<PAGE> 1
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1998
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to
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Commission File Number: 0-18415
----------------------
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
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $67,905,000 as of March 5, 1999.
The number of shares outstanding of the registrant's Common Stock ($6 par value)
was 881,885 as of March 5, 1999.
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 20, 1999
<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 two
subsidiaries: Isabella Bank and Trust and IBT Financial Services. Isabella Bank
and Trust has two wholly owned subsidiaries, IBT Agency and IBT Title. Its
principal subsidiary, Isabella Bank and Trust has fifteen banking offices
located throughout Isabella County, northeastern Montcalm County, and southern
Clare County, all of which are located in central Michigan. IBT Financial
Services is a full service retail brokerage offering stocks, bonds and mutual
funds to individuals. IBT agency is authorized to sell life insurance, casualty
insurance, and fixed and variable annuities. IBT Title provides title insurance,
abstract searches, and closes loans in Isabella County. The principal city in
which the Corporation operates is Mount Pleasant, which has a population of
approximately 24,000. Central Michigan University, with enrollment of 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 2.4% 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 1998
and 1997. The Bank offers a broad array of banking services to businesses,
institutions, and individuals. Deposit services offered include checking
accounts, savings accounts, certificates of deposit, and direct deposits.
Lending activity includes loans made pursuant to lines of credit, real estate
loans, consumer loans, student loans, and charge card loans. Other financial
related products include trust services, title insurance, stocks, investment
securities, bond, mutual fund sales, 24 hour banking service locally and
nationally through shared automatic teller machines, and safe deposit box
rentals.
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<PAGE> 3
LENDING
The Bank limits lending activity to its local market and has not purchased any
loans from the secondary market. The Bank does not make loans to fund leveraged
buyouts, has no foreign corporate or government loans, and no corporate debt
securities. The general lending philosophy of the Bank is to avoid
concentrations to individuals and business segments. The following table sets
forth the composition of the Bank's loan portfolio, as of December 31, 1998.
<TABLE>
<CAPTION>
LOANS BY MAJOR LENDING CATEGORY:
(in thousands) Amount %
------ -----
<S> <C> <C>
Real Estate:
One to four family residential $111,114 45.0
Commercial and other 38,341 15.6
Construction & land development 16,098 6.5
-------- -------
Total Real Estate 165,553 67.1
Commercial:
Farmland & agricultural production 10,750 4.3
State and political subdivisions 4,842 2.0
Commercial and other 29,325 11.9
-------- -------
Total Commercial 44,917 18.2
Personal:
Credit cards 1,987 0.8
Student loans 1,043 0.4
Other 33,208 13.5
-------- -------
Total Personal 36,238 14.7
-------- -------
TOTAL $246,708 100.0
======== =======
</TABLE>
First and second residential mortgages are the single largest category of loans
(45.0% of total loans). The Bank offers 3 and 5 year fixed rate balloon
mortgages with a maximum 30 year amortization, and 15 and 30 year amortized
fixed rate loans. Fixed rate loans with an amortization greater than 15 years
are sold upon origination to the Federal Home Loan Mortgage Association. Fixed
rate residential mortgage loans with an amortization of 15 years or less may be
held for future sale or sold upon origination. Factors used in determining when
to sell these mortgages include management's judgement about the direction of
interest rates, the Corporation's need for fixed rate assets in the management
of its interest rate sensitivity, and overall loan demand. The Corporation has a
policy that these loans may not exceed 5% of its total assets.
The Bank's lending policies generally limit the maximum loan-to-value ratio on
residential mortgages to 95% of the lower of appraised value of the property or
the purchase price, with the condition that private mortgage insurance is
required on loans with loan-to-value ratios in excess of 80%. The majority of
the Bank's loans have a loan-to-value ratio of
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<PAGE> 4
less than 80%. When underwriting residential real estate loans, the Bank
evaluates the borrower's ability to make monthly payments and the value of the
property securing the loan. The Bank requires that the payment of principal,
interest, taxes, and hazard insurance does not exceed 28% of a borrower's gross
income and that all debt servicing does not exceed 36% of income. In addition to
the above requirements, the Bank reviews credit reports and verifies employment,
income, and financial information. Appraisals are performed by independent
appraisers. The Bank requires an escrow account for taxes and insurance on all
loans with loan-to-value in excess of 80%. All mortgage loan requests are
reviewed by a mortgage loan committee; loans in excess of $200,000 require the
approval of either the Bank's Board of Directors or its loan committee.
Construction and land development loans consisted mostly of 1 to 4 family
residential properties. These loans have a 6 to 9 month maturity and are made
using the same underwriting criteria as residential mortgages. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Construction loans are either converted to permanent loans at the completion of
construction or are paid off from financing through another financial
institution.
Commercial lending, which includes loans for farmland and agricultural
production, state and political subdivisions, commercial real estate, and
commercial loans equaled 18.2% of the Bank's loan portfolio at December 31,
1998. 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 $200,000. Loan requests in excess of $200,000 require the
approval of either the Bank's Board of Directors or its loan committee.
Consumer loans granted by the Bank include automobile loans, 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 5
years; except home improvement loans, which are amortized for up to 10 years.
The Bank places underwriting emphasis on a borrower's ability to pay rather than
collateral value. Except for student loans, no installment loans are sold in the
secondary market. All student loans are sold in the secondary market upon
reaching a payout status.
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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 subsidiaries, IBT Agency and IBT Title, are licensed
insurance agencies and are subject to regulation by the Michigan Insurance
Bureau.
PERSONNEL
As of December 31, 1998, the Corporation had one full-time employee, the Bank
had 182 full-time equivalent employees, IBT Financial Services had three
full-time employees, IBT Agency has a dual employee arrangement with IBT
Financial Services, and IBT Title had five full-time employees. The Corporation
and the Bank provide group life, health, accident, disability and other
insurance programs for employees and a number of other employee benefit
programs. The Corporation believes its relationship with its employees to be
good.
LEGAL PROCEEDINGS
There are various claims and law suits in which the Bank is periodically
involved, such as claims to enforce liens, condemnation proceedings on making
and servicing of real property loans and other issues incident to the Bank's
business. However, neither the Corporation nor the Bank is involved in any
material pending litigation.
REGULATION
The earnings and growth of the banking industry and therefore the earnings of
the Corporation and the earnings of the Bank are affected by the credit policies
of monetary authorities, including the Federal Reserve System. An important
function of the Federal Reserve System is to regulate the national supply of
bank credit in order to combat recession and curb inflationary pressures. Among
the instruments of monetary policy used by the Federal Reserve to implement
these objectives are open market operations in U.S. Treasury securities, changes
in the discount rate on member bank borrowing, and
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<PAGE> 6
changes in reserve requirements against member bank deposits. These methods are
used in varying combinations to influence overall growth of bank loans,
investments and deposits and may also affect interest rates charged on loans or
paid for deposits. The monetary policies of the Federal Reserve System have had
a significant effect on the operating results of commercial banks in the past
and are expected to continue to do so in the future. The effect of such policies
upon the future business and earnings of the Corporation and the Bank cannot be
predicted.
THE CORPORATION
The Corporation, as a bank holding company, is regulated under the Bank Holding
Company Act of 1956, as amended ("BHC Act"), and is subject to the supervision
of the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). The Corporation is registered as a bank holding company with the
Federal Reserve Board and is required to file with the Federal Reserve Board an
annual report and such additional information as the Federal Reserve Board
requires. The Federal Reserve Board may also make inspections and examinations
of the Corporation and its subsidiaries.
Under the BHC Act, bank holding companies such as the Corporation are
prohibited, with certain limited exceptions, from engaging in activities other
than those of banking or of managing or controlling banks and from acquiring or
retaining direct or indirect ownership or control of voting shares or assets of
any company which is not a bank or bank holding company, other than subsidiary
companies furnishing services to or performing services for its subsidiaries,
and other subsidiaries engaged in activities which the Federal Reserve Board
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. Under the BHC Act, bank holding companies
may not (subject to certain limited exceptions) directly or indirectly acquire
the ownership or control of more than 5% of any class of voting shares or
substantially all of the assets of any company, including a bank or bank holding
company, without the prior written approval of the Federal Reserve Board.
The BHC Act prohibits the Federal Reserve Board (subject to certain limited
exceptions) from approving the acquisition, by a bank holding company, such as
the Corporation, the principal banking operations of which are conducted in one
state, of control of a bank or bank holding company conducting its principal
banking operations in another state, unless the statutory laws of the state in
which are conducted the principal banking operations of the bank holding company
or bank to be acquired, explicitly authorize such an acquisition. Under existing
Michigan law and with the approval of the Commissioner of the Michigan Financial
Institutions Bureau, a Michigan-based bank and bank holding company (such as the
Corporation) may now be acquired by a bank holding company located in any state,
if the laws of such state would grant Michigan-based banks or bank holding
companies the right to acquire one or more banks or bank holding companies
located in such state under conditions which are not unduly restrictive. Under
the Michigan statute, the Commissioner of the Michigan Financial Institutions
Bureau must not approve any such transaction without first determining among
other things that the other state's law satisfies the reciprocity requirement
imposed by the Michigan statute.
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<PAGE> 7
Most states have adopted legislation that permits out-of-state bank holding
companies to acquire local banks and bank holding companies subject, in most
cases, to reciprocity requirements.
Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financing strength to its subsidiary bank and to commit resources to
support its subsidiary. This support may be required at times when, in the
absence of such Federal Reserve Board policy, the Corporation would not
otherwise be required to provide it.
Under Michigan law, if the capital of a Michigan state chartered bank (such as
the Corporation's bank subsidiary) has become impaired by losses or otherwise,
the Commissioner of the Michigan Financial Institutions Bureau may require that
the deficiency in capital be met by assessment upon the Bank's stockholders pro
rata on the amount of capital stock held by each, and if any such assessment is
not paid by any stockholder within 30 days of the date of mailing of notice
thereof to such stockholder, cause the sale of the stock of such stockholder to
pay such assessment and the costs of sale of such stock.
Any capital loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment. This priority would apparently
apply to guarantees of capital plans under the Federal Deposit Insurance
Corporation Improvement Act of 1991.
Certain additional information concerning regulatory guidelines for capital
adequacy and other regulatory matters is presented herein under the caption
"Capital" on page 23 and "Note I - Commitments and Other Matters" and "Note J -
Regulatory Capital Matters" on pages 45 and 46, respectively.
ISABELLA BANK & TRUST
The Bank is subject to regulation and examination primarily by the Michigan
Financial Institutions Bureau. As an insured state bank, which is a member of
the Federal Reserve Bank of Chicago, the subsidiary is also subject to
regulation and examination by the FDIC and the Federal Reserve.
The agencies and federal and state law extensively regulate various aspects of
the banking business including, among other things, permissible types and
amounts of loans, investments and other activities, capital adequacy, branching,
interest rates on loans and on deposits and the safety and soundness of banking
practices.
Banking laws and regulations also restrict transactions by insured banks owned
by a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal shareholders, officers, directors and their affiliates, and
investments by the subsidiary
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<PAGE> 8
banks in the shares or securities of the parent holding company (or any of the
other non-bank or bank affiliates), acceptance of such share or securities as
collateral security for loans to any borrower.
The Bank is also subject to legal limitations on the frequency and amount of
dividends that can be paid to the Corporation. For example, a Michigan state
bank may not declare a cash dividend or a dividend in kind except out of net
profits then on hand after deducting all losses and bad debts, and then only if
it will have a surplus amounting to not less than 20% of its capital after the
payment of the dividend. Moreover, a Michigan state bank may not declare or pay
any cash dividend or dividend in kind until the cumulative dividends on its
preferred stock, if any, have been paid in full. Further, if the surplus of a
Michigan state bank is at any time less than the amount of its capital, before
the declaration of a cash dividend or dividend in kind, it must transfer to
surplus not less than 10% of its net profits for the preceding half-year (in the
case of quarterly or semi-annual dividends) or the preceding two consecutive
half-year periods (in the case of annual dividends).
