IRW Ibt Bancorp,

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

For the quarterly period ended March 31, 2008

 

OR

 

 

For the transition period from __________ to __________.

 

Commission File No. 1-31655

 

 

 

 

 

 

 

 

 

 

 

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    o No

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      o Yes x No

 

Number of shares of Common Stock outstanding as of May 7, 2008:        5,852,924

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IBT BANCORP, INC.

Quarterly Report on Form 10-Q

For Quarter Ended March 31, 2008

 

Contents

 

 

 

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CONSOLIDATED BALANCE SHEETS

IBT BANCORP, INC.   AND SUBSIDIARY

 

 

 

 

 

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CONSOLIDATED STATEMENTS OF INCOME

IBT BANCORP, INC.   AND SUBSIDIARY

 

 

The accompanying notes are an integral part of these consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

IBT BANCORP, INC.   AND SUBSIDIARY

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

IBT BANCORP, INC.   AND SUBSIDIARY

 

Three Months Ended March 31, 2008

 

NOTE A – BASIS OF PRESENTATION

 

The accompanying unaudited 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 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 of normal recurring accruals considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or any future interim period. The interim financial statements should be read in conjunction with the financial statements and footnotes thereto included in the IBT Bancorp, Inc. and subsidiary Annual Report on Form 10-K for the year ended December 31, 2007.

 

NOTE B – EARNINGS PER SHARE

 

Basic earnings per share are calculated on the basis of the weighted average number of shares outstanding. The weighted average shares outstanding was 5,852,924 for the three months ended March 31, 2008 and 5,882,183 for the three months ended March 31, 2007.

 

Diluted earnings per share are calculated on the basis of the weighted average number of shares outstanding. Weighted-average number of shares outstanding assuming dilution of exercisable stock options using the treasury stock method was 5,949,852 for the three months ended March 31, 2008 and 5,927,763 for the three months ended March 31, 2007.

 

NOTE C – COMPREHENSIVE INCOME

 

Total comprehensive income includes net income and unrealized holding gains and losses from available for sale securities and the pension obligation change for the defined benefit plan. The changes in other comprehensive income are reported net of income taxes, as follows:

 

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

IBT BANCORP, INC.   AND SUBSIDIARY

 

Three Months Ended March 31, 2008

 

NOTE D – INVESTMENT SECURITIES

 

Investment securities available for sale consist of the following:

 

 

 

NOTE E – RECENT ACCOUNTING PRONOUNCEMENTS

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective on January 1, 2008. The Company elected to not expand the use of fair value under SFAS No. 159.

 

In November 2007, the SEC issued Staff Accounting Bulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at Fair Value Through Earnings” which expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff’s views consistent with current authoritative accounting guidance, the SAB revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments.” Specifically, the SAB revises the SEC staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff’s view on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect SAB 109 to have a material impact on its consolidated financial statements.

 

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations”, and SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements”. SFAS No. 141R and SFAS No. 160 require most identifiable assets, liabilities, noncontrolling interest, and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. Statements, SFAS No. 141R and SFAS No. 160 are effective for periods beginning on or after December 15, 2008 and earlier adoption is prohibited. SFAS No. 141R will be applied to all business entities and SFAS No. 160 will be applied prospectively to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

IBT BANCORP, INC.   AND SUBSIDIARY

 

Three Months Ended March 31, 2008

 

all noncontrolling interests, including any that arose before the December 15, 2008 effective date. The Company does not expect SFAS No. 141R or SFAS No. 160 to have a material impact on its consolidated financial statements.

 

NOTE F – FAIR VALUE

 

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The new guidance is effective for financial years beginning after November 15, 2007, and for interim periods within those fiscal years.

 

SFAS 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under SFAS 157 are as follows:

 

Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities

 

Level 2 – Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

 

Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

 

The Company’s available for sale securities are reported at fair value utilizing Level 2 inputs. Fair value measurements are obtained from FTN Financial’s Portfolio Accounting System.

 

U.S. Government agencies and mortgage backed securities are valued by FTN using Interactive Data Corporation (IDC) as the primary source for security valuation. IDC is recognized industry-wide as one of the most reliable valuations services. IDC’s methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

 

The obligations of state and political subdivisions portfolio is valued using FTN’s proprietary valuation matrices. FTN has recently enhanced their market evaluation model to include a separate curve structure for the bank-qualified versus general market municipals. They further break down the grouping of securities according to insurer, credit support, state of issuance, and rating to incorporate additional spreads and municipal curves.

