1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 1999 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to ----------------- ---------------- Commission File Number: 0-18415 -------------------------------------------------------- IBT BANCORP, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Michigan 38-2830092 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) identification No.) 200 East Broadway Street, Mt. Pleasant, Michigan 48858 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (517) 772-9471 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered - ----------------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: Common Stock - $0.00 Par Value - ------------------------------------------------------------------------------ (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $89,309,000 as of March 3, 2000. The number of shares outstanding of the registrant's Common Stock ($6 par value) was 2,976,975 as of March 3, 2000. DOCUMENTS INCORPORATED BY REFERENCE (Such documents are incorporated herein only to the extent specifically set forth in response to an item herein.) Documents Part of Form 10-K Incorporated into --------- ----------------------------------- IBT Bancorp, Inc. Proxy Statement for its Annual Meeting of Part III Shareholders to be held April 18, 2000
2 PART I ITEM 1. BUSINESS GENERAL IBT Bancorp, Inc. (the Corporation) is a registered bank holding company incorporated under Michigan law in September 1988. The Corporation has three subsidiaries: Isabella Bank and Trust, IBT Financial Services, and IBT Loan Production. Isabella Bank and Trust has two wholly owned subsidiaries, IBT Agency and IBT Title. Its principal subsidiary, Isabella Bank and Trust has fifteen banking offices located throughout Isabella County, northeastern Montcalm County, and southern Clare County, all of which are located in central Michigan. IBT Financial Services is a full service retail brokerage offering stocks, bonds and mutual funds to individuals. IBT Agency is authorized to sell life insurance, casualty insurance, and fixed and variable annuities. IBT Title provides title insurance, abstract searches, and closes loans in Isabella County and Mecosta County. IBT Loan Production originates residential real estate mortgages. Its principle products are 15 and 30 year fixed rate loans. All loans originated are sold with servicing to Isabella Bank and Trust. The principal city in which the Corporation operates is Mount Pleasant, which has a population of approximately 24,000. Central Michigan University, with enrollment of 18,000 students, is the area's largest employer and provides a stable source of employment and income. Mount Pleasant, as a result of having a large state supported university within its boundaries and being centrally located between 4 cities of similar size, has a sizable retail shopping industry. Mt. Pleasant is also the base for the state's oil and gas production; Michigan is the 12th largest producer of oil and gas in the United States. Other economic activity in Isabella County includes farming, light industrial manufacturing and gaming at the Saginaw Chippewa Indian Tribe Reservation. The area's unemployment rate is approximately 1.9% and the average household income is $34,500. COMPETITION The Corporation competes with other commercial banks, many of which are subsidiaries of other bank holding companies, savings and loan associations, finance companies, credit unions, and retail brokerage firms. The Bank is a community bank and focuses on providing high-quality, personalized service at a fair price. Based on deposits maintained by all financial institutions, the Bank's market share exceeded 50% of the total for Isabella County in both 1999 and 1998. The Bank offers a broad array of banking services to businesses, institutions, and individuals. Deposit services offered include checking accounts, savings accounts, certificates of deposit, and direct deposits. Lending activity includes loans made pursuant to lines of credit, real estate loans, consumer loans, student loans, and charge card loans. Other financial related products include trust services, title insurance, stocks, investment securities, bond, mutual fund sales, 24 hour banking service locally and nationally through shared automatic teller machines, and safe deposit box rentals. 2
3 LENDING The Bank limits lending activity to its local market and has not purchased any loans from the secondary market. The Bank does not make loans to fund leveraged buyouts, has no foreign corporate or government loans, and no corporate debt securities. The general lending philosophy of the Bank is to avoid concentrations to individuals and business segments. The following table sets forth the composition of the Bank's loan portfolio, as of December 31, 1999. LOANS BY MAJOR LENDING CATEGORY (in thousands) <TABLE> <CAPTION> Amount % ------ --- <S> <C> <C> Real Estate One to four family residential $127,115 46.0 Commercial and other 62,897 22.7 Construction & land development 17,525 6.3 --------- ------ Total Real Estate 207,537 75.0 Commercial Farmland & agricultural production 10,885 3.9 State and political subdivisions 4,272 1.5 Commercial and other 28,650 10.4 --------- ----- Total Commercial 43,807 15.8 Personal Credit cards 2,023 0.7 Other 23,355 8.5 --------- ------ Total Personal 25,378 9.2 --------- ------ TOTAL $276,722 100.0 ========= ====== </TABLE> First and second residential mortgages are the single largest category of loans (46.0% of total loans). The Bank offers 3 and 5 year fixed rate balloon mortgages with a maximum 30 year amortization, and 15 and 30 year amortized fixed rate loans. Fixed rate loans with an amortization greater than 15 years are sold upon origination to the Federal Home Loan Mortgage Association. Fixed rate residential mortgage loans with an amortization of 15 years or less may be held for future sale or sold upon origination. Factors used in determining when to sell these mortgages include management's judgement about the direction of interest rates, the Corporation's need for fixed rate assets in the management of its interest rate sensitivity, and overall loan demand. The Corporation has a policy that these loans may not exceed 5% of its total assets. The Bank's lending policies generally limit the maximum loan-to-value ratio on residential mortgages to 95% of the lower of appraised value of the property or the purchase price, with the condition that private mortgage insurance is required on loans with loan-to-value 3
4 ratios in excess of 80%. The majority of the Bank's loans have a loan-to-value ratio of less than 80%. When underwriting residential real estate loans, the Bank evaluates the borrower's ability to make monthly payments and the value of the property securing the loan. The Bank requires that the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower's gross income and that all debt servicing does not exceed 36% of income. In addition to the above requirements, the Bank reviews credit reports and verifies employment, income, and financial information. Appraisals are performed by independent appraisers. The Bank requires an escrow account for taxes and insurance on all loans with loan-to-value in excess of 80%. All mortgage loan requests are reviewed by a mortgage loan committee; loans in excess of $200,000 require the approval of either the Bank's Board of Directors or its loan committee. Construction and land development loans consisted mostly of 1 to 4 family residential properties. These loans have a 6 to 9 month maturity and are made using the same underwriting criteria as residential mortgages. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are either converted to permanent loans at the completion of construction or are paid off from financing through another financial institution. Commercial lending, which includes loans for farmland and agricultural production, state and political subdivisions, commercial real estate, and commercial loans equaled 15.8% of the Bank's loan portfolio at December 31, 1999. Repayment of commercial loans is often dependent upon the successful operation and management of a business; thus, these loans generally involve greater risk than other types of lending. The Bank minimizes its risk by generally limiting the amount of loans to any one borrower to $3.5 million. Borrowers with credit needs of more than $3.5 million are serviced through the use of loan participations with other commercial banks. All commercial real estate loans require loan-to-value limits of less than 80%. Depending upon the type of loan, past credit history, and current operating results, the Bank may require the borrower to pledge accounts receivable, inventory, and fixed assets. Personal guarantees are generally required from the owners of closely held corporations, partnerships, and proprietorships. In addition, the Bank requires annual financial statements, prepares cash flow analysis, and reviews credit reports. All commercial loan requests require the approval of two senior loan officers if the amount exceeds $200,000. Loan requests in excess of $200,000 require the approval of either the Bank's Board of Directors or its loan committee. Consumer loans granted by the Bank include automobile loans, secured and unsecured personal loans, credit cards, student loans, and overdraft protection. The Bank does not offer revolving home equity loans nor does it purchase dealer paper. Loan amortization is generally for a period of up to 5 years; except home improvement loans, which are amortized for up to 10 years. The Bank places underwriting emphasis on a borrower's ability to pay rather than collateral value. Except for student loans, no installment loans are sold in the secondary market. All student loans are sold in the secondary market upon reaching a payout status. 4
5 SUPERVISION AND REGULATION The Corporation 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. (See Regulation below.) Isabella Bank is chartered by the State of Michigan. The Bank is a member of the Federal Reserve System, its deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law, and is a member of the Federal Home Loan Bank of Indianapolis. The Bank and IBT Loan Production are supervised and regulated by the Financial Institutions Bureau of the State of Michigan and the Federal Reserve Board. (See Regulation below) IBT Financial Services, Inc., is a broker-dealer, registered and subject to regulation by the Securities and Exchange Commission under federal securities laws. This subsidiary is also subject to regulation under state securities laws. The Bank's non-banking subsidiaries, IBT Agency and IBT Title, are licensed insurance agencies and are subject to regulation by the Michigan Insurance Bureau. PERSONNEL As of December 31, 1999, the Corporation had one full-time employee, the Bank had 180 full-time equivalent employees, IBT Financial Services had four full-time employees, IBT Agency has a dual employee arrangement with IBT Financial Services, IBT Title had fourteen full-time equivalent employees, and IBT Loan Production had two full-time employees. The Corporation and the Bank provide group life, health, accident, disability and other insurance programs for employees and a number of other employee benefit programs. The Corporation believes its relationship with its employees to be good. LEGAL PROCEEDINGS There are various claims and law suits in which the Bank is periodically involved, such as claims to enforce liens, condemnation proceedings on making and servicing of real property loans and other issues incident to the Bank's business. However, neither the Corporation nor the Bank is involved in any material pending litigation. REGULATION The earnings and growth of the banking industry and therefore the earnings of the Corporation and the earnings of the Bank are affected by the credit policies of monetary authorities, including the Federal Reserve System. An important function of the Federal Reserve System is to regulate the national supply of bank credit in order to combat recession and curb inflationary pressures. Among the instruments of monetary policy used by the Federal Reserve to implement these objectives are open market operations in U.S. Treasury securities, changes in the discount rate on member bank borrowing, and 5
