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, 2000 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to -------------------- -------------------- Commission File Number: 0-18415 -------------------------------------------------------- IBT BANCORP, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) <TABLE> <CAPTION> <S> <C> 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) </TABLE> Registrant's telephone number, including area code (517) 772-9471 -------------- Securities registered pursuant to Section 12(b) of the Act: <TABLE> <CAPTION> <S> <C> Title of each class Name of each exchange on which registered - ------------------------------ ----------------------------------------- </TABLE> 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $119,856,000 as of March 20, 2001. The number of shares outstanding of the registrant's Common Stock ($0 par value) was 3,866,619 as of March 20, 2001. DOCUMENTS INCORPORATED BY REFERENCE (Such documents are incorporated herein only to the extent specifically set forth in response to an item herein.) <TABLE> <CAPTION> <S> <C> Documents Part of Form 10-K Incorporated into --------- ------------------------------------ IBT Bancorp, Inc. Proxy Statement for its Annual Meeting of Part III Shareholders to be held May 8, 2001 </TABLE>
2 PART I ITEM 1. BUSINESS GENERAL IBT Bancorp, Inc. (the Corporation) is a registered financial services holding company incorporated in September 1988 under Michigan law. The Corporation has five subsidiaries: Isabella Bank and Trust, Farmers State Bank, IBT Financial Services, IBT Title, and IBT Loan Production. 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. Farmers State Bank has three offices located in Gratiot and Saginaw Counties. IBT Financial Services is a full service retail brokerage and insurance agency offering stocks, bonds, mutual funds, 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. Markets served include Isabella, Gratiot, Mecosta, southwest Midland, western Saginaw, northern Montcalm, and southern Clare. The area includes significant agricultural production, light manufacturing, retail, gaming and tourism, and two universities with enrollment of approximately 30,000 students. The area unemployment rate is approximately 3.5% and average household income is $35,000. 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. Its subsidiary banks are community banks and focus on providing high-quality, personalized service at a fair price. The banks offer 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, bonds, mutual fund sales, 24 hour banking service locally and nationally through shared automatic teller machines, and safe deposit box rentals. LENDING The subsidiary banks limit lending activities to local markets and have not purchased any loans from the secondary market. They do not make loans to fund leveraged buyouts, have no foreign corporate or government loans, and limited corporate debt securities. The general lending philosophy is to avoid concentrations to individuals and business segments. The following table sets forth the composition of the banks loan portfolio, as of December 31, 2000. 2
3 LOANS BY MAJOR LENDING CATEGORY <TABLE> <CAPTION> (in thousands) Amount % -------- ----- <S> <C> <C> Residential real estate One to four family residential $176,688 43.8 Construction & land development 19,122 4.7 -------- ------ Total 195,810 48.5 Commercial Commercial and real estate 74,658 18.5 Farmland & agricultural production 49,221 12.2 Commercial and other 36,423 9.0 -------- ------ Total 160,302 39.7 Other individual Other personal 45,239 11.2 Credit cards 2,328 0.6 -------- ------ Total 47,566 11.8 -------- ------ TOTAL $403,679 100.0% ======== ====== </TABLE> First and second residential mortgages are the single largest category of loans (43.8% of total loans). The Corporation, through its subsidiary banks, 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. Currently all loans with a fixed maturity over 7 years are sold. The Corporation has a policy that these loans may not exceed 5% of its total assets. 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 ratios in excess of 80%. The majority of the loans have a loan-to-value ratio of less than 80%. Underwriting criteria for residential real estate loans include: evaluation of the borrower's ability to make monthly payments, the value of the property securing the loan, the payment of principal, interest, taxes, and hazard insurance does not exceed 28% of a borrower's gross income, all debt servicing does not exceed 36% of income, acceptable credit reports, (verification of employment, income, and financial information). Appraisals are performed by independent appraisers. Escrow accounts for taxes and insurance are required 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 $250,000 require the approval of either the subsidiary bank's Board of Directors or its loan committee. 3
4 Construction and land development loans consist 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 operating loans equaled 39.7% of the Corporation's loan portfolio at December 31, 2000. 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 Corporation minimizes its risk by generally limiting the amount of loans to any one borrower to $4.5 million in the aggregate at its subsidiary banks. Borrowers with credit needs of more than $4.5 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 Corporation 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 Corporation requires annual financial statements, prepares cash flow analysis, and reviews credit reports. Consumer loans granted include automobile loans, secured and unsecured personal loans, credit cards, student loans, and overdraft protection. 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 underwriting emphasis is 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. SUPERVISION AND REGULATION The Corporation is subject to supervision and regulation by the Federal Reserve Board under the Financial Services Holding Company Act of 2000. 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 and Trust and Farmers State Bank are chartered by the State of Michigan. The banks are members of the Federal Reserve System, their deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law, and are members of the Federal Home Loan Bank of Indianapolis. The banks and IBT Loan Production are supervised and regulated by the Office of Financial and Insurance Services and the Federal Reserve Board. (See Regulation below) 4
5 IBT Financial Services, Inc., is a registered broker-dealer and insurance agency 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 and regulation by the Office of Financial and Insurance Services. The Bank's non-banking subsidiary, IBT Title, is a licensed insurance agency and is subject to regulation by the Office of Financial and Insurance Services. PERSONNEL As of December 31, 2000, the Corporation had one full-time employee, Isabella Bank and Trust had 180, Farmers State Bank had 49, IBT Financial Services had four, IBT Title had ten, and IBT Loan Production had one. 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 lawsuits in which the Corporation's subsidiary banks are periodically involved, such as claims to enforce liens, condemnation proceedings on making and servicing of real property loans and other issues incidental to the Bank's business. However, neither the Corporation nor the banks are 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 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 financial services 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 5
6 Board"). The Corporation is registered as a financial services 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. Prior to March 13, 2000, a bank holding company generally was prohibited under the BHC Act from acquiring the beneficial ownership or control of more than 5% of the voting shares or substantially all the assets of any company, including a bank, without the Federal Reserve Board's prior approval. Also, prior to March 13, 2000, a bank holding company generally was limited to engaging in banking and such other activities as determined by the Federal Reserve Board to be closely related to banking. Under the Gramm-Leach-Bliley Act of 1999 ("GLB Act"), beginning March 13, 2000, an eligible bank holding company may elect to become a financial holding company and thereafter affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. The GLB Act defines "financial in nature" to include securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking activities; activities that the Federal Reserve Board has determined to be closely related to banking; and other activities that the Federal Reserve Board, after consultation with the Secretary of the Treasury, determines by regulation or order to be financial in nature or incidental to a financial activity. No Federal Reserve Board approval is required for a financial holding company to acquire a company, other than a bank holding company, bank or savings association, engaged in activities that are financial in nature or incidental to activities that are financial in nature, as defined in the GLB Act or as determined by the Federal Reserve Board. A bank holding company is eligible to become a financial holding company if each of its subsidiary banks and savings associations is well capitalized under the prompt corrective action provisions of the Federal Deposit Insurance Act ("FDI Act"), is well managed and has a rating under the Community Reinvestment Act (CRA) of satisfactory or better. If any bank or savings association subsidiary of a financial holding company ceases to be well capitalized or well managed, the Federal Reserve Board may require the financial holding company to divest the subsidiary. Alternatively, the financial holding company may elect to conform its activities to those permissible for bank holding companies that do not elect to become financial holding companies. If any bank or savings association subsidiary of a financial holding company receives a CRA rating of less than satisfactory, the financial holding company will be prohibited from engaging in new activities or acquiring companies other than bank holding companies, banks or savings associations. The Corporation became a financial holding company effective March 13, 2000. It continues to maintain its status as a bank holding company for purposes of other Federal Reserve Board regulations. 6
7 Under Federal Reserve Board policy, the Corporation is expected to act as a source of financing strength to its subsidiary banks and to commit resources to support its subsidiaries. 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 subsidiaries) has become impaired by losses or otherwise, the Commissioner of the Office of Financial and Insurance Services 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 24 and "Note I -- Commitments and Other Matters" and "Note M -- Regulatory Capital Matters" on pages 46, 48, and 49, respectively. SUBSIDIARY BANKS The banks are subject to regulation and examination primarily by the Office of Financial and Insurance Services. As insured state banks, which are members of the Federal Reserve Bank of Chicago, the subsidiaries are 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 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. 7
