UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the quarterly period ended September 30, 2006
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from ______________ to ______________
Commission File Number: 0-18415
IBT Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Michigan 38-2830092
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway, Mt. Pleasant, MI 48858
(Address of principal executive offices) (Zip code)
(989) 772-9471
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated file, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
One).
Large accelerated filer [ ] Accelerated Filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock no par value, 6,307,881 as of October 18, 2006
1
IBT BANCORP, INC.
Index to Form 10-Q
Page Numbers
------------
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Financial Statements 3-11
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-21
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 22-23
Item 4 Controls and Procedures 24
PART II OTHER INFORMATION
Item 1A Risk Factors 25
Item 2 Unregistered Sales of Equity Securities and
Use of Proceeds 25
Item 6 Exhibits 26
Signatures 27
Exhibit 31(a) 29
Exhibit 31(b) 30
Exhibit 32 31
2
PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
IBT BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30 December 31
(dollars in thousands) 2006 2005
------------ -----------
ASSETS
Cash and demand deposits due from banks $ 25,693 $ 30,825
Securities available for sale (amortized
cost of $194,833 in 2006 and $185,688
in 2005) 193,268 183,406
Mortgage loans available for sale 656 744
Loans
Agricultural 49,640 49,424
Commercial 206,149 179,541
Personal 26,947 28,026
Residential real estate mortgage 240,411 226,251
-------- --------
TOTAL LOANS 523,147 483,242
Less allowance for loan losses 7,129 6,899
-------- --------
NET LOANS 516,018 476,343
Other assets 53,537 50,336
-------- --------
TOTAL ASSETS $789,172 $741,654
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 74,031 $ 73,839
NOW accounts 101,511 104,251
Certificates of deposit and other
savings 332,738 328,780
Certificates of deposit over $100,000 124,872 85,608
-------- --------
TOTAL DEPOSITS 633,152 592,478
Other borrowed funds 58,515 52,165
Escrow funds payable 5,692 9,823
Accrued interest and other liabilities 5,330 6,286
-------- --------
TOTAL LIABILITIES 702,689 660,752
Shareholders' Equity
Common stock -- no par value
10,000,000 shares authorized;
outstanding -- 5,510,418 in 2006
(4,974,715 in 2005) 83,070 72,296
Retained earnings 4,446 10,112
Accumulated other comprehensive loss (1,033) (1,506)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 86,483 80,902
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $789,172 $741,654
======== ========
See notes to condensed consolidated financial statements.
3
IBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
Nine Months Ended
September 30
-----------------------
(dollars in thousands) 2006 2005
---------- ----------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of period 4,974,715 4,896,412
10% common stock dividend 497,299 --
Issuance of common stock 38,404 32,820
---------- ----------
BALANCE END OF PERIOD 5,510,418 4,929,232
========== ==========
COMMON STOCK
Balance at beginning of period $ 72,296 $ 66,908
10% common stock dividend 8,887 --
Issuance of common stock 1,537 1,172
Share-based payment awards under
equity compensation plan 350 --
---------- ----------
BALANCE END OF PERIOD 83,070 68,080
RETAINED EARNINGS
Balance at beginning of period 10,112 6,590
Net income 5,039 4,852
10% common stock dividend (8,887) --
Cash dividends ($0.33 per share in 2006
and $0.30 in 2005) (1,818) (1,622)
---------- ----------
BALANCE END OF PERIOD 4,446 9,820
ACCUMULATED OTHER COMPREHENSIVE LOSS
Balance at beginning of period (1,506) (904)
Other comprehensive income (loss) 473 (989)
---------- ----------
BALANCE END OF PERIOD (1,033) (1,893)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY END OF PERIOD $ 86,483 $ 76,007
========== ==========
See notes to condensed consolidated financial statements.
4
IBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(dollars in thousands) 2006 2005 2006 2005
------- ------ ------- -------
INTEREST INCOME
Loans, including fees $ 9,269 $7,872 $26,129 $22,495
Investment securities
Taxable 1,252 864 3,572 2,547
Nontaxable 693 599 2,018 1,774
Federal funds sold and other 98 104 236 234
------- ------ ------- -------
TOTAL INTEREST INCOME 11,312 9,439 31,955 27,050
INTEREST EXPENSE
Deposits 4,425 3,001 11,874 8,172
Borrowings 739 424 1,878 1,082
------- ------ ------- -------
TOTAL INTEREST EXPENSE 5,164 3,425 13,752 9,254
------- ------ ------- -------
NET INTEREST INCOME 6,148 6,014 18,203 17,796
Provision for loan losses 245 196 628 515
------- ------ ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,903 5,818 17,575 17,281
NONINTEREST INCOME
Trust fees 217 231 648 613
Service charges on deposit accounts 76 67 228 184
Other service charges and fees 1,138 1,041 3,175 2,803
Gain on sale of mortgage loans 53 60 164 196
Title insurance revenue 679 698 1,826 1,793
Other 243 231 702 695
------- ------ ------- -------
TOTAL NONINTEREST INCOME 2,406 2,328 6,743 6,284
NONINTEREST EXPENSES
Compensation 3,148 3,451 10,161 10,202
Occupancy 457 415 1,325 1,210
Furniture and equipment 677 666 2,113 1,977
Other 1,377 1,359 4,337 3,981
------- ------ ------- -------
TOTAL NONINTEREST EXPENSES 5,659 5,891 17,936 17,370
INCOME BEFORE FEDERAL INCOME TAXES 2,650 2,255 6,382 6,195
Federal income taxes 619 511 1,343 1,343
------- ------ ------- -------
NET INCOME $ 2,031 $1,744 $ 5,039 $ 4,852
======= ====== ======= =======
EARNINGS PER SHARE
Basic $ 0.37 $ 0.32 $ 0.92 $ 0.90
======= ====== ======= =======
Diluted $ 0.36 $ 0.32 $ 0.89 $ 0.90
======= ====== ======= =======
Cash dividends per share $ 0.11 $ 0.10 $ 0.33 $ 0.30
======= ====== ======= =======
See notes to condensed consolidated financial statements.
5
IBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(dollars in thousands) 2006 2005 2006 2005
------ ------ ------ -------
NET INCOME $2,031 $1,744 $5,039 $ 4,852
Other comprehensive income (loss) before
income taxes:
Unrealized holding gains (losses) on
available-for-sale investment
securities arising during the period 2,067 (857) 608 (1,498)
Reclassification adjustment for net
realized losses (gains) included in
net income 6 -- 109 (2)
------ ------ ------ -------
Other comprehensive (loss) income before
income taxes 2,073 (857) 717 (1,500)
Income tax (expense) benefit related to other
comprehensive income (loss) (705) 293 (244) 511
------ ------ ------ -------
OTHER COMPREHENSIVE INCOME (LOSS) 1,368 (564) 473 (989)
------ ------ ------ -------
COMPREHENSIVE INCOME $3,399 $1,180 $5,512 $ 3,863
====== ====== ====== =======
See notes to condensed consolidated financial statements.
