<PAGE> 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. (Fee required)
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number: 0-18415
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IBT BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Michigan 38-2830092
------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway Street, Mt. Pleasant, Michigan 48858
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 772-9471
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $6.00 Par Value
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $34,050,000 as of March 15, 1996.
The number of shares outstanding of the registrant's Common Stock ($6 par
value) was 773,916 as of March 15, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
(Such documents are incorporated herein only to the extent specifically set
forth in response to an item herein.)
Documents Part of Form 10-K Incorporated into
- --------------------------------- -----------------------------------
IBT Bancorp, Inc. Proxy Statement
for its Annual Meeting of Part III
Shareholders to be held
April 23, 1996
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL
IBT Bancorp, Inc. (the Corporation) is a registered bank holding company
incorporated under Michigan law in September 1988. The Corporation has three
subsidiaries: Isabella Bank and Trust, IBT Financial Services, and IBT Agency.
Its principal subsidiary, Isabella Bank and Trust has eleven banking offices
strategically located throughout Isabella County, northeastern Montcalm County,
and southern Clare County, all of which are located in central Michigan. IBT
Financial Services is a full service retail brokerage offering stocks, bonds
and mutual funds to individuals. IBT Agency will not become active until 1996.
The agency is authorized to sell life insurance, casualty insurance, and fixed
and variable annuities. The principal city in which the Corporation operates
is Mount Pleasant, which has a population of approximately 23,000. Central
Michigan University, with enrollment of 16,000 students, is the area's largest
employer and provides a stable source of employment and income. Mount
Pleasant, as a result of having a large state supported university within its
boundaries and being centrally located between 4 cities of similar size, has a
sizable retail shopping industry. Mt. Pleasant is also the base for the
state's oil and gas production; Michigan is the 12th largest producer of oil
and gas in the United States. Other economic activity in Isabella County
includes farming, light industrial manufacturing and gaming at the Saginaw
Chippewa Indian Tribe Reservation. The area's unemployment rate is
approximately 3.5% and the average household income is $32,400.
COMPETITION
The Corporation competes with other commercial banks, many of which are
subsidiaries of other bank holding companies, savings and loan associations,
finance companies, and credit unions, and retail brokerage firms. The Bank is
a community bank and focuses on providing high-quality, personalized service at
a fair price. Based on deposits maintained by all financial institutions, the
Bank's market share exceeded 40% of the total for Isabella County in both 1995
and 1994. The Bank offers a broad array of banking services to businesses,
institutions, and individuals. Deposit services offered include checking
accounts, savings accounts, certificates of deposit, and direct deposits.
Lending activity includes loans made pursuant to lines of credit, real estate
loans, consumer loans, student loans, and charge card loans. Other financial
related products include trust services, stocks, investment securities, bond,
mutual fund sales, 24 hour banking service locally and nationally through
shared automatic teller machines, and safe deposit box rentals.
LENDING
The Bank limits lending activity to its local market and has not purchased any
loans from the secondary market. The Bank does not make loans to fund
leveraged buyouts, has
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no foreign corporate or government loans, and no corporate debt securities.
The general lending philosophy of the Bank is to avoid concentrations to
individuals and business segments. The following table sets forth the
composition of the Bank's loan portfolio, as of December 31, 1995.
LOANS BY MAJOR LENDING CATEGORY:
<TABLE>
<CAPTION>
(in thousands) Amount %
------ ---
<S> <C> <C>
Real Estate;
One to four family residential $ 73,611 39.58
Commercial and other 36,780 19.77
Construction & Land Development 5,327 2.87
-------- ------
Total Real Estate 115,718 62.22
Commercial;
Farmland & Agricultural Prod. 6,454 3.47
State and political subdivisions 3,207 1.72
Commercial and other 23,924 12.87
-------- ------
Total Commercial 33,585 18.06
Personal;
Credit Cards 1,795 0.97
Student Loans 6,861 3.69
Other 28,037 15.06
-------- ------
Total Personal 36,693 19.72
TOTAL $185,996 100.00
======== ======
</TABLE>
First and second residential mortgages are the single largest category of loans
(39.58% of total loans). The Bank offers 3 and 5 year fixed rate balloon
mortgages with a maximum 25 year amortization, and 15 and 30 year amortized
fixed rate loans. Fixed rate loans with a 30 year amortization are sold upon
origination to the Federal Home Loan Mortgage Association. Fixed rate
residential mortgage loans with a 15 year amortization may be held for future
sale or sold upon origination. Factors used in determining when to sell these
mortgages include management's judgement about the direction of interest rates,
the Corporation's need for fixed rate assets in the management of its interest
rate sensitivity, and overall loan demand. The Corporation has a policy that
these loans may not exceed 5% of its total assets.
The Bank's lending policies generally limit the maximum loan-to-value ratio on
residential mortgages to 90% 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 Bank's loans have a loan-to-value ratio of
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less than 80%. When underwriting residential real estate loans, the Bank
evaluates the borrower's ability to make monthly payments and the value of the
property securing the loan. The Bank requires that the payment of principal,
interest, taxes, and hazard insurance does not exceed 28% of a borrower's gross
income and that all debt servicing does not exceed 36% of income. In addition
to the above requirements, the Bank reviews credit reports and verifies
employment, income, and financial information. Appraisals are performed by
independent appraisers. The Bank requires an escrow account for taxes and
insurance on all 15 and 30 year fixed rate mortgages. All mortgage loan
requests are reviewed by a mortgage loan committee; loans in excess of $125,000
require the approval of either the Bank's Board of Directors or its loan
committee.
Commercial lending, which includes loans for farmland and agricultural
production, state and political subdivisions, commercial real estate, and
commercial loans equaled 18.06% of the Bank's loan portfolio at December 31,
1995. Repayment of commercial loans is often dependent upon the successful
operation and management of a business; thus, these loans generally involve
greater risk than other types of lending. The Bank minimizes its risk by
limiting the amount of loans to any one borrower to $2.0 million. Borrowers
with credit needs of more than $2.0 million are serviced through the use of
loan participation with other commercial banks. All commercial real estate
loans require loan-to-value limits of less than 80%. Depending upon the type
of loan, past credit history, and current operating results, the Bank may
require the borrower to pledge accounts receivable, inventory, and fixed
assets. Personal guarantees are generally required from the owners of closely
held corporations, partnerships, and proprietorships. In addition, the Bank
requires annual financial statements, prepares cash flow analysis, and reviews
credit reports. All commercial loan requests require the approval of two
senior loan officers if the amount exceeds $30,000. Loan requests in excess of
$60,000 require the approval of either the Bank's Board of Directors or its
loan committee.
Construction and land development loans consisted solely 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.
Consumer loans granted by the Bank include automobile loans, second mortgages,
secured and unsecured personal loans, credit cards, student loans, and
overdraft protection. The Bank does not offer revolving home equity loans nor
does it purchase dealer paper. Loan amortization is generally for a period of
up to 4 years; except home improvement loans, which are amortized for up to 10
years. The Bank places underwriting emphasis on a borrower's ability to pay
rather than collateral value. Except for student loans, no installment loans
are sold in the secondary market. All student loans are sold on the secondary
market upon reaching a payout status.
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SUPERVISION AND REGULATION
The Corporation is subject to supervision and regulation by the Federal Reserve
Board under the Bank Holding Company Act of 1956, as amended. A bank holding
company and its subsidiaries are able to conduct only the business of
commercial banking and activities closely related or incidental to it. (See
Regulation below.)
The Bank is chartered by the State of Michigan and is supervised and regulated
by the Financial Institutions Bureau of the State of Michigan. The Bank is a
member of the Federal Reserve System and its deposits are insured by the
Federal Deposit Insurance Corporation to the extent provided by law. (See
Regulation below)
The Corporation's non-banking subsidiary, IBT Financial Services, Inc., is a
broker-dealer, registered and subject to regulation by the Securities and
Exchange Commission under federal securities laws. This subsidiary is also
subject to regulation under state securities laws.
PERSONNEL
As of December 31, 1995, the Corporation had one full-time employee, the Bank
had 144 full-time equivalent employees, and IBT Financial Services had two
full-time employees. The Corporation and the Bank provide group life, health,
accident, disability and other insurance programs for employees and a number of
other employee benefit programs. The Corporation believes its relationship
with its employees to be good.
LEGAL PROCEEDINGS
There are various claims and law suits in which the Bank is periodically
involved, such as claims to enforce liens, condemnation proceedings on making
and servicing of real property loans and other issues incident to the Bank's
business. However, neither the Corporation nor the Bank is involved in any
material pending litigation.
REGULATION
The earnings and growth of the banking industry and therefore the earnings of
the Corporation and the earnings of the Bank are affected by the credit
policies of monetary authorities, including the Federal Reserve System. An
important function of the Federal Reserve System is to regulate the national
supply of bank credit in order to combat recession and curb inflationary
pressures. Among the instruments of monetary policy used by the Federal
Reserve to implement these objectives are open market operations in U.S.
Government 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.
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The monetary policies of the Federal Reserve System have had a significant
effect on the operating results of commercial banks in the past and are
expected to continue to do so in the future. The effect of such policies upon
the future business and earnings of the Corporation and the Bank cannot be
predicted.
THE CORPORATION
The Corporation, as a bank holding company, is regulated under the Bank Holding
Company Act of 1956, as amended ("BHC Act"), and is subject to the supervision
of the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). The Corporation is registered as a bank holding company with the
Federal Reserve Board and is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board
requires. The Federal Reserve Board may also make inspections and examinations
of the Corporation and its subsidiary.
Under the BHC Act, bank holding companies such as the Corporation are
prohibited, with certain limited exceptions, from engaging in activities other
than those of banking or of managing or controlling banks and from acquiring or
retaining direct or indirect ownership or control of voting shares or assets of
any company which is not a bank or bank holding company, other than subsidiary
companies furnishing services to or performing services for its subsidiaries,
and other subsidiaries engaged in activities which the Federal Reserve Board
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Under the BHC Act, bank holding companies
may not (subject to certain limited exceptions) directly or indirectly acquire
the ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company, including a bank or bank
holding company, without the prior written approval of the Federal Reserve
Board.
The BHC Act prohibits the Federal Reserve Board (subject to certain limited
exceptions) from approving the acquisition, by a bank holding company, such as
the Corporation, the principal banking operations of which are conducted in one
state, of control of a bank or bank holding company conducting its principal
banking operations in another state, unless the statutory laws of the state in
which are conducted the principal banking operations of the bank holding
company or bank to be acquired, explicitly authorize such an acquisition.
Under existing Michigan law and with the approval of the Commissioner of the
Michigan Financial Institutions Bureau, a Michigan-based bank and bank holding
company (such as the Corporation) may now be acquired by a bank holding company
located in any state, if the laws of such state would grant Michigan-based
banks or bank holding companies the right to acquire one or more banks or bank
holding companies located in such state under conditions which are not unduly
restrictive. Under the Michigan statute, the Commissioner of the Michigan
Financial Institutions Bureau must not approve any such transaction without
first determining among other things that the other state's law satisfies the
reciprocity requirement imposed by the Michigan statute.
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Most states have adopted legislation that permits out-of-state bank holding
companies to acquire local banks and bank holding companies subject, in most
cases, to reciprocity requirements.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financing strength to its subsidiary bank and to commit resources to
support its subsidiary. This support may be required at times when, in the
absence of such Federal Reserve Board policy, the Corporation would not
otherwise be required to provide it.
