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 March 31, 2006 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. For the transition period from ______________ to ______________ Commission File Number: 0-18415 IBT Bancorp, Inc. (Exact name of registrant as specified in its charter) <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 a large accelerated filer, an accelerated file, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check One). Large accelerated filer [ ] Accelerated Filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock no par value, 5,484,325 as of April 10, 2006 1
IBT BANCORP, INC. Index to Form 10-Q <TABLE> <CAPTION> Page Numbers ------------ <S> <C> PART I FINANCIAL INFORMATION Item 1 Condensed Consolidated Financial Statements 3-11 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12-23 Item 3 Quantitative and Qualitative Disclosures About Market Risk 24-25 Item 4 Controls and Procedures 26 PART II OTHER INFORMATION Item 1A Risk Factors 27 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 27 Item 6 Exhibits 28 Signatures 29 Exhibit 31(a) 30 Exhibit 31(b) 31 Exhibit 32 32 </TABLE> 2
PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS IBT BANCORP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> March 31 December 31 2006 2005 -------- ----------- <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 30,619 $ 30,825 Securities available for sale (amortized cost of $203,006 in 2006 and $185,688 in 2005) 200,341 183,406 Mortgage loans available for sale 831 744 Loans Agricultural 48,151 49,424 Commercial 182,685 179,541 Personal 26,862 28,026 Residential real estate mortgage 227,199 226,251 -------- -------- TOTAL LOANS 484,897 483,242 Less allowance for loan losses 6,947 6,899 -------- -------- NET LOANS 477,950 476,343 Other assets 52,008 50,336 -------- -------- TOTAL ASSETS $761,749 $741,654 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 71,763 $ 73,839 NOW accounts 105,095 104,251 Certificates of deposit and other savings 341,094 328,780 Certificates of deposit over $100,000 98,764 85,608 -------- -------- TOTAL DEPOSITS 616,716 592,478 Other borrowed funds 44,242 52,165 Escrow funds payable 13,748 9,823 Accrued interest and other liabilities 5,225 6,286 -------- -------- TOTAL LIABILITIES 679,931 660,752 Shareholders' Equity Common stock -- no par value 10,000,000 shares authorized; outstanding-- 5,484,324 in 2006 (4,974,715 in 2005) 81,748 72,296 Retained earnings 1,829 10,112 Accumulated other comprehensive loss (1,759) (1,506) -------- -------- TOTAL SHAREHOLDERS' EQUITY 81,818 80,902 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $761,749 $741,654 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 3
IBT BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31 ----------------------- 2006 2005 ---------- ---------- <S> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of period 4,974,715 4,896,412 10% common stock dividend 497,299 -- Issuance of common stock 12,310 12,625 ---------- ---------- BALANCE END OF PERIOD 5,484,324 4,909,037 ========== ========== COMMON STOCK Balance at beginning of period $ 72,296 $ 66,908 10% common stock dividend 8,887 -- Issuance of common stock 448 420 Share-based payment awards under equity compensation plan 117 -- ---------- ---------- BALANCE END OF PERIOD 81,748 67,328 RETAINED EARNINGS Balance at beginning of period 10,112 6,590 Net income 1,214 1,343 10% common stock dividend (8,887) -- Cash dividends ($0.11 per share in 2006 and 2005) (610) (540) ---------- ---------- BALANCE END OF PERIOD 1,829 7,393 ACCUMULATED OTHER COMPREHENSIVE LOSS Balance at beginning of period (1,506) (904) Other comprehensive loss (253) (1,379) ---------- ---------- BALANCE END OF PERIOD (1,759) (2,283) ---------- ---------- TOTAL SHAREHOLDERS' EQUITY END OF PERIOD $ 81,818 $ 72,438 ========== ========== </TABLE> See notes to condensed consolidated financial statements. 4
IBT BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31 --------------- 2006 2005 ------ ------ <S> <C> <C> INTEREST INCOME Loans, including fees $8,167 $7,159 Investment securities Taxable 1,078 831 Nontaxable 649 576 Federal funds sold and other 74 62 ------ ------ TOTAL INTEREST INCOME 9,968 8,628 INTEREST EXPENSE Deposits 3,556 2,472 Borrowings 506 293 ------ ------ TOTAL INTEREST EXPENSE 4,062 2,765 ------ ------ NET INTEREST INCOME 5,906 5,863 Provision for loan losses 167 210 ------ ------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 5,739 5,653 NONINTEREST INCOME Trust fees 214 183 Service charges on deposit accounts 77 34 Other service charges and fees 953 851 Gain on sale of mortgage loans 57 76 Title insurance revenue 474 503 Other 226 210 ------ ------ TOTAL NONINTEREST INCOME 2,001 1,857 NONINTEREST EXPENSES Compensation 3,529 3,338 Occupancy 456 420 Furniture and equipment 713 645 Other 1,610 1,454 ------ ------ TOTAL NONINTEREST EXPENSES 6,308 5,857 INCOME BEFORE FEDERAL INCOME TAXES 1,432 1,653 Federal income taxes 218 310 ------ ------ NET INCOME $1,214 $1,343 ====== ====== EARNINGS PER SHARE Basic $ 0.23 $ 0.25 ====== ====== Diluted $ 0.22 $ 0.25 ====== ====== Cash dividends per share $ 0.11 $ 0.10 ====== ====== </TABLE> See notes to condensed consolidated financial statements. 5
IBT BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31 ---------------- 2006 2005 ------ ------- <S> <C> <C> NET INCOME $1,214 $ 1,343 Unrealized holding losses on investment securities arising during period (383) (2,090) Income tax benefit related to other comprehensive loss 130 711 ------ ------- OTHER COMPREHENSIVE LOSS (253) (1,379) ------ ------- COMPREHENSIVE INCOME (LOSS) $ 961 $ (36) ====== ======= </TABLE> See notes to condensed consolidated financial statements. 6