6
IBT BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30
-----------------------
(dollars in thousands) 2006 2005
------------ --------
OPERATING ACTIVITIES
Net income $ 5,039 4,852
Reconciliation of net income to net cash
provided by operations:
Provision for loan losses 628 515
Depreciation 1,375 1,298
Net amortization of investment securities 572 739
Realized loss (gain) on sale of investment
securities 109 (2)
Amortization and impairment of mortgage
servicing rights 141 110
Increase in cash value of life insurance (305) (271)
Amortization of acquisition intangibles 70 70
Equity shares granted 350 --
Changes in operating assets and liabilities
which provided (used)cash
Mortgage loans available for sale 88 502
Interest receivable (682) (332)
Other assets (737) (710)
Escrow funds payable (4,131) 3,619
Accrued interest and other liabilities (956) 1,322
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,561 11,712
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 36,182 28,947
Purchases (46,008) (41,951)
Net increase in loans (40,303) (26,079)
Purchases of premises and equipment (2,183) (1,519)
Purchases of corporate owned life
insurance policies (499) --
Acquisition of title office (400) --
-------- --------
NET CASH USED IN INVESTING
ACTIVITIES (53,211) (40,602)
FINANCING ACTIVITIES
Net increase in noninterest bearing
deposits 192 4,805
Net increase in interest bearing deposits 40,482 12,087
Net increase in other borrowed funds 6,350 16,800
Cash dividends paid on common stock (1,818) (1,622)
Proceeds from issuance of common stock 1,312 1,172
-------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 46,518 33,242
-------- --------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVELANTS (5,132) 4,352
Cash and cash equivelants at beginning of
period 30,825 20,760
-------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 25,693 $ 25,112
======== ========
See notes to condensed consolidated financial statements.
7
IBT BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods ended
September 30, 2006 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2006. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Corporation's annual report for the year ended December 31, 2005.
All amounts other than share and per share amounts have been rounded to the
nearest thousand ($000) in this report.
NOTE 2 - IMPLEMENTATION OF NEW ACCOUNTING STANDARD
On January 1, 2006, the Corporation adopted Statement of Financial Accounting
Standards No. 123R (revised 2004), "Share-Based Payment" (SFAS No. 123R) issued
by the Financial Accounting Standards Board (FASB). This statement requires that
compensation cost relating to share-based payment transactions be recognized in
financial statements and that this cost be measured based on the fair value of
the equity instruments issued. The adoption of this standard decreased dilutive
earnings per share by $.01 and $.03 for the three month and nine month periods
ended September 30, 2006, respectively.
NOTE 3 - COMPUTATION OF EARNINGS PER SHARE
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustments to income that would result from the assumed issuance.
Potential common shares that may be issued by the Corporation relate solely to
outstanding shares in the Corporation's Deferred Director fee plan.
Earnings per common share have been computed based on the following:
Three months ended Nine months ended
September 30 September 30
--------------------- ---------------------
2006 2005 2006 2005
--------- --------- --------- ---------
Average number of common shares outstanding* 5,503,044 5,414,567 5,491,180 5,405,979
Effect of shares in the Deferred Director
fee plan* 166,278 -- 163,179 --
--------- --------- --------- ---------
Average number of common shares outstanding
used to calculate diluted earnings per
common share 5,669,322 5,414,567 5,654,359 5,405,979
========= ========= ========= =========
* As adjusted for the 10% stock dividend paid February 15, 2006
8
NOTE 4 - OPERATING SEGMENTS
The Corporation's reportable segments are based on legal entities that account
for at least 10% of operating results. The accounting policies are the same as
those discussed in Note 1 to the Consolidated Financial Statements in the
Corporation's annual report for the year ended December 31, 2005. The
Corporation evaluates performance based principally on net income and asset
quality of the respective segments. Summaries of selected financial information
for the Corporation's reportable segments as of and for the three and nine month
periods ended September 30 follow:
(dollars in thousands)
All Others
Isabella Bank Farmers (Including
Three Months Ended and Trust State Bank Parent) Total
------------- ---------- ---------- --------
SEPTEMBER 30, 2006
Total assets $631,429 $140,405 $ 17,338 $789,172
Interest income 9,055 2,251 6 11,312
Net interest income 4,789 1,297 62 6,148
Provision for loan losses 196 49 -- 245
Net income (loss) 1,714 420 (103) 2,031
SEPTEMBER 30, 2005
Total assets 574,047 132,396 13,637 720,080
Interest income 7,367 2,052 20 9,439
Net interest income 4,623 1,351 40 6,014
Provision for loan losses 146 50 -- 196
Net income (loss) 1,479 340 (75) 1,744
All Others
Isabella Bank Farmers (Including
Nine Months Ended and Trust State Bank Parent) Total
------------- ---------- ---------- --------
SEPTEMBER 30, 2006
Total assets $631,429 $140,405 $ 17,338 $789,172
Interest income 25,363 6,526 66 31,955
Net interest income 14,065 3,953 185 18,203
Provision for loan losses 483 145 -- 628
Net income (loss) 4,624 1,141 (726) 5,039
SEPTEMBER 30, 2005
Total assets 574,047 132,396 13,637 720,080
Interest income 21,138 5,842 70 27,050
Net interest income 13,726 3,949 121 17,796
Provision for loan losses 375 140 -- 515
Net income (loss) 4,206 1,043 (397) 4,852
9
NOTE 5 - DEFINED BENEFIT PENSION PLAN
The Corporation has a defined benefit pension plan covering substantially all of
its employees. Benefits are based on years of service and the employees' five
highest consecutive years of compensation out of the last ten years of service.
The funding policy is to contribute annually the maximum amount that can be
deducted for federal income tax purposes. Contributions are intended to provide
not only for benefits attributed to services to date but also for those expected
to be earned in the future. The Corporation used a January 1, 2006 measurement
date for this pension plan.
The components of net periodic benefit cost related to the Corporation's
administered plan for the three and nine-month period ended September 30 were as
follows:
Pension Benefits
--------------------------------------
Three months ended Nine months ended
September 30 September 30
------------------ -----------------
2006 2005 2006 2005
----- ----- ----- -----
(thousands)
Components of net periodic benefit cost
Service cost $ 159 $ 137 $ 478 $ 410
Interest cost 152 135 455 405
Expected return on plan assets (139) (116) (416) (348)
Amortization of prior service cost 5 5 14 14
Amortization of net actuarial loss 58 50 174 151
----- ----- ----- -----
Net periodic benefit cost $ 235 $ 211 $ 705 $ 632
===== ===== ===== =====
The Corporation contributed $1,128 and $545 to the pension plan during the nine
month periods ended September 30, 2006 and 2005, respectively. The Corporation
does not expect to make additional contributions to the plan during the
remainder of 2006.
NOTE 6 - SUBSEQUENT EVENT
On October 3, 2006, The Farwell State Savings Bank (FSSB) was acquired and
merged with and into Farmers State Bank, a wholly-owned subsidiary of the
Corporation. Under the terms of the Merger Agreement, for each share of FSSB
common stock, the shareholder of FSSB received 3.0382 shares of IBT Bancorp
common stock and $29.00 in cash. The Corporation issued an aggregate of 797,475
shares of IBT common stock valued at $30,448 and paid a total of $7,612 in cash
to FSSB shareholders, resulting in total consideration of $38,060.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
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 US 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 is effective for fiscal years beginning after
November 15, 2007. The Corporation is currently assessing the impact of SFAS No.
157 on its consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS No. 158). SFAS No.
158 requires that employers recognize on a prospective basis the funded status
of their defined benefit pension and other postretirement plans on their
consolidated balance sheet and recognize as a component of other comprehensive
income, net of tax, the gains or losses and prior service costs or credits that
arise during the period but are not recognized as components of net periodic
benefit cost. SFAS No. 158 also requires additional disclosures in the notes to
financial statements. SFAS No. 158 is effective for years ending after December
15, 2006. While the Corporation is currently assessing the impact of SFAS No.
