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, 2005 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) <TABLE> <S> <C> Michigan 38-2830092 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) </TABLE> <TABLE> <S> <C> 200 East Broadway 48858 (Address of principal executive offices) (Zip code) </TABLE> (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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [X] Yes [ ] No 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, 4,929,232 as of October 12, 2005 1
IBT BANCORP, INC. Index to Form 10-Q <TABLE> <CAPTION> Page Numbers ------------ <S> <C> PART I FINANCIAL INFORMATION Item 1 Consolidated Financial Statements 3-10 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11-23 Item 3 Quantitative and Qualitative Disclosures About Market Risk 24-25 Item 4 Controls and Procedures 26 PART II OTHER INFORMATION Item 6 Exhibits 27 Signatures 28 Exhibit 31 29 Exhibit 32 30 </TABLE> 2
PART I - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS IBT BANCORP, INC. CONSOLIDATED BALANCE SHEETS (dollars in thousands) <TABLE> <CAPTION> September 30 2005 December 31 (Unaudited) 2004 ------------ ----------- <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 20,506 $ 20,561 Interest bearing balances 4,606 199 Federal funds sold -- -- -------- -------- TOTAL CASH AND CASH EQUIVELANTS 25,112 20,760 Investment securities Securities available for sale (amortized cost of $173,995 in 2005 and $161,561 in 2004) 172,964 162,030 Securities held to maturity (fair value - $358 in 2005 and $537 in 2004) 356 523 -------- -------- TOTAL INVESTMENT SECURITIES 173,320 162,553 Mortgage loans available for sale 1,837 2,339 Loans Agricultural 54,728 49,179 Construction and land development 32,027 35,384 Commercial 159,962 146,152 Personal 27,107 30,143 Residential real estate mortgage 204,992 192,037 -------- -------- TOTAL LOANS 478,816 452,895 Less allowance for loan losses 6,801 6,444 -------- -------- NET LOANS 472,015 446,451 Other assets 47,796 45,931 -------- -------- TOTAL ASSETS $720,080 $678,034 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 70,541 $ 65,736 NOW accounts 100,845 101,362 Certificates of deposit and other savings 331,180 323,954 Certificates of deposit over $100,000 78,202 72,824 -------- -------- TOTAL DEPOSITS 580,768 563,876 Other borrowed funds 47,782 30,982 Accrued interest and other liabilities 15,523 10,582 -------- -------- TOTAL LIABILITIES 644,073 605,440 Shareholders' Equity Common stock -- no par value 10,000,000 shares authorized; outstanding-- 4,929,232 in 2005 (4,896,412 in 2004) 68,080 66,908 Retained earnings 9,820 6,590 Accumulated other comprehensive loss (1,893) (904) -------- -------- TOTAL SHAREHOLDERS' EQUITY 76,007 72,594 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $720,080 $678,034 ======== ======== </TABLE> See notes to consolidated financial statements. 3
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Nine Months Ended September 30 ----------------------- 2005 2004 ---------- ---------- <S> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of period 4,896,412 4,403,404 Common stock dividend -- 440,191 Issuance of common stock 32,820 31,660 Common stock repurchased -- (4,571) ---------- ---------- BALANCE END OF PERIOD 4,929,232 4,870,684 ========== ========== COMMON STOCK Balance at beginning of period $ 66,908 $ 47,491 Common stock dividend -- 17,608 Issuance of common stock 1,172 1,094 Common stock repurchased -- (192) ---------- ---------- BALANCE END OF PERIOD 68,080 66,001 RETAINED EARNINGS Balance at beginning of period 6,590 20,623 Net income 4,852 4,981 Common stock dividend -- (17,608) Cash dividends ($0.33 per share in 2005 and 2004) (1,622) (1,609) ---------- ---------- BALANCE END OF PERIOD 9,820 6,387 ACCUMULATED OTHER COMPREHENSIVE LOSS Balance at beginning of period (904) 822 Other comprehensive loss (989) (1,091) ---------- ---------- BALANCE END OF PERIOD (1,893) (269) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY END OF PERIOD $ 76,007 $ 72,119 ========== ========== </TABLE> See notes to consolidated financial statements 4
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 2005 2004 2005 2004 ------ ------ ------- ------- <S> <C> <C> <C> <C> INTEREST INCOME Loans, including fees $7,872 $7,002 $22,495 $20,664 Investment securities Taxable 864 847 2,547 2,870 Nontaxable 599 523 1,774 1,572 Federal funds sold and other 104 43 234 157 ------ ------ ------- ------- TOTAL INTEREST INCOME 9,439 8,415 27,050 25,263 INTEREST EXPENSE Deposits 3,001 2,301 8,172 7,022 Borrowings 424 261 1,082 776 ------ ------ ------- ------- TOTAL INTEREST EXPENSE 3,425 2,562 9,254 7,798 ------ ------ ------- ------- NET INTEREST INCOME 6,014 5,853 17,796 17,465 Provision for loan losses 196 120 515 585 ------ ------ ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,818 5,733 17,281 16,880 NONINTEREST INCOME Trust fees 231 189 613 499 Service charges on deposit accounts 67 61 184 194 Other service charges and fees 1,041 950 2,803 2,679 Gain on sale of mortgage loans 