6 changes in reserve requirements against member bank deposits. These methods are used in varying combinations to influence overall growth of bank loans, investments and deposits and may also affect interest rates charged on loans or paid for deposits. The monetary policies of the Federal Reserve System have had a significant effect on the operating results of commercial banks and related financial service providers in the past and are expected to continue to do so in the future. The effect of such policies upon the future business and earnings of the Corporation and the Bank cannot be predicted. THE CORPORATION The Corporation, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended ("BHC Act"), and is subject to the supervision of the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). The Corporation is registered as a bank holding company with the Federal Reserve Board and is required to file with the Federal Reserve Board an annual report and such additional information as the Federal Reserve Board requires. The Federal Reserve Board may also make inspections and examinations of the Corporation and its subsidiaries. Under the BHC Act, bank holding companies such as the Corporation are prohibited, with certain limited exceptions, from engaging in activities other than those of banking or of managing or controlling banks and from acquiring or retaining direct or indirect ownership or control of voting shares or assets of any company which is not a bank or bank holding company, other than subsidiary companies furnishing services to or performing services for its subsidiaries, and other subsidiaries engaged in activities which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Under the BHC Act, bank holding companies may not (subject to certain limited exceptions) directly or indirectly acquire the ownership or control of more than 5% of any class of voting shares or substantially all of the assets of any company, including a bank or bank holding company, without the prior written approval of the Federal Reserve Board. The BHC Act prohibits the Federal Reserve Board (subject to certain limited exceptions) from approving the acquisition, by a bank holding company, such as the Corporation, the principal banking operations of which are conducted in one state, of control of a bank or bank holding company conducting its principal banking operations in another state, unless the statutory laws of the state in which are conducted the principal banking operations of the bank holding company or bank to be acquired, explicitly authorize such an acquisition. Under existing Michigan law and with the approval of the Commissioner of the Michigan Financial Institutions Bureau, a Michigan-based bank and bank holding company (such as the Corporation) may now be acquired by a bank holding company located in any state, if the laws of such state would grant Michigan-based banks or bank holding companies the right to acquire one or more banks or bank holding companies located in such state under conditions which are not unduly restrictive. Under the Michigan statute, the Commissioner of the Michigan Financial Institutions Bureau must not approve any such transaction without first determining among other things that the other state's law satisfies the reciprocity requirement imposed by the Michigan statute. 6
7 Most states have adopted legislation that permits out-of-state bank holding companies to acquire local banks and bank holding companies subject, in most cases, to reciprocity requirements. Under Federal Reserve Board policy, the Corporation is expected to act as a source of financing strength to its subsidiary bank and to commit resources to support its subsidiary. This support may be required at times when, in the absence of such Federal Reserve Board policy, the Corporation would not otherwise be required to provide it. Under Michigan law, if the capital of a Michigan state chartered bank (such as the Corporation's bank subsidiary) has become impaired by losses or otherwise, the Commissioner of the Michigan Financial Institutions Bureau may require that the deficiency in capital be met by assessment upon the Bank's stockholders pro rata on the amount of capital stock held by each, and if any such assessment is not paid by any stockholder within 30 days of the date of mailing of notice thereof to such stockholder, cause the sale of the stock of such stockholder to pay such assessment and the costs of sale of such stock. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would apparently apply to guarantees of capital plans under the Federal Deposit Insurance Corporation Improvement Act of 1991. Certain additional information concerning regulatory guidelines for capital adequacy and other regulatory matters is presented herein under the caption "Capital" on page 23 and "Note I - Commitments and Other Matters" and "Note K - Regulatory Capital Matters" on pages 44, 45, and 46, respectively. ISABELLA BANK & TRUST The Bank is subject to regulation and examination primarily by the Michigan Financial Institutions Bureau. As an insured state bank, which is a member of the Federal Reserve Bank of Chicago, the subsidiary is also subject to regulation and examination by the FDIC and the Federal Reserve. The agencies and federal and state law extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other activities, capital adequacy, branching, interest rates on loans and on deposits and the safety and soundness of banking practices. Banking laws and regulations also restrict transactions by insured banks owned by a bank holding company, including loans to and certain purchases from the parent holding company, non-bank and bank subsidiaries of the parent holding company, principal shareholders, officers, directors and their affiliates, and investments by the subsidiary 7
8 banks in the shares or securities of the parent holding company (or any of the other non-bank or bank affiliates), acceptance of such share or securities as collateral security for loans to any borrower. The Bank is also subject to legal limitations on the frequency and amount of dividends that can be paid to the Corporation. For example, a Michigan state bank may not declare a cash dividend or a dividend in kind except out of net profits then on hand after deducting all losses and bad debts, and then only if it will have a surplus amounting to not less than 20% of its capital after the payment of the dividend. Moreover, a Michigan state bank may not declare or pay any cash dividend or dividend in kind until the cumulative dividends on its preferred stock, if any, have been paid in full. Further, if the surplus of a Michigan state bank is at any time less than the amount of its capital, before the declaration of a cash dividend or dividend in kind, it must transfer to surplus not less than 10% of its net profits for the preceding half-year (in the case of quarterly or semi-annual dividends) or the preceding two consecutive half-year periods (in the case of annual dividends). The payment of dividends by the Corporation and the Bank is also affected by various regulatory requirements and policies, such as the requirement to maintain adequate capital above regulatory guidelines. Recently enacted legislation will impose further restrictions on the payment of dividends by insured banks which fail to meet specified capital levels. The FDIC may prevent an insured bank from paying dividends if the bank is in default of payment of any assessment due to the FDIC. In addition, payment of dividends by a bank may be prevented by the applicable federal regulatory authority if such payment is determined, by reason of the financial condition of such bank, to be an unsafe and unsound banking practice. The Federal Reserve Board and the FDIC have issued policy statements providing that bank holding companies and insured banks should generally only pay dividends out of current operating earnings. These regulations and restrictions may limit the Corporation's ability to obtain funds from the Bank for its cash needs, including payment of dividends and operating expenses. The activities and operations of the Bank are also subject to other federal and state laws and regulations, including usury and consumer credit laws, the Federal Trust-in-Lending Act, Truth-in-Saving and Regulation Z of the Federal Reserve Board and the Federal Bank Merger Act. 8
9 ITEM 2. PROPERTIES The Corporation's offices are located in the main office building of the Bank. The Bank owns and operates 15 facilities and leases one. IBT Title owns one facility. The Corporation's facilities current, planned, and best use is for conducting its current activities with the exception of approximately 8% of the main office, and 45% of the Clare office, which is leased to tenants. In management's opinion, each facility has excess capacity and is in good condition. The following table sets forth the location of the Corporation's offices, as well as certain additional information relating to those offices as of December 31, 1999. <TABLE> <CAPTION> Year Approximate Net Facility Square Book Value Opened Footage 12/31/99 (1) -------- ---------------- ------------ <S> <C> <C> <C> Isabella Bank and Trust Main Office 200 East Broadway (2) Mt. Pleasant, Michigan 1903 27,640 $213,401 Main Office Extension Customer Service Center 139 East Broadway Mt. Pleasant, Michigan 1985 16,736 498,266 Isabella County Branch Offices 1416 East Pickard (3) Mt. Pleasant, Michigan 1983 1,450 504,013 2133 South Mission (6) Mt. Pleasant, Michigan 1976 1,560 397,702 200 South University (4) Mt. Pleasant, Michigan 1964 1,795 58,905 1402 West High Mt. Pleasant, Michigan 1973 2,150 49,734 401 East Main Street (5) Blanchard, Michigan 1911 6,561 14,562 500 East Wright Avenue Shepherd, Michigan 1980 1,830 184,194 3388 N. Woodruff Road Weidman, Michigan 1975 5,400 73,987 </TABLE> 9
10 <TABLE> <CAPTION> Year Net Facility Approximate Book Value Opened Sq. Footage 12/31/99 (1) -------- --------------- ------------ <S> <C> <C> <C> 1867 Winn Road Beal City, Michigan 1977 1,100 $50,548 Montcalm County Branch Office 313 W. Bridge Street (6) Six Lakes, Michigan 1966 1,527 421,267 Clare County Branch Offices 532 N. McEwan Street Clare, Michigan 1993 7,300 387,119 1125 N. McEwan Street Clare, Michigan 1997 525 415,253 Mecosta County Branch Offices 220 W. Wheatland Street Remus, Michigan 1998 4,273 313,184 240 E. Northern Avenue Barryton, Michigan 1998 4,273 257,337 8529 - 100th Avenue Stanwood, Michigan 1998 2,665 22,687 IBT Title 209 E. Broadway Mt. Pleasant, Michigan 1998 2,640 225,556 </TABLE> (1) includes land and buildings (2) substantially remodeled in 1986 (3) substantially remodeled in 1990 (4) partially remodeled in 1986 and 1988 (5) substantially remodeled in 1976 and partially remodeled in 1986 (6) substantially remodeled in 1992 and 1996 10
11 ITEM 3. LEGAL PROCEEDINGS The Corporation and the Bank are not involved in any material pending legal proceedings. The Bank, because of the nature of its business, is at times subject to numerous pending and threatened legal actions which arises out of the normal course of their business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 1999 to a vote of security holders through the solicitation of proxies or otherwise. EXECUTIVE OFFICERS OF REGISTRANT Pursuant to instruction G(3), the following information is included as an unnumbered item under Part I of this report in lieu of being included in the Proxy Statement for the Annual Shareholders Meeting to be held on April 18, 2000. The names, ages, corporate positions, and years of service of the executive officers of the Corporation are as follows: <TABLE> <CAPTION> YEARS OF NAME AGE POSITION SERVICE ---- --- -------- ------- <S> <C> <C> <C> David W. Hole 62 President and CEO 40 Mary Ann Breuer 60 Secretary 40 Dennis P. Angner 44 Treasurer 16 </TABLE> 11