 

Equity securities that have an active, quotable market are classified in Level 1, equity securities that are quotable, but thinly traded are classified in Level 2, and securities that are not readily traded and do not have a quotable market are classified as Level 3.

 

Assets measured at fair value on a recurring basis are summarized below:

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

IBT BANCORP, INC.   AND SUBSIDIARY

 

Three Months Ended March 31, 2008

 

 

 

 

NOTE G – GUARANTEES

 

In the normal course of business, there are various outstanding commitments and certain contingent liabilities which are not reflected in the accompanying financial statements. These commitments and contingent liabilities represent financial instruments with off-balance-sheet risk. The contract or notional amounts of those instruments were comprised of commitments to extend credit approximating $121,270,000.

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believes”, “anticipates”, “contemplates”, “expects”, and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which include changes in interest rates, risks associated with the effect of opening new branches, the ability to control costs and expenses, and general economic conditions. IBT Bancorp, Inc. undertakes no obligation to update those forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

GENERAL

 

IBT Bancorp, Inc. is a bank holding company headquartered in Irwin, Pennsylvania, which provides a full range of commercial and retail banking services through its wholly owned banking subsidiary, Irwin Bank (collectively, the “Company”). The Company’s stock is traded on the American Stock Exchange under the symbol IRW.

 

PROPOSED MERGER

 

On December 16, 2007, S&T Bancorp, Inc. (“S&T”) and IBT Bancorp, Inc. (“the Registrant”) entered into an Agreement and Plan of Merger (“Merger Agreement”) under which the Registrant will be merged with and into S&T. Under the terms of the Merger Agreement, each share of the Registrant’s common stock will be converted into the right to receive, at the election of the holder: (i) $31.00 in cash; (ii) between 0.93 and 0.97 shares of S&T common stock with the precise exchange ratio to be determined based upon the average of the high and low sale prices for S&T common stock for a 20 trading day period prior to the date of the registrant shareholder meeting at which the Merger Agreement will be considered; or (iii) a combination of cash and shares of S&T common stock. Elections will be subject to limitations set forth in the Merger Agreement that require that 45% of the outstanding shares of the registrant common stock will be exchanged for cash with the remaining 55% of the outstanding shares to be exchanged for shares of S&T common stock. The Registrant has the right to terminate the Merger Agreement if (1) the average closing price of S&T’s common stock for the 20 consecutive trading days ending the day before the date on which the last regulatory approval is received is less than 85% of the closing price of S&T common stock on December 14, 2007, the last trading day preceding announcement of the Merger Agreement and (2) from December 16, 2007 through such date, S&T’s common stock has underperformed the Nasdaq Bank Index by more than 15%, unless S&T elects to increase the merger consideration per share pursuant to a formula specified in the Merger Agreement. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the stockholders of the Registrant at a special meeting to be held on May 13, 2008. The Merger is currently expected to be completed in the second quarter of 2008.

 

FINANCIAL CONDITION

 

At March 31, 2008 total assets increased $40.0 million to $827.2 million from $787.2 million at December 31, 2007. The asset growth was primarily due to increases in federal funds sold and securities available for sale of $30.0 million and $12.5 million, respectively. Asset growth was funded by an increase of $33.5 million in total deposits.

 

Cash and cash equivalents increased $28.5 million to $53.7 million at March 31, 2008 from $25.2 million at December 31, 2007, primarily as a result of the Company’s investment of $30.0 million in federal funds. The Company determined to direct funds into the federal funds market in view of reduced loan demand.

 

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At March 31, 2008, securities available for sale increased $12.5 million to $264.0 million from $251.5 million at December 31, 2007. This change was primarily due to increases in mortgage-backed securities of $19.5 million offset by a net decrease of $7.6 million in U.S. Government Agencies. The Company evaluates the available-for-sale investment portfolio on an on-going basis to maximize yield, within board-approved risk thresholds, making purchasing and selling decisions accordingly.

 

Investments are reviewed for declines in value on a quarterly basis. At March 31, 2008 and 2007, no investments were recognized as having an other-than-temporary impairment.

 

Net loans at March 31, 2008 were $476.8 million, a $500,000 decrease from the reported total of $477.3 million at December 31, 2007. Loan growth was primarily stagnated by large borrower payoffs of approximately $8.0 million in commercial mortgage loans. The payoffs were mostly offset by commercial mortgage originations.

