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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____________________ to ____________________
Commission File Number: 0-18415
---------------------------------------------------
IBT BANCORP, INC.
(Exact name of registrant as specified in its charter)
Michigan 38-2830092
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)
200 East Broadway Street, Mt. Pleasant, Michigan 48858
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (517) 772-9471
---------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
_______________________________ _________________________________________
Securities registered pursuant to Section 12(g) of the Act:
Common Stock - $6.00 Par Value
- --------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $37,628,000 as of March 14, 1997.
The number of shares outstanding of the registrant's Common Stock ($6 par
value) was 783,921 as of March 14, 1997.
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, 1997
<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
located throughout Isabella County, northeastern Montcalm County, and southern
Clare County, all of which are located in central Michigan. IBT Financial
Services is a full service retail brokerage offering stocks, bonds and mutual
funds to individuals. IBT agency is authorized to sell life insurance,
casualty insurance, and fixed and variable annuities. The principal city in
which the Corporation operates is Mount Pleasant, which has a population of
approximately 23,500. 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 2.8% and the average household income is $34,500.
COMPETITION
The Corporation competes with other commercial banks, many of which are
subsidiaries of other bank holding companies, savings and loan associations,
finance companies, credit unions, and retail brokerage firms. The Bank is a
community bank and focuses on providing high-quality, personalized service at a
fair price. Based on deposits maintained by all financial institutions, the
Bank's market share exceeded 50% of the total for Isabella County in both 1996
and 1995. 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 no foreign corporate or government loans, and no
corporate debt securities. The general
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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, 1996.
LOANS BY MAJOR LENDING CATEGORY:
(in thousands) Amount %
------ -
Real Estate:
One to four family residential $ 82,692 38.4
Commercial and other 43,707 20.3
Construction & Land Development 11,599 5.3
-------- ----
Total Real Estate 137,998 64.0
Commercial:
Farmland & Agricultural Prod. 7,695 3.5
State and political subdivisions 3,372 1.6
Commercial and other 29,001 13.5
-------- ----
Total Commercial 40,068 18.6
Personal:
Credit Cards 1,941 0.9
Student Loans 4,166 2.0
Other 31,281 14.5
-------- ------
Total Personal 37,388 17.4
TOTAL $215,454 100.00
======== ======
First and second residential mortgages are the single largest category of loans
(38.4% of total loans). The Bank offers 3 and 5 year fixed rate balloon
mortgages with a maximum 30 year amortization, and 15 and 30 year amortized
fixed rate loans. Fixed rate loans with an amortization greater than 15 years
are sold upon origination to the Federal Home Loan Mortgage Association. Fixed
rate residential mortgage loans with an amortization of 15 years or less may be
held for future sale or sold upon origination. Factors used in determining
when to sell these mortgages include management's judgement about the direction
of interest rates, the Corporation's need for fixed rate assets in the
management of its interest rate sensitivity, and overall loan demand. The
Corporation has a policy that these loans may not exceed 5% of its total
assets.
The Bank's lending policies generally limit the maximum loan-to-value ratio on
residential mortgages to 95% of the lower of appraised value of the property or
the purchase price, with the condition that private mortgage insurance is
required on loans with loan-to-value ratios in excess of 80%. The majority of
the Bank's loans have a loan-to-value ratio of less than 80%. When
underwriting residential real estate loans, the Bank evaluates the borrower's
ability to make monthly payments and the value of the property securing the
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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 $200,000 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.
Commercial lending, which includes loans for farmland and agricultural
production, state and political subdivisions, commercial real estate, and
commercial loans equaled 18.6% of the Bank's loan portfolio at December 31,
1996. 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 $2.5 million. Borrowers
with credit needs of more than $2.5 million are serviced through the use of
loan participations with other commercial banks. All commercial real estate
loans require loan-to-value limits of less than 80%. Depending upon the type
of loan, past credit history, and current operating results, the Bank may
require the borrower to pledge accounts receivable, inventory, and fixed
assets. Personal guarantees are generally required from the owners of closely
held corporations, partnerships, and proprietorships. In addition, the Bank
requires annual financial statements, prepares cash flow analysis, and reviews
credit reports. All commercial loan requests require the approval of two
senior loan officers if the amount exceeds $100,000. Loan requests in excess
of $175,000 require the approval of either the Bank's Board of Directors or its
loan committee.
Consumer loans granted by the Bank include automobile loans, 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, its deposits are insured by the Federal
Deposit Insurance Corporation to the extent provided by law, and is a member of
the Federal Home Loan Bank of Indianapolis. (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.
The Bank's non-banking subsidiary, IBT Agency, is a licensed insurance agency
and is subject to regulation by the Michigan Insurance Bureau.
PERSONNEL
As of December 31, 1996, the Corporation had one full-time employee, the Bank
had 146 full-time equivalent employees, IBT Financial Services had three
full-time employees, and IBT Agency has a dual employee arrangement with IBT
Financial Services. 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
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used by the Federal Reserve to implement these objectives are open market
operations in U.S. Treasury securities, changes in the discount rate on member
bank borrowing, and changes in reserve requirements against member bank
deposits. These methods are used in varying combinations to influence overall
growth of bank loans, investments and deposits and may also affect interest
rates charged on loans or paid for deposits. The monetary policies of the
Federal Reserve System have had a significant effect on the operating results
of commercial banks 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
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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. 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 40 and 41, respectively.
ISABELLA BANK & TRUST
The Bank is subject to regulation and examination primarily by the Michigan
Financial Institutions Bureau. As an insured state bank, which is a member of
the Federal Reserve Bank of Chicago, the subsidiary is also subject to
regulation and examination by the FDIC and the Federal Reserve.
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The agencies and federal and state law extensively regulate various aspects of
the banking business including, among other things, permissible types and
amounts of loans, investments and other activities, capital adequacy, branching,
interest rates on loans and on deposits and the safety and soundness of banking
practices.
Banking laws and regulations also restrict transactions by insured banks owned
by a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal shareholders, officers, directors and their affiliates, and
investments by the subsidiary banks in the shares or securities of the parent
holding company (or any of the other non-bank or bank affiliates), acceptance of
such share or securities as collateral security for loans to any borrower.
The Bank is also subject to legal limitations on the frequency and amount of
dividends that can be paid to the Corporation. For example, a Michigan state
bank may not declare a cash dividend or a dividend in kind except out of net
profits then on hand after deducting all losses and bad debts, and then only if
it will have a surplus amounting to not less than 20% of its capital after the
payment of the dividend. Moreover, a Michigan state bank may not declare or pay
any cash dividend or dividend in kind until the cumulative dividends on its
preferred stock, if any, have been paid in full. Further, if the surplus of a
Michigan state bank is at any time less than the amount of its capital, before
the declaration of a cash dividend or dividend in kind, it must transfer to
surplus not less than 10% of its net profits for the preceding half-year (in the
case of quarterly or semi-annual dividends) or the preceding two consecutive
half-year periods (in the case of annual dividends).
The payment of dividends by the Corporation and the Bank is also affected by
various regulatory requirements and policies, such as the requirement to
maintain adequate capital above regulatory guidelines. Recently enacted
legislation will impose further restrictions on the payment of dividends by
insured banks which fail to meet specified capital levels. The FDIC may prevent
an insured bank from paying dividends if the bank is in default of payment of
any assessment due to the FDIC. In addition, payment of dividends by a bank may
be prevented by the applicable federal regulatory authority if such payment is
determined, by reason of the financial condition of such bank, to be an unsafe
and unsound banking practice. The Federal Reserve Board and the FDIC have
issued policy statements providing that bank holding companies and insured banks
should generally only pay dividends out of current operating earnings.
These regulations and restrictions may limit the Corporation's ability to obtain
funds from the Bank for its cash needs, including payment of dividends and
operating expenses.
The activities and operations of the Bank are also subject to other federal and
state laws and regulations, including usury and consumer credit laws, the
Federal Trust-in-Lending Act, Truth-in-Saving and Regulation Z of the Federal
Reserve Board and the Federal Bank Merger Act.
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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,
1996.
Year Net
Facility Approximate Book Value
Opened Sq. Footage 12/31/96 (1)
--------- ----------- -----------
Main Office:
200 East Broadway (2)
Mt. Pleasant, Michigan 1903 27,640 247,747
Main Office Extension:
Customer Service Center
139 East Broadway
Mt. Pleasant, Michigan 1985 16,736 585,963
Isabella County Branch Offices:
1416 East Pickard (3)
Mt. Pleasant, Michigan 1983 1,450 551,451
2133 South Mission (6)
Mt. Pleasant, Michigan 1976 1,560 444,426
200 South University (4)
Mt. Pleasant, Michigan 1964 1,795 66,688
1402 West High
Mt. Pleasant, Michigan 1973 2,150 49,734
401 East Main Street (5)
Blanchard, Michigan 1911 6,561 32,745
500 East Wright Avenue
Shepherd, Michigan 1980 1,830 207,419
3388 N. Woodruff Road 1975 5,400 97,928
Weidman, Michigan
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Year Net
Facility Approximate Book Value
Opened Sq. Footage 12/31/96 (1)
-------- ----------- -----------
1867 Winn Road
Beal City, Michigan 1977 1,100 56,355
Montcalm County Branch Office:
313 W. Bridge Street (6)
Six Lakes, Michigan 1966 1,527 470,089
Clare County Branch Office:
532 N. McEwan Street
Clare, Michigan 1993 7,300 500,527
(1) includes land and buildings
(2) substantially remodeled in 1986
(3) substantially remodeled in 1990
(4) partially remodeled in 1986 and 1988
(5) substantially remodeled in 1976 and partially
remodeled in 1986
(6) substantially remodeled in 1992 and 1996
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 1996 to a vote of
security holders through the solicitation of proxies or otherwise.