The payment of dividends by the Corporation and the Bank is also affected by
various regulatory requirements and policies, such as the requirement to
maintain adequate capital above regulatory guidelines. Recently enacted
legislation will impose further restrictions on the payment of dividends by
insured banks which fail to meet specified capital levels. The FDIC may prevent
an insured bank from paying dividends if the bank is in default of payment of
any assessment due to the FDIC. In addition, payment of dividends by a bank may
be prevented by the applicable federal regulatory authority if such payment is
determined, by reason of the financial condition of such bank, to be an unsafe
and unsound banking practice. The Federal Reserve Board and the FDIC have issued
policy statements providing that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
These regulations and restrictions may limit the Corporation's ability to obtain
funds from the Bank for its cash needs, including payment of dividends and
operating expenses.
The activities and operations of the Bank are also subject to other federal and
state laws and regulations, including usury and consumer credit laws, the
Federal Trust-in-Lending Act, Truth-in-Saving and Regulation Z of the Federal
Reserve Board and the Federal Bank Merger Act.
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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 15 facilities and leases one. IBT Title owns one
facility. The Corporation's facilities current, planned, and best use is for
conducting its current activities with the exception of approximately 8% of the
main office, and 45% of the Clare office, which is leased to tenants. In
management's opinion, each facility has excess capacity and is in good
condition. The following table sets forth the location of the Corporation's
offices, as well as certain additional information relating to those offices as
of December 31, 1998.
<TABLE>
<CAPTION>
Year Approximate Net
Facility Square Book Value
Opened Footage 12/31/98 (1)
-------- ----------- ------------
<S> <C> <C> <C>
Isabella Bank and Trust:
Main Office:
200 East Broadway (2)
Mt. Pleasant, Michigan 1903 27,640 $224,850
Main Office Extension:
Customer Service Center
139 East Broadway
Mt. Pleasant, Michigan 1985 16,736 535,273
Isabella County Branch Offices:
1416 East Pickard (3)
Mt. Pleasant, Michigan 1983 1,450 519,825
2133 South Mission (6)
Mt. Pleasant, Michigan 1976 1,560 413,277
200 South University (4)
Mt. Pleasant, Michigan 1964 1,795 61,499
1402 West High
Mt. Pleasant, Michigan 1973 2,150 49,734
401 East Main Street (5)
Blanchard, Michigan 1911 6,561 20,623
500 East Wright Avenue
Shepherd, Michigan 1980 1,830 191,935
3388 N. Woodruff Road
Weidman, Michigan 1975 5,400 81,967
</TABLE>
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<TABLE>
<CAPTION>
Year Approximate Net
Facility Square Book Value
Opened Footage 12/31/98 (1)
-------- ----------- ------------
<S> <C> <C> <C>
1867 Winn Road
Beal City, Michigan 1977 1,100 $ 52,484
Montcalm County Branch Office:
313 W. Bridge Street (6)
Six Lakes, Michigan 1966 1,527 437,541
Clare County Branch Offices:
532 N. McEwan Street
Clare, Michigan 1993 7,300 463,351
1125 N. McEwan Street
Clare, Michigan 1997 525 424,350
Mecosta County Branch Offices:
220 W. Wheatland Street
Remus, Michigan 1998 4,273 318,855
240 E. Northern Avenue
Barryton, Michigan 1998 4,273 265,030
8529 - 100th Avenue
Stanwood, Michigan 1998 2,665 28,437
IBT Title:
209 E. Broadway
Mt. Pleasant, Michigan 1998 2,640 232,222
</TABLE>
(1) includes land and buildings
(2) substantially remodeled in 1986
(3) substantially remodeled in 1990
(4) partially remodeled in 1986 and 1988
(5) substantially remodeled in 1976 and partially
remodeled in 1986
(6) substantially remodeled in 1992 and 1996
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ITEM 3. LEGAL PROCEEDINGS
The Corporation and the Bank are not involved in any material pending legal
proceed ings. 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 1998 to a vote of
security holders through the solicitation of proxies or otherwise.
EXECUTIVE OFFICERS OF REGISTRANT
Pursuant to instruction G(3), the following information is included as an
unnumbered item under Part I of this report in lieu of being included in the
Proxy Statement for the Annual Shareholders Meeting to be held on April 20,
1999.
The names, ages, corporate positions, and years of service of the executive
officers of the Corporation are as follows:
<TABLE>
<CAPTION>
YEARS OF
NAME AGE POSITION SERVICE
---- --- -------- -------
<S> <C> <C> <C>
David W. Hole 61 President and CEO 39
Mary Ann Breuer 59 Secretary 39
Dennis P. Angner 43 Treasurer 15
</TABLE>
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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, 1997 through December 31, 1998 there were, so far as management knows, 59
sales of the Corporation's common stock. These sales involved 9,024 shares, as
adjusted for a 10 percent stock dividend declared in December 1997 paid in March
of 1998. 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 $77.00
per share in both the third and fourth quarters of 1998, and the lowest price
was $45.45 per share in the first and second quarters of 1997. The following is
a summary of all known transfers since January 1, 1997. All of the information
has been adjusted to reflect the stock dividend referred to above.
<TABLE>
<CAPTION>
Number of Number of Low High
Date Sales Shares Bid Bid
---- ----- ------ --- ---
<S> <C> <C> <C> <C>
1997:
First Quarter 9 582 $ 45.45 $ 50.00
Second Quarter 9 800 45.45 57.27
Third Quarter 7 701 57.27 59.09
Fourth Quarter 8 1,525 59.09 59.09
1998:
First Quarter 3 225 $ 59.09 $ 59.09
Second Quarter 5 2,133 72.00 72.00
Third Quarter 11 2,178 72.00 77.00
Fourth Quarter 7 880 77.00 77.00
</TABLE>
The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10 percent stock dividend.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
First Quarter $0.25 $0.23
Second Quarter 0.25 0.23
Third Quarter 0.25 0.23
Fourth Quarter 0.80 0.79
----- -----
TOTAL $1.55 $1.48
===== =====
</TABLE>
IBT Bancorp's authorized stock consists of 4,000,000 shares, of which 881,573
shares are issued as of December 31, 1998 (after the stock dividend paid March
2, 1998) with a par value of $6 per share. As of year end 1998, there were 870
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>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total interest income $ 25,799 $ 22,730 $ 21,698 $ 19,852 $ 17,991
Net interest income 13,317 12,196 11,741 10,855 10,280
Provision for loan losses 321 386 500 475 475
Net income 3,634 3,609 3,340 2,958 2,802
BALANCE SHEET DATA:
End of year assets $ 388,783 $318,731 $298,742 $281,505 $ 263,203
Daily average assets 358,207 303,088 289,308 265,860 255,399
Daily average deposits 322,297 270,311 259,240 238,761 230,598
Daily average loans/net 226,997 213,757 196,783 177,109 159,556
Daily average equity 32,349 29,591 26,954 24,313 22,316
PER SHARE DATA: (1)
Net income $ 4.15 $ 4.17 $ 3.90 $ 3.50 $ 3.36
Cash dividends 1.55 1.48 1.38 1.20 1.13
Book value (at year end) 39.16 35.52 32.49 30.33 26.81
FINANCIAL RATIOS:
Shareholders' equity to assets 8.88% 9.71% 9.37% 9.17% 8.56%
Net income to average equity 11.23 12.20 12.39 12.17 12.56
Cash dividend payout to net income 37.64 35.38 35.60 34.27 33.67
Net income to average assets 1.01 1.19 1.15 1.11 1.10
</TABLE>
(1) Retroactively restated for the 10% stock dividend declared on December 15,
1997, paid March 2, 1998.
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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 IBT Bancorp (the Corporation). This discussion and
analysis is intended to provide a better understanding of the financial
statements and statistical data included elsewhere in the Annual Report.
TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY;
INTEREST RATE AND INTEREST DIFFERENTIAL
(Dollars in thousands)
The following schedules present the daily average amount outstanding for each
major category (at historical cost) of interest earning assets, nonearning
assets, interest bearing liabilities, and noninterest bearing liabilities. This
schedule also presents an analysis of interest income and interest expense for
the periods indicated. All interest income is reported on a fully taxable
equivalent (FTE) basis using a 34% tax rate. Nonaccruing loans, for the purpose
of the following computations, are included in the average loan amounts
outstanding.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
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 $229,966 $20,112 8.75% $216,612 $18,865 8.71% $199,277 $17,690 8.88%
Taxable investment securities 71,104 4,305 6.05 42,438 2,688 6.33 46,505 3,280 7.05
Nontaxable investment securities 18,677 1,318 7.06 14,053 967 6.88 15,524 788 5.08
Federal funds sold 9,828 520 5.29 9,700 524 5.40 7,983 419 5.25
Other 1,610 117 7.27 1,441 108 7.49 431 27 6.26
-------- ------- ---- -------- --------- ---- -------- ------- -----
TOTAL EARNING ASSETS 331,185 26,372 7.96 284,244 23,152 8.15 269,720 22,204 8.23
NONEARNING ASSETS:
Allowance for loan losses (2,969) (2,855) (2,494)
Cash and due from banks 12,984 10,380 11,136
Premises and equipment 7,044 5,727 5,449
Accrued income and other assets 9,963 5,592 5,497
-------- -------- --------
TOTAL ASSETS $358,207 $303,088 $289,308
======== ======== ========
INTEREST BEARING LIABILITIES:
Interest bearing demand deposits $ 47,364 1,259 2.66 $38,875 1,044 2.69 $ 39,876 1,091 2.74
Savings deposits 85,541 2,738 3.20 70,517 2,291 3.25 68,667 2,165 3.15
Time deposits 146,417 8,485 5.80 122,525 7,199 5.88 114,279 6,701 5.86
------- ------- ---- -------- ------- ---- -------- ----- ----
TOTAL INTEREST BEARING
LIABILITIES 279,322 12,482 4.47 231,917 10,534 4.54 222,822 9,957 4.47
NONINTEREST BEARING LIABILITIES
AND SHAREHOLDERS' EQUITY:
Demand deposits 42,975 38,394 36,418
Other 3,561 3,186 3,114
Shareholders' equity 32,349 29,591 26,954
-------- -------- --------
TOTAL LIABILITIES AND EQUITY $358,207 $303,088 $289,308
======== ======== ========
NET INTEREST INCOME (FTE) $13,890 $12,618 $12,247
======= ======= =======
NET YIELD ON INTEREST EARNING ASSETS (FTE) 4.19% 4.44% 4.54%
==== ==== ====
</TABLE>
14
<PAGE> 15
RESULTS OF OPERATIONS
The Corporation achieved record net income for the twelfth consecutive year in
1998 with earnings of $3,634,000, versus $3,609,000 in 1997. Earnings per share
was $4.15, a decrease of $0.02 from 1997 and a $0.25 increase over 1996.
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 1.01%
in 1998, 1.19% in 1997, and 1.15% in 1996. 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
11.23% in 1998, 12.20% in 1997, and 12.39% in 1996.
The Corporation's subsidiary bank, Isabella Bank and Trust, completed the
purchase of three branches from Old Kent Bank on March 31, 1998. The purchase
included approximately $43.1 million in deposits and $233,000 in loans. On July
31, 1998, IBT Title, a wholly owned subsidiary of Isabella Bank and Trust,
acquired Isabella County Abstract Company. The acquisition included premises,
equipment, and an abstract title plant. The purchase price was less than 1% of
the Corporation's assets. The Results of Operations and Changes in Financial
Position include the operating results from the dates of purchase.
