604
Marketing and advertising 642 697 624
Audit and SOX compliance fees 583 1,010 606
Other, not individually significant 4,527 3,715 3,292
------ ------ ------
$6,548 $6,006 $5,126
====== ====== ======
58
NOTE 13 - FEDERAL INCOME TAXES
Components of the consolidated provision for income taxes are as follows for the
year ended December 31:
2007 2006 2005
------ ------ ------
Currently payable $1,304 $1,645 $1,685
Deferred 301 274 263
------ ------ ------
FEDERAL INCOME TAXES $1,605 $1,919 $1,948
====== ====== ======
The reconciliation of the provision for federal income taxes and the amount
computed at the federal statutory tax rate of 34% of income before federal
income taxes is as follows for the year ended December 31:
2007 2006 2005
------- ------- -------
Income taxes at 34% statutory rate $ 3,242 $ 3,033 $ 2,966
Effect of nontaxble income (1,782) (1,239) (1,100)
Effect of nondeductible expenses 145 125 82
------- ------- -------
FEDERAL INCOME TAXES $ 1,605 $ 1,919 $ 1,948
======= ======= =======
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities, included in other assets,
are as follows as of December 31:
2007 2006
------ ------
DEFERRED TAX ASSETS
Allowance for loan losses $1,658 $1,728
Deferred directors' fees 1,803 1,359
Employee benefit plans 33 307
Core deposit premium and acquisition expenses 116 --
Net unrealizd losses on trading securities 119 --
Net unrecognized actuarial loss on pension plan 424 1,405
Net unrealized loss on available-for-sale securities -- 392
Other 209 78
------ ------
TOTAL DEFERRED TAX ASSETS 4,362 5,269
------ ------
DEFERRED TAX LIABILITIES
Prepaid pension asset 899 794
Premises and equipment 606 638
Accretion on securities 47 66
Core deposit premium and acquisition expenses 315 157
Net unrealized gains on available-for-sale securities 286 --
Other 194 178
------ ------
TOTAL DEFERRED TAX LIABILITIES 2,347 1,833
------ ------
NET DEFERRED TAX ASSETS $2,015 $3,436
====== ======
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN No. 48),
an interpretation of Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes. FIN No. 48 seeks to reduce the significant
diversity in practice associated with financial statement recognition and
measurement in accounting for income taxes and prescribes a recognition
threshold and measurement attribute for disclosure of tax positions taken or
expected to be taken on an income tax return, in order for those tax provisions
to be recognized in the Corporation's financial statements. During 2007, the
Corporation adopted the provisions of FIN No. 48. The adoption had no effect on
the Corporation's financial statements.
59
The Corporation and its subsidiaries are subject to U.S. federal income tax. The
Corporation is no longer subject to examination by taxing authorities for years
before 2004. The Corporation does not expect the total amount of unrecognized
tax benefits to significantly increase in the next twelve months.
The Corporation recognizes interest and/or penalties related to income tax
matters in income tax expense. The Corporation does not have any amounts accrued
for interest and penalties at December 31, 2007 and is not aware of any claims
for such amounts by federal income tax authorities.
NOTE 14 - OFF-BALANCE-SHEET ACTIVITIES
CREDIT-RELATED FINANCIAL INSTRUMENTS
The Corporation is party to credit related financial instruments with
off-balance-sheet risk. These financial instruments are entered into in the
normal course of business to meet the financing needs of its customers. These
financial instruments, which include commitments to extend credit and standby
letters of credit, involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the consolidated balance
sheets. The contract or notional amounts of these instruments reflect the extent
of involvement the Corporation has in a particular class of financial
instrument.
CONTRACT AMOUNT
-----------------
2007 2006
------- -------
Unfunded commitments under lines of credit $87,969 $85,077
Commercial and standby letters of credit 4,405 4,079
The Corporation's exposure to credit-related loss in the event of nonperformance
by the counter parties to the financial instruments for commitments to extend
credit and standby letters of credit is represented by the contractual notional
amount of those instruments. The Corporation uses the same credit policies in
deciding to make these commitments as it does for extending loans to customers.
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.
The Corporation considers standby letters of credit to be guarantees. 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 assets. Guarantees that are not derivative
contracts have been recorded on the Corporation's consolidated balance sheet at
their fair values at inception.
NOTE 15 - ON-BALANCE SHEET ACTIVITIES
DERIVATIVE LOAN COMMITMENTS
Mortgage loan commitments are referred to as derivative loan commitments if the
loan that will result from exercise of the commitment will be held for sale upon
funding. The Corporation enters into commitments to fund residential mortgage
loans at specific times in the future, with the intention that these loans will
subsequently be sold in the secondary market. A mortgage loan commitment binds
the Corporation to lend funds to a potential borrower at a specified interest
rate within a specified period of time, generally up to 60 days after inception
of the rate lock.
Outstanding derivative loan commitments expose the Corporation to the risk that
the price of the loans arising from the exercise of the loan commitment might
decline from the inception of the rate lock to funding of the loan due to
increases in mortgage interest rates. If interest rates increase, the value of
these loan commitments decreases. Conversely, if interest rates decrease, the
value of these loan commitments increases. The notional amount of undesignated
interest rate lock commitments was $311and $532 at December 31, 2007 and 2006,
respectively.
60
FORWARD LOAN SALE COMMITMENTS
To protect against the price risk inherent in derivative loan commitments, the
Corporation utilized both "mandatory delivery" and "best efforts" forward loan
sale commitments to mitigate the risk of potential decreases in the values of
loan that would result from the exercise of the derivative loan commitments.
With a "mandatory delivery" contract, the Corporation commits to deliver a
certain principal amount of mortgage loans to an investor at a specified price
on or before a specified date. If the Corporation fails to deliver the amount of
mortgages necessary to fulfill the commitment by the specified date, it is
obligated to pay a "pair-off" fee, based on then current market prices, to the
investor to compensate the investor for the shortfall.