IBT BANCORP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) <TABLE> <CAPTION> Three Months Ended March 31 ------------------- 2006 2005 -------- -------- <S> <C> <C> OPERATING ACTIVITIES Net income $ 1,214 $ 1,343 Reconciliation of net income to cash provided by operations: Provision for loan losses 167 210 Depreciation 480 423 Net amortization of investment securities 209 280 Amortization and impairment of mortgage servicing rights 34 24 Increase in cash value of life insurance (100) (91) Amortization of acquisition intangibles 23 23 Equity shares granted 117 -- Changes in operating assets and liabilities which (used) provided cash Loans held for sale (87) 1,688 Interest receivable 44 (292) Other assets (829) (996) Escrow funds payable 3,925 348 Accrued interest and other liabilities (1,061) (283) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,136 2,677 INVESTING ACTIVITIES Activity in available-for-sale securities Maturities, calls, and sales 8,605 9,857 Purchases (26,132) (15,593) Net (increase) decrease in loans (1,774) 2,843 Purchases of premises and equipment (695) (695) Purchases of corporate owned life insurance policies (499) -- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (20,495) (3,588) FINANCING ACTIVITIES Net decrease in noninterest bearing deposits (2,076) (2,488) Net increase in interest bearing deposits 26,314 1,595 Net decrease in other borrowed funds (7,923) (2,312) Cash dividends paid on common stock (610) (540) Proceeds from the issuance of common stock 448 420 -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 16,153 (3,325) -------- -------- DECREASE IN CASH AND CASH EQUIVELANTS (206) (4,236) Cash and cash equivelants at beginning of period 30,825 20,760 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 30,619 $ 16,524 ======== ======== </TABLE> See notes to condensed consolidated financial statements. 7
IBT BANCORP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in the Corporation's annual report for the year ended December 31, 2005. NOTE 2 IMPLEMENTATION OF NEW ACCOUNTING STANDARD On January 1, 2006, the Corporation adopted Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R). This statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity instruments issued. The adoption of this standard decreased earnings per share by $.01. 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: <TABLE> <CAPTION> Three months ended March 31 --------------------- 2006 2005 --------- --------- <S> <C> <C> Average number of common shares outstanding 5,306,091 4,909,037* Effect of shares in the Deferred Director fee plan 158,329 -- --------- --------- Average number of common shares outstanding used to calculate diluted earnings per common share 5,464,420 4,909,037 ========= ========= </TABLE> * As adjusted for the 10% stock dividend paid February 15, 2006 8
NOTE 4 OPERATING SEGMENTS The Corporation's reportable segments are based on legal entities that account for at least 10% of operating results. The accounting policies are the same as those discussed in Note 1 to the Consolidated Financial Statements in the Corporation's annual report for the year ended December 31, 2005. The Corporation evaluates performance based principally on net income and asset quality of the respective segments. Summaries of selected financial information for the Corporation's reportable segments as of and for the three month periods ended March 31 follow: (dollars in thousands) <TABLE> <CAPTION> Isabella All Others Bank Farmers (Including and Trust State Bank Parent) Total --------- ---------- ---------- -------- <S> <C> <C> <C> <C> Three Months Ended MARCH 31, 2006 Total assets $598,435 $136,378 $26,936 $761,749 Interest income 7,855 2,083 30 9,968 Net interest income 4,541 1,306 59 5,906 Provision for loan losses 118 49 -- 167 Net income (loss) 1,331 334 (451) 1,214 MARCH 31, 2005 Total assets 536,475 125,072 13,191 674,738 Interest income 6,749 1,858 21 8,628 Net interest income 4,533 1,285 45 5,863 Provision for loan losses 165 45 -- 210 Net income (loss) 1,263 340 (260) 1,343 </TABLE> 9
NOTE 5 DEFINED BENEFIT PENSION PLAN The Corporation has a defined benefit pension plan covering substantially all of its employees. Benefits are based on years of service and the employees' five highest consecutive years of compensation out of the last ten years of service. The funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to services to date but also for those expected to be earned in the future. The Corporation used a January 1, 2006 measurement date for this pension plan. The components of net periodic benefit cost related to the Corporation's administered plan for the three-month period ended March 31 were as follows: <TABLE> <CAPTION> Pension Benefits ------------------ Three months ended March 31 ------------------ 2006 2005 ----- ----- (thousands) <S> <C> <C> Components of net periodic benefit cost Service cost $ 159 $ 140 Interest cost 152 135 Expected return on plan assets (139) (116) Amortization of prior service cost 5 5 Amortization of net actuarial loss 58 50 ----- ----- Net periodic benefit cost $ 235 $ 214 ===== ===== </TABLE> The Corporation contributed $750 and $232 to the pension plan during the three month periods ended March 31, 2006 and 2005, respectively. The Corporation expects to contribute approximately $1,128 to the plan by the end of 2006. NOTE 6 - POTENTIAL BUSINESS ACQUISITION On December 22, 2005, IBT Bancorp, Inc. signed a definitive agreement to acquire The Farwell State Savings Bank ("Farwell"). Farwell operates two banking offices in Clare County, Michigan and has total assets and stockholders' equity of approximately $89,100 and $13,600 as of December 31, 2005. The acquisition is expected to be completed by the issuance of a combination of IBT Bancorp, Inc. common stock and cash valued at approximately $38,063. Completion of the acquisition is subject to a number of contingencies including but not limited to regulatory approval. 10
