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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement.
[ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY
RULE 14a-6(e)(2)).
[X] Definitive Proxy Statement.
[ ] Definitive Additional Materials.
[ ] Soliciting Material Pursuant to Section 240.14a-12
IBT BANCORP, INC
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
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Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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4) Date Filed:
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SEC 1913 (02-02)
IBT BANCORP, INC.
200 East Broadway
Mount Pleasant, Michigan 48858
NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 29, 2003
Notice is hereby given that the Annual Meeting of Shareholders of IBT Bancorp,
Inc. will be held on Tuesday, April 29, 2003 At 7:00 p.m. Eastern Standard Time,
at the Holiday Inn, 5665 E. Pickard Street, Mount Pleasant, Michigan. The
meeting is for the purpose of considering and acting upon the following:
1. The election of four directors.
2. Such other business as may properly come before the meeting,
or any adjournment or adjournments thereof.
The Board of Directors has fixed March 17, 2003 as the record date for
determination of shareholders entitled to notice of, and to vote at, the meeting
or any adjournments thereof.
Your vote is important. Even if you plan to attend the meeting, please date and
sign the enclosed proxy form, indicate your choice with respect to the matters
to be voted upon, and return it promptly in the enclosed envelope. Note that if
stock is held in more than one name, all parties should sign the proxy form.
By order of the Board of Directors
/s/ Mary Ann Breuer
Mary Ann Breuer, Secretary
Dated: March 31, 2003
IBT BANCORP, INC.
200 EAST BROADWAY
MOUNT PLEASANT, MICHIGAN 48858
PROXY STATEMENT
GENERAL INFORMATION
This Proxy Statement is furnished in connection with the solicitation of proxies
by the Board of Directors of IBT Bancorp, Inc. (the Corporation) a Michigan
financial holding company, to be voted at the Annual Meeting of Shareholders of
the Corporation to be held on Tuesday, April 29, 2003 at 7:00 p.m. at the
Holiday Inn, 5665 E. Pickard Street, Mount Pleasant, Michigan, or at any
adjournment or adjournments thereof, for the purposes set forth in the
accompanying Notice of Annual Meeting of Shareholders and in this Proxy
Statement.
This Proxy Statement has been mailed on March 31, 2003 to all holders of record
of common stock as of the record date.
VOTING AT THE MEETING
The Board of Directors of the Corporation has fixed the close of business on
March 17,2003 as the record date for the determination of shareholders entitled
to notice of, and to vote at, the Annual Meeting of Shareholders and any
adjournment thereof. The Corporation has only one class of common stock and no
preferred stock. As of March 17, 2003, there were 4,337,807 shares of common
stock of the Corporation outstanding. Each outstanding share entitles the holder
thereof to one vote on each separate matter presented for vote at the meeting.
If the enclosed proxy is executed and returned, it may be revoked at any time
before it is exercised at the meeting. All shareholders are encouraged to date
and sign the enclosed proxy form, indicate their choice with respect to the
matters to be voted upon, and return it to the Corporation.
ELECTION OF DIRECTORS
The Board of Directors is divided into three classes, with the directors in each
class being elected for a term of three years. At the Annual Meeting of
Shareholders, four directors will be elected for terms ending with the annual
meeting of shareholders in 2006.
Except as otherwise specified in the proxy, proxies will be voted for election
of the four nominees named below. If a nominee becomes unable or unwilling to
serve, proxies will be voted for such other person, if any, as shall be
designated by the Board of Directors. However, the Corporation's management now
knows of no reason to anticipate that this will occur. Directors are elected by
a plurality of the votes cast, whether in person or by proxy, by holders of the
Corporation's common stock at the Annual Meeting of Shareholders, provided a
quorum (a majority of the shares entitled to be voted at the Annual Meeting of
Shareholders) is present or represented. Thus, the four nominees for election as
directors who receive the greatest number of votes cast will be elected
directors. Consequently, shares not voted, whether by withholding of authority
or otherwise, have no effect on the election of directors. If a proxy is
returned for such shares or they are represented in person at the Annual Meeting
of Shareholders, they will be counted toward the establishment of a quorum.
Nominees for reelection and other current directors are listed below. Also shown
for each nominee and each other current director is his principal occupation for
the last five or more years, age and length of service as a director of the
Corporation.
2 IBT BANCORP, INC. PROXY STATEMENT
DIRECTOR NOMINEES FOR
TERMS ENDING IN 2003
Frederick L. Bradford (age 68) has been a director of Isabella Bank and Trust
since 1974 and the Corporation since 1988. Dr. Bradford is a dentist.
William J. Strickler (age 62) was appointed director of the Corporation in 2002.
He has been a director of Isabella Bank and Trust since 1995. Mr. Strickler is
President of Michiwest Energy.
Dean E. Walldorff (age 69) has been a director of Isabella Bank and Trust since
1982 and the Corporation since 1988. He is also a director on the board of IBT
Loan Production. Mr. Walldorff was the owner of Water Care Systems and retired
in the fall of 2000.
Dennis P. Angner (age 47) has been a director of the Corporation since 2000. He
also serves as an ex-officio member of all of the Corporation's subsidiary
Boards of Directors. Mr. Angner has been President and CEO of the Corporation
since December 30, 2001. Prior to his appointment as President and CEO, he
served as Executive Vice President of the Corporation.
CURRENT DIRECTORS WHOSE
TERMS END IN 2004
James C. Fabiano (age 59) has been a director of Isabella Bank and Trust since
1979 and of the Corporation since 1988. Mr. Fabiano is President and CEO of
Fabiano Brothers, Inc.
David W. Hole (age 65) has been a director of Isabella Bank and Trust since
1982. He has served on the board of the Corporation since 1988. He currently is
a director of IBT Loan Production and Financial Group Information Services. He
retired as President and CEO of Isabella Bank and Trust and the Corporation on
December 30, 2001.
L. A. Johns (age 74) was a director of Isabella Bank and Trust from 1961 through
2001. He became a director of the Corporation in 1988. Mr. Johns is currently
Chairman of the Corporation and has served in that capacity since 1995. He is
past President and CEO of the Corporation and also of Isabella Bank and Trust.
Dale Weburg (age 59) has been a director of Farmers State Bank since 1987. He
has served on the board of the Corporation since 2000. Mr. Weburg is President
of Weburg Farms.
DIRECTOR NOMINEES FOR
TERMS ENDING IN 2005
Richard J. Barz (age 54) was appointed director of the Corporation in 2002. He
has been a director of Isabella Bank and Trust since 2000. Mr. Barz also serves
on the Board of Farmers State Bank, IBT Loan Production, IBT Title, and
Financial Group Information Services. Mr. Barz has been President and CEO of
Isabella Bank and Trust since December 30, 2001. Prior to his appointment as
President and CEO he served as Executive Vice President of Isabella Bank and
Trust.
Gerald D. Cassel (age 68) has been a director of Isabella Bank and Trust since
1980 and the Corporation since 1988. He also serves as a director of IBT Loan
Production. Mr. Cassel is presently the Chairman of Isabella Bank and Trust. Mr.
Cassel is a Certified Public Accountant.
Ronald E. Schumacher (age 65) has been a director of Isabella Bank and Trust
since 1984, and the Corporation since 1988. Mr. Schumacher is the President of
A. Schumacher Sons.
Herbert C. Wybenga (age 67) has been a director of Farmers State Bank since
1990. Mr. Wybenga has been a director of the Corporation since 2000. He is
currently Chairman of Farmers State Bank, and a Vice President of the
Corporation. He retired as President and CEO of Farmers State Bank on December
31, 2002.
IBT BANCORP, INC. PROXY STATEMENT 3
Each of the directors has been engaged in their stated occupations for more than
five years. The principal occupation of Dennis P. Angner is with the
Corporation, and has been employed by the Corporation since 1984. Other
executive officers of the Corporation include; Richard J. Barz, President of
Isabella Bank and Trust, has been employed by the Bank since 1972. Herbert C.
Wybenga is with Farmers State Bank of Breckenridge (retired), and has been
employed by the Bank since 1985. Mary Ann Breuer (age 63), Senior Vice President
and Cashier of Isabella Bank and Trust, has been employed by the Bank since
1959. All officers of the Corporation serve at the pleasure of the Board of
Directors.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE
The Board of Directors of the Corporation met 13 times during 2002. All
incumbent directors attended 75% or more of the meetings held in 2002. The Board
of Directors has an Audit Committee and a Nominating Committee.
The Audit Committee is composed of independent directors who meet the
requirements for independence as defined in Rule 4200(a)(15) of the National
Association of Securities Dealers' listing standards. Information regarding the
functions performed by the Committee, its membership, and the number of meetings
held during the year, is set forth in the "Report of the Audit Committee"
included elsewhere in this annual proxy statement. The Audit Committee is
governed by a written charter approved by the Board of Directors.
The Corporation has a standing Nominating Committee. The Committee consists of
directors Fabiano, Schumacher and Weburg. Shareholders who wish to recommend
nominees should submit their nominations in writing to the Secretary of the
Corporation. Recommendations for the 2004 Annual Meeting of Shareholders should
be delivered no later than December 2, 2003.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee oversees the Corporation's financial reporting process on
behalf of the Board of Directors. The Committee consists of directors
Schumacher, Cassel, Hole, Walldorff and Weburg.
The Audit Committee is responsible for pre-approving all auditing services and
permitted non-audit services to be performed during 2003 or thereafter for the
Corporation by its independent auditors or any other auditing or accounting
firm, except as noted below. The Audit Committee will establish general
guidelines for the permissible scope and nature of any permitted non-audit
services in connection with its annual review of the audit plan and will review
such guidelines with the Board of Directors. Pre-approval may be granted by
action of the full Audit Committee or, in the absence of such Audit Committee
action, by the Audit Committee Chairman whose action shall be considered to be
that of the entire Committee. Pre-approval shall not be required for the
provision of non-audit services if (1) the aggregate amount of all such
non-audit services constitute no more than 5% of the total amount of revenues
paid by the Corporation to the auditors during the fiscal year in which the
non-audit services are provided, (2) such services were not recognized by the
Corporation at the time of engagement to be non-audit services, and (3) such
services are promptly brought to the attention of the Audit Committee and
approved prior to the completion of the audit.
Management has the primary responsibility for the financial statements and the
reporting process including the systems of internal controls. In fulfilling its
oversight responsibilities, the Committee reviewed the audited consolidated
financial statements in the Annual Report with management including a discussion
of the quality, not just the acceptability, of the accounting principles, the
reasonableness of significant judgments, and the clarity of disclosures in the
consolidated financial statements.
The Committee reviewed with the independent auditors, who are responsible for
expressing an opinion on the conformity of those audited consolidated financial
statements with auditing principles generally accepted in the United States of
America, their judgments as to the quality, not just the acceptability, of the
Corporation's accounting principles and such other matters as are required to be
discussed with the Committee under SAS 61. In addition, the Committee has
discussed with the independent auditors the auditors' independence from
management and the Corporation including the matters in the written disclosures
required by professional auditing standards and considered the compatibility of
non-audit services with the auditors' independence.
4 IBT BANCORP, INC. PROXY STATEMENT
The Committee discussed with the Corporation's internal and independent auditors
the overall scope and plans for their respective audits. The Committee meets
with the internal and independent auditors, with and without management present,
to discuss the results of their examinations, their evaluations of the
Corporation's internal controls and the overall quality of the Corporation's
financial reporting process. The Committee held seven meetings during the fiscal
year 2002, and all directors attended 75% or more of the meetings held in 2002.
In reliance on the reviews and discussions referred to above, the Committee
recommended to the Board of Directors (and the Board has approved) that the
audited consolidated financial statements be included in the Annual Report on
Form 10-K for the year ended December 31, 2002 for filing with the Securities
and Exchange Commission. The Committee and the Board have also approved the
reappointment of the Corporation's independent auditors.
Respectfully Submitted,
Ronald E. Schumacher, Chairman Dean E. Walldorff
Gerald D. Cassel Dale Weburg
David W. Hole
EXECUTIVE OFFICERS
Executive Officers of the Corporation are compensated in accordance with their
employment with the applicable entity. The executive officers of the Corporation
whose annual compensation exceeded $100,000 for the periods indicated are as
follows:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY (1) COMPENSATION (2)
- --------------------------- ---- --------- ----------------
Dennis P. Angner, President 2002 $204,605 $12,607
and CEO of IBT Bancorp 2001 117,600 5,843
Bancorp 2000 106,425 4,094
Richard J. Barz, Senior Vice 2002 $200,980 $13,735
President of IBT Bancorp and 2001 121,000 5,916
President and CEO of Isabella 2000 110,475 4,071
Bank and Trust
Herbert C. Wybenga, Vice President 2002 $148,155 $2,832
of IBT Bancorp and Chairman 2001 113,600 2,297
and CEO of Farmers State Bank (3) 2000 104,808 7,066
(1) Includes compensation voluntarily deferred under the Corporation's 401(k)
and Non-qualified Deferred Salary Agreement and Board of Directors fees,
paid in cash or deferred under the Non-qualified Deferred Directors
Compensation Plan.
IBT BANCORP, INC. PROXY STATEMENT 5
(2) The amounts shown represent contributions by the Corporation under its
Employee Stock Ownership Plan (ESOP), in which substantially all employees
participate, expenses related to a nonqualified supplemental Executive
Retirement Plan (ERP), and Farmers State Bank Employees Profit Sharing Plan
(EPSP). The amounts contributed are as follows:
YEAR ESOP ERP EPSP
Dennis P. Angner 2002 $4,262 $8,345 --
2001 2,383 3,460 --
2000 1,485 2,609 --
Richard J. Barz 2002 $4,353 $9,382 --
2001 2,456 3,460 --
2000 1,572 2,499 --
Herbert C. Wybenga 2002 $2,832 -- --
2001 2,297 -- --
2000 -- -- $7,066
(3) Mr. Wybenga retired as President of Farmers State Bank of Breckenridge on
December 31, 2002.
The Corporation believes it generally maintains a conservative level of
perquisites and personal benefits. The dollar value of perquisites and personal
benefits provided to the named executive officer does not exceed 10% of his
annual compensation.
REPORT ON EXECUTIVE COMPENSATION
Dennis Angner serves as President and Chief Executive Officer of the
Corporation. With the exception of Dennis Angner, services performed by other
executive officers of the Corporation are incidental to their primary services
as officers and employees of a subsidiary Bank, and they receive no compensation
directly from the Corporation. The compensation for the President of each Bank
subsidiary is reviewed and approved by the Corporation's Board of Directors
based on recommendations from each Bank's Board of Directors.
The entire Board of Directors of the Corporation serves as a compensation
committee with Angner, Barz and Wybenga excused from the meetings where
decisions with respect to their own compensation are made. The Board of
Directors has the responsibility for establishing all formal employee benefit
plans offered to subsidiary employees.