12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS 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 the management of the Corporation is aware. From January 1, 1998 through December 31, 1999 there were, so far as management knows, 78 sales of the Corporation's common stock. These sales involved 58,807 shares, as adjusted for a 3.3 for 1 stock split declared in December 1999 paid in February 2000. 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 Bank's stock was $27.27 per share in both the third and fourth quarters of 1999, and the lowest price was $17.91 per share in the first quarter of 1998. The following is a summary of all known transfers since January 1, 1998. All of the information has been adjusted to reflect the stock dividend referred to above. <TABLE> <CAPTION> Number of Number of Low High Date Sales Shares Bid Bid ---- --------- --------- --- ---- <S> <C> <C> <C> <C> 1998 First Quarter 3 743 $17.91 $17.91 Second Quarter 5 7,039 21.82 21.82 Third Quarter 11 7,187 21.82 23.33 Fourth Quarter 7 2,904 23.33 23.33 1999 First Quarter 12 27,430 $23.33 $24.85 Second Quarter 7 4,376 23.79 25.76 Third Quarter 18 4,704 24.24 27.27 Fourth Quarter 15 3,704 27.27 27.27 </TABLE> The following table sets forth the cash dividends paid for the following quarters, adjusted for the 3.3 for 1 stock split. <TABLE> <CAPTION> 1999 1998 ---- ---- <S> <C> <C> First Quarter $0.08 $0.08 Second Quarter 0.08 0.08 Third Quarter 0.08 0.08 Fourth Quarter 0.26 0.23 ----- ----- TOTAL $0.50 $0.47 ===== ===== </TABLE> IBT Bancorp's authorized common stock consists of 4,000,000 shares, of which 2,976,436 shares are issued and outstanding as of December 31, 1999 (as adjusted for the stock split paid February 18, 2000). As of year end 1999, there were 895 shareholders of record. 12
13 ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands except per share data) <TABLE> <CAPTION> 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA Total interest income $27,501 $ 25,799 $ 22,730 $ 21,698 $ 19,852 Net interest income 14,603 13,317 12,196 11,741 10,855 Provision for loan losses 309 321 386 500 475 Net income 4,051 3,634 3,609 3,340 2,958 BALANCE SHEET DATA End of year assets $402,018 $388,783 $318,731 $298,742 $281,505 Daily average assets 397,194 358,207 303,088 289,308 265,860 Daily average deposits 356,596 322,297 270,311 259,240 238,761 Daily average loans/net 252,755 226,997 213,757 196,783 177,109 Daily average equity 35,356 32,349 29,591 26,954 24,313 PER SHARE DATA (1) Net income $1.38 $ 1.26 $ 1.26 $ 1.18 $ 1.06 Cash dividends 0.50 0.47 0.45 0.42 0.36 Book value (at year end) 12.32 11.87 10.76 9.85 9.19 FINANCIAL RATIOS Shareholders' equity to assets 9.12% 8.88% 9.71% 9.37% 9.17% Net income to average equity 11.46 11.23 12.20 12.39 12.17 Cash dividend payout to net income 36.24 37.64 35.38 35.60 34.27 Net income to average assets 1.02 1.01 1.19 1.15 1.11 </TABLE> (1) Retroactively restated for the 3.3 for 1 stock split declared on December 14, 1999, paid February 18, 2000. 13
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY; INTEREST RATE AND INTEREST DIFFERENTIAL (Dollars in thousands) The following schedules present the daily average amount outstanding for each major category (at historical cost) 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. <TABLE> <CAPTION> 1999 1998 1997 ------------------------------ ---------------------------- ------------------------------ Tax Average Tax Average Tax Average Average Equivalent Yield/ Average Equivalent Yield/ Average Equivalent Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- ---------- ---- ------- -------- ---- ------- -------- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> INTEREST EARNING ASSETS Loans $255,907 $21,486 8.40% $229,966 $20,112 8.75% $216,612 $18,865 8.71% Taxable investment securities 73,997 4,363 5.90 71,104 4,305 6.05 42,438 2,688 6.33 Nontaxable investment securities 21,118 1,494 7.07 18,677 1,318 7.06 14,053 967 6.88 Federal funds sold 13,679 662 4.84 9,828 520 5.29 9,700 524 5.40 Other 1,804 125 6.93 1,610 117 7.27 1,441 108 7.49 -------- ------- ---- -------- ------- ---- -------- ------- ---- TOTAL EARNING ASSETS 366,505 28,130 7.68 331,185 26,372 7.96 284,244 23,152 8.15 NONEARNING ASSETS Allowance for loan losses (3,152) (2,969) (2,855) Cash and due from banks 14,480 12,984 10,380 Premises and equipment 8,395 7,044 5,727 Accrued income and other assets 10,966 9,963 5,592 -------- -------- -------- TOTAL ASSETS $397,194 $358,207 $303,088 ======== ======== ======== INTEREST BEARING LIABILITIES Interest bearing demand deposits $55,797 1,343 2.41 $ 47,364 1,259 2.66 $ 38,875 1,044 2.69 Savings deposits 100,988 3,085 3.05 85,541 2,738 3.20 70,517 2,291 3.25 Time deposits 155,212 8,440 5.44 146,143 8,469 5.80 122,525 7,199 5.88 Federal funds purchased 543 30 5.52 274 16 5.84 --- --- --- -------- ------- ---- -------- ------ ---- -------- ------- ------ TOTAL INTEREST BEARING LIABILITIES 312,540 12,898 4.13 279,322 12,482 4.47 231,917 10,534 4.54 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 44,599 42,975 38,394 Other 4,699 3,561 3,186 Shareholders' equity 35,356 32,349 29,591 -------- -------- -------- TOTAL LIABILITIES AND EQUITY $397,194 $358,207 $303,088 ======== ======== ======== NET INTEREST INCOME (FTE) $15,232 $13,890 $12,618 ======= ======= ======= NET YIELD ON INTEREST EARNING ASSETS (FTE) 4.16% 4.19% 4.44% ===== ===== ===== </TABLE> 14
15 RESULTS OF OPERATIONS The Corporation achieved record net income for the thirteenth consecutive year in 1999 with earnings of $4,051,000, versus $3,634,000 in 1998. Earnings per share was $1.38, an increase of $0.12 from 1998 and 1997. 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 equaled 1.02% in 1999, 1.01% in 1998, and 1.19% in 1997. 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 equaled 11.46% in 1999, 11.23% in 1998, and 12.20% in 1997. The Corporation's subsidiary bank, Isabella Bank and Trust, completed the purchase of three branches from Old Kent Bank on March 31, 1998. The purchase included approximately $43.1 million in deposits and $233,000 in loans. IBT Title, a wholly owned subsidiary of Isabella Bank and Trust, acquired Isabella County Abstract Company on July 31, 1998 and Mecosta County Abstract and Title on June 30, 1999. The acquisitions included premises, equipment, and abstract title plants. The purchase prices were less than 1% of the Corporation's assets. The Results of Operations and Changes in Financial Position include the operating results from the dates of purchase. NET INTEREST INCOME The Corporation derives the majority of its 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. 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 $789,000 in 1999; $879,000 in 1998; and $599,000 in 1997. 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 (Dollars in thousands) 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. <TABLE> <CAPTION> 1999 Compared to 1998 1998 Compared to 1997 Increase (Decrease) Due to Increase (Decrease) Due to -------------------------------- ------------------------------ Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- <S> <C> <C> <C> <C> <C> <C> CHANGES IN INTEREST INCOME Loans $2,202 $(828) $1,374 $1,168 $ 79 $1,247 Taxable investment securities 172 (114) 58 1,740 (123) 1,617 Nontaxable investment securities 173 3 176 326 25 351 Federal funds sold 189 (47) 142 7 (11) (4) Other 14 (6) 8 12 (3) 9 ------ ----- ------ ------ ----- ------ TOTAL CHANGES IN INTEREST INCOME 2,750 (992) 1,758 3,253 (33) 3,220 CHANGES IN INTEREST EXPENSE Interest bearing demand deposits 210 (126) 84 226 (11) 215 Savings deposits 476 (129) 347 481 (34) 447 Time deposits 509 (538) (29) 1,370 (100) 1,270 Federal funds purchased 15 (1) 14 16 -- 16 ------ ----- ------ ------ ----- ------ TOTAL CHANGES IN INTEREST EXPENSE 1,210 (794) 416 2,093 (145) 1,948 ------ ----- ------ ------ ----- ------ NET CHANGE IN FTE NET INTEREST INCOME $1,540 $(198) $1,342 $1,160 $ 112 $1,272 ====== ====== ====== ====== ===== ====== </TABLE> 15
16 As shown in Tables 1 and 2, when comparing year ending December 31, 1999 to 1998, fully taxable equivalent (FTE) net interest income increased $1.34 million or 9.7%. An increase of 10.7% in average interest earning assets provided $2.75 million of FTE interest income. The majority of this growth was funded by a 11.9% increase in interest bearing deposits, resulting in $1.21 million of additional interest expense. Overall, changes in volume resulted in $1.54 million in additional FTE interest income. The average FTE interest rate earned on assets decreased by 0.28%, decreasing FTE interest income by $992,000, and the average rate paid on deposits decreased by 0.34%, decreasing interest expense by $794,000 The net change related to interest rates earned and paid was a $198,000 decrease in FTE net interest income. The Corporation's FTE net yield as a percentage of average assets declined 0.03% to 4.16% in 1999. A $90,000 decrease in loan fees included in interest income accounted for 0.02% of the decline. Other factors affecting the Corporation's net interest margin are the increasing reliance on higher cost deposits such as certificates of deposit and money market accounts to fund asset growth, and intense rate competition for new commercial and installment loans. Management expects the Corporation's reliance on higher cost deposits to fund asset growth to continue and for rates charged for loans in relation to deposit costs to continue declining. Net interest income increased $1.27 million to $13.9 million in 1998 from $12.6 million in 1997. As shown in Tables 1 and 2, in 1998 (FTE) interest income increased $3.25 million, from a 16.5% increase in the volume of average earning assets. The growth of interest earning assets was funded primarily by a 20.4% increase in interest bearing deposits that resulted in additional interest expense of $2.09 million. Overall, the Corporation earned an additional $1.16 million in FTE interest income as a result of volume. The average rate earned in 1998 decreased by 0.19%, decreasing FTE interest income by $33,000 and the average rate paid on deposits decreased by 0.07%, decreasing interest expense by $145,000. The net result of the lower interest rates earned and paid increased FTE net interest income by $112,000. The Corporation's FTE net interest yield as a percentage of average earning assets equaled 4.19% during 1998 versus 4.44% in 1997. The 0.25% decrease in the net interest yield was primarily a result of the Bank's purchase of the Old Kent branches. The net proceeds (due to the assumption of the deposit liabilities) were invested in investment securities. The overall net FTE interest yield on these additional funds was approximately 2.20%, and lowered the yield by an estimated 0.18% in 1999. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Total loans outstanding represent 77.8% 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, both the Board of Directors and senior management 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, 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 12.2% in 1999 and 13.6% in 1998. The provision for loan losses in 1999 was $309,000, a $12,000 decrease from 1998 and a $77,000 decrease from 1997. The allowance for loan losses as a percentage of total outstanding loans at year end 1999 was 1.16% compared to 1.21% at December 31, 1998. The Corporation's net charged off loans as a percentage of average loans was 0.03% in 1999 and 0.01% in 1998. The provision was reduced in 1999 due to a decrease in nonperforming loans, as shown in Table 4, and an extremely moderate amount of net charged off loans of $76,000. 16