With a "best efforts" contract, the Corporation commits to deliver an individual
mortgage loan of a specified principal amount and quality to an investor if the
loan to the underlying borrower closes. Generally, the price the investor will
pay the seller for an individual loan is specified prior to the loan being
funded (e.g. on the same day the lender commits to lend funds to a potential
borrower).
The Corporation expects that these forward loan sale commitments will experience
changes in fair value opposite to change in fair value of derivate loan
commitments. The notional amount of undesignated forward loan sale commitments
was $2,525 and $3,266 at December 31, 2007 and 2006, respectively.
The fair values of the rate lock loan commitments related to the origination of
mortgage loans that will be held for sale and the forward loan sale commitments
are deemed insignificant by management and, accordingly, are not recorded in the
accompanying consolidated financial statements.
NOTE 16 - COMMITMENTS AND OTHER MATTERS
Banking regulations require banks to maintain cash reserve balances in currency
or as deposits with the Federal Reserve Bank. At December 31, 2007 and 2006, the
reserve balances amounted to $370 and $979, respectively.
Isabella Bank and Trust sponsors the IBT Foundation (the "Foundation"), which is
a nonprofit entity formed for the purpose of distributing charitable donations
to recipient organizations generally located in the communities serviced by
Isabella Bank and Trust. The Bank periodically makes charitable contributions in
the form of cash transfers to the Foundation. The Foundation is administered by
members of the Isabella Bank and Trust Board of Directors. The assets and
transactions of the Foundation are not included in the consolidated financial
statements of IBT Bancorp, Inc. No donations were made to the Foundation by
Isabella Bank and Trust during the years ended December 31, 2007, 2006 and 2005.
The assets of the Foundation as of December 31, 2007 and 2006 were $1,069 and
$1,318, respectively.
Banking regulations limit the transfer of assets in the form of dividends,
loans, or advances from the Bank to the Corporation. At December 31, 2007,
substantially all of the Bank's assets were restricted from transfer to the
Corporation in the form of loans or advances. Consequently, bank dividends are
the principal source of funds for the Corporation. Payment of dividends without
regulatory approval is limited to the current years retained net income plus
retained net income for the preceding two years, less any required transfers to
capital surplus. At January 1, 2007, the amount available for dividends without
regulatory approval was approximately $7,192.
The Bank has obtained approval to borrow up to $100,000 from the Federal Home
Loan Bank (FHLB) of Indianapolis. Under the terms of the agreement, the Bank may
obtain advances at the stated rate at the time of the borrowings. The Bank has
agreed to pledge eligible mortgage loans and U.S. Treasury and governmental
agencies as collateral for any such borrowings. The Corporation also has a
$10,000 line of credit with LaSalle Bank that the Corporation has agreed to
pledge stock for any advances.
61
NOTE 17 - MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Corporation (on a consolidated basis) and the Bank are subject to various
regulatory capital requirements administered by the Federal Reserve Bank and the
Federal Deposit Insurance Corporation (The Regulators). Failure to meet minimum
capital requirements can initiate mandatory and possibly additional
discretionary actions by The Regulators that if undertaken, could have a
material effect on the Corporation's and Bank's financial statements. Under The
Regulators' capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific capital
guidelines that include quantitative measures of their assets, liabilities,
capital, and certain off-balance-sheet items, as calculated under regulatory
accounting standards. The Bank's capital amounts and classifications are also
subject to qualitative judgments by The Regulators about components, risk
weightings, and other factors. Prompt corrective action provisions are not
applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined) and Tier 1 capital to average
assets (as defined). Management believes, as of December 31, 2007 and 2006, that
the Corporation and the Bank meet all capital adequacy requirements to which
they are subject.
As of December 31, 2007, the most recent notifications from The Regulators
categorized the Bank as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, an institution
must maintain total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as
set forth in the following tables. There are no conditions or events since the
notifications that management believes has changed the Bank's categories. The
Corporation's and each Bank's actual capital amounts (in thousands) and ratios
are also presented in the table.
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
---------------- --------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------- -----
DECEMBER 31, 2007
Total capital to risk weighted assets
Isabella Bank & Trust $ 75,769 12.7% $47,705 8.0% $59,632 10.0%
Consolidated 103,436 17.0 48,636 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank & Trust 68,468 11.5 23,853 4.0 35,779 6.0
Consolidated 96,135 15.8 24,318 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank & Trust 68,468 7.7 35,723 4.0 44,654 5.0
Consolidated 96,135 10.7 35,936 4.0 N/A N/A
DECEMBER 31, 2006
Total capital to risk weighted assets
Isabella Bank & Trust $ 51,484 12.2% $33,748 8.0% $42,185 10.0%
FSB Bank 30,660 20.4 12,025 8.0 15,032 10.0
Consolidated 96,792 16.6 46,552 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank & Trust 46,917 11.1 16,874 4.0 25,311 6.0
FSB Bank 28,767 19.1 6,013 4.0 9,019 6.0
Consolidated 89,514 15.4 23,276 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank & Trust 46,917 7.5 25,146 4.0 31,432 5.0
FSB Bank 28,767 12.3 9,337 4.0 11,672 5.0
Consolidated 89,514 11.6 30,926 4.0 N/A N/A
62
NOTE 18 - BENEFIT PLANS
DEFINED BENEFIT PENSION PLAN
The Corporation has a non-contributory defined benefit pension plan covering
substantially all of its employees. In December 2006, the Board of Directors
voted to curtail the defined benefit plan effective March 1, 2007. The effect of
the curtailment, which was recognized in the first quarter of 2007, suspended
the current participant's accrued benefits as of March 1, 2007 and limited
participation in the plan to eligible employees as of December 31, 2006. As a
result of the curtailment, the Corporation changed its method of accounting for
the plan to be in accordance with SFAS No. 88 Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits. Due to the curtailment, future salary increases will not
be considered and the benefits are based on years of service and the employees'
five highest consecutive years of compensation out of the last ten years of
service through March 1, 2007. As a result of the curtailment, the Corporation
does not anticipate contributing to the plan in the future.