The Board's approach to determining the annual salary of executive officers is
to offer competitive salaries in comparison with other comparable financial
institutions. The Board utilizes regional and national compensation surveys
which provide salary ranges for banks of similar size. Based on these surveys,
the Board establishes salary ranges for all job classifications. In setting
salaries, the Corporation and the Banks seek to assure relative fairness in the
compensation of officers and to recognize the value of their contribution to the
Corporation's overall success. Specific factors used to decide where an
executive officer salary should be within the established range include the
historical financial performance, financial performance outlook, years of
service, and job performance. The salary paid to Dennis P. Angner, President and
Chief Executive Officer of the Corporation, was in the 25th to 50th percentile
in 2002. The Board's primary consideration in where Angner's salary fit within
the defined range was based on a discretionary evaluation of his personal
performance and years of service as President and CEO, and the Corporation
exceeding its financial performance goals.
Respectfully submitted,
Dennis P. Angner L. A. Johns
Richard J. Barz Ronald E. Schumacher
Frederick L. Bradford William J. Strickler
Gerald D. Cassel Dean E. Walldorff
James C. Fabiano Dale Weburg
David W. Hole Herbert C. Wybenga
6 IBT BANCORP, INC. PROXY STATEMENT
THE DEFINED BENEFIT PENSION PLAN
The Corporation sponsors a defined benefit pension plan. This plan was
originally adopted in 1973 and was substantially revised in 1989. Only employees
who have attained the age of 21 and who have worked more than 1,000 hours in the
current plan year are eligible to participate.
Annual contributions are made to the plan as required by accepted actuarial
principles, applicable federal tax law, and expenses of operating and
maintaining the plan. The amount of contributions on behalf of any one
participant cannot be separately or individually computed.
Pension plan benefits are based on an average of a participant's five highest
years of compensation. A participant may earn a benefit for up to 35 years of
accredited service. Earned benefits are 100 percent vested after five years of
service. Benefit payments normally start when a participant reaches age 65. A
participant with more than five years of service may elect to take early
retirement benefits anytime after reaching age 55. Benefits payable under early
retirement are reduced actuarially for each month prior to age 65 in which
benefits begin.
The following table indicates estimated annual benefits payable upon normal
retirement for various compensation levels and years of service. Additional
benefits may be earned due to integration of social security benefits. The
amounts that may be earned are undeterminable until retirement.
FIVE YEAR
AVERAGE YEARS OF ACCREDITED SERVICE
OF HIGHEST
COMPENSATION 5 15 25 35
------------ ----- ------- ------- -------
$ 20,000 $ 900 $ 2,700 $ 4,500 $ 6,300
50,000 2,250 6,750 11,250 15,750
75,000 3,375 10,125 16,875 23,625
100,000 4,500 13,500 22,500 31,500
125,000 5,625 16,875 28,125 39,375
150,000 6,750 20,250 33,750 47,750
200,000 7,875 23,625 39,375 56,125
The amounts calculated under the plan's benefit formula assume a monthly payment
for life. A married participant will generally receive an actuarially reduced
monthly payment because the participant's surviving spouse will also receive
monthly payments for life after the participant's death. As of December 31,
2002, Richard J. Barz had 30 years, Dennis P. Angner had 19 years, and Herbert
C. Wybenga had two years of credited service under the plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The entire Board of Directors serves as a Compensation Committee. Director
Angner was President and CEO of the Corporation, Director Barz was President and
CEO of Isabella Bank and Trust, and Director Wybenga was Chairman, President and
CEO of Farmers State Bank during 2002. Neither Barz nor Wybenga participated in
any of the procedures which pertain to executive officers compensation and they
are excused from the meetings at such times. Director Angner participated in
deliberations concerning compensation of other executive officers, however, was
excused from the meeting at which his compensation was set.
IBT BANCORP, INC. PROXY STATEMENT 7
REMUNERATION OF DIRECTORS
The Corporation paid $600 per board meeting to its directors during 2002 and
$175 per committee meeting attended. Directors of Isabella Bank and Trust are
paid $700 per board meeting and $175 per committee meeting they attend. Farmers
State Bank paid a retainer of $2,000, $400 per board meeting, and $125 per
committee meeting they attended (provided the committee meeting was on a
non-board meeting day). Directors who are officers of a subsidiary are not paid
for attendance at committee meetings.
The Corporation sponsors a deferred compensation plan for directors (the
Directors' Plan). The Directors' Plan was adopted in 1984 and was substantially
revised in 1989 and 1996. Under the Directors' Plan, deferred directors' fees
are converted on a quarterly basis into stock units of the Corporation's common
stock. The fees are converted based on the purchase price for a share of the
Corporation's common stock under the Corporation's Dividend Reinvestment Plan.
Pursuant to the terms of the Directors' Plan, directors of the Corporation and
its subsidiaries are required to defer at least 25% of their earned board fees.
The amount deferred under the terms of the plan in 2002 was $351,000, resulting
in 12,473 stock units being credited to participants' accounts. As of December
31, 2002, there were 126,956 stock units credited to participants' accounts.
Stock units credited to a participant's account are eligible for cash and stock
dividends as payable. All amounts deferred are unsecured claims against the
Corporation's general assets. The net cost of this benefit to the Corporation
was $73,000 in 2002.
Distribution from the Directors' Plan occurs when the participant terminates
service with the Bank and/or attains age 65. Distributions may take the form of
shares of Corporation common stock equal to the number of stock units credited
to the participant's account, cash equal to the value of the stock units on the
date of distribution, or a combination of stock and cash. Any Corporation common
stock issued under the Directors' Plan will be considered restricted stock under
the Securities Act of 1933, as amended.
INDEBTEDNESS OF AND TRANSACTIONS WITH MANAGEMENT
Certain directors and officers of the Corporation and members of their families
were loan customers of the subsidiary Banks, or have been directors or officers
of corporations, or partners of partnerships which have had transactions with
the subsidiary Banks. In management's opinion, all such transactions are made in
the ordinary course of business and are essentially on the same terms, including
collateral and interest rates, as those prevailing at the same time for similar
transactions with other customers. These transactions do not involve more than a
normal credit risk. Total loans to these customers were $7,721,000 as of
December 31, 2002.
STOCK PERFORMANCE
The graph on the following page compares the cumulative total shareholder return
on Corporation common stock for the last five years with the cumulative total
return on (1) the NASDAQ Stock Market Index, which is comprised of all United
States common shares traded on the NASDAQ and (2) the NASDAQ Bank Stock Index,
which is comprised of bank and bank holding company common shares traded on the
NASDAQ over the same period. The graph assumes the value of an investment in the
Corporation and each index was $100 at January 1, 1998 and all dividends are
reinvested.
8 IBT BANCORP, INC. PROXY STATEMENT
STOCK PERFORMANCE
FIVE-YEAR TOTAL RETURN
[LINE GRAPH]
The dollar values for total shareholder return plotted in the graph above are
shown in the table below:
COMPARISON OF FIVE YEAR CUMULATIVE
AMONG IBT BANCORP, NASDAQ STOCK MARKET,
AND NASDAQ BANK STOCKS
NASDAQ
YEAR IBT BANCORP NASDAQ BANKS
---- ----------- ------ ------
01/01/98 100.0 100.0 100.0
12/31/98 133.1 139.5 89.8
12/31/99 158.5 259.6 84.5
12/31/00 177.6 154.6 103.5
12/31/01 198.9 132.0 116.4
12/31/02 236.2 90.8 114.5
IBT BANCORP, INC. PROXY STATEMENT 9
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 3, 2003 as to the
common stock of the Corporation owned of record or beneficially by any person
who is known to the Corporation to be the beneficial owner of more than 5% of
the common stock of the Corporation.
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP
-----------------------
SOLE VOTING SHARED VOTING PERCENTAGE OF
NAME AND INVESTMENT AND INVESTMENT COMMON STOCK
OWNER POWERS POWERS OUTSTANDING
- ----- -------------- -------------- -------------
James J. McGuirk 238,806 -- 5.51%
P.O. Box 222
Mt. Pleasant, MI
The following table sets forth certain information as of March 3, 2003 as to the
common stock of the Corporation owned beneficially by each director, by each
named executive officer, and by all directors and executive officers of the
Corporation as a group.
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP
-----------------------
SOLE VOTING SHARED VOTING PERCENTAGE OF
NAME AND INVESTMENT AND INVESTMENT COMMON STOCK
OWNER POWERS POWERS OUTSTANDING
- ----- -------------- -------------- -------------
Dennis P. Angner* 9,588 70 0.22%
Richard J. Barz* 8,487 -- 0.20%
Frederick L. Bradford 69,283 -- 1.60%
Gerald D. Cassel* 7,121 -- 0.16%
James C. Fabiano 177,253 -- 4.09%
David W. Hole 11,756 4,023 0.35%
L. A. Johns 19,746 241 0.46%
Ronald E. Schumacher -- 21,773 0.50%
William J. Strickler 55,083 -- 1.27%
Dean E. Walldorff -- 8,150 0.19%
Dale D. Weburg 44,378 -- 1.02%
Herbert C. Wybenga -- 5,321 0.12%
All Directors and Executive
Officers as a Group 402,695 39,578 10.20%
*Trustees of the ESOP who vote ESOP stock.
AS TO OTHER BUSINESS WHICH MAY COME BEFORE THE MEETING
Management of the Corporation does not intend to bring any other business before
the meeting for action. However, if any other business should be presented for
action, it is the intention of the persons named in the enclosed form of proxy
to vote in accordance with their judgment on such business.
RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
The Audit Committee and Board of Directors has reappointed Rehmann Robson, P.C.
as independent auditors of the Corporation for the year ending December 31,
2003.
A representative of Rehmann Robson, P.C., is expected to be present at the
Annual Meeting of Shareholders to respond to appropriate questions from
shareholders and to make any comments they believe appropriate.
10 IBT BANCORP, INC. PROXY STATEMENT
AUDIT FEES
The aggregate fees billed by Rehmann Robson, P.C. for professional services
rendered for the audit of the Corporation's consolidated financial statements
for 2002 and the review of the financial statements included in the
Corporation's quarterly Form 10-Q filings were $55,100.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
For the year 2002, Rehmann Robson P.C. did not render to the Corporation
professional services for financial information systems design and
implementation.
ALL OTHER FEES
The aggregate fees billed by Rehmann Robson, P.C. to the Corporation and its
subsidiaries in 2002 for other audit related services were $26,900 and for
nonaudit related services were $84,300.
The Audit Committee concluded the provisions of the nonaudit related services
listed under "All Other Fees" above were compatible with maintaining Rehmann
Robson, P.C.'s independence.
SHAREHOLDER PROPOSALS
Any proposals which shareholders of the Corporation intend to present at the
next annual meeting of the Corporation must be received before December 2, 2003
to be considered for inclusion in the Corporation's proxy statement and proxy
form for that meeting. Proposals should be made in accordance with Securities
and Exchange Commission Rule 14a-8.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's
directors and certain officers and persons who own more than ten percent of the
Corporation's common stock, to file with the SEC initial reports of ownership
and reports of changes in ownership of the Corporation's common stock. These
officers, directors, and greater than ten percent shareholders are required by
SEC regulation to furnish the Corporation with copies of these reports.
To the Corporation's knowledge, based solely on review of the copies of such
reports furnished to the Corporation, during the year ended December 31, 2002
all Section 16(a) filing requirements were satisfied, with respect to the
applicable officers, directors, and greater than 10 percent beneficial owners.
OTHER MATTERS
The cost of soliciting proxies will be borne by the Corporation. In addition to
solicitation by mail, officers and other employees of the Corporation may
solicit proxies by telephone or in person, without compensation other than their
regular compensation.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ MARY ANN BREUER
MARY ANN BREUER, SECRETARY
IBT BANCORP, INC. PROXY STATEMENT 11
IBT BANCORP, INC.
FINANCIAL INFORMATION INDEX
PAGE DESCRIPTION
13 Summary of Selected Financial Data
14 Report of Independent Auditors
15-19 Consolidated Financial Statements
20-35 Notes to Consolidated Financial Statements
36-50 IBT Financial Review
50 Common Stock and Dividend Information
51 Other Matters
12 IBT BANCORP, INC. PROXY STATEMENT
SUMMARY OF SELECTED
FINANCIAL DATA (1)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
2002 2001 2000 1999 1998
-------- -------- ------- -------- --------
INCOME STATEMENT DATA
Total interest income $ 38,161 $ 40,798 $ 38,754 $ 35,445 $ 33,651
Net interest income 22,905 21,538 20,352 19,224 17,601
Provision for loan losses 1,025 770 565 509 531
Net income 6,925 6,066 5,431 5,244 4,701
BALANCE SHEET DATA
End of year assets $652,717 $592,143 $540,897 $503,596 $485,983
Daily average assets 623,507 566,547 516,145 493,606 451,668
Daily average deposits 549,970 494,847 452,664 441,566 405,291
Daily average loans/net 390,613 399,239 380,392 332,083 300,794
Daily average equity 59,540 54,787 50,506 45,482 41,670
PER SHARE DATA (2)
Net income $ 1.61 $ 1.42 $ 1.28 $ 1.25 $ 1.14
Cash dividends 0.60 0.55 0.49 0.45 0.44
Book value (at year end) 14.63 13.30 12.19 11.13 10.75
FINANCIAL RATIOS
Shareholders' equity to assets 9.71% 9.60% 9.60% 9.35% 9.09%
Net income to average equity 11.63 11.07 10.75 11.53 11.28
Cash dividend payout to net income 37.33 38.36 38.30 36.80 37.94
Net income to average assets 1.11 1.07 1.05 1.06 1.04
2002 2001
------------------------------------------ ---------------------------------------------
Quarterly Operating Results: 4th 3rd 2nd 1st 4th 3rd 2nd 1st
------ ------ ------ ------ ------ ------- ------- -------
Total interest income $9,530 $9,731 $9,433 $9,467 $9,996 $10,256 $10,338 $10,208
Interest expense 3,581 3,754 3,850 4,071 4,385 4,876 4,985 5,041
Net interest income 5,949 5,977 5,583 5,396 5,638 5,380 5,353 5,167
Provision for loan losses 487 188 162 188 275 167 166 162
Noninterest income 2,750 2,213 1,572 1,568 1,990 1,558 1,464 1,186
Noninterest expenses 6,279 5,227 4,648 4,618 5,573 4,446 4,395 4,280
Net income 1,499 2,063 1,749 1,614 1,376 1,680 1,622 1,388
Per Share of Common Stock: (2)
Net income $ 0.35 $ 0.48 $ 0.41 $ 0.38 $ 0.32 $ 0.39 $ 0.37 $ 0.34
Cash dividends 0.30 0.10 0.10 0.10 0.28 0.09 0.09 0.09
Book value 14.63 14.86 14.02 13.51 13.30 13.39 12.92 12.57
(1) 2000 and prior years presented were restated for the merger in August 2000
with FSB Bancorp, which was accounted for as a pooling of interests.
(2) Retroactively restated for the 10% stock dividend paid on February 28, 2002.
IBT BANCORP, INC. FINANCIAL STATEMENTS 13
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
IBT Bancorp
Mt. Pleasant, Michigan
We have audited the accompanying consolidated balance sheets of IBT Bancorp,
Inc. and subsidiaries as of December 31, 2002 and 2001, and the related
consolidated statements of changes in shareholders' equity, income,
comprehensive income, and cash flows for the three years then ended. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IBT
Bancorp, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the three
years then ended in conformity with accounting principles generally accepted in
the United States of America.
/s/ Rehmann Robson P.C.