158 on its consolidated financial statements for 2006, it is expected that
adoption will not impact results of operations or cash flows, but will likely
result in a decrease to net financial position by an amount that will likely not
be material to other comprehensive loss.
10
In September 2006, the SEC staff issued Staff Accounting Bulletin ("SAB") 108
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 requires
that public companies utilize a "dual-approach" in assessing the quantitative
effects of financial misstatements. This dual approach includes both an income
statement focused assessment and a balance sheet focused assessment. The
guidance in SAB 108 must be applied to annual financial statements for fiscal
years ending after November 15, 2006. The Corporation is currently assessing the
impact of adopting SAB 108 but does not expect that it will have a material
effect on its consolidated financial position or results of operations.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of the major factors that
influenced IBT Bancorp's financial performance. This analysis should be read in
conjunction with the Corporation's 2005 annual report and with the unaudited
condensed consolidated financial statements and notes, as set forth on pages 3
through 10 of this report.
CRITICAL ACCOUNTING POLICIES: A summary of the Corporation's significant
accounting policies is set forth in Note 1 of the Consolidated Financial
Statements included in the Corporation's Annual Report for the year ended
December 31, 2005. Of these significant accounting policies, the Corporation
considers its policies regarding the allowance for loan losses to be its most
critical accounting policies.
The allowance for loan losses requires management's most subjective and complex
judgment. Changes in economic conditions can have a significant impact on the
allowance for loan losses and therefore the provision for loan losses and
results of operations. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Corporation's assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations, and the discovery of information with respect to
borrowers which is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see Provision for
Loan Losses and Allowance for Loan Losses in the Corporation's 2005 Annual
Report and herein.
11
RESULTS OF OPERATIONS
The following table outlines the results of operations for the periods ended
September 30, 2006 and 2005. Return on average assets measures the ability of
the Corporation to profitably and efficiently employ its resources. Return on
average equity indicates how effectively the Corporation is able to generate
earnings on shareholder invested capital.
SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands except per share data)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2006 2005 2006 2005
------ ------ ------- -------
INCOME STATEMENT DATA
Net interest income $6,148 $6,014 $18,203 $17,796
Provision for loan losses 245 196 628 515
Net income 2,031 1,744 5,039 4,852
PER SHARE DATA
Earnings per share
Basic $ 0.37 $ 0.32 $ 0.92 $ 0.90
Diluted 0.36 0.32 0.89 0.90
Cash dividends per common share 0.11 0.10 0.33 0.30
RATIOS
Average primary capital to average assets 11.67% 11.18% 11.69% 11.46%
Net income to average assets 1.03 0.99 0.88 0.93
Net income to average equity 9.51 9.61 8.06 8.80
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is the
primary source of income for IBT Bancorp. Interest income includes loan fees of
$325 and $881 in the three and nine month periods ended September 30, 2006,
respectively, as compared to $305 and $849 during the same periods in 2005. For
analytical purposes, net interest income is adjusted to a "taxable equivalent"
basis by adding the income tax savings from interest on tax-exempt loans and
securities, thus making year-to-year comparisons more meaningful.
(Continued on page 15)
12
TABLE 1 - AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
Results for the three months ended September 30, 2006 and September 30, 2005.
(Dollars in Thousands)
The following schedules present the daily average amount outstanding for each
major category of interest earning assets, nonearning assets, interest bearing
liabilities, and noninterest bearing liabilities. This schedule also presents an
analysis of interest income and interest expense for the periods indicated. All
interest income is reported on a fully taxable equivalent (FTE) basis using a
34% tax rate. Nonaccruing loans, for the purpose of the following computations,
are included in the average loan amounts outstanding. Federal Reserve and
Federal Home Loan Bank restricted equity holdings are included in Other.
Three Months Ended
-----------------------------------------------------------------
September 30, 2006 September 30, 2005
------------------------------- -------------------------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Balance Interest Rate Balance Interest Rate
-------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans $520,348 $ 9,269 7.13% $470,955 $7,872 6.69%
Taxable investment securities 119,936 1,252 4.18% 101,950 864 3.39%
Non-taxable investment securities 75,885 1,095 5.77% 65,772 953 5.80%
Federal funds sold 2,367 31 5.24% 5,353 46 3.44%
Other 5,299 67 5.06% 5,792 58 4.01%
-------- ------- ---- -------- ------ ----
Total earning assets 723,835 11,714 6.47% 649,822 9,793 6.03%
NON EARNING ASSETS:
Allowance for loan losses (7,081) (6,753)
Cash and due from banks 21,281 18,016
Premises and equipment 17,612 15,620
Accrued income and other assets 29,710 26,095
-------- --------
Total assets $785,357 $702,800
======== ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $104,870 449 1.71% $109,307 289 1.06%
Savings deposits 148,988 669 1.80% 152,465 436 1.14%
Time deposits 302,956 3,307 4.37% 248,108 2,276 3.67%
Other borrowed funds 58,756 739 5.03% 39,335 424 4.31%
-------- ------- ---- -------- ------ ----
Total interest bearing liabilities 615,570 5,164 3.36% 549,215 3,425 2.49%
NONINTEREST BEARING LIABILITIES:
Demand deposits 69,349 68,932
Other 15,033 12,066
Shareholders' equity 85,405 72,587
-------- --------
Total liabilities and equity $785,357 $702,800
======== ========
Net interest income (FTE) $ 6,550 $6,368
======= ======
---- ----
Net yield on interest earning
assets (FTE) 3.62% 3.92%
==== ====
13
TABLE 2 - AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME
Results for the nine months ended September 30, 2006 and September 30, 2005.
(Dollars in Thousands)
The following schedules present the daily average amount outstanding for each
major category of interest earning assets, nonearning assets, interest bearing
liabilities, and noninterest bearing liabilities. This schedule also presents an
analysis of interest income and interest expense for the periods indicated. All
interest income is reported on a fully taxable equivalent (FTE) basis using a
34% tax rate. Nonaccruing loans, for the purpose of the following computations,
are included in the average loan amounts outstanding. Federal Reserve and
Federal Home Loan Bank restricted equity holdings are included in Other.