The curtailment resulted in a reduction of $2,939 in the projected benefit
obligation, which served to reduce unrecognized net actuarial loss of $2,939, a
component of accumulated other comprehensive loss.
Subsequent to the decision to curtail the defined benefit plan, the Corporation
decided to increase the contributions to the Corporation's 401(k) plan effective
January 1, 2007 (see "Other Employee Benefit Plans")
Changes in the projected benefit obligation and plan assets during each year,
the funded status of the plan, and the amount recognized on the Corporation's
consolidated balance sheets using an actuarial measurement date of December 31,
are summarized as follows during the years ended December 31:
2007 2006
------- -------
Change in benefit obligation
Benefit obligation, January 1 $10,996 $ 9,557
Service cost 109 593
Interest cost 489 607
Actuarial loss 51 724
Benefits paid, including plan expenses (500) (485)
Plan curtailment (2,939) --
------- -------
BENEFIT OBLIGATION, DECEMBER 31 8,206 10,996
------- -------
Change in plan assets
Fair value of plan assets, January 1 9,199 7,609
Investment return 558 947
Corporation contribution 350 1,128
Benefits paid, including plan expenses (500) (485)
------- -------
FAIR VALUE OF PLAN ASSETS, DECEMBER 31 9,607 9,199
------- -------
FUNDED STATUS (DEFICIENCY) AT DECEMBER 31 $ 1,401 $(1,797)
======= =======
2007 2006
------- -------
Change in prepaid (accrued) pension benefit costs
Prepaid (accrued) benefit cost at January 1 $(1,797) $ 2,148
Contributions to the plan 350 1,128
Net periodic benefit cost for the year (2) (939)
Plan curtailment loss (40) --
Net change in unrecognized actuarial loss and prior service cost 2,890 (4,134)
------- -------
PREPAID (ACCRUED) PENSION BENEFIT COST AT DECEMBER 31 $ 1,401 $(1,797)
======= =======
63
During 2006, the Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 158, Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans ("SFAS No. 158") and in accordance therewith
reflected the under funded status of the plan in its consolidated balance sheet
at December 31, 2006. Prospectively, the Corporation will adjust the liability
to reflect the current funded status of the plan. Any gains or losses that arise
during the period but are not recognized as components of net periodic benefit
cost will be recognized as a component of other comprehensive income (loss).
The adoption of SFAS No. 158 had no effect on the Corporation's consolidated
statement of operations for the year ended December 31, 2006, and it will not
affect the Corporation's operating results in future periods.
The incremental effects of applying FASB Statement No. 158 on individual line
items in the consolidated statement of financial position as of the December 31,
2006 implementation date are as follows:
Before SFAS No. 158 After
Application of Application Application of
SFAS No. 158 Adjustments SFAS No. 158
-------------- ------------ --------------
(Prepaid) accrued liability for pension benefits $ (2,337) $ 4,134 $ 1,797
Deferred income tax assets 2,030 1,406 3,436
Total liabilities 792,581 1,797 794,378
Accumulated other comprehensive loss (759) (2,728) (3,487)
Total shareholders' equity 118,477 (2,728) 115,749
Amounts recognized in accumulated other comprehensive loss consist of:
December 31
---------------------------
2007 2006 2005
------- ------- -------
Reduction of unrecognized pension cost, primarily
as a result of plan curtailment $ 2,890 $ -- $ --
Tax effect (983) -- --
------- ------- -------
Net of tax amount 1,907 -- --
------- ------- -------
Additional minimum pension liability -- -- (1,839)
Tax effect -- -- 625
------- ------- -------
Net of tax amount -- -- (1,214)
------- ------- -------
Adjustment to initially apply FASB Statement No. 158 -- (4,134) --
Tax effect -- 1,406 --
------- ------- -------
Net of tax amount -- (2,728) --
------- ------- -------
TOTAL $ 1,907 $(2,728) $(1,214)
======= ======= =======
The accumulated benefit obligation was $8,206 and $8,072 at December 31, 2007
and 2006, respectively. The $4,134 adjustment to initially apply SFAS No. 158 in
2006 consisted primarily of previously unrecognized net actuarial losses.
An adjustment to the additional minimum pension liability in the amount of
$1,839 was recorded as of December 31, 2005, which resulted in a reduction to
other comprehensive loss.
64
The components of net periodic benefit cost and other pension related amounts
recognized in other comprehensive income (loss) are as follows for the years
ended December 31:
NET PERIODIC BENEFIT COST 2007 2006 2005
----- ----- -----
Service cost on benefits earned for
services rendered during the year $ 109 $ 637 $ 558
Interest cost on projected benefit obligation 489 607 540
Expected return on plan assets (628) (555) (463)
Amortization of unrecognized prior service cost -- 18 18
Amortization of unrecognized actuarial net loss 32 232 201
----- ----- -----
NET PERIODIC BENEFIT COST $ 2 $ 939 $ 854
===== ===== =====
2007 2006 2005
------ ---- ------
OTHER CHANGES IN PLAN ASSETS AND BENEFIT OBLIGATIONS
RECOGNIZED IN OTHER COMPREHENSIVE INCOME (LOSS)
Net reduction of unrecognized pension cost
as a result of plan curtailment, net of tax $1,907 $-- $ --
Adjustment to record the additional minimum pension
liability, net of tax -- -- 1,214
------ --- ------
TOTAL RECOGNIZED IN OTHER COMPREHENSIVE INCOME $1,907 $-- $1,214
====== === ======
Accumulated other comprehensive loss at December 31, 2007 includes net actuarial
losses of $1,244, of which $18 is expected to be amortized during the year
ending December 31, 2008.
