IBT Bancorp, Inc.
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BY FACSIMILE AND EDGAR
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June 30, 2005
Mr. Don Walker
Senior Assistant Chief Accountant
Securities and Exchange Commission
450 Fifth Street, N.W.
Mail Stop 0408
Washington D.C. 20549
Dear Mr. Walker,
I am writing on behalf of IBT Bancorp, Inc. (the "Registrant") in response
to the staff's second letter of comment dated June 16, 2005. Our responses are
numbered so as to correspond with the numbering in the comment letter.
Form 10-K
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Nonperforming and Problem Assets - page 8
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1. No specific reserves were recorded for loans included in the 90 days or
more past due category. Our methodology for calculating the adequacy of the
reserve includes a percentage allocation of certain classifications of
homogeneous pools of loans. Of the loans classified as 90 days or more past
due our calculations indicated that an amount of $169,605 should be
included in the determination of the adequacy of the loss reserve for that
classification of loans.
2. The two mortgages charged off in 2004 were not included in mortgage loans
accounted for on a non-accrual basis as of December 31, 2003. The loan
secured by the multi-family residential and part retail building was
included in loans classified as 90 days or more delinquent at December 31,
2003. This loan was charged off in December 2004. The facts and
circumstances related to that charge-off are as follows: The borrower is a
real estate investor who, we believe, became over extended. Because of his
poor business acumen and absentee landlord status the borrower allowed the
property to become run-down. As a result tenants began leaving, resulting
in a decline in cash flow, which lead to an inability to make timely
mortgage payments. Beginning in December 2002 the loan began to be 15 days
delinquent. As the year progressed the loan became delinquent 30 to 45 days
on a continuous basis. Serious delinquency began in late 2003. The last
payment received was in January 7, 2004, but was returned NSF. Collection
efforts in January 2004 produced no results. On January 21, 2004 we
enforced the assignment of rents. We received notice from the municipality
claiming extreme conditions existed at the building that required the
tenants to be evicted. The borrower notified us in February 2004 that he
was relinquishing management of the property. We began foreclosure
proceedings. A
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309 Main Street - Irwin, PA 15642 o (724) 863-3100
fire in the building in March 2004 resulted in the fire department evicting
the tenants. In April 2004 we secured the property to prevent unauthorized
occupation of the building. In July 2004 it was found that the furnace was
inoperable with an estimated cost of $100,000 to repair or replace. In
October 2004 we were the successful bidder at the Sheriff's sale and paid
$725 in costs to acquire the property. In December 2004, several water
pipes froze and subsequently burst within concrete walls. The broken boiler
in the furnace also caused significant water damage. The original principal
balance of the loan was $488,000. The loan was originated on July 31, 2002
at a fixed rate of 7%. Because of the condition of the property an
appraisal indicated a market value of $100,000, $90,000 was recorded as
Real Estate Owned and $409,651, which included the remaining principal and
other costs associated with this loan, was charged off in December 2004.
The property was sold at a price of $118,413 net of selling expenses in
January 2005.
The loan secured by the motel was charged off in June 2004 in the amount of
$777,916. This was a commercial real estate loan secured by a motel located
in New Stanton Pennsylvania. The original amount of the loan was $1,900,000
at 7.75 % recorded on November 22, 2002. Falling operating revenues caused
a reduction in cash flow, which caused postponing required maintenance,
loss of franchise and delaying debt service. We also believe the borrower
diverted profits from this property to fund other operations. Loan payments
were habitually 30 days late beginning in early 2004. The last payment was
received on February 6, 2004 for the due date of December 1, 2003. Between
December 2003 and March 2004 routine collection efforts were applied. On
March 25, 2004 payment in full was demanded. In April 2004 an agreement was
made with the borrower to workout the loan. The borrower did not honor the
agreement. In May we initiated foreclosure proceedings. In June 2004, the
borrower surrendered the property to the bank via a deed in lieu of
foreclosure. An appraisal indicated that the value of the property, based
on a Net Operating Income approach, was significantly less than the
original appraisal. Naturally, the Net Operating Income approach reduced
the appraised value because of the negative impact of the declining
operating revenues of the motel. The deteriorated physical condition also
reduced the appraised value. It is our policy to record, as real estate
owned 90% of the appraised value of the foreclosed property, the balance of
the loan was charged off. The property was appraised at $1,300,000,
$1,170,000 was recorded as real Estate Owned and $777,916 was charged off.
In July 2004 we secured the services of a hotel management firm to operate
the property for the bank, until the motel could be sold. The property is
currently under an agreement to sell at $1,348,500, net of selling
expenses.
Allocation of the Allowance for Loan Losses, page 11
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3. As of December 2003 there were $7.1 million in commercial loans classified
as substandard. At December 2004, commercial loans classified as
substandard
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were only $865,000. The decline in commercial loans classified as
substandard reduced the allocation of the loan loss reserve assigned to
commercial loans.
Delinquent mortgages increased from $704,000 to $3.6 million from 2003 to
2004. The classifications (watch, substandard, or doubtful) of these
delinquent loans would have increased the allocation of the calculated
reserve for these loans.
Exhibit 13
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2004 Annual Report
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Results of Operations
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Provision for Loan Losses, page 5
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4. Prior to charging off the loan secured by the motel there was no specific
amount included in the allowance for loan losses attributable to this loan.
For the loan secured by the multi-family apartment/retail building $287,286
was included in the calculation regarding the adequacy of the loan loss
reserve as of November 30, 2004. There were no allocations made to the loan
loss reserve in 2003 regarding either of these loans.
5. As of December 31, 2004 $352,205 of the reserve for loan losses was applied
to specific loans, the balance, $2,241,437 was formula driven. For December
31, 2003 100% of the amount in the reserve was formula driven.
We are pleased to be able to provide the information you requested. If you
require anything further regarding this matter, please do not hesitate to call.
Sincerely,
/s/ Charles G. Urtin
Charles G. Urtin
President and CEO
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