Nine Months Ended
-----------------------------------------------------------------
September 30, 2006 September 30, 2005
------------------------------- -------------------------------
Tax Average Tax Average
Average Equivalent Yield\ Average Equivalent Yield\
Balance Interest Rate Balance Interest Rate
-------- ---------- ------- -------- ---------- -------
INTEREST EARNING ASSETS:
Loans $500,168 $26,129 6.97% $460,064 $22,495 6.52%
Taxable investment securities 120,433 3,572 3.95% 102,312 2,547 3.32%
Non-taxable investment securities 74,053 3,195 5.75% 64,867 2,826 5.81%
Federal funds sold 1,417 52 4.89% 4,620 99 2.86%
Other 5,135 184 4.78% 4,254 135 4.23%
-------- ------- ---- -------- ------- ----
Total earning assets 701,206 33,132 6.30% 636,117 28,102 5.89%
NON EARNING ASSETS:
Allowance for loan losses (6,983) (6,635)
Cash and due from banks 25,361 20,458
Premises and equipment 17,405 17,773
Accrued income and other assets 29,002 25,244
-------- --------
Total assets $765,991 $692,957
======== ========
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits $104,259 1,191 1.52% $106,165 708 0.89%
Savings deposits 153,734 1,892 1.64% 158,131 1,087 0.92%
Time deposits 285,361 8,791 4.11% 241,499 6,377 3.52%
Other borrowed funds 52,398 1,878 4.78% 34,187 1,082 4.22%
-------- ------- ---- -------- ------- ----
Total interest bearing liabilities 595,752 13,752 3.08% 539,982 9,254 2.29%
NONINTEREST BEARING LIABILITIES:
Demand deposits 69,559 64,927
Other 17,329 11,520
Shareholders' equity 83,351 73,528
-------- --------
Total liabilities and equity $765,991 $689,957
======== ========
Net interest income (FTE) $19,380 $18,848
======= =======
---- ----
Net yield on interest earning
assets (FTE) 3.69% 3.95%
==== ====
14
TABLE 3 - VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
The following table sets forth the effect of volume and rate changes on
interest income and expense for the periods indicated. For the purpose of this
table, changes in interest due to volume and rate were determined as follows:
Volume Variance - change in volume multiplied by the previous year's rate.
Rate Variance - change in the fully taxable equivalent (FTE) rate
multiplied by the prior year's volume.
The change in interest due to both volume and rate has been allocated to
volume and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
Three Months Ended Nine Months Ended
September 30, 2006 September 30, 2006
compared to compared to
September 30, 2005 September 30, 2005
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------- ------------------------
Volume Rate Net Volume Rate Net
------ ----- ------ ------ ------ ------
CHANGES IN INTEREST INCOME:
Loans $ 859 $ 538 $1,397 $2,036 $1,598 $3,634
Taxable investment securities 168 220 388 493 532 1,025
Nontaxable investment securities 146 (4) 142 397 (28) 369
Federal funds sold (33) 18 (15) (93) 46 (47)
Other (5) 14 9 30 19 49
------ ----- ------ ------ ------ ------
Total changes in interest income 1,135 786 1,921 2,863 2,167 5,030
Interest bearing demand deposits (12) 172 160 (13) 496 483
Savings deposits (10) 243 233 (31) 836 805
Time deposits 555 476 1,031 1,259 1,155 2,414
Other borrowings 235 80 315 638 158 796
------ ----- ------ ------ ------ ------
Total changes in interest expense 768 971 1,739 1,853 2,645 4,498
------ ----- ------ ------ ------ ------
Net change in interest margin (FTE) $ 367 $(185) $ 182 $1,010 $ (478) $ 532
====== ===== ====== ====== ====== ======
NET INTEREST INCOME, CONTINUED
As shown in Table 1, net interest income, on a fully taxable equivalent (FTE)
basis, was $6,550 for the three months ended September 30, 2006 compared to
$6,368 for the same period in 2005, an increase of $182 or 2.86%. This increase
was primarily the result of a $74,013 or 11.39% increase in earning assets,
which was funded by a $66,355 or 12.08% increase in interest bearing
liabilities. As shown in Table 3, these changes in volume provided the
Corporation with an additional $367 of FTE net interest income. The $367
increase was offset by a decrease of 0.30% in the FTE net yield on interest
earning assets, which resulted in a $185 decrease in FTE net interest income.
This 0.30% decrease in FTE rate was a result of the average rate earned on
interest earning assets rising slower than those paid on interest bearing
liabilities.
As shown in Table 2, net interest income, on a fully taxable equivalent (FTE)
basis, was $19,380 for the nine months ended September 30, 2006 compared to
$18,848 for the same period in 2005, an increase of $532 or 2.82%. This increase
was primarily the result of a $65,089 or 10.23% increase in earning assets,
which was funded by a $55,770 or 10.33% increase in interest bearing
liabilities. As shown in Table 3, these changes in volume provided the
Corporation with an additional $1,010 of FTE net interest income. The $1,010
increase was offset by a 0.26% decrease in the FTE net yield on interest earning
assets, which resulted in a $478 decrease in FTE net interest income. This 0.26%
decrease in FTE rate was a result of the average rate earned on interest earning
assets rising slower than those paid on interest bearing liabilities.
Management expects the high level of competition for funding to continue for the
remainder of the year, which will result in further tightening of the
Corporation's interest rate margins. However, the Corporation does anticipate
that projected increases in interest earning assets will continue to be strong
enough to overshadow the tightening interest rate margins and result in
continued increases in net interest margin.
15
ALLOWANCE FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represent 66.3% of the
Corporation's total assets and is the Corporation's single largest concentration
of risk. The allowance for loan losses is management's estimation of potential
future losses inherent in the existing loan portfolio. Factors used to evaluate
the loan portfolio, and thus to determine the current charge to expense, include
recent loan loss history, financial condition of borrowers, amount of
nonperforming and impaired loans, overall economic conditions, and other
factors. The following table summarizes the Corporation's charge off and
recovery activity for the nine month periods ended September 30, 2006 and 2005.
The table also compares the Corporation's allowance for loan loss as a percent
of loans and loans classified as nonperforming as a percent of outstanding loans
to its peer group. The Corporation's peer group includes 416 holding companies
with assets between $500 million and $1.0 billion.
Since September 2005, the Corporation has experienced an increase in the percent
of loans classified as nonperforming. This is mainly being caused by the
increase in nonaccrual loans. However, based on management's analysis of the
allowance for loan losses, the current allowance stills falls within the
acceptable range and therefore the allowance for loan losses is adequate as of
September 30, 2006.
Nine Months Ended
September 30
-----------------
2006 2005
------ ------
Allowance for loan losses - January 1 $6,899 $6,444
Loans charged off
Commercial and agricultural 181 15
Real estate mortgage 166 135
Personal 362 256
------ ------
TOTAL LOANS CHARGED OFF 709 406
Recoveries
Commercial and agricultural 98 100
Real estate mortgage 15 --
Personal 198 148
------ ------
TOTAL RECOVERIES 311 248
------ ------
Net loans charged off 398 158
Provision charged to income 628 515
------ ------
ALLOWANCE FOR LOAN LOSSES -
SEPTEMBER 30 $7,129 $6,801
====== ======
ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.36% 1.42%
====== ======
PEER GROUP (AS OF JUNE 30, 2006 AND 2005) 1.19% 1.22%
====== ======
NONPERFORMING LOANS
September 30
-------------------
2006 2005
-------- --------
Total amount of loans outstanding at
September 30 $523,147 $478,816
Nonaccrual loans 2,272 1,208
Accruing loans past due 90 days or more 1,308 1,771
Restructured loans 705 542
-------- --------
TOTAL $ 4,285 $ 3,521
======== ========
LOANS CLASSIFIED AS NONPERFORMING AS A
% OF OUTSTANDING LOANS 0.82% 0.74%
======== ========
PEER GROUP (AS OF JUNE 30, 2006 AND 2005) 0.49% 0.51%
======== ========
To management's knowledge, there are no other loans which cause management to
have serious doubts as to the ability of a borrower to comply with their loan
repayment terms.