Saginaw, Michigan
January 31, 2003
14 IBT BANCORP, INC. FINANCIAL STATEMENTS
CONSOLIDATED
BALANCE SHEETS
(Dollars in thousands)
DECEMBER 31
2002 2001
-------- --------
ASSETS
Cash and cash equivalents $ 28,587 $ 22,562
Federal funds sold 25,850 32,900
-------- --------
CASH AND CASH EQUIVALENTS 54,437 55,462
Investment securities
Securities available for sale (amortized cost of
$153,499 in 2002 and $100,969 in 2001) 157,909 102,518
Securities held to maturity (fair value of
$1,803 in 2002 and $3,526 in 2001) 1,736 3,454
-------- --------
TOTAL INVESTMENT SECURITIES 159,645 105,972
Loans
Agricultural 53,223 48,523
Commercial 143,957 128,098
Residential real estate mortgage 152,778 167,976
Installment 54,522 53,267
-------- --------
TOTAL LOANS 404,480 397,864
Less allowance for loan losses 5,593 5,471
-------- --------
NET LOANS 398,887 392,393
Premises and equipment 14,470 13,985
Bank-owned life insurance 9,810 9,038
Accrued interest receivable, net 4,897 4,961
Acquisition intangibles and goodwill, net 3,498 2,528
Other assets 7,073 7,804
-------- --------
TOTAL ASSETS $652,717 $592,143
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest bearing $ 63,106 $ 62,020
NOW accounts 111,195 86,676
Certificates of deposit and other savings 316,845 308,120
Certificates of deposit over $100 70,310 59,425
-------- --------
TOTAL DEPOSITS 561,456 516,241
Other borrowed funds 17,793 11,632
Accrued interest and other liabilities 10,011 7,442
-------- --------
TOTAL LIABILITIES 589,260 535,315
Shareholders' equity
Common stock-- no par value;
10,000,000 shares authorized;
4,336,283 shares issued and outstanding
(3,884,985 shares at December 31, 2001) 45,610 31,017
Retained earnings 16,299 24,788
Accumulated other comprehensive income 1,548 1,023
-------- --------
TOTAL SHAREHOLDERS' EQUITY 63,457 56,828
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $652,717 $592,143
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
IBT BANCORP, INC. FINANCIAL STATEMENTS 15
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(Dollars in thousands)
YEAR ENDED DECEMBER 31
2002 2001 2000
---------- ---------- ----------
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING
Balance at beginning of year 3,884,985 3,871,552 3,848,248
10% stock dividend 388,758 -- --
Issuance of common stock 81,326 37,434 23,304
Common stock repurchased (18,786) (24,001) --
---------- ---------- ----------
BALANCE END OF YEAR 4,336,283 3,884,985 3,871,552
========== ========== ==========
COMMON STOCK
Balance at beginning of year $ 31,017 $ 30,814 $ 30,322
10% stock dividend 12,829 -- --
Issuance of common stock 2,383 971 492
Common stock repurchased (619) (768) --
---------- ---------- ----------
BALANCE END OF YEAR 45,610 31,017 30,814
RETAINED EARNINGS
Balance at beginning of year 24,788 21,049 17,816
Net income 6,925 6,066 5,431
10% stock dividend (12,829) -- --
Cash dividends ($0.60 per share in 2002,
$0.55 in 2001, and $0.49 in 2000) (2,585) (2,327) (2,198)
---------- ---------- ----------
BALANCE END OF YEAR 16,299 24,788 21,049
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of year 1,023 67 (1,031)
Unrealized gains on securities available
for sale, net of income taxes and reclassification
adjustment 1,887 956 1,098
Minimum pension liability adjustment, net of
income taxes (1,362) -- --
---------- ---------- ----------
BALANCE END OF YEAR 1,548 1,023 67
---------- ---------- ----------
TOTAL SHAREHOLDERS' EQUITY END OF YEAR $ 63,457 $ 56,828 $ 51,930
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
16 IBT BANCORP, INC. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF
INCOME
(Dollars in thousands except per share data)
YEAR ENDED DECEMBER 31
2002 2001 2000
------- ------- -------
INTEREST INCOME
Loans, including fees $31,527 $35,091 $33,470
Investment securities
Taxable 4,362 3,173 3,839
Tax exempt 1,849 1,637 1,275
Federal funds sold and other 423 897 170
------- ------- -------
TOTAL INTEREST INCOME 38,161 40,798 38,754
------- ------- -------
INTEREST EXPENSE
Deposits 14,578 18,678 17,927
Borrowings 678 582 475
------- ------- -------
TOTAL INTEREST EXPENSE 15,256 19,260 18,402
------- ------- -------
NET INTEREST INCOME 22,905 21,538 20,352
Provision for loan losses 1,025 770 565
------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,880 20,768 19,787
NONINTEREST INCOME
Trust fees 597 548 535
Service charges on deposit accounts 277 288 327
Other service charges and fees 1,807 1,686 1,530
Gain on sale of mortgage loans 1,762 1,051 98
Title insurance revenue 2,221 1,578 1,039
Other 1,439 1,047 876
------- ------- -------
TOTAL NONINTEREST INCOME 8,103 6,198 4,405
NONINTEREST EXPENSES
Salaries, wages, and employee benefits 11,307 9,790 8,594
Occupancy 1,422 1,201 1,025
Furniture and equipment 2,277 2,037 1,943
Amortization of acquisition intangibles 94 655 568
Charitable donations 815 490 130
Other 4,857 4,522 4,417
------- ------- -------
TOTAL NONINTEREST EXPENSES 20,772 18,695 16,677
------- ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 9,211 8,271 7,515
Federal income taxes 2,286 2,205 2,084
------- ------- -------
NET INCOME $ 6,925 $ 6,066 $ 5,431
======= ======= =======
Net income per basic share of common stock $ 1.61 $ 1.42 $ 1.28
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
IBT BANCORP, INC. FINANCIAL STATEMENTS 17
CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(Dollars in thousands)
YEAR ENDED DECEMBER 31
2002 2001 2000
---- ---- ----
NET INCOME $ 6,925 $ 6,066 $ 5,431
------- ------- -------
Other comprehensive income before income taxes
Unrealized gains (losses) on securities available for sale
Unrealized holding gains arising during year 2,861 1,440 1,661
Reclassification adjustment for realized (gain) loss
included in net income (2) 8 4
Minimum pension liability adjustment (2,063) -- --
------- ------- -------
Other comprehensive income before income taxes 796 1,448 1,665
Income taxes related to other comprehensive income 271 492 567
------- ------- -------
OTHER COMPREHENSIVE INCOME 525 956 1,098
------- ------- -------
COMPREHENSIVE INCOME $ 7,450 $ 7,022 $ 6,529
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
18 IBT BANCORP, INC. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(Dollars in thousands)
YEAR ENDED DECEMBER 31
2002 2001 2000
--------- --------- --------
OPERATING ACTIVITIES
Net income $ 6,925 $ 6,066 $ 5,431
Reconciliation of net income to net cash provided
by operations
Provision for loan losses 1,025 770 565
Provision for depreciation 1,647 1,197 1,155
Net amortization on investment securities 1,006 295 211
Amortization and impairment of mortgage
servicing rights 994 390 139
Increase in cash surrender value of life insurance (472) (205) (166)
Amortization of acquisition intangibles 94 655 568
Deferred income tax benefit (276) (277) (272)
Gain on sale of mortgage loans (1,762) (1,051) (98)
Proceeds from sale of mortgage loans 192,407 126,814 12,360
Loans originated for sale (195,776) (132,875) (12,261)
Decrease (increase) in accrued interest receivable 64 92 (741)
Increase in other assets (1,959) (1,461) (463)
Increase in accrued interest and other liabilities 2,207 1,735 404
--------- --------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,124 2,145 6,832
INVESTING ACTIVITIES
Activity in available-for-sale securities
Maturities, calls, and sales 40,019 24,935 23,341
Purchases (93,225) (48,479) (9,702)
Activity in held-to-maturity securities
Maturities and calls 1,386 4,537 5,832
Purchases -- -- (2,355)
Net decrease (increase) in loans (2,388) 12,466 (50,575)
Purchases of premises and equipment (2,107) (3,921) (2,025)
Acquisition of title office (25) -- --
Purchase of cash value life insurance (300) (7,135) --
--------- --------- --------
NET CASH USED IN INVESTING ACTIVITIES (56,640) (17,597) (35,484)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits 1,086 1,222 913
Net increase in interest bearing deposits 44,129 38,203 30,827
Net increase in borrowings 5,897 5,188 334
Cash dividends (2,585) (2,327) (2,198)
Proceeds from issuance of common stock 1,583 971 492
Common stock repurchase (619) (768) --
--------- --------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 49,491 42,489 30,368
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,025) 27,037 1,716
Cash and cash equivalents beginning of year 55,462 28,425 26,709
--------- --------- --------
CASH AND CASH EQUIVALENTS END OF YEAR $ 54,437 $ 55,462 $ 28,425
========= ========= ========
Supplemental cash flow information:
Federal income taxes paid $ 2,774 $ 2,670 $ 2,254
Interest paid 15,312 19,357 18,228
The accompanying notes are an integral part of these consolidated financial
statements.
IBT BANCORP, INC. FINANCIAL STATEMENTS 19
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(Dollars in thousands except per share amounts)
NOTE A - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements
include the accounts of IBT Bancorp (the "Corporation"), a Financial Services
Holding company, and its wholly owned subsidiaries, Isabella Bank and Trust,
Farmers State Bank of Breckenridge, IBT Title, IBT Financial Services, IBT Loan
Production, and its majority owned subsidiary, IBT Personnel, LLC (79%). All
intercompany transactions and accounts have been eliminated.
NATURE OF OPERATIONS: IBT Bancorp is a Financial Service Holding Company
offering a wide array of financial products and services in mid-Michigan. Its
banking subsidiaries, Isabella Bank and Trust and Farmers State Bank of
Breckenridge, offer banking services through 19 locations, 24-hour banking
services locally and nationally through shared automatic teller machines, and
direct deposits to businesses, institutions, and individuals. Lending services
offered include commercial real estate loans and lines of credit, residential
real estate loans, consumer loans, student loans, and credit cards. Deposit
services include interest and noninterest bearing checking accounts, savings
accounts, money market accounts, and certificates of deposit. Other related
financial products include trust services, safe deposit box rentals, and credit
life insurance. Active competition, principally from other commercial banks,
savings banks and credit unions, exists in all of the Banks' principal markets.
The Corporation's results of operations can be significantly affected by changes
in interest rates or changes in the local economic environment.
IBT Title does business under the names Isabella County Abstract and Title,
Mecosta County Abstract and Title, IBT Title Clare, and Benchmark Title of
Greenville. IBT Title provides title insurance, abstract searches, and closes
real estate loans.
IBT Financial Services is a full service retail brokerage company offering
stocks, bonds, and mutual fund sales to individuals.
IBT Loan Production is a mortgage loan origination company. Principal loan
products include 15 and 30 year fixed rate mortgage loans. All loans originated
are sold to Isabella Bank and Trust.
IBT Personnel provides payroll services, benefit administration, and other human
resource services to IBT Bancorp's subsidiaries.
USE OF ESTIMATES: The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowance for
loan losses and foreclosed real estate, management obtains independent
appraisals for significant properties.
SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK. Most of the Corporation's
activities are with customers located within the central Michigan area. A
significant amount of its outstanding loans are secured by real estate or are
made to finance agricultural production. Other than these types of loans, there
is no significant concentration to any other industry or customer.
CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash
flows, the Corporation considers cash on hand, demand deposits due from banks,
and federal funds sold as cash and cash equivalents. Generally, federal funds
are sold for a one day period. The Corporation maintains deposit accounts in
various financial institutions which at times may exceed FDIC insured limits or
are not insured. Management believes the Corporation is not exposed to any
significant interest rate or other financial risk as a result of these deposits.
SECURITIES: Management determines the appropriate classification of debt
securities at the time of purchase. Debt securities are
20 IBT BANCORP, INC. FINANCIAL STATEMENTS
classified as held to maturity when the Corporation has the positive intent and
ability to hold the securities to maturity. Securities held to maturity are
stated at amortized cost. Debt securities not classified as held to maturity are
classified as available for sale and are stated at fair value with the
unrealized gains and losses net of taxes excluded from earnings and reported in
other comprehensive income.
The amortized cost of debt securities classified as either held to maturity or
available for sale is adjusted for amortization of premiums and accretion of
discounts to maturity and is computed using a method that approximates the level
yield method. Declines in the fair value of held-to-maturity and
available-for-sale securities below their cost that are determined to be other
than temporary are reflected in earnings as realized losses. Gains or losses on
the sale of securities available for sale are calculated using the adjusted cost
for the specific securities sold.
ALLOWANCE FOR LOAN LOSSES: Management determines the adequacy of the allowance
for loan losses based on evaluations of the loan portfolio, past and recent loan
loss experience, current economic conditions and other pertinent factors. The
allowance is increased by a charge to income for provisions for loan losses.
Loans deemed to be uncollectible are charged against the allowance for loan
losses and subsequent recoveries, if any, are credited to the allowance. The
allowance for loan losses on loans classified as impaired is based on discounted
cash flows using the loans initial interest rate or the fair value of the
collateral for certain collateral dependent loans.
LOANS AND RELATED INCOME: Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding principal balance adjusted for any charge offs,
the allowance for loans losses, and any deferred fees or costs on originated
loans. Interest income on loans is accrued over the term of the loan based on
the principal amount outstanding. The accrual of interest on impaired loans is
discontinued when, in the opinion of management, the borrower may be unable to
meet payments as scheduled. When the accrual of interest is discontinued, all
uncollected accrued interest is reversed against interest income. The interest
income on such loans is subsequently recognized only to the extent cash payment
is received. Loans are returned to accrual status when all principal and
interest amounts contractually due are brought current and future payments are
reasonably assured. For impaired loans not classified as nonaccrual, interest
income continues to be accrued over the term of the loan based on the principal
amount outstanding.
Loan origination fees and certain direct loan origination costs are capitalized
and recognized as a component of interest income over the term of the loan using
the constant yield method.
MORTGAGE BANKING ACTIVITIES: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. Gains or losses on sales of such loans are recognized at the
time of sale and are determined by the difference between the net sales proceeds
and the unpaid principal balance of the loans sold, adjusted for any yield
differential, servicing fee, and servicing costs applicable to future years. Net
unrealized losses, if any, are recognized in a valuation allowance by charges to
income. Mortgage servicing rights ("MSR") are amortized in proportion to, and
over the period of, estimated net servicing income. To determine the fair value
of MSR, the Corporation estimates the present value of future cash flows
incorporating a number of assumptions including servicing income, cost of
servicing, discount rates, and prepayment rates.
The Corporation has established a valuation allowance for the excess of the book
value of the capitalized MSR over the estimated fair value. For purposes of
measuring impairment, the rights are stratified based on their predominant risk
characteristics, primarily period of origination, interest rate, and current
prepayment rates.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. For financial reporting purposes, the provision for
depreciation is computed principally by the straight line method based upon the
useful lives of the assets which generally range from 5 to 30 years.