60 111 196 391 Title insurance revenue 698 511 1,793 1,522 Other 231 241 695 913 ------ ------ ------- ------- TOTAL NONINTEREST INCOME 2,328 2,063 6,284 6,198 NONINTEREST EXPENSES Compensation 3,451 3,289 10,202 9,823 Occupancy 415 375 1,210 1,109 Furniture and equipment 666 607 1,977 1,812 Other 1,359 1,231 3,981 3,803 ------ ------ ------- ------- TOTAL NONINTEREST EXPENSES 5,891 5,502 17,370 16,547 INCOME BEFORE FEDERAL INCOME TAXES 2,255 2,294 6,195 6,531 Federal income taxes 511 545 1,343 1,550 ------ ------ ------- ------- NET INCOME $1,744 $1,749 $ 4,852 $ 4,981 ====== ====== ======= ======= Basic net income per share $ 0.35 $ 0.36 $ 0.99 $ 1.03 ====== ====== ======= ======= Cash dividends per share $ 0.11 $ 0.11 $ 0.33 $ 0.33 ====== ====== ======= ======= </TABLE> See notes to consolidated financial statements. 5
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30 September 30 ------------------ ----------------- 2005 2004 2005 2004 ------ ------ ------- ------- <S> <C> <C> <C> <C> NET INCOME $1,744 $1,749 $ 4,852 $ 4,981 Other comprehensive (loss) income before income taxes: Unrealized (losses) gains on available-for-sale securities: Unrealized holding (losses) gains arising during period (857) 2,095 (1,498) (1,563) Reclassification adjustment for net realized gains included in net income -- (15) (2) (90) ------ ------ ------- ------- Other comprehensive (loss) income before income tax benefit (expense) (857) 2,080 (1,500) (1,653) Income tax benefit (expense) related to other comprehensive (loss) income 293 (707) 511 562 ------ ------ ------- ------- OTHER COMPREHENSIVE (LOSS) INCOME (564) 1,373 (989) (1,091) ------ ------ ------- ------- COMPREHENSIVE INCOME $1,180 $3,122 $ 3,863 $ 3,890 ====== ====== ======= ======= </TABLE> See notes to consolidated financial statements. 6
IBT BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Nine Months Ended September 30 ------------------- 2005 2004 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 4,852 $ 4,981 Reconciliation of net income to cash provided by operations: Provision for loan losses 515 585 Provision for depreciation 1,298 1,137 Net amortization of securities 739 1,227 Realized gain on sale of investment securities (2) (90) Amortization of mortgage servicing rights 110 244 Increase in cash value of life insurance (271) (317) Amortization of intangibles 70 70 Gain on sale of mortgage loans (196) (391) Net decrease in loans held for sale 698 3,623 (Increase) decrease in interest receivable (332) 277 Increase in other assets (710) (948) Increase in accrued interest and other expenses 4,941 764 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 11,712 11,162 INVESTING ACTIVITIES Activity in available-for-sale securities Maturities, calls, and sales 28,947 58,042 Purchases (42,116) (49,586) Activity in held to maturity securities Maturities, calls, and sales 165 735 Net increase in loans (26,079) (23,685) Purchases of equipment and premises (1,519) (3,379) -------- -------- NET CASH USED IN INVESTING ACTIVITIES (40,602) (17,873) FINANCING ACTIVITIES Net increase in noninterest bearing deposits 4,805 1,646 Net increase (decrease) in interest bearing deposits 12,087 (12,334) Net increase in other borrowed funds 16,800 4,933 Cash dividends (1,622) (1,609) Proceeds from the issuance of common stock 1,172 1,094 Common stock repurchased -- (192) -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 33,242 (6,462) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVELANTS 4,352 (13,173) Cash and cash equivelants at beginning of period 20,760 31,218 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,112 $ 18,045 ======== ======== </TABLE> See notes to consolidated financial statements 7
IBT BANCORP, INC. NOTES TO 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 nine month period ended September 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. 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, 2004. NOTE 2 COMPUTATION OF EARNINGS PER SHARE The net income per share amounts are based on the weighted average number of common shares outstanding. The weighted average number of common shares outstanding were 4,914,526 and 4,856,051 for the nine month periods ended September 30, 2005 and 2004, respectively. The Corporation has no common stock equivalents and, accordingly, presents only basic earnings per share. 8
NOTE 3 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 A to the Consolidated Financial Statements in the Corporations annual report for the year ended December 31, 2004. 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 nine and three month periods ended September 30 follow: (dollars in thousands) <TABLE> <CAPTION> All Others Isabella Bank Farmers (Including Nine Months Ended and Trust State Bank Parent) Total - ----------------- ------------- ---------- ---------- -------- <S> <C> <C> <C> <C> 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 SEPTEMBER 30, 2004 Total assets 528,064 122,940 11,267 662,271 Interest income 19,740 5,398 125 25,263 Net interest income 13,662 3,632 171 17,465 Provision for loan losses 400 185 -- 585 Net income (loss) 4,264 921 (204) 4,981 </TABLE> <TABLE> <CAPTION> All Others Isabella Bank Farmers (Including Quarter Ended and Trust State Bank Parent) Total - ------------- ------------- ---------- ---------- -------- <S> <C> <C> <C> <C> 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 SEPTEMBER 30, 2004 Total assets 528,064 122,940 11,267 662,271 Interest income 6,534 1,841 40 8,415 Net interest income 4,519 1,275 59 5,853 Provision for loan losses 100 20 -- 120 Net income (loss) 1,444 381 (76) 1,749 </TABLE> 9