16
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, fees for
other financial services, gains on the sale of mortgage loans, title insurance
revenue, and other. Significant account balances are highlighted in the
following table:
Three Months Ended Nine Months Ended
------------------------------- -------------------------------
September 30 Change September 30 Change
--------------- ------------- --------------- -------------
2006 2005 $ % 2006 2005 $ %
------ ------ ---- ------ ------ ------ ---- ------
Trust fees $ 217 $ 231 $(14) -6.1% $ 648 $ 613 $ 35 5.7%
Service charges on deposit accounts 76 67 9 13.4% 228 184 44 23.9%
Other service charges and fees
NSF and overdraft fees 798 711 87 12.2% 2,175 1,874 301 16.1%
ATM and debit card fees 144 124 20 16.1% 400 332 68 20.5%
Freddie Mac servicing fee 158 157 1 0.6% 475 464 11 2.4%
All other 38 49 (11) -22.4% 125 133 (8) -6.0%
------ ------ ---- ----- ------ ------ ---- -----
Total other service charges and fees 1,138 1,041 97 9.3% 3,175 2,803 372 13.3%
------ ------ ---- ----- ------ ------ ---- -----
Gain on sale of mortgage loans 53 60 (7) -11.7% 164 196 (32) -16.3%
Title insurance revenue 679 698 (19) -2.7% 1,826 1,793 33 1.8%
Other
Increase in cash value of corporate
owned life insurance policies 102 92 10 10.9% 305 273 32 11.7%
Brokerage and advisory fees 51 47 4 8.5% 156 142 14 9.9%
All other 90 92 (2) -2.2% 241 280 (39) -13.9%
------ ------ ---- ----- ------ ------ ---- -----
Total other 243 231 12 5.2% 702 695 7 1.0%
------ ------ ---- ----- ------ ------ ---- -----
TOTAL NONINTEREST INCOME $2,406 $2,328 $ 78 3.4% $6,743 $6,284 $459 7.3%
====== ====== ==== ===== ====== ====== ==== =====
Since the first quarter of 2005, the Corporation has made substantial efforts to
increase noninterest income. To help achieve this goal, management analyzed
various fees related to deposit accounts, including service charges, NSF and
overdraft fees, and ATM and debit card fees. Based on this analysis, the
Corporation made any necessary adjustments to ensure that its fee structure fell
within a range of its competitors, while at the same time making sure that the
fees remained fair to deposit customers. Management does not expect significant
changes to its deposit fee structure for the remainder of 2006.
The competitive landscape in the Michigan title insurance industry has had both
positive and negative impacts on title insurance revenues. The Corporation has
seen increased title insurance activity resulting from other title insurance
companies closing offices around the state as a result of the struggling
Michigan economy and the decrease in volume of mortgage activity. These closures
have provided the Corporation with an opportunity to take advantage of the
decreased level of competition for business. However, these same factors make
continued increases in revenues challenging. Management does anticipate that
title insurance revenues will approximate current levels for the rest of the
year.
The increase in the cash value from corporate owned life insurance policies
relates to policies that had a carrying value of $11,337 as of September 30,
2006, and were included in other assets. These policies earned an average rate
of 3.59% and 3.49% during the nine month periods ended September 30, 2006 and
2005, respectively. Due to their preferential tax treatment, these policies have
a taxable equivalent rate of 5.43% and 5.28% as of September 30, 2006 and 2005,
respectively. These policies are placed with five different insurance companies
with an S & P rating of A- or better. The increase in income related to the
change of the cash surrender value of the policies can be attributed to both the
increases in rates and the purchase of additional policies in January 2006.
All other noninterest income includes losses on the sale of securities of $6 and
$109 which occurred in the three and nine month periods ended September 30,
2006, respectively, as compared to $2 and $0 in the same periods in 2005.
Management has determined that the additional interest income which will be
earned from the reinvestment of the proceeds of these sales will exceed the
losses recognized by approximately $25 by year end 2006.
17
NONINTEREST EXPENSES
Noninterest expenses include compensation, occupancy, furniture and equipment,
and other expenses. Significant account balances are outlined in the following
table:
Three Months Ended Nine Months Ended
-------------------------------- -----------------------------------
September 30 Change September 30 Change
--------------- -------------- ----------------- ---------------
2006 2005 $ % 2006 2005 $ %
------ ------ ----- ------ ------- ------- ----- -------
Compensation
Leased employee salaries $2,501 $2,427 $ 74 3.0% $ 7,426 $ 7,162 $ 264 3.7%
Leased employee benefits 612 1,002 (390) -38.9% 2,621 2,992 (371) -12.4%
All other 35 22 13 59.1% 114 48 66 137.5%
------ ------ ----- ------ ------- ------- ----- -------
Total compensation 3,148 3,451 (303) -8.8% 10,161 10,202 (41) -0.4%
------ ------ ----- ------ ------- ------- ----- -------
Occupancy
Depreciation 103 92 11 12.0% 302 272 30 11.0%
Property taxes 87 87 -- 0.0% 254 261 (7) -2.7%
Outside services 77 82 (5) -6.1% 242 236 6 2.5%
Utilities 78 70 8 11.4% 242 213 29 13.6%
Building rent 64 35 29 82.9% 142 91 51 56.0%
All other 48 49 (1) -2.0% 143 137 6 4.4%
------ ------ ----- ------ ------- ------- ----- -------
Total occupancy 457 415 42 10.1% 1,325 1,210 115 9.5%
------ ------ ----- ------ ------- ------- ----- -------
Furniture and equipment
Depreciation 351 346 5 1.4% 1,072 1,026 46 4.5%
Service contracts 178 155 23 14.8% 541 455 86 18.9%
Computer costs 73 89 (16) -18.0% 269 270 (1) -0.4%
ATM and debit card fees 60 61 (1) -1.6% 188 185 3 1.6%
All other 15 15 -- 0.0% 43 41 2 4.9%
------ ------ ----- ------ ------- ------- ----- -------
Total furniture and equipment 677 666 11 1.7% 2,113 1,977 136 6.9%
------ ------ ----- ------ ------- ------- ----- -------
Other
SOX compliance fees 47 42 5 11.9% 499 336 163 48.5%
Marketing 174 158 16 10.1% 479 450 29 6.4%
Audit fees 50 66 (16) -24.2% 173 191 (18) -9.4%
All other 1,106 1,093 13 1.2% 3,186 3,004 182 6.1%
------ ------ ----- ------ ------- ------- ----- -------
Other 1,377 1,359 18 1.3% 4,337 3,981 356 8.9%
------ ------ ----- ------ ------- ------- ----- -------
TOTAL NONINTEREST EXPENSES $5,659 $5,891 $(232) -3.9% $17,936 $17,370 $ 566 3.3%
====== ====== ===== ====== ======= ======= ===== =======
Management is continuously analyzing noninterest expenses to determine where
expenditures can be decreased or held to modest increases. Management has been
fairly successful in stabilizing noninterest expenses as compared to the
percentage increase in total assets.
Leased employee salaries expense has increased due to normal merit increases,
and also due to the Corporation's growth in both size as well as complexity.
Management does not anticipate any significant changes in leased employee
salaries for the remainder of 2006.
Leased employee benefits have decreased substantially during the three and nine
month periods ended September 30, 2006, when compared to the same periods in
2005. This decrease is primarily attributed to the Corporation changing medical
insurance administrators. One of the benefits of the change was that the
Corporation's premium payments would be capped based on the current year's
projected claims. This cap allowed the Corporation to reduce its medical reserve
liability by $304 in the three month period ended September 30, 2006. Leased
employee benefit expenses are expected to approximate $313 a month for the rest
of 2006.