Under Michigan law, if the capital of a Michigan state chartered bank (such as
the Corporation's bank subsidiary) has become impaired by losses or otherwise,
the Commissioner of the Michigan Financial Institutions Bureau may require that
the deficiency in capital be met by assessment upon the Bank's stockholders pro
rata on the amount of capital stock held by each, and if any such assessment is
not paid by any stockholder within 30 days of the date of mailing of notice
thereof to such stockholder, cause the sale of the stock of such stockholder to
pay such assessment and the costs of sale of such stock.
Any capital loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness
of such subsidiary bank. In the event of a bank holding company's bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency
to maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment. This priority would apparently
apply to guarantees of capital plans under the Federal Deposit Insurance
Corporation Improvement Act of 1991.
Certain additional information concerning regulatory guidelines for capital
adequacy and other regulatory matters is presented herein under the caption
"Capital" on pages 21 and 22, and "Note I - Commitments and Other Matters" and
"Note J - Regulatory Capital Matters" on page 38.
ISABELLA BANK & TRUST
The Bank is subject to regulation and examination primarily by the Michigan
Financial Institutions Bureau. As an insured state bank, which is a member of
the Federal Reserve Bank of Chicago, the subsidiary is also subject to
regulation and examination by the FDIC and the Federal Reserve.
The agencies and federal and state law extensively regulate various aspects of
the banking business including, among other things, permissible types and
amounts of loans, investments and other activities, capital adequacy,
branching, interest rates on loans and on deposits and the safety and soundness
of banking practices.
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<PAGE> 8
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.
The Bank is also subject to legal limitations on the frequency and amount of
dividends that can be paid to the Corporation. For example, a Michigan state
bank may not declare a cash dividend or a dividend in kind except out of net
profits then on hand after deducting all losses and bad debts, and then only if
it will have a surplus amounting to not less than 20% of its capital after the
payment of the dividend. Moreover, a Michigan state bank may not declare or
pay any cash dividend or dividend in kind until the cumulative dividends on its
preferred stock, if any, have been paid in full. Further, if the surplus of a
Michigan state bank is at any time less than the amount of its capital, before
the declaration of a cash dividend or dividend in kind, it must transfer to
surplus not less than 10% of its net profits for the preceding half-year (in
the case of quarterly or semi-annual dividends) or the preceding two
consecutive half-year periods (in the case of annual dividends). At January 1,
1996, the amount available for dividends without regulatory approval was
approximately $3,872,000.
The payment of dividends by the Corporation and the Bank is also affected by
various regulatory requirements and policies, such as the requirement to
maintain adequate capital above regulatory guidelines. Recently enacted
legislation will impose further restrictions on the payment of dividends by
insured banks which fail to meet specified capital levels. The FDIC may
prevent an insured bank from paying dividends if the bank is in default of
payment of any assessment due to the FDIC. In addition, payment of dividends
by a bank may be prevented by the applicable federal regulatory authority if
such payment is determined, by reason of the financial condition of such bank,
to be an unsafe and unsound banking practice. The Federal Reserve Board and
the FDIC have issued policy statements providing that bank holding companies
and insured banks should generally only pay dividends out of current operating
earnings.
These regulations and restrictions may limit the Corporation's ability to
obtain funds from the Bank for its cash needs, including payment of dividends
and operating expenses.
The activities and operations of the Bank are also subject to other federal and
state laws and regulations, including usury and consumer credit laws, the
Federal Trust-in-Lending Act, Truth-in-Saving and Regulation Z of the Federal
Reserve Board and the Federal Bank Merger Act.
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ITEM 2. PROPERTIES
The Corporation's offices are located in the main office building of the Bank.
The Bank owns and operates all of its 12 facilities, which are located in
Isabella, Montcalm and Clare counties in the State of Michigan. The
Corporation's facilities current, planned, and best use is for transacting
commercial and retail banking 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, 1995.
<TABLE>
<CAPTION>
Year Net
Facility Approximate Book Value
Opened Sq. Footage 12/31/95 (1)
-------- ----------- ------------
<S> <C> <C> <C>
Main Office:
200 East Broadway (2)
Mt. Pleasant, Michigan..... 1903 27,640 $287,641
Main Office Extension:
Customer Service Center
139 East Broadway
Mt. Pleasant, Michigan..... 1985 16,736 623,798
Isabella County Branch Offices:
1416 East Pickard (3)
Mt. Pleasant, Michigan..... 1983 1,450 561,167
2133 South Mission(6)
Mt. Pleasant, Michigan..... 1976 1,560 464,167
200 South University (4)
Mt. Pleasant, Michigan..... 1964 1,795 72,386
1402 West High
Mt. Pleasant, Michigan..... 1973 2,150 130,763
401 East Main Street (5)
Blanchard, Michigan........ 1911 6,561 48,247
500 East Wright Avenue
Shepherd, Michigan......... 1980 1,830 215,258
3388 N. Woodruff Road
Weidman, Michigan.......... 1975 5,400 106,165
</TABLE>
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<TABLE>
<CAPTION>
Year Net
Facility Approximate Book Value
Opened Sq. Footage 12/31/95 (1)
----------- ----------- ------------
<S> <C> <C> <C>
1867 Winn Road
Beal City, Michigan....... 1977 1,100 58,290
Montcalm County Branch Office:
313 W. Bridge Street (6)
Six Lakes, Michigan....... 1966 1,527 315,089
Clare County Branch Office:
532 N. McEwan Street
Clare, Michigan........... 1993 7,300 $520,527
</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
ITEM 3. LEGAL PROCEEDINGS
The Corporation and the Bank are not involved in any material pending legal
proceedings. The Bank, because of the nature of its business, is at times
subject to numerous pending and threatened legal actions which arises out of
the normal course of their business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1995 to a vote of
security holders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF REGISTRANT
Pursuant to instruction G(3), the following information is included as an
unnumbered item under Part I of this report in lieu of being included in the
Proxy Statement for the Annual Shareholders Meeting to be held on April 23,
1996.
The names, ages, corporate positions, and years of service of the executive
officers of the Corporation are as follows:
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<TABLE>
<CAPTION>
YEARS OF
NAME AGE POSITION SERVICE
---- --- -------- --------
<S> <C> <C> <C>
David W. Hole 58 President and CEO 36
Mary Ann Breuer 56 Secretary 36
Dennis P. Angner 40 Treasurer 12
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS'
MATTERS There is no established market for the Corporation's common stock or
public information with respect to its market price. There are occasional
sales by shareholders of which the management of the Corporation is aware.
From January 1, 1994 through December 31, 1995 there were, so far as management
knows, 34 sales of the Corporation's common stock. These sales involved 22,179
shares, as adjusted for a 10 percent stock dividend declared in January of
1996, to be paid in March of 1996. 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 $40.00 per share in the fourth quarter of 1995, and the lowest price
was $33.64 per share in the first quarter of 1994. The following is a summary
of all known transfers since January 1, 1994. 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 Price Price
- -------------- --------- --------- ----- -----
<S> <C> <C> <C> <C>
1994:
First Quarter 1 314 33.64 33.64
Second Quarter 6 11,073 33.64 36.36
Third Quarter 2 1,109 34.55 36.36
Fourth Quarter 3 3,905 36.36 36.36
1995:
First Quarter 2 1,940 38.18 38.18
Second Quarter 6 1,004 38.18 39.55
Third Quarter 8 2,099 38.18 40.00
Fourth Quarter 6 736 40.00 40.00
</TABLE>
The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10 percent stock dividend.
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
First Quarter $0.22 $0.20
Second Quarter 0.22 0.20
Third Quarter 0.22 0.20
Fourth Quarter 0.66 0.64
----- -----
Total $1.32 $1.24
===== =====
</TABLE>
IBT Bancorp's authorized stock consists of 4,000,000 shares, of which 703,248
shares are issued (773,572 after the stock dividend payable March 15, 1996)
with a par value of $6 per share. As of year end 1995, there were 807
shareholders of record.
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ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income $ 19,852 $ 17,991 $ 17,901 $ 18,350 $ 18,254
Net interest income 10,855 10,280 9,737 9,150 8,171
Provision for loan losses 475 475 400 360 424
Net income 2,958 2,802 2,607 2,291 2,011
BALANCE SHEET DATA:
End of period assets $ 281,505 $263,203 $249,367 $233,690 $215,178
Daily average assets 265,860 255,399 240,342 223,767 200,269
Daily average deposits 238,761 230,598 217,954 203,870 182,141
Daily average loans/net 177,109 159,556 142,970 132,081 123,476
Daily average equity 24,313 22,316 19,892 17,873 16,107
PER SHARE DATA: (1)
Net income per common share $ 3.85 3.70 $ 3.50 $ 3.14 $ 2.78
Cash dividend per common share 1.32 1.24 1.13 1.04 0.90
Book value (at period end) 33.36 29.49 27.59 25.17 23.05
FINANCIAL RATIOS:
Shareholders' equity to assets 9.17% 8.56% 8.34% 7.98% 7.81%
Net income to average equity 12.17 12.56 13.10 12.82 12.49
Cash dividend payout to net income 34.27 33.67 32.15 33.36 32.39
Net income to average assets 1.11 1.10 1.08 1.02 1.00
</TABLE>
<TABLE>
<CAPTION>
1995 1994
---- ----
Fourth Third Second First Fourth Third Second First
------ ----- ------ ------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Quarterly Operating Results:
Total interest income $5,175 $5,093 $4,904 $4,680 $4,662 $4,555 $4,424 $4,350
Interest on deposits 2,402 2,305 2,208 2,082 1,979 1,927 1,902 1,903
Net interest income 2,773 2,788 2,696 2,598 2,683 2,628 2,522 2,447
Provision for loan losses 124 121 117 113 175 100 100 100
Noninterest income 538 509 478 446 497 431 419 438
Noninterest expense 2,060 2,048 2,121 2,099 1,941 1,988 1,969 1,954
Net income 811 821 692 634 805 720 648 629
Per Share of Common Stock (1)
Net income $ 1.05 $ 1.07 $ 0.90 $ 0.83 $ 1.06 $ 0.95 $ 0.85 $ 0.84
Cash dividend 0.66 0.22 0.22 0.22 0.64 0.20 0.20 0.20
Book Value 33.36 32.79 31.84 30.61 29.49 29.70 29.06 28.75
</TABLE>
(1) Retroactively restated for the 10% stock dividend declared on January 16,
1996, payable March 1996
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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 the Corporation. This discussion and
analysis is intended to provide a better understanding of the financial
statements and statistical data included elsewhere herein.
