<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
IBT BANCORP, INC.
(Exact name of registrant as specified in charter)
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<TABLE>
<S> <C> <C>
MICHIGAN 6712 38-2830092
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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IBT BANCORP, INC.
200 East Broadway
Mt. Pleasant, Michigan 48858
(517) 772-9471
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
------------------
DAVID W. HOLE
PRESIDENT
IBT BANCORP, INC.
200 East Broadway
Mt. Pleasant, Michigan 48858
(517) 772-9471
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
MATT G. HREBEC LLOYD C. FELL
FOSTER, SWIFT, COLLINS & SMITH, P.C. BODMAN, LONGLEY & DAHLING, L.L.P.
313 SOUTH WASHINGTON SQUARE 229 COURT STREET, P.O. BOX 405
LANSING, MICHIGAN 48933-2193 CHEBOYGAN, MICHIGAN 49721
(517) 371-8100 (231) 627-4351
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this registration statement becomes effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
---------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE(1) REGISTRATION FEE(2)
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<S> <C> <C> <C> <C>
Common stock, no par value... 875,092 N/A $10,806,540.62 $2,852.93
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</TABLE>
(1) Computed in accordance with Rule 457(f)(2) based on the book value on March
31, 2000 of the maximum number of shares of FSB Bancorp, Inc. common stock
expected to be received by the registrant in the merger and calculated by
multiplying (i) the book value of a share of FSB Bancorp, Inc. common stock
on March 31, 2000 ($26.38) by (ii) 409,649, representing the maximum
approximate number of shares of FSB Bancorp, Inc. common stock expected to
be received by the registrant in the merger.
(2) Based on .000264 of the proposed maximum aggregate offering price.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
FSB BANCORP, INC.
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD , 2000
------------------
To the Shareholders of FSB Bancorp, Inc.:
A special meeting of shareholders of FSB Bancorp, Inc., a Michigan
corporation ("FSB"), will be held on , , 2000, at
a.m., local time, at the United Methodist Church, 125 Third Street,
Breckenridge, Michigan, 48615, for the following purposes:
1. To consider and vote upon a proposal to approve the Agreement and
Plan of Merger, dated as of April 7, 2000, (the "Merger Agreement"), by and
between FSB and IBT Bancorp, Inc. ("IBT"), pursuant to which, among other
things, FSB will merge with and into IBT upon the terms and subject to the
conditions set forth in the Merger Agreement, as more fully described in
the proxy statement-prospectus that follows this notice.
2. To transact such other business as may properly be brought before
the special meeting and any adjournments or postponements of the special
meeting.
The board of directors of FSB has fixed the close of business on
, 2000 as the record date for determining those shareholders
entitled to vote at the special meeting and any adjournments or postponements of
the special meeting. Only shareholders of record on this date are entitled to
notice of, and to vote at, the special meeting and any adjournments or
postponements of the special meeting.
By Order of the Board of Directors
------------------------------------
Chairman
Breckenridge, Michigan
, 2000
Please promptly complete, sign, date and return the enclosed proxy card whether
or not you plan to attend the special meeting. Failure to return a properly
executed proxy or to vote at the meeting will have the same effect as a vote
against the Merger Agreement and the merger. You may still vote at the special
meeting even if you have previously returned your proxy card.
<PAGE> 3
[FSB LOGO]
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The board of directors of FSB has approved the sale of FSB to IBT (the
"Merger"). The Merger requires the approval of FSB's shareholders. A special
meeting of shareholders will be held to vote on the proposed merger. The date,
time and place of the meeting are set forth in the notice of special meeting on
the preceding page.
If the merger is completed, IBT expects to exchange 2.1362 of shares of its
common stock for each share of FSB common stock then outstanding.
The last transaction price in IBT common stock known to management
occurring prior to the public announcement of the Merger was $30.00 a share on
March 29, 2000, making 2.1362 shares of IBT common stock on that date equal to
$64.09. The last transaction price in IBT common stock known to management
occurring prior to the mailing of this Proxy Statement-Prospectus was
$ a share on , 2000, making 2.1362 shares of IBT common
stock equal on that date to $ .
The Merger is expected to be generally tax free to FSB shareholders, except
for cash received instead of fractional shares.