NET INTEREST INCOME
The Corporation derives the majority of its income from interest earned on loans
and investments, while its most significant expense is the interest cost
incurred for funds used. Net interest income is the amount by which interest
income on earning assets exceeds the interest cost of deposits. Net interest
income is influenced by changes in the balance and mix of assets and
liabilities, and market interest rates. Management exerts some control over
these factors; however, Federal Reserve monetary policy and competition have a
significant impact. Interest income includes loan fees of $848,000 in 1998,
$599,000 in 1997, and $754,000 in 1996. 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>
1998 Compared to 1997 1997 Compared to 1996
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 $ 1,168 $ 79 $ 1,247 $ 1,515 $ (340) $ 1,175
Taxable investment securities 1,740 (123) 1,617 (273) (319) (592)
Nontaxable investment securities 326 25 351 (80) 259 179
Federal funds sold 7 (11) (4) 92 13 105
Other 12 (3) 9 75 6 81
------- ------- ------- ------- ------- -------
TOTAL CHANGES IN INTEREST INCOME 3,253 (33) 3,220 1,329 (381) 948
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits 226 (11) 215 (27) (20) (47)
Savings deposits 481 (34) 447 59 67 126
Time deposits 1,386 (100) 1,286 484 14 498
------- ------- ------- ------- ------- -------
TOTAL CHANGES IN INTEREST EXPENSE 2,093 (145) 1,948 516 61 577
NET CHANGE IN FTE NET INTEREST INCOME $ 1,160 $ 112 $ 1,272 $ 813 $ (442) $ 371
======= ======= ======= ======= ======= =======
</TABLE>
15
<PAGE> 16
As shown in Tables 1 and 2, when comparing year ending December 31, 1998 to
1997, fully taxable equivalent (FTE) net interest income increased $1.27 million
or 10.1%. An increase of 16.5% in average interest earning assets provided $3.25
million of FTE interest income. The majority of this growth was funded by a
20.4% increase in interest bearing deposits, resulting in $2.09 million of
additional interest expense. Overall, changes in volume resulted in $1.16
million in additional FTE interest income. The average FTE interest rate earned
on assets decreased by 0.19%, decreasing FTE interest income by $33,000, and the
average rate paid on deposits decreased by 0.07%, decreasing interest expense by
$145,000. The net change related to interest rates earned and paid was a
$112,000 increase in FTE net interest income.
The Corporation's FTE net interest yield as a percentage of average earning
assets equaled 4.19% during 1998 versus 4.44% in 1997. The 0.25% decrease in the
net interest yield was primarily a result of the Bank's purchase of the Old Kent
branches. The net proceeds (due to the assumption of the deposit liabilities)
were invested in investment securities. The overall net FTE interest yield on
these additional funds was approximately 2.20%, and lowered the yield by an
estimated 0.18% in 1998. Other factors affecting the Corporation's net interest
margin are the increasing reliance on higher cost deposits such as Certificates
of Deposit and money market accounts to fund asset growth, and intense rate
competition for new commercial and installment loans. Management expects the
Corporation's reliance on higher cost deposits to fund asset growth to continue
and for rates charged for loans in relation to deposit costs to continue
declining.
In addition to the impact of changes in asset and liability mix on the
Corporation's interest income, changes in interest rates also exert considerable
influence. Management expects interest rates to decline during 1999. 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 be further decreased by lower
rates. Due to the many factors that can affect net interest income, interest
income earned cannot be predicted with any certainty.
Net interest income increased $371,000 to $12.6 million in 1997 from $12.2
million in 1996. As shown in Tables 1 and 2, in 1996 (FTE) interest income
increased $1,329,000, from a 5.4% increase in the volume of average earning
assets. The growth of interest earning assets was funded primarily by a 4.1%
increase in interest bearing deposits that resulted in additional interest
expense of $516,000. Overall, the Corporation earned an additional $813,000 in
FTE interest income as a result of volume. The average rate earned in 1997
decreased by 0.08%, decreasing FTE interest income by $381,000 and the average
rate paid on deposits increased by 0.07%, increasing interest expense by
$61,000. The net result of increased interest rates earned and paid reduced FTE
net interest income by $442,000.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Total loans outstanding represent 70.48% of the
Corporation's total year end deposits, and is the Corporation's single largest
concentration of risk. Inevitably, poor operating performance may result from
the failure to control credit risk. Given the importance of maintaining sound
underwriting practices, both the Board of Directors and senior management spend
a large portion of their time and effort in loan review. The provision for loan
losses is the amount added to the allowance for loan losses on a monthly basis.
The allowance for loan losses is management's estimation of potential future
losses inherent in the loan portfolio, and is maintained at a level considered
by management to be adequate to absorb potential future losses. Evaluation of
the allowance for loan losses and the provision for loan losses is based on a
continuous review of the changes in the type and volume of the loan portfolio,
reviews of specific loans to evaluate their collectibility, recent loan loss
history, financial condition of borrowers, the amount of impaired loans, overall
economic conditions, and other factors. This evaluation is inherently subjective
as it requires material estimates, including the amounts and timing of future
cash flows expected to be received on impaired loans that may be subject to
significant change.
As shown in Table 3, total loans outstanding increased 13.6% in 1998 and 0.8% in
1997. The provision for loan losses in 1998 was $321,000, a $65,000 decrease
from 1997 and a $179,000 decrease from 1996. The principal reason for the
decline in 1998 was a $309,000 decrease in net charged-off loans. The allowance
for loan losses as a percentage of total outstanding loans at year end 1998 was
1.21% compared to 1.23% at December 31, 1997. The Corporation's net charged off
loans as a percentage of average loans was 0.01% in 1998 and 0.15% in 1997.
16
<PAGE> 17
TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE
(Dollars in thousands)
The following is a summary of loan balances at the end of each period and their
daily average balances, changes in the allowance for possible loan losses
arising from loans charged off and recoveries on loans previously charged off,
and additions to the allowance which have been expensed.
<TABLE>
<CAPTION>
December 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding
at the end of year $246,708 $217,249 $215,455 $185,996 $173,939
======== ======== ======== ======== ========
Average amount of loans
outstanding for the year $229,966 $216,612 $199,277 $179,355 $161,669
======== ======== ======== ======== ========
Summary of changes in allowance:
Allowance for loan losses - January 1 $ 2,677 $ 2,621 $ 2,248 $ 2,083 $ 1,854
Loans charged off:
Commercial and agricultural 42 230 166 334 375
Real estate mortgage 70 181 36 4 5
Installment 152 164 173 161 181
-------- -------- -------- -------- --------
TOTAL LOANS CHARGED OFF 264 575 375 499 561
Recoveries:
Commercial and agricultural 128 124 146 109 247
Real estate mortgage 13 2 -- -- 2
Installment 102 119 102 80 66
-------- -------- -------- -------- --------
TOTAL RECOVERIES 243 245 248 189 315
-------- -------- -------- -------- --------
Net charge offs 21 330 127 310 246
Provision charged to income 321 386 500 475 475
-------- -------- -------- -------- --------
ALLOWANCE FOR LOAN LOSSES - DECEMBER 31 $ 2,977 $ 2,677 $ 2,621 $ 2,248 $ 2,083
======== ======== ======== ======== ========
Ratio of net charge offs during the
year to average loans outstanding 0.01% 0.15% 0.06% 0.17% 0.15%
==== ==== ==== ==== ====
Ratio of the allowance for loan losses
to loans outstanding at year end 1.21% 1.23% 1.22% 1.21% 1.20%
==== ==== ==== ==== ====
</TABLE>
As shown in Table 4, the percentage of loans classified as nonperforming by the
Corporation as of December 31, 1998 and 1997 equaled 0.38% and 0.24% of total
loans, respectively. The Bank's policy, including a loan considered impaired
under SFAS No. 118, is to transfer a loan to nonaccrual status whenever it is
determined that interest should be recorded on the cash basis instead of the
accrual basis because of a deterioration in the financial position of the
borrower, it is determined that payment in full of interest or principal cannot
be expected, or the loan has been in default for a period of 90 days or more,
unless it is both well secured and in the process of collection. Restructured
loans are loans whose terms have been renegotiated to provide a reduction or
deferral of interest or principal because of a deterioration in the financial
position of the borrower.
17
<PAGE> 18
TABLE 4. NONPERFORMING LOANS
(Dollars in thousands)
The following loans are all the credits which require classification for state
or federal regulatory purposes.
<TABLE>
<CAPTION>
December 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 99 $292 $ -- $262 $347
Accruing loans past due 90 days or more 847 235 441 590 183
Restructured loans -- -- 107 -- --
---- ---- ---- ---- ----
TOTAL NONPERFORMING LOANS $946 $527 $548 $852 $530
==== ==== ==== ==== ====
</TABLE>
As of December 31, 1998, 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, 1998. Management has allocated, as shown in Table 5, the allowance
for loan losses to the following categories: 34.1% to commercial and
agricultural loans; 29.0% to real estate loans; 29.2% to installment loans; and
7.7% 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
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
% of Each % of Each % of Each % of Each % of Each
Category Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $1,014 18.21% $1,093 17.02% $1,110 18.60% $1,079 18.06% $ 915 19.01%
Real estate mortgage 864 67.10 584 66.02 384 64.05 278 62.22 249 60.91
Installment 869 14.69 782 16.96 928 17.35 707 19.72 706 20.08
Impaired loans --- --- --- --- --- --- 5 --- 50 ---
Unallocated 230 --- 218 --- 199 --- 179 --- 163 ---
------ ------- ------ ------ ------ ------ ------ ------ ------ ------
TOTAL $2,977 100.00% $2,677 100.00% $2,621 100.00% $2,248 100.00% $2,083 100.00%
====== ======= ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
18
<PAGE> 19
NONINTEREST INCOME
Noninterest income consists of trust fees, deposit service charges, fees for
other financial services, gain on the sale of mortgage loans, and gains and
losses on investment securities available for sale. There was an $851,000
increase in fees earned from these sources during 1998. Significant individual
account changes during 1998 include $320,000 of revenue from IBT Title, a
$49,000 increase in brokerage commissions, a $38,000 increase in trust income, a
$64,000 increase in gains on the sale of investment securities available for
sale, and a $214,000 increase in gains on the sale of mortgage loans.
Included in noninterest income is a $345,000 gain from the sale of $55.8 million
in mortgages during 1998 versus a $131,000 gain on the sale of $24.8 million for
1997. The Corporation has established a policy that all 30-year fixed rate
mortgage loans will be sold. During 1998, 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 1998 and 1997 was
calculated under the provisions of SFAS No. 125.
Noninterest income decreased $90,000 or 4.1% in 1997 when compared to 1996. The
most significant change was a $295,000 decrease in automatic teller machine
fees. In December 1997, 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 was partially offset by decreases in ATM
operating costs, depreciation expense, and additional interest income due to a
substantial decrease in vault cash. Other changes in noninterest income included
a $37,000 increase in brokerage commissions, a $41,000 increase in trust fees, a
$42,000 increase in overdraft fees, a $52,000 gain on the sale of ATM equipment,
and a $38,000 increase in gains on the sale of residential real estate
mortgages.
NONINTEREST EXPENSES
Noninterest expense increased $2.13 million or 24.2% during 1998. The purchase
of the Old Kent branches and Isabella County Abstract had a significant impact
on these expenses. Specifically, of the $2.13 million increase in noninterest
expense, $1.30 million is related to the conversion and operations of these
subsidiaries. Excluding these costs, noninterest expense would have increased
approximately $830,000 or 9.4%.
The largest component of noninterest expense is salaries and employee benefits,
which increased $1.15 million or 23.8%. Salary expenses related to the
acquisitions are estimated to equal $575,000. The remaining increase is related
to normal merit and promotional salary increases, and to an across the board
increase in hourly wages to retain its current technical and clerical employees
and to attract qualified workers in a tight labor market.