Actuarial assumptions used in determining the projected benefit obligation are
as follows for the year ended December 31:
2007 2006 2005
---- ---- ----
Weighted average discount rate 6.44% 6.00% 6.25%
Rate of increase in future compensation N/A 4.50% 4.50%
Expected long-term rate of return 7.00% 7.50% 7.50%
The actual weighted average assumptions used in determining the net periodic
pension costs are as follows for the year ended December 31:
2007 2006 2005
---- ---- ----
Discount rate 6.44% 6.00% 6.25%
Rate of compensation increase N/A 4.50% 4.50%
Expected long-term return on plan assets 7.00% 7.00% 7.50%
The expected long term rate of return is an estimate of anticipated future long
term rates of return on the Corporation's plan assets as measured on a market
value basis. Factors considered in arriving at this assumption include:
- Historical longer term rates of return for broad asset classes.
- Actual past rates of return achieved by the plan.
- The general mix of assets held by the plan.
- The stated investment policy for the plan.
The selected rate of return is net of anticipated investment related expenses.
65
The Corporation's actual pension plan weighted-average asset allocations by
asset category are as follows at December 31:
Asset Category 2007 2006
-------------- ------ ------
Money market 4.0% 100.0%
Equity securities 38.0% --
Debt securities 58.0% --
------ ------
Total 100.00% 100.00%
====== ======
As of December 31, 2007, the plan held $371 (4.0% of total plan assets) of funds
in a money market account with Isabella Bank and Trust. The remaining funds are
invested in two mutual funds managed by its investment advisors. These funds had
$3,695 in equity investments and $5,541 in debt securities as of December 31,
2007.
As a result of the Corporation changing investment advisors as of year end 2006,
all of the plan's assets were invested in money market accounts as of December
31, 2006. These funds were substantially re-invested by January 15, 2007.
The Corporation's investment policy for the benefit plan includes asset holdings
in publicly traded equities, U.S. Government agency obligations and investment
grade corporate and municipal bonds. The policy restricts equity investment to
less than 20% of equity investments in any sector and to less than 4% of plans
assets in any one company.
The asset mix, the sector weighting of equity investments, and debt issues to
hold are based on a third party investment advisor retained by the Corporation
to manage the plan. The Corporation reviews the performance of the advisor no
less than annually.
The Corporation does not expect to make contributions to the pension plan in
2008.
Estimated future benefit payments, which reflect expected future service, as
appropriate, are as follows for the next ten years:
Year Amount
---- ------
2008 $ 346
2009 350
2010 374
2011 392
2012 444
Years 2013 - 2017 (total) 3,165
OTHER EMPLOYEE BENEFIT PLANS
The Corporation maintains a nonqualified supplementary employee retirement plan
(SERP) for qualified officers to provide supplemental retirement benefits to
each participant. Expenses related to this program for 2007, 2006, and 2005 were
$202, $97, and $85, respectively, and are being recognized over the
participants' expected years of service. As a result of curtailing IBT Bancorp's
defined benefit plan in March 2007, the Corporation established an additional
SERP to maintain the benefit levels for all employees that were at least forty
years old and had at least 15 years of service. The cost to provide this benefit
was $120 for 2007.
The Corporation maintains a non-leveraged employee stock ownership plan (ESOP)
and a profit sharing plan which cover substantially all of its employees.
Contributions to the plans are discretionary and are approved by the Board of
Directors and recorded as compensation expense. Expenses related to the plans
for 2007, 2006, and 2005 was $115, $13, and $11, respectively. Total allocated
shares outstanding related to the ESOP at December 31, 2007, 2006, and 2005 were
149,154 , 161,762, and 159,987, respectively, were included in the computation
of dividends and earnings per share in each of the respective years and have not
been adjusted for the 10% stock dividend paid February 29, 2008.
The Corporation maintains a self-funded medical plan under which the Corporation
is responsible for the first $50 per year of claims made by a covered family.
Medical claims are subject to a lifetime maximum of $5,000 per covered
individual. Expenses are accrued based on estimates of the aggregate liability
for claims incurred and the Corporation's experience. Expenses were $1,804 in
2007, $1,316 in 2006 and $1,650 in 2005.
The Corporation offers dividend reinvestment, and employee and director stock
purchase plans. The dividend reinvestment plan allows shareholders to purchase
previously unissued IBT Bancorp common shares. The stock purchase plan allows
employees and directors to
66
purchase IBT Bancorp common stock through payroll deduction. The number of
shares reserved for issuance under these plans are 280,000, with 38,850 shares
unissued at December 31, 2007, as adjusted for the 10% stock dividend paid
February 29, 2008. During 2007, 2006 and 2005, 63,233 shares were issued for
$2,657, 61,258 shares were issued for $2,459, and 58,019 shares were issued for
$2,180, respectively, in cash pursuant to these plans, exclusive of the effects
of the 10% stock dividend paid February 29, 2008.
401(K) PLAN
The Corporation has a 401(k) plan in which substantially all employees are
eligible to participate. Employees may contribute up to 100% of their
compensation subject to certain limits based on federal tax laws. The
Corporation began making matching contributions equal to 25% of the first 3% of
an employee's compensation contributed to the plan in 2005. Employees are 0%
vested through their first two years of employment and are 100% vested after 6
years of service.
As a result of the curtailment of the defined benefit plan noted above, the
Corporation decided to increase the contributions to the Corporation's 401(k)
plan effective January 1, 2007. The enhancement includes an automatic 3.0%
contribution for all eligible employees and matching contributions equal to 50%
of the first 4.0% of an employee's compensation contributed to the Plan during
the year. For the year ended December 31, 2007 and 2006, expenses attributable
to the Plan were $439 and $47, respectively.