This proxy statement-prospectus provides detailed information about the
proposed merger. Please read this entire document carefully. You can find
additional information about IBT from documents filed with the Securities
Exchange Commission.
Whether or not you plan to attend the meeting, please complete and mail the
enclosed proxy card. If you sign, date and mail your proxy card without
indicating how you want to vote, your proxy will be voted in favor of the
Merger. If you fail to return your proxy card, or if you fail to instruct your
broker how to vote shares held for you in the broker's name, the effect will be
the same as a vote against the merger.
No vote of IBT's shareholders is required to approve the transaction.
Herbert C. Wybenga
President
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE IBT COMMON STOCK TO BE ISSUED OR
DETERMINED IF THIS PROXY STATEMENT-PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SHARES OF IBT COMMON STOCK TO BE ISSUED IN THE MERGER ARE NOT SAVINGS
OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OR ANY BANK OR NON-BANK SUBSIDIARY OF
IBT, AND THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
------------------
Proxy Statement-Prospectus dated , 2000.
First mailed to FSB shareholders on or about , 2000.
<PAGE> 4
ADDITIONAL INFORMATION
This proxy statement-prospectus incorporates important business and
financial information about IBT that is not included in or delivered with this
document. See "Where You Can Find More Information" on page 79 for a list of the
documents that IBT has incorporated into this proxy statement-prospectus. The
documents are available to you without charge upon written or oral request made
as follows:
IBT BANCORP, INC.
200 East Broadway
Mt. Pleasant, Michigan 48858
(517) 772-9471
TO OBTAIN DOCUMENTS IN TIME FOR THE SPECIAL MEETING, YOUR REQUEST SHOULD BE
RECEIVED BY , 2000.
QUESTIONS AND ANSWERS ABOUT THIS DOCUMENT
WHAT IS THE PURPOSE OF THIS DOCUMENT?
This document serves as both a proxy statement of FSB and a prospectus of
IBT. As a proxy statement, it's being provided to you because FSB's board of
directors is soliciting your proxy for use at the special meeting of
shareholders called to consider and vote on the proposed merger of FSB to IBT.
As a prospectus, it's being provided to you because IBT is offering to exchange
shares of its common stock for your shares of FSB common stock.
DO I NEED TO READ THE ENTIRE DOCUMENT?
Absolutely. Much of this proxy statement-prospectus summarizes information
that is in greater detail elsewhere in this document or in the appendices to
this document. Each summary discussion is qualified by reference to the full
text. For example, the summary of the terms of the Merger Agreement is qualified
by the actual terms of the Merger Agreement, a copy of which is attached as
Appendix A.
IS THERE OTHER INFORMATION I SHOULD CONSIDER?
Yes. Much of the business and financial information about IBT that may be
important to you is not included in this document. Instead, this information is
incorporated by reference to documents filed by IBT with the SEC. This means
that IBT may satisfy its disclosure obligations to you by referring you to one
or more documents separately filed by it with the SEC.
See "Where You Can Find More Information" on page 79 for a list of
documents that IBT has incorporated by reference into this proxy
statement-prospectus and for instructions on how to obtain copies of these
documents. The documents are available to you without charge.
WHAT IF THERE IS A CONFLICT BETWEEN DOCUMENTS?
You should rely on the later filed document. Information in this proxy
statement-prospectus may update information contained in one or more of the IBT
documents incorporated by reference. Similarly, information in documents that
IBT may file after the date of this proxy statement-prospectus may update
information in this proxy statement-prospectus or information in previously
filed documents.
i
<PAGE> 5
WHAT IF I CHOOSE NOT TO READ THE INCORPORATED DOCUMENTS?
Information contained in a document that is incorporated by reference is
part of this proxy statement-prospectus, unless it is superseded by information
contained directly in this proxy statement-prospectus or in one or more
documents filed with the SEC after the date of this proxy statement-prospectus.