Occupancy and furniture and equipment expenses increased $288,000 or 18.6% in
1998. Approximately half of the increase is related to the acquisitions. Other
significant changes include automatic teller machine operating costs, equipment
depreciation, and computer expenses. All other operating expenses increased
$691,000, a 28.6% increase. The deposit premium amortization accounted for
$433,000 of the increase. Telephone, printing and office supplies, postage, and
loan acquisition expenses accounted for the majority of the remaining increase.
Noninterest expense increased $15,000 or 0.2% in 1997 when compared with 1996.
Salaries and employee benefits increased $241,000 or 5.2%. The majority of this
increase was related to normal merit and promotional salary increases and
additional staff. Occupancy and furniture and equipment expenses decreased
$243,000 or 13.6% in 1997. The majority of this decrease was associated with
reduced operating costs in the following expense categories: automatic teller
machine, computer operations, and furniture and equipment depreciation. Other
noninterest expenses increased $17,000, or 0.7%. The most significant increases
were in FDIC premiums and other real estate expenses.
FEDERAL INCOME TAXES
Federal income tax expense for 1998 was $1,371,000 or 27.4% of pre-tax income
compared to $1,490,000 or 29.2% of pre-tax income in 1997 and $1,295,000 or
27.9% in 1996. The decrease in income tax expense as a percentage of income in
1998 is attributable to an increase in non taxable municipal income as a
percentage of the Corporation's pretax net income. A reconcilement of federal
income tax expense and the amount computed at the federal statutory rate of 34%
is found in Note E, Federal Income Taxes, in the accompanying consolidated
financial statements.
19
<PAGE> 20
ANALYSIS OF CHANGES IN THE STATEMENT OF CONDITION
Total assets were $388.8 million at December 31, 1998, an increase of $70.1
million or 22.0% over year end 1997. Asset growth was primarily funded by a
$65.5 million increase in deposits and a $3.6 million increase in shareholders'
equity.
A discussion of changes in balance sheet amounts by major categories follows.
INVESTMENT SECURITIES
The primary objective of the Corporation's investing activities is to provide
for safety of the principal invested. Secondary considerations include the need
for earnings, liquidity, and the Corporation's overall exposure to changes in
interest rates. During 1998, the Corporation's net holding of investment
securities increased $31.5 million. Table 6 shows the carrying value of
investment securities available for sale and held to maturity. Securities held
to maturity, which are stated at amortized cost, consist mostly of local
municipal bond issues, 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: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury and U.S. government agencies $59,630 $42,682 $37,905
States and political subdivisions 27,842 14,709 12,579
Commercial paper 2,014 -- --
------- ------- -------
TOTAL $89,486 $57,391 $50,484
======= ======= =======
Held to maturity
U.S. Treasury and U.S. government agencies $ 1,425 $ 3,306 $ 4,163
States and political subdivisions 3,509 2,388 3,963
Other securities 1,614 1,466 1,369
------- ------- -------
TOTAL $ 6,548 $ 7,160 $ 9,495
======= ======= =======
</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 and Federal Home Loan Bank stock, which are
restricted investments and have no contractual maturity. The Corporation has a
policy prohibiting investments in securities that it deems are unsuitable due to
their inherent credit or market risks. Prohibited investments include stripped
mortgage backed securities, collateralized mortgage obligations, zero coupon
bonds, nongovernment agency asset backed securities, and structured notes.
20
<PAGE> 21
The following is a schedule of maturities of each category of investment
securities (at carrying value) and their weighted average yield as of December
31, 1998. 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 After Ten
Year but Years but Years or
Within Within Within Investments with no
One Year Five Years Ten Years contractual maturity
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Treasury and U.S.
government agencies $12,179 5.86% $44,166 6.03% $ 3,286 5.94% $ --- ---
States and political
subdivisions 2,919 7.78 16,398 8.26 8,193 7.16 331 9.09%
Commercial paper 2,014 5.71 --- --- --- --- --- ---
------- ------- ------- ------
TOTAL $17,112 6.17% $60,564 6.63% $11,479 6.80% $ 331 9.09%
======= ======= ======= ======
Held to maturity:
U.S. Treasury and U.S
government agencies $ --- --- $1,139 6.11% $ 286 8.22% $ --- ---
States and political
subdivisions 1,560 6.33% 872 7.51 1,077 7.58 --- ---
Other securities --- --- --- 1,614 7.62%
------ ------ ------ ------
TOTAL $1,560 6.33% $2,011 6.72% $1,363 7.72% $1,614 7.62%
====== ====== ====== ======
</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
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial and agricultural $ 44,917 $ 36,978 $ 40,068 $ 33,585 $ 33,062
Real estate mortgage 165,553 143,424 137,998 115,718 105,953
Installment 36,238 36,847 37,389 36,693 34,924
-------- -------- -------- -------- --------
TOTAL LOANS $246,708 $217,249 $215,455 $185,996 $173,939
======== ======== ======== ======== ========
</TABLE>
Total loans increased $29.5 million in 1998. The increase was primarily in
residential real estate mortgages. During 1998, a total of 5,698 new loans were
granted for a total of $179.3 million.
21
<PAGE> 22
DEPOSITS
Total deposits increased $65.5 million and were $350.0 million at year end 1998,
a 23.0% increase over 1997. Average deposits increased 19.2% in 1998 and 4.3% in
1997. During 1998, average noninterest bearing deposits increased 11.9%,
interest bearing demand deposits increased 21.8%, savings deposits increased
21.3%, and time deposits increased 19.5%. Time deposits over $100,000 as a
percentage of total deposits equaled 5.4% and 7.4% as of December 31, 1998 and
1997, respectively.
TABLE 9. AVERAGE DEPOSITS
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest bearing demand deposits $ 42,975 $ 38,394 $ 36,418
Interest bearing demand deposits 47,364 2.66% 38,875 2.69% 39,876 2.74%
Savings deposits 85,541 3.20 70,517 3.25 68,667 3.15
Time deposits 146,417 5.80 122,525 5.88 114,279 5.86
-------- -------- --------
TOTAL $322,297 $270,311 $259,240
======== ======== ========
</TABLE>
TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Maturity:
Within 3 months $ 5,651 $ 9,406 $ 5,095
Within 3 to 6 months 5,471 6,523 2,825
Within 6 to 12 months 4,530 2,439 418
Over 12 months 3,119 2,777 5,666
------- ------- -------
TOTAL $18,771 $21,145 $14,004
======= ======= =======
</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 their
customers. The Bank's trust department also offers a variety of financial
products in addition to traditional estate services. Competition from other
financial institutions in Isabella County, the Bank's primary market, has an
impact on both the amount of and the cost of deposits. Isabella County has a
population of less than 60,000 people and is serviced by eight financial
institutions with 24 locations. This competition results in a higher cost of
funds than would otherwise exist. Generally, deposit rates in Isabella County
are higher than in the major metropolitan areas in the state. Currently, the
Bank's market share of deposits in Isabella County is slightly in excess of 50%.
22
<PAGE> 23
CAPITAL
The capital of the Corporation consists solely of common stock, capital surplus,
retained earnings, and accumulated other comprehensive income. Total capital
increased approximately $3.6 million in 1998. The Corporation offers a dividend
reinvestment and employee stock purchase plan. Under the provisions of these
Plans, the Corporation issued 9,963 shares of common stock generating $597,000
of capital during 1998, and 8,998 shares of common stock generating $479,000 of
capital in 1997.
The Federal Reserve Board's current recommended minimum primary capital to
assets requirement is 6.0%. The Corporation's primary capital to average assets,
which consists of shareholders' equity plus the allowance for loan losses less
acquisition intangibles, was 8.5% at year end 1998. There are no commitments for
significant capital expenditures.
The Federal Reserve Board has established a minimum risk based capital standard.
Under this standard, a framework has been established that assigns risk weights
to each category of on and off-balance-sheet items to arrive at risk adjusted
total assets. Regulatory capital is divided by the risk adjusted assets with the
resulting ratio compared to the minimum standard to determine whether a
corporation has adequate capital. The minimum standard is 8%, of which at least
4% must consist of equity capital net of goodwill. The following table sets
forth the percentages required under the Risk Based Capital guidelines and the
Corporation's values at December 31, 1998:
Percentage of Capital to Risk Adjusted Assets:
<TABLE>
<CAPTION>
Required IBT Bancorp
<S> <C> <C>
Equity Capital 4.00% 12.87%
Secondary Capital 4.00 1.25
------ -------
Total Capital 8.00% 14.12%
====== ======
</TABLE>
IBT Bancorp's secondary capital includes only the allowance for loan losses. The
percentage for the secondary capital under the required column is the maximum
amount allowed from all sources.
The Federal Reserve also prescribes minimum capital requirements for the
Corporation's subsidiary bank, Isabella Bank and Trust. At December 31, 1998,
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, 1998 and 1997, cash and cash equivalents equaled 7.8% and
8.9% of total assets, respectively. Net cash provided from operations was
$853,000 in 1998 and $4.8 million in 1997. Net cash provided by financing
activities equaled $21.6 million in 1998 and $16.1 million in 1997. The
Corporation's investing activities used $20.4 million in 1998 and $7.5 million
in 1997. The accumulated effect of the Corporation's operating, investing, and
financing activities on cash and cash equivalents was a $2.0 million increase in
1998 and a $13.4 million increase in 1997.
23
<PAGE> 24
LIQUIDITY (CONTINUED)
In addition to cash and cash equivalents, investment securities available for
sale are another source of liquidity. Securities available for sale equaled
$89.5 million as of December 31, 1998 and $57.4 million as of December 31, 1997.
In addition to these primary sources of liquidity, the Corporation has the
ability to borrow in the federal funds market and at both the Federal Reserve
Bank and the Federal Home Loan Bank. The Corporation did not borrow from any of
these secondary sources during 1998 or 1997. 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 $246.7 million in
total loans, $16.0 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, 1998, the
Corporation had $47.8 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 interest 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.
24
<PAGE> 25
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, 1998. For
purposes of this analysis, nonaccrual loans and the allowance for loan losses
are excluded.
<TABLE>
<CAPTION>
0 to 3 4 to 12 1 to 5 Over 5
Months Months Years Years
------ ------- ------ ------
<S> <C> <C> <C> <C>
INTEREST SENSITIVE ASSETS:
Federal funds sold $15,000 $ --- $ --- $ ---
Investment securities 3,197 15,475 62,575 14,787
Loans 48,084 43,039 143,706 11,780
------- ------- -------- -------
TOTAL $66,281 $58,514 $206,281 $26,567
======= ======= ======== =======
INTEREST SENSITIVE LIABILITIES:
Time deposits $28,369 $56,905 $63,595 $ 122
Savings 61,184 2,872 18,098 14,556
Interest bearing demand 18,494 4,749 25,794 8,953
-------- ------- -------- -------
TOTAL $108,047 $64,526 $107,487 $23,631
======== ======= ======== =======
Cumulative gap $(41,766) $(47,778) $51,016 $53,952
Cumulative gap as a % of assets (10.74)% (12.29)% 13.12% 13.88%
</TABLE>
TABLE 12. LOAN MATURITY AND INTEREST RATE SENSITIVITY
(Dollars in thousands)
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 1998. 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 $20,368 $23,297 $1,252 $44,917
======= ======= ====== =======
Interest Sensitivity:
Loans maturing after one year which have:
Fixed interest rates $21,645 $1,252
Variable interest rates 1,652 ---
------- ------
TOTAL $23,297 $1,252
======= ======
</TABLE>
25
<PAGE> 26
THE YEAR 2000
The year 2000 poses a significant risk to financial institutions because of
their reliance on automation to manage information. If an automated computer
application failed to work properly, it would be difficult, if not impossible,
to conduct business. There are three basic risk areas: (1) application software
and hardware, (2) spillover business risk, and (3) systemic.