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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,
1997.
The names, ages, corporate positions, and years of service of the executive
officers of the Corporation are as follows:
YEARS OF
NAME AGE POSITION SERVICE
---- --- -------- --------
David W. Hole 59 President and CEO 37
Mary Ann Breuer 57 Secretary 37
Dennis P. Angner 41 Treasurer 13
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, 1995 through December 31, 1996 there were, so far as management knows, 40
sales of the Corporation's common stock. These sales involved 21,156 shares,
as adjusted for a 10 percent stock dividend 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 $48.00 per share in the fourth
quarter of 1996, and the lowest price was $38.18 per share in the first quarter
of 1995. The following is a summary of all known transfers since January 1,
1995. All of the information has been adjusted to reflect the stock dividend
referred to above.
Number of Number of Low High
Date Sales Shares Bid Bid
---- --------- --------- --- ----
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
1996:
First Quarter 3 1,317 $45.00 $45.00
Second Quarter 8 12,857 45.00 46.00
Third Quarter 6 1,062 45.00 48.00
Fourth Quarter 1 141 48.00 48.00
The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10 percent stock dividend.
1996 1995
---- ----
First Quarter $0.24 $0.22
Second Quarter 0.24 0.22
Third Quarter 0.24 0.22
Fourth Quarter 0.80 0.66
----- -----
Total $1.52 $1.32
===== =====
IBT Bancorp's authorized stock consists of 4,000,000 shares, of which 783,457
shares are issued with a par value of $6 per share. As of year end 1996, there
were 842 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>
1996 1995 1994 1993 1992
INCOME STATEMENT DATA: ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Total interest income $ 21,698 $ 19,852 $ 17,991 $ 17,901 $ 18,350
Net interest income 11,741 10,855 10,280 9,737 9,150
Provision for loan losses 500 475 475 400 360
Net income 3,340 2,958 2,802 2,607 2,291
BALANCE SHEET DATA:
End of period assets $298,742 $281,505 $263,203 $249,367 $233,690
Daily average assets 289,308 265,860 255,399 240,342 223,767
Daily average deposits 259,240 238,761 230,598 217,954 203,870
Daily average loans/net 196,783 177,109 159,556 142,970 132,081
Daily average equity 26,954 24,313 22,316 19,892 17,873
PER SHARE DATA: (1)
Net income $ 4.30 $ 3.85 $ 3.70 $ 3.50 $ 3.14
Cash dividends 1.52 1.32 1.24 1.13 1.04
Book value (at year end) 35.74 33.36 29.49 27.59 25.17
FINANCIAL RATIOS:
Shareholders' equity to assets 9.37% 9.17% 8.56% 8.34% 7.98%
Net income to average equity 12.39 12.17 12.56 13.10 12.82
Cash dividend payout to net income 35.60 34.27 33.67 32.15 33.36
Net income to average assets 1.15 1.11 1.10 1.08 1.02
</TABLE>
<TABLE>
<CAPTION>
1996 1995
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
QUARTERLY OPERATING RESULTS:
Total interest income $5,593 $5,498 $5,343 $5,264 $5,175 $5,093 $4,904 $4,680
Interest on deposits 2,569 2,506 2,422 2,460 2,402 2,305 2,208 2,082
Net interest income 3,024 2,992 2,921 2,804 2,773 2,788 2,696 2,598
Provision for loan losses 132 128 123 117 124 121 117 113
Noninterest income 580 556 550 504 538 509 478 446
Noninterest expense 2,302 2,232 2,179 2,083 2,060 2,048 2,121 2,099
Net income 828 853 847 812 811 821 692 634
PER SHARE OF COMMON STOCK: (1)
Net income $ 1.06 $ 1.10 $ 1.09 $1.05 $ 1.05 $ 1.07 $ 0.90 $ 0.83
Cash dividends 0.80 0.24 0.24 0.24 0.66 0.22 0.22 0.22
Book value 35.74 35.23 34.27 33.67 33.36 32.79 31.84 30.61
</TABLE>
(1) Retroactively restated in 1995 for the 10% stock dividend declared on
January 16, 1996, and paid in 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>
1996 1995 1994
---- ---- ----
Tax Average Tax Average Tax Average
Average Equivalent Yield/ Average Equivalent Yield/ Average Equivalent Yield/
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- ---------- ------ ------- ---------- ------ ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans $199,277 $17,690 8.88 % $179,355 $15,972 8.91 % $161,669 $14,079 8.71%
Taxable investment 46,505 3,280 7.05 43,329 2,660 6.14 52,435 2,803 5.35
securities
Nontaxable investment 15,524 788 5.08 16,271 1,258 7.73 16,467 1,311 7.96
securities
Federal funds sold 7,983 419 5.25 7,564 422 5.58 6,771 276 4.08
Other 431 27 6.26 336 20 5.95 336 20 5.95
-------- ------- ---- -------- ------- ---- ------- ------- ----
TOTAL EARNING ASSETS 269,720 22,204 8.23 246,855 20,332 8.24 237,678 18,489 7.78
NON EARNING ASSETS:
Allowance for loan
losses (2,494) ( 2,247) (2,113)
Cash and due from banks 11,136 10,945 10,375
Premises and equipment 5,449 5,218 4,786
Accrued income and
other assets 5,497 5,089 4,673
-------- -------- --------
TOTAL ASSETS $289,308 $265,860 $255,399
======== ======== ========
INTEREST BEARING
LIABILITIES:
Interest bearing
demand deposits $ 39,876 1,091 2.74 % $ 42,010 1,277 3.04 % $ 40,318 1,052 2.61%
Savings deposits 68,667 2,165 3.15 63,825 1,865 2.92 70,128 1,834 2.62
Time deposits 114,279 6,701 5.86 100,064 5,855 5.85 89,010 4,825 5.42
-------- ------- ---- -------- ------- ---- ------- ------- ----
TOTAL INTEREST
BEARING
LIABILITIES 222,822 9,957 4.47 205,899 8,997 4.37 199,456 7,711 3.87
NONINTEREST BEARING
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Demand deposits 36,418 32,862 31,142
Other 3,114 2,786 2,485
Shareholders' equity 26,954 24,313 22,316
-------- -------- --------
TOTAL LIABILITIES
AND EQUITY $289,308 $265,860 $255,399
======== ======== ========
NET INTEREST INCOME (FTE) $12,247 $11,335 $10,778
======= ======= =======
NET YIELD ON INTEREST
EARNING ASSETS (FTE) 4.54% 4.59% 4.53%
===== ====== ====
</TABLE>
13
<PAGE> 14
RESULTS OF OPERATIONS
The Corporation achieved record net income for the tenth consecutive year in
1996 with earnings of $3,340,198, a 12.9% increase over 1995. Earnings per
share were $4.30, an increase of $0.45 over 1995 and $0.60 over 1994.
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 1.15% in 1996, 1.11% in 1995, and 1.10% in 1994. 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 12.39% in 1996, 12.17% in 1995, and 12.56% in
1994.
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 Statement of Financial Accounting
Standards (SFAS) No. 91, interest income includes loan fees of $754,000 in
1996; $601,000 in 1995; and $639,000 in 1994. For analytical purposes, net
interest income is adjusted to a "taxable equivalent" basis by adding the
income tax savings from interest on tax-exempt loans and securities, thus
making year-to-year comparisons more meaningful.
TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS
(Dollars in Thousands)
The following table details the dollar amount of changes in FTE net interest
income for each major category of interest earning assets and interest bearing
liabilities, and the amount of change attributable to changes in average
balances (volume) or average rates. The change in interest due to both volume
and rate has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
1996 Compared to 1995 1995 Compared to 1994
------------------------------------ -------------------------------
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 $ 1,769 $ (51) $1,718 $1,569 $ 324 $1,893
Taxable investment securities 205 415 620 (526) 383 (143)
Nontaxable investment securities (55) (415) (470) (15) (38) (53)
Federal funds sold 23 (26) (3) 35 111 146
Other 6 1 7
-------- ------- ------ ------ ------ -------
TOTAL CHANGES IN INTEREST INCOME 1,948 (76) 1,872 1,063 780 1,843
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits (63) (123) (186) 46 179 225
Savings deposits 147 153 300 (173) 204 31
Time deposits 834 12 846 628 402 1,030
-------- ------- ------ ------ ----- ------
TOTAL CHANGES IN INTEREST EXPENSE 918 42 960 501 785 1,286
-------- ------- ------ ------ ----- ------
NET CHANGE IN FTE NET INTEREST INCOME $1,030 $ (118) $ 912 $ 562 $ (5) $ 557
======== ======= ====== ====== ====== ======
</TABLE>
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, when comparing 1996 to 1995 fully
taxable equivalent (FTE) interest income increased $912,000 or 8.0%. A 9.3%
increase in interest earning assets provided $1,948,000 of FTE interest income.