Maintenance, repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized. Management annually
reviews these assets to determine whether carrying values have been impaired.
A summary of premises and equipment at December 31 follows:
2002 2001
------- -------
Premises $12,194 $10,957
Equipment 15,479 14,585
------- -------
27,673 25,542
Less accumulated depreciation 13,203 11,557
------- -------
NET PREMISES AND EQUIPMENT $14,470 $13,985
IBT BANCORP, INC. FINANCIAL STATEMENTS 21
RESTRICTED INVESTMENTS: Included in other assets are restricted securities of
$2,648 in 2002 and $2,582 in 2001. Restricted securities include the stock of
the Federal Reserve Bank and the Federal Home Loan Bank and have no contractual
maturity.
BANK OWNED LIFE INSURANCE: The Corporation has purchased life insurance policies
on key members of management. In the event of death of one of these individuals,
the Corporation would receive a specified cash payment equal to the face value
of the policy. Such policies are recorded at their cash surrender value.
Increases in cash surrender value are reported as other noninterest income.
CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, the
Corporation has entered into commitments to extend credit, including commitments
under credit card arrangements, home equity lines of credit, commercial letters
of credit, and standby letters of credit. Such financial instruments are
recorded when funded.
FEDERAL INCOME TAXES: Federal income taxes are provided for the tax effects of
transactions reported in the consolidated financial statements and consist of
taxes currently due plus deferred income taxes. Deferred income taxes are
recognized for temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes. Deferred income tax assets and liabilities represent the future tax
return consequences of those differences, which will either be taxable or
deductible when the assets or liabilities are recorded or settled. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be realized. As changes in income tax laws or rates are
enacted, deferred tax assets and liabilities are adjusted through the provision
for income taxes.
PER SHARE AMOUNTS: Net income per share amounts were computed by dividing net
income by the weighted average number of shares outstanding. The weighted
average number of common shares outstanding were 4,292,467 in 2002; 4,266,174 in
2001; and 4,247,073 in 2000.
ACQUISITION INTANGIBLES: Isabella Bank and Trust previously acquired branch
facilities and related deposits in a business combination accounted for as a
purchase. The acquisition of the branches included amounts related to the
valuation of customer deposit relationships (core deposit intangibles). The
deposit intangible is being amortized on the straight line basis over nine
years, the expected life of the acquired relationship.
RECLASSIFICATIONS: Certain amounts reported in the 2001 and 2000 consolidated
financial statements have been reclassified to conform with the 2002
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS: In April 2002, the Financial Accounting
Standard Board (SFAS) issued Statement of Financial Accounting Standards No.
145. Statement No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria defined
in APB Opinion No. 30 which are that the event or transaction is both unusual in
nature and infrequent in occurrence. Events considered unusual should have a
high degree of abnormality and be clearly unrelated to the company's normal
operations and infrequency is defined as not expected to recur in the
foreseeable future. It is not expected that provisions of Statement No. 145 will
have a material impact on the financial position or results of operations of the
Corporation.
In June 2002, FASB issued Statement of Financial Accounting Standards No. 146
which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity" and as a result modified the criteria for measurement and recognition
of costs associated with exiting an activity. The provisions of this Statement
are effective for exit or disposal activities initiated after December 31, 2002.
It is not expected that provisions of Statement No. 146 will have a material
impact on the financial position or results of operations of the Corporation.
In October 2002, FASB issued Statement of Financial Accounting Standards No. 147
which amends FASB Statements No. 72 and 144, "Accounting for Certain
Acquisitions of Banking or Thrift Institutions" and "Accounting for the
Impairment or Disposal of Long-Lived Assets," respectively and FASB
Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and
Loan Association or a Similar Institution is Acquired in a Business Combination
Accounted for by the Purchase Method." The provisions of this standard generally
became effective October 1, 2002. IBT Bancorp adopted SFAS No. 142 on January 1,
2002. As a result, goodwill and other intangible assets were separately
disclosed on the consolidated balance sheet and amortization of the goodwill
ceased. Adoption of SFAS No. 147 did not have a significant impact on the
Corporation's financial reporting.
22 IBT BANCORP, INC. FINANCIAL STATEMENTS
In November 2002, FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" which addresses the disclosure to be made
by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 requires the guarantor to recognize a
liability for the non-contingent component of the guarantee. This is the
obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. The recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee or if the guarantee was issued with a premium payment or as part of a
transaction with multiple events. The initial recognition and measurement
provisions are effective for all guarantees within the scope of FIN 45 issued or
modified after December 31, 2002. The impact of adoption is not expected to have
a significant impact on the Corporation's financial reporting.
In December 2002, the FASB issued SFAS 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123," which is effective for years beginning after December 15, 2002. This
Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirement of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock based employee compensation and the
effect of the method used on reporting results. The Corporation has no
stock-based compensation, and thus the adoption of SFAS 148 will have no impact
on the Corporations financial reporting.
NOTE B - BUSINESS COMBINATION
On July 1, 2002, the Corporation's subsidiary IBT Title completed the purchase
of Benchmark Abstract and Title of Greenville, Michigan. The purchase was
accounted for according to the FASB Statement No. 141. The purchase price of
Benchmark was approximately $1.1 million, which was funded through the issuance
of $800 of IBT Bancorp stock, $25 cash, and a note payable in the amount of
$264. The purchase price was allocated $25 to premises and equipment and $1,064
to goodwill. Results of operations have not been significant.
IBT BANCORP, INC. FINANCIAL STATEMENTS 23
NOTE C - INVESTMENT SECURITIES
The following is a summary of securities available for sale and held to
maturity:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ------ ----- --------
DECEMBER 31, 2002
Securities available for sale
U.S. Treasury and U.S.
government agencies $ 88,546 $2,428 $ -- $ 90,974
Corporate 2,284 44 -- 2,328
States and political
subdivisions 62,669 1,960 (22) 64,607
-------- ------ ----- --------
TOTAL $153,499 $4,432 $ (22) $157,909
======== ====== ===== ========
Securities held to maturity
U.S. Treasury and U.S.
government agencies $ 74 $ 1 $ -- $ 75
States and political
subdivisions 1,662 66 -- 1,728
-------- ------ ----- --------
TOTAL $ 1,736 $ 67 $ -- $ 1,803
======== ====== ===== ========
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------- ------ ----- --------
DECEMBER 31, 2001
Securities available for sale
U.S. Treasury and U.S.
government agencies $ 52,209 $ 908 $ (70) $ 53,047
States and political
subdivisions 46,450 773 (82) 47,141
Commercial paper 2,310 20 -- 2,330
-------- ------ ----- --------
TOTAL $100,969 $1,701 $(152) $102,518
======== ====== ===== ========
Securities held to maturity
U.S. Treasury and U.S.
government agencies $ 148 $ 3 $ -- $ 151
States and political
subdivisions 3,306 71 (2) 3,375
-------- ------ ----- --------
TOTAL $ 3,454 $ 74 $ (2) $ 3,526
======== ====== ===== ========
The following table summarizes the fair value, realized gains, and realized
losses on sales of securities available for sale.
2002 2001 2000
------ ------ ------
Fair value of securities sold on the date of sale $2,066 $3,165 $4,354
Gross realized gains
U.S. Treasury and U.S. government agencies 2 4 --
Municipals -- -- 1
Gross realized losses
U.S. Treasury and U.S. government agencies -- -- 5
Municipals -- 12 --
24 IBT BANCORP, INC. FINANCIAL STATEMENTS
The following table shows the amortized cost and estimated fair value of
securities owned at December 31, 2002 by contractual maturity. Expected
maturities will differ from contractual maturities because the issuers of
securities may have the right to prepay obligations without prepayment penalty.
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
-------- -------- --------- ------
Due within one year or less $ 27,957 $ 28,382 $ 495 $ 501
Due after 1 year thru 5 years 88,958 91,734 1,167 1,227
Due after 5 years thru 10 years 21,409 22,131 -- --
Due after 10 years 4,681 4,735 -- --
-------- -------- ------ ------
Subtotal 143,005 146,982 1,662 1,728
Mortgage backed securities 10,494 10,927 74 75
-------- -------- ------ ------
TOTAL $153,499 $157,909 $1,736 $1,803
======== ======== ====== ======
Investment securities with a carrying value of approximately $10,359 and $8,537
were pledged to secure public deposits and for other purposes as necessary or
required by law at December 31, 2002 and 2001, respectively.
NOTE D - LOANS
An analysis of changes in the allowance for loan losses follows:
2002 2001 2000
------- ------ ------
Balance at beginning of year $ 5,471 $5,162 $4,622
Loans charged off (1,202) (692) (418)
Recoveries 299 231 393
Provision charged to income 1,025 770 565
------- ------ ------
BALANCE AT END OF YEAR $ 5,593 $5,471 $5,162
======= ====== ======
The following is a summary of information pertaining to impaired loans at
December 31:
2002 2001
------ ------
Impaired loans without a valuation allowance $1,085 $ --
Impaired loans with a valuation allowance 1,639 544
------ ------
Total impaired loans $2,724 $ 544
====== ======
Valuation allowance related to impaired loans $ 103 $ 56
------ ------
Average investment in impaired loans $2,968 $ 544
====== ======
The average investment in impaired loans for the year ended December 31, 2000
was not significant. Interest income recognized on impaired loans was not
significant during any of the three years ended December 31, 2002. No additional
funds are committed to be advanced in connection with impaired loans.
Certain directors and executive officers (including their families and companies
in which they have 10% or more ownership) of the Corporation and the Banks were
loan customers of the Banks. Total loans to these customers aggregated $7,721
and $9,248 at December 31, 2002 and 2001, respectively. During 2002, $5,858 of
new loans were made and repayments totaled $7,385.
IBT BANCORP, INC. FINANCIAL STATEMENTS 25
Residential mortgage loans serviced for others are not included in the
accompanying consolidated balance sheets. The unpaid principal balances of
mortgages serviced for others was $208,432 and $153,136 at December 31, 2002 and
2001, respectively. Servicing loans for others generally consists of collecting
mortgage payments, maintaining escrow accounts, disbursing payments to investors
and taxing authorities, and foreclosure processing.
The following table summarizes the fair value of mortgage servicing rights
included in other assets as of December 31:
2002 2001 2000
------- ------ ------
Balance at beginning of year $ 402 $ 271 $ 140
Mortgage servicing rights capitalized 1,632 660 270
Accumulated amortization (885) (358) (139)
Impairment valuation allowance (638) (171) --
------- ------ ------
BALANCE AT END OF YEAR $ 511 $ 402 $ 271
======= ====== ======
Residential mortgages committed for sale were $13,392 as of December 31, 2002
and $8,261 as of December 31, 2001.
NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation utilizes quoted market prices, where available, to compute the
fair value of its financial instruments. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Certain financial instruments and all
nonfinancial instruments are excluded from the disclosure requirements.
Accordingly, the aggregate of the fair value amounts presented are not
necessarily indicative of the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts reported in the balance sheets
for cash and demand deposits due from banks and federal funds sold approximate
those assets' fair value.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are unavailable, fair
values are based on quoted market prices of comparable instruments.
Loans: Fair values for variable rate loans that reprice at least quarterly and
have no significant change in credit risk are assumed to equal recorded book
value. Fixed rate loans are valued using present value discounted cash flow
techniques. The discount rate used in these calculations was the U.S. government
bond rate for securities with similar maturities adjusted for servicing costs,
credit loss, and prepayment risk.
Deposit liabilities: Demand, savings, and money market deposits have no stated
maturities and are payable on demand; thus their estimated fair value is equal
to their recorded book balance. Fair values for variable rate certificates of
deposit approximate their recorded book balance. Fair values for fixed rate
certificates of deposit are determined using discounted cash flow techniques
that apply interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into consideration the remaining terms of the agreements and
the counterparties' credit standings. The Corporation does not charge fees for
lending commitments; thus it is not practicable to estimate the fair value of
these instruments.
26 IBT BANCORP, INC. FINANCIAL STATEMENTS
The following sets forth the estimated fair value and recorded book balance of
the Corporation's financial instruments as of December 31.
2002 2001
------------------------------- ------------------------------
Estimated Fair Recorded Book Estimated Fair Recorded Book
Value Balance Value Balance
-------------- ------------- -------------- -------------
ASSETS
Cash and demand deposits due
from banks $ 28,587 $ 28,587 $ 22,562 $ 22,562
Federal funds sold 25,850 25,850 32,900 32,900
Investment securities 159,712 159,645 106,044 105,972
Net loans 400,416 398,887 395,328 392,393
Accrued interest receivable 4,897 4,897 4,961 4,961
LIABILITIES
Deposits with no stated
maturities 310,194 310,194 275,800 275,800
Deposits with stated maturities 256,755 251,262 243,799 240,441
Borrowed funds 18,507 17,793 11,904 11,632
Accrued interest payable 1,037 1,037 1,093 1,093
NOTE F - FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities, included in other assets,
as of December 31 are as follows:
2002 2001
-------- --------
Deferred tax assets
Allowance for loan losses $ 1,175 $ 1,156
Deferred directors' fees 664 565
Employee benefit plans 608 424
Core deposit premium and acquisition expenses 245 362
Net unrealized loss on minimum pension liability 701 --
Other 225 154
-------- --------
TOTAL DEFERRED TAX ASSETS 3,618 2,661
Deferred tax liabilities
Premises and equipment 222 278
Accretion on securities 73 56
Prepaid pension expense -- 639
Net unrealized gain on available-for-sale securities 1,498 526
Other 80 61
-------- --------
TOTAL DEFERRED TAX LIABILITIES 1,873 1,560
-------- --------
NET DEFERRED TAX ASSETS $ 1,745 $ 1,101
======== ========
Components of the consolidated provision for income taxes are as follows for the
year ended December 31:
2002 2001 2000
------- ------- -------
Current $ 2,562 $ 2,482 $ 2,356
Deferred benefit (276) (277) (272)
------- ------- -------
PROVISION FOR FEDERAL INCOME TAXES $ 2,286 $ 2,205 $ 2,084
======== ======= =======
IBT BANCORP, INC. FINANCIAL STATEMENTS 27
The reconciliation of the provision for federal income taxes and the amount
computed at the federal statutory tax rate of 34% of income before federal
income taxes is as follows for the year ended December 31:
2002 2001 2000
------- ------- -------
Income tax on pretax income $ 3,132 $ 2,812 $ 2,555
Effect of nontaxable interest income and expenses (846) (607) (471)
------- ------- -------
PROVISION FOR FEDERAL INCOME TAXES $ 2,286 $ 2,205 $ 2,084
======= ======= =======
NOTE G - BENEFIT PLANS
The Corporation has a defined benefit pension plan covering substantially all of
its employees. The benefits are based on years of service and the employees'
average compensation over their best five 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 defined pension plan's assets are invested primarily in common
stocks.