APPLICATION SOFTWARE AND HARDWARE
Isabella Bank and Trust relies solely on outside vendors to provide its main
operating system. The main operating system processes customer information and
internal accounting information. The failure of any one of its components to be
year 2000 compliant could result in financial loss and/or the loss of customer
and investor confidence. The Bank has assessed each component of its information
systems. The various hardware and software components were risk rated for year
2000 compliance risk as either high, moderate or low. The ratings were based on
management's assessment as to the importance of a system in performing its
mission critical functions. Systems and applications that were rated as a high
risk include the AS 400, NCR sorter and reader, bank application software, and
trust services software. As of December 31, 1998, these systems have been
upgraded and tested for year 2000 compliance. These systems will be validated
throughout 1999.
Systems that are not mission critical or which have functions which can be done
manually were risk rated as either low or moderate and include ATM systems, ACH
software, loan and deposit documentation software, and personal computers and
their related software. With the exception of ATM nationwide network linkage
software, these systems have been upgraded and tested for year 2000 compliance.
SPILLOVER BUSINESS RISK
Many of the Bank's loan customers and suppliers utilize computers in their day
to day operations. Failure of customers or suppliers to make the necessary
adjustments could lead to a loss of business and loss of asset value and could
create credit risk for the Bank. Management has reviewed its list of customers
and suppliers to identify those who, based on their products or services, are
most likely to have year 2000 compliance issues. These customers and providers
were individually contacted to assess their current state of readiness. The Bank
will continue to monitor progress of customers and suppliers that it identified
as having a material year 2000 compliance risk.
SYSTEMIC
Banks have extensive institutional linkages. Critical linkages include the
correspondent relationships for Federal funds sales and purchases, investment
security safekeeping, the Federal Reserve wire transfer and automatic clearing
house systems, and check processing systems. Each one of these is an important
component of the payment system. The failure of any one of these systems could
create an inability for the Bank to conduct business as usual. The Bank exerts
no control over these systems and/or the organizations that provide these
linkages. A problem in one part of the payment or settlement systems would
quickly affect the entire system. Other less critical linkages include ATM
networks, credit reporting systems, mortgage loans sold delivery systems, and
credit card processing networks. The Bank is requesting that providers of the
above services furnish periodic updates of progress in updating their systems
for the year 2000 and is reviewing its options if any one of the above systems
fail.
The Corporation has prepared, and will continue to upgrade as necessary, a
contingency plan in case any component of its service providing system fails as
a result of year 2000. These plans include utilizing information processing
backup sites, identifying replacement software vendors, and manually processing,
where it may be done cost effectively.
Based on the information currently available, the cost of becoming year 2000
compliant will not have a material impact on the Corporation's financial
position or results of operation. The overall budget for the Corporation's year
2000 compliance effort is $89,000, of which $25,000 is scheduled to be expended
in 1999. However, if the Corporation's vendors or
26
<PAGE> 27
customers are unable to resolve this issue in a timely manner, it could result
in a material financial risk. Accordingly, the Corporation plans to devote all
necessary resources to becoming year 2000 compliant in a timely manner.
SUPERVISION AND REGULATION
IBT Bancorp is subject to supervision and regulation by the Federal Reserve
Board, under the Bank Holding Company Act of 1956, as amended. A bank holding
company and its subsidiaries are able to conduct only the business of commercial
banking and activities closely related or incidental to it.
Isabella Bank and Trust is chartered by the State of Michigan and is supervised
and regulated by the Financial Institutions Bureau of the State of Michigan. The
Bank is a member of the Federal Reserve System and its deposits are insured by
the Federal Deposit Insurance Corporation to the extent provided by law.
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 7(A) QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's primary market risks are interest rate risk and, to a lesser
extent, liquidity risk. The Corporation has no foreign exchange risk, holds
limited loans outstanding to agricultural and oil and gas concerns, and holds no
trading account assets. Any changes in foreign exchange rates or commodity
prices would have an insignificant impact, if any, on the Corporation's interest
income and cash flows.
Interest rate risk ("IRR") is the exposure to the Corporation's net interest
income, its primary source of income, to changes in interest rates. IRR results
from the difference in the maturity or repricing frequency of a financial
institution's interest earning assets and its interest bearing liabilities.
Interest rate risk is the fundamental method in which financial institutions
earn income and create shareholder value. Excessive exposure to interest rate
risk could pose a significant risk to the Corporation's earnings and capital.
The Federal Reserve, the Corporation's primary Federal regulator, has adopted a
policy requiring the Board of Directors and senior management to effectively
manage the various risks that can have a material impact on the safety and
soundness of the Corporation. The risks include credit, interest rate,
liquidity, operational, and reputational. The Corporation has policies,
procedures and internal controls for measuring and managing these risks.
Specifically, the IRR policy and procedures include defining acceptable types
and terms of investments and funding sources, liquidity requirements, limits on
investments in long term assets, limiting the mismatch in repricing opportunity
of assets and liabilities, and the frequency of measuring and reporting to the
Board of Directors.
The Corporation uses several techniques to manage interest rate risk. The first
method is gap analysis. Gap analysis measures the cash flows and/or the earliest
repricing of the Corporation's interest bearing assets and liabilities. This
analysis is useful for measuring trends in the repricing characteristics of the
balance sheet. Significant assumptions are required in this process because of
the imbedded repricing options contained in assets and liabilities. A
substantial portion of the Corporation's assets are invested in loans and
mortgage backed securities. These assets have imbedded options that allow the
borrower to repay the balance prior to maturity without penalty. The amount of
prepayments is dependent upon many factors, including the interest rate of a
given loan in comparison to the current interest rates, for residential
mortgages the level of sales of used homes, and the overall availability of
credit in the market place. Generally, a decrease in interest rates will result
in an increase in the Corporation's cash flows from these assets. Investment
securities, other than those that are callable, do not have any significant
imbedded options. Savings and checking deposits may generally
27
<PAGE> 28
be withdrawn on request without prior notice. The timing of cash flow from these
deposits are estimated based on historical experience. Time deposits have
penalties which discourage early withdrawals.
The second technique used in the management of interest rate risk is to combine
the projected cash flows and repricing characteristics generated by the gap
analysis and the interest rates associated with those cash flows and projected
future interest income. By changing the amount and timing of the cash flows and
the repricing interest rates of those cash flows, the Corporation can project
the effect of changing interest rates on its interest income. Based on the
projections prepared for the year ended December 31, 1998, the Corporation's net
interest income would increase during a period of decreasing interest rates.
The following tables provide information about the Corporation's assets and
liabilities that are sensitive to changes in interest rates as of December 31,
1998 and 1997. The Corporation has no interest rate swaps, futures contracts, or
other derivative financial options. The principal amounts of assets and time
deposits maturing were calculated based on the contractual maturity dates.
Savings and NOW accounts are based on management's estimate of their future cash
flows.
Quantitative Disclosures of Market Risk
<TABLE>
<CAPTION>
Fair Value
1998 1999 2000 2001 2002 Thereafter Total 12/31/98
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Other interest bearing assets $15,000 -- -- -- -- -- $ 15,000 $ 15,000
Average interest rates 4.70% -- -- -- -- -- 4.70%
Fixed interest rate securities $18,672 $22,641 $16,576 $13,662 $ 9,696 $14,787 $ 96,034 $ 96,151
Average interest rates 5.59% 5.90% 5.81% 5.83% 5.91% 5.44% 5.74%
Fixed interest rate loans $75,146 $45,466 $53,079 $18,705 $26,555 $11,780 $230,731 $236,328
Average interest rates 7.97% 8.37% 8.00% 8.24% 7.80% 7.38% 8.03%
Variable interest rate loans $12,937 $ 2,241 $ 628 $ 171 -- -- $ 15,977 $ 15,977
Average interest rates 9.04% 10.04% 8.96% 9.39% -- -- 9.18%
Rate sensitive liabilities:
Savings and NOW accounts $87,299 $14,374 $11,448 $ 9,472 $ 8,598 $23,509 $154,700 $154,700
Average interest rates 3.38% 2.24% 2.24% 2.24% 2.24% 2.23% 2.88%
Fixed interest rate time deposits $84,180 $20,895 $17,261 $13,342 $12,097 $ 122 $147,897 $149,859
Average interest rates 5.35% 5.95% 6.33% 6.35% 5.75% 6.38% 5.67%
Variable interest rate time deposits $ 770 $ 319 $ 5 -- -- -- $ 1,094 $ 1,094
Average interest rates 4.67% 4.67% 4.67% -- -- -- 5.29%
</TABLE>
<TABLE>
<CAPTION>
Fair Value
1997 1998 1999 2000 2001 Thereafter Total 12/31/97
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate sensitive assets:
Other interest bearing assets $17,500 -- -- -- -- -- $ 17,500 $ 17,500
Average interest rates 5.45% -- -- -- -- -- 5.45%
Fixed interest rate securities $17,897 $11,932 $10,199 $ 8,857 $ 7,886 $ 7,780 $ 64,551 $ 64,622
Average interest rates 5.76% 6.16% 6.07% 5.94% 5.71% 6.57% 5.93%
Fixed interest rate loans $61,674 $48,840 $43,464 $26,482 $14,629 $ 6,438 $201,527 $202,603
Average interest rates 8.29% 8.25% 8.39% 8.10% 7.54% 8.00% 8.21%
Variable interest rate loans $12,425 $ 2,099 $ 949 $ 91 $ 26 $ 132 $ 15,722 $ 15,722
Average interest rates 10.23% 9.93% 9.42% 10.05% 10.76% 10.16% 10.23%
Rate sensitive liabilities:
Savings and NOW accounts $44,560 $13,382 $10,922 $ 9,686 $ 8,976 $21,107 $108,633 $108,633
Average interest rates 3.73% 2.81% 2.80% 2.79% 2.78% 2.65% 3.15%
Fixed interest rate time deposits $73,813 $21,918 $12,132 $12,862 $10,818 $ 179 $131,722 $131,325
Average interest rates 5.65% 6.10% 6.40% 6.52% 6.54% 7.13% 5.96%
Variable interest rate time deposits $ 640 $ 357 -- -- -- -- $ 997 $ 997
Average interest rates 5.58% 5.58% -- -- -- -- 5.58%
</TABLE>
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements of the registrant and reports of
independent auditors are set forth on pages 30 through 47 of this report:
Reports of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The supplementary data regarding quarterly results of operations set forth under
the table named "Summary of Selected Financial Data" on Page 13 of this report.
29
<PAGE> 30
Report of Independent Auditors
Board of Directors and Shareholders
IBT Bancorp
We have audited the accompanying consolidated balance sheets of IBT Bancorp and
subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of IBT
Bancorp and subsidiaries as of December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Rehmann Robson, P.C.