The majority of this growth was funded by an 8.2% increase in interest bearing
deposits, resulting in $918,000 of additional interest expense. Overall,
changes in volume resulted in $1,030,000 of additional FTE interest income.
The average FTE interest rate earned on assets decreased by 0.01%, decreasing
FTE interest income by $76,000 and the average rate paid on deposits increased
by 0.10%, increasing interest expense by $42,000. The net change related to
interest rates earned and paid was a $118,000 reduction in FTE net interest
income.
The Corporation's FTE net interest yield as a percentage of average earning
assets equaled 4.54% during 1996 versus 4.59% in 1995. The 0.05% decrease in
the net interest yield was primarily a result of the Corporation's increasing
reliance on higher cost deposits such as certificates of deposit and money
market accounts to fund asset growth. The percentage of assets funded with
these deposits increased from 46.8% in 1995 to 49.6%. Management expects the
Corporation's reliance on higher cost deposits to fund asset growth to
continue.
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 remain steady during 1997. 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
not change significantly in 1997. Due to the many factors that can affect net
interest income, interest income cannot be predicted with any certainty.
Net interest income increased $557,000 to $11.3 million in 1995 from $10.8
million in 1994. As shown in Tables 1 and 2, in 1995 (FTE) interest income
increased $1,063,000, from a 3.9% increase in the volume of average earning
assets. The growth of interest earning assets was funded primarily by a 3.2%
increase in interest bearing deposits that resulted in additional interest
expense of $501,000. Overall, the Corporation earned an additional $562,000 in
FTE interest income as a result of volume. The average rate earned in 1995
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.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Total loans outstanding represent 80.5% of the
Corporation's total year end deposits, and is the Corporation's single largest
concentration of risk. Inevitably, poor operating performance may result in
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 provision for loan losses is the amount added to the allowance for loan
losses on a monthly basis. The allowance for loan losses is management's
estimation of potential future losses inherent in the loan portfolio, and is
maintained at a level considered by management to be adequate to absorb
potential future losses. Evaluation of the allowance for loan losses and the
provision for loan losses is based on a continuous review of the changes in the
type and volume of the loan portfolio, reviews of specific loans to evaluate
their collectibility, recent loan loss history, financial condition of
borrowers, the amount of impaired loans, overall economic conditions, and other
factors. This evaluation is inherently subjective as it requires material
estimates, including the amounts and timing of future cash flows expected to be
received on impaired loans that may be subject to significant change.
As shown in Table 3, total loans outstanding increased 15.8% in 1996 and 6.9%
in 1995. The allowance for loan losses as a percentage of total outstanding
loans at year end 1996 was 1.22% compared to 1.21% at December 31, 1995. The
Corporation's net charged off loans as a percentage of average loans decreased
to 0.06% in 1996 from 0.17% in 1995. The decline in net charged off loans is
attributable to the strong economic conditions in our principal markets.
TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE
-----------------------------------------
(Dollars in Thousands)
The following is a summary of loan balances at the end of each period and their
daily average 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.
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding
at the end of period $215,454 $185,996 $173,939 $154,608 $139,092
======== ======== ======== ======== ========
Average amount of loans
outstanding for the period $199,277 $179,355 $161,669 $144,905 $133,859
======== ======== ======== ======== ========
Summary of changes in allowance:
Allowance for loan losses - January 1 $ 2,248 $ 2,083 $ 1,854 $ 1,686 $ 1,553
Loans charged off:
Commercial and agricultural 166 334 375 350 308
Real estate mortgage 36 4 5 10 26
Installment 173 161 181 123 141
-------- -------- -------- ------- ---------
TOTAL LOANS CHARGED OFF 375 499 561 483 475
Recoveries:
Commercial and agricultural 146 109 247 158 132
Real estate mortgage 2 19 1
Installment 102 80 66 74 115
-------- -------- --------- ------- ---------
TOTAL RECOVERIES 248 189 315 251 248
-------- -------- --------- ------- ---------
Net charge offs 127 310 246 232 227
Provision charged to income 500 475 475 400 360
-------- -------- --------- ------- ---------
ALLOWANCE FOR LOAN LOSSES - DECEMBER 31 $ 2,621 $ 2,248 $ 2,083 $ 1,854 $ 1,686
======== ======== ========= ======= ========
Ratio of net charge offs during the
year to average loans outstanding 0.06% 0.17% 0.15% 0.16% 0.17%
==== ==== ==== ==== ====
Ratio of the allowance for loan losses
to loans outstanding at year end 1.22% 1.21% 1.20% 1.20% 1.21%
==== ==== ==== ==== ====
</TABLE>
16
<PAGE> 17
As shown in Table 4, the percentage of loans classified as nonperforming by the
Corporation as of December 31, 1996 and 1995 equaled 0.25% and 0.46% of total
loans, respectively. The Bank's policy, including a loan impaired under SFAS
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)
The following loans are all the credits which require classification for state
or federal regulatory purposes.
December 31
1996 1995 1994 1993 1992
Nonaccrual loans $ $ 262 $ 347 $ 205 $ 122
Accruing loans past due 90 days or more 441 590 183 303 508
Restructured loans 107 19 280
----- ----- ------ ----- -----
TOTAL NONPERFORMING LOANS $ 548 $ 852 $ 530 $ 527 $ 910
===== ===== ====== ===== =====
As of December 31, 1996, there were no other interest bearing assets which
required classification. Management is not aware of any recommendations by
regulatory agencies which, if implemented, would have a material impact on the
Corporation's liquidity, capital, or operations.
In management's opinion, the allowance for loan losses is adequate as of
December 31, 1996. Management has allocated, as shown in Table 5, the
allowance for loan losses to the following categories: 42.4% to commercial and
agricultural loans; 14.6% to real estate loans; 35.4% to installment loans; and
7.6% unallocated. The above allocation is not intended to imply limitations on
usage of the allowance. The entire allowance is available for any future loans
without regard to loan type.
TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
-----------------------------------------------------
(Dollars in Thousands)
The allowance for loan losses has been allocated according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within the following categories:
<TABLE>
<CAPTION>
December 31
1996 1995 1994
---- ---- ----
% of Each % of Each % of Each
Category Category Category
Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $1,110 18.60% $1,079 18.06% $ 915 19.01%
Real estate mortgage 384 64.05 278 62.22 249 60.91
Installment 928 17.35 707 19.72 706 20.08
Impaired loans 5 50
Unallocated 199 179 163
------ ------- ------ ------- ------- -------
TOTAL $2,621 100.00% $2,248 100.00% $ 2,083 100.00%
====== ======= ====== ======= ======= =======
<CAPTION>
December 31
1993 1992
---- ----
% of Each % of Each
Category Category
Allowance to Total Allowance to Total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Commercial and agricultural $ 745 21.94% $ 667 22.53%
Real estate mortgage 318 60.97 317 62.37
Installment 644 17.09 567 15.10
Impaired loans
Unallocated 147 135
------- ------- ------- -------
TOTAL $ 1,854 100.00% $ 1,686 100.00%
======= ======= ======= =======
</TABLE>
17
<PAGE> 18
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, and fees
for other financial services. Noninterest income increased $219,000 or 11.1%
in 1996 when compared to 1995. The most significant changes were a $65,000
increase in automatic teller machine fees, a $48,000 gain on the sale of $2.9
million in student loans, a $44,000 increase in brokerage fees, and a $28,000
decrease in trust fees. In December 1996, a major contract for providing ATM
services was not renewed. During 1996, services provided under this contract
generated $300,000 in revenue. The decline in revenue is expected to be
partially offset by decreases in ATM operating cost, depreciation expense, and
additional interest income due to a substantial decrease in vault cash. In
anticipation of this event, the Bank offset the majority of its 1996 net
earnings related to this contract through the establishment and funding of a
charitable foundation.
Included in other operating income is a $120,000 gain from the sale of $18.8
million in mortgages during 1996 versus a $73,000 gain on the sale of $8.1
million for 1995. The Corporation has established a policy that all 30-year
amortized fixed rate mortgage loans will be sold. During 1996, all 15 and 30
year fixed rate mortgage loans granted were sold on the secondary market.