NOTE 4 DEFINED BENEFIT PENSION PLAN The Corporation has a defined benefit pension plan covering substantially all of its employees. 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. 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 uses a January 1, 2005 measurement date for this pension plan. The components of net periodic benefit cost related to Corporation administered plans for the three and nine-month periods ended September 30 were as follows: <TABLE> <CAPTION> Pension Benefits -------------------------------------- Three months ended Nine months ended September 30 September 30 ------------------ ----------------- 2005 2004 2005 2004 ----- ----- ----- ----- (thousands) <S> <C> <C> <C> <C> Components of net periodic benefit cost Service cost $ 137 $ 130 $ 410 $ 390 Interest cost 135 125 405 375 Expected return on plan assets (116) (108) (348) (324) Amortization of prior service cost 5 5 14 15 Amortization of net actuarial loss 50 53 151 159 ----- ----- ----- ----- Net periodic benefit cost $ 211 $ 205 $ 632 $ 615 ===== ===== ===== ===== </TABLE> The Corporation has contributed $545,000 to the pension plan during the nine month period ended September 30, 2005. The Corporation expects to contribute approximately $972,000 by the end of 2005. NOTE 5 RECENT ACCOUNTING PRONOUNCEMENTS In April 2005, the Securities and Exchange Commission adopted a new rule that amends the compliance dates for implementation of Financial Accounting Standards Board's ("FASB") Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R). The 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 or liability instruments issued. SFAS No. 123R covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Corporation will adopt SFAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Corporation's results of operations. 10
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 2004 annual report and with the unaudited financial statements and notes, as set forth on pages 3 through 10 of this report. CRITICAL ACCOUNTING POLICIES: The Corporation's significant accounting policies are set forth in Note 1 of the Consolidated Financial Statements included in the Corporation's Annual Report for the year ended December 31, 2004. Of these significant accounting policies, the Corporation considers its policies regarding the allowance for loan losses and carrying value of servicing assets to be its most critical accounting policies. The allowance for loan losses requires management's most subjective and complex judgment. Changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation's allowance for loan losses and related matters, see Provision for Loan Losses and Allowance for Loan Losses in the Corporation's 2004 Annual Report and herein. Servicing assets are recognized when loans are sold with servicing retained. Mortgage servicing rights (MSR's) are assets which are amortized in proportion to and over the period of estimated future net servicing income. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominate characteristics, such as interest rates and terms. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 RESULTS OF OPERATIONS Net income equaled $4.85 million for the nine month period ended September 30, 2005 versus $4.98 million in 2004. Return on average assets, which measures the ability of the Corporation to profitably and efficiently employ its resources, was 0.93% for the first nine months of 2005 and 0.98% in 2004. Return on average equity, which indicates how effectively the Corporation is able to generate earnings on shareholder invested capital, equaled 8.80% through September 30, 2005 versus 9.48% for the same period in 2004. 11
SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Nine Months Ended September 30 ----------------- 2005 2004 ------- ------- <S> <C> <C> INCOME STATEMENT DATA Net interest income $17,796 $17,465 Provision for loan losses 515 585 Net income 4,852 4,981 PER SHARE DATA Net income per common share $ 0.99 $ 1.03 Cash dividends per common share 0.33 0.33 RATIOS Average primary capital to average assets 11.46% 11.24% Net income to average assets 0.93 0.98 Net income to average equity 8.80 9.48 </TABLE> 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 $849,0002005 versus $854,000 in 2004. 