8 The banks are 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 banks 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 its subsidiary banks for its cash needs, including payment of dividends and operating expenses. The activities and operations of the banks 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 Isabella Bank and Trust. Isabella Bank and Trust owns 15 branches and leases one and Farmers State Bank owns three branches. IBT Title owns one office, and leases one. 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, 2000. <TABLE> <CAPTION> Year Approximate Net Facility Square Book Value Opened Footage 12/31/00 (1) -------- ----------- ----------- <S> <C> <C> <C> Isabella Bank and Trust Main Office 200 East Broadway (2) Mt. Pleasant, Michigan 1903 27,640 $ 201,950 Main Office Extension Customer Service Center 139 East Broadway Mt. Pleasant, Michigan 1985 16,736 461,259 Operations Center (7) 2750 Three Leaves Drive Mt. Pleasant, Michigan 2001 15,000 1,065,100 Isabella County Branch Offices 1416 East Pickard (3) Mt. Pleasant, Michigan 1983 1,450 488,200 2133 South Mission (6) Mt. Pleasant, Michigan 1976 1,560 382,127 200 South University (4) Mt. Pleasant, Michigan 1964 1,795 56,300 1402 West High Mt. Pleasant, Michigan 1973 2,150 49,734 401 East Main Street (5) Blanchard, Michigan 1911 6,561 14,060 </TABLE> 9
10 <TABLE> <CAPTION> Year Net Facility Approximate Book Value Opened Sq. Footage 12/31/00 (1) -------- ----------- ------------ <S> <C> <C> <C> 500 East Wright Avenue Shepherd, Michigan 1980 1,830 $176,453 3388 N. Woodruff Road Weidman, Michigan 1975 5,400 66,777 1867 Winn Road Beal City, Michigan 1977 1,100 48,612 Montcalm County Branch Office 313 W. Bridge Street (6) Six Lakes, Michigan 1966 1,527 404,993 Clare County Branch Offices 532 N. McEwan Street Clare, Michigan 1993 7,300 361,718 1125 N. McEwan Street Clare, Michigan 1997 525 406,156 Mecosta County Branch Offices 220 W. Wheatland Street Remus, Michigan 1998 4,273 307,513 240 E. Northern Avenue Barryton, Michigan 1998 4,273 253,874 8529 - 100th Avenue Stanwood, Michigan 1998 2,665 16,937 IBT Title Isabella County 209 E. Broadway Mt. Pleasant, Michigan 1998 2,640 209,445 Mecosta County 119 Michigan Avenue Big Rapids, Michigan 1999 1,700 53,397 </TABLE> 10
11 <TABLE> <CAPTION> Year Net Facility Approximate Book Value Opened Sq. Footage 12/31/00 (1) -------- ----------- ------------ <S> <C> <C> <C> Farmers State Bank Main Office (8) 1967 13,700 $312,800 316 E. Saginaw Breckenridge, Michigan Ithaca Branch 1402 E. Center Ithaca,Michigan 1991 2,387 197,700 Hemlock Branch 16490 Gratiot Hemlock, Michigan 1994 1,840 200,140 </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 (7) work-in-process, completed 2-10-01 (8) substantially remodeled in 1985 and 1993 11
12 ITEM 3. LEGAL PROCEEDINGS The Corporation and its banks are not involved in any material pending legal proceedings. The banks, because of the nature of their business, are 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 2000 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 May 8, 2001. 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 63 President and CEO 41 Mary Ann Breuer 61 Secretary 41 Dennis P. Angner 45 Exec. VP/Treasurer 17 Richard J. Barz 52 Vice President 28 Herbert C. Wybenga 65 Vice President 15 </TABLE> 12
13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS COMMON STOCK AND DIVIDEND INFORMATION There is no established market for the Corporation's common stock or public information with respect to its market price. There are occasional sales by shareholders of which the management of the Corporation is aware. From January 1, 1999 through December 31, 2000 there were, so far as management knows,123 sales of the Corporation's common stock. These sales involved 97,156 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 $30.00 per share in 2000, and the lowest price was $23.33 per share in the first quarter of 1999. The following is a summary of all known transfers since January 1, 1999. 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> 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 2000 First Quarter 17 4,859 $30.00 $30.00 Second Quarter 18 16,116 30.00 30.00 Third Quarter 18 22,288 30.00 30.00 Fourth Quarter 18 13,679 30.00 30.00 </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> 2000 1999 ----- ----- <S> <C> <C> First Quarter $0.09 $0.08 Second Quarter 0.09 0.08 Third Quarter 0.09 0.08 Fourth Quarter 0.27 0.24 ----- ----- TOTAL $0.54 $0.50 ===== ===== </TABLE> IBT Bancorp's authorized common stock consists of 10,000,000 shares, of which 3,871,552 shares are issued and outstanding as of December 31, 2000 (as adjusted for the stock split paid February 18, 2000). As of year end 2000, there were 1,440 shareholders of record. 13
14 ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF SELECTED FINANCIAL DATA (1) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) <TABLE> <CAPTION> 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA Total interest income $ 38,754 $ 35,445 $ 33,651 $ 30,397 $ 29,171 Net interest income 20,352 19,224 17,601 16,197 15,563 Provision for loan losses 565 509 531 476 560 Net income 5,431 5,244 4,701 4,649 4,349 BALANCE SHEET DATA End of year assets $540,897 $503,596 $485,983 $414,095 $389,508 Daily average assets 516,145 493,606 451,668 396,153 378,948 Daily average deposits 452,664 441,566 405,291 346,845 333,567 Daily average loans/net 380,392 332,083 300,794 278,293 253,884 Daily average equity 50,506 45,482 41,670 38,095 34,762 PER SHARE DATA (2) Net income $ 1.41 $ 1.38 $ 1.25 $ 1.25 $ 1.19 Cash dividends 0.54 0.50 0.48 0.45 0.42 Book value (at year end) 13.41 12.24 11.82 10.67 9.80 FINANCIAL RATIOS Shareholders' equity to assets 9.60% 9.35% 9.09% 10.05% 9.50% Net income to average equity 10.75 11.53 11.28 12.20 12.51 Cash dividend payout to net income 38.30 36.80 37.94 36.07 35.60 Net income to average assets 1.05 1.06 1.04 1.17 1.15 </TABLE> <TABLE> <CAPTION> 2000 1999 ---------------------------------------- ----------------------------------------- Quarterly Operating Results: 4th 3rd 2nd 1st 4th 3rd 2nd 1st ------- ------- ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Total interest income $10,212 $ 9,931 $ 9,448 $ 9,163 $ 8,899 $ 9,020 $ 8,873 $ 8,652 Interest expense 5,023 4,834 4,417 4,128 4,019 4,139 4,042 4,021 Net interest income 5,189 5,097 5,031 5,035 4,900 4,881 4,831 4,632 Provision for loan losses 75 186 179 125 65 162 158 124 Noninterest income 1,084 1,128 1,165 1,028 1,129 1,200 1,026 1,035 Noninterest expenses 4,214 4,239 4,127 4,097 4,107 4,052 3,834 3,825 Net income 1,427 1,302 1,363 1,339 1,313 1,348 1,338 1,245 Per Share of Common Stock: (2) Net income $ 0.37 $ 0.34 $ 0.35 $ 0.35 $ 0.35 $ 0.35 $ 0.35 $ 0.33 Cash dividend 0.27 0.09 0.09 0.09 0.26 0.08 0.08 0.08 Book value 13.41 13.18 12.72 12.64 12.24 12.29 12.06 11.87 </TABLE> (1) Restated for the merger in August 2000 with FSB Bancorp, which was accounted for as a pooling of interests. See Note B of Notes to Consolidated Financial Statements. (2) Retroactively restated for the 3.3 for 1 stock split declared on December 14, 1999, paid February 18, 2000. 14
15 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> 2000 1999 1998 ----------------------------- ---------------------------- ---------------------------- 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 $380,392 $33,333 8.76% $332,083 $28,612 8.62% $300,794 $26,981 8.97% Taxable investment securities 62,581 3,666 5.86 83,984 4,927 5.87 83,090 5,000 6.02 Nontaxable investment securities 29,914 2,194 7.33 24,710 1,729 7.00 21,753 1,530 7.03 Federal funds sold 2,731 170 6.22 15,177 734 4.84 12,033 644 5.35 Other 2,256 173 7.67 2,266 153 6.75 1,972 144 7.30 -------- ------- ---- -------- ------- ---- -------- ------- ---- TOTAL EARNING ASSETS 477,874 39,536 8.27 458,220 36,155 7.89 419,642 34,299 8.17 NONEARNING ASSETS Allowance for loan losses (4,939) (4,589) (4,405) Cash and due from banks 18,253 17,006 15,633 Premises and equipment 10,385 9,640 8,338 Accrued income and other assets 14,572 13,329 12,460 -------- -------- -------- TOTAL ASSETS $516,145 $493,606 $451,668 ======== ======== ======== INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 68,017 1,987 2.92 $ 62,713 1,485 2.37 $ 53,679 1,399 2.61 Savings deposits 122,610 3,908 3.19 127,259 3,870 3.04 110,819 3,596 3.24 Time deposits 206,849 12,032 5.82 199,373 10,808 5.42 190,986 11,049 5.79 Borrowed funds 7,158 475 6.64 1,224 64 5.23 383 21 5.48 -------- ------- ---- -------- ------- ---- -------- ------- ---- TOTAL INTEREST BEARING LIABILITIES 404,634 18,402 4.55 390,569 16,227 4.15 355,867 16,065 4.51 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 55,188 52,221 49,807 Other 5,817 5,334 4,324 Shareholders' equity 50,506 45,482 41,670 -------- -------- -------- TOTAL LIABILITIES AND EQUITY $516,145 $493,606 $451,668 ======== ======== ======== NET INTEREST INCOME (FTE) $21,134 $19,928 $18,234 ======= ======= ======= NET YIELD ON INTEREST EARNING ASSETS (FTE) 4.42% 4.35% 4.35% ===== ===== ===== </TABLE> 15
16 RESULTS OF OPERATIONS The Corporation achieved record net income for the fourteenth consecutive year in 2000 with earnings of $5,431,000 versus $5,244,000 in 1999. Earnings per share was $1.41, an increase of $0.03 from 1999. 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 1.05% in 2000, 1.06% in 1999, and 1.04% in 1998. 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 10.75% in 2000, 11.53% in 1999, and 11.28% in 1998. 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 IBT Bancorp, 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. On August 10, 2000 the Corporation merged with FSB Bancorp of Breckenridge, Michigan. The merger was accounted for as a pooling of interests resulting in the restatement of all financial information for all periods presented. 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 $957,000 in 2000; $1.2 million in 1999; and $1.3 million in 1998. 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> 2000 Compared to 1999 1999 Compared to 1998 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 $ 4,226 $ 495 $ 4,721 $2,708 $(1,077) $1,631 Taxable investment securities (1,254) (7) (1,261) 59 (132) (73) Nontaxable investment securities 378 87 465 207 (8) 199 Federal funds sold (730) 166 (564) 153 (63) 90 Other (1) 21 20 21 (12) 9 ------- ------ ------- ------ ------- ------ TOTAL CHANGES IN INTEREST INCOME 2,619 762 3,381 3,148 (1,292) 1,856 CHANGES IN INTEREST EXPENSE Interest bearing demand deposits 133 369 502 223 (137) 86 Savings deposits (144) 182 38 509 (235) 274 Time deposits 415 809 1,224 470 (711) (241) Federal funds purchased 389 22 411 43 -- 43 ------- ------ ------- ------ ------- ------ TOTAL CHANGES IN INTEREST EXPENSE 793 1,382 2,175 1,245 (1,083) 162 NET CHANGE IN FTE NET INTEREST INCOME $1,826 $ (620) $ 1,206 $1,903 $ (209) $1,694 ======= ====== ======= ====== ======= ====== </TABLE> 16