NOTE 7 RECENT ACCOUNTING PRONOUNCEMENTS In February 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments," an amendment of SFAS No. 133 and SFAS No. 140. SFAS No. 155 simplifies accounting for certain hybrid instruments under SFAS No. 133 by permitting fair value remeasurement for financial instruments that otherwise would require bifurcation and eliminating SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets," which provides that beneficial interests are not subject to the provisions of SFAS No. 133. SFAS No. 155 also eliminates the previous restriction under SFAS No. 140 on passive derivative instruments that a qualifying special-purpose entity may hold. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity's fiscal year that begins after September 15, 2006. The Corporation will adopt this statement as required, and adoption is not expected to have an impact on the Corporation's results of operations, financial condition or liquidity. In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156 (SFAS No. 156), "Accounting for Servicing of Financial Assets". This statement amends Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires companies to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract. The statement permits a company to choose either the amortized cost method or fair value measurement method for each class of separately recognized servicing assets. This statement is effective as of the beginning of a company's first fiscal year after September 15, 2006. The Corporation is currently in the process of analyzing the impact, if any, of SFAS No. 156. In March 2006, the Financial Accounting Standards Board issued an exposure draft that seeks to make improvements to Statement of Financial Accounting Standards No. 132R (SFAS No. 132R), "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans". The proposed amendment would not alter the basic approach to measuring plan assets, benefit obligations, or net periodic benefit cost (expense). Major changes to SFAS No. 132R proposed in the amendment include 1) the recognition of an asset or liability for the overfunded or underfunded status of a defined benefit plan, 2) the recognition of actuarial gains and losses and prior service costs and credits in other comprehensive income, 3) measurement of plan assets and benefit obligations as of the employer's balance sheet date, rather than at interim measurement dates as currently allowed, and 4) disclosure of additional information concerning actuarial gains and losses and prior service costs and credits recognized in other comprehensive income. The amendment's requirement for public companies to recognize on their balance sheet the asset or liability associated with the overfunded or underfunded status of a defined benefit pension plan would take effect for the years ending after December 15, 2006. Companies would be required to synchronize their measurement dates to the end of their fiscal years beginning after December 31, 2006. The Corporation is monitoring the proposed effects of SFAS No. 132R. 11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the major factors that influenced IBT Bancorp's financial performance. This analysis should be read in conjunction with the Corporation's 2005 annual report and with the unaudited condensed consolidated financial statements and notes, as set forth on pages 3 through 11 of this report. CRITICAL ACCOUNTING POLICIES: A summary of 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, 2005. Of these significant accounting policies, the Corporation considers its policies regarding the allowance for loan losses and carrying value of servicing assets to be its most critical accounting policies. The allowance for loan losses requires management's most subjective and complex judgment. Changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation's allowance for loan losses and related matters, see Provision for Loan Losses and Allowance for Loan Losses in the Corporation's 2005 Annual Report and herein. 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. 12
THREE MONTHS ENDED MARCH 31, 2006 AND 2005 RESULTS OF OPERATIONS The following table outlines the results of operations for the three month periods ended March 31, 2006 and 2005. Return on average assets measures the ability of the Corporation to profitably and efficiently employ its resources. Return on average equity indicates how effectively the Corporation is able to generate earnings on shareholder invested capital. SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> Three Months Ended March 31 ------------------ 2006 2005 ------ ------ <S> <C> <C> INCOME STATEMENT DATA Net interest income $5,906 $5,863 Provision for loan losses 167 210 Net income 1,214 1,343 PER SHARE DATA Earnings per share Basic $ 0.23 $ 0.25 Diluted 0.22 0.25 Cash dividends per common share 0.11 0.10 RATIOS Average primary capital to average assets 11.69% 11.54% Net income to average assets 0.65 0.78 Net income to average equity 5.97 7.31 </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 $238 in 2006 versus $262 in 2005. For analytical purposes, net interest income is adjusted to a "taxable equivalent" basis by adding the income tax savings from interest on tax-exempt loans and securities, thus making year-to-year comparisons more meaningful. (Continued on page 16) 13