Information that is incorporated from another document is considered to have
been disclosed to you whether or not you choose to read the document.
ii
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................... 1
The Merger................................................ 1
The Companies............................................. 1
What You Will Receive..................................... 1
Federal Income Tax Consequences to FSB Shareholders....... 2
Reasons for the Merger.................................... 2
Fairness Opinions......................................... 2
Surrender of FSB Shares................................... 2
Additional Benefits to FSB Management..................... 2
Dissenters' Rights........................................ 2
Special Meeting........................................... 2
Vote Required to Approve Merger........................... 3
Differences in the Rights of Shareholders................. 3
Regulatory Approvals...................................... 3
Other Conditions to Completing the Merger................. 3
Termination of the Merger Agreement....................... 3
Accounting Treatment...................................... 3
Regulation of IBT......................................... 3
Selected Financial Data................................... 4
Comparative Per Common Share Data......................... 5
SPECIAL MEETING OF SHAREHOLDERS............................. 6
Date, Time and Place...................................... 6
Record Date............................................... 6
Vote Required to Approve Merger........................... 6
Voting and Revocation of Proxies.......................... 6
Solicitation of Proxies................................... 7
Other Matters Considered at the Meeting................... 7
THE MERGER.................................................. 8
Effect of the Merger...................................... 8
Background of and Reasons for the Merger.................. 8
Opinions of FSB's and IBT's Financial Advisors............ 10
Additional Interests of FSB Management.................... 19
Dissenters' Rights........................................ 19
Exchange of Certificates.................................. 21
Regulatory Approvals...................................... 21
Effect of Merger on FSB's Employee Benefit Plans.......... 22
U.S. Federal Income Tax Consequences of the Merger........ 22
Resale of IBT Common Stock Issued in the Merger........... 23
Accounting Treatment...................................... 23
THE MERGER AGREEMENT........................................ 24
Basic Plan of Reorganization.............................. 24
Representations and Warranties............................ 25
Management and Operations After the Merger................ 25
Certain Covenants......................................... 25
Conditions to the Merger.................................. 27
Termination of the Merger Agreement....................... 27
Effect of Termination..................................... 28
Waiver and Amendment...................................... 28
Expenses.................................................. 28
</TABLE>
iii
<PAGE> 7
<TABLE>
<S> <C>
COMPARISON OF SHAREHOLDER RIGHTS............................................................................ 29
Introduction.............................................................................................. 29
Authorized and Outstanding Capital Stock.................................................................. 29
Number and Election of Directors.......................................................................... 29
Amendment of Governing Documents.......................................................................... 30
Approval of Mergers and Assets Sales...................................................................... 30
Preemptive Rights......................................................................................... 30
Special Meetings.......................................................................................... 31
Action Without a Meeting.................................................................................. 31
Limitations on Directors' Liability....................................................................... 31
Indemnification of Officers and Directors................................................................. 32
Dividends................................................................................................. 32
Corporate Governance Procedures; Nomination of Directors.................................................. 32
INFORMATION ABOUT IBT....................................................................................... 33
General................................................................................................... 33
Management and Additional Information..................................................................... 33
DESCRIPTION OF IBT CAPITAL STOCK............................................................................ 34
REGULATION AND SUPERVISION OF IBT........................................................................... 35
Introduction.............................................................................................. 35
Regulatory Agencies....................................................................................... 35
Financial Holding Company Activities...................................................................... 35
Dividend Restrictions..................................................................................... 36
Holding Company Structure................................................................................. 36
Capital Requirements...................................................................................... 37
FDIC Insurance............................................................................................ 38
Fiscal and Monetary Policies.............................................................................. 39
Competition............................................................................................... 39
Financial Modernization................................................................................... 39
INFORMATION ABOUT FSB....................................................................................... 40
General................................................................................................... 40
FSB Audited Consolidated Financial Statements............................................................. 41
FSB Management's Discussion and Analysis.................................................................. 56
FSB Condensed Consolidated Financial Statements........................................................... 66
IBT AND FSB UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION.................................... 72
EXPERTS..................................................................................................... 78
IBT's Independent Accountants............................................................................. 78
FSB's Independent Accountants............................................................................. 78
OPINIONS.................................................................................................... 78
Share Issuance............................................................................................ 78
Tax Matters............................................................................................... 79
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES................................................................................ 79
WHERE YOU CAN FIND MORE INFORMATION......................................................................... 79
SEC Filings............................................................................................... 79
Registration Statement.................................................................................... 79
Documents Incorporated By Reference....................................................................... 79
Documents Available Without Charge........................................................................ 80
FORWARD-LOOKING STATEMENTS.................................................................................. 80
</TABLE>
iv
<PAGE> 8
APPENDIX A -- AGREEMENT AND PLAN OF MERGER
APPENDIX B -- MBCA PROVISIONS ON DISSENTER'S RIGHTS
APPENDIX C -- OPINION OF AUSTIN ASSOCIATES, INC.