Changes in the projected benefit obligation and plan assets during each year,
the funded status of the plan and a reconciliation to the amount recognized in
the Corporation's consolidated balance sheets are summarized as follows at
December 31:
2002 2001 2000
------- ------ ------
Change in projected benefit obligation
Benefit obligation, January 1 $ 5,870 $5,130 $4,839
Service cost 297 271 188
Interest cost 425 384 352
Actuarial loss (gain) 634 305 (34)
Benefits paid (277) (220) (215)
------- ------ ------
BENEFIT OBLIGATION, DECEMBER 31 $ 6,949 $5,870 $5,130
======= ====== ======
Change in plan assets
Fair value of plan assets, January 1 $ 5,259 $5,446 $5,230
Investment return (loss) (509) (439) (112)
Corporation contribution 357 472 543
Benefits paid (277) (220) (215)
------- ------ ------
FAIR VALUE OF PLAN ASSETS, DECEMBER 31 $ 4,830 $5,259 $5,446
======= ====== ======
Reconciliation of funded status
Funded status $(2,119) $ (611) $ 316
Unrecognized net transition asset (22) (44) (66)
Unrecognized prior service cost 113 125 143
Unrecognized net loss from experience
different than that assumed and
effects of changes in assumptions 3,843 2,409 1,268
Adjustment to recognize additional minimum
pension liability (2,176) -- --
------- ------ ------
(ACCRUED LIABILITY) PREPAID PENSION COST $ (361) $1,879 $1,661
======= ====== ======
An adjustment to record the additional minimum pension liability as of December
31, 2002 was established by the recording of an intangible pension asset of $113
and a charge to other comprehensive income of $2,063 in 2002.
28 IBT BANCORP, INC. FINANCIAL STATEMENTS
Net pension expense consists of the following components for the year ended
December 31:
2002 2001 2000
-------- -------- --------
Service cost on benefits earned for
services rendered during the year $ 297 $ 271 $ 188
Interest cost on projected benefit
obligation 425 384 352
Expected return on plan assets (409) (445) (436)
Amortization of unrecognized transition asset (22) (22) (22)
Amortization of unrecognized prior service cost 18 18 18
Amortization of unrecognized actuarial net loss 113 48 12
-------- -------- --------
NET PENSION EXPENSE $ 422 $ 254 $ 112
======== ======== ========
Actuarial assumptions used in determining the projected benefit obligation and
the net periodic pension cost are as follows for the year ended December 31:
2002 2001 2000
-------- -------- --------
Weighted average discount rate 6.75% 7.50% 7.50%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 8.00% 8.00% 8.00%
The Corporation maintains a nonqualified supplementary retirement plan for
officers to provide supplemental retirement benefits and death benefits to each
participant. Insurance policies, designed primarily to fund death benefits, have
been purchased on the life of each participant with the Corporation as the sole
owner and beneficiary of the policies. Expenses related to this program for
2002, 2001, and 2000 were $41, $84, and $20, respectively, and are being
recognized over the participants' expected years of service.
The Corporation maintains an employee stock ownership plan (ESOP) and a profit
sharing plan which cover substantially all of its employees. Contributions to
the Plans are discretionary and are approved by the Board of Directors and
recorded as compensation expense. Compensation expense related to the Plans for
2002, 2001, and 2000 was $196, $146, and $200, respectively. Total shares
outstanding related to the ESOP at December 31, 2002 and 2001 were 166,139 and
152,107, respectively, and were included in the computation of dividends and
earnings per share in each of the respective years.
NOTE H - DEPOSITS
At December 31, 2002, the scheduled maturities of time deposits were as follows:
YEAR AMOUNT
---- --------
2003 $132,003
2004 32,912
2005 37,852
2006 26,984
2007 21,452
Thereafter 59
IBT BANCORP, INC. FINANCIAL STATEMENTS 29
NOTE I - BORROWED FUNDS
Borrowed funds at December 31 consist of the following obligations:
2002 2001
-------- --------
Federal Home Loan Bank advances $ 14,360 $ 11,381
Securities sold under agreements to repurchase 3,169 251
Unsecured note payable 264 --
-------- --------
$ 17,793 $ 11,632
======== ========
The Federal Home Loan Bank borrowings are collateralized by a blanket lien on
all qualified 1 to 4 family residential mortgage loans and U.S. Treasury and
government agency securities equal to at least 160% of outstanding advances.
Advances are also secured by FHLB stock owned by the Banks.
The unsecured note payable has an imputed interest rate of 4.16% and is payable
in annual installments of $60,000, including interest, through July 2007.
Securities sold under agreements to repurchase, which are classified as secured
borrowings, generally mature within one to four days from the transaction date.
Securities sold under agreement to repurchase are reflected at the amount of
cash received in connection with the transaction. The U.S. government agency
securities underlying the agreements have a carrying value and a fair value of
approximately $3,625 and $1,030 at December 31, 2002 and 2001, respectively.
Such securities remain under the control of the Corporation. The Corporation may
be required to pledge additional collateral based on the fair value of the
underlying securities.
The maturity and weighted average interest rates of FHLB advances at December 31
follow:
2002
----
AMOUNT RATE
-------- --------
Fixed rate advance due 2004 $ 1,000 5.05%
Two year putable advance due 2006 5,000 5.08
Fixed rate advance due 2009 1,000 4.19
Fixed rate advance due 2010 2,360 6.62
One year putable advance due 2010 3,000 4.98
Fixed rate advance due 2012 2,000 4.90
-------- ----
TOTAL ADVANCES $ 14,360 5.22%
======== ====
2001
----
AMOUNT RATE
-------- --------
Fixed rate advance due 2004 $ 1,000 5.05%
Two year putable advance due 2006 5,000 5.08
Fixed rate advance due 2010 2,381 6.62
One year putable advance due 2010 3,000 4.98
-------- ----
TOTAL ADVANCES $ 11,381 5.26%
======== ====
30 IBT BANCORP, INC. FINANCIAL STATEMENTS
NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
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 $60,800 at December 31, 2002, 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 December 31,
2002, the Corporation had a total of $506 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.
NOTE K - COMMITMENTS AND OTHER MATTERS
There were no material noncancelable lease commitments outstanding at December
31, 2002.
Banking regulations require banks to maintain cash reserve balances in currency
or as deposits with the Federal Reserve Bank. The Corporation's requirement was
approximately $11,031 at December 31, 2002, and $8,709 at December 31, 2001.
Banking regulations also limit the transfer of assets in the form of dividends,
loans, or advances from the subsidiary Banks to the Corporation. At December 31,
2002, substantially all of the subsidiary Banks' assets were restricted from
transfer to the Corporation in the form of loans or advances. Consequently, bank
dividends are the principal source of funds for the Corporation. Payment of
dividends without regulatory approval is limited to the current years retained
net income plus retained net income for the preceding two years, less any
required transfers to capital surplus. At January 1, 2003, the amount available
for dividends without regulatory approval was approximately $1,373.
The Corporation maintains a self-funded medical plan under which the Corporation
is responsible for the first $50 per year of claims made by a covered
individual. Medical claims are subject to a lifetime maximum of $2,000 per
covered individual. Expenses are accrued based on estimates of the aggregate
liability for claims incurred and the Corporation's experience. Expenses were
$1,370 in 2002, $1,063 in 2001 and $634 in 2000.
IBT BANCORP, INC. FINANCIAL STATEMENTS 31
The Corporation offers a dividend reinvestment and employee stock purchase plan.
The dividend reinvestment plan allows shareholders to purchase previously
unissued IBT Bancorp common shares. The employee stock purchase plan allows
employees to purchase IBT Bancorp common stock through payroll deduction. The
number of shares authorized for issuance under these plans are 150,000 with
14,538 shares unissued at December 31, 2002. During 2002, 2001 and 2000, 52,473
shares were issued for $1,524, 37,434 shares were issued for $971, and 23,304
shares were issued for $492, respectively, in cash pursuant to these plans.
The subsidiary Banks of the Corporation have obtained approval to borrow up to
$30,000 from the Federal Home Loan Bank (FHLB) of Indianapolis. Under the terms
of the agreement, the Banks may obtain advances at the stated rate at the time
of the borrowings. The Banks have agreed to pledge eligible mortgage loans and
U.S. Treasury and governmental agencies as collateral for any such borrowings.
Certain directors and executive officers and their related interests of the
Corporation and the Banks were deposit customers of the Banks. Total deposits of
these customers aggregate approximately $6,956 and $4,881 at December 31, 2002
and December 31, 2001, respectively.
NOTE L - OPERATING SEGMENTS
The Corporation's reportable segments are based on legal entities that account
for at least 10% of operating results. The accounting policies are the same as
those discussed in Note A to the Consolidated Financial Statements. The
Corporation evaluates performance based principally on net income and asset
quality of the respective segments. A summary of selected financial information
for the Corporation's reportable segments follows:
All Others
Isabella Bank Farmers (Including
and Trust State Bank Parent) Total
----------- ---------- ---------- --------
2002
Total assets $515,831 $126,850 $ 11,038 $653,719
Interest income 29,689 8,353 119 38,161
Net interest income 17,559 5,135 211 22,905
Provision for loan losses 650 375 -- 1,025
Net income 5,516 1,206 203 6,925
2001
Total assets $469,408 $116,903 $ 5,832 $592,143
Interest income 31,718 8,987 93 40,798
Net interest income 16,292 5,003 243 21,538
Provision for loan losses 500 270 -- 770
Net income (loss) 4,824 1,269 (27) 6,066
2000
Total assets $430,060 $106,699 $ 4,138 $540,897
Interest income 29,554 9,135 65 38,754
Net interest income 15,002 5,199 151 20,352
Provision for loan losses 265 300 -- 565
Net income (loss) 4,223 1,439 (231) 5,431
NOTE M - REGULATORY CAPITAL MATTERS
The Corporation (on a consolidated basis) and its subsidiary banks, Isabella
Bank and Trust and Farmers State Bank of Breckenridge ("Banks") are subject to
various regulatory capital requirements administered by their primary regulator,
the Federal Reserve Bank. Failure to meet minimum capital requirements can
initiate mandatory and/or discretionary actions by the Federal Reserve. These
actions could have a material effect on the Corporation's and Banks' financial
statements.
32 IBT BANCORP, INC. FINANCIAL STATEMENTS
Under the Federal Reserve's capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Corporation and the Banks must meet
specific capital guidelines that include quantitative measures of their assets,
certain off-balance-sheet items, and capital, as calculated under regulatory
accounting standards. The Banks' required capital is also subject to regulatory
qualitative judgment regarding the Banks' interest rate risk exposure and credit
risk. Prompt corrective action provisions are not applicable to bank holding
companies.
Measurements established by regulation to ensure capital adequacy require the
Corporation and the Banks to maintain minimum total capital to risk weighted
assets (as defined in the regulations), Tier 1 capital to risk weighted assets
(as defined), and Tier 1 capital to average assets (as defined). Management
believes, as of December 31, 2002 and 2001, that the Corporation and the Banks
met all capital adequacy requirements to which they are subject.
As of December 31, 2002, the most recent notifications from the Federal Reserve
Bank categorized the Banks as well capitalized. To be categorized as well
capitalized, a bank must maintain total risk based capital, Tier 1 risk-based,
and Tier 1 leverage ratios as set forth in the following tables. There have been
no conditions or events since the notifications that management believes has
changed the Banks' category.
The Corporation's and each Bank's actual capital amounts (in thousands) and
ratios are also presented in the table.
Minimum
To Be Well Capitalized
Minimum Capital Under Prompt Corrective
Actual Requirements Action Provisions
Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------- -----
AS OF DECEMBER 31, 2002
Total capital to risk weighted assets
Isabella Bank and Trust $ 40,385 12.9% $24,998 8.0% $31,247 10.0%
Farmers State Bank of Breckenridge 12,957 14.2 7,284 8.0 9,106 10.0
Consolidated 62,030 15.2 32,670 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank and Trust 36,525 11.7 12,499 4.0 18,748 6.0
Farmers State Bank of Breckenridge 11,811 13.0 3,642 4.0 5,463 6.0
Consolidated 56,919 13.9 16,335 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank and Trust 36,525 7.4 19,856 4.0 24,820 5.0
Farmers State Bank of Breckenridge 11,811 9.6 4,912 4.0 6,140 5.0
Consolidated 56,919 9.2 24,795 4.0 N/A N/A
AS OF DECEMBER 31, 2001
Total capital to risk weighted assets
Isabella Bank and Trust $ 37,154 12.5% $23,867 8.0% $29,834 10.0%
Farmers State Bank of Breckenridge 12,294 14.9 6,593 8.0 8,241 10.0
Consolidated 58,065 15.1 30,831 8.0 N/A N/A
Tier 1 capital to risk weighted assets
Isabella Bank and Trust 33,425 11.2 11,933 4.0 17,900 6.0
Farmers State Bank of Breckenridge 11,255 13.7 3,296 4.0 4,945 6.0
Consolidated 53,240 13.8 15,415 4.0 N/A N/A
Tier 1 capital to average assets
Isabella Bank and Trust 33,425 7.4 17,979 4.0 22,474 5.0
Farmers State Bank of Breckenridge 11,255 10.3 4,371 4.0 5,464 5.0
Consolidated 53,240 9.4 22,553 4.0 N/A N/A
IBT BANCORP, INC. FINANCIAL STATEMENTS 33
NOTE N - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
December 31
2002 2001
-------- --------
ASSETS
Cash on deposit at subsidiary Banks $ 4,690 $ 5,861
Securities available for sale 1,497 588
Investments in subsidiaries 58,949 51,912
Premises and equipment 98 113
Other assets 1,722 1,157
-------- --------
TOTAL ASSETS $ 66,956 $ 59,631
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 3,553 $ 2,803
Shareholders' equity 63,403 56,828
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 66,956 $ 59,631
======== ========
CONDENSED STATEMENTS OF INCOME
Year Ended December 31
2002 2001 2000
-------- ------- -------
Income
Dividends from subsidiaries $ 3,325 $ 3,115 $ 4,700
Interest income 122 154 105
Management fee and other 292 245 6
-------- ------- -------
TOTAL INCOME 3,739 3,514 4,811
Expenses 824 680 563
-------- ------- -------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries 2,915 2,834 4,248
Federal income tax benefit 152 103 166
-------- ------- -------
3,067 2,937 4,414
Undistributed earnings of subsidiaries 3,858 3,129 1,017
-------- ------- -------
NET INCOME $ 6,925 $ 6,066 $ 5,431
======== ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31
2002 2001 2000
-------- ------- -------
OPERATING ACTIVITIES
Net income $ 6,925 $ 6,066 $ 5,431
Adjustments to reconcile net income
to cash provided by operations
Undistributed earnings of subsidiaries (3,858) (3,129) (1,017)
Net amortization of securities -- 1 3
(Increase) decrease in interest receivable (2) 1 20
(Increase) decrease in other assets (1,947) (240) 3
Increase in accrued expenses 389 1,353 1,440
Provision for depreciation 20 19 19
Deferred income taxes (benefit) 328 (401) (512)
-------- ------- -------
NET CASH PROVIDED BY OPERATIONS 1,855 3,670 5,387
34 IBT BANCORP, INC. FINANCIAL STATEMENTS
Year Ended December 31
2002 2001 2000
-------- ------- -------
INVESTING ACTIVITIES
Proceeds from the maturities of investments securities
available for sale 175 75 867
Purchases of investment securities available for sale (1,080) -- --
Investment in subsidiaries (495) -- (2,924)
Purchases of equipment and premises (5) (39) (19)
-------- ------- -------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,405) 36 (2,076)
FINANCING ACTIVITIES
Cash dividends (2,585) (2,327) (2,198)
Issuance of common stock 1,583 971 492
Repurchase of common stock (619) (768) --
-------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,621) (2,124) (1,706)
-------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,171) 1,582 1,605
Cash and cash equivalents at beginning of year 5,861 4,279 2,674
-------- ------- -------
CASH AND CASH EQUIVALENTS AT YEAR END $ 4,690 $ 5,861 $ 4,279
======== ======= =======
NOTE O - GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Corporation adopted the FASB Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets." Statement
No. 142 addresses the reporting and other intangible assets subsequent to their
acquisition. This Statement requires that goodwill be separately disclosed if
material from other intangible assets on the consolidated balance sheet and that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but, instead, tested for impairment at least annually. The adoption
of Statement No. 142 resulted in the reduction of goodwill amortization of $392
or $0.09 per share for 2002.
