UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended March 31, 2008

or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the transition period from                      to                     

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.

þ Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(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). o Yes þ 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.

 

 

IBT BANCORP, INC.
Index to Form 10-Q

				Page Numbers
PART I FINANCIAL INFORMATION
Item 1		Condensed Consolidated Financial Statements		3-13
Item 2		Management's Discussion and Analysis of Financial Condition and Results of Operations		14-27
Item 3		Quantitative and Qualitative Disclosures About Market Risk		28-29
Item 4		Controls and Procedures		30
PART II OTHER INFORMATION
Item 1A		Risk Factors		31
Item 2		Unregistered Sales of Equity Securities and Use of Proceeds		31
Item 6		Exhibits		31
Signatures				32
Certification pursuant to Section 302 by the Principal Executive Officer
Certification pursuant to Section 302 by the Principal Financial Officer
Section 1350 Certification of Principal Executive Officer & Principal Financial Officer

Item 1 — Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)

		March 31				December 31
		2008				2007
ASSETS
Cash and demand deposits due from banks		$	27,365			$	25,583
Trading securities			31,101				25,064
Securities available for sale (amortized cost of $228,514 in 2008 and $212,285 in 2007)			231,846				213,127
Mortgage loans available for sale			1,983				2,214
Loans
Agricultural			48,858				47,407
Commercial			288,972				238,306
Installment			47,672				29,037
Residential real estate mortgage			317,158				297,937
Total loans			702,660				612,687
Less allowance for loan losses			8,333				7,301
Net loans			694,327				605,386
Accrued interest receivable			7,192				5,948
Premises and equipment			22,497				22,516
Corporate-owned life insurance policies			14,101				13,195
Acquisition intangibles and goodwill, net			48,129				27,010
Equity securities without readily determinable fair values			14,932				7,353
Other assets			11,746				9,886
TOTAL ASSETS		$	1,105,219			$	957,282
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest bearing		$	88,349			$	84,846
NOW accounts			119,296				105,526
Certificates of deposit and other savings			470,767				410,782
Certificates of deposit over $100,000			154,251				132,319
Total deposits			832,663				733,473
Other borrowed funds ($7,640 carried at fair value in 2008, $7,523 in 2007)			122,392				92,887
Escrow funds payable			—				1,912
Accrued interest and other liabilities			7,269				5,930
Total liabilities			962,324				834,202
Shareholders’ Equity
Common stock — no par value 10,000,000 shares authorized; outstanding— 7,493,804 in 2008 (6,364,120 in 2007)			137,288				116,319
Retained earnings			4,229				7,027
Accumulated other comprehensive income (loss)			1,378				(266	)
Total shareholders’ equity			142,895				123,080
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY		$	1,105,219			$	957,282

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(UNAUDITED)
(Dollars in thousands except per share data)

		Three Months Ended
		March 31
		2008				2007
Number of Shares of Common Stock Outstanding
Balance at beginning of period			6,364,120				6,335,861
Common stock dividends			687,599				—
Issuance of common stock			34,786				13,480
Shares issued in exchange for bank acquisition			514,809				—
Common stock repurchased			(107,510	)			(13,000	)
Balance end of period			7,493,804				6,336,341
Common Stock
Balance at beginning of period		$	116,319			$	114,785
Common stock dividends (10%)			30,254				—
Transfer			(28,000	)			—
Issuance of common stock in exchange for bank acquisition			22,652				—
Other issuances of common stock			645				522
Share-based payment awards under equity compensation plan			143				152
Common stock repurchased			(4,725	)			(550	)
Balance end of period			137,288				114,909
Retained Earnings
Balance at beginning of period			7,027				4,451
Adjustment to initially apply FASB Statement No. 159, net of tax			—				(1,050	)
Adjustment to initially apply EITF 06-4, net of tax			(1,571	)			—
Net income			1,927				1,810
Common stock dividends (10%)			(30,254	)			—
Transfer			28,000				—
Cash dividends ($0.12 per share in 2008 and $0.11 per share in 2007)			(900	)			(759	)
Balance end of period			4,229				4,452
Accumulated Other Comprehensive Income (Loss)
Balance at beginning of period			(266	)			(3,487	)
Adjustment to initially apply fair value provisions of FASB Statement No. 159, net of tax			—				897
Other comprehensive income			1,644				151
Balance end of period			1,378				(2,439	)
Total shareholders’ equity end of period		$	142,895			$	116,922