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 IBT BANCORP, INC. AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME (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. <TABLE> <CAPTION> Nine Months Ended ----------------------------------------------------------------- September 30, 2005 September 30, 2004 ------------------------------- ------------------------------- Tax Average Tax Average Average Equivalent Yield\ Average Equivalent Yield\ Balance Interest Rate Balance Interest Rate -------- ---------- ------- -------- ---------- ------- <S> <C> <C> <C> <C> <C> <C> INTEREST EARNING ASSETS: Loans $460,064 $22,495 6.52% $432,995 $20,664 6.36% Taxable investment securities 105,312 2,547 3.22 118,325 2,870 3.23 Non-taxable investment securities 61,867 2,826 6.09 54,801 2,382 5.80 Federal funds sold 4,620 99 2.86 6,051 51 1.12 Other 4,254 135 4.23 2,949 106 4.79 -------- ------- ---- -------- ------- ---- Total earning assets 636,117 28,102 5.89 615,121 26,073 5.65 NON EARNING ASSETS: Allowance for loan losses (6,635) (6,575) Cash and due from banks 20,458 24,601 Premises and equipment 17,773 17,209 Accrued income and other assets 25,244 24,773 -------- -------- Total assets $692,957 $675,129 ======== ======== INTEREST BEARING LIABILITIES: Interest-bearing demand deposits $106,165 $ 708 0.89% $109,699 $ 393 0.48% Savings deposits 158,131 1,087 0.92 155,342 656 0.56 Time deposits 241,499 6,377 3.52 239,518 5,976 3.33 Other borrowed funds 34,187 1,082 4.22 27,159 773 3.79 -------- ------- ---- -------- ------- ---- Total interest bearing liabilities 539,982 9,254 2.29 531,718 7,798 1.96 NONINTEREST BEARING LIABILITIES: Demand deposits 67,927 63,323 Other 11,520 10,033 Shareholders' equity 73,528 70,055 -------- -------- Total liabilities and equity $692,957 $675,129 ======== ======== Net interest income (FTE) $18,848 $18,275 ======= ======= Net yield on interest earning ---- ---- assets (FTE) 3.95% 3.96% ==== ==== </TABLE> 13
TABLE 2 IBT BANCORP, INC. 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. <TABLE> <CAPTION> Nine Month Period Ended September 30, 2005 Compared to Nine Month Period Ended September 30, 2004 Increase (Decrease) Due to ------------------------------------------ Volume Rate Net ------ ------ ------ <S> <C> <C> <C> CHANGES IN INTEREST INCOME: Loans $1,315 $ 516 $1,831 Taxable investment securities (315) (8) (323) Nontaxable investment securities 319 125 444 Federal funds sold (15) 63 48 Other 43 (14) 29 ------ ------ ------ Total changes in interest income 1,347 682 2,029 Total changes in interest expense 265 1,191 1,456 ------ ------ ------ Net change in interest margin (FTE) $1,082 $ (509) $ 573 ====== ====== ====== </TABLE> 14
NET INTEREST INCOME, CONTINUED As shown in Tables number 1 and 2, when comparing the nine month period ended September 30, 2005 to the same period in 2004, fully taxable equivalent (FTE) net interest income increased $573,000 or 3.13%. An increase of 3.41% in average interest earning assets provided $1.3 million of FTE interest income. The growth in interest earning assets was primarily funded by an increase in other borrowings, noninterest bearing deposits, and shareholders equity. The overall change in volume resulted in $1.1 million of additional net FTE interest income. The average FTE interest rate earned on assets increased by 0.24%, resulting in an increase in interest income of $682,000. The average rate paid on interest bearing liabilities increased by 0.33%, increasing interest expense by $1.2 million. The net change related to interest rates earned and paid was a $509,000 decrease in FTE net interest income. During the first nine months of 2005, short term rates such as prime rate and certificates of deposits less than three months have risen substantially while rates on longer term assets and funding sources have remained essentially unchanged, resulting in essentially a flat yield curve. A flat yield curve encourages our customers to invest their funds in short term deposits and borrowers to prefer long term fixed rate loans. Given the flat yield curve, there is little opportunity to earn additional interest income from incurring interest rate risk. The Corporation is carefully monitoring its interest rate risk to assure that either a steepening of or an inverted yield curve will not have a significant adverse impact on the Corporation's net interest income in future periods. This defensive position has resulted in the Corporation's FTE net interest yield as a percentage of average earning assets equaling 3.95% during the first nine months of 2005 versus 3.96% for the same period in 2004. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Net loans outstanding represent 65.6% 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. Comparing the year to date period of September 30, 2005 to September 30, 2004, the provision for loan losses was decreased $70,000 to $515,000 of loans classified as nonperforming decreasing to 0.62% of loans as of September 30, 2005 compared to 0.80% for September 30, 2004. Year to date 2005, the Corporation had net charge-offs of $158,000 in 2005 versus $115,000 in 2004. The Corporation's peer group, which includes 383 holding companies with assets between $500 million and $1.0 billion, had a nonperforming loans to total loans ratio of 0.51% as of June 30, 2005. As of September 30, 2005, the allowance for loan losses as a percentage of loans equaled 1.42%. In management's opinion, the allowance for loan losses is adequate as of September 30, 2005. 15