17 As shown in Tables 1 and 2, when comparing year ending December 31, 2000 to 1999, fully taxable equivalent (FTE) net interest income increased $1.21 million or 6.1%. An increase of 4.3% in average interest earning assets provided $2.62 million of FTE interest income. The majority of this growth was funded by a 3.6% increase in interest bearing liabilities, resulting in $793,000 of additional interest expense. Overall, changes in volume resulted in $1.83 million in additional FTE interest income. The average FTE interest rate earned on assets increased by 0.38%, increasing FTE interest income by $762,000, and the average rate paid on deposits increased by 0.40%, increasing interest expense by $1.38 million. The net change related to interest rates earned and paid was a $620,000 decrease in FTE net interest income. The Corporation's FTE net yield as a percentage of average earning assets increased 0.07%. The increase was primarily a result of an increase in average loans to total average earning assets. The ratio in 2000 was 79.6% versus 72.5% in 1999. The increase in this ratio represents a $33.9 million shift from lower yielding investments to loans. The shift resulted in approximately $500,000 of FTE interest income or 0.10% increase in the net yield. Other factors negatively 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 $1.7 million to $19.9 million in 1999 from $18.2 million in 1998. As shown in Tables 1 and 2, in 1999 (FTE) interest income increased $3.1 million, from a 9.2% increase in the volume of average earning assets. The growth of interest earning assets was funded primarily by a 9.8% increase in interest bearing liabilities that resulted in additional interest expense of $1.2 million. Overall, the Corporation earned an additional $1.9 million in FTE interest income as a result of volume. The average rate earned in 1999 decreased by 0.28%, decreasing FTE interest income by $1.3 million, and the average rate paid on deposits decreased by 0.36%, decreasing interest expense by $1.1 million. The net result of decreased interest rates earned and paid decreased FTE net interest income by $200,000. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Total loans outstanding represent 84.7% 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 13.4% in 2000 and 11.6% in 1999. The provision for loan losses in 2000 was $565,000, a $56,000 increase from 1999 and a $34,000 increase from 1998. The allowance for loan losses as a percentage of total outstanding loans at year end 2000 was 1.28% compared to 1.30% at December 31, 1999. The Corporation's net charged off loans as a percentage of average loans was 0.01% in 2000 and 0.09% in 1999. 17
18 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 ------------------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- <S> <C> <C> <C> <C> <C> Amount of loans outstanding at the end of year $403,679 $355,846 $318,914 $286,525 $279,731 ======== ======== ======== ======== ======== Average amount of gross loans outstanding for the year $380,392 $332,083 $300,794 $281,148 $256,378 ======== ======== ======== ======== ======== Summary of changes in allowance Allowance for loan losses -- January 1 $ 4,622 $ 4,412 $ 4,112 $ 4,028 $ 3,637 Loans charged off Commercial and agricultural 65 221 252 299 251 Real estate mortgage 58 78 70 181 36 Personal 295 347 297 227 239 --------- -------- -------- --------- --------- TOTAL LOANS CHARGED OFF 418 646 619 707 526 Recoveries Commercial and agricultural 172 86 255 169 220 Real estate mortgage 64 92 13 2 1 Personal 157 169 120 144 136 --------- -------- -------- --------- --------- TOTAL RECOVERIES 393 347 388 315 357 Net charge offs 25 299 231 392 169 Provision charged to income 565 509 531 476 560 --------- -------- -------- --------- --------- ALLOWANCE FOR LOAN LOSSES -- DECEMBER 31 $ 5,162 $ 4,622 $ 4,412 $ 4,112 $ 4,028 ========= ======== ======== ========= ========= Ratio of net charge offs during the year to average loans outstanding 0.01% 0.09% 0.08% 0.14% 0.07% ===== ===== ===== ===== ===== Ratio of the allowance for loan losses to loans outstanding at year end 1.28% 1.30% 1.38% 1.44% 1.44% ===== ===== ===== ===== ===== </TABLE> As shown in Table 4, the percentage of loans classified as nonperforming by the Corporation as of December 31, 2000 and 1999 equaled 0.46% and 0.44% of total loans, respectively. The peer group analysis as of September 30, 2000 (the peer group is a composite of financial information of all bank holding companies with assets between $500 million and $1 billion; there were 258 holding companies in the Corporation's peer group for the period indicated) showed on average nonperforming loans were 0.43%. The Banks' policies, including a loan considered impaired under SFAS No. 118, are to transfer a loan to nonaccrual status whenever it is determined that interest should be recorded on the cash basis instead of the accrual basis because of a deterioration in the financial position of the borrower, 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. 18
19 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 ---------------------------------------------------------------- 2000 1999 1998 1997 1996 ------ ------ ------ ------ ---- <S> <C> <C> <C> <C> <C> Nonaccrual loans $ 382 $ 945 $ 274 $ 824 $181 Accruing loans past due 90 days or more 1,484 618 1,130 504 662 ------ ------ ------ ------ ---- TOTAL NONPERFORMING LOANS $1,866 $1,563 $1,404 $1,328 $843 ====== ====== ====== ====== ==== NONPERFORMING LOANS AS % OF LOANS 0.46% 0.44% 0.44% 0.46% 0.30% ===== ===== ===== ===== ===== </TABLE> As of December 31, 2000, 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, 2000. Management has allocated, as shown in Table 5, the allowance for loan losses to the following categories: 25.2% to commercial and agricultural loans; 30.2% to real estate loans; 37.3% to installment loans; and 7.3% unallocated. When analyzing the adequacy of the allowance for loan losses at December 31, 2000, 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 -------------------------------------------------------------------------------------- 2000 1999 1998 1997 -------------------- -------------------- -------------------- -------------------- % of Each % of Each % of Each % of Each Category Category Category Category Allowance to Total Allowance to Total Allowance to Total Allowance to Total Amount Loans Amount Loans Amount Loans Amount Loans --------- --------- --------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Commercial and agricultural $1,301 26.65% $1,502 26.1% $1,473 27.3% $1,515 26.9% Real estate mortgage 1,559 59.96 1,232 59.8 1,171 58.4 911 55.7 Installment 1,923 13.39 1,555 14.1 1,467 14.3 1,391 17.4 Unallocated 379 333 301 295 ------ ----- ------ ----- ------ ----- ------ ----- TOTAL $5,162 100.0% $4,622 100.0% $4,412 100.0% $4,112 100.0% ====== ===== ====== ===== ====== ===== ====== ===== </TABLE> <TABLE> <CAPTION> December 31 ------------------- 1996 ------------------- % of Each Category Allowance to Total Amount Loans --------- --------- <S> <C> <C> Commercial and agricultural $1,524 27.8% Real estate mortgage 705 54.8 Installment 1,525 17.4 Unallocated 274 ------ ---- TOTAL $4,028 100.0% ====== ===== </TABLE> 19
20 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 a $15,000 increase in fees earned from these sources during 2000. Significant changes during 2000 include a $51,000 increase from the sale of title insurance and related services, a $22,000 increase in brokerage commissions, a $44,000 increase in overdraft fees, a $103,000 increase in mortgage servicing fees, a $99,000 increase in trust fees, a $199,000 decline in gains on the sale of real estate mortgages, a $16,000 decline in gains on the sale of investment securities available for sale, and an $18,000 decrease in service charges on deposit accounts. Included in noninterest income is a $98,000 gain from the sale of $12.3 million in mortgages during 2000 versus a $297,000 gain on the sale of $37.8 million for 1999. The Corporation has established a policy that all 30-year fixed rate mortgage loans will be sold. During 2000, 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 $961,000 or 28.0% in 1999 when compared to 1998. Significant changes in 1999 include $670,000 increase in revenue from IBT Title, a $26,000 increase in brokerage commissions, a $27,000 increase in trust fees, a $37,000 decline in gains on the sale of investment securities available for sale, a $48,000 decline in gains on the sale of residential real estate mortgages, and a $112,000 increase in ATM access fees. NONINTEREST EXPENSES Noninterest expense increased $859,000 or 5.4% during 2000. Net noninterest expense less noninterest income divided by average total assets equalled 2.38% in 2000, 2.32% in 1999, and 2.32% in 1998. The increase in the 2000 ratio was primarily a result of the $199,000 decline in the gains on the sale of real estate mortgages. The largest component of noninterest expense is salaries and employee benefits, which increased $385,000 or 4.7%. Salary expense related to the acquisition of Mecosta County Abstract in July 1999 was $64,000. The remaining increase is related to normal merit and promotional salary increases and additional staffing. Occupancy and furniture and equipment expenses increased $180,000 or 6.5% in 2000. The majority of the increase is related to depreciation, service contracts, computer operating costs, property taxes, and utilities. All other operating expenses and the amortization of deposit intangibles increased $294,000, a 6.1% increase. The expenses associated with the merger of the Corporation with FSB Bancorp were $268,000. Increases in FDIC insurance expense and marketing costs were the most significant other increases. During 2000, the amortization of deposit based intangibles declined by $45,000. Noninterest expense increased $1.90 million or 13.6% in 1999. The additional expenses related to the acquisition of three branches in March 1998, Isabella County Abstract in July 1998, and Mecosta County Abstract in June 1999 were approximately $1.3 million. During 1999, salaries and benefits increased $775,000, occupancy and furniture and equipment expenses increased $322,000 and all other operating expenses increased $791,000. FEDERAL INCOME TAXES Federal income tax expense for 2000 was $2.08 million or 27.7% of pre-tax income compared to $2.04 million or 28.0% of pre-tax income in 1999 and $1.87 million or 28.4% in 1998. The decrease in income tax expense as a percentage of income in 2000 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 F, Federal Income Taxes, in the accompanying consolidated financial statements. 20