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> Three Months Ended ----------------------------------------------------------------- March 31, 2006 March 31, 2005 ------------------------------- ------------------------------- 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 $484,880 $ 8,167 6.74% $451,977 $7,159 6.34% Taxable investment securities 116,760 1,078 3.69% 102,051 831 3.26% Non-taxable investment securities 71,658 1,029 5.74% 62,878 919 5.85% Federal funds sold 1,492 16 4.29% 6,345 22 1.39% Other 5,184 58 4.48% 3,631 40 4.41% -------- ------- ---- -------- ------ ---- Total earning assets 679,974 10,348 6.09% 626,882 8,971 5.72% NON EARNING ASSETS: Allowance for loan losses (6,927) (6,498) Cash and due from banks 29,289 22,336 Premises and equipment 17,312 19,621 Accrued income and other assets 28,804 23,504 -------- -------- Total assets $748,452 $685,845 ======== ======== INTEREST BEARING LIABILITIES: Interest-bearing demand deposits $106,751 376 1.41% $106,314 255 0.96% Savings deposits 157,011 593 1.51% 165,425 236 0.57% Time deposits 269,211 2,587 3.84% 236,073 1,981 3.36% Other borrowed funds 44,807 506 4.52% 29,598 293 3.96% -------- ------- ---- -------- ------ ---- Total interest bearing liabilities 577,780 4,062 2.81% 537,410 2,765 2.06% NONINTEREST BEARING LIABILITIES: Demand deposits 69,425 64,337 Other 19,882 10,681 Shareholders' equity 81,365 73,417 -------- -------- Total liabilities and equity $748,452 $685,845 ======== ======== Net interest income (FTE) $ 6,286 $6,206 ======= ====== ---- ---- Net yield on interest earning assets (FTE) 3.70% 3.96% ==== ==== </TABLE> 14
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> Quarter Ended March 31, 2006 Compared to March 31, 2005 Increase (Decrease) Due to ---------------------------- Volume Rate Net ------ ----- ------ <S> <C> <C> <C> CHANGES IN INTEREST INCOME: Loans $539 $ 469 $1,008 Taxable investment securities 128 119 247 Nontaxable investment securities 127 (17) 110 Federal funds sold (26) 20 (6) Other 17 1 18 ---- ----- ------ Total changes in interest income 785 592 1,377 Interest bearing demand deposits 1 120 121 Savings deposits (13) 370 357 Time deposits 298 308 606 Other borrowings 167 46 213 ---- ----- ------ Total changes in interest expense 453 844 1,297 ---- ----- ------ Net change in interest margin (FTE) $332 $(252) $ 80 ==== ===== ====== </TABLE> 15
NET INTEREST INCOME, CONTINUED As shown in Tables number 1 and 2, when comparing the three month period ended March 31, 2006 to the same period in 2005, fully taxable equivalent (FTE) net interest income increased $80 or 1.29%. An increase of 8.47% in average interest earning assets provided $785 of FTE interest income. The growth in interest earning assets was primarily funded by an 18.20% increase in time deposits and other borrowings. The increase in interest bearing liabilities resulted in an increase in interest expense of $453. The overall change in volume resulted in $332 of additional net FTE interest income. The average FTE interest rate earned on assets increased by 0.37%, resulting in an increase in interest income of $592. The average rate paid on interest bearing liabilities increased by 0.75%, increasing interest expense by $844. The net change related to interest rates earned and paid was a $252 decrease in FTE net interest income. The Corporation, as well as all other financial institutions, has been coping with an essentially flat yield curve since the third quarter of 2005. This flat yield curve has encouraged our customers to invest their funds in short term deposits and to borrow long term with fixed rate loans. This flat yield curve has provided the Corporation with little opportunity to earn additional interest income and has resulted in a 0.26% decrease in the Corporation's FTE net interest yield as a percentage of average earning asset since March 2005. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Net loans outstanding represent 62.7% 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 March 31, 2006 to March 31, 2005, the provision for loan losses was decreased $43 to $167. The decrease in the provision for loan losses was a result of loans classified as nonperforming decreasing to 0.76% of loans as of March 31, 2006 as compared to 0.99% for March 31, 2005. Year to date 2006, the Corporation had net charge-offs of $119 in 2006 versus net recoveries of $3 in 2005. The Corporation's peer group, which includes 399 holding companies with assets between $500 million and $1.0 billion, had a nonperforming loans to total loans ratio of 0.46% as of December 31, 2005. As of March 31, 2006, the allowance for loan losses as a percentage of loans equaled 1.43%. In management's opinion, the allowance for loan losses is adequate as of March 31, 2006. 16
TABLE 3 IBT BANCORP, INC. SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in Thousands) <TABLE> <CAPTION> Three Months Ended March 31 ------------------ 2006 2005 ------ ------ <S> <C> <C> Allowance for loan losses - January 1 $6,899 $6,444 Loans charged off Commercial and agricultural 74 2 Real estate mortgage 22 7 Personal 107 103 ------ ------ TOTAL LOANS CHARGED OFF 203 112 Recoveries Commercial and agricultural 11 64 Real estate mortgage 6 -- Personal 67 51 ------ ------ TOTAL RECOVERIES 84 115 ------ ------ Net loans charged off (recovered) 119 (3) Provision charged to income 167 210 ------ ------ ALLOWANCE FOR LOAN LOSSES - MARCH 31 $6,947 $6,657 ====== ====== ALLOWANCE FOR LOAN LOSSES AS A % OF LOANS 1.43% 1.48% ====== ====== </TABLE> NONPERFORMING LOANS <TABLE> <CAPTION> March 31 ------------------- 2006 2005 -------- -------- <S> <C> <C> Total amount of loans outstanding for the period $484,897 $450,052 Nonaccrual loans 2,050 1,683 Accruing loans past due 90 days or more 935 2,101 Restructured loans 720 682 -------- -------- TOTAL $ 3,705 $ 4,466 ======== ======== LOANS CLASSIFIED AS NONPERFORMING AS A % OF OUTSTANDING LOANS 0.76% 0.99% ======== ======== </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. 17