TABLE 3 IBT BANCORP, INC. SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) <TABLE> <CAPTION> Nine Months Ended September 30 ------------------- 2005 2004 -------- -------- <S> <C> <C> Summary of changes in allowance Allowance for loan losses - January 1 $ 6,444 $ 6,204 Loans charged off (406) (504) Recoveries of charged off loans 248 389 -------- -------- Net loans charged off (158) (115) Provision charged to operations 515 585 -------- -------- ALLOWANCE FOR LOAN LOSSES - SEPTEMBER 30 $ 6,801 $ 6,674 ======== ======== ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.42% 1.50% ======== ======== </TABLE> NONPERFORMING LOANS (Dollars in thousands) <TABLE> <CAPTION> September 30 ------------------- 2005 2004 -------- -------- <S> <C> <C> Total amount of loans outstanding for the period $478,816 $445,429 Nonaccrual loans $ 1,208 $ 1,151 Accruing loans past due 90 days or more 1,771 2,400 -------- -------- Total $ 2,979 $ 3,551 ======== ======== Loans classified as nonperforming as a % of outstanding loans 0.62% 0.80% ======== ======== </TABLE> 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. Income earned from these sources increased $86,000 or 1.39% during the first nine months of 2005 when compared to the same period in 2004. Significant individual account changes during this period include a $114,000 increase in trust fees, a $124,000 increase in other service charges and fees, and a $271,000 increase in title insurance revenue. These increases were offset by a $10,000 decrease in service charges on deposit accounts, a $195,000 decrease in gains on the sale of mortgage loans, and a $218,000 decrease in other non interest income. The $124,000 increase in other service charges and fees includes a $171,000 increase in NSF and overdraft fees a $73,000 increase in ATM and debit card fee income, as well as a $123,000 decrease in income from the valuation of mortgage servicing rights due to a decline in mortgage activity. Management expects NSF and overdraft income to remain relatively level, due to current deposit portfolio activity. Based on current market trends, the value of mortgage servicing rights is anticipated to remain at current levels. The $218,000 decrease in other noninterest income includes a $88,000 decrease in the gain on sale of securities, a $44,000 decrease in income from corporate owned life insurance policies, a $45,000 decrease in building rent, and a $41,000 decrease in other noninterest income. Included in other assets is $10.4 million in cash value of corporate owned life insurance policies. The increase in cash value of these policies of $271,000 and $212,000 during the nine month periods ended September 30, 2005 and 2004, respectively, is recorded as other income. These policies earned an average rate of 3.49% and 4.13% during the nine month period ended September 30, 2005 and 2004, respectively. Due to their preferential tax treatment, these policies have a taxable equivalent rate of 5.28% and 6.26% as of September 30, 2005 and 2004, respectively. These policies are placed with five different insurance companies with an S & P rating of A- or better. The Corporation has established a policy that all 30 year amortized fixed rate mortgage loans will be sold. The calculation of gains on the sale of mortgages excludes at least 25 basis points allocated to the value of servicing rights on these loans. Included in other noninterest income is a $196,000 of $27.0 million in mortgages during the first nine months of 2005 versus a $391,000 gain on the sale of $48.0 million in mortgages for the same period in 2004. Management does not expect the gain on sale of mortgages to fluctuate significantly from current levels based on current market trends. NONINTEREST EXPENSES Noninterest expenses increased $823,000 or 4.97% during the first nine months of 2005 when compared to 2004. The largest component of noninterest expense is compensation expense, which increased $379,000 or 3.86%. The increase is due an increase in medical benefit expenses, additional staffing related to Isabella Bank and Trust's new branch location in Big Rapids, Michigan, and normal merit and promotional salary increases. Occupancy and furniture and equipment expenses increased $266,000 or 9.11% in 2005. The majority of this increase is related to a $132,000 in equipment depreciation, a $26,000 increase in service contracts, and a $93,000 increase in ATM and debit card expenses, which is related to the 2004 information systems conversion and upgrade, and a $55,000 increase in property tax expense and a $29,000 increase in building depreciation associated with the new location referred to above. These increases were offset by decreases of $87,000 in computer processing and related costs. Various other expenses increased by $178,000 or 4.68%. Included in other expenses were Extended Audit and Sarbanes Oxley Section 404 compliance costs which totaled $336,000 during the first nine months of 2005 compared to zero in 2004. These costs were partially offset by decreases in various other expense categories. 17