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>
1995 1994 1993
---- ---- ----
Tax Average Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
INTEREST EARNING ASSETS: ------- ---------- ------- ------- ---------- -------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans $179,355 $15,972 8.91% $161,669 $14,079 8.71% $144,905 $13,661 9.43%
Taxable investment securities 43,329 2,660 6.14 52,435 2,803 5.35 53,968 3,126 5.79
Nontaxable investment securities 16,271 1,258 7.73 16,467 1,311 7.96 16,294 1,321 8.11
Federal funds sold 7,564 422 5.58 6,771 276 4.08 9,245 279 3.02
Other 336 20 5.95 336 20 5.95 293 18 6.14
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL EARNING ASSETS 246,855 20,332 8.24 237,678 18,489 7.78 224,705 18,405 8.19
NON EARNING ASSETS:
Allowance for loan losses (2,247) (2,113) (1,935)
Cash and due from banks 10,945 10,375 8,598
Premises and equipment 5,218 4,786 4,286
Accrued income and other assets 5,089 4,673 4,688
-------- -------- --------
TOTAL ASSETS $265,860 $255,399 $240,342
======== ======== ========
INTEREST BEARING LIABILITIES
Interest-bearing demand deposits $ 42,010 1,277 3.04% $ 40,318 1,052 2.61% $ 36,382 997 2.74%
Savings deposits 63,825 1,865 2.92 70,128 1,834 2.62 65,681 1,926 2.93
Time deposits 100,064 5,855 5.85 89,010 4,825 5.42 89,021 5,241 5.89
-------- ------- ---- -------- ------- ---- -------- ------- ----
TOTAL INTEREST BEARING
LIABILITIES 205,899 8,997 4.37 199,456 7,711 3.87 191,084 8,164 4.27
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Demand deposit 32,862 31,142 26,870
Other 2,786 2,485 2,496
Shareholders' equity 24,313 22,316 19,892
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $265,860 $255,399 $240,342
======== ======== ========
Net interest income (FTE) $11,335 $10,778 $10,241
======= ======= =======
Net yield on interest earning assets (FTE) 4.59% 4.53% 4.56%
===== ===== =====
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS
The Corporation achieved record net income for the ninth consecutive year in
1995 with earnings of $2,958,065, a 5.6% increase over 1994. Earnings per
share were $3.85, an increase of $0.15 over 1994 and $0.35 over 1993.
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 bank to profitably and
efficiently employ its resources. The Corporation's return on average assets
equaled 1.11% in 1995, 1.10% in 1994, and 1.08% in 1993. Return on average
equity indicates how effectively a bank is able to generate earnings on capital
invested by its shareholders. The Corporation's return on average
shareholders' equity equaled 12.17% in 1995, 12.56% in 1994, and 13.10% in
1993.
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>
1995 Compared to 1994 1994 Compared to 1993
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 $1,569 $324 $1,893 $1,508 ($1,090) $418
Taxable investment securities (526) 383 (143) (87) (236) (323)
Nontaxable investment securities (15) (38) (53) 14 (24) (10)
Federal funds sold 35 111 146 (86) 83 (3)
Other 0 0 0 3 (1) 2
------ ---- ------ ------ -------- ----
TOTAL CHANGES IN INTEREST INCOME 1,063 780 1,843 1,352 (1,268) 84
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits 46 179 225 104 (49) 55
Savings deposits (173) 204 31 125 (217) (92)
Time deposits 628 402 1,030 (1) (415) (416)
------ ---- ------ ------ -------- ----
TOTAL CHANGES IN INTEREST EXPENSE 501 785 1,286 228 (681) (453)
------ ---- ------ ------ -------- ----
NET CHANGE IN NET INTEREST INCOME $ 562 $ (5) $ 557 $1,124 ($ 587) $537
====== ==== ====== ====== ======== ====
</TABLE>
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. In accordance with Financial Accounting Board (FASB)
Statement No. 91, "Accounting for Loan Fees", interest income includes loan
fees of $601,000 in 1995; $639,000 in 1994; and $811,000 in 1993. 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.
14
<PAGE> 15
NET INTEREST INCOME (CONTINUED)
Changes in net interest income from period to period result from changes in the
average balances (volume) of interest earning assets and interest bearing
liabilities and the average rate earned and paid on such assets and
liabilities. As shown in Tables 1 and 2, 1995 (FTE) interest income increased
$557,000 or 5.2%. A 3.9% increase in interest earning assets provided
$1,063,000 of FTE interest income. The majority of this growth was funded by a
3.2% increase in interest bearing deposits, resulting in $501,000 of additional
interest expense. Overall, changes in volume resulted in $562,000 of
additional FTE interest income. The average FTE interest rate earned on assets
increased by 46 basis points, increasing FTE interest income by $780,000 and
the average rate paid on deposits increased by 50 basis points, increasing
interest expense by $785,000. The net result of increased interest rate earned
and paid reduced FTE net interest income by $5,000.
The Corporation's FTE net interest yield as a percentage of average earning
assets during 1995 equaled 4.59% versus 4.53% during 1994. The 6 basis points
change in net interest yield was primarily due to a shift of invested dollars
from taxable investment securities to loans net of the shift from savings
deposits to time deposits. The following table shows these shifts:
As a percentage of average assets:
<TABLE>
<CAPTION>
Assets: 1995 1994 Change
---- ---- ------
<S> <C> <C> <C>
Loans 67.46% 63.30% 4.16%
Taxable investment securities 16.30 20.53 (4.23)
Deposits:
Time deposits 37.64 34.85 2.79
Savings deposits 24.01 27.46 (3.45)
</TABLE>
The average rate earned on loans was 2.77% higher than on taxable investment
securities. Management estimates that the changes in asset mix provided an
additional $307,000 of interest income. The average rate paid on time deposits
was 2.93% higher than on savings. The increase to higher rate time deposits
increased the Corporation's interest expense by $217,000. The combination of
these shifts was to provide an additional $90,000 in FTE net interest income
and to increase the average FTE net interest yield by 4 basis points.
In addition to changes in asset and liability mix, changes in rates have an
impact on the Corporation's interest income. Management expects interest rates
to decrease moderately during 1996. Based on this expectation and the
Corporation's asset and liability repricing characteristics, management
calculates that the Corporation's FTE net interest margin as a percentage of
average assets will decrease in 1996. Due to the many factors that can affect
net interest income, the overall effect of changing interest rates on interest
income earned cannot be predicted with any certainty.
Net interest income increased $537,000 to $10.78 million in 1994 from $10.24
million in 1993. As shown in Tables 1 and 2, in 1994 (FTE) interest income
increased $1.35 million, a 5.8% increase in the volume average earning assets.
The growth of interest earning assets was funded primarily by a 4.4% increase
in interest bearing deposits that resulted in additional interest expense of
$228,000. Overall, the Corporation earned an additional $1.12 million in FTE
interest income as a result of volume. The average rate earned in 1995
decreased by 0.41%, reducing FTE interest income by $1.27 million. This
reduction was offset by a 0.40% decrease in the average cost of deposits, which
reduced interest expense by $681,000. Overall, net interest income declined by
$587,000 due to the reduction in interest rates.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Loans outstanding represent 73.5% of the
Corporation's total year end deposits, and is the Corporation's single largest
concentration of risk. Inevitably, poor operating results of any financial
institution are due to the failure to control this 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.
15
<PAGE> 16
PROVISION FOR LOAN LOSSES (CONTINUED)
The allowance for loan losses is management's estimation of potential future
losses inherent in the loan portfolio. The provision for loan losses is
credited to an allowance for loan losses, which is maintained at a level
considered by management to be adequate to absorb potential loan 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, and overall economic conditions. 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 subjected to significant change. The following table is a summary of
loan balances at the end of each period and their daily average balance,
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. Total loans outstanding increased 6.93% in
1995 and 12.50% in 1994. The allowance for loan losses as a percentage of
total outstanding loans at year end 1995 was 1.21% compared to 1.20% at
December 31, 1994. The Corporation's net charged off loans as a percentage of
average loans increased slightly to 0.17% in 1995 from 0.15% in 1994. The
increase in net charge-offs was a result of a decrease in amounts recovered
from loans previously charged off.
TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding
at the end of period $185,996 $173,939 $154,608 $139,092 $129,144
======== ======== ======== ======== ========
Average amount of loans
outstanding for the period $179,355 $161,669 $144,905 $133,859 $125,092
======== ======== ======== ======== ========
Summary of changes in allowance:
Allowance for loan losses - January 1 $ 2,083 $ 1,854 $ 1,686 $ 1,553 $ 1,414
Loans charged off:
Commercial and agricultural 334 375 350 308 236
Real estate mortgage 4 5 10 26 36
Installment 161 181 123 141 213
-------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF 499 561 483 475 485
Recoveries:
Commercial and agricultural 109 247 158 132 113
Real estate mortgage 0 2 19 1 7
Installment 80 66 74 115 80
-------- -------- -------- -------- --------
TOTAL RECOVERIES 189 315 251 248 200
-------- -------- -------- -------- --------
Net charge-offs 310 246 232 227 285
Provision charged to income 475 475 400 360 424
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES -
DECEMBER 31 $ 2,248 $ 2,083 $ 1,854 $ 1,686 $ 1,553
======== ======== ======== ======== ========
Ratio of net charge-offs during the
year to average loans outstanding 0.17% 0.15% 0.16% 0.17% 0.23%
======== ======== ======== ======== ========
Ratio of the allowance for loan losses
to loans outstanding at year end 1.21% 1.20% 1.20% 1.21% 1.20%
======== ======== ======== ======== ========
</TABLE>
16
<PAGE> 17
As shown in Table 4, the percentage of loans classified as nonperforming by the
Corporation as of December 31, 1995 and 1994 equaled 0.46% and 0.30% of total
loans, respectively. The Bank's policy, including impaired loans as defined by
FASB Statement No. 114, is to transfer a loan to nonaccrual status whenever it
is determined that interest should be recorded on the cash basis instead of the
accrual basis because of a deterioration in the financial position of the
borrower, it is determined that payment in full of interest or principal cannot
be expected, or the loan has been in default for a period of 90 days or more,
unless it is both well secured and in the process of collection. Restructured
loans are loans whose terms have been renegotiated to provide a reduction or
deferral of interest or principal because of a deterioration in the financial
position of the borrower.
TABLE 4. NONPERFORMING LOANS
(Dollars in Thousands)
Risk Elements
The following loans are all the credits which require classification for state
or federal regulatory purposes.
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 262 $ 347 $ 205 $ 122 $ 580
Accruing loans past due 90 days or more 590 183 303 508 710
Restructured loans 0 0 19 280 190
------ ------ ------ ------ ------
TOTAL NONPERFORMING LOANS $ 852 $ 530 $ 527 $ 910 $1,480
====== ====== ====== ====== ======
</TABLE>
As of December 31, 1995, there were no other interest bearing assets which
were classified as past due, nonaccruing, or restructured. 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, 1995. Management has allocated, as shown in Table 5, the
allowance for loan losses to the following categories: 48.0% to commercial and
agricultural loans; 12.3% to real estate loans; 31.5% to installment loans;
0.2% to impaired loans; leaving 8.0% unallocated. The $5,000 allocated to
impaired loans is for an impaired mortgage loan.
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
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
% of Each % of Each % of Each % of Each % of Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and
agricultural $1,079 18.06% $ 915 19.01% $ 745 21.94% $ 667 22.53% $ 624 21.69%
Real estate
mortgage 278 62.22 249 60.91 318 60.97 317 62.37 308 62.78
Installment 707 19.72 706 20.08 644 17.09 567 15.10 495 15.53
Impaired loans 5 50
Unallocated 179 163 147 135 126
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
TOTAL $2,248 100.00% $2,083 100.00% $1,854 100.00% $1,686 100.00% $1,553 100.00%
====== ======= ====== ======= ====== ======= ====== ======= ====== =======
</TABLE>
17
<PAGE> 18
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, and fees
for other financial services. Total noninterest income increased $185,000 or
10.4% in 1995 when compared to 1994. The most significant changes were a
$111,000 increase in automatic teller machine fees, a $51,000 increase in
overdraft charges, a $44,000 increase in brokerage fees, and a $14,000 decrease
in trust fees.