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Dollars in thousands except per share data)

		Three Months Ended
		March 31
		2008				2007
Interest Income
Loans, including fees		$	12,525			$	10,523
Investment securities
Taxable			1,368				745
Nontaxable			1,148				786
Trading account securities			328				700
Federal funds sold and other			157				138
Total interest income			15,526				12,892
Interest Expense
Deposits			5,904				5,586
Borrowings			1,178				663
Total interest expense			7,082				6,249
Net interest income			8,444				6,643
Provision for loan losses			1,207				126
Net interest income after provision for loan losses			7,237				6,517
Noninterest Income
Service charges and fees			1,230				1,132
Title insurance revenue			234				474
Trust fees			218				218
Gain on sale of mortgage loans			84				53
Net gain on trading securities			443				225
Other			308				309
Total noninterest income			2,517				2,411
Noninterest Expenses
Compensation and benefits			4,334				3,897
Occupancy			528				458
Furniture and equipment			933				816
Other			1,761				1,633
Total noninterest expenses			7,556				6,804
Income before federal income taxes			2,198				2,124
Federal income taxes			271				314
NET INCOME		$	1,927			$	1,810
Earnings per share
Basic		$	0.26			$	0.26
Diluted		$	0.25			$	0.25
Cash dividends per basic share		$	0.12			$	0.11

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(Dollars in thousands)

		Three months Ended
		March 31
		2008				2007
Net Income		$	1,927			$	1,810
Unrealized gains on available-for-sale securities:
Unrealized holding gains arising during period			2,490				197
Reclassification adjustment for net realized losses included in net income			—				30
Net unrealized gains			2,490				227
Tax effect			(846	)			(76	)
Unrealized gains, net of tax			1,644				151
Adjustment to initially apply FASB Statement No. 159			—				1,359
Tax effect			—				(462	)
FASB Statement No. 159 adjustment, net of tax			—				897
Other comprehensive income, net of tax			1,644				1,048
Comprehensive income		$	3,571			$	2,858

See notes to condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)

		Three months ended March 31
		2008				2007
OPERATING ACTIVITIES
Net income		$	1,927			$	1,810
Reconciliation of net income to cash provided by operations:
Provision for loan losses			1,207				126
Depreciation			530				482
Amortization and impairment of mortgage servicing rights			111				47
Amortization of acquisition intangibles			105				70
Net amortization of investment securities			58				46
Realized loss on sale of investment securities			—				30
Unrealized gains on trading securities			(443	)			(225	)
Unrealized losses on borrowings measured at their fair values			117				—
Earnings on corporate owned life insurance policies			(125	)			(103	)
Deferred income tax benefit			(212	)			(2	)
Share-based payment awards			143				152
Net changes in operating assets and liabilities which provided (used) cash, net in 2008 of bank acquisition and joint venture formation:
Trading securities			85				928
Loans held for sale			231				1,397
Accrued interest receivable			(644	)			(191	)
Other assets			(1,249	)			(1,809	)
Escrow funds payable			(46	)			(929	)
Accrued interest and other liabilities			(988	)			(169	)
Net Cash Provided By Operating Activities			807				1,660
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales			19,568				19,619
Purchases			(29,548	)			(34,023	)
Loan principal originations, net			(2,411	)			(6,799	)
Proceeds from sales of foreclosed assets			260				—
Purchases of premises and equipment			(615	)			(949	)
Bank acquisition, net of cash acquired			(9,480	)			—
Title company joint venture formation, net of cash exchanged			(4,542	)			—
Net Cash Used In Investing Activities			(26,768	)			(22,152	)
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits			(6,646	)			(2,446	)
Net increase in interest bearing deposits			15,787				17,197
Net increase in other borrowed funds			23,582				2,933
Cash dividends paid on common stock			(900	)			(759	)
Proceeds from the issuance of common stock			645				522
Common stock repurchased			(4,725	)			(550	)
Net Cash Provided By Financing Activities			27,743				16,897
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			1,782				(3,595	)
Cash and cash equivalents at beginning of year			25,583				31,359
CASH AND CASH EQUIVALENTS AT END OF YEAR		$	27,365			$	27,764
Supplemental cash flows information:
Transfer of foreclosed loans to other real estate owned		$	478			$	75