QUARTER ENDED SEPTEMBER 30, 2005 AND 2004 RESULTS OF OPERATIONS Net income equaled $1.74 million for the third quarter in 2005 versus $1.75 million in 2004. Return on average assets equaled 0.99% for the third quarter of 2005 versus 1.04% for the same period in 2004. Return on average equity equaled 9.61% for the third quarter in 2005, versus 9.85% for the third quarter in 2004. SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended September 30 ------------------ 2005 2004 ------ ------ <S> <C> <C> INCOME STATEMENT DATA Net interest income $6,014 $5,853 Provision for loan losses 196 120 Net income 1,744 1,749 PER SHARE DATA Net income per common share $ 0.35 $ 0.36 Cash dividends per common share 0.11 0.11 RATIOS Average primary capital to average assets 11.18% 11.51% Net income to average assets 0.99 1.04 Net income to average equity 9.61 9.85 </TABLE> NET INTEREST INCOME When comparing the third quarter of 2005 to 2004, net FTE interest income increased $246,000. An increase of 6.06% in interest earning assets provided $548,000 of FTE interest income. The growth in interest earning assets was primarily funded by an increase in interest bearing deposits, time deposits, and other borrowings which resulted in a $227,000 increase in interest expense. Overall, increased volume resulted in $321,000 of additional net FTE interest income. During the third quarter of 2005, the average FTE interest rate earned on assets increased by 0.36% and the average rate paid on deposits and borrowed funds increased by 0.53%. The changes in interest rates earned and paid resulted in a $75,000 decrease in FTE net interest income. The Corporation's FTE net interest yield as a percentage of average earning assets decreased 0.08% to 3.92% when comparing the third quarter of 2005 to the same period in 2004. The primary factor for the decrease was the average rate paid on interest bearing liabilities increasing faster than the average rate earned on earning assets. 18
TABLE 4 IBT BANCORP, INC. AVERAGE BALANCES; INTEREST RATE AND NET INTEREST INCOME (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 stock is included in Other. <TABLE> <CAPTION> Quarter Ended ----------------------------------------------------------------- September 30, 2005 September 30, 2004 ------------------------------- ------------------------------- Tax Average Tax Average Average Equivalent Yield\ Average Equivalent Yield\ Balance Interest Rate Balance Interest Rate -------- ---------- ------- -------- ---------- ------- <S> <C> <C> <C> <C> <C> <C> INTEREST EARNING ASSETS: Loans $470,955 $7,872 6.69% $445,421 $7,002 6.29% Taxable investment securities 104,950 864 3.29 105,119 847 3.22 Non-taxable investment securities 62,772 953 6.07 56,549 792 5.60 Federal funds sold 5,353 46 3.44 2,667 9 1.35 Other 5,792 58 4.01 2,960 34 4.59 -------- ------ ---- -------- ------ ---- Total earning assets 649,822 9,793 6.03 612,716 8,684 5.67 NON EARNING ASSETS: Allowance for loan losses (6,753) (6,796) Cash and due from banks 18,016 21,328 Premises and equipment 15,620 18,734 Accrued income and other assets 26,095 23,575 -------- -------- Total assets $702,800 $669,557 ======== ======== INTEREST BEARING LIABILITIES: Interest-bearing demand deposits $109,307 $ 289 1.06% $102,205 $ 120 0.47% Savings deposits 152,465 436 1.14 154,226 216 0.56 Time deposits 248,108 2,276 3.67 237,273 1,965 3.31 Other borrowed funds 39,335 424 4.31 27,291 261 3.83 -------- ------ ---- -------- ------ ---- Total interest bearing liabilities 549,215 3,425 2.49 520,995 2,562 1.97 NONINTEREST BEARING LIABILITIES: Demand deposits 68,932 68,055 Other 12,066 9,457 Shareholders' equity 72,587 71,050 -------- -------- Total liabilities and equity $702,800 $669,557 ======== ------ ======== ------ Net interest income (FTE) $6,368 $6,122 ====== ====== Net yield on interest earning ---- ---- assets (FTE) 3.92% 4.00% ==== ==== </TABLE> 19
TABLE 5 IBT BANCORP, INC. 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. <TABLE> <CAPTION> Quarter Ended September 30, 2005 Compared to Quarter Ended September 30, 2004 Increase (Decrease) Due to -------------------------------- Volume Rate Net ------ ---- ------ <S> <C> <C> <C> CHANGES IN INTEREST INCOME: Loans $413 $457 $ 870 Taxable investment securities (1) 18 17 Nontaxable investment securities 92 69 161 Federal funds sold 15 22 37 Other 29 (5) 24 ---- ---- ------ Total changes in interest income 548 561 1,109 Total changes in interest expense 227 636 863 ---- ---- ------ Net change in interest margin (FTE) $321 $(75) $ 246 ==== ==== ====== </TABLE> PROVISION FOR LOAN LOSSES The amount provided for loan losses in the third quarter of 2005 was $196,000 versus $120,000 in 2004. During the third quarter of 2005 the Corporation had net charge-offs