NONINTEREST INCOME Noninterest income consists of trust fees, deposit service charges, fees for other financial services, gains on the sale of mortgage loans, title insurance revenue, and other. Significant account balances are highlighted in the following table: <TABLE> <CAPTION> Three Months Ended ------------------------------------- March 31 --------------- 2006 2005 $ Change % Change ------ ------ -------- -------- <S> <C> <C> <C> <C> Trust fees $ 214 $ 183 $ 31 16.9% Service charges on deposit accounts 77 34 43 126.5% Other service charges and fees NSF and overdraft fees 625 524 101 19.3% ATM and debit card fees 122 99 23 23.2% Freddie Mac servicing fee 156 154 2 1.3% All other 50 74 (24) -32.4% ------ ------ ---- ----- Total other service charges and fees 953 851 102 12.0% ------ ------ ---- ----- Gain on sale of mortgage loans 57 76 (19) -25.0% Title insurance revenue 474 503 (29) -5.8% Other Increase in cash value of corporate owned life insurance policies 100 91 9 9.9% Brokerage and advisory fees 54 44 10 22.7% All other 72 75 (3) -4.0% ------ ------ ---- ----- Total other 226 210 16 7.6% ------ ------ ---- ----- TOTAL NONINTEREST INCOME $2,001 $1,857 $144 7.8% ====== ====== ==== ===== </TABLE> Trust fees have steadily increased over the past few years. These increases have been driven by continued growth in the portfolio managed as well as the appreciation of trust assets. Management expects these increases to continue in the future. Since the first quarter of 2005, the Corporation has made substantial efforts to increase noninterest income. To help achieve this goal, management increased various fees related to deposit accounts, including service charges, NSF and overdraft fees, and ATM and debit card fees. These increases are apparent when the first quarter of 2006 is compared to the same period in 2005. The Corporation is continuing to monitor its deposit account fees to ensure that they are comparable to those of competitive financial intuitions, and fair to customers. The Corporation, through its Banks, has established a policy that all amortized fixed rate mortgage loans with maturities greater than 15 years will be sold. The gain on sale of these mortgage loans have steadily decreased, due to the increases in residential mortgage rates and the resulting decline in real estate loan sales. 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. During the first three months of 2006, the Corporation sold $7,637 of mortgages as compared to $9,300 in mortgages for the same period in 2005. Management does not expect the gain on sale of mortgages to fluctuate significantly from current levels based on current market trends and the current and projected interest rate environment. The increase in the cash value from corporate owned life insurance policies relates to policies that had a carrying value of $11,132 as of March 31, 2006, and were included in other assets. These policies earned an average rate of 3.59% and 3.56% during the three month periods ended March 31, 2006 and 2005, respectively. Due to their preferential tax treatment, these policies have a taxable equivalent rate of 5.44% and 5.40% as of March 31, 2006 and 2005, respectively. These policies are placed with five different insurance companies with an S & P rating of A- or better. The Corporation expects the increase in the cash values of these policies to continue to increase as new policies continue to be added and as the rates earned on these policies continue to increase. 18
NONINTEREST EXPENSES Noninterest expenses include compensation, occupancy, furniture and equipment, and other expenses. Significant account balances are outlined in the following table: <TABLE> <CAPTION> Three Months Ended ------------------------------------- March 31 --------------- 2006 2005 $ Change % Change ------ ------ -------- -------- <S> <C> <C> <C> <C> Compensation Leased employee salaries $2,463 $2,377 $ 86 3.6% Leased employee benefits 1,021 951 70 7.4% All other 45 10 35 350.0% ------ ------ ---- ----- Total compensation 3,529 3,338 191 5.7% ------ ------ ---- ----- Occupancy Depreciation 106 87 19 21.8% Utilities 94 80 14 17.5% All other 256 253 3 1.2% ------ ------ ---- ----- Total occupancy 456 420 36 8.6% ------ ------ ---- ----- Furniture and equipment Depreciation 374 335 39 11.6% Service contracts 176 143 33 23.1% All other 163 167 (4) -2.4% ------ ------ ---- ----- Total furniture and equipment 713 645 68 10.5% ------ ------ ---- ----- Other SOX compliance fees 337 232 105 45.3% Audit fees 74 65 9 13.8% Marketing 153 144 9 6.3% All other 1,046 1,013 33 3.3% ------ ------ ---- ----- Other 1,610 1,454 156 10.7% ------ ------ ---- ----- TOTAL NONINTEREST EXPENSES $6,308 $5,857 $451 7.7% ====== ====== ==== ===== </TABLE> Leased employee salaries expense has increased due to normal merit increases, and also due to the Corporation's growth in both size as well as complexity. The increase in leased employee benefits is attributed to increases in costs related to the Corporation's defined benefit pension plan as well as health care expenses. Management is looking for ways to decrease its expenses related to leased employee benefits. The Corporation continues to struggle with the costs associated with complying with the Sarbanes-Oxley Act of 2002 (SOX). The costs associated with compliance extend beyond the continued increases in SOX compliance fees and audit fees into other areas including compensation expense. Management is continually analyzing ways to minimize the adverse financial statement impact of SOX compliance through the streamlining of the Corporation's operations. The increases in depreciation and service contracts expense is a reflection of the Corporation reinvesting in its technological infrastructure. This constant reinvestment helps the Corporation maintain a competitive edge in an ever changing marketplace. 19