IBT BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals with the exception of the fair value reporting election described in Note 6 and the adoption of EITF 06-4 in Note 7) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. 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, 2007.

All amounts other than share and per share amounts have been rounded to the nearest thousand ($000) in this report.

Effective January 1, 2008, the Corporation acquired Greenville Community Financial Corporation (GCFC). The consolidated financial statements include the results of operations of GCFC since January 1, 2008 (see Note 2). Effective March 1, 2008, the Corporation entered into a joint venture with Corporate Title Agency, LLC. The consolidated financial statements include the results of operations from this new entity since March 1, 2008 (see Note 2). Refer to Management’s Discussion and Analysis for further consideration of the impact of these transactions on the condensed consolidated financial statements.

NOTE 2 — BUSINESS COMBINATIONS AND JOINT VENTURE

Bank Acquisition

On the opening of business on January 1, 2008, IBT Bancorp, Inc. 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 Isabella Bank (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, Inc. common stock and $14.70 per share 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. The total consideration exchanged including the value of the common stock issued, cash paid to shareholders, plus cash paid for $579 in transaction costs resulted in a total purchase price of $34,596. The purchase price was determined using the latest transaction price known to management as of November 27, 2007, the date of the merger agreement. The acquisition of Greenville has increased the overall market share for IBT Bancorp in furtherance of the Bank’s strategic plan to pursue certain acquisitions.

The following table summarizes the estimate of the total purchase price of the transaction as well as adjustments to allocate the purchase price based on the preliminary estimates of fair values of the assets and liabilities of GCFC.

						Fair Value
						Adjustments of
						Nonintangible				Fair Value
		Greenville				Net Assets				of Net Assets
		January 1, 2008				Acquired				Acquired
ASSETS
Cash and cash equivalents		$	2,339			$	—			$	2,339
Federal funds sold			125				—				125
Trading securities			5,679				—				5,679
Securities available for sale			6,307				—				6,307
Loans, net			88,613				(398	)			88,215
Bank premises and equipment			2,054				194				2,248
Other assets			2,870				—				2,870
Total assets acquired			107,987				(204	)			107,783
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits			90,151				(102	)			90,049
Other borrowed funds			5,625				181				5,806
Accrued interest and other liabilities			146				—				146
Total liabilities assumed			95,922				79				96,001
Net assets acquired		$	12,065			$	(283	)			11,782
Core deposit intangible											1,480
Goodwill											21,334
Total consideration paid										$	34,596

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 15 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 2008 consolidated statements of income include operating results of GCFC since the date of acquisition.