As required by the Statement, intangible assets that do not meet the criteria
for recognition apart from goodwill must be reclassified. As a result of the
Corporation's analysis, no reclassifications were required as of December 31,
2002. Included in other assets on the accompanying consolidated balance sheets
are the following amounts as of December 31:
2002 2001
------- -------
Branch acquisition goodwill $ 2,036 $ 2,036
Title company goodwill 1,064 --
------- -------
Total goodwill 3,100 2,036
Core deposit intangibles 398 492
------- -------
$ 3,498 $ 2,528
======= =======
The core deposit intangibles are being amortized on a straight-line basis over
nine years.
IBT BANCORP, INC. FINANCIAL STATEMENTS 35
IBT BANCORP FINANCIAL REVIEW
(All dollars in thousands)
The following is management's discussion and analysis of the financial condition
and results of operations for IBT Bancorp (the Corporation). This discussion and
analysis is intended to provide a better understanding of the financial
statements and statistical data included elsewhere in the Annual Report.
CRITICAL ACCOUNTING POLICIES: The Corporation's significant accounting policies
are set forth in Note 1 of the Consolidated Financial Statements. Of these
significant accounting policies, the Corporation considers its policies
regarding the allowance for loan losses and 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.
Servicing assets are recognized when loans are sold with servicing retained.
Servicing assets are amortized in proportion to and over the period of estimated
future net servicing income. The fair value of servicing assets is estimated by
discounting the future cash flows at estimated future current market rates for
the expected life of the loans. The Corporation uses industry prepayment
statistics in estimating the expected life of the loan. Management periodically
evaluates servicing assets for impairment. For purposes of measuring impairment,
the rights are stratified based on original term to maturity. The amount of
impairment recognized is the amount by which the servicing asset for a stratum
exceeds its fair value.
36 IBT BANCORP, INC. FINANCIAL STATEMENTS
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS'
EQUITY; INTEREST RATE AND INTEREST DIFFERENTIAL
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 Equity holdings are included in Other Investments.
2002 2001 2000
----------------------------- ---------------------------- ----------------------------
Tax Average Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- --------- ------- -------- --------- ------- ------- --------- -------
INTEREST EARNING ASSETS
Loans $396,234 $31,554 7.96% $404,586 $35,118 8.68% $380,392 $33,333 8.76%
Taxable investment securities 94,383 4,197 4.45 54,171 2,993 5.53 62,581 3,666 5.86
Nontaxable investment securities 45,663 2,864 6.27 34,748 2,481 7.14 29,914 2,194 7.33
Federal funds sold 26,364 423 1.60 23,827 897 3.76 2,731 170 6.22
Other investments 2,735 165 6.03 2,626 180 6.85 2,256 173 7.67
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL EARNING ASSETS 565,379 39,203 6.93 519,958 41,669 8.01 477,874 39,536 8.27
NONEARNING ASSETS
Allowance for loan losses (5,621) (5,347) (4,939)
Cash and due from banks 24,236 21,052 18,253
Premises and equipment 14,983 12,461 10,385
Accrued income and other assets 24,530 18,423 14,572
-------- -------- --------
TOTAL ASSETS $623,507 $566,547 $516,145
======== ======== ========
INTEREST BEARING LIABILITIES
Interest bearing demand deposits $ 98,478 1,406 1.43 $ 81,260 1,955 2.41 $ 68,017 1,987 2.92
Savings deposits 135,792 2,201 1.62 121,202 3,258 2.69 122,610 3,908 3.19
Time deposits 247,182 10,971 4.44 235,481 13,465 5.72 206,849 12,032 5.82
Borrowed funds 13,960 678 4.86 10,712 582 5.43 7,158 475 6.64
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL INTEREST BEARING LIABILITIES 495,412 15,256 3.08 448,655 19,260 4.29 404,634 18,402 4.55
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY
Demand deposits 59,518 56,904 55,188
Other 9,037 6,201 5,817
Shareholders' equity 59,540 54,787 50,506
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $623,507 $566,547 $516,145
======== ======== ========
NET INTEREST INCOME (FTE) $23,947 $22,409 $21,134
======= ======= =======
NET YIELD ON INTEREST EARNING
ASSETS (FTE) 4.24% 4.31% 4.42%
==== ==== ====
RESULTS OF OPERATIONS
The Corporation achieved record net income for the sixteenth consecutive year in
2002 with net earnings of $6,925 versus $6,066 in 2001.
Two key measures of earnings performance commonly used in the banking industry
are return on average assets and return on average shareholders' equity. Return
on average assets measures the ability of a corporation to profitably and
efficiently employ its resources. The Corporation's return on average assets was
1.11% in 2002, 1.07% in 2001, and 1.05% in 2000. Return on average equity
indicates how effectively a corporation is able to generate earnings on capital
invested by its shareholders. The Corporation's return on average shareholders'
equity was 11.63% in 2002, 11.07% in 2001, and 10.75% in 2000.
IBT BANCORP, INC. FINANCIAL STATEMENTS 37
NET INTEREST INCOME
The Corporation derives the majority of its gross income from interest earned on
loans and investments, while its most significant expense is the interest cost
incurred for funds used. Net interest income is the amount by which interest
income on earning assets exceeds the interest cost of deposits and borrowings.
Net interest income is influenced by changes in the balance and mix of assets
and liabilities and market interest rates. Management exerts some control over
these factors, however, Federal Reserve monetary policy and competition have a
significant impact. Interest income includes loan fees of $1,524 in 2002, $1,425
in 2001, and $957 in 2000. 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.
TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS
The following table details the dollar amount of changes in FTE net interest
income for each major category of interest earning assets and interest bearing
liabilities and the amount of change attributable to changes in average balances
(volume) or average rates. 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.
2002 Compared to 2001 2001 Compared to 2000
Increase (Decrease) Due to Increase (Decrease) Due to
----------------------------------- -----------------------------------
Volume Rate Net Volume Rate Net
------ ------- ------- ------ ------- ------
CHANGES IN INTEREST INCOME
Loans $ (713) $(2,851) $(3,564) $2,103 $ (318) $1,785
Taxable investment securities 1,878 (674) 1,204 (473) (200) (673)
Nontaxable investment securities 711 (328) 383 346 (59) 287
Federal funds sold 87 (561) (474) 819 (92) 727
Other investments 7 (22) (15) 27 (20) 7
------ ------- ------- ------ ------- ------
TOTAL CHANGES IN INTEREST INCOME 1,970 (4,436) (2,466) 2,822 (689) 2,133
CHANGES IN INTEREST EXPENSE
Interest bearing demand deposits 357 (906) (549) 351 (383) (32)
Savings deposits 356 (1,413) (1,057) (44) (606) (650)
Time deposits 642 (3,136) (2,494) 1,640 (207) 1,433
Other borrowings 163 (67) 96 205 (98) 107
------ ------- ------- ------ ------- ------
TOTAL CHANGES IN INTEREST EXPENSE 1,518 (5,522) (4,004) 2,152 (1,294) 858
NET CHANGE IN FTE NET INTEREST INCOME $ 452 $ 1,086 $ 1,538 $ 670 $ 605 $1,275
====== ======= ======= ====== ======= ======
38 IBT BANCORP, INC. FINANCIAL STATEMENTS
As shown in Tables 1 and 2, when comparing year ending December 31, 2002 to
2001, fully taxable equivalent (FTE) net interest income increased $1,538 or
6.9%. An increase of 8.7% in average interest earning assets provided $1,970 of
FTE interest income. The majority of this growth was funded by a 10.4% increase
in interest bearing liabilities, resulting in $1,518 of additional interest
expense. Overall, changes in volume resulted in $452 in additional FTE interest
income. The average FTE interest rate earned on assets decreased by 1.08%,
decreasing FTE interest income by $4,436, and the average rate paid on deposits
decreased by 1.21%, decreasing interest expense by $5,522. The net change
related to interest rates earned and paid was a $1,086 increase in FTE net
interest income.
The Corporation's FTE net yield as a percentage of average earning assets
decreased 0.07%. The decrease was primarily the result of a significant change
in the mix of assets and funding sources. Average investment securities as a
percentage of total earning assets, increased 7.7% to 24.8% in 2002, while
loans, the Corporation's highest yielding assets, decreased 7.7% to 70.1%. The
change in mix resulted in a 0.23% decrease in the FTE net yield on interest
earning assets. The funding of interest earning assets was done primarily
through a 10.4% increase in the percentage of average earning assets funded by
interest bearing liabilities. The increased utilization of interest bearing
liabilities in funding earning assets resulted in a 0.04% decrease in the FTE
net yield on interest earning assets.
Net interest income increased $1,275 to $22,409 in 2001 from $21,134 in 2000. As
shown in Tables 1 and 2, in 2001 (FTE) interest income increased $2,822, from an
8.8% increase in the volume of average earning assets. The growth of interest
earning assets was funded primarily by a 10.9% increase in interest bearing
liabilities that resulted in additional interest expense of $2,152. Overall, the
Corporation earned an additional $670 in FTE interest income as a result of
increased volume. The average rate earned in 2001 decreased by 0.26%, decreasing
FTE interest income by $689, and the average rate paid on deposits decreased by
0.26%, decreasing interest expense by $1,294. The net change related to interest
rates earned and paid was a $605 increase in FTE net interest income.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Total loans outstanding represent 72.0% of the
Corporation's total year end deposits and is the Corporation's single largest
concentration of risk. Inevitably, poor operating performance may result from
the failure to control credit risk. Given the importance of maintaining sound
underwriting practices, the Banks' Boards of Directors and senior management
teams spend a large portion of their time and effort in loan review. The
provision for loan losses is the amount added to the allowance for loan losses
on a monthly basis. The allowance for loan losses is management's estimation of
potential future losses inherent in the loan portfolio, and is maintained at a
level considered by management to be adequate to absorb potential future losses.
Evaluation of the allowance for loan losses and the provision for loan losses is
based on a continuous review of the changes in the type and volume of the loan
portfolio, reviews of specific loans to evaluate their collectibility, past and
recent loan loss history, financial condition of borrowers, the amount of
impaired loans, overall economic conditions, and other factors. This evaluation
is inherently subjective as it requires material estimates, including the
amounts and timing of future cash flows expected to be received on impaired
loans, that may be subject to significant change.
As shown in Table 3, total loans outstanding increased 1.7% in 2002 and
decreased 1.4% in 2001. The provision for loan losses in 2002 was $1,025, a $255
increase from 2001 and a $460 increase from 2000. The 2002 provision for loan
losses was increased as a result of increases in net charged-off loans of $442
and loans classified as nonperforming of $2,484. The majority of the increase in
nonperforming loans is related to one farm credit which was in the process of
liquidation at year end. Management does not expect any significant additional
losses related to this credit. The allowance for loan losses as a percentage of
total outstanding loans was 1.38% at both December 31, 2002, and 2001. The
Corporation's net charged off loans as a percentage of average loans was 0.23%
in 2002 and 0.11% in 2001.
IBT BANCORP, INC. FINANCIAL STATEMENTS 39
TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE
The following is a summary of loan balances at the end of each year and their
daily average balances, changes in the allowance for loan losses arising from
loans charged off and recoveries on loans previously charged off, and additions
to the allowance which have been expensed.
December 31
------------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Amount of loans outstanding
at the end of year $404,480 $397,864 $403,679 $355,846 $318,914
======== ======== ======== ======== ========
Average gross loans outstanding
for the year $396,234 $404,586 $380,392 $332,083 $300,794
======== ======== ======== ======== ========
Summary of changes in allowance
Allowance for loan losses - January 1 $ 5,471 $ 5,162 $ 4,622 $ 4,412 $ 4,112
Loans charged off
Commercial and agricultural 506 271 65 221 252
Real estate mortgage 236 70 58 78 70
Personal 460 351 295 347 297
-------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF 1,202 692 418 646 619
Recoveries
Commercial and agricultural 140 35 172 86 255
Real estate mortgage 18 41 64 92 13
Personal 141 155 157 169 120
-------- -------- -------- -------- --------
TOTAL RECOVERIES 299 231 393 347 388
Net charge offs 903 461 25 299 231
Provision charged to income 1,025 770 565 509 531
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES - DECEMBER 31 $ 5,593 $ 5,471 $ 5,162 $ 4,622 $ 4,412
======== ======== ======== ======== ========
Ratio of net charge offs during the
year to average loans outstanding 0.23% 0.11% 0.01% 0.09% 0.08%
======== ======== ======== ======== ========
Ratio of the allowance for loan losses
to loans outstanding at year end 1.38% 1.38% 1.28% 1.30% 1.38%
======== ======== ======== ======== ========
As shown in Table 4, the percentage of loans classified as nonperforming by the
Corporation as of December 31, 2002 and 2001 was 1.19% and 0.64% of total loans,
respectively. Average nonperforming loans for the peer group was 0.87%. The peer
group is a composite of financial information of all bank holding companies with
assets between $500 million and $1 billion; there were 330 bank holding
companies in the Corporation's peer group for the period indicated. The Banks'
policies, including a loan considered impaired under Statement of Financial
Accounting Standards (SFAS) No. 118, are to transfer a loan to nonaccrual status
whenever it is determined that interest should be recorded on the cash basis
instead of the accrual basis because of a deterioration in the financial
position of the borrower, or a determination that payment in full of interest or
principal cannot be expected, or the loan has been in default for a period of 90
days or more, unless it is both well secured and in the process of collection.
40 IBT BANCORP, INC. FINANCIAL STATEMENTS
TABLE 4. NONPERFORMING LOANS
The following loans are all the credits which require classification for state
or federal regulatory purposes:
December 31
------------------------------------------------------
2002 2001 2000 1999 1998
------ ------ ------ ------ ------
Nonaccrual loans $2,484 $1,346 $ 382 $ 945 $ 274
Accruing loans past due 90 days or more 1,840 1,219 1,484 618 1,130
Restructured loans 479 -- -- -- --
------ ------ ------ ------ ------
TOTAL NONPERFORMING LOANS $4,803 $2,565 $1,866 $1,563 $1,404
====== ====== ====== ====== ======
NONPERFORMING LOANS AS % OF LOANS 1.19% 0.64% 0.46% 0.44% 0.44%
====== ====== ====== ====== ======
As of December 31, 2002, there were no other interest bearing assets which
required classification. Management is not aware of any recommendations by
regulatory agencies which, if implemented, would have a material impact on the
Corporation's liquidity, capital, or operations.