APPENDIX D -- OPINION OF AUSTIN FINANCIAL SERVICES, INC.
v
<PAGE> 9
SUMMARY
This summary highlights selected information from this document and may not
contain all of the information that is important to you. To understand the
Merger fully, and for a more complete description of the legal terms of the
Merger, you should carefully read this document and the other documents to which
this document refers you. See "Where You Can Find More Information" on page 79.
Each item in this summary includes a page reference to a more complete
description of that item.
THE MERGER (PAGE 8)
In the proposed transaction, IBT will acquire FSB through the merger of FSB
with and into IBT. IBT will survive the Merger and Farmers State Bank of
Breckenridge ("Farmers Bank") shall become a wholly owned subsidiary of IBT. If
the Merger is completed, IBT will exchange shares of its common stock for shares
of FSB common stock so that, after the Merger is completed, IBT will own all of
the outstanding stock of Farmers Bank.
The Merger Agreement is attached to this proxy statement-prospectus as
Appendix A. Please read the Merger Agreement as it is the document that governs
the Merger.
THE COMPANIES (PAGES 33 AND 40)
IBT BANCORP, INC.
200 East Broadway
Mt. Pleasant, Michigan 48858
(517) 772-9471
IBT is a financial holding company whose subsidiaries provide banking,
insurance and investments through fifteen offices located throughout Isabella
County, northeastern Montcalm County, and southern Clare County, all of which
are located in central Michigan. At March 31, 2000, IBT had assets of $401.1
million.
FSB BANCORP, INC.
316 East Saginaw Street
Breckenridge, Michigan 48615
(517) 842-3191
FSB is a bank holding company with one subsidiary state bank and one
insurance agency subsidiary. The insurance agency conducts no business other
than obtaining insurance for FSB. FSB owns minority interests of Michigan
Bankers Title Company of Northern Michigan, LLC, and of West Shore Computer
Services, Inc. Its subsidiary bank provides a full range of banking services
from three offices in Gratiot and Saginaw Counties of Michigan. At March 31,
2000, FSB had assets of $99.7 million.
WHAT YOU WILL RECEIVE (PAGE 24)
Shares Of IBT Common Stock
If the Merger is completed, you will receive a certain number of IBT common
stock for each share of FSB common stock you own. The number of shares is
referred to as the exchange ratio.
FSB and IBT expect the exchange ratio to be 2.1362. The exchange ratio
formula is described in more detail in "The Merger Agreement -- Basic Plan Of
Reorganization."
Cash Instead Of Fractional Shares
IBT will not issue fractional shares in the Merger. If the total number of
shares of IBT common stock you will receive in the Merger does not equal a whole
number, you will receive cash instead of the fractional share.
1
<PAGE> 10
FEDERAL INCOME TAX CONSEQUENCES TO FSB SHAREHOLDERS (PAGE 22)
FSB shareholders generally will not recognize gain or loss for U.S. federal
income tax purposes from the exchange of their shares of FSB common stock for
shares of IBT common stock. FSB shareholders will be taxed on cash they receive
instead of fractional shares and cash received pursuant to the exercise of
dissenters' rights.
THE TAX TREATMENT DESCRIBED ABOVE MAY NOT APPLY TO EVERY FSB SHAREHOLDER.
DETERMINING THE TAX CONSEQUENCES OF THE MERGER TO YOU MAY BE COMPLICATED. YOU
SHOULD CONSULT YOUR OWN ADVISOR FOR A FULL UNDERSTANDING OF THE MERGER'S TAX
CONSEQUENCES.
The parties are not obligated to complete the Merger unless they receive an
opinion of their respective counsel that no gain or loss will be recognized by
the holders of FSB common stock upon receipt of IBT common stock except for cash
received instead of fractional shares and cash received pursuant to the exercise
of dissenters' rights.