The Corporation's 401(k) plan was amended in November 2007. Pursuant to this
amendment, the Corporation combined its ESOP and 401(k) plans. As of December
31, 2007, the ESOP funds are in the process of being transferred into the 401(k)
plan. This transfer will be complete on April 1, 2008.
EQUITY COMPENSATION PLAN
Pursuant to the terms of the Deferred Director fee plan, directors of the
Corporation and its subsidiaries are required to defer at least 25% of their
earned board fees. Deferred fees are converted on a quarterly basis into stock
units of the Corporation's common stock. The fees are converted to stock units
based on the purchase price for a share of common stock under the Corporation's
Dividend Reinvestment Plan. Stock units credited to a participant's account are
eligible for stock and cash dividends as declared. Upon retirement from the
board, a participant is eligible to receive one share of common stock for each
one stock unit. The Plan as modified does not allow for cash settlement, and
therefore such share-based payment awards qualify for classification as equity.
All authorized but unissued shares of common stock are eligible for issuance
under this Plan. As of 2007 and 2006, respectively, 198,939 and 188,116 shares
were to be issued under the plan, as adjusted for the 10% stock dividend paid on
February 29, 2008 pursuant to an existing antidilution provision required by the
plan.
NOTE 19 - COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) as well as unrealized
gains and losses, net of tax, on available-for-sale investment securities owned
and changes (beginning in 2007) in the funded status of the Corporation's
defined benefit pension plan, which are excluded from net income. Unrealized
investment securities gains and losses and changes in the funded status of the
pension plan, net of tax, are excluded from net income, and are reflected as a
direct charge or credit to shareholders' equity. Comprehensive income (loss) and
the related components are disclosed in the accompanying consolidated statements
of comprehensive income for each of the years ended December 31, 2007, 2006, and
2005.
The following is a summary of the components compromising the balance of
accumulated other comprehensive loss reported on the consolidated balance sheets
as of December 31 (presented net of tax):
2007 2006
----- -------
Unrealized gains (losses) on available-for-sale
investment securities $ 555 $ (759)
Unrecognized pension costs (821) (2,728)
----- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS $(266) $(3,487)
===== =======
67
NOTE 20 - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to principal
officers and directors and their affiliates (including their families and
companies in which they have 10% or more ownership). Annual activity consisted
of the following:
2007 2006
------- --------
Beginning balance $10,749 $ 9,679
New loans 8,720 12,521
Repayments (9,008) (11,451)
------- --------
Ending Balance $10,461 $ 10,749
======= ========
Total deposits of these principal officers and directors and their affiliates
amounted to $10,526 and $10,467 at December 31, 2007 and 2006, respectively. In
addition, IBT Bancorp's defined benefit plan and the Employee Stock Ownership
Plan (Note 18) held deposits with the Bank aggregating $370 and $928, and $4,000
and $862, respectively, at December 31, 2007 and 2006.
NOTE 21 - FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Corporation's various
financial instruments. In cases where quoted market prices are not available,
fair values are based on estimates using present value or other valuation
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. Accordingly, the
fair value estimates may not be realized in an immediate settlement of the
instrument. SFAS No. 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements. These include, among
other elements, the estimated earning power of core deposit accounts, the
trained work force, customer goodwill and similar items. Accordingly, the
aggregate of the fair value amounts presented are not necessarily indicative of
the underlying fair value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair value disclosures for financial instruments.
CASH AND CASH EQUIVALENTS: The carrying amounts of cash and short-term
instruments approximate fair values.
INVESTMENT SECURITIES: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are unavailable, fair
values are based on quoted market prices of comparable instruments.
MORTGAGE LOANS HELD FOR SALE: Fair values of mortgage loans held for sale are
based on commitments on hand from investors or prevailing market prices.
LOANS RECEIVABLE: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
Fair values for other loans (e.g. , real estate mortgage, agricultural,
commercial, and installment) are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. The resulting amounts are adjusted to
estimate the effect of declines, if any, in the credit quality of borrowers
since the loans were originated. Fair values for non-performing loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.
MORTGAGE SERVICING RIGHTS: Fair value is determined using prices for similar
assets with similar characteristics when applicable, or based upon discounted
cash flow analyses.
DEPOSIT LIABILITIES: Demand, savings, and money market deposits are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts). Fair values for variable rate certificates of deposit
approximate their recorded book balance. Fair values for fixed-rate certificates
of deposit are estimated using discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on time deposits.
SHORT-TERM BORROWINGS: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements, and other short-term borrowings maturing
within ninety days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analyses based on
the Corporation's current incremental borrowing rates for similar types of
borrowings arrangements.
68
BORROWINGS: The fair values of the Corporation's long-term borrowings are
estimated using discounted cash flow analyses based on the Corporation's current
incremental borrowing arrangements. The carrying amounts of federal funds
purchased and borrowings under repurchase agreements approximate their fair
value. The fair values of other borrowings are estimated using discounted cash
flow analyses based on the Corporation's current incremental borrowing rates for
similar types of borrowing arrangements.
ACCRUED INTEREST: The carrying amounts of accrued interest approximate fair
value.
DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for derivative loan commitments
and forward loan sale commitments are based on fair values of the underlying
mortgage loans and the probability of such commitments being exercised.
OFF-BALANCE-SHEET CREDIT-RELATED INSTRUMENTS: Fair values for off-balance-sheet
lending commitments are based on fees currently charged to enter into similar
agreements, taking into consideration the remaining terms of the agreements and
the counterparties' credit standings. The Corporation does not charge fees for
lending commitments; thus it is not practicable to estimate the fair value of
these instruments.