17 TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE (Dollars in thousands) The following is a summary of loan balances at the end of each period and their daily average balances, changes in the allowance for possible loan losses arising from loans charged off and recoveries on loans previously charged off, and additions to the allowance which have been expensed. <TABLE> <CAPTION> December 31 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Amount of loans outstanding at the end of year $276,722 $246,708 $217,249 $215,455 $185,996 ======== ======== ======== ======== ======== Average amount of gross loans outstanding for the year $255,907 $229,966 $216,612 $199,277 $179,355 ======== ======== ======== ======== ======== Summary of changes in allowance Allowance for loan losses - January 1 $ 2,977 $2,677 $ 2,621 $ 2,248 $ 2,083 Loans charged off Commercial and agricultural 93 42 230 166 334 Real estate mortgage 62 70 181 36 4 Personal 208 152 164 173 161 -------- -------- -------- -------- -------- TOTAL LOANS CHARGED OFF 363 264 575 375 499 Recoveries Commercial and agricultural 57 128 124 146 109 Real estate mortgage 92 13 2 --- --- Personal 138 102 119 102 80 -------- -------- -------- -------- -------- TOTAL RECOVERIES 287 243 245 248 189 -------- -------- -------- -------- -------- Net charge offs 76 21 330 127 310 Provision charged to income 309 321 386 500 475 -------- -------- -------- -------- -------- ALLOWANCE FOR LOAN LOSSES - DECEMBER 31 $ 3,210 $ 2,977 $ 2,677 $ 2,621 $ 2,248 ======== ======== ======== ======== ======== Ratio of net charge offs during the year to average loans outstanding 0.03% 0.01% 0.15% 0.06% 0.17% ===== ===== ===== ===== ===== Ratio of the allowance for loan losses to loans outstanding at year end 1.16% 1.21% 1.23% 1.22% 1.21% ===== ===== ===== ===== ===== </TABLE> As shown in Table 4, the percentage of loans classified as nonperforming by the Corporation as of December 31, 1999 and 1998 equaled 0.28% and 0.38% of total loans, respectively. The Bank's policy, including a loan considered impaired under SFAS No. 118, is 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, it is determined 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. Restructured loans are loans whose terms have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower. 17
18 TABLE 4. NONPERFORMING LOANS (Dollars in thousands) The following loans are all the credits which require classification for state or federal regulatory purposes. <TABLE> <CAPTION> December 31 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Nonaccrual loans $279 $ 99 $292 $--- $262 Accruing loans past due 90 days or more 505 847 235 441 590 Restructured loans --- --- --- 107 --- ----- ----- ----- ----- ----- TOTAL NONPERFORMING LOANS $784 $946 $527 $548 $852 ===== ===== ===== ===== ===== </TABLE> As of December 31, 1999, 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. In management's opinion, the allowance for loan losses is adequate as of December 31, 1999. Management has allocated, as shown in Table 5, the allowance for loan losses to the following categories: 57.1% to commercial and agricultural loans; 24.5% to real estate loans; 14.1% to installment loans; and 4.3% unallocated. When analyzing the adequacy of the allowance for loan losses at December 31, 1999, management reclassified commercial installment loans from the installment category to the commercial category, resulting in a shift of allocated allowance from installment to commercial and agricultural loans. The above allocation is not intended to imply limitations on usage of the allowance. The entire allowance is available for any future loans without regard to loan type. TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES (Dollars in thousands) 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: <TABLE> <CAPTION> December 31 1999 1998 1997 1996 1995 ------------------- ------------------- ------------------- -------------------- ------------------- % of Each % of Each % of Each % of Each % of Each Category Category Category Category Category Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans --------- --------- ---------- --------- --------- --------- --------- --------- ---------- -------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial and agricultural $1,832 17.4% $1,014 18.2% $1,093 17.0% $1,110 18.6% $1,079 18.1% Real estate mortgage 788 67.9 864 67.1 584 66.0 384 64.0 278 62.2 Installment 452 14.7 869 14.7 782 17.0 928 17.4 707 19.7 Impaired loans --- --- --- --- --- --- --- --- 5 --- Unallocated 138 --- 230 --- 218 --- 199 --- 179 --- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ TOTAL $3,210 100.0% $2,977 100.0% 2,677 100.0% $22,621 100.0% $2,248 100.0% ====== ====== ====== ====== ====== ====== ======= ====== ====== ====== </TABLE> 18
19 NONINTEREST INCOME Noninterest income consists of trust fees, deposit service charges, fees for other financial services, gain on the sale of mortgage loans, title insurance revenue, and gains and losses on investment securities available for sale. There was an $893,000 increase in fees earned from these sources during 1999. Significant changes during 1999 include a $670,000 increase in the sale of title insurance and related services, a $101,000 increase in ATM access fees, a $42,000 increase in brokerage commissions, a $35,000 increase in overdraft fees, a $64,000 increase in mortgage servicing fees, a $68,000 decline in gains on the sale of real estate mortgages, and a $37,000 decline in gains on the sale of investment securities available for sale. Included in noninterest income is a $277,000 gain from the sale of $35.8 million in mortgages during 1999 versus a $345,000 gain on the sale of $55.8 million for 1998. The Corporation has established a policy that all 30-year fixed rate mortgage loans will be sold. During 1999, most 15 and 30 year fixed rate mortgage loans granted were sold on the secondary market. These loans were sold without recourse, with servicing retained. Noninterest income increased $851,000 or 40.5% in 1998 when compared to 1997. Significant changes in 1998 include $318,000 of revenue from IBT Title, a $49,000 increase in brokerage commissions, a $38,000 increase in trust fees, a $64,000 increase in gains on the sale of investment securities available for sale, and a $214,000 increase in the gain on the sale of mortgage loans. NONINTEREST EXPENSES Noninterest expense increased $1.66 million or 15.1% during 1999. The dollar amount and percent of increase, but not the overall operating efficiency of the Corporation were significantly impacted by the acquisition of the Old Kent branches in March 1998, Isabella County Abstract in July 1998, and Mecosta County Abstract in July 1999. Net noninterest expense less noninterest income divided by average total assets equalled 2.20% in 1999, 2.23% in 1998, and 2.21% in 1997. The largest component of noninterest expense is salaries and employee benefits, which increased $620,000 or 10.3%. Salary expenses related to the acquisitions are estimated to equal $300,000. The remaining increase is related to normal merit and promotional salary increases and additional staffing. Occupancy and furniture and equipment expenses increased $301,000 or 16.4% in 1999. Approximately half of the increase is related to depreciation, service contracts, and computer costs related to the installation of a teller terminal system late in 1998. Other significant increases include property taxes and utilities related to the aforementioned acquisitions. All other operating expenses increased $734,000, a 23.6% increase. The amortization of acquisition intangibles accounted for $142,000 of the increase. Telephone, consultant fees, donations, printing and office supplies, marketing, and educational expenses accounted for the majority of the remaining increase. Noninterest expense increased $2.13 million or 24.2% in 1998. The additional expenses related to the 1998 acquisition was approximately $1.3 million. During 1998, salaries and benefits increased $1.15 million, occupancy and furniture and equipment expenses increased $288,000 and all other operating expenses increased $691,000. FEDERAL INCOME TAXES Federal income tax expense for 1999 was $1.49 million or 26.9% of pre-tax income compared to $1.37 million or 27.4% of pre-tax income in 1998 and $1.49 million or 29.2% in 1997. The decrease in income tax expense as a percentage of income in 1999 is attributable to an increase in non taxable 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 E, Federal Income Taxes, in the accompanying consolidated financial statements. 19
20 ANALYSIS OF CHANGES IN THE STATEMENT OF CONDITION Total assets were $402.0 million at December 31, 1999, an increase of $13.2 million or 3.4% over year end 1998. Asset growth was primarily funded by a $5.6 million increase in deposits, a $5.0 million increase in federal funds borrowing, and a $2.2 million 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 1999, the Corporation's net holding of investment securities decreased $6.4 million. 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, U.S. Agencies, and restricted securities. 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 (Dollars in thousands) The following is a schedule of the carrying value of investment securities available for sale and held to maturity: <TABLE> <CAPTION> December 31 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Available for sale U.S. Treasury and U.S. government agencies $52,151 $59,630 $42,682 States and political subdivisions 30,677 27,842 14,709 Commercial paper --- 2,014 --- ------- ------- ------- TOTAL $82,828 $89,486 $57,391 ======= ======= ======= Held to maturity U.S. Treasury and U.S. government agencies $ 656 $1,425 $3,306 States and political subdivisions 4,430 3,509 2,388 Restricted securities 1,736 1,614 1,466 ------ ------ ------ TOTAL $6,822 $6,548 $7,160 ====== ====== ====== </TABLE> 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. Restricted securities consist solely of Federal Reserve Bank and Federal Home Loan Bank stock, which have no contractual maturity. 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, collateralized mortgage obligations, zero coupon bonds, nongovernment agency asset backed securities, and structured notes. 20
21 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, 1999. The weighted average interest rates have been computed on a fully taxable equivalent basis, based on amortized cost. The rates shown on securities issued by states and political subdivisions are stated on a taxable equivalent basis using a 34% tax rate. TABLE 7. SCHEDULE OF MATURITIES OF INVESTMENT SECURITIES AND WEIGHTED AVERAGE YIELDS (Dollars in thousands) <TABLE> <CAPTION> Maturing ----------------------------------------------------------------------------------------------- After Ten After One After Five Years But Years But Years But Within Within Within Investments with no One Year Five Years Ten Years contractual maturity Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> Available for sale U.S. Treasury and U.S. government agencies $10,971 5.83% $40,178 5.83% $1,002 6.06% $ --- ---% States and political subdivisions 2,665 6.58 18,211 6.58 8,886 7.17 915 6.40 ------- ----- ------- ----- ------ ----- ---- ----- TOTAL $13,636 5.98% $58,389 6.06% $9,888 7.06% $915 6.40% ======= ===== ======= ===== ====== ===== ==== ===== Held to maturity U.S. Treasury and U.S government agencies $ 308 5.48% $ 293 6.31% $ 56 7.52% $ --- ---% States and political subdivisions 2,400 6.09 1,865 7.51 164 7.58 --- --- Restricted securities --- --- --- --- --- 1,736 7.46 ------ ----- ------ ----- ---- ----- ------ ----- TOTAL $2,708 6.02% $2,158 7.35% $220 7.56% $1,736 7.46% ====== ===== ====== ===== ==== ===== ====== ===== </TABLE> 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 (Dollars in thousands) <TABLE> <CAPTION> December 31 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Commercial and agricultural $ 48,156 $ 44,917 $ 36,978 $ 40,068 $ 33,585 Real estate mortgage 188,016 165,553 143,424 137,998 115,718 Installment 40,550 36,238 36,847 37,389 36,693 -------- --------- --------- --------- --------- TOTAL LOANS $276,722 $246,708 $217,249 $215,455 $185,996 ======== ======== ======== ======== ======== </TABLE> Total loans increased $30.0 million in 1999. The increase was primarily in residential real estate mortgages. During 1999, a total of 6,493 new loans were granted for a total of $171.9 million. 21