These loans were sold without recourse, with servicing retained. The gain on
sale in 1996 was calculated under the provisions of SFAS No. 122. For further
information regarding SFAS No. 122, refer to Note A, Business and Significant
Accounting Policies, and Note C, Loans, of the audited financial statements.
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.
NONINTEREST EXPENSES
Controlling noninterest expenses is important to maintain adequate and
satisfactory profitability. Noninterest expenses declined from 3.13% of
average assets in 1995 to 3.04% in 1996. The largest component of noninterest
expense is salaries and employee benefits, which increased $373,000 or 8.8%.
The majority of this increase was related to normal merit and promotional
salary increases and the addition of three full-time equivalent employees.
Salaries and benefits equaled 1.59% of average assets during 1996, 1995 and
1994.
Occupancy and furniture and equipment expenses increased $215,000 or 13.7% in
1996. The majority of this increase was associated with a $30,000 increase in
automatic teller machine operating costs, a $60,000 increase in computer
operations expenses, a $66,000 increase in depreciation, and a $32,000 increase
in building repairs.
Other noninterest expenses decreased $121,000, or 4.8%. The most significant
change was a decrease in FDIC insurance premiums from $272,000 in 1995 to
$2,000 in 1996. Federal legislation approved in September 1996 requires
commercial banks to assist in the repayment of debts issued by the Savings
Association Insurance Fund. These debts were authorized by Congress in prior
years as part of the savings and loan industry bailout. FDIC insurance premium
expense for 1997 is expected to increase by approximately $34,000 as a result
of this legislation. Additional significant changes in other operating
expenses included increases in donations of $108,000, State of Michigan single
business tax of $35,000, printing and office supplies of $95,000, marketing of
$46,000, and a decrease in other real estate expense of $138,000. The majority
of the increase in donations is related to establishment of a charitable
foundation by the Bank.
Noninterest expense increased $476,000 or 6.1% in 1995 when compared with 1994.
Salaries and employee benefits increased $174,000 or 4.3%. The majority of
this increase was 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 $229,000 in
1995. Significant increases in other operating expenses included legal
expenses, other losses, armored car services, and other real estate expenses.
18
<PAGE> 19
FEDERAL INCOME TAXES
Federal income tax expense for 1996 was $1,295,000 or 27.9% of pre-tax income
compared to $1,065,000 and 26.5% in 1995 and $936,000 and 25.0% in 1994. The
increase in tax expense as a percentage of income is attributable to a decrease
in non-taxable municipal income as a percentage of the Corporation's pretax net
income. A reconcilement of federal income tax expense and the amount computed
at the federal statutory rate of 34% is found in Note E, Federal Income Taxes.
ANALYSIS OF CHANGES IN THE STATEMENT OF CONDITION
Total assets were $298.7 million at December 31, 1996, an increase of $17.2
million or 6.1% over year end 1995. Asset growth was primarily funded by a
$14.6 million increase in deposits and a $2.2 million increase in shareholders'
equity. A discussion of changes in balance sheet amounts by major categories
follows.
INVESTMENT SECURITIES
The primary objective of the Corporation's investing 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 1996, the Corporation's net holding of investment
securities decreased $5.6 million. The proceeds from the reduction in
investment securities were invested in loans. Table 6 shows the carrying value
of investment securities available for sale and held to maturity. Securities
held to maturity, which are stated at amortized cost, consist mostly of local
municipal bond issues, 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 value.
TABLE 6. INVESTMENT PORTFOLIO
------------------------------
(Dollars in Thousands)
The following is a schedule of the carrying value of investment securities
available for sale and held to maturity:
<TABLE>
<CAPTION>
December 31
Available for sale: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury and U.S. government agencies $37,905 $43,723 $42,275
States and political subdivisions 12,579 12,898 14,988
------- ------- -------
$50,484 $56,621 $57,263
======= ======= =======
<CAPTION>
Held to maturity
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury and U.S. government agencies $4,163 $3,852 $2,693
States and political subdivisions 3,963 4,796 3,493
Other securities 1,369 336 336
----- ------ ------
$9,495 $8,984 $6,522
====== ====== ======
</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, nongovernment agency asset backed securities, corporate bonds, and
structured notes.
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,
1996. 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>
Available for sale:
U.S. Treasury and U.S.
government agencies $12,564 5.92% $24,435 6.28% $ 906 6.50%
States and political
subdivisions 4,770 8.09 6,103 7.49 1,706 7.40
------- ------- ------
TOTAL $17,334 6.51% $30,538 6.53% $2,612 7.09%
======= ======= ======
Held to maturity:
U.S. Treasury and U.S.
government agencies $ $ 3,481 6.38% $ 540 8.28% $ 142 8.49%
States and political
subdivisions 2,160 6.60% 562 7.69 1,241 7.50
Other securities 1,369 7.08
------- ------- ------ ------
TOTAL $ 2,160 6.60% $ 4,043 6.56% $1,781 7.74% $1,511 7.21%
======= ======= ====== ======
</TABLE>
LOANS
The largest component of earning assets is loans. The proper management of
credit and market risk inherent in loans is critical to the financial
well-being of the Corporation. To control these risks, the Corporation has
adopted strict underwriting standards. The standards include prohibitions
against lending outside the Corporation's defined market area, lending limits
to a single borrower, and strict loan to collateral value limits. The
Corporation also monitors and limits loan concentrations extended to volatile
industries. The Corporation has no foreign loans and there were no
concentrations greater than 10% of total loans that are not disclosed as a
separate category in Table 8.
TABLE 8. LOAN PORTFOLIO
------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
December 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $ 40,068 $ 33,585 $ 33,062 $ 33,926 $ 31,336
Real estate mortgage 137,998 115,718 105,953 94,264 86,749
Installment 37,388 36,693 34,924 26,418 21,007
--------- --------- --------- --------- ---------
TOTAL LOANS $215,454 $185,996 $173,939 $154,608 $139,092
======== ======== ======== ======== ========
</TABLE>
Total loans increased $29.5 million in 1996. The increase was primarily in
commercial operating loans, commercial real estate loans, and residential
mortgages. Loan growth was funded solely from new deposits and the liquidation
of investments. During 1996, a total of 5,819 new loans were granted for a
total of $114.6 million.
20
<PAGE> 21
DEPOSITS
Total deposits were $267.6 million at year end 1996, a 5.8% increase over 1995.
Average deposits increased 8.6% in 1996 and 3.5% in 1995. During 1996, average
noninterest bearing deposits increased 10.8%, interest bearing demand deposits
decreased 5.1%, savings deposits increased 7.6%, and time deposits increased
14.2%. Time deposits over $100,000 as a percentage of total deposits equaled
5.2% and 3.9% as of December 31, 1996 and 1995, respectively.
TABLE 9. AVERAGE DEPOSITS
--------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
Amount Rate Amount Rate Amount Rate
------ ----- ------- ---- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 36,418 $ 32,862 $ 31,142
Interest bearing demand deposits 39,876 2.74% 42,010 3.04% 40,318 2.61%
Savings deposits 68,667 3.15 63,825 2.92 70,128 2.62
Time deposits 114,279 5.86 100,064 5.85 89,010 5.42
-------- -------- ---------
TOTAL $259,240 $238,761 $230,598
======== ======== ========
</TABLE>
TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000
-------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<Caption
December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Maturity:
Within 3 months $ 5,095 $2,043 $2,105
Within 3 to 6 months 2,825 1,504 1,363
Within 6 to 12 months 418 2,138 759
Over 12 months 5,666 4,174 3,604
-------- ------ ------
TOTAL $14,004 $9,859 $7,831
======== ====== ======
</TABLE>
Within the banking industry there is agreement that competition from mutual
funds and annuities has had a significant impact on deposit growth. In
response, the Corporation's subsidiaries now offer mutual funds and annuities
to its customers. The Bank's trust department also offers a variety of
financial products in addition to traditional estate services. Competition
from other financial institutions in Isabella County has an impact on both the
amount of and the cost of deposits. Isabella County has a population of less
than 60,000 people and is serviced by eight financial institutions with 24
locations. This competition results in a higher cost of funds than would
otherwise exist. Generally, deposit rates in Isabella County are higher than
in the major metropolitan areas in the state. Currently, the Bank's market
share of deposits in Isabella County is slightly in excess of 50%.
CAPITAL
The capital of the Corporation consists solely of common stock, capital
surplus, retained earnings, and unrealized net gains on securities available
for sale. Total capital increased approximately $2.2 million in 1996. The
Corporation offers a dividend reinvestment and employee stock purchase plan.
Under the provisions of the Plan, the Corporation issued 9,966 shares of common
stock generating $432,000 of capital during 1996, and 9,000 common shares
generating $369,000 of capital in 1995.