The following sets forth the estimated fair value and recorded carrying values
of the Corporation's financial instruments as of December 31:
2007 2006
--------------------- ---------------------
Estimated Carrying Estimated Carrying
Fair Value Value Fair Value Value
---------- -------- ---------- --------
ASSETS
Cash and demand deposits due from banks $ 25,583 $ 25,583 $ 31,359 $ 31,359
Trading securities 25,064 25,064 -- --
Investment securities available for sale 213,127 213,127 213,450 213,450
Mortgage loans available for sale 2,228 2,214 2,765 2,734
Net loans 606,840 605,386 585,703 583,437
Accrued interest receivable 5,948 5,948 5,765 5,765
Mortgage servicing rights 2,198 2,198 2,155 2,155
LIABILITIES
Deposits with no stated maturities 387,054 387,054 373,309 373,309
Deposits with stated maturities 348,488 346,419 352,595 352,531
Borrowed funds 91,897 92,887 58,390 58,303
Accrued interest payable 1,284 1,284 1,197 1,197
NOTE 22 - PARENT COMPANY ONLY FINANCIAL INFORMATION (UNAUDITED)
December 31
-------------------
CONDENSED BALANCE SHEETS 2007 2006
------------------------ -------- --------
ASSETS
Cash on deposit at subsidiary Bank $ 14,265 $ 4,075
Securities available for sale 2,210 2,534
Investments in subsidiaries 77,486 83,801
Premises and equipment 3,637 3,094
Other assets 26,309 25,258
-------- --------
TOTAL ASSETS $123,907 $118,762
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 827 $ 3,013
Shareholders' equity 123,080 115,749
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $123,907 $118,762
======== ========
69
Year Ended December 31
-------------------------
CONDENSED STATEMENTS OF INCOME 2007 2006 2005
------------------------------ ------- ------ ------
Income
Dividends from subsidiaries $15,975 $4,025 $7,275
Interest income 177 305 182
Management fee and other 1,517 1,280 1,384
------- ------ ------
TOTAL INCOME 17,669 5,610 8,841
Expenses 3,890 3,872 2,808
------- ------ ------
Income before income tax benefit and equity in undistributed
earnings of subsidiaries 13,779 1,738 6,033
Federal income tax benefit 773 825 478
------- ------ ------
14,552 2,563 6,511
(Distributions in excess) undistributed earnings of subsidiaries (6,622) 4,438 265
------- ------ ------
NET INCOME $ 7,930 $7,001 $6,776
======= ====== ======
Year Ended December 31
---------------------------
CONDENSED STATEMENTS OF CASH FLOWS 2007 2006 2005
---------------------------------- ------- ------- -------
OPERATING ACTIVITIES
Net income $ 7,930 $ 7,001 $ 6,776
Adjustments to reconcile net income to cash provided by
operations
Distributions in excess (undistributed earnings) of
subsidiaries 6,622 (4,438) (265)
Share based payment awards 758 470 --
Depreciation 592 591 533
Net amortization of investment securities 4 21 27
Realized loss on sale of investment securities -- 8 --
Deferred income tax (benefit) expense (165) 128 680
Changes in operating assets and liabilities which (used)
provided cash
Interest receivable (2) 29 (29)
Other assets (776) (522) (746)
Accrued interest and other expenses (389) 138 (894)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,574 3,426 6,082
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 595 6,650 344
Purchases (266) (4,380) (1,523)
Purchases of equipment and premises (1,135) (660) (3,455)
(Advances to) repayment of investment in subsidiaries (50) (8,394) 652
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (856) (6,784) (3,982)
FINANCING ACTIVITIES
Cash dividends paid on common stock (4,304) (3,775) (3,254)
Proceeds from the issuance of common stock 2,657 2,459 2,684
Common stock repurchased (1,881) -- --
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (3,528) (1,316) (570)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVELANTS 10,190 (4,674) 1,530
Cash and cash equivelants at beginning of year 4,075 8,749 7,219
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $14,265 $ 4,075 $ 8,749
======= ======= =======
70
NOTE 23 - OPERATING SEGMENTS
In prior years, the Corporation's reportable segments were based on legal
entities that account for at least 10% of operating results. In April 2007, the
individual bank charters of Isabella Bank and Trust and FSB Bank were
consolidated into one bank charter as a part of the Corporation's strategy to
increase efficiencies. Retail banking operations for 2007, 2006, and 2005
represent approximately 90% or greater of the Corporation's total assets and
operating results. As such, no additional segment information is presented.
NOTE 24 - SUBSEQUENT EVENTS
On January 1, 2008, IBT Bancorp acquired 100 percent of Greenville Community
Financial Corporation (GCFC) in a transaction valued at $33,927. As a result of
this acquisition, Greenville Community Bank, a wholly owned subsidiary of GCFC,
merged with and into the Bank. Under the terms of the merger agreement, each
share of GCFC common stock was automatically converted into the right to receive
0.6659 shares of IBT Bancorp common stock and $14.70 in cash. Exclusive of the
effects of the 10% stock dividend paid February 29, 2008, the Corporation issued
514,809 shares of IBT Bancorp, Inc. common stock valued at $22,652 and paid a
total of $11,365 in cash to GCFC shareholders.
IBT Bancorp is in the process of renaming the Corporation and the Bank.
Effective February 15, 2008, Isabella Bank and Trust became Isabella Bank. On
April 21, 2008, a new logo will be introduced and the banking divisions of The
Farmers State Bank of Breckenridge, Farwell State Savings Bank, and Greenville
Community Bank will be renamed Isabella Bank with a community identifier.
Additionally, at the May 13, 2008 annual meeting, the shareholders will vote to
approve the IBT Bancorp, Inc.'s Board of Director's recommendation to change IBT
Bancorp, Inc.'s name to Isabella Bank Corporation.
On January 1, 2008, IBT Personnel, LLC merged with and into IB&T Employee
Leasing, LLC. As a result of this merger, the Corporation is now a 100 percent
owner of IB&T Employee Leasing, LLC. The purpose of this consolidation was to
help reduce operating expenses through the elimination of duplications in
processes and fees. The legal reorganization is not anticipated to have a
significant impact on the Corporation's consolidated financial statements.