 

At March 31, 2008, total liabilities increased $36.3 million to $757.5 million from $721.2 million at December 31, 2007. The changes in total liabilities were primarily due to increases in total deposits and repurchase agreements of $33.5 million and $3.2 million, respectively.

 

Non-interest bearing deposit accounts increased $14.9 million to $99.0 million at March 31, 2008, from $84.1 million at December 31, 2007. This change is attributed to new and existing depositors maintaining higher balances.

 

Interest-bearing deposits increased $18.6 million to $545.3 million at March 31, 2008, from $526.6 million at December 31, 2007. The change was primarily due to increases in certificates of deposits, savings, interest bearing checking, and money market accounts of $11.6 million, $4.4 million, $1.8 million, and $900,000, respectively. The competitive market rates paid on these accounts have contributed to higher balances being maintained.

 

Repurchase agreements increased $3.2 million to $48.1 million at March 31, 2008, from $44.9 million at December 31, 2007 as a result of existing customers maintaining higher balances. The Company offers its corporate customers sweep accounts where unused deposit balances are swept into an overnight repurchase agreement yielding market rates.

 

At March 31, 2008, total stockholders’ equity increased $3.7 million to $69.7 million from $66.0 million at December 31, 2007. The change was primarily due to net income of $2.0 million and an increase in accumulated other comprehensive income (net of deferred income taxes) of $3.1 million offset by dividends paid of $1.5 million. Accumulated other comprehensive income increased as a result of changes in the net unrealized gains/losses on securities available for sale. Because of the effect of interest rate volatility on unrealized gains/losses on securities available for sale, the Company’s accumulated other comprehensive income could materially fluctuate for each interim period and year-end. See Note D to the consolidated financial statements.

 

RESULTS OF OPERATIONS

 

Net income. Net income for the three months ended March 31, 2008 increased $179,000 to $2,047,000, or $.34 diluted earnings per share from $1,868,000, or $.32 diluted earnings per share, for the comparable three-month period in 2007. The increase for the three months ended March 31, 2008 was primarily the result of an increase in net interest income and other income and a decrease in the provision for loan losses, which was partially offset by an increase in other expenses and the provision for income taxes.

 

Net interest income . Net interest income increased $513,000 to $5,896,000 for the three months ended March 31, 2008 compared to $5,383,000 for the three months ended March 31, 2007. Interest income increased 7.1% over the comparable 2007 quarter but was partially offset by an increase in interest expense of 4.6%. This was due to rates paid for deposits decreasing at a faster rate than rates charged for loans. As a result, the Company’s net interest

 

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spread increased slightly to 2.58% from 2.52% in the prior year period and its net interest margin widened to 3.11% from 3.08%.

 

Interest income. Interest income for the three months ended March 31, 2008 increased $755,000 to $11,371,000 from $10,616,000 for the comparable three-month period in 2007. The increase in interest income is primarily attributable to an increase in volume, which offset a decline in average yield. The average balance of interest earning assets increased $60.5 million for the three months ended March 31, 2008, to $759.4 million from $698.9 million for the comparable period in 2007. The annualized yield on interest-earning assets decreased 9 basis points to 5.99%, for the three months ended March 31, 2008 from 6.08% for the comparable period in 2007. See “Average Balance Sheet and Rate/Volume Analysis”.

 

Interest expense. Interest expense for the three months ended March 31, 2008 increased $242,000 to $5,476,000 from $5,233,000 for the comparable period in 2007. The change in interest expense was primarily attributed to the average balance of interest-bearing liabilities increasing $54.4 million to $642.2 million for the three months ended March 31, 2008 from $587.8 million for the comparable period in 2007. Partially offsetting this increase was a decrease of 15 basis points in the annualized average cost of funds to 3.41% for the three months ended March 31, 2008 from 3.56% for the comparable period in 2007. See “Average Balance Sheet and Rate/Volume Analysis ”.

 

 

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Average Balance Sheet.

 

The following table sets forth certain information relating to the Company for the periods indicated. The average yields and costs are derived by dividing income or expense on an annualized basis by the average balance of assets or liabilities, respectively, for the periods presented. Average balances are derived from average daily balances.

 

 

 

 

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Rate / Volume Analysis

 

The following table shows the effect of changes in volumes and rates on interest income and interest expense. The changes in interest income and interest expense attributable to changes in both volume and rate have been allocated to the changes due to rate. Tax exempt income was not recalculated on a tax equivalent basis due to the immateriality of the change to the table resulting from a recalculation.