Included in other operating income is a $73,000 gain from the sale of $8.1
million in mortgages during 1995 versus a $286,000 gain on the sale of $11.8
million for 1994. The Corporation has established a policy that all 30-year
amortized fixed rate mortgage loans will be sold. These loans are accounted
for in accordance with FASB Statement No. 65 and are sold without recourse.
The Corporation retains the servicing of these loans. The calculation of gains
on the sale of mortgages excludes at least 25 basis points for the servicing of
these loans. As of January 1, 1996, the Corporation adopted FASB Statement No.
122, Accounting for Mortgage Servicing Rights, An Amendment of FASB Statement
No. 65. The adoption of this standard will not have a material impact in the
Corporation's financial statements.
Total noninterest income increased $27,000 or 1.5% in 1994 when compared to
1993. The most significant changes were a $125,000 increase in automatic
teller machine fees, a $40,000 increase in trust fees, a $24,000 increase in
mortgage servicing fees, a $24,000 increase in overdraft charges, and a
decrease on gains from the sale of residential mortgages of $215,000.
NONINTEREST EXPENSES
Controlling noninterest expenses is important to maintain adequate and
satisfactory profitability. Noninterest expenses increased $476,000 or 6.1% in
1995 when compared with 1994. The largest component of noninterest expense is
salaries and employee benefits, which increased $174,000 or 4.3%. The majority
of this increase is related to normal merit and promotional salary increases
and the addition of the brokerage subsidiary. Occupancy and furniture and
equipment expenses increased $243,000 or 18.2% in 1995. The majority of this
increase was associated with automatic teller machine operating costs, computer
operations, and furniture and equipment depreciation. Other noninterest
expenses increased $58,000, a 2.4% increase. The most significant change was a
decrease in FDIC insurance premiums effective June 1, 1995 from 23 cents per
hundred dollars in deposits to 4 cents. FDIC expense decreased $230,000 in
1995 and a further decrease is expected in 1996. Significant increases in
other operating expenses include legal expenses, other losses, armored car
services, and other real estate expenses.
Noninterest expenses increased $203,000 or 2.7% in 1994 when compared with
1993. Salaries and employee benefits increased $84,000 or 2.1%. The majority
of this increase is related to normal merit and promotional salary increases.
Occupancy and furniture and equipment expenses increased $106,000 or 8.7% in
1994. The majority of this increase was associated with automatic teller
machine operating costs, computer operations, and costs of operating a new
branch in Clare, Michigan. Other noninterest expenses increased $13,000, a
0.1% increase. The most significant changes were increases in FDIC insurance
premiums, consultants fees, and Michigan single business tax. Loan
documentation expenses and other losses decreased.
FEDERAL INCOME TAXES
Federal income tax expense for 1995 was $1,065,000 or 26.5% of pre-tax income
compared to $936,000 and 25.0% in 1994 and $840,000 and 24.4% in 1993. The
increase in tax expense as a percentage of income before federal income tax
over the past three years resulted from a decrease in nontaxable municipal
income. A reconcilement of federal income tax expense and the amount computed
at the federal statutory rate of 34% is found in Note E.
18
<PAGE> 19
BALANCE SHEET ANALYSIS
Total assets were $281.5 million at December 31, 1995, an increase of $18.3
million or 7.0% over year end 1994. Asset growth was primarily funded by a
$14.6 million increase in deposits and a $3.3 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 activity 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 1995, the Corporation's net holding of investment
securities increased $1.8 million. Table 6 shows the carrying value of
investment securities available for sale and held to maturity. Held to
maturity securities, which are stated at amortized cost, consist mostly of
local municipal bond issues, long term U.S. Government and Agency notes, and
mortgage backed securities. The mortgage backed securities are issues of the
Federal Home Loan Mortgage Corporation and pay regular monthly amortized
principal and interest. These investments have less than 10 years to final
maturity. Securities not classified by management as held to maturity are
classified as available for sale and are stated at fair market value.
TABLE 6. INVESTMENT PORTFOLIO
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31
Available for sale: 1995 1994
------- -------
<S> <C> <C>
U.S. Treasury and U.S. Government agencies $43,723 $42,275
State and political subdivisions 12,898 14,988
------- -------
$56,621 $57,263
======= =======
<CAPTION>
Held to maturity: 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
U.S. Treasury and U.S. Government agencies $ 3,852 $ 2,693 $ 55,983
State and political subdivisions 4,796 3,493 15,492
Other securities 336 336 336
------- -------- --------
$ 8,984 $ 6,522 $ 71,811
======= ======== ========
</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. Other securities
consist solely of Federal Reserve Bank Stock. The Corporation has a policy
prohibiting investments in securities that it deems are unsuitable due to their
inherent credit or market risks. Prohibited investments include stripped
mortgage backed securities, collateralized mortgage obligations, zero coupon
bonds, non-government agency asset backed securities, and corporate bonds. For
further information regarding investment securities, refer to Note A,
Significant Accounting Policies, and Note B, Investment Securities.
19
<PAGE> 20
The following is a schedule of maturities of each category of investment
securities (at book value) and their weighted average yield as of December 31,
1995. The weighted average interest rates have been computed on a fully
taxable equivalent basis, based on amortized cost. The rates shown on
securities issued by states and political subdivisions are stated on a taxable
equivalent basis using a 34% tax rate.
TABLE 7. SCHEDULE OF MATURITIES OF INVESTMENT SECURITIES AND WEIGHTED AVERAGE
YIELDS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Maturing
---------------------------------------------------------------------------------------
After One After Five
Year but Years but
Within Within Within After
One Year Five Years Ten Years Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury and U.S.
Government agencies $16,230 5.75% $28,086 6.30% $2,043 6.42% $630 8.24%
State and political
subdivisions 6,721 7.97 7,954 7.38 2,834 7.08
Other securities 336 6.00
------- ------- ------ ----
TOTAL $22,951 6.40% $36,040 6.54% $4,877 6.80% $966 7.46%
======= ======= ====== ====
</TABLE>
The weighted average interest rates have been computed on a fully taxable
equivalent basis. The rates shown on securities issued by state and political
subdivisions are stated on a taxable equivalent basis using a 34% tax rate.
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 were not disclosed as a
separate category in Table 8.
TABLE 8. LOAN PORTFOLIO
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $ 33,585 $ 33,062 $ 33,926 $ 31,336 $ 28,016
Real estate mortgage 115,718 105,953 94,264 86,749 81,074
Installment 36,693 34,924 26,418 21,007 20,054
-------- -------- -------- -------- --------
TOTAL LOANS $185,996 $173,939 $154,608 $139,092 $129,144
======== ======== ======== ======== ========
</TABLE>
20
<PAGE> 21
DEPOSITS
Total deposits were $253.0 million at year end 1995, a 6.1% increase over 1994.
Average deposits increased 3.5% in 1995 and 5.8% in 1994. During 1995, average
noninterest bearing deposits increased 5.5%, interest bearing demand deposits
increased 4.2%, savings deposits decreased 9.0%, and time deposits increased
12.4%. Time certificates of deposit over $100,000 as a percentage of total
deposits equaled 3.90% and 3.28% as of December 31, 1995 and 1994,
respectively.
TABLE 9. AVERAGE DEPOSIT BALANCES AND RATES
(Dollars in Thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 32,862 $ 31,142 $ 26,870
Interest bearing demand deposits 42,010 3.04% 40,318 2.61% 36,382 2.74%
Savings deposits 63,825 2.92 70,128 2.62 65,681 2.93
Time deposits 100,064 5.85 89,010 5.42 89,021 5.89
-------- -------- --------
TOTAL $238,761 $230,598 $217,954
======== ======== ========
</TABLE>
TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Maturity:
Within 3 months $2,043 $2,105 $2,739
Within 3 to 6 months 1,504 1,363 989
Within 6 to 12 months 2,138 759 1,273
Over 12 months 4,174 3,604 1,915
------ ------ ------
TOTAL $9,859 $7,831 $6,916
====== ====== ======
</TABLE>
CAPITAL
The capital of the Corporation consists solely of common stock, capital
surplus, retained earnings, and unrealized net gain or loss on securities
available for sale. Total capital increased approximately $3.3 million in
1995. The Corporation offers a dividend reinvestment and employee stock
purchase plan. Under the provisions of the Plan, the Corporation issued 9,000
shares of common stock generating $369,000 of capital during 1995, and 8,837
common shares generating $319,000 in 1994.
There are no commitments for significant capital expenditures; however, there
are regulatory constraints placed on the Corporation's capital. The Federal
Reserve Board's current recommended minimum Tier 1 and Tier 2 capital to
average assets requirement is 6.0%. The Corporation's Tier 1 and 2 capital to
average assets, which consists of shareholders' equity plus the allowance for
loan losses, was 10.46% at year end 1995.
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 bank has adequate capital. The minimum standard is 8%, of which at
least 4% must consist of equity capital net of good will. The following table
sets forth the percentages required under the Risk Based Capital guidelines and
the Corporation's values at December 31, 1995:
21
<PAGE> 22
Percentage of Capital to Risk Adjusted Assets:
<TABLE>
<CAPTION>
Required IBT Bancorp
-------- -----------
<S> <C> <C>
Equity Capital 4.00% 15.46%
Secondary Capital 4.00 1.25
----- ------
Total Capital 8.00% 16.71%
===== ======
</TABLE>
*IBT Bancorp's secondary capital includes only the allowance
for loan losses. The percentage for the secondary capital
under the required column is the maximum amount allowed from
all sources.
The Federal Reserve also prescribes minimum capital requirements for the
Corporation's subsidiary bank, Isabella Bank and Trust. At December 31, 1995,
Isabella Bank and Trust exceeded these minimums. For further information
regarding Isabella Bank and Trust's capital requirements, refer to Note J,
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, 1995 and 1994, cash and cash equivalents equaled 7.71% and
6.84% of total assets, respectively. Net cash provided from operations was
$3.2 million in 1995 and $3.9 million in 1994. Net cash provided by financing
activities equaled $14.0 million in 1995 and $11.4 million in 1994. The
Corporation's investing activities consumed $13.5 million in 1995 and $13.4
million in 1994. The accumulated effect of the Corporation's operating,
investing, and financing activities was to increase cash and cash equivalents
by $3.7 million in 1995 and $2.0 million in 1994.
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale equaled
$56.6 million as of December 31, 1995 and $57.3 million at year end 1994. In
addition to these primary sources of liquidity, the Corporation has the ability
to borrow in the federal funds market and at the Federal Reserve Bank. The
Corporation did not borrow from either of these secondary sources during 1995
or 1994. The Corporation's liquidity is considered adequate by the management
of the Corporation.
INTEREST RATE SENSITIVITY
Interest rate sensitivity management aims at achieving reasonable stability in
the net interest margin through periods of changing interest rates. Interest
rate sensitivity is determined by the amount of earning assets and
interest-bearing liabilities repricing within a specific time period, and their
relative sensitivity to a change in interest rates. One tool used by
management to measure interest rate sensitivity is gap analysis. As shown in
Table 11, the gap analysis depicts the Corporation's position for specific time
periods and the cumulative gap as a percentage of total assets. 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 $185.7 million in total loans,
$21.5 million are variable rate loans. Time deposit liabilities are scheduled
based on their contractual maturity except for variable rate time deposits in
the amount of $1.2 million which are included in the 0 to 3 month time frame.
Money market accounts reprice monthly and are included in the 0 to 3 month time
frame. Passbook savings, statement savings, and NOW accounts have no
contractual maturity date and are believed to be predominantly noninterest rate
sensitive by management. These accounts have been classified in the gap table
according to their estimated withdrawal rates based upon management's analysis
of deposit runoff over the past five years. Management believes this runoff
experience is consistent with its expectation for the future. As of December
31, 1995, the Corporation had $25.2 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.