On March 1, 2008, IBT Title and Insurance Agency, Inc. merged its assets and
liabilities with Corporate Title Agency, LLC, a third-party title business based
in Traverse City, Michigan, to form CT/IBT Title Agency, LLC. As a result of
this transaction, the Corporation became a 50 percent joint venture owner in
CT/IBT Title Agency, LLC and will not be the managing partner. The purpose of
this joint venture was to help IBT Title and Insurance Agency, Inc. expand its
service area and to take advantage of economies of scale.
A 10% common stock dividend was declared on December 20, 2007, with a record
date of January 1, 2008 and paid on February 29, 2008. All references to
per-share amounts have been adjusted to give retroactive effect to this stock
dividend, unless otherwise noted.
71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
ITEM 9 A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Corporation's management carried out an evaluation, under the supervision
and with the participation of the Chief Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) as of December 31, 2007, pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Chief Executive Officer and Principal Financial
Officer concluded that the Corporation's disclosure controls and procedures as
of December 31, 2007, are effective in timely alerting them to material
information relating to the Corporation (including its consolidated
subsidiaries) required to be included in the Corporation's periodic filings
under the Exchange Act.
CHANGES IN INTERNAL CONTROL
The Corporation also conducted an evaluation of internal control over financial
reporting to determine whether any changes occurred during the quarter ended
December 31, 2007, that have materially affected, or are reasonably likely to
materially affect, the Corporation's internal control over financial reporting.
Based on this evaluation, management has concluded that there have been no such
changes during the quarter ended December 31, 2007.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for the preparation and integrity of our published
consolidated financial statements. The consolidated financial statements have
been prepared in accordance with accounting principles generally accepted in the
United States of America and, accordingly, include amounts based on judgments
and estimates made by our management. We also prepared the other information
included in the annual report and are responsible for its accuracy and
consistency with the consolidated financial statements.
We are responsible for establishing and maintaining a system of internal control
over financial reporting, which is intended to provide reasonable assurance to
our management and Board of Directors regarding the reliability of our
consolidated financial statements. The system includes but is not limited to:
- A documented organizational structure and division of responsibility;
- Established policies and procedures, including a code of conduct to
foster a strong ethical climate which is communicated throughout the
Corporation;
- Internal auditors that monitor the operation of the internal control
system and report findings and recommendations to management and the
Audit Committee;
- Procedures for taking action in response to an internal audit finding
or recommendation;
- Regular reviews of our consolidated financial statements by qualified
individuals; and
- The careful selection, training and development of our people.
There are inherent limitations in the effectiveness of any system of internal
control, including the possibility of human error and the circumvention or
overriding of controls. Also, the effectiveness of an internal control system
may change over time. We have implemented a system of internal control that was
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial statements for external
purposes in accordance with generally accepted accounting principles.
We have assessed our internal control system in relation to criteria for
effective internal control over financial reporting described in "Internal
Control-Integrated Framework" issued by the Committee of Sponsoring
Organizations (COSO) of the Treadway Commission.
Based upon these criteria, we believe that, as of December 31, 2007, our system
of internal control over financial reporting was effective.
Our independent registered public accounting firm, Rehmann Robson PC, has
audited our 2007 consolidated financial statements. Rehmann Robson PC was given
unrestricted access to all financial records and related data, including minutes
of all meetings of
72
stockholders, the Board of Directors and committees of the Board. Rehmann Robson
PC has issued an unqualified audit opinion on our 2007 consolidated financial
statements as a result of the audit and also has issued an attestation report
the effectiveness of the Corporation's internal control over financial
reporting.
IBT Bancorp, Inc.
By: //s// Dennis P. Angner
--------------------------------
Dennis P. Angner
Chief Executive Officer
March 3, 2008
//s// Peggy L. Wheeler
------------------------------------
Peggy L. Wheeler
Principal Financial Officer
March 3, 2008
ITEM 9 B. OTHER INFORMATION
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
For information concerning directors and certain executive officers of the
Corporation, see "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Corporation's 2007 Annual Meeting Proxy Statement
("Proxy Statement") which is incorporated herein by reference.
For Information concerning the Corporation's Audit Committee financial experts,
see "Committees of the Board of Directors and Meeting Attendance" in the Proxy
Statement which is incorporated herein by reference.
The Corporation has adopted a Code of Business Conduct and Ethics that applies
to the Corporation's Chief Executive Officer and Principal Financial Officer.
The Corporation shall provide to any person without charge upon request, a copy
of its Code of Business Conduct and Ethics. Written requests should be sent to:
Secretary, IBT Bancorp, Inc., 200 East Broadway, Mount Pleasant, Michigan 48858.
ITEM 11. EXECUTIVE COMPENSATION
For information concerning executive compensation, see "Executive Officers,"
"Compensation Committee Report," "Compensation Committee Interlocks and Insider
Participation," "Compensation Discussion and Analysis," and "Remuneration of
Directors" in the Proxy Statement which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
For information concerning the security ownership of certain owners and
management, see "Security Ownership of Certain Beneficial Owners and Management"
in the Proxy Statement which is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2007, with respect
to compensation plans under which common shares of the Corporation are
authorized for issuance to directors, officers or employees in exchange for
consideration in the form of goods or services.