Management's internal analysis of the estimated range for the allowance was
$2,900 to $7,300 as of December 31, 2002. In management's opinion, the allowance
for loan losses of $5,593 is adequate as of December 31, 2002. Management has
allocated, as reflected in Table 5, the allowance for loan losses to the
following categories: 33.4% to commercial and agricultural loans; 29.5% to real
estate loans; 30.0% to installment loans; and 7.1% unallocated. The above
allocation is not intended to imply limitations on usage of the allowance. The
entire allowance is available to fund loan loss without regard to loan type.
TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses has been allocated according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within the following categories:
December 31
2002 2001 2000
--------------------- --------------------- ---------------------
% of Each % of Each % of Each
Category Category Category
Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans
--------- --------- --------- --------- --------- ---------
Commercial and agricultural $1,868 29.5% $2,081 26.9% $1,301 26.6%
Real estate mortgage 1,649 57.0 1,408 59.7 1,559 60.0
Installment 1,679 13.5 1,577 13.4 1,923 13.4
Unallocated 397 -- 405 -- 379 --
------ ------ ------ ------ ------ ------
TOTAL $5,593 100.0% $5,471 100.0% $5,162 100.0%
====== ====== ====== ====== ====== ======
1999 1998
--------------------- ---------------------
% of Each % of Each
Category Category
Allowance to Total Allowance to Total
Amount Loans Amount Loans
--------- --------- --------- ---------
Commercial and agricultural $1,502 26.9% $1,473 27.3%
Real estate mortgage 1,232 59.8 1,171 58.4
Installment 1,555 13.3 1,467 14.3
Unallocated 333 -- 301 --
------ ------ ------ ------
TOTAL $4,622 100.0% $4,412 100.0%
====== ====== ====== ======
IBT BANCORP, INC. FINANCIAL STATEMENTS 41
NONINTEREST INCOME
Noninterest income consists of trust fees, service charges on deposit accounts,
fees for other financial services, gain on the sale of mortgage loans, title
insurance revenue, and other. As is the case for many financial institutions,
management believes fee income is increasingly important as a source of net
earnings and expects this trend to continue. There was a $1,905 or 30.7%
increase in fees earned from these sources during 2002. Significant changes
during 2002 include a $643 increase from the sale of title insurance and related
services, a $161 increase in overdraft fees, a $138 increase in mortgage
servicing fees, and a $711 increase in gains on the sale of real estate
mortgages. During 2002, the Corporation had an average investment of $9.5
million in bank-owned life insurance, a $5.0 million increase over 2001. The
average net rate earned on the investment was approximately 5.0% and, because of
their tax free accumulation of earnings, they have a taxable equivalent rate of
7.6%. The rates on these contracts are adjustable annually on their anniversary
date. The investment is placed with five separate insurance companies with S&P
ratings of AA+ or better. The increase in other income due to this investment
was $245.
Included in noninterest income is a $1,762 gain from the sale of $192,407 in
mortgages during 2002 versus a $1,051 gain on the sale of $126,814 during 2001.
The Corporation has established a policy that all 30-year fixed rate mortgage
loans will be sold. During 2002, most 15-year fixed rate mortgage loans granted
were sold on the secondary market. These loans were sold without recourse, with
servicing retained.
Noninterest income increased $1,793 in 2001 when compared to 2000. Significant
changes in 2001 include a $539 increase in revenue from IBT Title, a $162
increase in overdraft fees, a $36 increase in mortgage servicing fees, a $953
increase in gains on the sale of residential real estate mortgages, a $39
decrease in service charges on deposit accounts, and a $41 decrease in brokerage
commissions.
NONINTEREST EXPENSES
Noninterest expenses increased $2,077 or 11.1% during 2002. Noninterest expenses
net of noninterest income divided by average total assets equalled 2.03% in
2002, 2.21% in 2001, and 2.38% in 2000. The decrease in the 2002 ratio was
primarily a result of the $711 increase in the gains on the sale of real estate
mortgages, and a $561 decline in the amortization of intangibles.
The largest component of noninterest expenses is salaries and employee benefits,
which increased $1,517 or 15.5%. Salaries increased $916 due to increases in
staffing and normal merit and promotional salary increases. Employee benefits
increased $601 in 2002. A significant portion of the increase was related to a
28.7% increase in medical insurance expenses, an 86.6% increase in pension
expense, and a 33.8% increase in the Corporation's voluntary contribution to the
ESOP. Footnote G in the Corporation's Notes to Consolidated Financial Statements
include the required disclosures regarding the benefit obligations, plan assets,
and funding status of the Corporation's Defined Pension Benefit Plan. Over the
last three years the plan has experienced an accumulated loss of $1,060 on the
Plan's investments. The entire loss is related to the general decline in market
value of stock equity investments. Over the same time period, the actuarial
assumption for the long term rate of return on the assets held by the Plan
should have produced a return of $1,161. Essentially, the actual loss combined
with the change in actuarial assumptions related to the benefit obligation has
produced a $2,119 underfunding of the Plan's assets as of December 31, 2002.
This shortfall will significantly increase the Corporation's pension expense in
future periods. The Corporation's Board of Directors has been discussing its
options and plans to make a decision on how to address the shortfall in 2003.
Occupancy and furniture and equipment expenses increased $461 or 14.2% in 2002.
The majority of this increase is related to building depreciation, property
taxes, service contracts and equipment depreciation. The amortization of
acquisition intangibles decreased $561 as a result of the adoption of SFAS No.
142. All other operating expenses increased $660. The most significant increases
are related to director fees, audit and examiner fees, and donations. The
Corporation contributed approximately $750 to the Isabella Bank and Trust
Community Foundation.
42 IBT BANCORP, INC. FINANCIAL STATEMENTS
Noninterest expenses increased $2,018 or 12.1% in 2001. During 2001, salaries
and benefits increased $1,196, occupancy and furniture and equipment expenses
increased $270, all other operating expenses increased $465, and the
amortization of the deposit based intangible increased by $87.
FEDERAL INCOME TAXES
Federal income tax expense for 2002 was $2,286 or 24.8% of pre-tax income
compared to $2,205 or 26.7% of pre-tax income in 2001 and $2,084 or 27.7% in
2000. The decrease in income tax expense as a percentage of income in 2002 is
attributable to an increase in nontaxable municipal income as a percentage of
the Corporation's pretax net income. A reconcilement of federal income tax
expense and the amount computed at the federal statutory rate of 34% is found in
Note F, Federal Income Taxes, in the accompanying consolidated financial
statements.
ANALYSIS OF CHANGES IN THE STATEMENT OF FINANCIAL CONDITION
Total assets were $652,717 at December 31, 2002, an increase of $60,574 or 10.2%
over year end 2001. Asset growth was primarily funded by a $45,215 increase in
deposits, a $6,161 increase in borrowings, and a $6,629 increase in
shareholders' equity. A discussion of changes in balance sheet amounts by major
categories follows.
INVESTMENT SECURITIES
The primary objective of the Corporation's investing activities is to provide
for safety of the principal invested. Secondary considerations include the need
for earnings, liquidity, and the Corporation's overall exposure to changes in
interest rates. During 2002, the Corporation's net holdings of investment
securities increased $53,673. Table 6 shows the carrying value of investment
securities available for sale and held to maturity. Securities held to maturity,
which are stated at amortized cost, consist mostly of local municipal bond
issues, and U.S. Agencies. Securities not classified by management as held to
maturity are classified as available for sale and are stated at fair value.
TABLE 6. INVESTMENT PORTFOLIO
The following is a schedule of the carrying value of investment securities
available for sale and held to maturity:
December 31
2002 2001 2000
-------- -------- -------
Available for sale
U.S. Treasury and U.S. government agencies $ 90,974 $ 53,047 $40,978
States and political subdivisions 64,607 47,141 36,186
Commercial paper 2,328 2,330 350
-------- -------- -------
TOTAL $157,909 $102,518 $77,514
======== ======== =======
Held to maturity
U.S. Treasury and U.S. government agencies $ 74 $ 148 $ 1,060
States and political subdivisions 1,662 3,306 6,637
Other securities -- -- 602
-------- -------- -------
TOTAL $ 1,736 $ 3,454 $ 8,299
======== ======== =======
Excluding those holdings of the investment portfolio in U.S. Treasury and U.S.
government agency securities, there were no investments in securities of any one
issuer which exceeded 10% of shareholders' equity. The Corporation has a policy
prohibiting investments in securities that it deems are unsuitable due to their
inherent credit or market risks. Prohibited investments include stripped
mortgage backed securities, zero coupon bonds, nongovernment agency asset backed
securities, and structured notes.
IBT BANCORP, INC. FINANCIAL STATEMENTS 43
The following is a schedule of maturities of each category of investment
securities (at carrying value) and their weighted average yield as of December
31, 2002:
TABLE 7. SCHEDULE OF MATURITIES OF INVESTMENT SECURITIES AND WEIGHTED AVERAGE
YIELDS
Maturing
---------------------------------------------------------------------------------------
After One After Five
Year But Years But
Within Within Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------- ---- ------- ---- ------- ---- ------- ----
Available for sale
U.S. Treasury and U.S.
government agencies $18,198 4.44% $61,849 3.55% $ -- --% $ -- --%
States and political
subdivisions 10,860 3.13 28,091 3.97 20,921 4.48 4,735 4.41
Mortgage backed 267 5.93 270 5.94 4,459 5.35 5,931 9.63
Corporate & other
securities 1,017 4.71 1,311 4.62 -- -- -- --
------- ---- ------- ---- ------- ---- ------- ----
TOTAL $30,342 3.99% $91,521 3.70% $25,380 4.63% $10,666 7.30%
======= ==== ======= ==== ======= ==== ======= ====
Held to maturity
States and political
subdivisions $ 50 4.50% $ 1,612 4.79% $ -- --% $ -- --%
Mortgage backed -- -- 74 5.76 -- -- -- --
------- ---- ------- ---- ------- ---- ------- ----
TOTAL $ 50 4.50% $ 1,686 4.83% $ -- --% $ -- --%
======= ==== ======= ==== ======= ==== ======= ====
LOANS
The largest component of earning assets is loans. The proper management of
credit and market risk inherent in loans is critical to the financial well-being
of the Corporation. To control these risks, the Corporation has adopted strict
underwriting standards. The standards include prohibitions against lending
outside the Corporation's defined market area, lending limits to a single
borrower, and strict loan to collateral value limits. The Corporation also
monitors and limits loan concentrations extended to volatile industries. The
Corporation has no foreign loans and there were no concentrations greater than
10% of total loans that are not disclosed as a separate category in Table 8.
TABLE 8. LOAN PORTFOLIO
December 31
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
Commercial $ 66,326 $ 58,424 $ 60,301 $ 55,247 $ 48,204
Agricultural 53,223 48,523 47,298 40,449 38,766
Real estate mortgage 230,409 237,650 242,042 212,724 186,413
Installment 54,522 53,267 54,038 47,426 45,531
-------- -------- -------- -------- --------
TOTAL LOANS $404,480 $397,864 $403,679 $355,846 $318,914
======== ======== ======== ======== ========
Total loans increased $6,616 in 2002. The increase was primarily in commercial
and agricultural loans. As of December 31, 2002, as a percentage of total loans,
commercial loans were 16.4%, agricultural were 13.1%, real estate mortgages were
57.0%, and installments were 13.5%.
44 IBT BANCORP, INC. FINANCIAL STATEMENTS
DEPOSITS
Total deposits increased $45,215 and were $561,456 at year end 2002, an 8.8%
increase over 2001. Average deposits increased 9.3% in 2002 and in 2001. During
2002, average noninterest bearing deposits increased 4.6%, interest bearing
demand deposits increased 21.2%, savings deposits increased 12.0%, and time
deposits increased 5.0%. Time deposits over $100 as a percentage of total
deposits equaled 12.5% and 11.5% as of December 31, 2002 and 2001, respectively.
TABLE 9. AVERAGE DEPOSITS
2002 2001 2000
---------------- ---------------- ----------------
Amount Rate Amount Rate Amount Rate
------- ---- ------- ---- ------- ----
Noninterest bearing demand deposits $ 59,518 $ 56,904 $ 55,188
Interest bearing demand deposits 98,478 1.43% 81,260 2.41% 68,017 2.92%
Savings deposits 135,792 1.62 121,202 2.69 122,610 3.19
Time deposits 247,182 4.44 235,481 5.72 206,849 5.82
-------- -------- --------
TOTAL $540,970 $494,847 $452,664
======== ======== ========
TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000
December 31
2002 2001 2000
-------- -------- --------
Maturity
Within 3 months $ 21,900 $ 22,259 $ 13,217
Within 3 to 6 months 15,928 11,418 7,250
Within 6 to 12 months 18,624 11,496 7,418
Over 12 months 13,858 14,252 10,627
-------- -------- --------
TOTAL $ 70,310 $ 59,425 $ 38,512
======== ======== ========
Within the banking industry there is agreement that competition from mutual
funds and annuities has had a significant impact on deposit growth. In response,
the Corporation's subsidiaries now offer mutual funds and annuities to its
customers. The Corporation's trust department also offers a variety of financial
products in addition to traditional estate services.
CAPITAL
The capital of the Corporation consists solely of common stock, capital surplus,
retained earnings, and accumulated other comprehensive income. Total capital
increased approximately $6,629 in 2002. The Corporation offers a dividend
reinvestment and employee stock purchase plan. Under the provisions of these
Plans, the Corporation issued 52,473 shares of common stock generating $1,524 of
capital during 2002, and 32,623 shares of common stock generating $971 of
capital in 2001. The Board of Directors authorized management to repurchase up
to $2.0 million of common stock shares. A total of 18,786 shares were
repurchased in 2002 at an average price of $32.95 per share. Accumulated other
comprehensive income increased $525 and consists of $1,887 increase in
unrealized gain on available for sale investment securities reduced by a loss of
$1,362 related to the recognition of an additional minimum pension liability.
The Federal Reserve Board's current recommended minimum primary capital to
assets requirement is 6.0%. The Corporation's primary capital to assets, which
consists of shareholders' equity plus the allowance for loan losses less
acquisition intangibles, was 10.0% at year end 2002. There are no commitments
for significant capital expenditures.
IBT BANCORP, INC. FINANCIAL STATEMENTS 45
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
corporation 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 values at December 31, 2002:
Percentage of Capital to Risk Adjusted Assets:
Required IBT Bancorp
-------- -----------
Equity Capital 4.00% 13.94%
Secondary Capital 4.00 1.25
---- -----
Total Capital 8.00% 15.19%
==== =====
IBT Bancorp's secondary capital includes only the allowance for loan losses. The
percentage for the secondary capital under the required column is the maximum
amount allowed from all sources.
The Federal Reserve also prescribes minimum capital requirements for the
Corporation's subsidiary Banks. At December 31, 2002, the Banks exceeded these
minimums. For further information regarding the Banks' capital requirements,
refer to Note M of the Financial Statements, Regulatory Capital Matters.
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 and
cash equivalents and available for sale investment securities.