Upon completion of a new branch location for the Canadian Lakes branch of
Isabella Bank & Trust (IB&T), IB&T terminated a building lease for space that
had previously housed the Canadian Lakes employees. Pursuant to the terms of the
lease, IB&T paid $37 in one time penalties, which was included in building rent.
The Corporation anticipates that the building rent for the remainder of 2006 to
approximate the amounts paid in the first six months of the year.
Service contracts continue to increase significantly from year to year. These
increases are a result of the Corporation reinvesting in its technological
infrastructure as well as increases in fees charged by vendors. This constant
reinvestment helps the Corporation maintain a competitive edge in an ever
changing marketplace. Management does expect service contracts to remain at
current levels for the remainder of 2006 as a significant amount of annual
service contracts were renewed in June and July.
18
The Corporation continues to experience elevated costs associated with complying
with the Sarbanes-Oxley Act of 2002 (SOX). The costs associated with compliance
extend beyond the continued increases in SOX compliance fees and into other
areas including compensation expense. Management is continually analyzing ways
to minimize the adverse financial statement impact of SOX compliance through the
streamlining of the Corporation's loan and deposit operations. The Corporation
has also made staff changes in the internal audit department which are expected
to decrease auditing and SOX compliance fees.
All other expenses includes consulting fees, director's fees, legal fees,
postage fees, printing and supplies, title insurance expenses, as well as other
miscellaneous expenses that are not individually significant. These increases
are a result of overall increases in the cost of doing business.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
September 30 December 31 % Change
2006 2005 $ Change (unannualized)
------------ ----------- -------- --------------
ASSETS
Cash and demand deposits due from banks $ 25,693 $ 30,825 $(5,132) -16.65%
Securities available for sale 193,268 183,406 9,862 5.38%
Mortgage loans available for sale 656 744 (88) -11.83%
Loans 523,147 483,242 39,905 8.26%
Allowance for loan losses (7,129) (6,899) (230) 3.33%
Other assets 53,537 50,336 3,201 6.36%
-------- -------- ------- ------
TOTAL ASSETS $789,172 $741,654 $47,518 6.41%
======== ======== ======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits $633,152 $592,478 $40,674 6.87%
Other borrowed funds 58,515 52,165 6,350 12.17%
Escrow funds payable 5,692 9,823 (4,131) -42.05%
Accrued interest and other liabilities 5,330 6,286 (956) -15.21%
-------- -------- ------- ------
TOTAL LIABILITIES 702,689 660,752 41,937 6.35%
SHAREHOLDERS' EQUITY 86,483 80,902 5,581 6.90%
-------- -------- ------- ------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $789,172 $741,654 $47,518 6.41%
======== ======== ======= ======
Since December 2005, the Corporation has experienced strong loan growth. In the
first nine months of 2006, commercial loans have increased $26,608 and
residential real estate mortgages have increased $14,160. The increase in
commercial loans was driven by the establishment of a new business development
team at Isabella Bank and Trust. The increase in residential mortgage loans can
be attributed to various loan specials that were offered during 2006. Management
does anticipate that loan demand, particularly commercial loan demand, will
remain strong for the remainder of 2006.
The Corporation, as part of its goal to increase 2006 average assets by 8.0%
over 2005, also increased securities during the nine month period ended
September 30, 2006. To achieve this growth, however, the Corporation experienced
smaller interest margins than in the past. Management anticipates that the
security portfolio will approximate current levels for the remainder of 2006.
The Corporation, through its Banks, has established a policy that all amortized
fixed rate mortgage loans with maturities greater than 15 years will be sold.
During the nine month period ended September 30, 2006, the Corporation sold
$22,247 of mortgages as compared to $26,973 in mortgages for the same period in
2005. Management does not expect the sale of mortgages to fluctuate
significantly from current levels based on current market trends and the current
and projected interest rate environment.
The Corporation enjoyed a solid increase in deposits during the first nine
months of 2006. A significant portion of the deposit growth came in the form of
brokered and internet certificate of deposits. However, the increases in
deposits were not enough to fund the increases in loans and securities. To help
overcome this funding shortfall, the Corporation utilized wholesale borrowing
sources such as the Federal Home Loan Bank. Management is constantly monitoring
deposit account balances in an effort to maintain and increase the current
customer base, as deposit account rates are typically lower than those demanded
from internet and brokered deposits and wholesale borrowing sources. Management
is also performing market analyses to help ensure that the Corporation's
products remain attractive to consumers.
19
The Corporation observed a substantial decrease in escrow funds payable during
the first nine months of 2006. This decrease can be attributed to Internal
Revenue Code Section ( "IRC") 1031 exchange account balances being reinvested by
customers of IBT Title and Insurance Agency, Inc. ("IBT Title"). These IRC 1031
accounts allow owners of business or investment property to defer realized gains
from the sale of business or investment property if the funds are reinvested in
another property. As such, these balances can fluctuate significantly between
periods as the funds are reinvested. The Corporation does anticipate that these
1031 exchange accounts will continue to decrease through 2006 as the funds are
reinvested by IBT Title's customers.
LIQUIDITY
Liquidity management is designed to have adequate resources available to meet
depositor and borrower discretionary demands for funds. Liquidity is also
required to fund expanding operations, investment opportunities, and payment of
cash dividends. The primary sources of the Corporation's liquidity are cash,
cash equivalents, and available-for-sale investment securities.
As of September 30, 2006, cash and cash equivalents as a percentage of total
assets equaled 3.26%, versus 4.16% as of December 31, 2005. During the first
nine months of 2006, operating activities provided $1,561 of cash and financing
activities provided $46,518, while investing activities used $53,211. The
accumulated effect of the Corporation's operating, investing and financing
activities was a $5,132 decrease in cash and cash equivalents during the first
nine months of 2006.
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale were
$193,268 as of September 30, 2006 and $183,406 as of December 31, 2005. In
addition to these primary sources of liquidity, the Corporation has the ability
to borrow in the federal funds market and at both the Federal Reserve Bank and
the Federal Home Loan Bank. The Corporation's liquidity is considered adequate
by management.
CAPITAL
The capital of the Corporation consists solely of common stock, surplus,
retained earnings, and accumulated other comprehensive loss. The overall capital
has increased $5,581 since December 31, 2005 primarily due to corporate
earnings. Accumulated other comprehensive loss decreased $473 due to unrealized
gains in available-for-sale securities during 2006.
There are no significant regulatory constraints placed on the Corporation's
capital. The Federal Reserve Board's current recommended minimum tier 1 and tier
2 capital to average assets requirement is 6.0%. The Corporation's tier 1 and
tier 2 capital to adjusted average assets, which consists of shareholders'
equity plus the allowance for loan losses less unamortized acquisition
intangibles, was 11.85% as of September 30, 2006.
The Federal Reserve Board has established a minimum risk based capital standard.
Under this standard, a framework has been established that assigns risk weights
to each category of on- and off-balance sheet items to arrive at risk adjusted
total assets. Regulatory capital is divided by the risk adjusted assets with the
resulting ratio compared to the minimum standard to determine whether a bank has
adequate capital. The minimum standard is 8%, of which at least 4% must consist
of equity capital net of goodwill. The following table sets forth the
percentages required under the Risk Based Capital guidelines and the
Corporation's ratios as of September 30, 2006:
PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS
IBT Bancorp
September 30, 2006
------------------
Required Actual
-------- ------
Equity Capital 4.00% 15.90%
Secondary Capital* 4.00% 1.25%
---- -----
Total Capital 8.00% 17.15%
==== =====
* IBT Bancorp's secondary capital consists solely of the allowance for loan
losses. The percentage for the secondary capital under the required column
is the maximum allowed from all sources.