73
Number of Securities
Number of Securities Remaining
to be Issued Weighted Average Available for Future
Upon Exercise of Exercise Price Issuance Under Equity
Outstanding of Outstanding Compensation Plans
Options, Warrants, Options, Warrants, (Excluding Securities
and Rights and Rights Reflected in Column (A))
Plan Category (A) (B) (C)
------------- -------------------- ------------------ ------------------------
Equity compensation plans approved by
Shareholders: None -- -- --
Equity compensation plans not
approved by shareholders (1):
Deferred director compensation plan* 198,938 (1) (1)
-------
TOTAL 198,938
=======
----------
(1) Pursuant to the terms of the Deferred Director fee plan, directors of the
Corporation and its subsidiaries are required to defer at least 25% of
their earned board fees. Deferred fees are converted on a quarterly basis
into stock units of the Corporation's common stock. The fees are converted
to stock units based on the purchase price for a share of common stock
under the Corporation's Dividend Reinvestment Plan. Stock units credited to
a participant's account are eligible for stock and cash dividends as
declared. Upon retirement from the board, a participant is eligible to
receive one share of common stock for each one stock unit. The Plan as
modified does not allow for cash settlement, and therefore such share-based
payment awards qualify for classification as equity. All authorized but
unissued shares of common stock are eligible for issuance under this Plan.
As of 2007, 198,938 shares were to be issued under the plan, as adjusted
for the 10% stock dividend paid on February 29, 2008 pursuant to an
existing antidilution provision required by the plan.
* As adjusted for the 10% stock dividend paid February 29, 2008.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
For information, see "Indebtedness of and Transactions with Management" and
"Election of Directors" in the Proxy Statement, which is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
For information concerning the principal accountant fees and services see "Fees
for Professional Services Provided by Rehmann Robson P.C." and "Pre-approval
Policies and Procedures" in the Proxy Statement which is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements:
The following consolidated financial statements of IBT Bancorp are
incorporated by reference in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
74
2. Financial Statement Schedules:
All schedules are omitted because they are neither applicable nor required, or
because the required information is included in the consolidated financial
statements or related notes.
3. See the exhibits listed below under Item 15(b):
(b) The following exhibits required by Item 601 of Regulation S-K are filed as
part of this report:
3(a) Amended Articles of Incorporation (1)
3(b) Amendment to the Articles of Incorporation (2)
3(c) Amendment to the Articles of Incorporation (4)
3(d) Amendment to the Articles of Incorporation (4)
3(e) Amended Bylaws (8)
3(f) Amendment to Bylaws (10)
10(a) Isabella Bank & Trust Executive Supplemental Income
Agreement (2)*
10(b) Isabella Bank & Trust Deferred Compensation Plan (3)*
10(c) IBT Bancorp, Inc. and Related Companies Deferred
Compensation Plan for Directors (5)*
10(d) Isabella Bank and Trust Death Benefit Only Agreement (6)*
10(e) Deferred Compensation Plan for Non-Employee Directors (9)*
10(f) IBT Bancorp Retirement Bonus Plan (11)*
14 Code of Business Conduct and Ethics (7)
21 Subsidiaries of the Registrant
23 Consent of Rehmann Robson, P.C. Independent Registered
Public Accounting Firm
31(a) Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 by the Chief Executive Officer
31(b) Certification pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 by the Principal Financial
Officer
32 Section 1350 Certification of Chief Executive Officer and
Principal Financial Officer
(1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 12, 1991, and incorporated herein by reference.
(2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1994, and incorporated herein by reference.
(3) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
26, 1996, and incorporated herein by reference.
(4) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
22, 2000, and incorporated herein by reference.
(5) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
27, 2001, and incorporated herein by reference.
(6) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
25, 2002, and incorporated herein by reference.
(7) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 8-K, dated April
25, 2006 and incorporated herein by reference.
(8) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
16, 2005, and incorporated herein by reference.
(9) Previously filed as an Exhibit to IBT Bancorp, Inc. Current Report on Form
8-K, dated December 14, 2005, and incorporated herein by reference.
(10) Previously filed as an Exhibit to IBT Bancorp, Inc. Current Report on Form
8-K, dated November 20, 2006, and incorporated herein by reference.
(11) Previously filed as an Exhibit to IBT Bancorp, Inc. Current Report on Form
8-K, dated December 26, 2006, and incorporated herein by reference.
* Management Contract or Compensatory Plan or Arrangement.
75
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IBT BANCORP, INC.
(Registrant)
by: /s/ Dennis P. Angner Date: March 3, 2008
---------------------------------
Dennis P. Angner
President and Chief Executive
Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Capacity Date
---------- ------------------- --------------
/s/ Dennis P. Angner President and Chief March 3, 2008
------------------------------------- Executive Officer
Dennis P. Angner and Director
/s/ Richard J. Barz Director March 11, 2008
-------------------------------------
Richard J. Barz
/s/ Sandra L. Caul Director March 3, 2008
-------------------------------------
Sandra L. Caul
/s/ James C. Fabiano Director March 4, 2008
-------------------------------------
James C. Fabiano
/s/ Theodore W. Kortes Director March 10, 2008
-------------------------------------
Theodore W. Kortes
/s/ David J. Maness Director March 3, 2008
-------------------------------------
David J. Maness
/s/ W. Joseph Manifold Director March 3, 2008
-------------------------------------
W. Joseph Manifold
/s/ W. Michael McGuire Director March 3, 2008
-------------------------------------
W. Michael McGuire
76
/s/ William J. Strickler Director March 11, 2008
-------------------------------------
William J. Strickler
/s/ Dale Weburg Director March 10, 2008
--- ---------------------------------
Dale Weburg
/s/ Peggy L. Wheeler Sr. Vice President March 3, 2008
------------------------------------- and Controller
Peggy L. Wheeler (Principal
Financial Officer)
77
IBT Bancorp
FORM 10-K
Index to Exhibits
Exhibit Form 10-K
Number Exhibit Page Number
------ --------------------------------------------------------- -----------
21 Subsidiaries of the Registrant 79
23 Consent of Rehmann Robson P.C. 80
Independent Registered Public Accounting Firm
31(a) Certification pursuant to Rule 13a - 14(a) of the Chief
Executive Officer 81
31(b) Certification pursuant to Rule 13a - 14(a) of the
Principal Financial Officer 82
32 Section 1350 Certification of Chief Executive Officer and
Principal Financial Officer 83
78