21
<PAGE> 22
Since year end 1993, equity capital growth has averaged 10.5% annually versus
average annual asset growth of 6.4%. The principal sources of capital growth
are retained earnings and cash dividends reinvested. As a result of the
differential between internal capital growth and asset growth since 1993, the
equity to asset ratio has increased by 1.03% and return on equity has decreased
by approximately .50%. The Board of Directors has determined that the
Corporation's capital ratio of 9.37% is sufficient and is reviewing options to
stabilize the capital ratio at a level below 10.0%. Options being considered
include acquisitions, branch expansion, a common stock repurchase program, and
a curtailment of the dividend reinvestment plan combined with an increase in
cash dividend payouts. The Board may act on any one or all of these options in
1997. Any actions taken in regard to a common stock repurchase plan or
curtailment of the dividend reinvestment plan will be preceded by an
announcement to the Corporation's shareholders.
There are no commitments for significant capital expenditures. The Federal
Reserve Board's current recommended mini-mum primary capital to average assets
requirement is 6.0%. The Corporation's primary capital to average assets,
which consists of shareholders' equity plus the allowance for loan losses, was
10.49% at year end 1996.
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 goodwill. The following table
sets forth the percentages required under the Risk Based Capital guidelines and
the Corporation's values at December 31, 1996:
Percentage of Capital to Risk Adjusted Assets:
Required IBT Bancorp
-------- -----------
Equity Capital 4.00% 15.26%
Secondary Capital 4.00 1.25
---- -----
Total Capital 8.00% 16.51%
==== =====
*IBT Bancorp's secondary capital includes only the allowance for loan
losses. entage 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, 1996,
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, 1996 and 1995, cash and cash equivalents equaled 5.1% and
7.7% of total assets, respectively. Net cash provided from operations was $5.7
million in 1996 and $3.2 million in 1995. Net cash provided by financing
activities equaled $13.9 million in 1996 and $14.0 million in 1995. The
Corporation's investing activities consumed $26.1 million in 1996 and $13.5
million in 1995. The accumulated effect of the Corporation's operating,
investing, and financing activities on cash and cash equivalents was a $6.6
million decrease in 1996 and a $3.7 million increase in 1995.
22
<PAGE> 23
LIQUIDITY (CONTINUED)
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale equaled
$50.5 million as of December 31, 1996 and $56.6 million at year end 1995. 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 1996
or 1995. 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 $215.5 million
in total loans, $19.8 million are variable rate loans. Time deposit
liabilities are scheduled based on their contractual maturity except for
variable rate time deposits in the amount of $1.1 million which are included in
the 0 to 3 month time frame. Money market accounts reprice monthly and are
included in the 0 to 3 month time frame.
Passbook savings, statement savings, and NOW accounts have no contractual
maturity date and are believed to be predominantly noninterest rate sensitive
by management. These accounts have been classified in the gap table according
to their estimated withdrawal rates based upon management's analysis of deposit
runoff over the past five years. Management believes this runoff experience is
consistent with its expectation for the future. As of December 31, 1996, the
Corporation had $11.6 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.
In addition to the GAP analysis, the Corporation utilizes a computer simulation
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. The Corporation does not use interest rate swaps or
derivatives in the management of interest rate risk.
23
<PAGE> 24
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, 1996. 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 $ 3,175 $ 3,175
Investment securities 3,819 $16,481 $ 34,430 $ 5,065 59,795
Loans 41,609 35,171 131,403 7,271 215,454
Nonearning 20,318
------- ------- -------- ------- --------
TOTAL $48,603 $51,652 $165,833 $12,336 $298,742
------- ------- -------- ------- --------
INTEREST SENSITIVE LIABILITIES:
Time deposits $19,627 $36,436 $60,483 $ 1,352 $117,898
Savings 39,268 2,210 11,909 14,556 67,943
Interest bearing demand 10,803 3,530 15,462 10,090 39,885
Noninterest bearing 73,016
------- ------- -------- ------- --------
TOTAL $69,698 $42,176 $87,854 $25,998 $298,742
------- ------- ------- ------- --------
Cumulative gap $(21,095) $(11,619) $66,360 $52,698
Cumulative gap as a % of assets (7.06)% (3.89)% 22.21% 17.64%
</TABLE>
TABLE 12. LOAN MATURITY AND INTEREST SENSITIVITY
-------------------------------------------------
(Dollars in Thousands)
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 1996. 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 $25,588 $13,406 $1,074 $40,068
======= ======= ====== =======
Interest Sensitivity:
Loans maturing after one year which have:
Fixed interest rates $12,300 $1,048
Variable interest rates 1,106 26
------- ------
TOTAL $13,406 $1,074
======= ======
</TABLE>
24
<PAGE> 25
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 26 through 42 of this report:
Reports of Independent Auditors
Consolidated Balance Sheet
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.
25
<PAGE> 26
Report of Independent Auditors
Board of Directors and Shareholders
IBT Bancorp
We have audited the accompanying consolidated balance sheet of IBT Bancorp and
subsidiaries as of December 31, 1996, and the related consolidated statements
of income, changes in shareholders' equity, and cash flows for the year then
ended. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IBT
Bancorp and subsidiaries as of December 31, 1996, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
As described in Note A to the consolidated financial statements, in 1996 IBT
Bancorp and subsidiaries changed their method of accounting for originated
mortgage servicing rights.
Saginaw, Michigan
February 6, 1997
Rehmann Robson P.C.
26
<PAGE> 27
ANDREWS, HOOPER & PAVLIK, P.L.C.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
IBT Bancorp
We have audited the accompanying consolidated statement of financial position
of IBT Bancorp and subsidiaries as of December 31, 1995 and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the two 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 the consolidated results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ANDREWS HOOPER & PAVLIK, P.L.C.
February 2, 1996
27
<PAGE> 28
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Cash and demand deposits due from banks -- Note I $ 11,944,739 $ 15,299,222
Federal funds sold 3,175,000 6,400,000
------------ ------------
CASH AND CASH EQUIVALENTS 15,119,739 21,699,222
Investment securities -- Note B
Securities available for sale (Amortized cost of
$50,299,984 in 1996 and $55,849,730 in 1995) 50,483,580 56,621,213
Securities held to maturity (Fair value of
$9,509,025 in 1996 and $9,058,737 in 1995) 9,495,293 8,984,422
------------ ------------
TOTAL INVESTMENT SECURITIES 59,978,873 65,605,635
Loans -- Notes C and H
Commercial 40,067,951 33,584,662
Real estate mortgage 137,997,951 115,717,820
Installment 37,388,521 36,693,646
------------ ------------
TOTAL LOANS 215,454,423 185,996,128
Less allowance for loan losses -- Note C 2,620,570 2,248,184
------------ ------------
NET LOANS 212,833,853 183,747,944
Premises and equipment -- Note A 5,622,955 5,150,853
Accrued interest receivable 2,059,236 2,075,387
Other assets 3,126,946 3,226,281
------------ ------------
TOTAL ASSETS $298,741,602 $281,505,322
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 41,922,878 $ 39,620,454
NOW accounts 39,885,743 39,882,893
Certificates of deposit and other savings 171,835,681 163,642,277
Certificates of deposit over $100,000 14,004,225 9,859,419
------------ ------------
TOTAL DEPOSITS 267,648,527 253,005,043
Accrued interest and other liabilities 3,092,659 2,695,270
------------ ------------
TOTAL LIABILITIES 270,741,186 255,700,313
Shareholders' Equity -- Note I
Common stock -- $6 par value:
4,000,000 shares authorized;
783,457 shares issued and outstanding
(703,248 shares at December 31, 1995) 4,700,741 4,219,489
Capital surplus 13,261,911 10,220,114
Retained earnings 9,916,593 10,856,229
Unrealized gain on securities available for sale, net
of taxes of $62,000 in 1996 and $262,000 in 1995
121,171 509,177
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 28,000,416 25,805,009
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $298,741,602 $281,505,322
============ ============
See notes to consolidated financial statements.