The unaudited pro forma information presented in the following table has been prepared based on IBT Bancorp’s historical results combined with GCFC. The information has been combined to present the results of operations as if the acquisition had occurred at the beginning of the period 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 (as adjusted for the 10% stock dividend paid February 29, 2008):

		Three Months Ended March 31
		2008				2007
Net interest income		$	8,444			$	7,543
Net income		$	1,927			$	2,081
Basic earnings per share		$	0.26			$	0.27

Title Joint Venture

On March 1, 2008, IBT Title and Insurance Agency, Inc., a wholly owned subsidiary of IBT Bancorp, Inc., merged its assets and liabilities with Corporate Title Agency, LLC (“Corporate Title”), 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. 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. As the Corporation is a 50% owner of this new entity, revenues and expenses will now be recorded under the equity method, and as such net income from the joint venture will be included in other income. As of March 31, 2008, the Corporation had a recorded investment of $7,173 in the new entity, which is included in equity securities without readily determinable fair values. The following table summarizes the balance sheet of IBT Title as of March 1, 2008. These amounts were excluded from the balance sheet detail of the Corporation and are now properly recorded as an investment in equity securities without readily determinable fair values.

		IBT Title
		March 1, 2008
ASSETS
Cash and cash equivalents		$	4,542
Premises and equipment			2,352
Other assets			2,339
Total assets			9,233
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Escrow funds		$	1,866
Other liabilities			194
Total liabilities			2,060
Total equity			7,173
Total liabilities & equity		$	9,233

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 amounts:

		Three Months Ended
		March 31
		2008				2007
Average number of common shares outstanding for basic calculation*			7,493,804				6,973,578
Potential effect of shares in the Deferred Director fee plan*			182,682				195,201
Average number of common shares outstanding used to calculate diluted earnings per common share			7,676,486				7,168,779

NOTE 4 — OPERATING SEGMENTS

The Corporation’s reportable segments are based on legal entities that account for at least 10% of net 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. As of March 31, 2008 and 2007, retail banking operations represent approximately 90% or greater of the Corporation’s total assets and operating results. As such, no segment reporting is presented.

The accounting policies are the same as those discussed in Note 1 to the Consolidated Financial Statements included in the Corporation’s annual report for the year ended December 31, 2007, with the addition of new pronouncements adopted during 2008 (see Note 7).

NOTE 5 — 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 participants’ 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 components of net periodic benefit (income) cost for the three month periods ended March 31 are as follows:

		Pension Benefits
		Three months ended
		March 31
		2008				2007
Net periodic benefit cost
Service cost on benefits earned for services rendered during the period		$	—			$	28
Interest cost on projected benefit obligation			126				122
Expected return on plan assets			(165	)			(157	)
Amortization of unrecognized actuarial net loss			1				8
Net periodic benefit (income) cost			(38	)			1
Loss on plan curtailment			—				40
Total net periodic benefit (income) cost		$	(38	)		$	41

NOTE 6 — FINANCIAL INSTRUMENTS RECORDED AT FAIR VALUE

Fair value is the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements and related disclosures, the fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value measurement in its entirety falls shall be determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Level 1 instruments are those assets for which the identical item is traded on an active exchange, such as publicly-traded instruments. The majority of the fair value amounts included in current period earnings resulted from Level 2 fair value methodologies; that is, the Corporation values the assets and liabilities based on observable market data for similar instruments. The Corporation has no assets or liabilities that meet the Level 3 criteria.

														Changes in Fair Value for the 3-month Period
						Fair Value Measurements at March								Ended March 31, 2008 for Items Measured at Fair Value Pursuant to Election of the Fair Value Option
						31, 2008 Using
										Significant
						Quoted Prices in				Other												Total Changes in Fair
		Fair Value				Active Markets for				Observable												Values Included in
		Measurements				Identical Assets				Inputs				Trading Gains								Current Period
Description		3/31/2008				(Level 1)				(Level 2)				and (Losses)				Other Losses				Earnings
Recurring Items
Trading securities		$	31,101			$	—			$	31,101			$	443			$	—			$	443
Investment securities available for sale			231,846				1,988				229,858				—				—				—
Mortgage loans available for sale			1,983				—				1,983				—				—				—
Other borrowed funds			7,640				—				7,640				—				(117	)			(117	)
Nonrecurring Items
Mortgage servicing rights			2,155				—				2,155				—				(30	)			(30	)
Other real estate owned			2,295				—				2,295				—				—				—