Saginaw, Michigan
January 28, 1999
30
<PAGE> 31
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and demand deposits due from banks -- Note I $ 15,497 $ 11,005
Federal funds sold 15,000 17,500
-------- --------
CASH AND CASH EQUIVALENTS 30,497 28,505
Investment securities -- Note B
Securities available for sale (amortized cost of
$88,015 in 1998 and $56,985 in 1997) 89,486 57,391
Securities held to maturity (fair value of
$6,665 in 1998 and $7,231 in 1997) 6,548 7,160
-------- --------
TOTAL INVESTMENT SECURITIES 96,034 64,551
Loans -- Notes C and H
Commercial 44,917 36,978
Real estate mortgage 165,553 143,424
Installment 36,238 36,847
-------- --------
TOTAL LOANS 246,708 217,249
Less allowance for loan losses -- Note C 2,977 2,677
-------- --------
NET LOANS 243,731 214,572
Premises and equipment -- Note A 7,890 5,831
Accrued interest receivable 2,571 2,000
Acquisition intangibles -- Note A 4,327 --
Other assets 3,733 3,272
-------- --------
TOTAL ASSETS $388,783 $318,731
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Noninterest bearing $ 46,348 $ 43,207
NOW accounts 57,990 37,892
Certificates of deposit and other savings 226,930 182,314
Certificates of deposit over $100 18,771 21,145
-------- --------
TOTAL DEPOSITS 350,039 284,558
Accrued interest and other liabilities 4,221 3,215
-------- --------
TOTAL LIABILITIES 354,260 287,773
Shareholders' Equity -- Note I
Common stock -- $6 par value:
4,000,000 shares authorized;
881,573 shares issued and outstanding
(792,455 shares at December 31, 1997) 5,290 4,755
Capital surplus 18,894 13,687
Retained earnings 9,369 12,248
Accumulated other comprehensive income 970 268
-------- --------
TOTAL SHAREHOLDERS' EQUITY 34,523 30,958
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $388,783 $318,731
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<PAGE> 32
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING:
Balance at beginning of year 792,455 783,457 703,248
10% stock dividend 79,155 -- 70,243
Issuance of common stock 9,963 8,998 9,966
--------- --------- ---------
BALANCE END OF YEAR 881,573 792,455 783,457
========= ========= =========
COMMON STOCK:
Balance at beginning of year $ 4,755 $ 4,701 $ 4,219
10% stock dividend 475 -- 422
Issuance of common stock 60 54 60
--------- --------- ---------
BALANCE END OF YEAR 5,290 4,755 4,701
CAPITAL SURPLUS:
Balance at beginning of year 13,687 13,262 10,220
10% stock dividend 4,670 -- 2,669
Issuance of common stock 537 425 373
--------- --------- ---------
BALANCE END OF YEAR 18,894 13,687 13,262
RETAINED EARNINGS:
Balance at beginning of year 12,248 9,916 10,856
Net income 3,634 3,609 3,340
10% stock dividend (5,145) -- (3,091)
Cash dividends ($1.55 per share in 1998,
$1.48 in 1997, and $1.38 in 1996) (1,368) (1,277) (1,189)
--------- --------- ---------
BALANCE END OF YEAR 9,369 12,248 9,916
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year 268 121 509
Unrealized gains (losses) on securities available for sale,
net of income taxes and reclassification adjustment 702 147 (388)
--------- --------- ---------
BALANCE END OF YEAR 970 268 121
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY END OF YEAR $ 34,523 $ 30,958 $ 28,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 33
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 19,986 $ 18,772 $ 17,589
Investment Securities
Taxable:
U.S. Treasury and U.S. government agencies 3,707 2,559 2,755
Other 715 237 147
Nontaxable:
States and political subdivisions 871 638 788
-------- -------- --------
TOTAL INTEREST ON INVESTMENT SECURITIES 5,293 3,434 3,690
Federal funds sold and other 520 524 419
-------- -------- --------
TOTAL INTEREST INCOME 25,799 22,730 21,698
INTEREST EXPENSE ON DEPOSITS 12,482 10,534 9,957
-------- -------- --------
NET INTEREST INCOME 13,317 12,196 11,741
Provision for loan losses -- Note C 321 386 500
-------- -------- --------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 12,996 11,810 11,241
NONINTEREST INCOME
Trust fees 409 371 330
Service charges on deposit accounts 316 285 281
Other service charges and fees 1,076 902 1,132
Other 756 426 346
Gain on sale of mortgage loans 345 131 93
Net realized gains (losses) on securities available for sale 49 (15) 8
-------- -------- --------
TOTAL NONINTEREST INCOME 2,951 2,100 2,190
NONINTEREST EXPENSES
Salaries, wages, and employee benefits 5,998 4,846 4,605
Occupancy 735 628 687
Furniture and equipment 1,101 920 1,104
Amortization of acquisition intangibles 433 -- --
Other 2,675 2,417 2,400
-------- -------- --------
TOTAL NONINTEREST EXPENSES 10,942 8,811 8,796
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES 5,005 5,099 4,635
Federal income taxes -- Note E 1,371 1,490 1,295
-------- -------- --------
NET INCOME $ 3,634 $ 3,609 $ 3,340
======== ======== ========
Net income per basic share of common stock -- Note A $ 4.15 $ 4.17 $ 3.90
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 34
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME $ 3,634 $ 3,609 $ 3,340
Other comprehensive income before income taxes:
Unrealized gains (losses) on securities available
for sale:
Unrealized holding gains (losses)
arising during year: 1,113 208 (580)
Reclassification adjustment for realized (gains)
losses included in net income: (49) 15 (8)
------- ------- -------
Other comprehensive income (loss) before income
taxes: 1,064 223 (588)
Income tax expense (benefit) related to compre-
hensive income: 362 76 (200)
------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS) NET OF
INCOME TAXES: 702 147 (388)
------- ------- -------
COMPREHENSIVE INCOME $ 4,336 $ 3,756 $ 2,952
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE> 35
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
1998 1997 1996
<S> <C> <C> <C>
OPERATING ACTIVITIES -- NOTE G
Interest and fees collected on loans and investments $ 25,515 $ 22,957 $ 21,954
Other fees and income received 2,877 2,052 2,082
Interest paid (12,517) (10,465) (9,988)
Cash paid to suppliers and employees (9,676) (8,173) (6,916)
Increase in loans originated for sale (4,032) (5) (621)
Federal income taxes paid (1,314) (1,557) (1,474)
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 853 4,809 5,037
INVESTING ACTIVITIES
Proceeds from maturities and sales of
securities available for sale 30,669 19,889 24,664
Proceeds from maturities of securities
held to maturity 2,591 3,036 3,095
Purchases of securities available for sale (63,617) (26,745) (18,071)
Purchases of securities held to maturity (350) (702) (4,893)
Net increase in loans (25,216) (2,119) (28,965)
Purchases of premises and equipment (929) (894) (1,333)
Acquisition of branch offices, less cash received 37,874 -- --
Acquisition of title office (1,471) -- --
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (20,449) (7,535) (25,503)
FINANCING ACTIVITIES
Net (decrease) increase in noninterest bearing deposits (103) 1,284 2,303
Net increase in interest bearing deposits 22,462 15,625 12,341
Cash dividends (1,368) (1,277) (1,189)
Proceeds from issuance of common stock 597 479 432
-------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 21,588 16,111 13,887
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS -------- -------- --------
1,992 13,385 (6,579)
Cash and cash equivalents beginning of year 28,505 15,120 21,699
-------- -------- --------
CASH AND CASH EQUIVALENTS END OF YEAR $ 30,497 $ 28,505 $ 15,120
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
NOTE A - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements
include the accounts of IBT Bancorp (the "Corporation") and its wholly owned
subsidiaries, Isabella Bank and Trust (the "Bank"), IBT Title, 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 15
locations to businesses, institutions, and individuals. Lending services offered
include commercial real estate loans and lines of credit, residential real
estate loans, consumer loans, student loans, and credit cards. Although the Bank
has a diversified loan portfolio, a substantial portion of its debtors' ability
to honor their contracts is dependent upon the real estate market in the Bank's
principal market areas. Deposit services include interest and noninterest
bearing checking accounts, savings accounts, money market accounts, and
certificates of deposit. Other related financial products include trust
services, 24-hour banking services locally and nationally through shared
automatic teller machines, safe deposit box rentals, credit life insurance, and
direct deposits. Active competition, principally from other commercial banks,
savings banks and credit unions, exists in all of the Bank's principal markets.
The Corporation's results of operations can be significantly affected by changes
in interest rates or changes in the local economic environment.
IBT Title does business under the name Isabella County Abstract and Title. IBT
Title provides title insurance, abstract searches, and closes real estate loans
in Isabella County.
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 consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for loan losses and
foreclosed real estate, management obtains independent appraisals for
significant properties.
CASH AND CASH EQUIVALENTS: For purposes of the statement of cash flows, the
Corporation considers cash, demand deposits due from banks, and federal funds
sold as cash and cash equivalents. Generally, federal funds are sold for a one
day period. The Corporation maintains deposit accounts in various financial
institutions which at times may exceed FDIC insured limits or not be insured.
Management believes the Corporation is not exposed to any significant interest
rate or other financial risk on these deposits.
SECURITIES 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 in other
comprehensive income.
The amortized cost of debt securities classified as either held to maturity or
available for sale is adjusted for amortization of premiums and accretion of
discounts to maturity, and is computed using a method that approximates the
level yield method. Gains or losses on the sale of securities available for sale
are calculated using the adjusted cost for the specific securities sold.
36
<PAGE> 37
ALLOWANCE FOR LOAN LOSSES: Management determines the adequacy of the allowance
for loan losses based on evaluation of the loan portfolio, past and recent loan
loss experience, current economic conditions and other pertinent factors. The
allowance is increased by a charge to income for provisions for loan losses.
Loans deemed to be uncollectible are charged against the allowance for loan
losses, and subsequent recoveries, if any, are credited to the allowance. The
allowance for loan losses on loans classified as impaired is based on discounted
cash flows using the loans initial interest rate or the fair value of the
collateral for certain collateral dependent loans.
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. For financial reporting purposes, the provision for
depreciation is computed principally by the straight line method based upon the
useful lives of the assets which generally range from 5 to 30 years. Maintenance
repairs and minor alterations are charged to current operations as expenditures
occur and major improvements are capitalized. Management annually reviews these
assets to determine whether carrying values have been impaired.
A summary of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Premises $ 7,024 $6,162
Equipment 7,467 5,508
------- -------
14,491 11,670
Less accumulated depreciation 6,601 5,839
------- -------
NET PREMISES AND EQUIPMENT $ 7,890 $ 5,831
======= =======
</TABLE>
LOANS AND RELATED INCOME: Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding principal adjusted for any charge offs, the
allowance for loans losses, and any deferred fees or costs on originated loans.
Interest on loans is accrued over the term of the loan based on the principal
amount outstanding. The accrual of interest on impaired loans is discontinued
when, in the opinion of management, the borrower may be unable to meet payments
as scheduled. When the accrual of interest is discontinued, all uncollected
accrued interest is reversed. Interest income on such loans is subsequently
recognized only to the extent cash payment is received. For impaired loans not
classified as nonaccrual, interest income continues to be accrued over the term
of the loan based on the principal amount outstanding.
Loan origination fees and certain direct loan origination costs are capitalized
and recognized as interest income over the term of the loan using the constant
yield method.
MORTGAGE BANKING ACTIVITIES: Mortgage loans originated and intended for sale in
the secondary market are carried at the lower of cost or estimated market value
in the aggregate. Gains or losses on sales of such loans are recognized at the
time of sale and are determined by the difference between the net sales proceeds
and the unpaid principal balance of the loans sold, adjusted for any yield
differential, servicing fees, and servicing costs applicable to future years.
Net unrealized losses are recognized in a valuation allowance by charges to
income. Mortgage servicing rights ("MSR") are amortized in proportion to, and
over the period of, estimated net servicing income. To determine the fair value
of MSR, the Corporation estimates the present value of future cash flows
incorporating a number of assumptions including servicing income, cost of
servicing, discount rates, and prepayment rates.
The Corporation has established a valuation allowance for the excess of book
value of the capitalized MSR over estimated fair value. For purposes of
measuring impairment, the rights are stratified based on their predominant risk
characteristics, primarily period of origination, interest rate, and current
prepayment rates.
FEDERAL INCOME TAXES: Federal income taxes have been provided based on amounts
reported in the consolidated statements of income (after the exclusion of
nontaxable interest income) and include deferred federal income taxes on
temporary differences between financial statement and income tax reporting. The
Corporation and its subsidiaries file a consolidated federal income tax return
on a calendar year basis.