</TABLE>
28
<PAGE> 29
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, 1994 $3,739,244 $ 7,710,415 $ 9,354,951 $ 889,040 $21,693,650
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 securities
available for sale, 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 securities
available for sale, 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
Net income for 1996 3,340,198 3,340,198
Cash dividends paid -- $1.52 per share (1,189,141) (1,189,141)
10% stock dividend 421,458 2,669,235 (3,090,693)
Issuance of 9,966 shares of common
stock under dividend reinvestment plan 59,794 372,562 432,356
Change in unrealized gain on securities
available for sale, net of taxes of $200,000 (388,006) (388,006)
---------- ----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996 $4,700,741 $13,261,911 $ 9,916,593 $ 121,171 $28,000,416
========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
29
<PAGE> 30
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
INTEREST INCOME
Loans $17,589,379 $15,880,947 $13,990,446
Investment Securities
Taxable:
U.S. Treasury and U.S. government agencies 2,755,495 2,588,935 2,785,201
Other 146,915 70,667 38,912
Nontaxable:
States and political subdivisions 787,954 868,887 900,857
----------- ----------- -----------
TOTAL INTEREST ON INVESTMENT SECURITIES 3,690,364 3,528,489 3,724,970
Federal funds sold and other 418,591 442,244 275,518
----------- ----------- -----------
TOTAL INTEREST INCOME 21,698,334 19,851,680 17,990,934
INTEREST EXPENSE ON DEPOSITS 9,957,039 8,996,712 7,711,291
----------- ----------- -----------
NET INTEREST INCOME 11,741,295 10,854,968 10,279,643
Provision for loan losses -- Note C 500,000 475,000 475,000
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 11,241,295 10,379,968 9,804,643
NONINTEREST INCOME
Trust fees 329,413 357,138 370,724
Service charges on deposit accounts 281,240 297,636 288,894
Other service charges and fees 1,131,953 1,030,241 865,425
Other 438,888 300,457 278,664
Net realized gains (losses) on securities available for sale 8,061 (14,503) (18,215)
----------- ----------- -----------
TOTAL NONINTEREST INCOME 2,189,555 1,970,969 1,785,492
NONINTEREST EXPENSE
Salaries, wages, and employee benefits 4,604,915 4,231,828 4,057,708
Occupancy 686,661 578,818 556,906
Furniture and equipment 1,104,166 996,606 775,387
Other 2,399,910 2,520,620 2,462,235
----------- ----------- -----------
TOTAL NONINTEREST EXPENSE 8,795,652 8,327,872 7,852,236
----------- ----------- -----------
INCOME BEFORE FEDERAL INCOME TAXES 4,635,198 4,023,065 3,737,899
Federal income taxes -- Note E 1,295,000 1,065,000 936,000
----------- ----------- -----------
NET INCOME $ 3,340,198 $ 2,958,065 $ 2,801,899
=========== =========== ===========
Net income per share -- Note A $4.30 $3.85 $3.70
===== ===== =====
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 31
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES -- NOTE G
Interest and fees collected on loans and investments $ 21,953,938 $ 19,555,643 $ 18,211,278
Other fees and income received 2,082,301 1,958,544 1,826,564
Interest paid (9,987,503) (8,898,078) (7,729,080)
Cash paid to suppliers and employees (6,916,070) (8,252,915) (7,431,480)
Federal income taxes paid (1,474,500) (1,134,961) (964,000)
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,658,166 3,228,233 3,913,282
INVESTING ACTIVITIES
Proceeds from maturities and sales of
securities available for sale 24,663,892 26,997,081 32,295,051
Proceeds from maturities of securities
held to maturity 3,095,371 4,407,685 876,273
Purchase of securities available for sale (18,070,826) (24,944,425) (19,833,945)
Purchase of securities held to maturity (4,893,051) (6,834,606) (6,178,383)
Net increase in loans (29,585,909) (12,367,647) (19,576,020)
Purchase of premises and equipment (1,333,825) (754,235) (939,222)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (26,124,348) (13,496,147) (13,356,246)
FINANCING ACTIVITIES
Net increase in noninterest bearing deposits 2,302,424 4,075,859 4,330,638
Net increase in interest bearing deposits 12,341,060 10,525,994 7,729,125
Cash dividends (1,189,141) (1,013,712) (943,469)
Proceeds from issuance of common stock 432,356 369,211 319,228
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,886,699 13,957,352 11,435,522
(DECREASE) INCREASE IN CASH AND ------------ ------------ ------------
CASH EQUIVALENTS (6,579,483) 3,689,438 1,992,558
Cash and cash equivalents at beginning of year 21,699,222 18,009,784 16,017,226
------------ ------------ ------------
CASH AND CASH EQUIVALENTS END OF YEAR $ 15,119,739 $ 21,699,222 $ 18,009,784
============= ============ ============
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements
include the accounts of IBT Bancorp (the "Corporation") and its wholly owned
subsidiaries, Isabella Bank and Trust (the "Bank"), IBT 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 loans and lines of credit, residential
real estate loans, consumer loans, student loans, and credit cards. 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 in
the Bank's principal market area. Deposit services include interest and
noninterest bearing checking accounts, savings accounts, money market accounts,
and certificates of deposit. Other related financial products include trust
services, 24-hour banking services locally and nationally through shared
automatic teller machines, safe deposit box rentals, credit life insurance, and
direct deposits. Active competition, principally from other commercial banks,
savings banks and credit unions, exists in all of the Bank's principal markets.
The Corporation's results of operations can be signficantly affected by changes
in interest rates or changes in the local economic environment.
IBT Financial Services is a full service retail brokerage offering stocks,
bonds, and mutual fund sales to individuals. IBT Agency, an insurance agency,
is authorized to sell life insurance, casualty insurance, and fixed and
variable rate annuities.
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 allowance
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. Securities
held to maturity are stated at amortized cost. Debt securities not classified
as held to maturity are classified as available for sale and are stated at fair
value, with the unrealized gains and losses, net of taxes, reported 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, and is computed using a method that approximates the
level yield method. Gains or losses on the sale of securities available for
sale are calculated using the adjusted cost for the specific securities sold.
ALLOWANCE FOR LOAN LOSSES: Management determines the adequacy of the allowance
for loan losses based on evaluation of the loan portfolio, past and recent loan
loss experience, current economic conditions and other pertinent factors. The
allowance is increased by a charge to income for provisions for loan losses.
Loans deemed to be uncollectible are charged against the allowance for loan
losses, and subsequent recoveries, if any, are credited to the allowance. The
allowance for loan losses on loans classified as impaired is based on
discounted cash flows using the loans initial interest rate or the fair value
of the collateral for certain collateral dependent loans.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. For financial reporting purposes, the provision for
depreciation is computed principally by the straight line method based upon the
useful lives of the assets which generally range from 5 to 30 years.
Maintenance repairs and minor alterations are charged to current operations as
expenditures occur and major improvements are capitalized.
32
<PAGE> 33
A summary of premises and equipment at December 31 follows:
1996 1995
Premises $ 6,052,005 $ 5,537,872
Equipment 5,004,068 5,509,394
----------- -----------
11,056,073 11,047,266
Less accumulated depreciation 5,433,118 5,896,413
----------- -----------
Net premises and equipment $ 5,622,955 $ 5,150,853
=========== ===========
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.
MORTGAGE SERVICING RIGHTS: In 1996, the Corporation adopted Statement of
Financial Accounting Standard (SFAS) No. 122, Accounting for Mortgage
Servicing Rights. SFAS No. 122 provides for the recognition of originated
mortgage servicing rights ("OMSR") retained for loans sold by allocating total
costs incurred between the loan and the servicing rights based on their
relative fair values. Previously, the value of OMSR was not recognized as an
asset when the related loan was sold. Mortgage servicing rights ("MSR") are
amortized in proportion to, and over the period of, estimated net servicing
income. To determine the fair value of MSR, the Corporation estimates the
present value of future cash flows incorporating a number of assumptions
including servicing income, cost of servicing, discount rates, and prepayment
rates.
SFAS No. 122 requires the establishment of a valuation allowance for the excess
of book value of the capitalized MSR over estimated fair value. For purposes
of measuring impairment, the rights are stratified based on their predominant
risk characteristics, primarily period of origination, interest rate, and
current prepayment rates.
FEDERAL INCOME TAXES: Federal income taxes have been provided based on
amounts reported in the statement of income (after the exclusion of nontaxable
interest income) and include deferred federal income taxes on temporary
differences between financial statement and income tax reporting. The
Corporation and its subsidiaries file a consolidated federal income tax return
on a calendar year basis.
PER SHARE AMOUNTS: Net income per share amounts were computed by dividing net
income by the weighted average number of shares outstanding. All per share
amounts have been adjusted for the 10% stock dividend paid on March 15, 1996.
The weighted average number of common shares outstanding were 777,619 in 1996,
767,878 in 1995; and 757,918 in 1994.
NOTE B - INVESTMENT SECURITIES
The following is a summary of securities available for sale and held to
maturity:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ----------- -------
<S> <C> <C> <C> <C>
December 31,1996:
Securities available for sale:
U.S. Treasury and U.S.
government agencies $37,759,549 $220,941 ($75,904) $37,904,586
States and political
subdivisions 12,540,435 73,763 (35,204) 12,578,994
----------- -------- --------- -----------
TOTAL $50,299,984 $294,704 ($111,108) $50,483,580
=========== ======== ========= ===========
Securities held to maturity:
U.S. Treasury and U.S.
government agencies $ 4,163,442 $ 23,040 ($29,484) $ 4,156,998
States and political
subdivisions 3,963,050 23,241 (3,065) 3,983,226
Other securities 1,368,801 1,368,801
----------- -------- --------- -----------
TOTAL $ 9,495,293 $ 46,281 ($32,549) $ 9,509,025
=========== ======== ========= ===========
</TABLE>
33
<PAGE> 34
NOTE B (CONTINUED)
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1995:
Securities available for sale:
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
=========== ======== ======== ===========
Securities 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 336,201 336,201
----------- -------- -------- -----------
TOTAL $ 8,984,422 $ 81,601 $ (7,286) $ 9,058,737
=========== ======== ======== ===========
</TABLE>
The following table summarizes the fair value, realized gains, and realized
losses on sales of securities available for sale:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Fair value of securities sold
at the date of sale: $4,973,892 $3,970,078 $4,992,000
Gross realized gains:
U.S. Treasury and U.S.
government agencies 8,850 1,118 5,924
Gross realized losses:
U.S. Treasury and U.S.
government agencies 789 15,621 24,139
</TABLE>
The following table shows the amortized cost and estimated fair value of
securities owned at December 31, 1996 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>
Available for sale Held to maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Due within one year or less $17,300,352 $17,333,727 $2,160,000 $2,162,973
Due after 1 year thru 5 years 28,438,193 28,595,333 561,979 567,781
Due after 5 years thru 10 years 1,704,892 1,706,084 1,241,071 1,252,472
Due after 10 years 1,368,801 1,368,801
----------- ----------- ---------- ----------
47,443,437 47,635,144 5,331,851 5,352,027
Mortgage backed securities 2,856,547 2,848,436 4,163,442 4,156,998
----------- ----------- ---------- ----------
TOTAL $50,299,984 $50,483,580 $9,495,293 $9,509,025
=========== =========== ========== ==========
</TABLE>
Investment securities with a carrying value of approximately $4,019,000 and
$2,712,000 were pledged to secure public deposits and for other purposes as
necessary or required by law at December 31, 1996 and 1995, respectively.