20
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET ARRANGEMENTS
The Corporation is party to financial instruments with off-balance-sheet risk.
These instruments are entered into in the normal course of business to meet the
financing needs of its customers. These financial instruments, which include
commitments to extend credit and standby letters of credit, involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The contract or notional amounts
of these instruments reflect the extent of involvement the Corporation has in a
particular class of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in deciding to
make these commitments as it does for extending loans to customers.
Commitments to extend credit, which totaled $86,660 at September 30, 2006, are
agreements to lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally have variable
interest rates, fixed expiration dates, or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. At September 30,
2006, the Corporation had a total of $1,733 in outstanding standby letters of
credit.
Generally, these commitments to extend credit and letters of credit mature
within one year. The credit risk involved in these transactions is essentially
the same as that involved in extending loans to customers. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Corporation upon the
extension of credit, is based on management's credit evaluation of the borrower.
Collateral held varies but may include accounts receivable, inventory, property,
plant and equipment, and other income producing commercial properties.
Isabella Bank and Trust (IB&T), a subsidiary of the Corporation, sponsors the
IBT Foundation (the "Foundation"), which is a nonprofit entity formed for the
purpose of distributing charitable donations to recipient organizations
generally located in the communities serviced by Isabella Bank and Trust. IB&T
periodically makes charitable contributions in the form of cash transfers to the
Foundation. The Foundation is administered by members of the Corporation's Board
of Directors. The assets and transactions of the Foundation are not included in
the consolidated financial statements of IBT Bancorp, Inc. The assets of the
Foundation as of September 30, 2006 were $1,358.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Corporation intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Corporation, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Corporation's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Corporation and the subsidiaries include,
but are not limited to, changes in: interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Corporation's market area, and accounting principles, policies and
guidelines. These risks and uncertainties should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements. Further information concerning the Corporation and its business,
including additional factors that could materially affect the Corporation's
financial results, is included in the Corporation's filings with the Securities
and Exchange Commission.
21
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has very limited foreign exchange risk
and holds no trading account assets, nor does it utilize interest rate swaps or
derivatives in the management of its interest rate risk. The Corporation does
have a significant amount of loans extended to borrowers involved in
agricultural production. Cash flow and ability to service debt of such customers
is largely dependent on growing conditions and the commodity prices for corn,
soybeans, sugar beets, milk, beef and a variety of dry beans. The Corporation
mitigates these risks by using conservative price and production yields when
calculating a borrower's available cash flow to service their debt.
Interest rate risk ("IRR") is the exposure to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors and senior management to effectively
manage the various risks that can have a material impact on the safety and
soundness of the Corporation. The risks include credit, interest rate,
liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
The Corporation uses several techniques to manage interest rate risk. The first
method is gap analysis. Gap analysis measures the cash flows and/or the earliest
repricing of the Corporation's interest bearing assets and liabilities. This
analysis is useful for measuring trends in the repricing characteristics of the
balance sheet. Significant assumptions are required in this process because of
the imbedded repricing options contained in assets and liabilities. A
substantial portion of the Corporation's assets are invested in loans and
investment securities. These assets have imbedded options that allow the
borrower to repay the balance prior to maturity without penalty. The amount of
prepayments is dependent upon many factors, including the interest rate of a
given loan in comparison to the current interest rates, for residential
mortgages the level of sales of used homes, and the overall availability of
credit in the market place. Generally, a decrease in interest rates will result
in an increase in the Corporation's cash flows from these assets. Investment
securities, other than those that are callable, do not have any significant
imbedded options. Saving and checking deposits may generally be withdrawn on
request without prior notice. The timing of cash flow from these deposits is
estimated based on historical experience. Time deposits have penalties which
discourage early withdrawals. Cash flows may vary based on current offering
rates, competition, customer need for deposits, and overall economic activity.
The second technique used in the management of interest rate risk is to combine
the projected cash flows and repricing characteristics generated by the gap
analysis and the interest rates associated with those cash flows and projected
future interest income. By changing the amount and timing of the cash flows and
the repricing interest rates of those cash flows, the Corporation can project
the effect of changing interest rates on its interest income.
The following table provides information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of September 30,
2006. The Corporation has no interest rate swaps, futures contracts, or other
derivative financial options, except for derivative loan commitments, which are
not significant. The principal amounts of assets and time deposits maturing were
calculated based on the contractual maturity dates. Savings and NOW accounts are
based on management's estimate of their future cash flows.
22
Quantitative Disclosures of Market Risk
September 30, 2006 Fair
------------------------------------------------------------------ Value
(dollars in thousands) 2007 2008 2009 2010 2011 Thereafter Total 09/30/06
-------- ------- ------- ------- ------- ---------- -------- --------
Rate sensitive assets
Other interest bearing assets $ 3,409 $ -- $ -- $ -- $ -- $ -- $ 3,409 $ 3,409
Average interest rates 1.31% -- -- -- -- -- 1.31%
Fixed interest rate securities $ 55,374 $44,316 $22,064 $14,303 $22,271 $34,940 $193,268 $193,268
Average interest rates 3.92% 3.71% 3.84% 4.33% 4.52% 4.58% 4.08%
Fixed interest rate loans $127,399 $80,772 $78,644 $58,334 $63,692 $32,735 $441,576 $436,267
Average interest rates 6.39% 6.38% 6.39% 6.47% 7.70% 5.94% 6.55%
Variable interest rate loans $ 46,872 $14,398 $13,355 $ 4,438 $ 1,603 $ 905 $ 81,571 $ 81,571
Average interest rates 9.51% 8.85% 8.91% 9.54% 8.86% 7.63% 9.26%
Rate sensitive liabilities
Borrowed funds $ 20,671 $ 3,000 $12,558 $ 4,000 $ 5,286 $13,000 $ 58,515 $ 58,547
Average interest rates 5.73% 3.70% 4.89% 4.11% 5.69% 4.84% 5.13%
Savings and NOW accounts $ 98,954 $65,802 $60,842 $19,491 $ 5,310 $ -- $250,399 $250,399
Average interest rates 3.37% 1.19% 0.69% 0.65% 0.78% -- 1.88%
Fixed interest rate time deposits $199,830 $45,448 $20,224 $28,767 $11,548 $ 1,492 $307,309 $307,036
Average interest rates 4.53% 4.27% 4.04% 4.49% 4.57% 5.18% 4.46%
Variable interest rate time deposits $ 761 $ 652 $ -- $ -- $ -- $ -- $ 1,413 $ 1,413
Average interest rates 4.23% 4.28% -- -- -- -- 4.25%
Quantitative Disclosures of Market Risk
September 30, 2005 Fair
------------------------------------------------------------------ Value
(dollars in thousands) 2006 2007 2008 2009 2010 Thereafter Total 09/30/05
-------- ------- ------- ------- ------- ---------- -------- --------
Rate sensitive assets
Other interest bearing assets $ 4,606 $ -- $ -- $ -- $ -- $ -- $ 4,606 $ 4,606
Average interest rates 1.88% -- -- -- -- -- 1.88%