of $135,000 versus $19,000 during the same period of 2004. The allowance for loan losses as a percent of loans was 1.42% as of September 30, 2005, a 0.08% decrease since September 30, 2004. NONINTEREST INCOME Noninterest income earned in the third quarter of 2005, when compared to the same period in 2004, increased $265,000, or 12.85%. Significant individual account changes during the period include a $42,000 increase in trust fees, a $91,000 increase in other service charges and fees, and a $187,000 increase in title insurance revenues. These increases were offset by a $51,000 decrease in income from the gain on sale of mortgage loans and a $10,000 decrease in other income. Management does not expect the gain on sale of mortgages to fluctuate significantly from current levels based on current market trends. The $91,000 increase in other service charges and fees includes a $123,000 increase in NSF and overdraft fees, a $45,000 increase in ATM and debit card fees, which were offset by a $73,000 decrease in income related to the valuation of mortgage servicing rights due to a decline in mortgage activity. Management expects NSF and overdraft 20
income to remain relatively level, due to current deposit portfolio activity. Based on current market trends, the value of mortgage servicing rights is anticipated to remain at current levels. NONINTEREST EXPENSES Noninterest expenses increased $389,000 or 7.07% during the third quarter of 2005 when compared to 2004. Noninterest expense includes compensation expense, occupancy, and other operating expenses. The largest component of noninterest expense is compensation expense, which increased $162,000 or 4.93%. The increase is due to an increase in medical benefit expenses, additional staffing related to Isabella Bank and Trust's new branch location in Big Rapids, Michigan, and normal merit and promotional salary increases. Occupancy and furniture and equipment expenses increased $99,000 or 10.08%. The majority of this increase is related to an increase of $20,000 in equipment depreciation, a $23,000 increase in service contracts, and a $49,000 increase in ATM and debit card expenses, which is related to the 2004 information systems conversion and upgrade. In addition, there was a $18,000 increase in property tax expense associated with the new location referred to above as well as increases of $25,000 in other occupancy and furniture and equipment expenses. These increases were partially offset by a $36,000 decrease in computer processing expenses. Various other operating expenses increased $128,000 or 10.40%. Significant account changes during the period include a $28,000 increase in marketing expenses, a $42,000 increase in extended audit and Sarbanes Oxley Section 404 compliance expenses, a $37,000 increase in consulting expenses, and a $27,000 increase in supplies expenses. ANALYSIS OF CHANGES IN FINANCIAL CONDITION Since December 31, 2004, total assets increased $42.0 million to $720.1 million. As of September 30, 2005, total loans increased $25.9 million, cash and cash equivalents increased $4.4 million, and investment securities increased $10.8 million when compared to December 31, 2004. Deposits during this period increased $16.9 million, borrowed funds increased $16.8 million and shareholders' equity increased $3.4 million. 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, 2005, cash and cash equivalents as a percentage of total assets equaled 3.49%, versus 3.06% as of December 31, 2004. During the first nine months of 2005, $11.7 million in net cash was provided from operations and $33.2 million was provided from financing activities. Investing activities used $40.6 million. The accumulated effect of the Corporation's operating, investing and financing activities was a $4.4 million increase in cash and cash equivalents during the first nine months of 2005. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale were $173.0 million as of September 30, 2005 and $162.0 million as of December 31, 2004. 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. 21
CAPITAL The capital of the Corporation consists solely of common stock, surplus, retained earnings, and accumulated other comprehensive loss; and increased approximately $3.4 million since December 31, 2004. Accumulated other comprehensive loss increased $989,000 due to unrealized losses in available-for-sale securities during 2005. 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 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 11.53% as of September 30, 2005. 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, 2005: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS <TABLE> <CAPTION> IBT Bancorp September 30, 2005 ------------------ Required Actual -------- ------ <S> <C> <C> Equity Capital 4.00% 15.09% Secondary Capital* 4.00 1.25 ---- ----- Total Capital 8.00% 16.34% ==== ===== </TABLE> * 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. 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 $77.8 million at September 30, 2005, 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, 22