34
<PAGE> 35
NOTE C - LOANS
An analysis of changes in the allowance for loan losses follows:
1996 1995 1994
---- ---- ----
Balance at beginning of year $2,248,184 $2,083,216 $1,854,163
Loans charged off (375,561) (498,922) (560,809)
Recoveries 247,947 188,890 314,862
Provision charged to income 500,000 475,000 475,000
---------- ---------- ----------
BALANCE AT END OF YEAR $2,620,570 $2,248,184 $2,083,216
========== ========== ==========
The following table summarizes loans considered impaired under SFAS No. 114:
<TABLE>
<CAPTION>
December 31
1996 1995
---- ----
<S> <C> <C>
Impaired loans which, as a result of charge-offs, do not have a
specific allowance for loan loss $107,000 $221,000
Average investment in impaired loans 153,000 858,000
Interest income recognized on average impaired loans using
cash basis method of income recognition 35,000 12,000
Loans classified as impaired and recorded on a nonaccrual basis 262,000
Impaired loans for which a specific allowance for loan loss has
been allocated 41,000
Specific allowance for loan losses that have been allocated to
impaired loan 5,000
</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 $5,400,000 and $5,550,000 at December 31, 1996 and 1995,
respectively. During 1996, $3,523,000 of new loans were made and repayments
totalled $3,673,000. 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 in the opinion of management do not
involve more than normal risk of collectibility.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgages
serviced for others was $48,744,000 at December 31, 1996. Servicing loans for
others generally consists of collecting mortgage payments, maintaining escrow
accounts, disbursing payments to investors and taxing authorities, and
foreclosure processing. Loan servicing income is accounted for under the
provisions of SFAS No. 122.
Mortgage servicing rights of $35,000 were capitalized in 1996. The fair value
of these rights was $27,000 at December 31, 1996 after amortization of $1,000
and recording a $7,000 impairment valuation allowance.
Residential mortgages committed for sale were $906,000 as of December 31, 1996
and $285,000 as of December 31, 1995.
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation utilized quoted market prices, where available, to compute the
fair value of its financial instruments. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates
35
<PAGE> 36
NOTE D - CONTINUED
of future cash flows. In that regard, the derived fair value estimates cannot
be substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Certain financial
instruments and all nonfinancial instruments are excluded from the disclosure
requirements. Accordingly, the aggregate of the fair value amounts presented
are not necessarily indicative of the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in
estimating fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and due from banks and federal funds sold approximate those assets'
fair value.
Investment securities: Fair values for investment securities are based on
quoted market prices, where available. If quoted market prices are
unavailable, fair values are based on quoted market prices of comparable
instruments.
Loans: Fair values for variable rate loans that reprice at least quarterly and
have no significant change in credit risk are assumed to equal recorded book
value. Fixed rate loans are valued using present value discounted cash flow
techniques. The discount rate used in these calculations was the U.S.
government bond rate for securities with similar maturities adjusted for
servicing costs, credit loss, and prepayment risk.
Deposit liabilities: Demand, savings, and money market deposits have no stated
maturities and are payable on demand, thus their estimated fair value is equal
to their recorded book balance. Fair values for variable rate certificates of
deposit approximate their recorded book balance. Fair values for fixed-rate
certificates of deposit are determined using discounted cash flow techniques
that apply interest rates currently being offered on certificates to a schedule
of aggregated expected monthly maturities on time deposits.
Off-balance sheet instruments: Fair values for off balance sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into consideration the remaining terms of the agreements and
the counterparties' credit standings. The Bank does not charge fees for
lending commitments, thus it is not practicable to estimate the fair value of
these instruments.
The following sets forth the estimated fair value and recorded book balance of
the Corporation's financial instruments as of December 31.
<TABLE>
<CAPTION>
1996 1995
---- ----
Estimated Fair Recorded Book Estimated Fair Recorded Book
Value Balance Value Balance
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Cash and due from banks $ 11,944,739 $ 11,944,739 $ 15,299,222 $ 15,299,222
Federal funds sold 3,175,000 3,175,000 6,400,000 6,400,000
Investment securities 59,992,605 59,978,873 65,679,950 65,605,635
Net Loans 216,668,376 212,833,853 189,038,657 183,747,944
Accrued interest receivable 2,059,236 2,059,236 2,075,387 2,075,387
Deposits with no stated
maturities 149,750,963 149,750,963 145,210,153 145,210,153
Deposits with stated maturities 117,583,681 117,897,564 107,331,341 107,794,890
Accrued interest payable 593,065 593,065 623,293 623,923
</TABLE>
36
<PAGE> 37
NOTE E - FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Corporation's deferred tax assets and liabilities, included in other
assets, as of December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ---
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 644,000 $ 526,000
Deferred directors fees 293,000 242,000
Employee benefit plans 254,000 265,000
Other 11,000 1,000
---------- ----------
TOTAL DEFERRED TAX ASSETS 1,202,000 1,034,000
Deferred tax liabilities:
Tax over book depreciation 142,000 159,000
Accretion on securities 112,000 91,000
Prepaid pension expense 206,000 166,000
Net unrealized gain on available for sale securities 62,000 262,000
Other 9,000 15,000
---------- ----------
TOTAL DEFERRED TAX LIABILITIES 531,000 693,000
---------- ----------
NET DEFERRED TAX ASSETS $ 671,000 $ 341,000
========== ==========
</TABLE>
Components of the consolidated provision for income taxes are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current $1,425,000 $1,162,000 $ 984,000
Deferred credit (130,000) (97,000) (48,000)
---------- ---------- ----------
PROVISION FOR INCOME TAXES $1,295,000 $1,065,000 $ 936,000
========== ========== ==========
</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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax on pretax income $1,576,000 $1,368,000 $1,271,000
Effect of nontaxable interest income (334,000) (317,000) (324,000)
Other 53,000 14,000 (11,000)
---------- ---------- ----------
PROVISION FOR INCOME TAXES $1,295,000 $1,065,000 $ 936,000
========== ========== ==========
</TABLE>
The income tax effects on securities gains or (losses) were $3,000 in 1996,
($5,000) in 1995, and ($6,000) in 1994.
37
<PAGE> 38
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 plan's assets are primarily invested in
mutual funds.
Defined benefit pension plan costs included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 110,000 $ 83,000 $ 106,000
Interest cost on projected
benefit obligation 263,000 235,000 228,000
Actual return on plan assets (229,000) (218,000) 24,000
Net amortization and deferral 17,000 7,000 (222,000)
-------- --------- ---------
Net periodic pension cost of
defined benefit plan $ 161,000 $ 107,000 $ 136,000
========= ========= =========
</TABLE>
The following table sets forth the defined benefit pension plan funding status
and a reconciliation to the amounts recognized in the Corporation's
consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefits $3,085,000 $2,924,000
Nonvested benefits 18,000 11,000
---------- ----------
Accumulated benefit obligation 3,103,000 2,935,000
Effect of projected future compensation levels 710,000 628,000
---------- ----------
Projected benefit obligation for services rendered 3,813,000 3,563,000
Plan assets at fair value 3,409,000 3,060,000
---------- ----------
Plan assets under projected benefit obligation (404,000) (503,000)
Unrecognized cost related to plan amendment (prior service cost) 215,000 195,000
Unrecognized net loss from past experience different from that
assumed and the effect of changes in assumptions 951,000 972,000
Unrecognized net transition asset being recognized over 17 years (155,000) (177,000)
---------- ----------
Prepaid pension cost included in other assets $ 607,000 $ 487,000
========== ==========
</TABLE>
38
<PAGE> 39
NOTE F - BENEFIT PLANS (CONTINUED)
Actuarial assumptions used in determining the projected benefit obligation and
the net periodic pension cost:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<C> <C> <C> <C>
Weighted average discount rate 7.50% 7.25% 8.50%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 8.00% 8.00% 8.00%
</TABLE>
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. Compensation expense related to this Plan for 1996, 1995
and 1994 was $70,000, $85,000 and $80,000 respectively. Total shares
outstanding at December 31, 1996 and 1995 were 49,034 and 44,491 respectively,
and were included in the computation of dividends and earnings per share in
each of the respective years.