 

 

Provision for loan losses. For the three months ended March 31, 2008, $150,000 was taken as a provision for loan losses compared to $250,000 for the comparable period in 2007. At March 31, 2008 and for the comparable period in 2007 the allowance for loan losses equaled 1.06% of gross loans outstanding. Net charge-offs as a percentage of average loans for the respective periods were .087% and .005%.

 

The non accrual loans at March 31, 2008 were $6.6 million or 1.36% of total loans outstanding compared to non accrual loans at December 31, 2007 which were $5.3 million or 1.09% of total loans outstanding.  The increase is primarily due to a large commercial loan becoming more than 90 days past due.  The loan is adequately collateralized and the Company does not anticipate any loss associated with this loan.

 

 

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The provision for loan losses is charged to operations to bring the total allowance for loan losses to a level that represents management’s best estimate of the losses inherent in the portfolio, based on a monthly review by management of the following factors:

 

 

Large groups of homogeneous loans, such as residential real estate, small commercial real estate loans and home equity and consumer loans are evaluated in the aggregate using historical loss factors and other data. The amount of loss reserve is calculated using historical loss rates, net of recoveries on a five year rolling weighted average, adjusted for environmental, and other qualitative factors such as industry, geographical, economic and political factors that can effect loss rates or loss measurements. Watch and classified loans are allocated additional reserves.

 

Large balance and/or more complex loans such as multi-family and commercial real estate loans may be evaluated on an individual basis and are also evaluated in the aggregate to determine adequate reserves. As specific loans are determined to be impaired, specific reserves are assigned based upon collateral value, market value, if determinable, or the present value of the estimated future cash flows of the loan.

 

The allowance is increased by a provision for loan losses which is charged to expense, and reduced by charge-offs, net of recoveries. Loans are placed on non-accrual status when they are 90 days past due.

 

The allowance for loan losses is maintained at a level that represents management’s best estimate of losses in the portfolio at the balance sheet date. However, there can be no assurance that the allowance for losses will be adequate to cover losses which may be realized in the future and that additional provisions for losses will not be required.

 

Other income. Total other income for the three months ended March 31, 2008 increased $126,000 to $1,753,000 from $1,627,000 for the comparable three-month period in 2007. The increase in other income for the quarter ended March 31, 2008 was primarily due to increases in trust, debit card, and account service fees of $19,000, $24,000, and $24,000, respectively. Growth in the Trust Department’s assets under management contributed to the increase in fees collected from the comparable period in 2007. Income from debit card and account service fees rose due to a larger deposit base and increased transactions from the comparable period in 2007.

 

Other expenses. Total other expenses for the three-month period ended March 31, 2008 increased $184,000 to $4,554,000 from $4,370,000 for the comparable three-month period in 2007. An increase in other expenses of $321,000 was partially offset by decreases in pension and other employee benefits and advertising expenses of $97,000 and $65,000, respectively. The increase in other expenses is primarily due to merger related costs which totaled approximately $380,000 while a decrease in pension and employee benefit costs is primarily due to lower health care costs.

 

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Provision for income taxes. Income taxes, for the three months ended March 31, 2008, increased $376,000 to $897,000 from $521,000 for the comparable period in 2007. The effective tax rate increased to 30.5% for the three month period ended March 31, 2008, compared to 21.8% for the comparable period in 2007. The increase in the effective tax rate is due to non-deductible fees related to the Company’s proposed merger with S&T Bancorp.

 

 

There were no significant changes for the three months ended March 31, 2008 from the information presented in Item 7A. Quantitative and Qualitative Disclosures About Market Risk of the Annual Report on Form 10-K for the year ended December 31, 2007.

 

 

The Company’s management evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, the effectiveness of the Company’s disclosure controls and procedures, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

There were no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. OTHER INFORMATION

 

 

The Registrant is not a party to any material legal proceedings at the present time. From time to time, the Bank is a party to routine legal proceedings within the normal course of business wherein it enforces its security interest in loans made by it, and other matters of a like kind.

 

 

There have been no material changes from the risk factors as previously disclosed in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007.

 

 

 

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Not applicable.

 

 

Not applicable.

 

 

Not applicable

 

 

The following exhibits are either filed with or incorporated by reference in this Quarterly Report on Form 10-Q:

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

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