including commercial paper, bond financing, and similar transactions. At September 30, 2005, the Corporation had a total of $958,000 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. 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. The Corporation 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, 2005 approximated $1.6 million. 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. 23
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation's primary market risks are interest rate risk and, to a lesser extent, liquidity risk. The Corporation has no foreign exchange risk, holds limited loans outstanding to oil and gas concerns, and holds no trading account assets, nor does it utilize interest rate swaps or derivatives in the management of its interest rate risk. The Corporation does have a significant amount of loans extended to borrowers in agricultural production. Their cash flow and their ability to service their debt 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 mortgage backed 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 are estimated based on historical experience. Time deposits have penalties which discourage early withdrawals. 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, 2005. The Corporation has no interest rate swaps, futures contracts, or other derivative financial options. The principal amounts of assets and time deposits maturing were calculated based on the contractual maturity dates. Savings and NOW accounts are based on management's estimate of their future cash flows. 24
Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> September 30, 2005 Fair Value ------------------------------------------------------------------------ ---------- 2006 2007 2008 2009 2010 Thereafter Total 09/30/05 -------- ------- ------- ------- ------- ---------- -------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> 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% 3.26% 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% 6.16% 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% 7.68% 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% 4.27% 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% -- 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% 3.75% Variable interest rate time deposits $ 975 $ 377 $ 8 $ -- $ -- $ -- $ 1,360 $ 1,360 Average interest rates 3.05% 3.05% 3.05% -- -- -- 3.05% </TABLE> Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> September 30, 2004 Fair Value ------------------------------------------------------------------------ ---------- 2005 2006 2007 2008 2009 Thereafter Total 09/30/04 -------- ------- ------- ------- ------- ---------- -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 199 $ -- $ -- $ -- $ -- $ -- $ 199 $ 199 Average interest rates 3.79% -- -- -- -- -- 3.79% Fixed interest rate securities $ 53,945 $20,565 $30,732 $16,794 $ 7,623 $29,504 $159,163 $159,168 Average interest rates 3.59% 3.49% 2.93% 3.29% 3.55% 3.46% 3.39% Fixed interest rate loans $ 70,017 $50,600 $69,429 $56,102 $65,646 $43,284 $355,078 $355,757 Average interest rates 6.54% 6.58% 5.97% 6.25% 5.72% 4.88% 6.03% Variable interest rate loans $ 43,260 $10,475 $15,323 $10,868 $ 8,427 $ 3,081 $ 91,434 $ 91,434 Average interest rates 6.30% 4.78% 5.02% 5.52% 5.64% 6.31% 5.76% Rate sensitive liabilities Borrowed funds $ 673 $ 8,527 $ 1,029 $ 32 $ 3,534 $ 9,191 $ 22,986 $ 23,105 Average interest rates 6.62% 3.97% 3.54% 6.22% 3.69% 5.13% 4.45% Savings and NOW accounts $158,951 $23,175 $18,893 $13,351 $ 9,824 $27,709 $251,903 $251,903 Average interest rates 0.58% 0.59% 0.54% 0.57% 0.54% 0.43% 0.56% Fixed interest rate time deposits $116,850 $43,323 $37,085 $20,613 $10,729 $ 3,221 $231,821 $232,542 Average interest rates 2.78% 4.00% 4.20% 3.62% 3.18% 4.40% 3.35% Variable interest rate time deposits $ 1,316 $ 2,033 $ 6 $ 408 $ 126 $ -- $ 3,889 $ 3,889 Average interest rates 2.70% 5.45% 1.44% 5.22% 3.70% -- 4.43% </TABLE> 25
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, 2005, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer/Principal Financial Officer concluded that the Corporation's disclosure controls and procedures as of September 30, 2005, 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. 26
PART II - OTHER INFORMATION 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) 31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer and 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. * Management contract or compensatory plan or arrangement. 27
SIGNATURE 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: November 1, 2005 /s/ Dennis P. Angner ---------------------------------------- Dennis P. Angner Principal Executive Officer and Principal Financial Officer 28
EXHIBIT INDEX <TABLE> <CAPTION> EXHIBIT NO. EXHIBIT DESCRIPTION - ----------- ------------------- <S> <C> 31 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer and Principal Financial Officer 32 Section 1350 Certification of Principal Executive Officer and Principal Financial Officer </TABLE> 29