22 DEPOSITS Total deposits increased $5.6 million and were $355.6 million at year end 1999, a 1.6% increase over 1998. Average deposits increased 10.6% in 1999 and 19.3% in 1998. During 1999, average noninterest bearing deposits increased 3.8%, interest bearing demand deposits increased 17.8%, savings deposits increased 18.1%, and time deposits increased 6.0%. Time deposits over $100,000 as a percentage of total deposits equaled 7.0% and 5.4% as of December 31, 1999 and 1998, respectively. TABLE 9. AVERAGE DEPOSITS (Dollars in thousands) <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- <S> <C> <C> <C> <C> <C> <C> Noninterest bearing demand deposits $ 44,599 $ 42,975 $ 38,394 Interest bearing demand deposits 55,797 2.41% 47,364 2.66% 38,875 2.69% Savings deposits 100,988 3.05 85,541 3.20 70,517 3.25 Time deposits 155,212 5.44 146,417 5.80 122,525 5.88 -------- -------- -------- TOTAL $356,596 $322,297 $270,311 ======== ======== ======== </TABLE> TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000 (Dollars in thousands) <TABLE> <CAPTION> December 31 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Maturity Within 3 months $10,163 $ 5,651 $ 9,406 Within 3 to 6 months 4,039 5,471 6,523 Within 6 to 12 months 3,106 4,530 2,439 Over 12 months 7,702 3,119 2,777 ------- ------- ------- TOTAL $25,010 $18,771 $21,145 ======= ======= ======= </TABLE> 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 Bank's trust department also offers a variety of financial products in addition to traditional estate services. Competition from other financial institutions in Isabella County, the Bank's primary market, has an impact on both the amount of and the cost of deposits. Isabella County has a population of less than 60,000 people and is serviced by eight financial institutions with 24 locations. This competition results in a higher cost of funds than would otherwise exist. Generally, deposit rates in Isabella County are higher than in the major metropolitan areas in the state. Currently, the Bank's market share of deposits in Isabella County is slightly in excess of 50%. 22
23 CAPITAL The capital of the Corporation consists solely of common stock, capital surplus, retained earnings, and accumulated other comprehensive income. Total capital increased approximately $2.2 million in 1999. The Corporation offers a dividend reinvestment and employee stock purchase plan. Under the provisions of these Plans, the Corporation issued 19,917 shares of common stock generating $429,000 of capital during 1999, and 32,878 shares of common stock generating $597,000 of capital in 1998. An additional 47,328 shares were issued in conjunction with the acquisition of Mecosta County Abstract and Title Company. These shares were valued at $1.13 million. Total capital decreased $1.98 million due to unrealized losses on investment securities available for sale in 1999. 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 9.0% at year end 1999. There are no commitments for significant capital expenditures. 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, 1999: Percentage of Capital to Risk Adjusted Assets: <TABLE> <CAPTION> Required IBT Bancorp <S> <C> <C> Equity Capital 4.00% 13.31% Secondary Capital 4.00 1.25 ------- -------- Total Capital 8.00% 14.56% ======= ======== </TABLE> 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 bank, Isabella Bank and Trust. At December 31, 1999, Isabella Bank and Trust exceeded these minimums. For further information regarding Isabella Bank and Trust's capital requirements, refer to Note K, 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, 1999 and 1998, cash and cash equivalents equaled 4.4% and 7.8% of total assets, respectively. Net cash provided from operations was $9.5 million in 1999 and $853,000 in 1998. Net cash provided by financing activities equaled $10.7 million in 1999 and $21.6 million in 1998. The Corporation's investing activities used $33.1 million in 1999 and $20.4 million in 1998. The accumulated effect of the Corporation's operating, investing, and financing activities on cash and cash equivalents was a $12.9 million decrease in 1999 and a $2.0 million increase in 1998. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale equaled $82.8 million as of December 31, 1999 and $89.5 million as of December 31, 1998. 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. 23
24 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. 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 $276.7 million in total loans, $17.7 million are variable rate loans. Time deposit liabilities are scheduled based on their contractual maturity except for variable rate time deposits in the amount of $1.2 million 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, 1999, the Corporation had $68.0 million 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 (Dollars in thousands) The following table shows the time periods and the amount of assets and liabilities available for interest rate repricing as of December 31, 1999. For purposes of this analysis, nonaccrual loans and the allowance for loan losses are excluded. <TABLE> <CAPTION> 0 to 3 4 to 12 1 to 5 Over 5 Months Months Years Years <S> <C> <C> <C> <C> Interest Sensitive Assets Investment securities $ 1,402 $14,942 $ 60,547 $12,759 Loans 48,197 45,925 172,060 10,540 ------- ------- -------- ------- TOTAL $49,599 $60,867 $232,607 $23,299 ======= ======= ======== ======= Interest Sensitive Liabilities Federal funds purchased $ 5,000 $ --- $ --- $ --- Time Deposits 31,520 52,946 66,867 5 Savings 64,360 2,902 18,255 14,949 Interest bearing demand 16,742 5,010 26,097 6,779 -------- ------- -------- ------- TOTAL $117,622 $60,858 $111,219 $21,733 ======== ======= ======== ======= Cumulative gap $(68,023) $(68,014) $ 53,374 $54,940 Cumulative gap as a % of assets (16.92)% (16.92)% 13.28% 13.67% </TABLE> 24
25 TABLE 12. LOAN MATURITY AND INTEREST RATE SENSITIVITY (Dollars in thousands) The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 1999. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates. <TABLE> <CAPTION> Due in 1 Year 1 to 5 Over 5 or Less Years Years Total -------- ------- ------ ------- <S> <C> <C> <C> <C> Commercial and agricultural $21,825 $25,193 $1,138 $48,156 ======== ======= ====== ======= Interest Sensitivity: Loans maturing after one year which have: Fixed interest rates $24,583 $1,138 Variable interest rates 610 --- ------- ------ TOTAL $25,193 $1,138 ======= ====== </TABLE> ITEM 7A. 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 agricultural and 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 to the Corporation's net interest income, its primary source of income, to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. 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. Saving and checking deposits may generally be withdrawn on request without prior notice. The timing of cash flow from these deposits are estimated based on historical experience. Time deposits have penalties which discourage early withdrawals. 25
26 The second technique used in the management of IRR is to combine the projected cash flows and repricing characteristics generated by the gap analysis and the interest rates associated with those cash flows and projected future interest income. By changing the amount and timing of the cash flows and the repricing interest rates of those cash flows, the Corporation can project the effect of changing interest rates on its interest income. Based on the projections prepared for the year ended December 31, 1999 the Corporation's net interest income would increase 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, 1999 and 1998. 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 <TABLE> <CAPTION> Fair Value 2000 2001 2002 2003 2004 Thereafter Total 12/31/99 ------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Fixed interest rate securities $16,344 $17,988 $24,745 $11,448 $6,366 $12,759 $89,650 $89,641 Average interest rates 5.46% 5.79% 5.59% 5.76% 5.42% 5.33% 5.58% Fixed interest rate loans $76,470 $55,921 $48,556 $32,078 $35,505 $10,540 $259,070 $258,106 Average interest rates 8.04% 8.01% 7.89% 7.82% 7.71% 7.68% 7.92% Variable interest rate loans $15,526 $1,826 $249 $51 --- --- $17,652 $17,652 Average interest rates 10.05% 10.55% 8.89% 9.27% --- --- 10.08% Rate sensitive liabilities Federal funds purchased $5,000 --- --- --- --- --- $5,000 $5,000 Average interest rates 5.50% --- --- --- --- --- 5.50% Savings and NOW accounts $89,014 $14,340 $11,226 $10,077 $8,710 $21,728 $155,095 $155,095 Average interest rates 3.54% 2.15% 2.15% 2.15% 2.15% 2.15% 2.95% Fixed interest rate time deposits $83,251 $24,102 $19,858 $12,196 $10,711 $5 $150,123 $149,980 Average interest rates 5.10% 5.97% 6.01% 5.76% 5.63% 5.34% 5.45% Variable interest rate time deposits $814 $392 $9 --- --- --- $1,215 $1,215 Average interest rates 5.29% 5.29% 5.29% --- --- --- 5.29% Fair Value 1999 2000 2001 2002 2003 Thereafter Total 12/31/98 ------------------------------------------------------------------------------------- Rate sensitive assets Other interest bearing assets $15,000 --- --- --- --- --- $15,000 $15,000 Average interest rates 4.70% --- --- --- --- --- 4.70% Fixed interest rate securities $18,672 $22,641 $16,576 $13,662 $9,696 $14,787 $96,034 $96,151 Average interest rates 5.59% 5.90% 5.81% 5.83% 5.91% 5.44% 5.74% Fixed interest rate loans $75,146 $45,466 $53,079 $18,705 $26,555 $11,780 $230,731 $236,328 Average interest rates 7.97% 8.37% 8.00% 8.24% 7.80% 7.38% 8.03% Variable interest rate loans $12,937 $2,241 $628 $171 --- --- $15,977 $15,977 Average interest rates 9.04% 10.04% 8.96% 9.39% --- --- 9.18% Rate sensitive liabilities Savings and NOW accounts $87,299 $14,374 $11,448 $9,472 $8,598 $23,509 $154,700 $154,700 Average interest rates 3.38% 2.24% 2.24% 2.24% 2.24% 2.23% 2.88% Fixed interest rate time deposits $84,180 $20,895 $17,261 $13,342 $12,097 $122 $147,897 $149,859 Average interest rates 5.35% 5.95% 6.33% 6.35% 5.75% 6.38% 5.67% Variable interest rate time deposits $770 $319 $5 --- --- --- $1,094 $1,094 Average interest rates 4.67% 4.67% 4.67% --- --- --- 5.29% </TABLE> 26
27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements of the registrant and reports of independent auditors are set forth on pages 28 through 47 of this report: Reports of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements The supplementary data regarding quarterly results of operations set forth under the table named "Summary of Selected Financial Data" on Page 13 of this report. 27
28 Report of Independent Auditors Board of Directors and Shareholders IBT Bancorp We have audited the accompanying consolidated balance sheets of IBT Bancorp and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 generally accepted auditing standards. 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 and subsidiaries as of December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. Rehmann Robson, P.C. Saginaw, Michigan January 21, 2000 28