														Changes in Fair Value for the 3-month Period
						Fair Value Measurements at March								Ended March 31, 2008 for Items Measured at Fair Value Pursuant to Election of the Fair Value Option
						31, 2008 Using
										Significant
						Quoted Prices in				Other												Total Changes in Fair
		Fair Value				Active Markets for				Observable												Values Included in
		Measurements				Identical Assets				Inputs				Trading Gains								Current Period
Description		3/31/2007				(Level 1)				(Level 2)				and (Losses)				Other gains and Losses				Earnings
Recurring Items
Trading securities		$	77,156			$	—			$	77,156			$	225			$	—			$	225
Investment securities available for sale			150,146				1,992				148,154				—				—				—
Mortgage loans available for sale			1,337				—				1,337				—				—				—
Other borrowed funds			7,486				—				7,486				—				2				2
Nonrecurring Items
Mortgage servicing rights			2,186				—				2,186				—				(1	)			(1	)
Other real estate owned			617				—				617				—				(26	)			(26	)

During the three month period ended March 31, 2008, in accordance with the provisions of SFAS No. 156, mortgage servicing rights with a carrying amount of $2,185 were written down to their fair value of $2,155, resulting in an impairment charge of $30, while during the same period in 2007, mortgage servicing rights with a carrying amount of $2,187 were written down to their fair value of $2,186, resulting in an impairment charge of $1. Such adjustments were included in earnings for the three month period ended March 31, 2008 and 2007, respectively.

During the three month period ended March 31, 2007, in accordance with the provisions of SFAS No. 144, other real estate owned with a carrying amount of $643 was written down to its fair value less costs to sell of $617, resulting in an impairment charge of $26. This adjustment was included in earnings for the three month period ended March 31, 2007. There were no adjustments to the fair value of other real estate owned during the three month period ended March 31, 2008.

The activity in the trading portfolio for the three month periods ended March 31, 2008 and 2007 was as follows:

		Three Months Ended March 31,
		2008				2007
Purchases			7,674				—
Sales, calls, and maturities			(2,082	)			(908	)
Total			5,592				(908	)

The net gain on trading securities, which includes mark-to-market adjustments, totaled $443, of which $430 relates to securities that were held in the Corporation’s trading portfolio as of March 31, 2008.

During the first three months of 2008 and 2007, there were no changes in the level of borrowings measured at fair value, only recurring market value adjustments.

NOTE 7 — RECENT ACCOUNTING PRONOUNCEMENTS

On March 19, 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 161 (SFAS No.161) Disclosures about Derivative Instruments and Hedging Activities. The objective of SFAS No. 161 is to enhance disclosures about an entity’s derivative and hedging activities and thereby improve the transparency of financial reporting. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008 and is not expected to have a significant 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 condensed 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 adopted EITF Issue No. 06-4 effective January 1, 2008 and as a result recorded an initial liability of $2,375. To establish this liability, the Corporation recorded a one time charge of $1,571, net of tax, directly to retained earnings at that date. The periodic policy maintenance costs were $18 for the three months ended March 31, 2008.

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 2007 annual report and with the unaudited interim condensed consolidated financial statements and notes, as set forth on pages 3 through 13 of this report.

CRITICAL ACCOUNTING POLICIES: A summary of the Corporation’s significant accounting policies is set forth in Note 1 of the Consolidated Financial Statements included in the Corporation’s Annual Report for the year ended December 31, 2007. 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 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 2007 Annual Report and herein.

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 identified 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, including identifiable intangibles, is recorded as goodwill. This goodwill is not amortized, but is tested for impairment on at least an annual basis.

RESULTS OF OPERATIONS

The following table outlines the results of operations for the three month periods ended March 31, 2008 and 2007. Return on average assets measures the ability of the Corporation to profitably and efficiently employ its resources. Return on average equity indicates how effectively the Corporation is able to generate earnings on shareholder invested capital.