22
<PAGE> 23
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, 1995. For
purposes of this analysis, nonaccrual loans, the allowance for loan losses, and
the market value adjustment on investment securities available for sale are
included in nonearning assets.
<TABLE>
<CAPTION>
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years Total
-------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
INTEREST SENSITIVE ASSETS:
Federal funds sold $ 6,400 $ 6,400
Investment securities 7,423 16,528 35,039 $ 5,844 64,834
Loans 33,653 27,867 115,503 8,711 185,734
Nonearning 24,537
-------- -------- -------- -------- --------
TOTAL $ 47,476 $ 44,395 $150,542 $ 14,555 $281,505
-------- -------- -------- -------- --------
INTEREST SENSITIVE LIABILITIES:
Time deposits $ 16,407 $ 45,397 $ 45,060 $ 931 $107,795
Savings 37,044 2,208 11,778 14,677 65,707
Interest bearing demand 12,757 3,331 14,197 9,598 39,883
Noninterest bearing 68,120
-------- -------- -------- -------- --------
TOTAL $ 66,208 $ 50,936 $ 71,035 $ 25,206 $281,505
-------- -------- -------- -------- --------
Cumulative gap $(18,732) $(25,273) $ 54,234
43,583
Cumulative gap as a % of assets (6.65)% (8.98)% 19.27% 15.48%
</TABLE>
In addition to the gap analysis, the Corporation utilizes a computer program to
project interest margins into the future. These projections are based on the
repricing characteristics and cash flows of the Corporation's interest earning
assets and interest bearing deposits. By using different prepayment
assumptions and interest rate and balance sheet scenarios, the Corporation can
measure the effect of changes in interest rates on its net intererst margin and
adjust its position to minimize any change. The GAP and interest rate risk
reports are reviewed regularly by the Corporation's Asset and Liability
Management Committee.
Management expects average interest rates to decrease in 1996. Based on this
expectation and the Corporation's asset and liability repricing
characteristics, management estimates that the Corporation's FTE net interest
income as a percentage of average earning assets will decrease modestly in 1996
when compared to 1995.
TABLE 12. LOAN MATURITY AND INTEREST
SENSITIVITY (Dollars in Thousands)
The following table shows the maturity of loans outstanding at December 31,
1995. 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 $18,122 $13,483 $1,980 $33,585
======= ======= ====== =======
Interest Sensitivity:
Loans maturing after one year which have:
Fixed interest rates $11,083 $1,772
Variable interest rates 2,400 208
------- ------
TOTAL
$13,483 $1,980
======= ======
</TABLE>
23
<PAGE> 24
IMPACT OF INFLATION
The majority of assets and liabilities of financial institutions are monetary
in nature. Generally, changes in interest rates have a more significant impact
on earnings of the Corporation than inflation. Although influenced by
inflation, changes in rates do not necessarily move in either the same
magnitude or direction as changes in the price of goods and services.
Inflation does impact the growth of total assets, creating a need to increase
equity capital at a higher rate to maintain an adequate equity to assets ratio,
which in turn reduces the amount of earnings available for cash dividends.
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 25 through 39 of this report:
Reports of Independent Auditors
Consolidated Statements of Financial Position
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of 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 12 of this
report.
24
<PAGE> 25
REPORT OF ANDREWS, HOOPER & PAVLIK, P.L.C.
Independent Auditors
Board of Directors
IBT Bancorp
We have audited the accompanying consolidated statements of financial position
of IBT Bancorp and subsidiaries as of December 31, 1995 and 1994, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of IBT Bancorp and
subsidiaries at December 31, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
Andrews, Hooper & Pavlik, P.L.C.
Saginaw, Michigan
February 2, 1996
25
<PAGE> 26
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
DECEMBER 31
1995 1994
----- ----
<S> <C> <C>
ASSETS
Cash and demand deposits due from banks $ 15,299,222 $ 16,409,784
Federal funds sold 6,400,000 1,600,000
-------------- --------------
TOTAL CASH AND CASH EQUIVALENTS 21,699,222 18,009,784
Investment securities - Note B
Securities available for sale (at market value) 56,621,213 57,262,614
Securities held to maturity (market value
$9,058,737 in 1995 and $6,454,658 in 1994) 8,984,422 6,522,434
------------- --------------
TOTAL INVESTMENT SECURITIES 65,605,635 63,785,048
Loans -- Notes C and H
Commercial 33,584,662 33,062,056
Real estate mortgage 115,717,820 105,953,211
Installment 36,693,646 34,923,246
-------------- --------------
TOTAL LOANS 185,996,128 173,938,513
Less allowance for loan losses 2,248,184 2,083,216
--------------- ---------------
NET LOANS 183,747,944 171,855,297
Premises and equipment -- Note A 5,150,853 5,115,691
Accrued income receivable 2,075,387 1,759,790
Other assets 3,226,281 2,677,512
--------------- ---------------
TOTAL ASSETS $ 281,505,322 $ 263,203,122
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 39,620,454 $ 35,544,595
NOW Accounts 39,882,893 45,946,435
Certificates of Deposit and other savings 163,642,277 149,081,213
Certificates of Deposit over $100,000 9,859,419 7,830,947
-------------- ---------------
TOTAL DEPOSITS 253,005,043 238,403,190
Accrued interest and other liabilities 2,695,270 2,276,350
-------------- ---------------
TOTAL LIABILITIES 255,700,313 240,679,540
Shareholders' Equity -- Note I
Common stock -- $6 par value:
4,000,000 shares authorized;
703,248 shares issued and outstanding
(694,247 shares at December 31, 1994) 4,219,489 4,165,488
Capital surplus 10,220,114 9,904,904
Retained earnings 10,856,229 8,911,876
Unrealized gain (loss) on securities available for sale,
net of taxes of $262,000 in 1995 and tax credit of
$236,000 in 1994 509,177 (458,686)
--------------- ---------------
TOTAL SHAREHOLDERS' EQUITY 25,805,009 22,523,582
--------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 281,505,322 $ 263,203,122
=============== ===============
</TABLE>
See notes to consolidated financial statements.
26
<PAGE> 27
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized
Net Gain/
(Loss) on
Securities Total
Common Capital Retained Available Shareholders'
Stock Surplus Earnings For Sale Equity
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $3,673,902 $ 7,389,472 $ 7,586,416 $ $18,649,790
Net income for 1993 2,606,530 2,606,530
Cash dividends paid--$1.13 per share (837,995) (837,995)
Issuance of 10,890 shares of common
stock under dividend reinvestment plan 65,342 320,943 386,285
---------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1993 3,739,244 7,710,415 9,354,951 20,804,610
Adjustment to beginning balance
for change in accounting method
net of taxes of $458,000 889,040 889,040
Net income for 1994 2,801,899 2,801,899
10% Stock dividend 373,217 1,928,288 (2,301,505)
Cash dividends paid--$1.24 per share (943,469) (943,469)
Issuance of 8,837 shares of common
stock under dividend reinvestment plan 53,027 266,201 319,228
Change in unrealized loss on
investment securities, net of $694,000
tax benefits (1,347,726) (1,347,726)
---------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1994 4,165,488 9,904,904 8,911,876 (458,686) 22,523,582
Net income for 1995 2,958,065 2,958,065
Cash dividends paid - $1.32 per share
(1,013,712) (1,013,712)
Issuance of 9,000 shares of common
stock under dividend reinvestment plan 54,001 315,210 369,211
Change in unrealized gain on investment
securities, net of taxes of $498,000 967,863 967,863
---------- ----------- ----------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 $4,219,489 $10,220,114 $10,856,229 $ 509,177 $25,805,009
========== =========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
27
<PAGE> 28
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
---------- ------------- ------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $15,880,947 $13,990,446 $13,565,744
Interest on investment securities:
Taxable:
U.S. Treasury and U.S. Government agencies 2,588,935 2,785,201 3,126,346
Other 70,667 38,912 17,541
Nontaxable:
States and political subdivisions 868,887 900,857 913,109
------------ ------------- -------------
TOTAL INTEREST ON INVESTMENT SECURITIES 3,528,489 3,724,970 4,056,996
Interest on federal funds sold and other 442,244 275,518 278,664
------------ ------------- -------------
TOTAL INTEREST INCOME 19,851,680 17,990,934 17,901,404
INTEREST ON DEPOSITS 8,996,712 7,711,291 8,164,464
------------ ------------ -------------
NET INTEREST INCOME 10,854,968 10,279,643 9,736,940
Provision for loan losses--Note C 475,000 475,000 400,000
------------ ------------- -------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 10,379,968 9,804,643 9,336,940
NONINTEREST INCOME
Trust fees 357,138 370,724 330,670
Service charges on deposit accounts 297,636 288,894 286,329
Other service charges and fees 1,030,241 865,425 689,865
Other 300,457 278,664 450,091
Available for sale investment security gains (losses) (14,503) (18,215) 1,541
---------- ----------- ------------
TOTAL NONINTEREST INCOME 1,970,969 1,785,492 1,758,496
NONINTEREST EXPENSE
Salaries, wages, and employee benefits 4,231,828 4,057,708 3,973,684
Occupancy 578,818 556,906 575,734
Furniture and equipment 996,606 775,387 650,101
Other 2,520,620 2,462,235 2,449,387
---------- ----------- ------------
TOTAL NONINTEREST EXPENSE 8,327,872 7,852,236 7,648,906
---------- ----------- ------------
INCOME BEFORE FEDERAL INCOME TAXES
Federal income taxes--Note E 4,023,065 3,737,899 3,446,530
1,065,000 936,000 840,000
---------- ----------- ------------
NET INCOME $2,958,065 $ 2,801,899 $ 2,606,530
========== =========== ============
Net income per share--Note A $3.85 $3.70 $3.50
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
28
<PAGE> 29
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993
----------- ----------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES -- NOTE G
Interest and fees collected on loans and investments $19,555,643 $18,211,278 $18,270,877
Other fees and income received 1,958,544 1,826,564 1,753,188
Interest paid (8,898,078) (7,729,080) (8,231,193)
Cash paid to suppliers and employees (8,252,915) (7,431,480) (6,588,297)
Federal income taxes paid (1,134,961) (964,000) (831,000)
----------- ----------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 3,228,233 3,913,282 4,373,575
INVESTING ACTIVITIES
Proceeds from maturities and sales of investment
securities available for sale 26,997,081 32,295,051
Proceeds from maturities of investment securities
held to maturity 4,407,685 876,273 26,020,464
Purchase of investment securities available for sale (24,944,425) (19,833,945)
Purchase of investment securities held to maturity (6,834,606) (6,178,383) (32,823,068)
Net increase in loans (12,367,647) (19,576,020) (15,747,757)
Purchase of premises and equipment (754,235) (939,222) (1,085,245)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (13,496,147) (13,356,246) (23,635,606)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits 4,075,859 4,330,638 3,440,846
Net increase in interest bearing deposits 10,525,994 7,729,125 10,040,208
Cash dividends (1,013,712) (943,469) (837,995)
Proceeds from issuance of common stock 369,211 319,228 386,285
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,957,352 11,435,522 13,029,344
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
3,689,438 1,992,558 (6,232,687)
Cash and cash equivalents at beginning of year 18,009,784 16,017,226 22,249,913
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT YEAR END $21,699,222 $18,009,784 $16,017,226
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements
include the accounts of IBT Bancorp (the "Corporation") and its wholly owned
subsidiaries, Isabella Bank and Trust, IBT Agency, and IBT Financial Services.