ANALYSIS OF CHANGES IN FINANCIAL CONDITION <TABLE> <CAPTION> March 31 December 31 % Change 2006 2005 $ Change (unannualized) -------- ----------- -------- -------------- <S> <C> <C> <C> <C> ASSETS Cash and demand deposits due from banks $ 30,619 $ 30,825 $ (206) -0.67% Securities 200,341 183,406 16,935 9.23% Mortgage loans available for sale 831 744 87 11.69% Loans 484,897 483,242 1,655 0.34% Allowance for loan losses (6,947) (6,899) (48) 0.70% Other assets 52,008 50,336 1,672 3.32% -------- -------- ------- ------ TOTAL ASSETS $761,749 $741,654 $20,095 2.71% ======== ======== ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Deposits $616,716 $592,478 $24,238 4.09% Other borrowed funds 44,242 52,165 (7,923) -15.19% Escrow funds payable 13,748 9,823 3,925 39.96% Accrued interest and other liabilities 5,225 6,286 (1,061) -16.88% -------- -------- ------- ------ TOTAL LIABILITIES 679,931 660,752 19,179 2.90% SHAREHOLDERS' EQUITY 81,818 80,902 916 1.13% -------- -------- ------- ------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $761,749 $741,654 $20,095 2.71% ======== ======== ======= ====== </TABLE> The first quarter is typically slow for loan growth, and the first three months of 2006 have been no exception. However, management does anticipate a substantial increase in loans over the next nine months. The majority of this growth is anticipated to come in the form of commercial loans. The Corporation's goal is to increase 2006 average assets 8.00% over 2005. Deposit growth during the first three months of 2006 was fairly strong. These increases enabled the Corporation to reduce borrowed funds and increase investment securities. This transfer is typically beneficial to the bottom line as deposits are traditionally less costly than other borrowed funds. The growth in deposits was primarily in certificates of deposit (CD's). This increase can be attributed to substantial increases in traditional CD's, internet based CD's, and brokered CD's. Management is constantly monitoring deposit account balances in an effort to maintain and increase our current customer base. Management does realize that as consumers regain confidence in stocks and mutual funds these deposits will become more difficult to retain. However, management is constantly performing market analyses to help ensure that the Corporation's products remain attractive to consumers. Management anticipates that the securities balance will not increase significantly over the remainder of 2006. The Corporation observed a substantial increase in escrow funds payable during the first three months of 2006. This increase can be attributed to additional funds placed in 1031 exchange accounts at IBT Title and Insurance Company (IBT Title). While the Corporation has seen substantial increases in the past 6 months, management does not anticipate this growth trend to continue. In fact, it is likely that these escrow funds payable will decrease throughout the year as the funds are reinvested by IBT Title's customers. The decrease in accrued interest and other liabilities can primarily be attributed to a decrease in Isabella Bank and Trust's IPS account. This account represents outstanding money orders and official checks written by Isabella Bank and Trust and the balance can fluctuate significantly from period to period. 20
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 March 31, 2006, cash and cash equivalents as a percentage of total assets equaled 4.02%, versus 4.16% as of December 31, 2005. During the first three months of 2006, $4,136 in net cash was provided from operations and $16,153 was provided from financing activities. Investing activities used $20,495. The accumulated effect of the Corporation's operating, investing and financing activities was a $206 decrease in cash and cash equivalents during the first three months of 2006. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale were $200,341 as of March 31, 2006 and $183,406 as of December 31, 2005. In addition to these primary sources of liquidity, the Corporation has the ability to borrow in the federal funds market and at both the Federal Reserve Bank and the Federal Home Loan Bank. The Corporation's liquidity is considered adequate by management. CAPITAL The capital of the Corporation consists solely of common stock, surplus, retained earnings, and accumulated other comprehensive loss; and increased $917 since December 31, 2005. Accumulated other comprehensive loss increased $253 due to unrealized losses in available-for-sale securities during 2006. There are no significant regulatory constraints placed on the Corporation's capital. The Federal Reserve Board's current recommended minimum tier 1 and tier 2 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 11.48% as of March 31, 2006. The Federal Reserve Board has established a minimum risk based capital standard. Under this standard, a framework has been established that assigns risk weights to each category of on- and off-balance sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a bank has adequate capital. The minimum standard is 8%, of which at least 4% must consist of equity capital net of goodwill. The following table sets forth the percentages required under the Risk Based Capital guidelines and the Corporation's ratios as of March 31, 2006: PERCENTAGE OF CAPITAL TO RISK ADJUSTED ASSETS <TABLE> <CAPTION> IBT Bancorp March 31, 2006 ----------------- Required Actual -------- ------ <S> <C> <C> Equity Capital 4.00% 15.90% Secondary Capital* 4.00% 1.25% ---- ----- Total Capital 8.00% 17.15% ==== ===== </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. 21