21 ANALYSIS OF CHANGES IN THE STATEMENT OF CONDITION Total assets were $540.9 million at December 31, 2000, an increase of $37.3 million or 7.4% over year end 1999. Asset growth was primarily funded by a $31.7 million increase in deposits, a $0.3 million increase in borrowing, and a $4.8 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 2000, the Corporation's net holding of investment securities decreased $12.9 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 ----------------------------------------- Available for sale 2000 1999 1998 ------- ------- ------- <S> <C> <C> <C> Available for sale U.S. Treasury and U.S. government agencies $40,978 $55,033 $65,943 States and political subdivisions 36,186 30,974 27,842 Commercial paper 350 349 2,014 ------- ------- ------- TOTAL $77,514 $86,356 $95,799 ======= ======= ======= Held to maturity U.S. Treasury and U.S. government agencies $ 1,060 $ 928 $ 1,813 States and political subdivisions 6,637 9,080 8,719 Other securities 2,963 4,758 5,698 ------- ------- ------- TOTAL $10,660 $14,766 $16,230 ======= ======= ======= </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, zero coupon bonds, nongovernment agency asset backed securities, and structured notes. 21
22 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, 2000. TABLE 7. SCHEDULE OF MATURITIES OF INVESTMENT SECURITIES AND WEIGHTED AVERAGE YIELDS (Dollars in Thousands) <TABLE> <CAPTION> Maturing -------------------------------------------------------------------------------------- After One After Five After Ten Year But Years But Years 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 $12,897 5.90% $23,714 5.74% $ -- --% $ -- --% States and political subdivisions 8,227 5.28 14,423 5.32 10,329 4.75 3,207 5.85 Mortgage backed 799 6.38 3,568 6.04 -- -- -- -- Corporate & other securities 350 5.76 -- -- -- -- -- -- ------- ----- ------- ----- ------- ------ ------ ----- TOTAL $22,273 5.69% $41,705 5.62% $10,329 4.75% $3,207 5.85% ======= ===== ======= ===== ======= ====== ====== ===== Held to maturity States and political subdivisions $ 3,304 5.21% $ 2,613 4.79% $ -- --% $ 720 3.83% Mortgage backed 334 5.89 193 5.83 40 7.46 493 5.48 Corporate and other securities 502 5.64 100 4.85 -- -- 2,361 7.66 ------- ----- ------- ----- ------- ----- ------ ----- TOTAL $ 4,140 5.32% $ 2,906 4.86% $ 40 7.46% $3,574 6.59% ======= ===== ======= ===== ======= ===== ====== ===== </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 ----------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------- -------- -------- --------- -------- <S> <C> <C> <C> <C> <C> Commercial $ 60,301 $ 55,247 $ 48,204 $ 41,497 $ 43,707 Agricultural 47,298 40,449 38,766 35,538 34,169 Real estate mortgage 242,042 212,724 186,413 159,757 153,168 Installment 54,038 47,426 45,531 49,733 48,688 -------- -------- -------- -------- -------- TOTAL LOANS $403,679 $355,846 $318,914 $286,525 $279,732 ======== ======== ======== ======== ======== </TABLE> Total loans increased $47.8 million in 2000. The increase was primarily in residential real estate mortgages. As of December 31,2000 commercial loans, as a percentage of total loans were 14.9%, agricultural 11.7%, real estate mortgages 60.0%, and installments 13.4%. 22
23 DEPOSITS Total deposits increased $31.7 million and were $476.8 million at year end 2000, a 7.1% increase over 1999. Average deposits increased 2.5% in 2000 and 9.0% in 1999. During 2000, average noninterest bearing deposits increased 5.7%, interest bearing demand deposits increased 8.5%, savings deposits decreased 3.7%, and time deposits increased 3.7%. Time deposits over $100,000 as a percentage of total deposits equaled 8.1% and 6.2% as of December 31, 2000 and 1999, respectively. TABLE 9. AVERAGE DEPOSITS (Dollars in thousands) <TABLE> <CAPTION> 2000 1999 1998 -------------------- ------------------- -------------------- Amount Rate Amount Rate Amount Rate -------- ----- -------- ----- -------- ----- <S> <C> <C> <C> <C> <C> <C> Noninterest bearing demand deposits $ 55,188 $ 52,221 $ 49,807 Interest bearing demand deposits 68,017 2.92% 62,713 2.37% 53,679 2.61% Savings deposits 122,610 3.19 127,259 3.04 110,819 3.24 Time deposits 206,849 5.82 199,373 5.42 190,986 5.79 -------- -------- -------- TOTAL $452,664 $441,566 $405,291 ======== ======== ======== </TABLE> TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000 (Dollars in thousands) <TABLE> <CAPTION> December 31 ---------------------------------------------------------- 2000 1999 1998 ------- ------- ------- <S> <C> <C> <C> Maturity Within 3 months $13,217 $ 9,728 $ 6,327 Within 3 to 6 months 7,250 4,391 7,661 Within 6 to 12 months 7,418 5,360 4,757 Over 12 months 10,627 8,096 5,103 ------- ------- ------- TOTAL $38,512 $27,575 $23,848 ======= ======= ======= </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 Corporation's trust department also offers a variety of financial products in addition to traditional estate services. 23
24 CAPITAL The capital of the Corporation consists solely of common stock, capital surplus, retained earnings, and accumulated other comprehensive income. Total capital increased approximately $4.8 million in 2000. The Corporation offers a dividend reinvestment and employee stock purchase plan. Under the provisions of these Plans, the Corporation issued 23,304 shares of common stock generating $492,000 of capital during 2000, and 25,066 shares of common stock generating $548,000 of capital in 1999. 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 increased $1.10 million due to unrealized gains on investment securities available for sale in 2000. 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 9.90% at year end 2000. 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, 2000: Percentage of Capital to Risk Adjusted Assets: <TABLE> <CAPTION> Required IBT Bancorp -------- ----------- <S> <C> <C> Equity Capital 4.00% 13.43% Secondary Capital 4.00 1.25 ----- ------ Total Capital 8.00% 14.69% ===== ====== </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 Banks. At December 31, 2000, the Banks exceeded these minimums. For further information regarding the Banks' capital requirements, refer to Note M of the Financial Statements, Regulatory Capital Matters. LIQUIDITY Liquidity management is designed to have adequate resources available to meet depositor and borrower discretionary demands for funds. Liquidity is also required to fund expanding operations, investment opportunities, and payment of cash dividends. The primary sources of the Corporation's liquidity are cash and cash equivalents and available for sale investment securities. As of December 31, 2000 and 1999, cash and cash equivalents equaled 5.3% of total assets. Net cash provided from operations was $6.8 million in 2000 and $11.5 million in 1999. Net cash provided by financing activities equaled $30.4 million in 2000 and $13.0 million in 1999. The Corporation's investing activities used $35.5 million in 2000 and $34.9 million in 1999. The accumulated effect of the Corporation's operating, investing, and financing activities on cash and cash equivalents was a $1.7 million increase in 2000 and a $10.4 million decrease in 1999. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale equaled $77.5 million as of December 31, 2000 and $86.4 million as of December 31, 1999. 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. 24
25 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 $403.7 million in total loans, $43.3 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 $1.1 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, 2000, the Corporation had $63.9 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, 2000. 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 Fed funds sold $ 900 $ -- $ -- $ -- Investment securities 5,930 20,483 44,611 17,150 Loans 81,883 72,566 237,130 11,718 ------- -------- -------- ------- TOTAL $88,713 $ 93,049 $281,741 $28,868 ======= ======== ======== ======= Interest Sensitive Liabilities Borrowed funds $ 1,044 $ 3,000 $ -- $ 2,400 Time deposits 39,871 83,654 92,090 -- Savings 72,009 3,579 22,255 18,781 Interest bearing demand 36,273 6,194 32,430 8,882 -------- -------- -------- ------- TOTAL $149,197 $ 96,427 $146,775 $30,063 ======== ======== ======== ======= Cumulative gap $(60,484) $(63,862) $71,104 $69,909 Cumulative gap as a % of assets (11.18)% (11.81)% 13.15% 12.92% </TABLE> 25
26 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, 2000. 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 $62,445 $44,865 $289 $107,599 ======= ======= ==== ======== Interest Sensitivity: Loans maturing after one year which have: Fixed interest rates $44,546 $289 Variable interest rates 319 -- ------- ---- TOTAL $44,865 $289 ======= ==== </TABLE> ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation's primary market risks are interest rate risk and, to a lesser extent, liquidity risk. The Corporation has no foreign exchange risk, holds limited loans outstanding to oil and gas concerns, holds no trading account assets, nor does it utilize interest rate swaps or derivatives in the management of its interest rate risk. Any changes in foreign exchange rates or commodity prices would have an insignificant impact, if any, on the Corporation's interest income and cash flows. Interest rate risk ("IRR") is the exposure of the Corporation's net interest income, its primary source of income, to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. IRR is the fundamental method in which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to the Corporation's earnings and capital. The Federal Reserve, the Corporation's primary Federal regulator, has adopted a policy requiring the Board of Directors and senior management to effectively manage the various risks that can have a material impact on the safety and soundness of the Corporation. The risks include credit, interest rate, liquidity, operational, and reputational. The Corporation has policies, procedures and internal controls for measuring and managing these risks. Specifically, the IRR policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long term assets, limiting the mismatch in repricing opportunity of assets and liabilities, and the frequency of measuring and reporting to the Board of Directors. The Corporation uses several techniques to manage IRR. The first method is gap analysis. Gap analysis measures the cash flows and/or the earliest repricing of the Corporation's interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the imbedded repricing options contained in assets and liabilities. A substantial portion of the Corporation's assets are invested in loans and mortgage backed securities. These assets have imbedded options that allow the borrower to repay the balance prior to maturity without penalty. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current interest rate for residential mortgages, the level of sales of used homes, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in the Corporation's cash flows from these assets. Investment securities, other than those that are callable, do not have any significant imbedded options. 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. 26