All intercompany transactions and accounts have been eliminated.
NATURE OF OPERATIONS: IBT Bancorp is a registered bank holding company
offering a wide array of financial products and services in mid Michigan. Its
principal subsidiary, Isabella Bank and Trust, offers banking services through
11 locations to businesses, institutions, and individuals. Lending services
offered include commercial real estate 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 markets, 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.
IBT Financial Services is a full service retail brokerage offering stocks,
bonds, and mutual funds sales to individuals. IBT Agency, an insurance agency,
will not become active until 1996. The agency is authorized to sell life
insurance, casualty insurance, and fixed and variable rate annuities.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for losses on loans and the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for losses on loans and foreclosed real estate, management obtains independent
appraisals for significant properties.
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.
SECURITIES HELD TO MATURITY AND AVAILABLE FOR SALE: 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. Held to
maturity securities are stated at amortized cost. Debt securities not
classified as held to maturity are classified as available for sale and are
stated at fair market value, with the unrealized gains and losses, net of
taxes, reported as a separate component of shareholders' equity.
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 or call date, and is computed using a method that
approximates the level yield method. Gains or losses on the sale of available
for sale securities 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.
30
<PAGE> 31
A summary of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
Premises $5,537,872 $5,537,872
Equipment 5,509,394 4,965,192
---------- ----------
11,047,266 10,503,064
Less accumulated depreciation 5,896,413 5,387,373
---------- ----------
$5,150,853 $5,115,691
========== ==========
</TABLE>
INTEREST ON LOANS: Interest on loans is credited to income based upon the
principal outstanding. The accrual of interest income is generally
discontinued when a loan becomes 90 days past due as to principal or interest.
Loans are placed on nonaccrual status whenever the collectibility of principal
or interest is considered doubtful.
FEDERAL INCOME TAXES: Federal income taxes have been provided for based on
amounts reported in the Statement of Income (after the exclusion of nontaxable
interest income) and include deferred federal income taxes on timing
differences between financial statement and income tax accounting. 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 per share
amounts have been adjusted for the 10% stock dividend declared on January 16,
1996, payable on March 15, 1996. The weighted average number of common shares
outstanding were 698,071 in 1995; 689,016 in 1994; and 676,723 in 1993.
NOTE B - INVESTMENT SECURITIES
The following is a summary of available for sale and held to maturity
securities:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ----------- -------
December 31, 1995:
<S> <C> <C> <C> <C>
Available for Sale Securities:
U.S. Treasury and U.S.
Government agencies $43,137,308 $ 619,228 ($33,583) $43,722,953
States and political
subdivisions 12,712,422 188,389 (2,551) 12,898,260
----------- ---------- ----------- -----------
TOTAL $55,849,730 $ 807,617 ($36,134) $56,621,213
=========== ========== =========== ===========
Held to Maturity:
U.S. Treasury and U.S.
Government agencies $ 3,851,725 $ 49,936 ($188) $ 3,901,473
States and political
subdivisions 4,796,496 31,665 (7,098) 4,821,063
Other securities 336,201 0 0 336,201
----------- ---------- ----------- -----------
TOTAL $ 8,984,422 $ 81,601 ($7,286) $ 9,058,737
=========== ========== =========== ===========
</TABLE>
31
<PAGE> 32
NOTE B - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------ ------------ ----------- -------
<S> <C> <C> <C> <C>
December 31,1994:
Available for Sale Securities:
U.S. Treasury and U.S.
Government agencies $43,051,847 $ 31,977 ($808,609) $42,275,215
States and political
subdivisions 14,905,742 177,351 (95,694) 14,987,399
----------- --------- ----------- -----------
TOTAL $57,957,589 $ 209,328 ($904,303) $57,262,614
=========== ========= =========== ===========
Held to Maturity:
U.S. Treasury and U.S.
Government agencies $ 2,692,945 $ 6,226 ($70,037) $ 2,629,134
States and political
subdivisions 3,493,288 1,466 (5,431) 3,489,323
Other securities 336,201 0 0 336,201
----------- --------- ----------- -----------
TOTAL $ 6,522,434 $ 7,692 ($75,468) $ 6,454,658
=========== ========= =========== ===========
</TABLE>
The following table summarizes the fair value, realized gains, and realized
losses on sales of available for sale securities:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Fair value of securities sold
at the date of sale: $3,970,078 $4,992,000
Gross realized gains:
U.S. Government and U.S.
Government agencies 1,118 5,924
Gross realized losses:
U.S. Government and U.S.
Government agencies (15,621) (24,139)
</TABLE>
The following table shows the amortized cost and estimated fair value of
securities owned at December 31, 1995 by contractual maturity. Expected
maturities will differ from contractual maturities because the issuers of
securities may have the right to prepay obligations without prepayment
penalties.
<TABLE>
<CAPTION>
Held to Maturity Available for
Amortized Market Amortized Market
Cost Value Cost Value
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Due within one year or less $2,714,099 $2,710,501 $ 20,333,955 $ 20,333,955
Due after 1 year thru 5 years 380,000 381,303 33,608,654 34,279,772
Due after 5 years thru 10 years 1,702,397 1,729,259 1,131,629 1,134,251
Due after 10 years 336,201 336,201 0 0
---------- ---------- ------------ ------------
5,132,697 5,157,264 54,976,495 55,747,978
Mortgage backed securities 3,851,725 3,901,473 873,235 873,235
---------- ---------- ------------ ------------
TOTAL $8,984,422 $9,058,737 $ 55,849,730 $ 56,621,213
========== ========== ============ ============
</TABLE>
Investment securities with a carrying value of $2,712,000 and $2,656,000 were
pledged to secure public deposits and for other purposes as required by law at
December 31, 1995 and 1994, respectively.
32
<PAGE> 33
NOTE C - LOANS
An analysis of changes in the allowance for loan loss follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance at beginning of year $2,083,216 $1,854,163 $1,685,805
Net loan charge-offs:
Loans charged off (498,922) (560,809) (483,340)
Recoveries 188,890 314,862 251,698
---------- ---------- ----------
Net Charge-offs (310,032) (245,947) (231,642)
Provision charged to income 475,000 475,000 400,000
---------- ---------- ----------
BALANCE AT END OF YEAR $2,248,184 $2,083,216 $1,854,163
========== ========== ==========
</TABLE>
The following table summarizes loans considered impaired under FASB 114:
<TABLE>
<CAPTION>
December 31
1995 1994
---- ----
<S> <C> <C>
Loans classified as impaired and recorded on a nonaccrual basis $262,000 $347,000
Impaired loans for which a specific allowance for loan loss has
been allocated 41,000 301,000
Specific allowance for loan losses that have been allocated to
impaired loan 5,000 50,000
Impaired loans which, as a result of charge-offs, do not have a
specific allowance for loan loss 221,000 46,000
Average investment in impaired loans 858,000 491,000
Interest income recognized on average impaired loans using
cash basis method of income recognition 12,000 34,000
</TABLE>
Certain directors and executive officers (including their families and
companies in which they have 10% or more ownership) of the Corporation and the
Bank were loan customers of the Bank. Total loans to these customers
aggregated $5,550,000 and $5,260,000 at December 31, 1995 and 1994,
respectively. During 1995, $2,604,000 of new loans were made and repayments
totalled $2,314,000. 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 did not involve more than normal risk
of collectibility.
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosures of fair value information about financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. 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
non-financial instruments are excluded from the Statement's disclosure
requirements. Accordingly, the aggregate of the fair value amounts presented
do not represent the underlying value of the Corporation.
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and 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.
33
<PAGE> 34
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Net 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 valued 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.
The following sets forth the estimated fair value, recorded book balance, and
the methodology used to determine the fair value of IBT Bancorp's financial
instruments as of December 31, 1995 and 1994.
<TABLE>
<CAPTION>
1995 1994
---- ----
Estimated Fair Recorded Book Estimated Fair Recorded Book
Value Balance Value Balance
--------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash and due from banks $15,299,222 $15,299,222 $16,409,784 $16,409,784
Federal funds sold 6,400,000 6,400,000 1,600,000 1,600,000
Investment securities 65,679,950 65,605,635 63,717,272 63,785,048
Net loans 189,038,657 183,747,944 168,948,487 171,855,297
Accrued income receivable 2,075,387 2,075,387 1,759,790 1,759,790
Deposits with no stated
maturities 145,210,153 145,210,153 145,510,654 145,510,654
Deposits with stated maturities 107,331,341 107,794,890 92,478,164 92,892,536
Accrued interest payable 623,293 623,293 524,659 524,659
</TABLE>
NOTE E - FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Corporation's deferred tax assets and liabilities as of December 31 are
as follows:
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 526,000 $ 461,000
Deferred directors fees 242,000 199,000
Employee benefit plan 265,000 198,000
Net unrealized loss on available for sale securities 236,000
Other 1,000
---------- -------------
TOTAL DEFERRED TAX ASSETS 1,034,000 1,094,000
Deferred tax liabilities:
Tax over book depreciation 159,000 161,000
Accretion on securities 91,000 58,000
Prepaid pension expense 181,000 117,000
Net unrealized gain on available for sale securities 262,000 16,000
Other
---------- -------------
TOTAL DEFERRED TAX LIABILITIES 693,000 352,000
---------- -------------
NET DEFERRED TAX ASSETS $ 341,000 $ 742,000
========== =============
</TABLE>
34
<PAGE> 35
NOTE E - FEDERAL INCOME TAXES (CONTINUED)
Significant components of the consolidated provision for income taxes are as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- ------------
<S> <C> <C> <C>
Current $1,162,000 $ 984,000 $ 864,000
Deferred credit (97,000) (48,000) ( 24,000)
---------- --------- ---------
TOTAL $1,065,000 $ 936,000 $ 840,000
========== ========= =========
</TABLE>
The reconciliation of federal income tax and the amount computed at the federal
statutory tax rate of 34% to income before federal income tax expense is as
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------ -------------
<S> <C> <C> <C>
Income tax on pretax income $1,368,000 $1,271,000 $1,172,000
Effect of non-taxable interest income (317,000) (324,000) (306,000)
Other 14,000 (11,000) (26,000)
---------- ---------- ----------
TOTAL $1,065,000 $ 936,000 $ 840,000
========== ========== ==========
</TABLE>
The income tax effect of securities gains or (losses) were ($5,000) in 1995,
($6,000) in 1994, and $1,000 in 1993.
NOTE F - BENEFIT PLANS
The Bank has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employee's
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 service to date but also for those expected to be earned
in the future. The defined pension plans assets are primarily invested in
mutual funds.