29 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> DECEMBER 31 1999 1998 ---- ---- <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 17,610 $ 15,497 Federal funds sold --- 15,000 --------- --------- CASH AND CASH EQUIVALENTS 17,610 30,497 Investment securities Securities available for sale (amortized cost of $84,363 in 1999 and $88,015 in 1998) 82,828 89,486 Securities held to maturity (fair value of $6,813 in 1999 and $6,665 in 1998) 6,822 6,548 --------- --------- TOTAL INVESTMENT SECURITIES 89,650 96,034 Loans Commercial 48,156 44,917 Real estate mortgage 188,016 165,553 Installment 40,550 36,238 --------- --------- TOTAL LOANS 276,722 246,708 Less allowance for loan losses 3,210 2,977 --------- --------- NET LOANS 273,512 243,731 Premises and equipment 8,980 7,890 Accrued interest receivable, net 2,588 2,571 Acquisition intangibles, net 3,752 4,327 Other assets 5,926 3,733 --------- --------- TOTAL ASSETS $402,018 $388,783 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 49,203 $ 46,348 NOW accounts 54,628 57,990 Certificates of deposit and other savings 226,794 226,930 Certificates of deposit over $100 25,010 18,771 --------- --------- TOTAL DEPOSITS 355,635 350,039 Federal funds purchased 5,000 --- Accrued interest and other liabilities 4,705 4,221 --------- --------- TOTAL LIABILITIES 365,340 354,260 Shareholders' equity Common stock -- no par value: 4,000,000 shares authorized; 2,976,436 shares issued and outstanding (2,909,191 shares at December 31, 1998) 25,739 24,184 Retained earnings 11,952 9,369 Accumulated other comprehensive (loss) income (1,013) 970 --------- --------- TOTAL SHAREHOLDERS' EQUITY 36,678 34,523 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $402,018 $388,783 ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 29
30 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of year 2,909,191 2,615,102 2,585,408 10% stock dividend --- 261,211 --- Issuance of common stock 67,245 32,878 29,694 --------- --------- --------- BALANCE END OF YEAR 2,976,436 2,909,191 2,615,102 ========= ========= ========= COMMON STOCK Balance at beginning of year $24,184 $18,442 $17,963 10% stock dividend --- 5,145 --- Issuance of common stock 1,555 597 479 ------- ------- -------- BALANCE END OF YEAR 25,739 24,184 18,442 RETAINED EARNINGS Balance at beginning of year 9,369 12,248 9,916 Net income 4,051 3,634 3,609 10% stock dividend --- (5,145) --- Cash dividends ($0.50 per share in 1999, $0.47 in 1998, and $0.45 in 1997) (1,468) (1,368) (1,277) ------- ------- -------- BALANCE END OF YEAR 11,952 9,369 12,248 ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME Balance at beginning of year 970 268 121 Unrealized (losses) gains on securities available for sale, net of income taxes and reclassification adjustment (1,983) 702 147 ------- ------- -------- BALANCE END OF YEAR (1,013) 970 268 TOTAL SHAREHOLDERS' EQUITY END OF YEAR $36,678 $34,523 $30,958 ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 30
31 CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share data) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> INTEREST INCOME Loans, including fees $21,364 $19,986 $18,772 Investment securities Taxable 4,488 4,422 2,796 Tax exempt 987 871 638 Federal funds sold and other 662 520 524 ------- ------- ------- TOTAL INTEREST INCOME 27,501 25,799 22,730 ------- ------- ------- INTEREST EXPENSE Deposits 12,868 12,466 10,534 Federal funds purchased 30 16 -- ------- ------- ------- TOTAL INTEREST EXPENSE 12,898 12,482 10,534 ------- ------- ------- NET INTEREST INCOME 14,603 13,317 12,196 Provision for loan losses 309 321 386 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 14,294 12,996 11,810 NONINTEREST INCOME Trust fees 436 409 371 Service charges on deposit accounts 317 316 285 Other service charges and fees 1,283 1,076 902 Gain on sale of mortgage loans 277 345 131 Title insurance revenue 988 318 -- Other 543 487 411 ------- ------- ------- TOTAL NONINTEREST INCOME 3,844 2,951 2,100 NONINTEREST EXPENSES Salaries, wages, and employee benefits 6,618 5,998 4,846 Occupancy 811 735 628 Furniture and equipment 1,326 1,101 920 Amortization of acquisition intangibles 575 433 -- Other 3,267 2,675 2,417 ------- ------- ------- TOTAL NONINTEREST EXPENSES 12,597 10,942 8,811 ------- ------- ------- INCOME BEFORE FEDERAL INCOME TAXES 5,541 5,005 5,099 Federal income taxes 1,490 1,371 1,490 ------- ------- ------- NET INCOME $ 4,051 $ 3,634 $ 3,609 ======= ======= ======= Net income per basic share of common stock $ 1.38 $ 1.26 $ 1.26 ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 31
32 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) <TABLE> <CAPTION> Year Ended December 31 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> NET INCOME $ 4,051 $ 3,634 $ 3,609 Other comprehensive (loss) income before income taxes Unrealized (losses) gains on securities available for sale Unrealized holding (losses) gains arising during year (3,018) 1,113 208 Reclassification adjustment for realized (gain) loss included in net income (12) (49) 15 ------- ------- ------- Other comprehensive (loss) income before income taxes (3,006) 1,064 223 Income tax (benefit) expense related to comprehensive (loss) income (1,023) 362 76 ------- ------- ------- OTHER COMPREHENSIVE (LOSS) INCOME NET OF INCOME TAXES (1,983) 702 147 ------- ------- ------- TOTAL COMPREHENSIVE INCOME $ 2,068 $ 4,336 $ 3,756 ======= ======= ======= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 32
33 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> OPERATING ACTIVITIES Interest and fees collected on loans and investments $ 27,844 $ 25,515 $ 22,957 Other fees and income received 3,720 2,877 2,052 Interest paid (12,943) (12,517) (10,465) Cash paid to suppliers and employees (11,129) (9,676) (8,173) Decrease (increase) in loans originated for sale 3,992 (4,032) (5) Federal income taxes paid (1,971) (1,314) (1,557) -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,513 853 4,809 INVESTING ACTIVITIES Activity in available for sale securities Maturities, calls, and sales 27,940 30,669 19,889 Purchases (25,527) (63,617) (26,745) Activity in held to maturity securities Maturities and calls 829 2,591 3,036 Purchases (222) (350) (702) Net increase in loans (34,081) (25,216) (2,119) Purchases of premises and equipment (922) (929) (894) Acqusitions of branch offices, less cash received -- 37,874 -- Acquisition of title office -- (1,471) -- -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (31,983) (20,449) (7,535) FINANCING ACTIVITIES Net increase (decrease) in noninterest bearing deposits 2,856 (103) 1,284 Net increase in interest bearing deposits 2,740 22,462 15,625 Federal funds purchased 5,000 -- -- Cash dividends (1,468) (1,368) (1,277) Proceeds from issuance of common stock 455 597 479 -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 9,583 21,588 16,111 (DECREASE) INCREASE IN CASH AND CASH -------- -------- -------- EQUIVALENTS (12,887) 1,992 13,385 Cash and cash equivalents beginning of year 30,497 28,505 15,120 -------- -------- -------- CASH AND CASH EQUIVALENTS END OF YEAR $ 17,610 $ 30,497 $ 28,505 ======== ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 33
34 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") and its wholly owned subsidiaries, Isabella Bank and Trust (the "Bank"), IBT Title, IBT Agency, IBT Financial Services, and IBT Loan Production. All intercompany transactions and accounts have been eliminated. NATURE OF OPERATIONS: IBT Bancorp is a registered bank holding company offering a wide array of financial products and services in mid Michigan. Its principal subsidiary, Isabella Bank and Trust, offers banking services through 15 locations 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, 24-hour banking services locally and nationally through shared automatic teller machines, safe deposit box rentals, credit life insurance, and direct deposits. Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of the Bank's 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, and Mecosta County Abstract and Title. IBT Title provides title insurance, abstract searches, and closes real estate loans. The Corporation purchased the assets of Mecosta County Abstract and Title in a non-cash transaction for $1.1 million (14,014 shares) of IBT Bancorp common stock on June 30, 1999. IBT Financial Services is a full service retail brokerage offering stocks, bonds, and mutual fund sales to individuals. IBT Agency, an insurance agency, is authorized to sell life insurance, casualty insurance, and fixed and variable rate annuities. 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. 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. Other than real estate, there is no significant concentration to any other industry or customer. 34
35 CASH AND CASH EQUIVALENTS: For purposes of the statement of cash flows, the Corporation considers cash, 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 not be insured. Management believes the Corporation is not exposed to any significant interest rate or other financial risk on these deposits. SECURITIES: Management determines the appropriate classification of debt securities at the time of purchase. Debt securities are 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, 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. 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 evaluation 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. 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: <TABLE> <CAPTION> 1999 1998 -------- -------- <S> <C> <C> Premises $7,207 $7,024 Equipment 9,275 7,467 ------ ------ 16,482 14,491 Less accumulated depreciation 7,502 6,601 ------ ------ NET PREMISES AND EQUIPMENT $8,980 $7,890 ====== ====== </TABLE> Depreciation expense for the years ended December 31, 1999, 1998 and 1997 was $933, $790, and $685, respectively. 35
36 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 adjusted for any charge offs, the allowance for loans losses, and any deferred fees or costs on originated loans. Interest 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. Interest income on such loans is subsequently recognized only to the extent cash payment is received. 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. CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, the Corporation has entered into commitments to extend credit, including credit card arrangements, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such instruments are recorded when funded. 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 fees, and servicing costs applicable to future years. Net unrealized losses 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 book value of the capitalized MSR over 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. FEDERAL INCOME TAXES: Federal income taxes have been provided based on amounts reported in the consolidated statements of income (after the exclusion of nontaxable interest income) and include deferred federal income taxes on temporary differences between financial statement and income tax reporting. The Corporation and its subsidiaries file a consolidated federal income tax return on a calendar year basis. PER SHARE AMOUNTS: Net income per share amounts were computed by dividing net income by the weighted average number of shares outstanding. All shares and per share amounts have been adjusted for the 3.3 for 1 stock split declared on December 14, 1999 and paid February 18, 2000. The weighted average number of common shares outstanding were 2,942,422 in 1999; 2,890,444 in 1998; and 2,857,939 in 1997. 36