REASONS FOR THE MERGER (PAGE 8)
FSB's board of directors believes that the Merger is in the best interests
of FSB shareholders and recommends that FSB shareholders approve the Merger.
FSB's board believes that, as a result of the Merger, FSB shareholders will have
the potential for greater stock value appreciation than they would if FSB had
remained independent. Currently Farmers Bank has a substantial amount of
agricultural lending. Isabella Bank and Trust has a more diverse loan portfolio,
which helps alleviate the risk of a concentration in agricultural lending. The
Merger Agreement provides that Farmers Bank shall remain in existence as a state
chartered commercial bank, its banking offices will remain open and that there
will be no layoffs of Farmers Bank employees as a result of the Merger.
FAIRNESS OPINIONS (PAGE 10)
Austin Associates, Inc. has given its opinion to FSB's and IBT's boards of
directors that the consideration to be received in the Merger by FSB
shareholders is fair from a financial point of view. Austin Financial Services,
Inc. has given its opinion to FSB's board of directors that the consideration to
be received in the Merger by FSB shareholders is fair from a financial point of
view.
SURRENDER OF FSB SHARES (PAGE 21)
To receive certificates for your shares of FSB common stock, you will need
to surrender your FSB share certificates. After the Merger is completed, IBT's
stock transfer agent will send you written instructions for exchanging your
stock certificates.
PLEASE DO NOT SEND IN YOUR CERTIFICATES UNTIL YOU RECEIVE THESE
INSTRUCTIONS.
ADDITIONAL BENEFITS TO FSB MANAGEMENT (PAGE 19)
In considering FSB's board of directors' recommendation to approve the
Merger, you should be aware that the President of FSB has an interest in the
Merger that is in addition to his interests as an FSB shareholder. This interest
involves an employment agreement with Farmers Bank and generated by IBT. The
board of directors of FSB was aware of this additional interest when it approved
the Merger Agreement.
DISSENTERS' RIGHTS (PAGE 19)
FSB shareholders will have dissenters' rights under Michigan law in
connection with the Merger.
SPECIAL MEETING (PAGE 6)
FSB will hold the special meeting of shareholders at a.m., local time,
on , , 2000, at the United Methodist Church, 125 Third
Street, Breckenridge, Michigan 48615. You can vote at
2
<PAGE> 11
the meeting if you owned FSB common stock at the close of business on
, 2000, the record date for the meeting.
VOTE REQUIRED TO APPROVE MERGER (PAGE 6)
Approval of the Merger requires the affirmative vote of a majority of the
outstanding shares of FSB common stock entitled to vote at the special meeting.
Not voting, or failing to instruct your broker how to vote shares held for you
in the broker's name, will have the same effect as voting against the Merger.
At the record date for the special meeting, FSB's directors and executive
officers beneficially owned a total of 61,648 shares of FSB common stock,
representing approximately 15% of the shares of FSB common stock entitled to
vote at the special meeting. At the record date, IBT and its subsidiaries
beneficially owned no shares of FSB common stock.
DIFFERENCES IN THE RIGHTS OF SHAREHOLDERS (PAGE 29)
Your rights as an FSB shareholder are currently governed by Michigan law
and FSB's articles of incorporation and bylaws. Upon completion of the Merger,
you will become an IBT shareholder, and your rights will be governed by Michigan
law and IBT's articles of incorporation and bylaws.
REGULATORY APPROVALS (PAGE 21)
The Board of Governors of the Federal Reserve System must approve the
Merger before it can be completed. IBT believes that it has filed the required
application with the Federal Reserve Board. As of the date of this proxy
statement-prospectus, the Federal Reserve Board had not acted on IBT's
application for approval of the Merger. Although IBT expects that the Federal
Reserve Board will approve the Merger, it cannot be certain when or if, or on
what terms and conditions, the required approvals will be given.
OTHER CONDITIONS TO COMPLETING THE MERGER (PAGE 27)
In addition to the receipt of regulatory approvals, there are a number of
other conditions that must be met before the Merger can be completed. These
conditions include obtaining requisite shareholder and regulatory approvals, the
absence of any materially burdensome requirement or condition imposed in
connection with obtaining any such regulatory approval, the accuracy in all
material respects of the representations and warranties of the two companies and
receipt of opinions of counsel in respect of certain Federal income tax
consequences of the Merger.