37
<PAGE> 38
STATEMENT OF COMPREHENSIVE INCOME: In 1998 the Corporation adopted the Financial
Accounting Standards Board SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes presentation standards for the reporting and display of
comprehensive income and its components. Comprehensive income for the
Corporation consists of net income and net unrealized gains and losses on
available for sale securities and is presented in a separate Consolidated
Statement of Comprehensive Income. The adoption of SFAS No. 130 had no impact on
net income or shareholders' equity. Prior year financial statements have been
reclassified to conform to SFAS No. 130 requirements.
PER SHARE AMOUNTS: Net income per share amounts were computed by dividing net
income by the weighted average number of shares outstanding. All per share
amounts have been adjusted for the 10% stock dividend declared on December 15,
1997 and paid March 2, 1998. The weighted average number of common shares
outstanding were 875,892 in 1998; 866,042 in 1997; and 855,381 in 1996.
ACQUISITION INTANGIBLES: The Bank acquired branch facilities and related
deposits in a business combination accounted for as a purchase. Results of
operations are included in the accompanying consolidated financial statements
since March 31, 1998, the date of acquisition and are not significant. The
allocation of the purchase price of assets acquired and liabilities assumed is
as follows:
<TABLE>
<S> <C> <C>
Deposits acquired $43,123
Accrued interest payable 144
Purchased loans (233)
Core deposit premium paid and acquisition expenses (4,484)
Purchases of equipment and premises (676)
--------
Cash received $37,874
========
</TABLE>
The acquisition of the branches includes amounts related to the value of
customer deposit relationships (core deposit intangibles). The deposit
intangible of $4,180 is amortized over the expected life of the acquired
relationship.
RECLASSIFICATION: Certain amounts reported in the 1997 and 1996 consolidated
financial statements have been reclassified to conform with the 1998
presentation.
NOTE B - INVESTMENT SECURITIES
The following is a summary of securities available for sale and held to
maturity. Other securities include only the stock of the Federal Reserve Bank
and the Federal Home Loan Bank, which are restricted investments and have no
contractual maturities.
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1998:
Securities available for sale:
U.S. Treasury and U.S.
government agencies $58,716 $ 924 $ (10) $59,630
States and political
subdivisions 27,281 568 (7) 27,842
Commercial paper 2,018 -- (4) 2,014
------- ------- ------- -------
TOTAL $88,015 $ 1,492 $ (21) $89,486
======= ======= ======= =======
Securities held to maturity:
U.S. Treasury and U.S.
government agencies $ 1,425 $ 19 $ -- $ 1,444
States and political
subdivisions 3,509 98 -- 3,607
Other securities 1,614 -- -- 1,614
------- ------- ------- -------
TOTAL $ 6,548 $ 117 $ -- $ 6,665
======= ======= ======= =======
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
<S> <C> <C> <C> <C>
December 31, 1997:
Securities available for sale:
U.S. Treasury and U.S.
government agencies $42,410 $ 284 $ (12) $42,682
States and political
subdivisions 14,575 142 (8) 14,709
------- ------- ------- -------
TOTAL $56,985 $ 426 $ (20) $57,391
======= ======= ======= =======
Securities held to maturity:
U.S. Treasury and U.S.
government agencies $ 3,306 $ 20 $ (7) $ 3,319
States and political
subdivisions 2,388 59 (1) 2,446
Other securities 1,466 -- -- 1,466
------- ------- ------- -------
TOTAL $ 7,160 $ 79 $ (8) $ 7,231
======= ======= ======= =======
</TABLE>
The following table summarizes the fair value, realized gains, and realized
losses on sales of securities available for sale.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Fair value of securities sold
at the date of sale $11,055 $5,016 $4,974
Gross realized gains
U.S. Treasury and U.S.
government agencies 54 -- 9
Gross realized losses
U.S. Treasury and U.S.
government agencies 5 15 1
</TABLE>
The following table shows the amortized cost and estimated fair value of
securities owned at December 31, 1998 by contractual maturity. Expected
maturities will differ from contractual maturities because the issuers of
securities may have the right to prepay obligations without prepayment penalty.
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
<S> <C> <C> <C> <C>
Due within one year or less $17,021 $17,112 $1,560 $1,571
Due after 1 year thru 5 years 53,218 54,315 872 905
Due after 5 years thru 10 years 7,973 8,193 1,077 1,131
Due after 10 years 328 331 -- --
--------- --------- --------- ---------
78,540 79,951 3,509 3,607
Other securities -- -- 1,614 1,614
Mortgage backed securities 9,475 9,535 1,425 1,444
--------- --------- --------- ---------
TOTAL $88,015 $89,486 $6,548 $6,665
========= ========= ========= =========
</TABLE>
Investment securities with a carrying value of approximately $5,133 and $5,010
were pledged to secure public deposits and for other purposes as necessary or
required by law at December 31, 1998 and 1997, respectively.
39
<PAGE> 40
NOTE C - LOANS
An analysis of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $2,677 $2,621 $2,248
Loans charged off (264) (575) (375)
Recoveries 243 245 248
Provision charged to income 321 386 500
------- ------- -------
BALANCE AT END OF YEAR $2,977 $2,677 $2,621
======= ======= =======
</TABLE>
At December 31, 1998 and 1997, nonaccrual and other impaired loans were not
significant. Based on collateral values, no specific allowance for loan losses
has been allocated to these loans.
Certain directors and executive officers (including their families and companies
in which they have 10% or more ownership) of the Corporation and the Bank were
loan customers of the Bank. Total loans to these customers aggregated $7,167 and
$7,196 at December 31, 1998 and 1997, respectively. During 1998, $4,834 of new
loans were made and repayments totalled $4,863. 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 $86,299 and $63,982 at December 31, 1998 and 1997, respectively.
Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and taxing
authorities, and foreclosure processing.
The following table summarizes the fair value of mortgage servicing rights as of
December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
Balance at beginning of year $50 $27
Mortgage servicing rights capitalized 210 87
Amortization (64) (9)
Impairment valuation allowance (96) (55)
---- ---
BALANCE AT END OF YEAR $100 $50
==== ===
</TABLE>
Residential mortgages committed for sale were $4,943 as of December 31, 1998 and
$911 as of December 31, 1997.
NOTE D - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Corporation utilizes quoted market prices, where available, to compute the
fair value of its financial instruments. In cases where quoted market prices are
not available, fair values are based on estimates using present value or other
techniques. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Certain financial instruments and all nonfinancial
instruments are excluded from the disclosure requirements. Accordingly, the
aggregate of the fair value amounts presented are not necessarily indicative of
the underlying value of the Corporation.
The following methods and assumptions were used by the Corporation in estimating
fair value disclosures for financial instruments.
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and demand deposits due from banks and federal funds sold approximate
those assets' fair value.
40
<PAGE> 41
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>
1998 1997
---- ----
Estimated Fair Recorded Book Estimated Fair Recorded Book
Value Balance Value Balance
----- ------- ----- -------
<S> <C> <C> <C> <C>
Cash and demand deposits due
from banks $15,497 $15,497 $11,005 $ 11,005
Federal funds sold 15,000 15,000 17,500 17,500
Investment securities 96,151 96,034 64,622 64,551
Net loans 252,305 243,731 218,325 214,572
Accrued interest receivable 2,571 2,571 2,000 2,000
Deposits with no stated
maturities 201,048 201,048 151,839 151,839
Deposits with stated maturities 150,953 148,991 132,322 132,719
Accrued interest payable 771 771 662 662
</TABLE>
NOTE E - FEDERAL INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Corporation's deferred tax assets and liabilities, included in other assets,
as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 772 $ 671
Deferred directors' fees 366 329
Employee benefit plans 352 287
Core deposit premium and acquisition expenses 70 ---
Other 24 20
------ -------
TOTAL DEFERRED TAX ASSETS 1,584 1,307
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax liabilities:
Premises and equipment 196 162
Accretion on securities 51 131
Prepaid pension expense 338 268
Net unrealized gain on available for sale securities 500 138
Other 5 8
------ ------
TOTAL DEFERRED TAX LIABILITIES 1,090 707
------ ------
NET DEFERRED TAX ASSETS $ 494 $ 600
====== ======
</TABLE>
Components of the consolidated provision for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current $1,627 $1,492 $1,425
Deferred credit (256) (2) (130)
------- -------- -------
PROVISION FOR FEDERAL INCOME TAXES $1,371 $1,490 $1,295
======= ======== =======
</TABLE>
The reconciliation of the provision for federal income taxes and the amount
computed at the federal statutory tax rate of 34% of income before federal
income tax expense is as follows.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax on pretax income $1,702 $1,734 $1,576
Effect of nontaxable interest income (378) (277) (334)
Other 47 33 53
------- ------- ------
PROVISION FOR FEDERAL INCOME TAXES $1,371 $1,490 $1,295
====== ======= ======
</TABLE>
The income tax effects on securities gains or (losses) were $17 in 1998, $(5) in
1997, and $3 in 1996.
NOTE F - BENEFIT PLANS
The Bank has a defined benefit pension plan covering substantially all of its
employees. The benefits are based on years of service and the employees' average
compensation over their last five years of service. The funding policy is to
contribute annually the maximum amount that can be deducted for federal income
tax purposes. Contributions are intended to provide not only for benefits
attributed to services to date but also for those expected to be earned in the
future. The defined pension plan's assets are primarily invested in mutual
funds.
Changes in the projected benefit obligation and plan assets during each year,
the funded status of the plan and a reconciliation to the amount recognized in
the Corporation's balance sheet are summarized as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
PROJECTED BENEFIT OBLIGATION:
Accumulated benefit obligation $3,883 $3,495
Effects of projected salary increases 1,069 897
------ ------
PROJECTED BENEFIT OBLIGATIONS $4,952 $4,392
====== ======
CHANGE IN PROJECTED BENEFIT OBLIGATION:
Benefit obligation January 1 $4,392 $3,813
Service cost 145 115
Interest cost 310 285
Actuarial loss 320 375
Benefits paid (215) (196)
------ ------
BENEFIT OBLIGATION, DECEMBER 31 $4,952 $4,392
====== ======
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CHANGE IN PLAN ASSETS:
Fair value of plan assets, January 1 $4,001 $3,409
Investment return 433 457
Corporation contribution 371 331
Benefits paid (215) (196)
------- -------
FAIR VALUE OF PLAN ASSETS, DECEMBER 31 $4,590 $4,001
====== ======
RECONCILIATION OF FUNDED STATUS:
Funded status $ (362) $ (391)
Unrecognized net transition asset (111) (133)
Unrecognized prior service cost 179 197
Unrecognized net loss from experience
different than that assumed and
effects of changes in assumptions 1,288 1,114
------ ------
PREPAID PENSION COST $ 994 $ 787
====== ======
</TABLE>
Net pension expense consists of the following components for the years ended
December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost on benefits earned for
services rendered during the year $145 $115 $110
Interest cost on projected benefit
obligation 310 285 263
Expected return on plan assets (329) (279) (245)
Amortization of unrecognized transition asset (22) (22) (22)
Amortization of unrecognized prior service cost 18 18 16
Amortization of unrecognized actuarial net loss 43 33 39
----- ----- -----
NET PENSION EXPENSE $165 $150 $161
==== ==== ====
</TABLE>
Actuarial assumptions used in determining the projected benefit obligation and
the net periodic pension cost:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate 6.75% 7.00% 7.50%
Rate of increase in future compensation 4.50% 4.50% 4.50%
Expected long-term rate of return 8.00% 8.00% 8.00%
</TABLE>
The Corporation maintains a nonqualified supplementary retirement plan for
officers to provide supplemental retirement benefits and preretirement death
benefits to each participant. Insurance policies, designed primarily to fund
preretirement benefits, have been purchased on the life of each participant with
the Corporation as the sole owner and beneficiary of the policies. Expenses
related to this program for 1998, 1997, and 1996 were $48, $35, and $30,
respectively, and are being recognized over the participants' expected years of
service.