Fixed interest rate securities $ 38,344 $45,593 $32,571 $15,619 $ 9,057 $33,167 $174,351 $173,322
Average interest rates 3.81% 3.28% 3.34% 3.55% 3.82% 3.42% 3.49%
Fixed interest rate loans $ 97,038 $74,027 $81,593 $50,603 $55,355 $29,472 $388,088 $408,347
Average interest rates 6.23% 6.02% 6.19% 5.87% 6.31% 5.97% 6.13%
Variable interest rate loans $ 47,607 $15,323 $18,991 $ 5,794 $ 4,069 $ 781 $ 92,565 $ 92,565
Average interest rates 8.08% 7.71% 7.24% 7.43% 8.55% 8.46% 7.83%
Rate sensitive liabilities
Borrowed funds $ 16,857 $ 4,000 $ 3,113 $ 2,500 $ 4,000 $17,312 $ 47,782 $ 47,645
Average interest rates 3.94% 3.59% 3.71% 3.46% 4.11% 5.11% 4.31%
Savings and NOW accounts $ 77,049 $77,400 $76,571 $20,810 $ 5,439 $ -- $257,269 $257,269
Average interest rates 2.16% 0.95% 0.80% 0.51% 0.59% 0.00% 1.22%
Fixed interest rate time deposits $127,447 $56,069 $29,413 $15,262 $22,589 $ 818 $251,598 $252,487
Average interest rates 3.47% 4.13% 3.79% 3.49% 4.23% 4.67% 3.73%
Variable interest rate time deposits $ 975 $ 377 $ 8 $ -- $ -- $ -- $ 1,360 $ 1,360
Average interest rates 3.05% 3.05% 3.05% -- -- -- 3.05%
23
ITEM 4 - CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Corporation's management carried out an evaluation, under the supervision
and with the participation of the Principal Executive Officer and Principal
Financial Officer, of the effectiveness of the design and operation of the
Corporation's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act")) as of September 30, 2006, pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Principal Executive Officer and Principal
Financial Officer concluded that the Corporation's disclosure controls and
procedures as of September 30, 2006, were effective to ensure that information
required to be disclosed by the Corporation in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the most recent fiscal quarter, no change occurred in the Corporation's
internal control over financial reporting that materially affected, or is likely
to materially affect, the Corporation's internal control over financial
reporting. The Corporation is currently evaluating what changes, if any, might
be necessary in internal control arising as a result of the October 3, 2006
acquisition of the Farwell State Savings Bank.
24
PART II - OTHER INFORMATION
ITEM 1A - RISK FACTORS
There have been no material changes to the risk factors disclosed in Item 1A in
our Annual Report on Form 10-K for the year ended December 31, 2005.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(A) NONE
(B) NONE
(C) REPURCHASES OF COMMON STOCK
In October 2002, the Corporation's Board of Directors authorized the repurchase
of up to $2 million of the Corporation's common stock. This authorization does
not have an expiration date. Based on repurchases since October 2002, the
Corporation is currently able to repurchase up to $1.7 million of its common
stock or 38,636 shares under the repurchase authorization. The following table
provides information as of September 30, 2006, with respect to this plan:
Total Number
Shares Repurchased of Shares
------------------ Purchased as
Average Part of Publicly Maximum Shares That
Price Announced Plan May Be Purchased Under
(Dollars in thousands) Number Per Share or Program the Plans or Programs
------ --------- ---------------- ----------------------
Balance, June 30, 2006 38,636
July 1 - 31, 2006 -- $-- -- --
August 1 - 31, 2006 -- -- -- --
September 1 - 30, 2006 -- -- -- --
--- --- --- ------
Balance September 30, 2006 -- $-- -- 38,636
=== === === ======
25
ITEM 6 - EXHIBITS
(a) Exhibits
The following exhibits are filed as part of this report:
3(a) Amended Articles of Incorporation (1)
3(b) Amendment to the Articles of Incorporation (2)
3(c) Amendment to the Articles of Incorporation (4)
3(d) Amendment to the Articles of Incorporation (4)
3(e) Amended Bylaws (7)
10(a)* Isabella Bank & Trust Executive Supplemental Income Agreement (2)
10(b)* Isabella Bank & Trust Deferred Compensation Plan (3)
10(c)* IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan
for Directors (5)
10(d)* Isabella Bank and Trust Death Benefit Only Agreement (6)
10(e)* Amendment to the IBT Bancorp, Inc. and Related Companies Deferred
Compensation Plan for Directors (8)
10(f)* The IBT Bancorp, Inc. and Related Companies Deferred Compensation
Plan for Non-Employee Directors (9)
10(g)* First amendment to the IBT Bancorp, Inc. and Related Companies
Deferred Compensation Plan for Non-Employee Directors (10)
31(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Principal Executive Officer
31(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Principal Financial Officer
32 Section 1350 Certification of Principal Executive Officer and
Principal Financial Officer
1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 12, 1991, and incorporated herein by reference.
2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1994, and incorporated herein by reference.
3) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1996, and incorporated herein by reference.
4) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 22, 2000, and incorporated herein by reference.
5) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 27, 2001, and incorporated herein by reference.
6) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 25, 2002, and incorporated herein by reference.
7) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 16, 2005, and incorporated herein by reference.
8) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated
March 10, 2006, and incorporated herein by reference.
9) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated
December 19, 2005, and incorporated herein by reference.
10) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated
March 28, 2006, and incorporated herein by reference.
* Management contract or compensatory plan or arrangement.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IBT Bancorp, Inc.
Date: October 30, 2006 /s/ Dennis P. Angner
----------------------------------------
Dennis P. Angner
Chief Executive Officer
/s/ Peggy L. Wheeler
----------------------------------------
Peggy L. Wheeler
Principal Financial Officer
27
Exhibit Index
Exhibit
No. Description
------- ----------------------------------------------------------------------
3(a) Amended Articles of Incorporation (1)
3(b) Amendment to the Articles of Incorporation (2)
3(c) Amendment to the Articles of Incorporation (4)
3(d) Amendment to the Articles of Incorporation (4)
3(e) Amended Bylaws (7)
10(a)* Isabella Bank & Trust Executive Supplemental Income Agreement (2)
10(b)* Isabella Bank & Trust Deferred Compensation Plan (3)
10(c)* IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan for
Directors (5)
10(d)* Isabella Bank and Trust Death Benefit Only Agreement (6)
10(e)* Amendment to the IBT Bancorp, Inc. and Related Companies Deferred
Compensation Plan for Directors (8)
10(f)* The IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan
for Non-Employee Directors (9)
10(g)* First amendment to the IBT Bancorp, Inc. and Related Companies
Deferred Compensation Plan for Non-Employee Directors (10)
31(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Principal Executive Officer
31(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by the Principal Financial Officer
32 Section 1350 Certification of Principal Executive Officer and
Principal Financial Officer
1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 12, 1991, and incorporated herein by reference.
2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1994, and incorporated herein by reference.
3) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 26, 1996, and incorporated herein by reference.
4) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 22, 2000, and incorporated herein by reference.
5) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 27, 2001, and incorporated herein by reference.
6) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 25, 2002, and incorporated herein by reference.
7) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 16, 2005, and incorporated herein by reference.
8) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated
March 10, 2006, and incorporated herein by reference.
9) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated
December 19, 2005, and incorporated herein by reference.
10) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated
March 28, 2006, and incorporated herein by reference.
* Management contract or compensatory plan or arrangement.
28