37 ACQUISITION INTANGIBLES: The Bank acquired branch facilities and related deposits in a business combination accounted for as a purchase. Results of operations are included in the accompanying consolidated financial statements since March 31, 1998, the date of acquisition and are not significant. The allocation of the purchase price of assets acquired and liabilities assumed in 1998 is as follows: <TABLE> <S> <C> Deposits acquired $43,123 Accrued interest payable 144 Purchased loans (233) Core deposit premium paid and acquisition expenses (4,484) Purchases of equipment and premises (676) -------- Cash received $37,874 ======== </TABLE> The acquisition of the branches includes amounts related to the value of customer deposit relationships (core deposit intangibles). The deposit intangible of $4,180 is amortized over the expected life of the acquired relationship. RECLASSIFICATION: Certain amounts reported in the 1998 and 1997 consolidated financial statements have been reclassified to conform with the 1999 presentation. NEW ACCOUNTING STANDARDS: The Financial Accounting Standards Board adopted Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS #133") in June 1998. SFAS #133 requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. The accounting for changes in value of derivatives will depend upon the use of derivatives and whether they qualify for hedge accounting. This statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 with earlier applications allowed and is to be applied prospectively. The Corporation does not use interest rate swaps or other derivatives in its management of risk and accordingly this statement is not expected to have a material impact on the Corporation's financial statements. 37
38 NOTE B - INVESTMENT SECURITIES The following is a summary of securities available for sale and held to maturity. Other securities include only the stock of the Federal Reserve Bank and the Federal Home Loan Bank, which are restricted investments and have no contractual maturities. <TABLE> <CAPTION> Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- <S> <C> <C> <C> <C> DECEMBER 31, 1999 Securities available for sale U.S. Treasury and U.S. government agencies $53,298 $ 17 $(1,164) $52,151 States and political subdivisions 31,065 38 (426) 30,677 ------- ------- ------- ------- TOTAL $84,363 $ 55 $(1,590) $82,828 ======= ======= ======= ======= Securities held to maturity U.S. Treasury and U.S. government agencies $ 656 $--- $ (21) $ 635 States and political subdivisions 4,430 29 (17) 4,442 Restricted investments 1,736 --- --- 1,736 ------- ------- ------- ------- TOTAL $ 6,822 $ 29 $ (38) $ 6,813 ======= ======= ======= ======= </TABLE> <TABLE> <CAPTION> Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ----- <S> <C> <C> <C> <C> DECEMBER 31,1998 Securities available for sale U.S. Treasury and U.S. government agencies $58,716 $ 924 $ (10) $59,630 States and political subdivisions 27,281 568 (7) 27,842 Commercial paper 2,018 --- (4) 2,014 ------- ------- ------- ------- TOTAL $88,015 $ 1,492 $ (21) $89,486 ======= ======= ======= ======= Securities held to maturity U.S. Treasury and U.S. government agencies $ 1,425 $ 19 $ --- $1,444 States and political subdivisions 3,509 98 --- 3,607 Restricted investments 1,614 --- --- 1,614 ------- ------- ------- ------- $ 6,548 $ 117 $ --- $ 6,665 ======= ======= ======= ======= </TABLE> 38
39 The following table summarizes the fair value, realized gains, and realized losses on sales of securities available for sale. <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Fair value of securities sold at the date of sale $8,372 $11,055 $5,016 Gross realized gains U.S. Treasury and U.S. government agencies 23 54 --- Gross realized losses U.S. Treasury and U.S. government agencies 11 5 15 </TABLE> The following table shows the amortized cost and estimated fair value of securities owned at December 31, 1999 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. <TABLE> <CAPTION> Available for Sale Held to Maturity Amortized Fair Amortized Fair Cost Value Cost Value -------- ------- --------- -------- <S> <C> <C> <C> <C> Due within one year or less $12,674 $12,652 $ 2,400 $ 2,394 Due after 1 year thru 5 years 48,989 47,814 1,864 1,882 Due after 5 years thru 10 years 15,733 15,530 165 166 Due after 10 years 461 451 -- -- ------- ------- ------- ------- 77,857 76,447 4,429 4,442 Restricted investments -- -- 1,736 1,736 Mortgage backed securities 6,506 6,381 657 635 ------- ------- ------- ------- TOTAL $84,363 $82,828 $ 6,822 $ 6,813 ======= ======= ======= ======= </TABLE> Investment securities with a carrying value of approximately $9,512 and $5,133 were pledged to secure public deposits and for other purposes as necessary or required by law at December 31, 1999 and 1998, respectively. NOTE C - LOANS An analysis of changes in the allowance for loan losses follows: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Balance at beginning of year $2,977 $2,677 $2,621 Loans charged off (363) (264) (575) Recoveries 287 243 245 Provision charged to income 309 321 386 ------ ------ ------ BALANCE AT END OF YEAR $3,210 $2,977 $2,677 ====== ====== ====== </TABLE> At December 31, 1999 and 1998, nonaccrual and other impaired loans were not significant. Based on collateral values, no specific allowance for loan losses has been allocated to these loans. Certain directors and executive officers (including their families and companies in which they have 10% or more ownership) of the Corporation and the Bank were loan customers of the Bank. Total loans to these customers aggregated $6,659 and $7,293 at December 31, 1999 and 1998, respectively. During 1999, $4,527 of new loans were made and repayments totalled $5,161. All such loans and commitments were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions and in the opinion of management do not involve more than normal risk of collectibility. 39
40 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 $103,024 and $86,299 at December 31, 1999 and 1998, 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: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Balance at beginning of year $ 100 $ 50 $ 27 Mortgage servicing rights capitalized 237 210 87 Amortization (99) (64) (9) Impairment valuation allowance (98) (96) (55) ----- ----- ----- BALANCE AT END OF YEAR $ 140 $ 100 $ 50 ===== ===== ===== </TABLE> Residential mortgages committed for sale were $951 as of December 31, 1999 and $4,943 as of December 31, 1998. NOTE D - 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 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 sheet 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. 40
41 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 Bank does not charge fees for lending commitments; thus it is not practicable to estimate the fair value of these instruments. The following sets forth the estimated fair value and recorded book balance of the Corporation's financial instruments as of December 31. <TABLE> <CAPTION> 1999 1998 ---- ---- Estimated Fair Recordede Book Estimated Fair Recorded Book Value Balance Value Balance -------------- -------------- -------------- ------------- <S> <C> <C> <C> <C> Cash and demand deposits due from banks $ 17,610 $ 17,610 $ 15,497 $ 15,497 Federal funds sold -- -- 15,000 15,000 Investment securities 89,641 89,650 96,151 96,034 Net loans 275,758 273,512 252,305 243,731 Accrued interest receivable 2,588 2,588 2,571 2,571 Deposits with no stated maturities 204,297 204,297 201,048 201,048 Deposits with stated maturities 151,195 151,338 150,953 148,991 Federal funds purchased 5,000 5,000 -- -- Accrued interest payable 725 725 771 771 </TABLE> NOTE E - 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: <TABLE> <CAPTION> 1999 1998 ---- ---- <S> <C> <C> Deferred tax assets Allowance for loan losses $ 851 $ 772 Deferred directors' fees 426 366 Employee benefit plans 387 352 Core deposit premium and acquisition expenses 157 70 Net unrealized loss on available for sale securities 522 --- Other 47 24 ------ ------ TOTAL DEFERRED TAX ASSETS 2,390 1,584 Deferred tax liabilities Premises and equipment 225 196 Accretion on securities 38 51 Prepaid pension expense 418 338 Net unrealized gain on available for sale securities --- 500 Other 19 5 ------ ------ TOTAL DEFERRED TAX LIABILITIES 700 1,090 ------ ------ NET DEFERRED TAX ASSETS $1,690 $ 494 ====== ====== </TABLE> Components of the consolidated provision for income taxes are as follows: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Current $ 1,664 $ 1,627 1,495 Deferred credit (174) (256) (5) ------- ------- ------- PROVISION FOR FEDERAL INCOME TAXES $ 1,490 $ 1,371 $ 1,490 ======= ======= ======= </TABLE> 41
42 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 tax expense is as follows. <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Income tax on pretax income $ 1,884 $ 1,702 $ 1,734 Effect of nontaxable interest income (415) (378) (277) Other 21 47 33 ------- ------- ------- PROVISION FOR FEDERAL INCOME TAXES $ 1,490 $ 1,371 $ 1,490 ======= ======= ======= </TABLE> The income tax effects on realized securities gains or (losses) were $4 in 1999, $17 in 1998, and $(5) in 1997. NOTE F - BENEFIT PLANS The Bank 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 last 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 primarily invested in mutual funds. 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: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Change in projected benefit obligation Benefit obligation January 1 $ 4,952 $ 4,392 $ 3,813 Service cost 189 145 115 Interest cost 337 310 285 Actuarial (gain) loss (419) 320 375 Benefits paid (220) (215) (196) ------- ------- ------- BENEFIT OBLIGATION, DECEMBER 31 $ 4,839 $ 4,952 $ 4,392 ======= ======= ======= Change in plan assets Fair value of plan assets, January 1 $ 4,590 $ 4,001 $ 3,409 Investment return 436 433 457 Corporation contribution 424 371 331 Benefits paid (220) (215) (196) ------- ------- ------- FAIR VALUE OF PLAN ASSETS, DECEMBER 31 $ 5,230 $ 4,590 $ 4,001 ======= ======= ======= Reconciliation of funded status Funded status $ 390 $ (362) (391) Unrecognized net transition asset (88) (111) (133) Unrecognized prior service cost 161 179 197 Unrecognized net loss from experience different than that assumed and effects of changes in assumptions 766 1,288 1,114 ------- ------- ------- PREPAID PENSION COST $ 1,229 $ 994 $ 787 ======= ======= ======= </TABLE> 42
43 Net pension expense consists of the following components for the years ended December 31: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Service cost on benefits earned for services rendered during the year $ 189 $ 145 $ 115 Interest cost on projected benefit obligation 337 310 285 Expected return on plan assets (381) (329) (279) Amortization of unrecognized transition asset (23) (22) (22) Amortization of unrecognized prior service cost 18 18 18 Amortization of unrecognized actuarial net loss 48 43 33 ----- ----- ----- NET PENSION EXPENSE $ 188 $ 165 $ 150 ===== ===== ===== </TABLE> Actuarial assumptions used in determining the projected benefit obligation and the net periodic pension cost are as follows: <TABLE> <CAPTION> 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Weighted average discount rate 7.50% 6.75% 7.00% Rate of increase in future compensation 4.50% 4.50% 4.50% Expected long-term rate of return 8.00% 8.00% 8.00% </TABLE> The Corporation maintains a nonqualified supplementary retirement plan for officers to provide supplemental retirement benefits and preretirement death benefits to each participant. Insurance policies, designed primarily to fund preretirement 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 1999, 1998, and 1997 were $37, $48, and $35, respectively, and are being recognized over the participants' expected years of service. The Corporation maintains an employee stock ownership plan (ESOP) which covers substantially all of its employees. Contributions to the Plan are discretionary and are approved by the Board of Directors and recorded as compensation expense. Compensation expense related to this Plan for 1999, 1998, and 1997 was $100, $40, and $70 respectively. Total shares outstanding at December 31, 1999 and 1998 were 164,399 and 160,680 respectively, and were included in the computation of dividends and earnings per share in each of the respective years. NOTE G - CONSOLIDATED STATEMENTS OF CASH FLOWS The reconciliation of net income to net cash provided by operating activities is as follows. <TABLE> <CAPTION> Year Ended December 31 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> Net income 4,051 $ 3,634 $ 3,609 Reconciliation of net income to net cash provided by operations: Provision for loan losses 309 321 386 Provision for depreciation 933 790 685 Net amortization on investment securities 358 288 173 Amortization of acquisition intangibles 575 433 -- Deferred income tax benefit (174) (256) (5) Gain on sale of mortgage loans (277) (345) (131) Proceeds from sale of mortgage loans 35,798 55,808 24,758 Loans originated for sale (31,529) (59,495) (24,632) (Increase) decrease in: Accrued interest receivable (17) (571) 59 Other assets (998) (566) (216) Accrued interest and other liabilities 484 812 123 -------- -------- -------- Net cash provided by operating activities $ 9,513 $ 853 $ 4,809 ======== ======== ======== </TABLE> 43