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 $92,985 at March 31, 2006, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have variable interest rates, fixed expiration dates, or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. At March 31, 2006, the Corporation had a total of $1,571 in outstanding standby letters of credit. Generally, these commitments to extend credit and letters of credit mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon the extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and other income producing commercial properties. Isabella Bank and Trust (IB&T), a subsidiary of the Corporation, sponsors the IBT Foundation (the "Foundation"), which is a nonprofit entity formed for the purpose of distributing charitable donations to recipient organizations generally located in the communities serviced by Isabella Bank and Trust. IB&T periodically makes charitable contributions in the form of cash transfers to the Foundation. The Foundation is administered by members of the Corporation's Board of Directors. The assets and transactions of the Foundation are not included in the consolidated financial statements of IBT Bancorp, Inc. The assets of the Foundation as of March 31, 2006 were $1,526. 22
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 involved in agricultural production. Cash flow and ability to service debt of such customers is largely dependent on growing conditions and the commodity prices for corn, soybeans, sugar beets, milk, beef and a variety of dry beans. The Corporation mitigates these risks by using conservative price and production yields when calculating a borrower's available cash flow to service their debt. Interest rate risk ("IRR") is the exposure to the Corporation's net interest income, its primary source of income, to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. Interest rate risk is the fundamental method in which financial institutions earn income and create shareholder value. Excessive exposure to interest rate risk could pose a significant risk to the Corporation's earnings and capital. The Federal Reserve, the Corporation's primary Federal regulator, has adopted a policy requiring the Board of Directors and senior management to effectively manage the various risks that can have a material impact on the safety and soundness of the Corporation. The risks include credit, interest rate, liquidity, operational, and reputational. The Corporation has policies, procedures and internal controls for measuring and managing these risks. Specifically, the IRR policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long term assets, limiting the mismatch in repricing opportunity of assets and liabilities, and the frequency of measuring and reporting to the Board of Directors. The Corporation uses several techniques to manage interest rate risk. The first method is gap analysis. Gap analysis measures the cash flows and/or the earliest repricing of the Corporation's interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the imbedded repricing options contained in assets and liabilities. A substantial portion of the Corporation's assets are invested in loans and investment securities. These assets have imbedded options that allow the borrower to repay the balance prior to maturity without penalty. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current interest rates, for residential mortgages the level of sales of used homes, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in the Corporation's cash flows from these assets. Investment securities, other than those that are callable, do not have any significant imbedded options. Saving and checking deposits may generally be withdrawn on request without prior notice. The timing of cash flow from these deposits 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 March 31, 2006. The Corporation has no interest rate swaps, futures contracts, or other derivative financial options, except for derivative loan commitments, which are not significant. The principal amounts of assets and time deposits maturing were calculated based on the contractual maturity dates. Savings and NOW accounts are based on management's estimate of their future cash flows. 24
Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> March 31, 2006 ------------------------------------------------------------------------ Fair Value 2007 2008 2009 2010 2011 Thereafter Total 03/31/06 -------- ------- ------- ------- ------- ---------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 1,101 $ -- $ -- $ -- $ -- $ -- $ 1,101 $ 1,101 Average interest rates 1.56% -- -- -- -- -- 1.56% Fixed interest rate securities $ 69,404 $44,886 $26,435 $13,272 $12,397 $33,947 $200,341 $200,341 Average interest rates 4.22% 3.43% 3.70% 3.94% 3.91% 3.48% 3.81% Fixed interest rate loans $101,262 $74,880 $74,874 $56,264 $64,312 $28,612 $400,204 $402,044 Average interest rates 6.21% 6.19% 6.20% 6.02% 6.62% 6.06% 6.23% Variable interest rate loans $ 43,600 $16,232 $16,703 $ 4,623 $ 2,880 $ 655 $ 84,693 $ 84,693 Average interest rates 8.86% 8.49% 6.44% 8.06% 8.26% 8.68% 8.25% Rate sensitive liabilities Borrowed funds $ 9,343 $ 5,000 $ 7,613 $ 1,000 $ 8,286 $13,000 $ 44,242 $ 44,321 Average interest rates 4.39% 3.72% 4.34% 4.19% 5.11% 4.84% 4.57% Savings and NOW accounts $101,735 $69,736 $67,233 $21,109 $ 5,658 $ -- $265,471 $265,471 Average interest rates 2.88% 0.98% 0.70% 0.64% 0.76% -- 1.61% Fixed interest rate time deposits $164,310 $48,271 $26,842 $20,192 $18,149 $ 361 $278,125 $277,250 Average interest rates 3.97% 4.12% 3.86% 4.04% 4.42% 4.69% 4.02% Variable interest rate time deposits $ 923 $ 433 $ 1 $ -- $ -- $ -- $ 1,357 $ 1,357 Average interest rates 3.73% 3.73% 3.73% -- -- -- 3.73% </TABLE> Quantitative Disclosures of Market Risk (dollars in thousands) <TABLE> <CAPTION> March 31, 2005 ------------------------------------------------------------------------ Fair Value 2006 2007 2008 2009 2010 Thereafter Total 03/31/05 -------- ------- ------- ------- ------- ---------- -------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $ 705 $ -- $ -- $ -- $ -- $ -- $ 705 $ 705 Average interest rates 2.80% -- -- -- -- -- 