27 The second technique used in the management of IRR is to combine the projected cash flows and repricing characteristics generated by the gap analysis, the interest rates associated with those cash flows to project future interest income. By changing the amount and timing of the cash flows and the repricing interest rates of those cash flows, the Corporation can project the effect of changing interest rates on its interest income. Based on the projections prepared for the year ended December 31, 2000 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, 2000 and 1999. 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 2001 2002 2003 2004 2005 Thereafter Total 12/31/00 ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Rate sensitive assets Other interest bearing assets $900 -- -- -- -- -- $900 $900 Average interest rates 5.75% -- -- -- -- -- 5.75% Fixed interest rate securities $26,258 $25,464 $12,656 $5,908 $1,458 $16,430 $88,175 $88,208 Average interest rates 5.62% 5.53% 5.71% 5.36% 4.96% 5.43% 5.55% Fixed interest rate loans $110,804 $68,175 $84,985 $57,695 $29,148 $9,430 $360,237 $359,584 Average interest rates 8.66% 8.22% 8.42% 8.04% 8.44% 8.12% 8.39% Variable interest rate loans $41,398 $1,863 $167 $14 -- -- $43,442 $43,442 Average interest rates 10.80% 10.96% 9.71% 10.49% -- -- 10.80% Rate sensitive liabilities Borrowed funds $4,044 -- -- -- -- $2,400 $6,444 $6,444 Average interest rates 5.36% -- -- -- -- 6.65% 5.84% Savings and NOW accounts $115,198 $18,690 $14,598 $13,083 $11,262 $27,493 $200,324 $200,324 Average interest rates 3.96% 2.12% 2.12% 2.13% 2.13% 2.15% 3.18% Fixed interest rate time deposits $122,409 $37,250 $20,911 $15,100 $18,831 -- $214,501 $214,775 Average interest rates 5.70% 6.21% 6.04% 5.76% 6.60% -- 5.91% Variable interest rate time deposits $911 $282 -- -- -- -- $1,193 $1,193 Average interest rates 6.01% 6.01% -- -- -- -- 6.01% </TABLE> <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 Other interest bearing assets $4,550 -- -- -- -- -- $ 4,550 $4,550 Average interest rates 5.20% -- -- -- -- -- 5.20% Fixed interest rate securities $22,471 $22,071 $25,318 $11,477 $6,401 $13,337 $101,122 $101,013 Average interest rates 5.53% 5.78% 5.59% 5.76% 5.43% 5.42% 5.61% Fixed interest rate loans $91,011 $67,107 $62,833 $46,859 $37,179 $10,540 $315,529 $315,807 Average interest rates 8.13% 8.05% 8.06% 7.99% 7.77% 7.68% 8.02% Variable interest rate loans $38,191 $1,826 $249 $51 -- -- $40,317 $40,317 Average interest rates 10.02% 10.55% 8.89% 9.27% -- -- 10.04% Rate sensitive liabilities Borrowed funds $6,110 -- -- -- -- -- $6,110 $6,110 Average interest rates 5.50% -- -- -- -- -- 5.50% Savings and NOW accounts $108,842 $17,554 $13,777 $12,388 $10,755 $27,442 $190,758 $190,758 Average interest rates 3.34% 2.21% 2.21% 2.21% 2.21% 2.20% 2.84% Fixed interest rate time deposits $108,571 $32,710 $24,094 $16,345 $11,493 $5 $193,218 $193,258 Average interest rates 5.37% 5.94% 6.21% 6.14% 5.78% 6.38% 5.65% Variable interest rate time deposits $770 $319 $5 -- -- -- $1,215 $1,215 Average interest rates 5.29% 5.29% 5.29% -- -- -- 5.29% </TABLE> 27
28 FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Corporation, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Corporation's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Corporation and the subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation's market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Corporation and its business, including additional factors that could materially affect the Corporation's financial results, is included in the Corporation's filings with the Securities and Exchange Commission. 28
29 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 30 through 50 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 14 of this report. 29
30 Report of Independent Auditors Board of Directors and Shareholders IBT Bancorp We have audited the accompanying consolidated balance sheets of IBT Bancorp, Inc. and subsidiaries as of December 31, 2000, and the related consolidated statements of changes in shareholders' equity, income, comprehensive income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IBT Bancorp, Inc. and subsidiaries as of December 31, 2000, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. We previously audited and reported on the consolidated balance sheet at December 31, 1999, and the related consolidated statements of changes in shareholders' equity, income, comprehensive income, and cash flows of IBT Bancorp and subsidiaries for each of the two years in the period ended December 31, 1999 prior to their restatement for the 2000 pooling of interests described in Note B. The contribution of IBT Bancorp to total assets, interest income, and net income represented 80%, 78%, and 77% of the 1999 restated totals and the contribution to interest income and net income represented 77% of the 1998 restated totals. Separate financial statements of FSB Bancorp, Inc. included in the 1999 and 1998 restated consolidated financial statements were audited and reported on separately by other auditors. We also have audited, as to combination only, the accompanying consolidated balance sheet as of December 31, 1999, and the related consolidated statements of changes in shareholders' equity, income, comprehensive income, and cash flows for each of the two years in the period ended December 31, 1999, after restatement for the 2000 pooling of interests; in our opinion, such consolidated financial statements have been properly combined on the basis described in the notes to the consolidated financial statements. Rehmann Robson P.C. Saginaw, Michigan February 2, 2001 30
31 CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) <TABLE> <CAPTION> DECEMBER 31 ---------------------- 2000 1999 -------- -------- <S> <C> <C> ASSETS Cash and demand deposits due from banks $ 27,525 $ 22,159 Federal funds sold 900 4,550 -------- -------- CASH AND CASH EQUIVALENTS 28,425 26,709 Investment securities Securities available for sale (amortized cost of $77,412 in 2000 and $87,919 in 1999) 77,514 86,356 Securities held to maturity (fair value of $10,687 in 2000 and $14,704 in 1999) 10,660 14,766 -------- -------- TOTAL INVESTMENT SECURITIES 88,174 101,122 Loans Agricultural 47,298 40,449 Commercial 129,302 118,561 Residential real estate mortgage 173,041 149,410 Installment 54,038 47,426 -------- -------- TOTAL LOANS 403,679 355,846 Less allowance for loan losses 5,162 4,622 -------- -------- NET LOANS 398,517 351,224 Premises and equipment 11,079 10,209 Accrued interest receivable, net 5,053 4,312 Acquisition intangibles, net 3,365 3,933 Other assets 6,284 6,087 -------- -------- TOTAL ASSETS $540,897 $503,596 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 60,798 $ 59,885 NOW accounts 83,779 62,902 Certificates of deposit and other savings 293,727 294,714 Certificates of deposit over $100 38,512 27,575 -------- -------- TOTAL DEPOSITS 476,816 445,076 Other borrowed funds 6,444 6,110 Accrued interest and other liabilities 5,707 5,303 -------- -------- TOTAL LIABILITIES 488,967 456,489 Shareholders' equity Common stock -- no par value: 10,000,000 shares authorized; 3,871,552 shares issued and outstanding (3,848,248 shares at December 31, 1999) 30,814 30,322 Retained earnings 21,049 17,816 Accumulated other comprehensive income (loss) 67 (1,031) -------- -------- TOTAL SHAREHOLDERS' EQUITY 51,930 47,107 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $540,897 $503,596 ======== ======== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 31
32 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 --------------------------------------------- 2000 1999 1998 ---------- ---------- ----------- <S> <C> <C> <C> NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of year 3,848,248 3,734,711 3,394,839 10% stock dividend -- 41,143 300,175 Issuance of common stock 23,304 72,394 39,697 ---------- ---------- ---------- BALANCE END OF YEAR 3,871,552 3,848,248 3,734,711 COMMON STOCK Balance at beginning of year $ 30,322 $ 27,833 $ 21,307 10% stock dividend -- 841 5,820 Issuance of common stock 492 1,648 706 ---------- ---------- ---------- BALANCE END OF YEAR 30,814 30,322 27,833 RETAINED EARNINGS Balance at beginning of year 17,816 15,343 18,246 Net income 5,431 5,244 4,701 10% stock dividend -- (841) (5,820) Cash dividends ($0.54 per share in 2000, $0.50 in 1999, and $0.48 in 1998) (2,198) (1,930) (1,784) ---------- ---------- ---------- BALANCE END OF YEAR 21,049 17,816 15,343 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance at beginning of year (1,031) 998 276 Unrealized gains (losses) on securities available for sale, net of income taxes and reclassification adjustment 1,098 (2,029) 722 ---------- ---------- ---------- BALANCE END OF YEAR 67 (1,031) 998 ---------- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY END OF YEAR $ 51,930 $ 47,107 $ 44,174 ========== ========== ========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 32
33 CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share data) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 --------------------------------- 2000 1999 1998 ------- ------- ------- <S> <C> <C> <C> INTEREST INCOME Loans, including fees $33,470 $28,488 $26,853 Investment securities Taxable 3,839 5,000 5,024 Tax exempt 1,275 1,222 1,130 Federal funds sold and other 170 735 644 ------- ------- ------- TOTAL INTEREST INCOME 38,754 35,445 $33,651 ------- ------- ------- INTEREST EXPENSE Deposits 17,927 16,157 16,029 Short term borrowings 475 64 21 ------- ------- ------- TOTAL INTEREST EXPENSE 18,402 16,221 16,050 -------- ------- -------- NET INTEREST INCOME 20,352 19,224 17,601 Provision for loan losses 565 509 531 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 19,787 18,715 17,070 NONINTEREST INCOME Trust fees 535 436 409 Service charges on deposit accounts 327 345 342 Other service charges and fees 1,530 1,456 1,324 Gain on sale of mortgage loans 98 297 345 Title insurance revenue 1,039 988 318 Other 876 868 691 ------- ------- ------- TOTAL NONINTEREST INCOME 4,405 4,390 3,429 NONINTEREST EXPENSES Salaries, wages, and employee benefits 8,594 8,209 7,434 Occupancy 1,025 957 875 Furniture and equipment 1,943 1,831 1,591 Amortization of acquisition intangibles 568 613 472 Other 4,547 4,208 3,558 ------- ------- ------- TOTAL NONINTEREST EXPENSES 16,677 15,818 13,930 ------- ------- ------- INCOME BEFORE FEDERAL INCOME TAXES 7,515 7,287 6,569 Federal income taxes 2,084 2,043 1,868 ------- ------- ------- NET INCOME $ 5,431 $ 5,244 $ 4,701 ======= ======= ======= Net income per basic share of common stock $1.41 $1.38 $1.25 ===== ===== ===== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 33
34 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 ---------------------------- 2000 1999 1998 ------ ------ ------ <S> <C> <C> <C> NET INCOME $5,431 $5,244 $4,701 Other comprehensive income (loss) before income taxes Unrealized gains (losses) on securities available for sale Unrealized holding gains (losses) arising during year 1,661 (3,088) 1,143 Reclassification adjustment for realized loss (gain) included in net income 4 (12) (49) ------ ------ ------ Other comprehensive income (loss) before income taxes 1,665 (3,076) 1,094 Income tax expense (benefit) related to other comprehensive income (loss) 566 (1,047) 372 ------ ------ ------ OTHER COMPREHENSIVE INCOME (LOSS) 1,098 (2,029) 722 ------ ------ ------ COMPREHENSIVE INCOME $6,529 $3,215 $5,423 ====== ====== ====== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 34