NOTE G - CONSOLIDATED STATEMENTS OF CASH FLOWS
The reconciliation of net income to net cash provided by operating activities
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Income $3,340,198 $2,958,065 $2,801,899
Reconcilement of net income to
cash provided by operations:
Provision for loan losses 500,000 475,000 475,000
Provision for depreciation 861,723 719,073 543,026
Net amortization on investment
securities 243,488 20,137 171,486
Deferred income tax benefit (130,000) (97,000) (48,000)
Decrease (increase) in:
Accrued income receivable 16,151 (315,597) 49,487
Other assets 429,217 (950,365) (164,717)
Increase in accrued interest
and other liabilities 397,389 418,920 85,101
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES $5,658,166 $3,228,233 $3,913,282
========== ========== ==========
</TABLE>
39
<PAGE> 40
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 nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in deciding
to make these commitments as it does for extending loans to customers.
Commitments to extend credit, which totalled $26,165,000 at December 31, 1996,
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,
1996, the Corporation had a total of $185,000 in outstanding standby letters
of credit.
Generally, these commitments to extend credit and letters of credit mature
within one year. The credit risk involved in these transactions is essentially
the same as that involved in extending loans to customers. The Corporation
evaluates each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Corporation upon the
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies but may include accounts receivable,
inventory, property, plant and equipment, and other income producing commercial
properties.
NOTE I - COMMITMENTS AND OTHER MATTERS
There were no material noncancelable lease commitments outstanding at December
31, 1996. Included in other expenses are FDIC insurance premiums of
approximately $2,000 in 1996, $272,000 in 1995, and $502,000 in 1994.
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 $3,800,000 at December 31, 1996 and $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, 1996,
substantially all of the Bank's assets were restricted from transfer to the
Corporation in the form of loans or advances. Consequently, Bank dividends are
the principal source of funds for the Corporation. Payment of dividends
without regulatory approval is limited to the current year's retained net
income plus retained net income for the preceding two years, less any required
transfers to capital surplus. At January 1, 1997, the amount available for
dividends without regulatory approval was approximately $2,540,000.
The Corporation maintains a self-funded medical plan under which the
Corporation is responsible for the first $30,000 per year of claims made by a
covered individual and a maximum of $397,000. Claims in excess of these
amounts are insured through an "excess loss" policy up to $1,000,000. Medical
claims are subject to a lifetime maximum of $2,000,000 per covered individual.
Certain directors and executive officers (including their families and
companies in which they have 10% or more ownership) of the Corporation and the
Bank were deposit customers of the Bank. Total deposits of these customers'
aggregated approximately $3,701,000 at December 31, 1996.
40
<PAGE> 41
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, 1996, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1996, 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
(in thousands).
<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> <C>
As of December 31, 1996:
Total capital (to risk weighted assets) $28,485 15.62% $14,592 >8.0% $18,240 >10.0%
Tier 1 capital (to risk weighted assets) 26,199 14.55 7,204 >4.0 10,807 > 6.0
Tier 1 capital (to average assets) 26,199 9.06 11,565 >4.0 14,456 > 5.0
</TABLE>
41
<PAGE> 42
NOTE K - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
1996 1995
---- ----
ASSETS
Cash on deposit at subsidiary bank $ 1,464,287 $ 932,225
Investments in subsidiaries 26,405,285 24,705,266
Premises and equipment 133,730 158,710
Other assets 3,114 10,808
----------- -----------
TOTAL ASSETS $28,006,416 $25,807,009
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 6,000 $ 2,000
Shareholders' equity 28,000,416 25,805,009
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $28,006,416 $25,807,009
=========== ===========
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income
Dividends from subsidiary $1,400,000 $1,200,000 $ 950,000
Interest income 31,962 16,364 11,735
Other 6,000 6,000 6,000
---------- ---------- ----------
TOTAL INCOME 1,437,962 1,222,364 967,735
Expenses 186,789 176,210 149,699
---------- ---------- ----------
Income before income tax benefit and equity in
undistributed earnings of subsidiary 1,251,173 1,046,154 818,036
Federal income tax benefit (51,000) (52,000) (44,000)
---------- ---------- ----------
1,302,173 1,098,154 862,036
Undistributed earnings of
subsidiaries 2,038,025 1,859,911 1,939,863
---------- ---------- ----------
NET INCOME $3,340,198 $2,958,065 $2,801,899
========== ========== ==========
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Interest on investments $ 32,027 $ 16,063 $ 11,735
Dividends from subsidiary 1,400,000 1,200,000 950,000
Cash paid to suppliers (144,180) (137,862) (176,566)
Other operating activities 51,000 52,000 34,000
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,338,847 1,130,201 819,169
INVESTING ACTIVITIES
Investment in IBT Financial Services (50,000) (150,000)
Purchase of equipment and premises (732) ( 15,420)
---------- ---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (50,000) (150,732) (15,420)
FINANCING ACTIVITIES
Cash dividends (1,189,141) (1,013,712) (943,469)
Issuance of common stock 432,356 369,211 319,228
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (756,785) (644,501) (624,241)
---------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 532,062 334,968 179,508
Cash and cash equivalents at beginning of year 932,225 597,257 417,749
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT YEAR END $1,464,287 $ 932,225 $ 597,257
========== ========== ==========
</TABLE>
42
<PAGE> 43
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
Part III incorporated by reference from the Corporation's Definitive Proxy
Statement pursuant to instruction G(3). The Corporation will file with the SEC
a definitive Proxy Statement pursuant to Schedule 14A involving the election of
directors no later than 120 days after the close of the calendar year (April
30, 1997).
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 Balance Sheets
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)
21 Subsidiaries of the Registrant
43
<PAGE> 44
ITEM 14 (CONTINUED)
23(a) Consent of Rehmann Robson, P.C., Independent
Certified Public Accountants
23(b) 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,
1996.
(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.
**** Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 26, 1996, and incorporated herein.
(1) Management's Contract or Compensatory Plan or Arrangement.
44
<PAGE> 45
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 5, 1997
------------------------------
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.
Signatures Capacity Date
---------- -------- ----
/s/ L. A. Johns Chairman of the Board March 5, 1997
- ---------------------------------- and Director
L. A. Johns
/s/ James R. Bigard Director March 5, 1997
- ----------------------------------
James R. Bigard
/s/ Frederick L. Bradford Director March 5, 1997
- ----------------------------------
Frederick L. Bradford
/s/ Gerald D. Cassel Director March 5, 1997
- ----------------------------------
Gerald D. Cassel
/s/ James C. Fabiano Director March 5, 1997
- ----------------------------------
James C. Fabiano
/s/ Ronald E. Schumacher Director March 5, 1997
- ----------------------------------
Ronald E. Schumacher
45
<PAGE> 46
Signatures Capacity Date
---------- -------- ----
/s/ Robert O. Smith Director March 5, 1997
- ----------------------------------
Robert O. Smith
/s/ Dean Walldorff Director March 5, 1997
- ----------------------------------
Dean Walldorff
/s/ David W. Hole President March 5, 1997
- ---------------------------------- Chief Executive Officer
David W. Hole and Director
(Principal Executive Officer)
/s/ Dennis P. Angner Treasurer March 5, 1997
- ---------------------------------- (Principal Financial Officer)
Dennis P. Angner
46
<PAGE> 47
IBT Bancorp
FORM 10-K
Index to Exhibits
Exhibit Form 10-K
Number Exhibit Page Number
- ------- ------- -----------
21 Subsidiaries of the Registrant 48
23(a) Consent of Rehmann Robson P.C. 49
Independent Certified Public Accountants
23(b) Consent of Andrews, Hooper & Pavlik, P.L.C. 50
Independent Certified Public Accountants
27 Financial Data Schedule 51
47
<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
48
<PAGE> 1
Exhibit 23(a)
Consent of Rehmann Robson P.C.
Independent Certified Public Accountants
IBT Bancorp
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 6, 1997, which appears on page 26 of
this Annual Report (Form 10-K) for the year ended December 31, 1996.
Rehmann, Robson, P.C.
Saginaw, Michigan
March 17, 1997
49
<PAGE> 1
Exhibit 23(b)
Consent of Andrews Hooper & Pavlik P.L.C.
We 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, with respect to the
consolidated financial statements of IBT Bancorp and subsidiaries included in
this Annual Report (Form 10-K) for the years ended December 31, 1995 and 1994.
Andrews Hooper & Pavlik, P.L.C.
Saginaw, Michigan
March 17, 1997
50
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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