SUMMARY OF SELECTED FINANCIAL DATA

		Three Months Ended
		March 31
		2008				2007
INCOME STATEMENT DATA
Net interest income		$	8,444			$	6,643
Provision for loan losses			1,207				126
Net income			1,927				1,810
PER SHARE DATA
Earnings per share:
Basic		$	0.26			$	0.26
Diluted			0.25				0.25
Cash dividends per common share			0.12				0.11
RATIOS
Average primary capital to average assets			14.15	%			13.42	%
Net income to average assets			0.71				0.79
Net income to average equity			5.26				6.22

Net Interest Income

Net interest income equals interest income less interest expense and is the primary source of income for IBT Bancorp, Inc. Interest income includes loan fees of $411 for the three month period ended March 31, 2008 as compared to $231 during the same period in 2007. For analytical purposes, net interest income is adjusted to a “taxable equivalent” basis by adding the income tax savings from interest on tax-exempt loans and securities, thus making year-to-year comparisons more meaningful.

(Continued on page 17)

AVERAGE BALANCES, INTEREST RATE, AND NET INTEREST INCOME

The following schedules present the daily average amount outstanding for each major category of interest earning assets, nonearning assets, interest bearing liabilities, and noninterest bearing liabilities. This schedule also presents an analysis of interest income and interest expense for the periods indicated. All interest income is reported on a fully taxable equivalent (FTE) basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following computations, are included in the average loan amounts outstanding. Federal Reserve and Federal Home Loan Bank restricted equity holdings are included in Other.

Results for the three month periods ended March 31, 2008 and March 31, 2007 are as follows:

		Three Months Ended
		March 31, 2008												March 31, 2007
						Tax				Average								Tax				Average
		Average				Equivalent				Yield\				Average				Equivalent				Yield\
		Balance				Interest				Rate				Balance				Interest				Rate
INTEREST EARNING ASSETS:
Loans		$	700,002			$	12,525				7.16	%		$	599,083			$	10,523				7.03	%
Taxable investment securities			97,193				1,368				5.63	%			56,473				745				5.28	%
Nontaxable investment securities			119,623				1,785				5.97	%			84,239				1,236				5.87	%
Trading account securities			32,214				386				4.79	%			77,525				745				3.84	%
Federal funds sold			6,232				49				3.15	%			6,017				80				5.32	%
Other			13,329				108				3.24	%			5,099				58				4.55	%
Total earning assets			968,593				16,221				6.70	%			828,436				13,387				6.46	%
NON EARNING ASSETS:
Allowance for loan losses			(8,699	)											(7,650	)
Cash and due from banks			20,708												19,764
Premises and equipment			23,800												20,956
Accrued income and other assets			84,105												55,628
Total assets		$	1,088,507											$	917,134
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits		$	123,805				378				1.22	%		$	118,527				553				1.87	%
Savings deposits			208,439				863				1.66	%			177,915				884				1.99	%
Time deposits			404,340				4,663				4.61	%			359,636				4,149				4.61	%
Other borrowed funds			107,005				1,178				4.40	%			54,045				663				4.91	%
Total interest bearing liabilities			843,589				7,082				3.36	%			710,123				6,249				3.52	%
NONINTEREST BEARING LIABILITIES:
Demand deposits			90,878												79,339
Other			7,487												11,248
Shareholders’ equity			146,553												116,424
Total liabilities and equity		$	1,088,507											$	917,134
Net interest income (FTE)						$	9,139											$	7,138
Net yield on interest earning assets (FTE)											3.77	%											3.45	%

VOLUME AND RATE VARIANCE ANALYSIS

The following table sets forth the effect of volume and rate changes on interest income and expense for the periods indicated. For the purpose of this table, changes in interest due to volume and rate were determined as follows:

Volume Variance — change in volume multiplied by the previous year’s rate.

Rate Variance — change in the fully taxable equivalent (FTE) rate multiplied by the prior year’s volume.