2.80% Fixed interest rate securities $ 34,463 $38,300 $33,079 $16,352 $10,191 $33,537 $165,922 $165,926 Average interest rates 3.71% 3.23% 3.27% 3.42% 3.81% 3.50% 3.45% Fixed interest rate loans $ 93,752 $76,824 $69,530 $49,723 $48,526 $22,329 $360,684 $379,713 Average interest rates 6.38% 5.97% 6.08% 5.87% 5.97% 5.18% 6.04% Variable interest rate loans $ 66,631 $ 4,934 $ 9,245 $ 5,529 $ 1,709 $ 1,320 $ 89,368 $ 89,368 Average interest rates 6.68% 7.72% 6.93% 6.76% 6.80% 9.16% 6.81% Rate sensitive liabilities Borrowed funds $ 8,693 $ 3,000 $ 4,165 $ 2,500 $ 6,000 $ 4,312 $ 28,670 $ 28,854 Average interest rates 3.86% 3.31% 3.65% 3.45% 4.51% 5.82% 4.17% Savings and NOW accounts $ 69,697 $52,666 $68,098 $35,347 $33,185 $ 3,953 $262,946 $262,946 Average interest rates 1.21% 0.60% 0.53% 0.35% 0.98% 0.55% 0.76% Fixed interest rate time deposits $126,525 $42,684 $33,980 $16,918 $13,565 $ 1,779 $235,451 $234,603 Average interest rates 3.18% 3.95% 3.89% 3.40% 3.67% 4.28% 3.47% Variable interest rate time deposits $ 796 $ 537 $ 5 $ -- $ -- $ -- $ 1,338 $ 1,338 Average interest rates 2.55% 2.55% 2.55% -- -- -- 2.55% </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 March 31, 2006, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that the Corporation's disclosure controls and procedures as of March 31, 2006, were effective to ensure that information required to be disclosed by the Corporation in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING During the most recent fiscal quarter, no change occurred in the Corporation's internal control over financial reporting that materially affected, or is likely to materially affect, the Corporation's internal control over financial reporting. 26
PART II - OTHER INFORMATION ITEM 1A - RISK FACTORS THERE HAVE BEEN NO MATERIAL CHANGES TO THE FACTORS DISCLOSED IN ITEM 1A. RISK FACTORS IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005. ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS (A) NONE (B) NONE (C) REPURCHASES OF COMMON STOCK In October 2002, the Corporation's Board of Directors authorized the repurchase of up to $2 million of the Corporation's common stock. This authorization does not have an expiration date. Based on repurchases since October 2002, the Corporation is currently able to repurchase up to $1.7 million of its common stock or 38,636 shares under the repurchase authorization. The following table provides information as of March 31, 2006, with respect to this plan: <TABLE> <CAPTION> Shares Repurchased ---------------------- Maximum Shares That Average Price May Be Purchased Under (Dollars in thousands) Number Per Share the Plans or Programs ------ ------------- ---------------------- <S> <C> <C> <C> Balance, December 31, 2005 38,636 January 1 - 31, 2006 -- $-- -- February 1 - 28, 2006 -- -- -- March 1 - 31, 2006 -- -- -- --- --- ------ Balance March 31, 2006 -- $-- 38,636 === === ====== </TABLE> 27
ITEM 6 - EXHIBITS (a) Exhibits The following exhibits are filed as part of this report: <TABLE> <S> <C> 3(a) Amended Articles of Incorporation (1) 3(b) Amendment to the Articles of Incorporation (2) 3(c) Amendment to the Articles of Incorporation (4) 3(d) Amendment to the Articles of Incorporation (4) 3(e) Amended Bylaws (7) 10(a)* Isabella Bank & Trust Executive Supplemental Income Agreement (2) 10(b)* Isabella Bank & Trust Deferred Compensation Plan (3) 10(c)* IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan for Directors (5) 10(d)* Isabella Bank and Trust Death Benefit Only Agreement (6) 10(e)* Ammendment to the IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan for Directors (8) 10(f)* The IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan for Non-Employee Directors (9) 10(g)* First amendment to the IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan for Non-Employee Directors (10) 31(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer 31(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer 32 Section 1350 Certification of Principal Executive Officer and Principal Financial Officer </TABLE> 1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 12, 1991, and incorporated herein by reference. 2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 26, 1994, and incorporated herein by reference. 3) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 26, 1996, and incorporated herein by reference. 4) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 22, 2000, and incorporated herein by reference. 5) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 27, 2001, and incorporated herein by reference. 6) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 25, 2002, and incorporated herein by reference. 7) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 16, 2005, and incorporated herein by reference. 8) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated March 10, 2006, and incorporated herein by reference. 9) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated December 19, 2005, and incorporated herein by reference. 10) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 8-K dated March 28, 2006, and incorporated herein by reference. * Management contract or compensatory plan or arrangement. 28
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: April 27, 2006 /s/ Dennis P. Angner ---------------------------------------- Dennis P. Angner Chief Executive Officer /s/ Peggy L. Wheeler ---------------------------------------- Peggy L. Wheeler Principal Financial Officer 29
Exhibit Index <TABLE> <CAPTION> Exhibit No. Description - ----------- ----------- <S> <C> 31(a) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Executive Officer 31(b) Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by the Principal Financial Officer 32 Section 1350 Certification of Principal Executive Officer and Principal Financial Officer </TABLE>