Employee benefit plan costs included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Service cost - benefits earned
during the period $ 83,000 $106,000 $ 94,000
Interest cost on projected
benefit obligation 235,000 228,000 202,000
Actual return on plan assets (218,000) 24,000 (138,000)
Net amortization and deferral 7,000 (222,000) (55,000)
-------- -------- --------
Net periodic pension cost of
defined benefit plan 107,000 136,000 103,000
Employee stock ownership plan 85,000 80,000 84,000
-------- -------- --------
Total employee benefit plan costs $192,000 $216,000 $187,000
======== ======== ========
</TABLE>
35
<PAGE> 36
NOTE F - BENEFIT PLANS (CONTINUED)
The following table sets forth the defined benefit pension plan funding status
and amounts recognized in the Corporation's consolidated statements of
financial position at December 31:
<TABLE>
<CAPTION>
1995 1994
------------ ------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $2,924,000 $2,372,000
Nonvested benefits 11,000 5,000
----------- ------------
Accumulated benefit obligation 2,935,000 2,377,000
Effect of projected future compensation
levels 628,000 471,000
----------- ------------
Projected benefit obligation for services
rendered 3,563,000 2,848,000
Plan assets at fair value 3,060,000 2,739,000
----------- ------------
Plan assets over (under) projected
benefit obligation (503,000) (109,000)
Unrecognized cost related to plan
amendment (prior service cost) 195,000 211,000
Unrecognized net loss from past
experience different from that
assumed and the effect of changes
in assumptions 972,000 441,000
Unrecognized net transition asset being
recognized over 17 years (177,000) (199,000)
----------- ------------
Prepaid pension cost included in
other assets $ 487,000 $ 344,000
=========== ============
</TABLE>
Actuarial assumptions used in determining the projected benefit obligation and
the net periodic pension cost:
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Weighted average discount rate 7.25% 8.50% 7.25%
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 decrease in the discount rate for 1995 resulted in an increase of $400,000
in the accumulated benefit obligation. The Bank 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 Bank as the sole owner and
beneficiary of the policies. Expenses related to this program are being
recognized over the participants' expected years of service.
The Bank maintains an employee stock ownership plan (ESOP) which covers
substantially all of its employees. Contributions to the plan are
discretionary and are approved by the Board of Directors and recorded as
compensation expense. Total shares outstanding at December 31, 1995 and 1994
were 44,491 and 45,028 respectively, and were included in the computation of
dividends and earnings per share in the respective years.
The Corporation also maintains a defined benefit health care plan that provides
post employment medical benefits to full-time employees who have worked 5 years
and attained age 62. The plan is contributory, with retiree contributions
adjusted annually, and contains other cost sharing features such as deductibles
and coinsurance. Retirees pay the full projected costs of the health care
medical benefits under the plan.
36
<PAGE> 37
NOTE G - CONSOLIDATED STATEMENTS OF CASH FLOWS
The reconciliation of net income to net cash provided by operating activities
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1995 1994 1993
------------ ------------- -------------
<S> <C> <C> <C>
Net Income $2,958,065 $2,801,899 $2,606,530
Reconcilement of net income to
cash provided by operations:
Provision for loan losses 475,000 475,000 400,000
Provision for depreciation 719,073 543,026 491,281
Net amortization on investment
securities 20,137 171,486 273,624
Deferred income tax credit (97,000) (48,000) ( 24,000)
Decrease in accrued
income receivable (315,597) 49,487 97,767
Decrease (increase) in other assets (950,365) (164,717) 444,863
Increase in accrued interest
and other liabilities 418,920 85,101 83,510
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $3,228,233 $3,913,282 $4,373,575
=========== =========== ===========
</TABLE>
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 statements of financial position. 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 non-performance 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 $22,111,000 at December 31, 1995,
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,
1995, the Corporation had a total of $523,000 in outstanding standby letters of
credit.
The Corporation's loan commitments, standby letters of credit, and undisbursed
loans have been estimated to have no realizable fair value. Historically, the
majority of the loan commitments have not been drawn upon and generally the
Corporation does not receive a fee in connection with these agreements.
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.
37
<PAGE> 38
NOTE I - COMMITMENTS AND OTHER MATTERS
There were no material noncancelable lease commitments outstanding at December
31, 1995. Included in other expenses are FDIC insurance premiums of
approximately $272,000 in 1995, $502,000 in 1994, and $475,000 in 1993.
Banking regulations require banks to maintain cash reserve balances in currency
or as deposits with the Federal Reserve Bank. The Bank's requirement was
approximately $3,446,000 at December 31, 1995.
Banking regulations also limit the transfer of assets in the form of dividends,
loans, or advances from the Bank to the Corporation. At December 31, 1995,
substantially all of the Bank's assets were restricted from transfer to the
Corporation in the form of loans or advances. Consequently, Bank dividends are
the principal source of funds for the Corporation. Payment of dividends
without regulatory approval is limited to the current year's retained net
income plus retained net income for the preceding two years, less any required
transfers to surplus. At January 1, 1996, the amount available for dividends
without regulatory approval was approximately $3,872,000.
The Bank grants commercial, residential, and consumer loans to customers
throughout mid Michigan. Although the Bank has a diversified loan portfolio, a
substantial portion of its debtors' ability to honor their contracts is
dependent upon the real estate market in this area.
NOTE J - REGULATORY CAPITAL MATTERS
The Bank is subject to various regulatory capital requirements administered by
its 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 Bank's
financial statements. Under the Federal Reserve's capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that include quantitative measures of the Bank's
assets, certain off-balance sheet items, and capital, as calculated under
regulatory accounting standards. The Bank's required capital is also subject
to regulatory qualitative judgement regarding the Bank's interest rate risk
exposure and credit risk.
Measurements established by regulation to ensure capital adequacy require the
Bank to maintain minimum ratios of capital to average assets, Tier 1 capital to
risk weighted assets, and Tier 1 capital to average assets. Management
believes, as of December 31, 1995, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1995, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized. To be categorized as well
capitalized, the Bank must maintain total risk based capital, Tier 1 risk
based, and Tier 1 leverage ratio as set forth in the following table. There
has been no condition or event since that notification that management believes
has changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C>
As of December 31, 1995:
Total capital (to risk weighted assets) $26,620 16.71% $12,746 >8.0% $15,932 >10.0%
Tier 1 capital (to risk weighted assets) 24,628 15.46 6,373 >4.0% 9,559 >6.0%
Tier 1 capital (to average assets) 24,628 9.27 10,626 >4.0% 13,282 >5.0%
</TABLE>
38
<PAGE> 39
NOTE K - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED STATEMENTS OF FINANCIAL POSITION
<TABLE>
<CAPTION>
1995 1994
---------- ------------
<S> <C> <C>
ASSETS
Cash on deposit at subsidiary bank $ 932,225 $ 597,257
Investments in subsidiaries 24,705,266 21,727,492
Premises and Equipment 158,710 182,948
Other assets 10,808 15,885
----------- -----------
TOTAL ASSETS $25,807,009 $22,523,582
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other Liabilities $ 2,000
Shareholders' Equity 25,805,009 $22,523,582
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $25,807,009 $22,523,582
=========== ===========
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1995 1994 1993
------------ ------------ --------------
<S> <C> <C> <C>
Income
Dividends from subsidiary $1,200,000 $ 950,000 $ 800,000
Interest income 16,364 11,735 8,941
Other 6,000 6,000 3,000
---------- ---------- ----------
TOTAL INCOME 1,222,364 967,735 811,941
Expenses 176,210 149,699 184,958
---------- ---------- ----------
Income before income tax (benefit) and equity in
undistributed earnings of subsidiary 1,046,154 818,036 626,983
Federal income tax (benefit) (52,000) (44,000) (77,000)
---------- ---------- ----------
1,098,154 862,036 703,983
Undistributed earnings of
subsidiaries 1,859,911 1,939,863 1,902,547
---------- ---------- ----------
NET INCOME $2,958,065 $2,801,899 $2,606,530
========== ========== ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1995 1994 1993
------------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Interest on investments $ 16,063 $ 11,735 $ 8,941
Dividends from subsidiary 1,200,000 950,000 800,000
Cash paid to suppliers (137,862) (176,566) (123,579)
Other operating activities 52,000 34,000 110,000
------------ ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,130,201 819,169 795,362
INVESTING ACTIVITIES
Investment in IBT Financial Services (150,000)
Purchase of Equipment and Premises (732) ( 15,420) (191,825)
------------ ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (150,732) (15,420) (191,825)
FINANCING ACTIVITIES
Cash dividends (1,013,712) (943,469) (837,995)
Issuance of common stock 369,211 319,228 386,285
------------ ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (644,501) (624,241) (451,710)
------------ ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 334,968 179,508 151,827
Cash and cash equivalents at beginning of year 597,257 417,749 265,922
------------ ---------- ----------
CASH AND CASH EQUIVALENTS AT YEAR END $ 932,225 $ 597,257 $ 417,749
============ ========== ==========
</TABLE>
39
<PAGE> 40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 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, 1996).
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:
Reports of Independent Auditors
Consolidated Statements of Financial Position
Consolidated Statements of Changes in Shareholders'
Equity
Consolidated Statements of 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) Amended Bylaws**
3(d) Amendment to the Bylaws***
3(e) 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) Isabella Bank & Trust Deferred Compensation Plan -
Restated (1)
21 Subsidiaries of the Registrant
40
<PAGE> 41
ITEM 14 (CONTINUED)
23 Consent of Andrews, Hooper & Pavlik, P.L.C.,
Independent Certified Public Accountants
27 Financial Data Schedule
(b) No reports on Form 8-K were filed for the quarter ended December 31,
1995.
(c) The index to exhibits is on page 44 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.
(1) Management's Contract or Compensatory Plan or Arrangement.
<PAGE> 42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IBT BANCORP, INC.
(Registrant)
by:/s/David W. Hole Date: March 14, 1996
------------------------------------- --------------
David W. Hole
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Capacity Date
- ---------- -------- ----
<S> <C> <C>
/s/L. A. Johns Chairman of the Board March 14, 1996
- --------------------------------- and Director
L. A. Johns
/s/James R. Bigard Director March 14, 1996
- ---------------------------------
James R. Bigard
/s/Frederick L. Bradford Director March 14, 1996
- ---------------------------------
Frederick L. Bradford
/s/Gerald D. Cassel Director March 14, 1996
- ---------------------------------
Gerald D. Cassel
/s/James C. Fabiano Director March 14, 1996
- ---------------------------------
James C. Fabiano
Director
- ---------------------------------
Robert O. Smith
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
Signatures Capacity Date
- ---------- -------- ----
<S> <C> <C>
/s/Ronald E. Schumacher Director March 14, 1996
- ---------------------------------
Ronald E. Schumacher
- ---------------------------------
/s/Dean Walldorff Director March 14, 1996
- ---------------------------------
Dean Walldorff
/s/John E. Weisenburger Director March 14, 1996
- ---------------------------------
John E. Weisenburger
/s/David W. Hole President March 14, 1996
- --------------------------------- Chief Executive Officer
David W. Hole and Director
(Principal Executive Officer)
/s/Dennis P. Angner Treasurer March 14, 1996
- --------------------------------- (Principal Financial Officer)
Dennis P. Angner
</TABLE>
43
<PAGE> 44
IBT Bancorp
FORM 10-K
Index to Exhibits
Exhibit Form 10-K
Number Exhibit Page Number
- ------- -------- -----------
10(c) Isabella Bank and Trust Deferred Director 45-49
Compensation Plan
21 Subsidiaries of the Registrant 50
23 Consent of Andrews, Hooper & Pavlik, P.L.C. 51
Independent Certified Public Accountants
27 Financial Data Schedule 52
44
<PAGE> 1
Exhibit 10(c)
ISABELLA BANK AND TRUST
DEFERRED COMPENSATION PLAN FOR DIRECTORS
1. PARTICIPANTS. Any director of Isabella Bank and Trust ("Bank"), or
employee of the Bank receiving board fees may elect to become a
participant ("Participant") under this Isabella Bank and Trust Deferred
Compensation Plan for Directors ("Plan") by providing written notice to
the Bank.