The change in interest due to both volume and rate has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

		Three Months Ended
		March 31, 2008 compared to
		March 31, 2007
		Increase (Decrease) Due to
		Volume				Rate				Net
CHANGES IN INTEREST INCOME:
Loans		$	1,802			$	200			$	2,002
Taxable investment securities			570				53				623
Nontaxable investment securities			528				21				549
Trading account securities			(511	)			152				(359	)
Federal funds sold			3				(34	)			(31	)
Other			71				(21	)			50
Total changes in interest income			2,463				371				2,834
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits			24				(199	)			(175	)
Savings deposits			139				(160	)			(21	)
Time deposits			516				(2	)			514
Other borrowings			589				(74	)			515
Total changes in interest expense			1,268				(435	)			833
Net change in interest margin (FTE)		$	1,195			$	806			$	2,001

Net interest income as a percentage of earning assets increased 0.32% in the first quarter of 2008 when compared to the same period in 2007. The principal factors affecting this increase were (1) a 2% increase, as a percentage of gross loans, in high yielding commercial loans with a corresponding decrease in residential mortgage loans and (2) the fact that in early 2007 the Corporation extended the maturities of interest earning assets. As interest rates declined in the latter half of 2007, the cost of funding sources decreased more rapidly than the rates earned on interest earning assets.

The yield curve began to correct itself during the third quarter of 2007, primarily as a result of a .50% decrease in the federal funds target rate, as this decrease lowered short term interest rates. The yield curve further corrected itself during the fourth quarter of 2007 and the first quarter of 2008 as a result of further rate cuts by the Fed. In total, the national prime rate has decreased 3.0% since the third quarter of 2007.

The Corporation’s balance sheet is currently 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.

The total volume and rate variances of $2,001 resulted in net increases in net FTE interest margin of $1,195 related to volume and $806 related to rate, when the three month period ended March 31, 2008 is compared to the same period in 2007.

Allowance for Loan Losses

The viability of any financial institution is ultimately determined by its management of credit risk. Total loans outstanding represent 63.6% 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 three month periods ended March 31, 2008 and 2007.

		Three Months Ended
		March 31
		2008				2007
Allowance for loan losses — January 1		$	7,301			$	7,605
Allowance of acquired bank			908				—
Loans charged off Commercial and agricultural			422				17
Real estate mortgage			658				44
Consumer			158				87
Total loans charged off			1,238				148
Recoveries
Commercial and agricultural			27				50
Real estate mortgage			45				3
Consumer			83				88
Total recoveries			155				141
Net loans charged off			1,083				7
Provision charged to income			1,207				126
Allowance for loan losses — March 31		$	8,333				7,724
Year to date average loans		$	700,002			$	599,083
Net loans charged off to average loans outstanding			0.15	%			0.00	%
Total amount of loans outstanding at March 31		$	702,660			$	597,834
Allowance for loan losses as a % of loans			1.19	%			1.29	%

The allowance for loan losses as a percentage of loans has decreased from 1.29% as of March 31, 2007 to 1.19% in the first quarter of 2008. The provision for loan losses was increased by $1,081 in 2008. This increase in the provision was the result of the increased level of net loans charged off as well as management’s knowledge of current economic conditions. The Corporation has experienced an increase in foreclosed loans and an increase in charge offs due to the downturn in the real estate mortgage market.

The nationwide increase in residential mortgage loans past due and in foreclosures has received considerable attention by both the media and banking regulators. Based on information provided by The Mortgage Bankers Association, the increases in both past dues and foreclosures are related to fixed and adjustable rate sub-prime mortgages. Additionally, a substantial portion of sub-prime adjustable rate mortgages are scheduled to reset at higher rates in the next 9 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. While Isabella Bank does not hold sub-prime mortgage loans, the difficulties experienced in the sub-prime market have the potential to adversely impact the entire market, and thus the overall credit quality of the Bank’s residential mortgage portfolio. The increase in troubled residential mortgage loans and a tightening of underwriting standards will most likely result in a continued increase in the inventory of unsold homes. 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 and US Bank. The Corporation has not originated loans for either trading or its own portfolio that would be classified as sub-prime or financed loans for more than 80% of market value unless insured by private third party insurance.