35 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 ---------------------------------- 2000 1999 1998 -------- -------- -------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 5,431 $ 5,244 $ 4,701 Reconciliation of net income to net cash provided by operations Provision for loan losses 565 509 531 Provision for depreciation 1,155 1,147 1,036 Net amortization on investment securities 211 431 356 Amortization of acquisition intangibles 568 575 433 Deferred income tax benefit (272) (254) (331) Gain on sale of mortgage loans (98) (297) (345) Proceeds from sale of mortgage loans 12,360 37,753 55,808 Loans originated for sale (12,261) (33,464) (59,495) Increase in: Accrued interest receivable (741) -- (810) Other assets (490) (560) (840) Accrued interest and other liabilities 404 449 949 -------- -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,832 11,533 1,993 INVESTING ACTIVITIES Activity in available-for-sale securities Maturities, calls, and sales 23,341 32,690 35,929 Purchases (9,702) (27,583) (66,581) Activity in held-to-maturity securities Maturities and calls 5,832 4,393 5,889 Purchases (2,355) (2,100) (6,350) Net increase in loans (50,575) (41,223) (28,356) Purchases of premises and equipment (2,025) (1,074) (1,072) Acquisition of branch offices, less cash received -- -- 37,874 Acquisition of title office -- -- (1,471) -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES (35,484) (34,897) (24,138) FINANCING ACTIVITIES Net increase in noninterest bearing deposits 913 4,930 880 Net increase in interest bearing deposits 30,827 3,406 22,462 Net increase in borrowings 334 6,000 -- Cash dividends (2,198) (1,930) (1,784) Proceeds from issuance of common stock 492 548 706 -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 30,368 12,954 22,264 INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,716 (10,410) 119 Cash and cash equivalents beginning of year 26,709 37,119 37,000 -------- -------- -------- CASH AND CASH EQUIVALENTS END OF YEAR $ 28,425 $ 26,709 $ 37,119 ======== ======== ======== Supplemental cash flow information: Federal income taxes paid $ 2,254 $ 2,592 $ 1,898 Interest paid 18,228 16,290 16,082 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. 35
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) NOTE A -- BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of IBT Bancorp (the "Corporation"), a Financial Services Holding company, and its wholly owned subsidiaries, Isabella Bank and Trust, Farmers State Bank of Breckenridge (See Note B), IBT Title, IBT Financial Services, and IBT Loan Production. All intercompany transactions and accounts have been eliminated. NATURE OF OPERATIONS: IBT Bancorp is a Financial Service Holding Company offering a wide array of financial products and services in mid Michigan. Its banking subsidiaries, Isabella Bank and Trust and Farmers State Bank of Breckenridge, offer banking services through 18 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 Banks' principal markets. The Corporation's results of operations can be significantly affected by changes in interest rates or changes in the local economic environment. IBT Title does business under the names Isabella County Abstract and Title, 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 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 and to finance agricultural production. Other than these type loans, there is no significant concentration to any other industry or customer. 36
37 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> 2000 1999 ------- ------- <S> <C> <C> Premises $10,020 $ 8,484 Equipment 11,485 11,040 ------- ------- 21,505 19,524 Less accumulated depreciation 10,426 9,315 ------- ------- NET PREMISES AND EQUIPMENT $11,079 $10,209 ======= ======= </TABLE> 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. 37
38 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 3,860,975 in 2000, 3,811,859 in 1999; and 3,752,837 in 1998. ACQUISITION INTANGIBLES: Isabella Bank and Trust acquired branch facilities and related deposits in a business combination accounted for as a purchase. The acquisition of the branches included amounts related to the valuation of customer deposit relationships (core deposit intangibles). The deposit intangible is being amortized on the straight line basis over nine years, the expected life of the acquired relationship. NEW ACCOUNTING STANDARDS: The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, for an entity that has not adopted Statement No. 133 before June 15, 2000. This statement shall be adopted concurrently with Statement No. 133. These statements require 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 financial position or results of operations. FASB issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. The statement is generally effective for transfers of financial assets occurring after March 31, 2001, and is effective for disclosures about securitizations and for reclassifications and disclosure about collateral in financial statements for fiscal years ending after December 15, 2000. 38
39 Statement No. 140, provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities and criteria for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. It is not expected that adoption of this Statement will have a material impact on the Corporation's financial position or results of operations. RECLASSIFICATIONS: Certain amounts reported in the 1999 and 1998 consolidated financial statements have been reclassified to conform with the 2000 presentation. NOTE B -- BUSINESS COMBINATION On August 10, 2000 the Corporation merged with FSB Bancorp of Breckenridge, Michigan. As part of the merger, IBT issued 871,941 shares of its common stock in a tax free exchange for all of the outstanding shares of FSB Bancorp, the parent company of Farmers State Bank of Breckenridge. The merger was accounted for as a pooling of interests resulting in the restatement of all financial information for the periods presented. The following presents the separate results of operations for the six month period ending June 30, 2000 (the latest available quarterly information immediately preceding the merger) and the year ending December 30, 1999 for FSB Bancorp and IBT Bancorp. <TABLE> <CAPTION> (Unaudited) Six Months Ended Year Ended June 30, 2000 December 31, 1999 ---------------- ----------------- <S> <C> <C> NET INTEREST INCOME IBT Bancorp $ 7,453 $14,603 FSB Bancorp 2,613 4,621 ------- ------- Combined $10,066 $19,224 ======= ======= NET INCOME IBT Bancorp $ 2,016 $ 4,051 FSB Bancorp 686 1,193 ------- ------- Combined $ 2,702 $ 5,244 ======= ======= EARNINGS PER SHARE IBT Bancorp $ 0.68 $ 1.38 FSB Bancorp 1.68 2.94 Combined 0.70 1.38 </TABLE> In the third quarter of 2000, a special charge of $243 ($160 after tax) related to the merger was recorded. The charge consisted of merger-related legal, accounting, consulting, and printing costs. 39
40 NOTE C -- INVESTMENT SECURITIES The following is a summary of securities available for sale and held to maturity. Restricted securities include only the stock of the Federal Reserve Bank and the Federal Home Loan Bank, which have no contractual maturities. <TABLE> <CAPTION> Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- ---------- ------- <S> <C> <C> <C> <C> DECEMBER 31, 2000 Securities available for sale U.S. Treasury and U.S. government agencies $41,003 $ 97 $ (122) $40,978 Corporate 351 -- (1) 350 States and political subdivisions 36,058 245 (117) 36,186 ------- ---- ------- ------- TOTAL $77,412 $342 $ (240) $77,514 ======= ==== ======= ======= Securities held to maturity U.S. Treasury and U.S. government agencies $ 412 $ -- $ (2) $ 410 Corporate 1,250 -- (7) 1,243 States and political subdivisions 6,637 44 (8) 6,673 Restricted investments 2,361 -- -- 2,361 ------- ---- ------- ------- TOTAL $10,660 $ 44 $ (17) $10,687 ======= ==== ======= ======= </TABLE> <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 $56,197 $ 17 $(1,181) $55,033 States and political subdivisions 31,368 38 (432) 30,974 Commercial paper 354 -- (5) 349 ------- ---- ------- ------- TOTAL $87,919 $ 55 $(1,618) $86,356 ======= ==== ======= ======= Securities held to maturity U.S. Treasury and U.S. government agencies $ 656 $ -- $ (21) $ 635 States and political subdivisions 9,080 39 (51) 9,068 Corporate & other securities 1,851 -- (12) 1,839 Collateralized mortgage obligations 1,072 -- (17) 1,055 Restricted investments 2,107 -- -- 2,107 ------- ---- ------- ------- TOTAL $14,766 $ 39 $ (101) $14,704 ======= ==== ======= ======= </TABLE> 40
41 The following table summarizes the fair value, realized gains, and realized losses on sales of securities available for sale. <TABLE> <CAPTION> 2000 1999 1998 ------ ------ ------ <S> <C> <C> <C> Fair value of securities sold at the date of sale $4,354 $8,372 $11,055 Gross realized gains U.S. Treasury and U.S. government agencies -- 23 54 Municipals 1 -- -- Gross realized losses U.S. Treasury and U.S. government agencies 5 11 5 </TABLE> The following table shows the amortized cost and estimated fair value of securities owned at December 31, 2000 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 $18,215 $18,222 $ 3,806 $ 3,816 Due after 1 year thru 5 years 37,346 37,329 2,713 2,738 Due after 5 years thru 10 years 16,061 16,196 -- -- Due after 10 years 1,400 1,400 720 719 ------- ------- ------- ------- 73,022 73,147 7,239 7,273 Restricted investments -- -- 2,361 2,361 Mortgage backed securities 4,390 4,367 1,060 1,053 ------- ------- ------- ------- TOTAL $77,412 $77,514 $10,660 $10,687 ======= ======= ======= ======= </TABLE> Investment securities with a carrying value of approximately $10,079 and $10,515 were pledged to secure public deposits and for other purposes as necessary or required by law at December 31, 2000 and 1999, respectively. NOTE D -- LOANS An analysis of changes in the allowance for loan losses follows: <TABLE> <CAPTION> 2000 1999 1998 ------ ------ ------ <S> <C> <C> <C> Balance at beginning of year $4,622 $4,412 $4,112 Loans charged off (418) (646) (619) Recoveries 393 347 388 Provision charged to income 565 509 531 ------ ------ ------ BALANCE AT END OF YEAR $5,162 $4,622 $4,412 ====== ====== ====== </TABLE> At December 31, 2000 and 1999, 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 Banks were loan customers of the Banks. Total loans to these customers aggregated $8,399 and $6,021 at December 31, 2000 and 1999, respectively. During 2000, $5,747 of new loans were made and repayments totalled $3,369. 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. 41