As of December 31, 2002 and 2001, cash and cash equivalents equaled 8.3% and
9.4%, respectively, of total assets. Net cash provided from operations was
$6,124 in 2002 and $2,145 in 2001. Net cash provided by financing activities
equaled $49,491 in 2002 and $42,489 in 2001. The Corporation's investing
activities used cash amounting to $56,640 in 2002 and $17,597 in 2001. The
accumulated effect of the Corporation's operating, investing, and financing
activities on cash and cash equivalents was a $1,025 decrease in 2002 and a
$28,425 increase in 2001.
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale equaled
$157,909 as of December 31, 2002 and $102,518 as of December 31, 2001. 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 the management of the Corporation.
INTEREST RATE SENSITIVITY
Interest rate sensitivity management aims at achieving reasonable stability in
the net interest margin through periods of changing interest rates. Interest
rate sensitivity is determined by the amount of earning assets and interest
bearing liabilities repricing within a specific time period, and their relative
sensitivity to a change in interest rates. One tool used by management to
measure interest rate sensitivity is gap analysis. As shown in Table 11, the gap
analysis depicts the Corporation's position for specific time periods and the
cumulative gap as a percentage of total assets.
46 IBT BANCORP, INC. FINANCIAL STATEMENTS
Investment securities and other investments are scheduled according to their
contractual maturity. Nonvariable rate loans are included in the appropriate
time frame based on their scheduled amortization. Variable rate loans are
included in the time frame of their earliest repricing. Of the $404,480 in total
loans, $67,424 are variable rate loans. Time deposit liabilities are scheduled
based on their contractual maturity except for variable rate time deposits in
the amount of $1,588 which are included in the 0 to 3 month time frame. Money
market accounts reprice monthly and are included in the 0 to 3 month time frame.
Passbook savings, statement savings, and NOW accounts have no contractual
maturity date and are believed to be predominantly noninterest rate sensitive by
management. These accounts have been classified in the gap table according to
their estimated withdrawal rates based upon management's analysis of deposit
runoff over the past five years. Management believes this runoff experience is
consistent with its expectation for the future. As of December 31, 2002, the
Corporation had $64,704 more in liabilities than assets maturing within one
year. A negative gap position results when more liabilities, within a specified
time frame, mature or reprice than assets.
TABLE 11. INTEREST RATE SENSITIVITY
The following table shows the time periods and the amount of assets and
liabilities available for interest rate repricing as of December 31, 2002. For
purposes of this analysis, nonaccrual loans and the allowance for loan losses
are excluded.
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years
-------- -------- -------- -------
Interest Sensitive Assets
Fed funds sold $ 25,850 $ -- $ -- $ --
Investment securities 4,892 25,500 93,208 36,045
Loans 115,153 50,299 215,889 20,655
-------- -------- -------- -------
TOTAL $145,895 $ 75,799 $309,097 $56,700
======== ======== ======== =======
Interest Sensitive Liabilities
Borrowed funds $ 3,169 $ 94 $ 6,375 $ 8,155
Time deposits 49,905 82,822 118,476 59
Savings 80,993 4,373 36,772 13,755
Interest bearing demand 58,000 7,042 41,446 4,707
-------- -------- -------- -------
TOTAL $192,067 $ 94,331 $203,069 $26,676
======== ======== ======== =======
Cumulative gap $(46,172) $(64,704) $ 41,324 $71,348
Cumulative gap as a % of assets (7.07%) (9.91%) 6.33% 10.98%
IBT BANCORP, INC. FINANCIAL STATEMENTS 47
TABLE 12. LOAN MATURITY AND INTEREST RATE SENSITIVITY
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 2002. Also provided are the amounts due after one
year, classified according to the sensitivity to changes in interest rates.
Due in
1 Year 1 to 5 Over 5
or Less Years Years Total
------- -------- ------ --------
Commercial and agricultural $57,089 $ 58,884 $3,576 $119,549
======= ======== ====== ========
Interest Sensitivity:
Loans maturing after one year which have:
Fixed interest rates $ 45,050 $3,385
Variable interest rates 13,834 191
TOTAL $ 58,884 $3,576
======== ======
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, holds no trading account
assets, nor does it utilize interest rate swaps or derivatives in the management
of its interest rate risk. Any changes in foreign exchange rates or commodity
prices would have an insignificant impact, if any, on the Corporation's interest
income and cash flows.
Interest rate risk ("IRR") is the exposure of 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. IRR
is the fundamental method in which financial institutions earn income and create
shareholder value. Excessive exposure to IRR 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 IRR. The first method is gap
analysis. Gap analysis measures the cash flows and/or the earliest repricing of
the Corporation's interest bearing assets and liabilities. This analysis is
useful for measuring trends in the repricing characteristics of the balance
sheet. Significant assumptions are required in this process because of the
imbedded repricing options contained in assets and liabilities. A substantial
portion of the Corporation's assets are invested in loans and mortgage backed
securities. These assets have imbedded options that allow the borrower to repay
the balance prior to maturity without penalty. The amount of prepayments is
dependent upon many factors, including the interest rate of a given loan in
comparison to the current interest rate 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. Savings
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.
48 IBT BANCORP, INC. FINANCIAL STATEMENTS
The second technique used in the management of IRR is to combine the projected
cash flows and repricing characteristics generated by the gap analysis, the
interest rates associated with those cash flows to project 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. Based on the projections
prepared for the year ended December 31, 2002 the Corporation's net interest
income would decrease during a period of decreasing interest rates.
The following tables provide information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of December 31,
2002 and 2001. The Corporation has no interest rate swaps, futures contracts, or
other derivative financial options. The principal amounts of assets and time
deposits maturing were calculated based on the contractual maturity dates.
Savings and NOW accounts are based on management's estimate of their future cash
flows.
QUANTITATIVE DISCLOSURES OF MARKET RISK
Fair Value
2003 2004 2005 2006 2007 Thereafter Total 12/31/02
--------------------------------------------------------------------------------------------
Rate sensitive assets
Other interest bearing assets $ 25,950 -- -- -- -- -- $25,950 $ 25,950
Average interest rates 1.25% -- -- -- -- -- 1.25%
Fixed interest rate securities $ 30,393 $50,671 $23,853 $12,169 $ 6,514 $36,045 $159,645 $159,712
Average interest rates 4.00% 3.77% 3.32% 4.06% 4.17% 4.76% 4.01%
Fixed interest rate loans $ 98,028 $86,180 $83,675 $27,107 $21,906 $20,160 $337,056 $338,585
Average interest rates 7.80% 7.69% 7.40% 7.57% 7.07% 5.89% 7.49%
Variable interest rate loans $ 45,756 $ 9,646 $ 4,541 $ 3,297 $ 3,689 $ 495 $ 67,424 $ 67,424
Average interest rates 6.13% 6.11% 5.95% 5.95% 5.52% 5.30% 6.07%
Rate sensitive liabilities
Borrowed funds $ 3,263 $ 1,094 $ 94 $ 5,094 $ 93 $ 8,155 $ 17,793 $ 18,507
Average interest rates 0.88% 5.07% 5.23% 5.08% 5.20% 5.30% 4.41%
Savings and NOW accounts $150,280 $20,646 $16,779 $13,749 $12,706 $32,928 $247,088 $247,088
Average interest rates 1.42% 1.25% 1.49% 1.57% 1.15% 0.91% 1.34%
Fixed interest rate time deposits $131,911 $32,404 $37,843 $26,984 $20,473 $ 59 $249,674 $255,167
Average interest rates 3.08% 4.85% 5.79% 4.89% 4.61% 7.20% 4.04%
Variable interest rate time deposits $ 816 $ 449 $ 9 -- $ 314 -- $ 1,588 $ 1,588
Average interest rates 2.03% 2.03% -- -- 3.82% -- 2.37%
Fair Value
2002 2003 2004 2005 2006 Thereafter Total 12/31/01
--------------------------------------------------------------------------------------------
Rate sensitive assets
Other interest bearing assets $ 32,900 $ 100 -- -- -- -- $ 33,000 $ 33,000
Average interest rates 1.50% 1.85% -- -- -- -- 1.50%
Fixed interest rate securities $ 31,156 $17,566 $17,533 $ 3,612 $ 8,209 $27,896 $105,972 $106,044
Average interest rates 4.57% 4.98% 4.55% 4.22% 4.68% 4.91% 4.72%
Fixed interest rate loans $104,468 $75,855 $93,477 $34,622 $21,839 $15,776 $346,037 $343,501
Average interest rates 9.37% 8.42% 8.13% 8.30% 8.28% 7.53% 8.57%
Variable interest rate loans $ 49,117 $ 2,158 $ 235 $ 186 $ 131 -- $ 51,827 $ 51,827
Average interest rates 7.25% 9.76% 7.41% 7.27% 7.00% -- 7.36%
Rate sensitive liabilities
Borrowed funds $ 251 -- $ 1,000 -- $ 5,000 $ 5,381 $ 11,632 $ 11,904
Average interest rates 2.00% -- 5.05% -- 5.08% 5.72% 5.31%
Savings and NOW accounts $122,022 $19,950 $16,209 $13,170 $12,153 $30,276 $213,780 $213,780
Average interest rates 1.72% 1.85% 1.80% 2.32% 1.50% 1.39% 1.72%
Fixed interest rate time deposits $141,602 $33,814 $19,952 $28,412 $15,406 $ 7 $239,193 $241,551
Average interest rates 5.37% 6.04% 5.95% 6.35% 6.67% 5.85% 5.71%
Variable interest rate time deposits $ 900 $ 348 -- -- -- -- $ 1,248 $ 1,248
Average interest rates 4.09% 4.09% -- -- -- -- 4.09%
IBT BANCORP, INC. FINANCIAL STATEMENTS 49
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 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.
COMMON STOCK AND DIVIDEND INFORMATION
There is no established market for the Corporation's common stock or public
information with respect to its market price. There are occasional sales by
shareholders of which management of the Corporation is aware. From January 1,
2001 through December 31, 2002 there were, so far as management knows, 196 sales
of the Corporation's common stock. These sales involved 103,587 shares. The
prices were reported to management in only some of the transactions and
management cannot confirm the prices which were reported during this period. The
highest known price paid for the Corporation's stock was $35.00 per share in the
fourth quarter of 2002, and the lowest price was $27.27 per share in the first
quarter of 2001. The following is a summary of all known transfers since January
1, 2001. All of the information has been adjusted to reflect the 10% stock
dividend paid February 28, 2002.
Number of Number of
Period Sales Shares Low High
------ --------- --------- --- ----
2001
First Quarter 28 14,972 $27.27 $30.91
Second Quarter 21 14,019 28.18 29.09
Third Quarter 22 10,472 29.09 29.09
Fourth Quarter 12 11,081 29.09 30.45
2002
First Quarter 27 6,022 $32.00 $34.00
Second Quarter 31 29,213 33.00 33.00
Third Quarter 31 11,538 33.00 33.00
Fourth Quarter 24 6,270 33.00 35.00
The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10% stock dividend paid on February 28,2002.
2002 2001
----- ----
First Quarter $0.10 $0.09
Second Quarter 0.10 0.09
Third Quarter 0.10 0.09
Fourth Quarter 0.30 0.28
----- -----
TOTAL $0.60 $0.55
===== =====
50 IBT BANCORP, INC. FINANCIAL STATEMENTS
IBT Bancorp's authorized common stock consists of 10,000,000 shares, of which
4,336,283 shares are issued and outstanding as of December 31, 2002. As of year
end 2002, there were approximately 1,700 shareholders of record.
SUPERVISION AND REGULATION
IBT Bancorp is subject to supervision and regulation by the Federal Reserve
Board, under the Bank Holding Company Act of 1956, as amended. A bank holding
company and its subsidiaries are able to conduct only the business of commercial
banking and activities closely related or incidental to it.
Isabella Bank and Trust and Farmers State Bank of Breckenridge are chartered by
the State of Michigan and are supervised and regulated by the Michigan Office of
Financial and Insurance Services, Division of Financial Institutions. The Banks
are members of the Federal Reserve System and their deposits are insured by the
Federal Deposit Insurance Corporation to the extent provided by law. IBT Title
and IBT Financial Services are licensed and supervised by the State of Michigan.
IMPACT OF INFLATION
The majority of assets and liabilities of financial institutions are monetary in
nature. Generally, changes in interest rates have a more significant impact on
earnings of the Corporation than inflation. Although influenced by inflation,
changes in rates do not necessarily move in either the same magnitude or
direction as changes in the price of goods and services. Inflation does impact
the growth of total assets, creating a need to increase equity capital at a
higher rate to maintain an adequate equity to assets ratio, which in turn
reduces the amount of earnings available for cash dividends.
SHAREHOLDERS' INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 7:00 p.m., Tuesday, April 29,
2003, Holiday Inn, 5665 E. Pickard Street, Mt. Pleasant, Michigan.
FINANCIAL INFORMATION AND FORM 10-K
Copies of the 2002 Annual Report, IBT Bancorp Form 10-K, and other financial
information not contained herein may be obtained by writing to:
Mary Ann Breuer
Secretary/Treasurer
IBT Bancorp
200 East Broadway
Mt. Pleasant, Michigan 48858
MISSION STATEMENT
The mission of IBT Bancorp shall be:
To create an operating environment that will provide shareholders with
sustained growth in their investment while maintaining our independence and
subsidiaries' autonomy.
EQUAL EMPLOYMENT OPPORTUNITY
The equal employment opportunity clauses in Section 202 of the Executive Order
11246, as amended; 38 USC 2012, Vietnam Era Veterans Readjustment Act of 1974;
Section 503 of the Rehabilitation Act of 1973, as amended; relative to equal
employment opportunity and implementing rules and regulations of the Secretary
of Labor are adhered to and supported by IBT Bancorp, and its subsidiaries.
IBT BANCORP, INC. FINANCIAL STATEMENTS 51
IBT BANCORP PROXY
200 EAST BROADWAY
MT. PLEASANT, MI 48858
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Gerald D. Cassel, James C. Fabiano, and Ronald
E. Schumacher, as Proxies, each with the power to appoint his/her substitute,
and hereby authorizes them to represent and to vote as designated below, all the
shares of Common Stock of IBT Bancorp held of record by the undersigned on March
17, 2003 at the annual meeting of shareholders to be held April 29, 2003 or any
adjournments thereof.
ELECTION OF DIRECTORS:
FOR ALL NOMINEES LISTED BELOW [ ] WITHHOLD AUTHORITY TO VOTE [ ]
EXCEPT AS MARKED TO THE FOR ALL NOMINEES LISTED
CONTRARY BELOW
(INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, CIRCLE
THE NOMINEE'S NAME IN THE LIST BELOW.)
DENNIS P. ANGNER WILLIAM J. STRICKLER
FREDERICK L. BRADFORD DEAN E. WALLDORFF
(CONTINUED AND TO BE SIGNED ON OTHER SIDE)
This proxy, when properly executed, will be voted in the manner directed herein
by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED TO ELECT ALL NOMINEES. The shares represented by this proxy will be voted
in the discretion of the proxies on any other matters which may come before the
meeting.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign full corporate name by the President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated:__________________________, 2003 _________________________________
Please mark, sign, date and return Signature
Proxy card promptly using the
enclosed envelope. _________________________________
Signature (if held jointly)