NONPERFORMING ASSETS

		March 31
		2008				2007
Nonaccrual loans		$	7,679			$	4,764
Accruing loans past due 90 days or more			1,549				1,288
Restructured loans			685				690
Total nonperforming loans			9,913				6,742
Other real estate owned			2,295				617
Total nonperperforming assets		$	12,208			$	7,359
Nonperforming loans as a % of total loans			1.41	%			1.13	%
Nonperforming assets as a % of total assets			1.10	%			0.79	%

Due to the aforementioned residential real estate market difficulties being experienced, the Corporation has taken a proactive approach as to when a loan should be placed on nonaccrual status. Residential real estate loans are now placed in nonaccrual status when the foreclosure process has begun, unless there is an abundance of collateral. Additionally, these loans are charged down to their estimated net realizable value when placed on nonaccrual. Historically, residential real estate loans were placed in nonaccrual status upon reaching the beginning of the legally mandated borrower redemption period, which is typically six months. Chargeoffs of any expected deficiency were previously done at the end of the six month redemption period. This proactive approach had a significant impact on the increase in loans classified as nonaccrual and as well as the increase in gross chargeoffs in the first quarter of 2008.

The increase in the Corporation’s nonperforming loans is primarily related to the current market difficulties previously discussed. The majority of the increase in other real estate owned is related to one large loan, in the amount of $670, that was transferred to other real estate owned in December 2007. Based on management’s analysis of the allowance for loan losses, the current allowance falls within the acceptable range and, therefore, the allowance for loan losses is considered adequate as of March 31, 2008.

To management’s knowledge, there are no other loans which cause management to have serious doubts as to the ability of a borrower to comply with their loan repayment terms.

NONINTEREST INCOME AND EXPENSES

The following discussions of noninterest income and noninterest expenses have been adjusted for the acquisition of Greenville Community Financial Corporation (“GCFC”) on January 1, 2008 to make the line items this quarter more comparable with the prior period numbers.

Noninterest Income

Noninterest income consists of trust fees, deposit service charges, fees for other financial services, gains on the sale of mortgage loans, title insurance revenue, and other. Significant account balances are highlighted in the accompanying tables with additional descriptions of significant fluctuations:

		Three Months Ended
		March 31
		2008												2007
										Adjusted								Adjusted Change
		Consolidated				Greenville				w/o Greenville				Consolidated				$				%
Service charges and fee income
NSF and overdraft fees		$	775			$	61			$	714			$	678			$	36				5.3	%
Freddie Mac servicing fee			156				—				156				156				—				0.0	%
ATM and debit card fees			212				8				204				141				63				44.7	%
Service charges on deposit accounts			90				15				75				83				(8	)			-9.6	%
Net OMSR Income			(42	)			—				(42	)			31				(73	)			-235.5	%
All other			39				5				34				43				(9	)			-20.9	%
Total service charges and fees			1,230				89				1,141				1,132				9				0.8	%
Title insurance revenue			234				—				234				474				(240	)			-50.6	%
Trust			218				—				218				218				—				0.0	%
Gain on sale of mortgage loans			84				23				61				53				8				15.1	%
Net gain on trading securities			443				9				434				225				209				92.9	%
Other
Increase in cash value of corporate owned life insurance policies			125				9				116				105				11				10.5	%
Brokerage and advisory fees			129				10				119				64				55				85.9	%
Loss on sale of investment securities			—				—				—				(30	)			30				-100.0	%
Change in the fair value of other borrowings carried at fair market value			(117	)			—				(117	)			2				(119	)			N/A
All other			171				13				158				168				(10	)			-6.0	%
Total other			308				32				276				309				(33	)			-10.7	%
Total noninterest income		$	2,517			$	153			$	2,364			$	2,411			$	(47	)			-1.9	%