42 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 $104,473 and $104,979 at December 31, 2000 and 1999, 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> 2000 1999 1998 ----- ----- ----- <S> <C> <C> <C> Balance at beginning of year $140 $100 $ 50 Mortgage servicing rights capitalized 270 237 210 Amortization (139) (99) (64) Impairment valuation allowance -- (98) (96) ---- ---- ----- BALANCE AT END OF YEAR $271 $140 $100 ==== ==== ==== </TABLE> Residential mortgages committed for sale were $1,089 as of December 31, 2000 and $951 as of December 31, 1999. NOTE E -- FAIR VALUE OF FINANCIAL INSTRUMENTS The Corporation utilizes quoted market prices, where available, to compute the fair value of its financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate of the fair value amounts presented are not necessarily indicative of the underlying value of the Corporation. The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments. Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and demand deposits due from banks and federal funds sold approximate those assets' fair value. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are unavailable, fair values are based on quoted market prices of comparable instruments. Loans: Fair values for variable rate loans that reprice at least quarterly and have no significant change in credit risk are assumed to equal recorded book value. Fixed rate loans are valued using present value discounted cash flow techniques. The discount rate used in these calculations was the U.S. government bond rate for securities with similar maturities adjusted for servicing costs, credit loss, and prepayment risk. Deposit liabilities: Demand, savings, and money market deposits have no stated maturities and are payable on demand; thus their estimated fair value is equal to their recorded book balance. Fair values for variable rate certificates of deposit approximate their recorded book balance. Fair values for fixed rate certificates of deposit are determined using discounted cash flow techniques that apply interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Off balance sheet instruments: Fair values for off balance sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties' credit standings. The Corporation does not charge fees for lending commitments; thus it is not practicable to estimate the fair value of these instruments. 42
43 The following sets forth the estimated fair value and recorded book balance of the Corporation's financial instruments as of December 31. <TABLE> <CAPTION> 2000 1999 ------------------------------------ ------------------------------------ Estimated Fair Recorded Book Estimated Fair Recorded Book Value Balance Value Balance --------------- --------------- -------------- ------------- <S> <C> <C> <C> <C> Cash and demand deposits due from banks $ 27,525 $ 27,525 $ 22,159 $ 22,159 Federal funds sold 900 900 4,550 4,550 Investment securities 88,201 88,174 101,060 101,122 Net loans 397,864 398,517 354,712 351,224 Accrued interest receivable 5,053 5,053 4,312 4,312 Deposits with no stated maturities 261,201 261,201 250,642 250,642 Deposits with stated maturities 215,889 215,615 194,473 194,434 Borrowed funds 6,444 6,444 6,110 6,110 Accrued interest payable 1,190 1,190 1,013 1,013 </TABLE> NOTE F -- FEDERAL INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation's deferred tax assets and liabilities, included in other assets, as of December 31 are as follows: <TABLE> <CAPTION> 2000 1999 ------ ------ <S> <C> <C> Deferred tax assets Allowance for loan losses $1,037 $ 841 Deferred directors' fees 479 426 Employee benefit plans 429 387 Core deposit premium and acquisition expenses 256 157 Net unrealized loss on available for sale securities -- 531 Other 77 83 ------ ------ TOTAL DEFERRED TAX ASSETS 2,278 2,425 Deferred tax liabilities Premises and equipment 266 304 Accretion on securities 53 38 Prepaid pension expense 565 418 Net unrealized gain on available for sale securities 35 -- Other 44 56 ------ ------ TOTAL DEFERRED TAX LIABILITIES 963 816 ------ ------ NET DEFERRED TAX ASSETS $1,315 $1,609 ====== ====== </TABLE> Components of the consolidated provision for income taxes are as follows: <TABLE> <CAPTION> 2000 1999 1998 ------ ------ ------ <S> <C> <C> <C> Current $2,356 $2,297 $2,199 Deferred benefit (272) (254) (331) ------ ------ ------ PROVISION FOR FEDERAL INCOME TAXES $2,084 $2,043 $1,868 ====== ====== ====== </TABLE> 43
44 The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income taxes is as follows. <TABLE> <CAPTION> 2000 1999 1998 ------ ------ ------ <S> <C> <C> <C> Income tax on pretax income $2,555 $2,478 $2,233 Effect of nontaxable interest income (514) (459) (418) Other 43 24 53 ------ ------ ------ PROVISION FOR FEDERAL INCOME TAXES $2,084 $2,043 $1,868 ====== ====== ====== </TABLE> The income tax effects on realized securities gains or (losses) were $(1) in 2000, $4 in 1999, and $17 in 1998. NOTE G -- BENEFIT PLANS The Corporation has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employees' average compensation over their 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 invested primarily in common stocks. Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan and a reconciliation to the amount recognized in the Corporation's consolidated balance sheets are summarized as follows at December 31: <TABLE> <CAPTION> 2000 1999 1998 ------ ------ ------ <S> <C> <C> <C> Change in projected benefit obligation Benefit obligation January 1 $4,839 $4,952 $4,392 Service cost 188 189 145 Interest cost 352 337 310 Actuarial (gain) loss (34) (419) 320 Benefits paid (215) (220) (215) ------ ------ ------ BENEFIT OBLIGATION, DECEMBER 31 $5,130 $4,839 $4,952 ====== ====== ====== Change in plan assets Fair value of plan assets, January 1 $5,230 $4,590 $4,001 Investment (loss) return (112) 436 433 Corporation contribution 543 424 371 Benefits paid (215) (220) (215) ------ ------ ------ FAIR VALUE OF PLAN ASSETS, DECEMBER 31 $5,446 $5,230 $4,590 ====== ====== ====== Reconciliation of funded status Funded status $ 316 $ 390 $ (362) Unrecognized net transition asset (66) (88) (111) Unrecognized prior service cost 143 161 179 Unrecognized net loss from experience different than that assumed and effects of changes in assumptions 1,268 766 1,288 ------ ------ ------ PREPAID PENSION COST $1,661 $1,229 $ 994 ====== ====== ====== </TABLE> 44
45 Net pension expense consists of the following components for the year ended December 31: <TABLE> <CAPTION> 2000 1999 1998 ------ ------ ------ <S> <C> <C> <C> Service cost on benefits earned for services rendered during the year $188 $189 $145 Interest cost on projected benefit obligation 352 337 310 Expected return on plan assets (436) (381) (329) Amortization of unrecognized transition asset (22) (23) (22) Amortization of unrecognized prior service cost 18 18 18 Amortization of unrecognized actuarial net loss 12 48 43 ---- ---- ---- NET PENSION EXPENSE $112 $188 $165 ==== ==== ==== </TABLE> Actuarial assumptions used in determining the projected benefit obligation and the net periodic pension cost are as follows: <TABLE> <CAPTION> 2000 1999 1998 ------ ------ ------ <S> <C> <C> <C> Weighted average discount rate 7.50% 7.50% 6.75% 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 2000, 1999, and 1998 were $20, $37, and $48, respectively, and are being recognized over the participants' expected years of service. The Corporation maintains an employee stock ownership plan (ESOP) and profit sharing plan which cover substantially all of its employees. Contributions to the Plans are discretionary and are approved by the Board of Directors and recorded as compensation expense. Compensation expense related to the Plans for 2000, 1999, and 1998 was $200, $195, and $115 respectively. Total shares outstanding related to the ESOP at December 31, 2000 and 1999 were 152,958 and 164,399 respectively, and were included in the computation of dividends and earnings per share in each of the respective years. 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 $46,145 at December 31, 2000, 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, 2000, the Corporation had a total of $567 in outstanding standby letters of credit. 45
46 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, 2000. Banking regulations require banks to maintain cash reserve balances in currency or as deposits with the Federal Reserve Bank. The Corporation's requirement was approximately $8,334 at December 31, 2000, and $6,515 at December 31, 1999. Banking regulations also limit the transfer of assets in the form of dividends, loans, or advances from the subsidiary banks to the Corporation. At December 31, 2000, substantially all of the subsidiary banks' assets were restricted from transfer to the Corporation in the form of loans or advances. Consequently, bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current year's retained net income plus retained net income for the preceding two years, less any required transfers to capital surplus. At January 1, 2001, the amount available for dividends without regulatory approval was approximately $3,023. 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 $620. 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 $634 in 2000, $565 in 1999 and $619 in 1998. The Corporation offers a dividend reinvestment and employee stock purchase plan. The dividend reinvestment plan allows shareholders to purchase previously unissued IBT Bancorp common shares. The employee stock purchase plan allows employees to purchase IBT Bancorp common stock through payroll deduction. The number of shares authorized for issuance under these plans are 155,000 with 91,899 shares unissued at December 31, 2000. During 2000, 1999 and 1998, 23,304 shares were issued for $492, 25,066 shares were issued for $548, and 32,878 shares were issued for $597, respectively, pursuant to these plans. The subsidiary Banks of the Corporation have obtained approval to borrow up to $34,000 from the Federal Home Loan Bank (FHLB) of Indianapolis. Under the terms of the agreement, the Banks may obtain advances at the stated rate at the time of the borrowings. The Banks have agreed to pledge eligible mortgage loans and U.S. Treasury and governmental agencies as collateral for any such borrowings. Certain directors and executive officers (including their families and companies in which they have 10% or more ownership) of the Corporation and the Banks were deposit customers of the Banks. Total deposits of these customers aggregates approximately $3,742 and $5,863 at December 31, 2000 and December 31, 1999, respectively. 46
47 NOTE J -- DEPOSITS At December 31, 2000, the scheduled maturities of time deposits were as follows: <TABLE> <CAPTION> YEAR AMOUNT ---- -------- <S> <C> 2001 $123,217 2002 37,559 2003 20,909 2004 15,099 2005 18,831 </TABLE> NOTE K -- BORROWED FUNDS Borrowed funds at December 31, 2000 consists of the following obligations: <TABLE> <CAPTION> 2000 1999 ------ ------ <S> <C> <C> Federal Home Loan Bank advances $6,400 $1,000 Securities sold under agreement to repurchase 44 110 Federal funds purchased -- 5,000 ------ ------ $6,444 $6,110 ====== ====== </TABLE> The Federal Home Loan Bank borrowings are collateralized by a blanket lien on all qualified 1 to 4 family and U.S. Treasury and government agency securities equal to at least 145% of outstanding advances. Advances are also secured by FHLB stock owned by the Banks. Securities sold under agreement to repurchase, which are classified as secured borrowing, generally mature within one to four days from the transaction date. Securities sold under agreement to repurchase are reflected at the amount of cash received in connection with the transaction. The U.S. government agency securities underlying the agreements have a carrying value and a fair value of approximately $1,016 and $1,000 at December 31, 2000 and 1999, respectively. Such securities remain under the control of the Corporation. The Corporation may be required to pledge additional collateral based on the fair value of the underlying securities. The maturity and weighted average interest rates of FHLB advances at December 31 follow: <TABLE> <CAPTION> 2000 ---------------- AMOUNT RATE ------ ------ <S> <C> <C> Fixed rate advance due 2010 $2,400 6.62% One year putable advance due 2010 3,000 4.98 One year fixed rate advance due 2001 1,000 6.75 ------ ---- Total advances $6,400 5.88% ====== ===== </TABLE> <TABLE> <CAPTION> 1999 --------------- AMOUNT RATE ------ ------ <S> <C> <C> One year fixed rate advance due 2000 $1,000 5.87% </TABLE> 47