44 NOTE H - 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 totalled $34,603 at December 31, 1999, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have 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, 1999, the Corporation had a total of $636 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 I - COMMITMENTS AND OTHER MATTERS There were no material noncancelable lease commitments outstanding at December 31, 1999. Banking regulations require banks to maintain cash reserve balances in currency or as deposits with the Federal Reserve Bank. The Bank's requirement was approximately $6,246 at December 31, 1999 and $5,717 at December 31, 1998. Banking regulations also limit the transfer of assets in the form of dividends, loans, or advances from the Bank to the Corporation. At December 31, 1999, substantially all of the Bank's 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 year's retained net income plus retained net income for the preceding two years, less any required transfers to capital surplus. At January 1, 2000, the amount available for dividends without regulatory approval was approximately $3,433. The Corporation maintains a self-funded medical plan under which the Corporation is responsible for the first $30 per year of claims made by a covered individual with a maximum of $654. Claims in excess of these amounts are insured through an "excess loss" policy up to $1,000. 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 $565 in 1999, $619 in 1998, and $378 in 1997. 44
45 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 issue under the plan is 155,000 with 114,392 shares unissued. During 1998, the Bank obtained approval to borrow up to $50,000 from the Federal Home Loan Bank (FHLB) of Indianapolis. Under the terms of the agreement, the Bank may obtain advances at the stated rate at the time of the borrowings. The Bank has agreed to pledge eligible mortgage loans as collateral for any such borrowings. No borrowings were outstanding at December 31, 1999 or 1998. Certain directors and executive officers (including their families and companies in which they have 10% or more ownership) of the Corporation and the Bank were deposit customers of the Bank. Total deposits of these customers aggregated approximately $2,963 and $3,223 at December 31, 1999 and 1998, respectively. During 1999, the Corporation eliminated the par value of its common stock. As a result, amounts previously recorded as capital surplus were reclassified to common stock in the accompanying balance sheets. NOTE J - DEPOSITS At December 31, 1999, the scheduled maturities of time deposits are as follows: <TABLE> <CAPTION> YEAR AMOUNT ---- ------- <S> <C> 2000 $84,065 2001 24,494 2002 19,867 2003 12,196 2004 10,711 Thereafter 5 </TABLE> NOTE K - REGULATORY CAPITAL MATTERS The Corporation (on a consolidated basis) and the Bank 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 Bank's financial statements. Under the Federal Reserve's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank 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 Bank's required capital is also subject to regulatory qualitative judgement regarding the Bank's 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 Bank 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, 1999, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 1999, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized. To be categorized as well capitalized, the Bank must maintain total risk based capital, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the following table. There have been no conditions or events since that notification that management believes has changed the institution's category. 45
46 The Corporation's and Bank's actual capital amounts (in thousands) and ratios are also presented in the table. <TABLE> <CAPTION> Minimum To Be Well Capitalized Minimum Capital Under Prompt Corrective Actual Requirements Action Provisions ------ ------------ ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> AS OF DECEMBER 31, 1999 TOTAL capital to risk weighted assets Isabella Bank and Trust $32,210 12.70% $20,349 8.0% $25,436 10.0% Consolidated 37,111 14.6 20,389 8.0 N/A N/A Tier 1 capital to risk weighted assets Isabella Bank and Trust 29,030 11.4 10,175 4.0 15,262 6.0 Consolidated 33,925 13.3 10,195 4.0 N/A N/A Tier 1 capital to average assets Isabella Bank and Trust 29,030 7.4 15,687 4.0 19,608 5.0 Consolidated 33,925 8.6 15,863 4.0 N/A N/A AS OF DECEMBER 31, 1998 Total capital to risk weighted assets Isabella Bank and Trust $30,060 13.30% $18,048 8.0% $22,560 10.0% Consolidated 32,056 14.2 18,086 8.0 N/A N/A Tier 1 capital to risk weighted assets Isabella Bank and Trust 27,238 12.1 9,024 4.0 13,536 6.0 Consolidated 29,216 12.9 9,043 4.0 N/A N/A Tier 1 capital to average assets Isabella Bank and Trust 27,238 7.7 14,158 4.0 17,697 5.0 Consolidated 29,216 8.2 14,195 4.0 N/A N/A </TABLE> NOTE L - PARENT COMPANY ONLY FINANCIAL INFORMATION CONDENSED BALANCE SHEET <TABLE> <CAPTION> December 31 1999 1998 ---- ---- <S> <C> <C> ASSETS Cash on deposit at subsidiary bank $ 2,674 $ 1,307 Securities available for sale 1,511 519 Investments in subsidiaries 32,373 32,580 Premises and equipment 93 114 Other assets 36 12 ------- ------- TOTAL ASSETS $36,687 $34,532 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities $ 9 $ 9 Shareholders' equity 36,678 34,523 ------- ------- TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $36,687 $34,532 ======= ======= </TABLE> 46
47 CONDENSED STATEMENTS OF INCOME <TABLE> <CAPTION> Year Ended December 31 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> INCOME Dividends from subsidiary $2,900 $1,500 $3,550 Interest income 82 78 97 Other 6 6 6 ------ ------ ------ TOTAL INCOME 2,988 1,584 3,653 Expenses 203 191 173 ------ ------ ------ Income before income tax benefit and equity in undistributed earnings of subsidiaries 2,785 1,393 3,480 Federal income tax benefit 56 48 36 ------ ------ ------ 2,841 1,441 3,516 Undistributed earnings of subsidiaries 1,210 2,193 93 ------ ------ ------ NET INCOME $4,051 $3,634 $3,609 ====== ====== ====== </TABLE> CONDENSED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Year Ended December 31 1999 1998 1997 ---- ---- ---- <S> <C> <C> <C> OPERATING ACTIVITIES Interest on investments $ 71 $ 113 $ 62 Dividends from subsidiaries 2,900 1,500 3,550 Cash paid to suppliers (172) (166) (142) Other operating activities 59 43 35 ------- ------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,858 1,490 3,505 INVESTING ACTIVITIES Proceeds from the maturities of investments available for sale 650 1,500 -- Purchases of investment securities available for sale (1,678) (101) (1,906) Investment in subsidiaries (550) (3,000) (50) Purchases of equipment and premises -- -- (26) ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES (1,578) (1,601) (1,982) FINANCING ACTIVITIES Cash dividends (1,468) (1,368) (1,279) Issuance of common stock 1,555 597 479 ------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES 87 (771) (798) ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,367 (882) 725 Cash and cash equivalents at beginning of year 1,307 2,189 1,464 ------- ------- ------- CASH AND CASH EQUIVALENTS AT YEAR END $ 2,674 $ 1,307 $ 2,189 ======= ======= ======= </TABLE> 47
48 ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III Part III incorporated by reference from the Corporation's Definitive Proxy Statement pursuant to instruction G(3). The Corporation will file with the SEC a definitive Proxy Statement pursuant to Schedule 14A involving the election of directors no later than 120 days after the close of the calendar year (April 29, 2000). PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The following consolidated financial statements of IBT Bancorp are incorporated by reference in Item 8: Report of Independent Auditors Consolidated Balance Sheets Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Income Consolidated Statements of Comprehensive Income Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements 2. Financial Statement Schedules: All schedules are omitted because they are neither applicable nor required, or because the required information is either included in the consolidated financial statements or related notes. 3. Exhibits: <TABLE> <S> <C> 3(a) Amended Articles of Incorporation* 3(b) Amendment to the Articles of Incorporation*** 3(c) Amendment to the Articles of Incorporation 3(d) Amended Bylaws* 3(e) Amendment to the Bylaws** 3(f) Amendment to the Bylaws*** 10(a) Isabella Bank & Trust Executive Supplemental Income Agreement***(1) 10(b) Isabella Bank & Trust Deferred Compensation Plan****(1) 21 Subsidiaries of the Registrant </TABLE> 48
49 ITEM 14 (CONTINUED) 23 Consent of Rehmann Robson, P.C., Independent Certified Public Accountants 27 Financial Data Schedule (b) No reports on Form 8-K were filed for the quarter ended December 31, 1999. (c) The index to exhibits is on page 50 of this report. (d) There are no financial statement schedules filed with this report. * Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 12, 1991, and incorporated herein by reference. ** Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated March 13, 1990, and incorporated herein by reference. *** Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March 26, 1994, and incorporated herein by reference. **** Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March 26, 1996, and incorporated herein. (1) Management's Contract or Compensatory Plan or Arrangement. 49
50 Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized. IBT BANCORP, INC. (Registrant) by:/s/David W. Hole Date: March 9, 2000 ------------------------- ----------------------------- David W. Hole President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. <TABLE> <CAPTION> Signatures Capacity Date ---------- -------- ---- <S> <C> <C> /s/L.A. Johns Chairman of the Board March 9, 2000 - ------------------------------ and Director L.A. Johns /s/Frederick L. Bradford Director March 9, 2000 - ------------------------------ Frederick L. Bradford /s/Gerald D. Cassel Director March 9, 2000 - ------------------------------ Gerald D. Cassel /s/James C. Fabiano Director March 9, 2000 - ------------------------------ James C. Fabiano /s/Ronald E. Schumacher Director March 9, 2000 - ------------------------------ Ronald E. Schumacher </TABLE> 50
51 <TABLE> <CAPTION> Signatures Capacity Date ---------- -------- ---- <S> <C> <C> /s/Robert O. Smith Director March 9, 2000 - ------------------------------ Robert O. Smith /s/Dean Walldorff Director March 9, 2000 - ------------------------------ Dean Walldorff /s/David W. Hole President March 9, 2000 - ------------------------------ Chief Executive Officer David W. Hole and Director (Principal Executive Officer) /s/Dennis P. Angner Treasurer March 9, 2000 - ------------------------------ (Principal Financial Officer) Dennis P. Angner </TABLE> 51
52 IBT Bancorp FORM 10-K Index to Exhibits <TABLE> <CAPTION> Exhibit Form 10-K Number Exhibit Page Number - ------- ------- ----------- <S> <C> <C> 3(c) Amendment to the Articles Incorporation 49 21 Subsidiaries of the Registrant 54 23 Consent of Rehmann Robson P.C. 55 Independent Certified Public Accountants 27 Financial Data Schedule 56 </TABLE> 52