2. AMENDMENT AND RESTATEMENT OF EXISTING PLAN. Effective January 1, 1990,
the Bank adopted the Isabella Bank and Trust Directors Deferred Income
Agreement ("Prior Plan"). The Prior Plan has been completely amended and
restated effective January 1, 1996 by adopting the Isabella Bank and Trust
Deferred Compensation Plan for Directors. Any amount due and owing under
the Prior Plan to any Participant in this Plan as of December 31, 1995
("Grandfathered Amounts") shall be credited to the Participant's Deferred
Money Account subject to the terms and conditions as set forth in
paragraph 4(a) below. Such Grandfathered Amounts shall then be converted
into a Stock Unit Account pursuant to the terms and conditions of
paragraph 4(b) of this Plan.
3. DEFERRED RETAINER AND FEES. Each Participant may defer all or any
portion (subject to a minimum required deferral of at least 25%) of his
Bank retainer and fees (including committee fees) which are earned for the
year commencing after the date of said election as he may specify in said
written notice to the Bank, and such amounts so deferred shall be paid
only as hereinafter provided. Any Participant may change the amount of,
or suspend, future deferrals with respect to fees and retainers earned for
years commencing after the date of change or suspension as he may specify
by written notice to the Bank. Following any such suspension, the
individual may make a new election to again become a Participant. No
Participant may make such change more often than once in any 12-month
period or again become a Participant within 12 months after the date of a
suspension. The election to defer shall be irrevocable as to the deferred
retainer and fees for the particular 12-month period.
4. METHOD OF DEFERRAL AND DISTRIBUTION.
(a) For each Participant electing to participate in this Plan, the Bank
shall maintain a deferred money account ("Deferred Money Account")
which shall periodically be converted into a stock unit account ("Stock
Unit Account") for each such Participant. Each Participant will be
furnished annually with a statement of his Account.
(b) Deferred retainers and fees of each Participant shall be credited as a
dollar amount to the Participant's Deferred Money Account on the date
they otherwise
45
<PAGE> 2
would be payable and shall be converted into stock units quarterly at
March 1, June 1, September 1, and December 1 in each year (the
"Valuation Dates") by dividing the dollar balance of such Deferred Money
Account as of the end of each such quarter by the price of a share of
IBT Bancorp, Inc. common stock as determined by the IBT Bancorp, Inc.
Stockholder Dividend Reinvestment and Employee Stock Purchase Plan. The
number of stock units for full shares so determined shall be credited to
the Participant's Stock Unit Account and the aggregate value thereof at
said closing price shall be charged to the Participant's Deferred Money
Account after such charge shall be used together with other subsequent
credits thereto at the next Valuation Date.
(c) Additional credits will be made to each Participant's Deferred
Money Account in dollar amounts equal to the cash dividends (or the
fair market value of dividends paid in property) the Participant would
have receive from time to time had he been the owner on the record dates
with respect thereto of the number of shares of IBT Bancorp, Inc. common
stock equal to the number of stock units in his Stock Unit Account on
such dates. In the case of a stock dividend or stock split, additional
credits will be made to each Participant's Stock Unit Account of the
number of stock units equal to the number of full shares of IBT Bancorp,
Inc. common stock in the case of a stock dividend or a stock split which
such Participant would have received from time to time had he been the
owner on the record dates with respect thereto of the number of shares
of IBT Bancorp, Inc. common stock equal to the number of stock units in
his Stock Unit Account on such dates.
5. DISTRIBUTION.
(a) Upon termination of a Participant's service with the Bank
(including mandatory retirement from the Bank's Board of Directors),
and/or upon attainment of age 65 (each event being a "Distribution
Event") the Participant, with the Bank's consent, shall receive:
(i) payment in cash of the balance in his Deferred Money Account,
if any, remaining after the Valuation Dates occurring in the
calendar year of the Distribution Event, but after the date of the
Distribution Event; and
(ii) payment of the balance in his Stock Unit Account as of the
date of the Distribution Event, in shares of IBT Bancorp, Inc.
common stock, or at the option of the Participant as he directs by
written notice delivered to the Bank within thirty (30) days after
the date of the Distribution Event, in cash equal to the value of
such shares as of the date(s) of distribution, or in any combination
of stock or cash.
46
<PAGE> 3
(iii) The distributions in 5(a)(i) and (ii) above shall be payable in
monthly installments commencing no sooner than six months
following the last Valuation Date that occurred prior to the
Distribution Event. Such distributions may be paid in a single sum
as determined by the Bank in its sole discretion. The Bank may
counsel with Participant prior to such determination.
(b) If such Participant shall cease his service with the Bank by reason
of his death or if he shall die after he shall be entitled to
distributions hereunder but prior to receipt of all distributions
hereunder, all cash or IBT Bancorp, Inc. common stock then distributable
hereunder shall be distributed to such beneficiary as such Participant
shall designate by an instrument in writing filed with the Bank, or in the
absence of such designation, to his personal representative, or if none is
appointed within six months of his death, to his spouse, or if not then
living, to his then living descendants, per stirpes, in the same manner
and at the same intervals as they would have been made to such Participant
had he continued to live. The Bank may, in its complete discretion,
accelerate some or all of the payments which may be due under this Section
5(b). Upon filing a written designation of beneficiary with the Bank, it
shall revoke all prior designations filed prior to that date by the
Participant.
6. PARTICIPANT'S RIGHTS UNSECURED. The right of any Participant to receive
a distribution hereunder in IBT Bancorp, Inc. common stock or in cash
shall be an unsecured claim against the general assets of the Bank. The
deferred retainers and fees may not be encumbered or assigned by the
Participant.
7. UNFUNDED PLAN. The Plan shall be a bookkeeping account only, and the
Bank shall not be required in any way to fund the Plan. The Bank shall
have no obligation to set aside, earmark or entrust any fund, policy or
money with which to pay its obligations under the Plan. The Participant,
or any successor in interest, shall be and remain a general creditor of
the Bank with respect to the right to receive a benefit under this Plan in
the same manner as any other creditor who has a general claim for unpaid
liability. The Bank shall be the sole owner and beneficiary of any assets
acquired for its general account under this plan. The Bank shall not make
any loans or extend credit to the Participant, or any successor in
interest, which shall be offset by benefits payable under this Plan.
8. AMENDMENTS TO THE PLAN. The Board of Directors of the Bank may amend the
Plan at any time, without the consent of the Participants or their
beneficiaries, provided, however, that no amendment shall divest any
Participant or beneficiary of rights to which he would have been entitled
if the Plan had been terminated on the effective date of such amendment.
47
<PAGE> 4
9. TERMINATION OF PLAN. The Board of Directors of the Bank may terminate the
Plan at any time. Upon termination of the Plan, distributions in
respect of credits to a Participant's Accounts as of the date of
termination shall be made in the manner and at the time heretofore
prescribed.
10. EXPENSES. Costs of administration of the Plan will be paid by the Bank.
11. STATUS OF PLAN. This Plan does not constitute a contract of employment
between the parties, nor shall any provision of this Plan restrict the
right of a director to terminate service on the Board.
12. BINDING EFFECT. This Plan shall be binding upon and inure to the benefit
of the parties hereto and upon the successors and assigns of the Bank, and
upon the heirs and legal representatives of the Participant.
13. INCOMPETENCY. If the Bank shall find that any person to whom any payment
is payable under this Plan is unable to care for his or her affairs
because of illness or accident, or is a minor, any payment due (unless a
prior claim therefore shall have been made by a duly appointed guardian, a
committee or other legal representative) may be paid to the spouse, a
child, a parent, a brother or sister, or a custodian determined pursuant
to the Uniform Gift to Minors Act, or to any person deemed by the Bank to
have incurred expense for such person otherwise entitled to payment, in
such manner and proportions as the Bank may determine. Any such payment
shall be a complete discharge of the liabilities of the Bank under this
Plan.
14. ASSIGNMENT OF RIGHTS. None of the rights to compensation under this Plan
are assignable by the Participant or any beneficiary or designee of the
Participant, and any attempt to anticipate, sell, transfer, assign,
pledge, encumber, or change the Participant's right to receive
compensation shall be void.
15. NAMED FIDUCIARY.
(a) The Bank is hereby designated as the named fiduciary under
this Plan. The named fiduciary shall have authority to control and
manage the operation and administration of this Plan, and it shall
be responsible for establishing and carrying out a funding policy
and method consistent with the objectives of this Plan.
(b) The Bank shall make all determinations as to rights to
benefits under this Plan. Any decision by the Bank denying a claim
made by the Participant or by a beneficiary for benefits under this
Plan shall be stated in writing and delivered or mailed to the
Participant or such beneficiary. Such statements shall set forth
the specific reasons for the denial, written to the best of the
48
<PAGE> 5
Bank's ability in a manner that may be understood without legal or
actuarial counsel. In addition, the Bank shall afford a reasonable
opportunity to the Participant or such beneficiary for a full and
fair review of the decision denying such claim.
(c) Subject to the foregoing, the Board of Directors of the Bank
shall appoint an impartial Administrative Committee consisting of
Bank officers who are not participants in the Plan. The
Administrative Committee shall have the full power and authority to
interpret, construe and administer this Plan. No member of the
Administrative Committee shall, in any event, be liable to any
person for any action taken or omitted in connection with the
interpretation, construction or administration of this Plan, so long
as such action or omission to act be made in good faith. In no
event, however, shall the provisions of paragraph 7 or any other
provisions in this Plan prevent the Participant from seeking legal
recourse for any claim he may have under this Plan.
16. GOVERNING LAW. This Plan shall be governed by the laws of the State of
Michigan.
17. SEVERABILITY. In the event that any of the provisions of this Plan or
portion thereof, are held to be inoperative or invalid by any court of
competent jurisdiction, then: (1) insofar as is reasonable, effect will
be given to the intent manifested in the provision held invalid or
inoperative; and (2) the validity and enforceability of the remaining
provisions will not be affected thereby.
18. PERIOD OF ECONOMIC HARDSHIP. If, in any year, payments made under this
Plan would, in the sole judgment of the Board of Directors, create
economic hardship for the Bank's depositors, the Board of Directors has
full authority to postpone such payments. However, upon such
postponement, the Bank will increase the total sum payable to the
Participant or the Participant's beneficiaries under this Plan by an
actuarially determined amount.
19. PRIOR PLAN. This Plan sets forth the entire understanding of the parties
hereto with respect to the transactions contemplated hereby, and any
previous plans (including the Prior Plan) or understanding between the
parties hereto regarding the subject matter hereof are merged into and
superseded by this Plan.
ISABELLA BANK AND TRUST
BY:
--------------------------------
ITS: Senior Vice President and CFO
-------------------------------
49
<PAGE> 1
IBT Bancorp
Form 10-K
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT: Isabella Bank and Trust
Wholly owned.
IBT Financial Services, Inc.
Wholly owned
IBT Agency
Wholly Owned
50
<PAGE> 1
Exhibit 23
Consent of Andrews Hooper & Pavlik P.L.C.
We hereby consent to the incorporation by reference in the Registration
Statement (Form S-3 No. 33-61590) pertaining to the Dividend Reinvestment Plan
and (Form S-8 No. 33-61596) pertaining to the Employees' Stock Purchase Plan of
IBT Bancorp, of our report dated February 2, 1996, which appears on page 25 of
this Annual Report (Form 10-K) for the year ended December 31, 1995.
Andrews, Hooper & Pavlik, P.L.C.
Saginaw, Michigan
March 22, 1996
51
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