48 NOTE L -- OPERATING SEGMENTS The Corporation's reportable segments are based on legal entities that account for at least 10% of operating results. The accounting policies are the same as those discussed in Note A to the Consolidated Financial Statements. The Corporation evaluates performance based principally on net income and asset quality of the respective segments. A summary of selected financial information for the Corporation's reportable segments follows: <TABLE> <CAPTION> Isabella Bank Farmers All and Trust State Bank Others Total ------------- ---------- ------- ------- <S> <C> <C> <C> <C> 2000 Total assets $430,060 $106,699 $4,138 $540,897 Interest income 29,554 9,135 65 38,754 Net interest income 15,002 5,199 151 20,352 Provision for loan losses 265 300 -- 565 Net income (loss) 4,223 1,439 (231) 5,431 1999 Total assets $400,366 $101,579 $1,651 $503,596 Interest income 27,417 7,944 84 35,445 Net interest income 14,473 4,615 136 19,224 Provision for loan losses 309 200 -- 509 Net income 3,988 1,194 62 5,244 1998 Total assets $388,105 $ 97,200 $ 678 $485,983 Interest income 25,762 7,853 36 33,651 Net interest income 13,236 4,270 95 17,601 Provision for loan losses 321 210 -- 531 Net income 3,640 1,067 (6) 4,701 </TABLE> NOTE M -- REGULATORY CAPITAL MATTERS The Corporation (on a consolidated basis) and its subsidiary banks, Isabella Bank and Trust and Farmers State Bank of Breckenridge ("Banks") are subject to various regulatory capital requirements administered by their primary regulator, the Federal Reserve Bank. Failure to meet minimum capital requirements can initiate mandatory and/or discretionary actions by the Federal Reserve. These actions could have a material effect on the Corporation's and Banks' financial statements. Under the Federal Reserve's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Banks must meet specific capital guidelines that include quantitative measures of their assets, certain off-balance-sheet items, and capital, as calculated under regulatory accounting standards. The Banks' required capital is also subject to regulatory qualitative judgement regarding the Banks' interest rate risk exposure and credit risk. Prompt corrective action provisions are not applicable to bank holding companies. Measurements established by regulation to ensure capital adequacy require the Corporation and the Banks to maintain minimum total capital to risk weighted assets (as defined in the regulations), Tier 1 capital to risk weighted assets (as defined), and Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2000, that the Corporation and the Banks meet all capital adequacy requirements to which they are subject. As of December 31, 2000, the most recent notifications from the Federal Reserve Banks categorized the Banks as well capitalized. To be categorized as well capitalized, a bank must maintain total risk based capital, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the following table. There have been no conditions or events since the notifications that management believes has changed the Banks' category. 48
49 The Corporation's and each 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, 2000 Total capital to risk weighted assets Isabella Bank and Trust $33,974 12.2% $22,364 8.0% $27,955 10.0% Farmers State Bank of Breckenridge 11,525 14.8 6,230 8.0 7,788 10.0 Consolidated 52,985 14.7 28,859 8.0 N/A N/A Tier 1 capital to risk weighted assets Isabella Bank and Trust 30,479 10.9 11,182 4.0 16,773 6.0 Farmers State Bank of Breckenridge 10,544 13.5 3,115 4.0 4,673 6.0 Consolidated 48,468 13.4 14,430 4.0 N/A N/A Tier 1 capital to average assets Isabella Bank and Trust 30,479 7.5 16,201 4.0 20,251 5.0 Farmers State Bank of Breckenridge 10,544 10.2 4,118 4.0 5,147 5.0 Consolidated 48,468 9.1 21,228 4.0 N/A N/A AS OF DECEMBER 31, 1999: Total capital to risk weighted assets Isabella Bank and Trust $32,210 12.7% $20,349 8.0% $25,436 10.0% Farmers State Bank of Breckenridge 11,174 15.5 5,771 8.0 7,214 10.0 Consolidated 48,285 14.8 26,160 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 Farmers State Bank of Breckenridge 10,266 14.2 2,886 4.0 4,328 6.0 Consolidated 44,191 13.5 13,081 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 Farmers State Bank of Breckenridge 10,266 10.4 3,933 4.0 4,917 5.0 Consolidated 44,191 9.0 19,796 4.0 N/A N/A </TABLE> NOTE N -- PARENT COMPANY ONLY FINANCIAL INFORMATION CONDENSED BALANCE SHEET <TABLE> <CAPTION> December 31 --------------------- 2000 1999 ------- ------- <S> <C> <C> ASSETS Cash on deposit at subsidiary Banks' $ 4,279 $ 2,674 Securities available for sale 653 1,511 Investments in subsidiaries 47,834 42,802 Premises and equipment 93 93 Other assets 521 36 ------- ------- TOTAL ASSETS $53,380 $47,116 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities $ 1,450 $ 9 Shareholders' equity 51,930 47,107 ------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $53,380 $47,116 ======= ======= </TABLE> 49
50 CONDENSED STATEMENTS OF INCOME <TABLE> <CAPTION> Year Ended December 31 ----------------------------------- 2000 1999 1998 ------- ------- ------- <S> <C> <C> <C> Income Dividends from subsidiaries $ 4,700 $ 3,255 $ 1,815 Interest income 105 82 78 Other 6 6 6 ------- ------- ------- TOTAL INCOME 4,811 3,343 1,899 Expenses 563 203 191 ------- ------- ------- Income before income tax benefit and equity in undistributed earnings of subsidiaries 4,248 3,140 1,708 Federal income tax benefit 166 56 48 ------- ------- ------- 4,414 3,196 1,756 Undistributed earnings of subsidiaries 1,017 2,048 2,945 ------- ------- ------- NET INCOME $ 5,431 $ 5,244 $ 4,701 ======= ======= ======= </TABLE> CONDENSED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> Year Ended December 31 ----------------------------------- 2000 1999 1998 ------- ------- ------- <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 5,431 $ 5,244 $ 4,701 Adjustments to reconcile net income to cash provided by operations Undistributed earnings of subsidiaries (1,017) (2,048) (2,945) Net amortization of securities 3 11 1 Decrease (increase) in interest receivable 20 (21) 34 Decrease (increase) in other assets 3 19 (19) Increase in accrued expenses 1,440 1 1 Provision for depreciation 19 21 23 Deferred income tax benefit (512) -- -- ------- ------- ------- NET CASH PROVIDED BY OPERATIONS 5,387 3,227 1,796 INVESTING ACTIVITIES Proceeds from the maturities of investments available for sale 867 650 1,500 Purchases of investment securities available for sale -- (1,678) (101) Investment in subsidiaries (2,924) (550) (3,000) Purchases of equipment and premises (19) -- ------- ------- ------- NET CASH USED IN INVESTING ACTIVITIES (2,076) (1,578) (1,601) FINANCING ACTIVITIES Cash dividends (2,198) (1,930) (1,784) Issuance of common stock 492 1,648 707 ------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES (1,706) (282) (1,077) ------- ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,605 1,367 (882) Cash and cash equivalents at beginning of year 2,674 1,307 2,189 ------- ------- ------- CASH AND CASH EQUIVALENTS AT YEAR END $ 4,279 $ 2,674 $ 1,307 ======= ======= ======= </TABLE> 50
51 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 30, 2001). 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: 3(a) Amended Articles of Incorporation* 3(b) Amendment to the Articles of Incorporation*** 3(c) Amendment to the Articles of Incorporation***** 3(d) Amendment to the Articles of Incorporation 3(e) Amended Bylaws* 3(f) Amendment to the Bylaws** 3(g) Amendment to the Bylaws*** 3(h) Amendment to the Bylaws 10(a) Isabella Bank & Trust Executive Supplemental Income Agreement***(1) 10(b) Isabella Bank & Trust Deferred Compensation Plan****(1) 10(c) IBT Bancorp, Inc. and Related Companies Deferred Compensation Plan for Directors (1) 21 Subsidiaries of the Registrant 51
52 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, 2000. (c) The index to exhibits is on page 51 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. ***** Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March 22, 2000, and incorporated herein. (1) Management's Contract or Compensatory Plan or Arrangement. 52
53 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) <TABLE> <S> <C> by:/s/David W. Hole Date: March 20, 2001 ------------------------------------ --------------------- David W. Hole President and Chief Executive Officer </TABLE> 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 20, 2001 - --------------------------------------- and Director L. A. Johns /s/Frederick L. Bradford Director March 20, 2001 - --------------------------------------- Frederick L. Bradford /s/Gerald D. Cassel Director March 20, 2001 - --------------------------------------- Gerald D. Cassel /s/James C. Fabiano Director March 20, 2001 - --------------------------------------- James C. Fabiano /s/Ronald E. Schumacher Director March 20, 2001 - --------------------------------------- Ronald E. Schumacher </TABLE> 53
54 <TABLE> <CAPTION> Signatures Capacity Date ---------- -------- ---- <S> <C> <C> /s/Robert O. Smith Director March 20, 2001 - --------------------------------------- Robert O. Smith /s/Dean Walldorff Director March 20, 2001 - --------------------------------------- Dean Walldorff /s/David W. Hole President March 20, 2001 - --------------------------------------- Chief Executive Officer David W. Hole and Director (Principal Executive Officer) /s/Herbert C. Wybenga Vice President and March 20, 2001 - --------------------------------------- Director Herbert C. Wybenga /s/Dale Weburg Director March 20, 2001 - --------------------------------------- Dale Weburg /s/Dennis P. Angner Executive Vice President, March 20, 2001 - --------------------------------------- Treasurer, and Director Dennis P. Angner (Principal Financial Officer) </TABLE> 54
55 IBT Bancorp FORM 10-K Index to Exhibits <TABLE> <CAPTION> Exhibit Form 10-K Number Exhibit Page Number - ------- ------- ----------- <S> <C> <C> 3(d) Amendment to the Articles of Incorporation 56 3(h) Amendment to the Bylaws 57 10(c) IBT Bancorp, Inc. and Related Companies 58 Deferred Compensation Plan for Directors 21 Subsidiaries of the Registrant 66 23 Consent of Rehmann Robson P.C. 67 Independent Certified Public Accountants </TABLE> 55