The Corporation maintains an employee stock ownership plan (ESOP) which covers
substantially all of its employees. Contributions to the Plan are discretionary
and are approved by the Board of Directors and recorded as compensation expense.
Compensation expense related to this Plan for 1998, 1997, and 1996 was $40, $70,
and $70 respectively. Total shares outstanding at December 31, 1998 and 1997
were 48,691 and 44,597 respectively, and were included in the computation of
dividends and earnings per share in each of the respective years.
43
<PAGE> 44
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
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income $ 3,634 $ 3,609 $ 3,340
Reconcilement of net income to net
cash provided by operations:
Provision for loan losses 321 386 500
Provision for depreciation 790 685 862
Net amortization on investment
securities 288 173 244
Amortization of acquisition intangibles 433 -- --
Deferred income tax benefit (256) (5) (130)
Gain on sale of mortgages (345) (131) (93)
Proceeds from sale of mortgage loans 55,808 24,758 15,798
Loans originated for sale (59,495) (24,632) (16,326)
Decrease (increase) in:
Accrued interest receivable (571) 59 16
Other assets (566) (216) 429
Accrued interest and other liabilities 812 123 397
-------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 853 $ 4,809 $ 5,037
======== ======== ========
</TABLE>
NOTE H - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is party to financial instruments with off-balance-sheet risk.
These instruments are entered into in the normal course of business to meet the
financing needs of its customers. These financial instruments, which include
commitments to extend credit and standby letters of credit, involve, to varying
degrees, elements of credit and interest rate risk in excess of the amounts
recognized in the consolidated balance sheets. The contract or notional amounts
of these instruments reflect the extent of involvement the Corporation has in a
particular class of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Corporation uses the same credit policies in deciding to
make these commitments as it does for extending loans to customers.
Commitments to extend credit, which totalled $34,897 at December 31, 1998, 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,
1998, the Corporation had a total of $365 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.
44
<PAGE> 45
NOTE I - COMMITMENTS AND OTHER MATTERS
There were no material noncancelable lease commitments outstanding at December
31, 1998.
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 $5,717 at December 31, 1998 and $3,563 at December 31, 1997.
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, 1998,
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, 1999, the amount available for dividends without
regulatory approval was approximately $2,348.
The Corporation maintains a self-funded medical plan under which the Corporation
is responsible for the first $30 per year of claims made by a covered individual
with a maximum of $677. Claims in excess of these amounts are insured through an
"excess loss" policy up to $1,000. Medical claims are subject to a lifetime
maximum of $2,000 per covered individual. Expenses are accrued based on
estimates of the aggregate liability for claims incurred and the Corporation's
experience. Expenses were $619 in 1998, $378 in 1997, and $360 in 1996.
The Corporation offers a dividend reinvestment and employee stock purchase plan.
The dividend reinvestment plan allows shareholders to purchase previously
unissued IBT Bancorp common shares. The employee stock purchase plan allows
employees to purchase IBT Bancorp common stock through payroll deduction. The
number of shares authorized for issue under the plan is 47,000 with 40,699
shares unissued.
During 1998, the Bank obtained approval to borrow up to $22,850 from the Federal
Home Loan Bank (FHLB) of Indianapolis. The Bank has limited, by Board
resolution, the amount that it may borrow to $20,000. Under the terms of the
agreement, the Bank may obtain advances at the stated rate at the time of the
borrowings. The Bank has agreed to pledge eligible mortgage loans as collateral
for any such borrowings. No borrowings were outstanding at December 31, 1998 or
1997.
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 $3,223 and $4,190 at December 31, 1998 and 1997, respectively.
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 total capital to risk weighted assets, Tier 1 capital
to risk weighted assets, and Tier 1 capital to average assets. Management
believes, as of December 31, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal Reserve
Bank categorized the Bank as well capitalized. To be categorized as well
capitalized, the Bank must maintain total risk based capital, Tier 1 risk based,
and Tier 1 leverage ratios as set forth in the following table. There have been
no conditions or events since that notification that management believes has
changed the institution's category.
45
<PAGE> 46
The Bank's actual capital amounts (in thousands) and ratios are also presented
in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total capital (to risk weighted assets) $30,060 13.32%
$18,048 >8.0% $22,560 >10.0%
Tier 1 capital (to risk weighted assets) 27,238 12.07 - -
9,024 >4.0 13,536 > 6.0
Tier 1 capital (to average assets) 27,238 7.70 - -
14,158 >4.0 17,697 > 5.0
- -
As of December 31, 1997:
Total capital (to risk weighted assets) $28,731 15.17%
$15,156 >8.0% $18,945 >10.0%
Tier 1 capital (to risk weighted assets) 26,359 13.91 - -
7,578 >4.0 11,367 > 6.0
Tier 1 capital (to average assets) 26,359 8.72 - -
12,084 >4.0 15,105 > 5.0
- -
</TABLE>
NOTE K - PARENT COMPANY ONLY FINANCIAL INFORMATION
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash on deposit at subsidiary bank $ 1,307 $ 2,189
Securities available for sale 519 1,915
Investments in subsidiaries 32,580 26,689
Premises and equipment 114 137
Other assets 12 36
------- -------
TOTAL ASSETS $34,532 $30,966
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 9 $ 8
Shareholders' equity 34,523 30,958
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $34,532 $30,966
======= =======
</TABLE>
46
<PAGE> 47
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income
Dividends from subsidiary $1,500 $ 3,550 $ 1,400
Interest income 78 97 32
Other 6 6 6
-------- ---------- ----------
TOTAL INCOME 1,584 3,653 1,438
Expenses 191 173 187
------- --------- ---------
Income before income tax benefit and equity in
undistributed earnings of subsidiaries 1,393 3,480 1,251
Federal income tax benefit 48 36 51
-------- ---------- ----------
1,441 3,516 1,302
Undistributed earnings of
subsidiaries 2,193 93 2,038
-------- ---------- ---------
NET INCOME $3,634 $ 3,609 $ 3,340
======== ========== =========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Interest on investments $ 113 $ 62 $ 32
Dividends from subsidiaries 1,500 3,550 1,400
Cash paid to suppliers (166) (142) (144)
Other operating activities 43 35 51
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,490 3,505 1,339
INVESTING ACTIVITIES
Proceeds from the maturities of investments
available for sale 1,500 -- --
Purchases of investment securities available for sale (101) (1,906) --
Investment in subsidiaries (3,000) (50) (50)
Purchases of equipment and premises -- (26) --
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (1,601) (1,982) (50)
FINANCING ACTIVITIES
Cash dividends (1,368) (1,278) (1,189)
Issuance of common stock 597 480 432
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (771) (798) (757)
------- ------- -------
(DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (882) 725 532
Cash and cash equivalents at beginning of year 2,189 1,464 932
------- ------- -------
CASH AND CASH EQUIVALENTS AT YEAR END $ 1,307 $ 2,189 $ 1,464
======= ======= =======
</TABLE>
47
<PAGE> 48
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
Part III incorporated by reference from the Corporation's Definitive Proxy
Statement pursuant to instruction G(3). The Corporation will file with the SEC a
definitive Proxy Statement pursuant to Schedule 14A involving the election of
directors no later than 120 days after the close of the calendar year (April 30,
1999).
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements:
The following consolidated financial statements of IBT Bancorp are
incorporated by reference in Item 8:
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders'
Equity
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
All schedules are omitted because they are neither applicable
nor required, or because the required information is either
included in the consolidated financial statements or related
notes.
3. Exhibits:
3(a) Amended Articles of Incorporation*
3(b) Amendment to the Articles of Incorporation***
3(c) 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
48
<PAGE> 49
ITEM 14 (CONTINUED)
23 Consent of Rehmann Robson, P.C., Independent Certified
Public Accountants
27 Financial Data Schedule
(b) No reports on Form 8-K were filed for the quarter ended December 31, 1998.
(c) The index to exhibits is on page 50 of this report.
(d) There are no financial statement schedules filed with this report.
* Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 12, 1991, and incorporated herein by reference.
** Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K, dated
March 13, 1990, and incorporated herein by reference.
*** Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
26, 1994, and incorporated herein by reference.
**** Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated March
26, 1996, and incorporated herein.
(1) Management's Contract or Compensatory Plan or Arrangement.
49
<PAGE> 50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IBT BANCORP, INC.
(Registrant)
by:/s/David W. Hole Date: March 9, 1999
------------------------------------ --------------------
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 9, 1999
- --------------------------------- and Director
L. A. Johns
/s/James R. Bigard Director March 9, 1999
- ---------------------------------
James R. Bigard
/s/Frederick L. Bradford Director March 9, 1999
- ---------------------------------
Frederick L. Bradford
/s/Gerald D. Cassel Director March 9, 1999
- ---------------------------------
Gerald D. Cassel
/s/James C. Fabiano Director March 9, 1999
- ---------------------------------
James C. Fabiano
/s/Ronald E. Schumacher Director March 9, 1999
- ---------------------------------
Ronald E. Schumacher
50
<PAGE> 51
Signatures Capacity Date
---------- -------- ----
/s/Robert O. Smith Director March 9, 1999
- --------------------------------
Robert O. Smith
/s/Dean Walldorff Director March 9, 1999
- --------------------------------
Dean Walldorff
/s/David W. Hole President March 9, 1999
- -------------------------------- Chief Executive Officer
David W. Hole and Director
(Principal Executive Officer)
/s/Dennis P. Angner Treasurer March 9, 1999
- -------------------------------- (Principal Financial Officer)
Dennis P. Angner
51
<PAGE> 52
IBT Bancorp
FORM 10-K
Index to Exhibits
Exhibit Form 10-K
Number Exhibit Page Number
- ------ ------- -----------
21 Subsidiaries of the Registrant 53
23 Consent of Rehmann Robson P.C. 54
Independent Certified Public Accountants
27 Financial Data Schedule 55
52
<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
53
<PAGE> 1
Exhibit 23
CONSENT OF REHMANN ROBSON, P.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 January 28, 1999, which appears on page 30 of this Annual
Report (Form 10-K) for the years ended December 31, 1998, 1997 and 1996.
Rehmann Robson, P.C.
Saginaw, Michigan
March 13, 1999
54
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-01-1998
<EXCHANGE-RATE> 1
<CASH> 15,497
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 89,486
<INVESTMENTS-CARRYING> 6,548
<INVESTMENTS-MARKET> 6,665
<LOANS> 246,708
<ALLOWANCE> 2,977
<TOTAL-ASSETS> 388,783
<DEPOSITS> 350,039
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,221
<LONG-TERM> 0
0
0
<COMMON> 5,290
<OTHER-SE> 29,233
<TOTAL-LIABILITIES-AND-EQUITY> 34,523
<INTEREST-LOAN> 19,986
<INTEREST-INVEST> 5,293
<INTEREST-OTHER> 520
<INTEREST-TOTAL> 25,799
<INTEREST-DEPOSIT> 12,482
<INTEREST-EXPENSE> 12,482
<INTEREST-INCOME-NET> 13,317
<LOAN-LOSSES> 321
<SECURITIES-GAINS> 49
<EXPENSE-OTHER> 10,942
<INCOME-PRETAX> 5,005
<INCOME-PRE-EXTRAORDINARY> 5,005
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,634
<EPS-PRIMARY> 4.15
<EPS-DILUTED> 4.15
<YIELD-ACTUAL> 4.02
<LOANS-NON> 99
<LOANS-PAST> 847
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,677
<CHARGE-OFFS> 264
<RECOVERIES> 243
<ALLOWANCE-CLOSE> 2,977
<ALLOWANCE-DOMESTIC> 2,977
<ALLOWANCE-FOREIGN> 2,977
<ALLOWANCE-UNALLOCATED> 2,977
</TABLE>