TERMINATION OF THE MERGER AGREEMENT (PAGE 27)
IBT and FSB can agree to terminate the Merger Agreement at any time without
completing the Merger. Also, either company can terminate the Merger Agreement
without the consent of the other under certain circumstances, including:
- a court or other governmental authority prohibits or denies the Merger;
or
- the Merger is not completed by December 31, 2000.
ACCOUNTING TREATMENT (PAGE 23)
IBT expects to account for the Merger under the pooling of interests method
of accounting.
REGULATION OF IBT (PAGE 35)
IBT, its banking subsidiary and its nonbanking subsidiaries are subject to
extensive regulation by a number of federal and state agencies. This regulation,
among other things, may restrict IBT's ability to diversify into other areas of
financial services, acquire depository institutions in certain states and pay
dividends on its stock. It may also require IBT to provide financial support to
its subsidiary bank, maintain
3
<PAGE> 12
capital balances in excess of those desired by management and pay higher deposit
premiums as a result of the deterioration in the financial condition of
depository institutions in general.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 that, effective March 11, 2000, will permit bank
holding companies to become financial holding companies and thereby affiliate
with securities firms and insurance companies and engage in other activities
that are financial in nature. The Gramm-Leach-Bliley Act defines "financial in
nature" to include:
- securities underwriting, dealing and market making;
- sponsoring mutual funds and investment companies;
- insurance underwriting and agency;
- merchant banking activities; and
- activities that the Board of Governors of the Federal Reserve System has
determined to be closely related to banking.
On February 12, 2000, IBT filed application with the Federal Reserve to
become a financial holding company. IBT's application was approved by the
Federal Reserve effective March 13, 2000.
Under the Gramm-Leach-Bliley Act, securities firms and insurance companies
that elect to become financial holding companies may acquire banks and other
financial institutions. The Gramm-Leach-Bliley Act may significantly change the
competitive environment in which IBT and its subsidiaries conduct business.
SELECTED FINANCIAL DATA
The following financial information is to aid you in your analysis of the
financial aspects of the Merger. The IBT financial data is derived from its
audited consolidated financial statements for 1995 through 1999. The FSB
financial data is derived from its audited consolidated financial statements for
1995 through 1999. The information in the table is only a summary and should be
read with the full financial statements and related notes of IBT and FSB. The
information in the table has been adjusted for stock splits and stock dividends.
IBT AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net interest income..................... $ 14,603 $ 13,317 $ 12,196 $ 11,741 $ 10,855
Net income.............................. 4,051 3,634 3,609 3,340 2,958
Diluted earnings per share.............. 1.38 1.26 1.26 1.18 1.06
Cash dividends per share................ 0.50 0.47 0.45 0.42 0.36
Book value per share.................... 12.32 11.87 10.76 9.85 9.19
Total assets............................ 402,018 388,783 318,731 298,742 281,505
Long-term debt.......................... 0 0 0 0 0
</TABLE>
4
<PAGE> 13
FSB AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net interest income..................... $ 4,615 $ 4,270 $ 4,001 $ 3,822 $ 3,743
Net income.............................. 1,194 1,067 1,040 1,009 1,008
Diluted earnings per share.............. 2.94 2.64 2.60 2.55 2.57
Cash dividends per share................ 1.12 1.02 1.00 0.90 0.83
Book value per share.................... 25.55 23.77 22.03 20.42 18.91
Total assets............................ 101,579 97,200 95,364 90,766 88,513
Long-term debt.......................... 0 0 0 0 0
</TABLE>
COMPARATIVE PER COMMON SHARE DATA
The following table shows comparative per share data for IBT common stock
on a historical and pro forma combined basis and for FSB common stock on a
historical and pro forma equivalent basis. The information in the table assumes
that IBT will account for the Merger as a pooling of interests and will exchange
2.1362 shares of its common stock for each share of FSB common stock. The pro
forma equivalent information for FSB is calculated by multiplying the pro forma
basic and diluted earnings per share, the historical cash dividends declared per
share of FSB common stock and the pro forma shareholders' equity per share by
the assumed exchange ratio of 2.1362.
You should read the data with the historical financial statements and
related notes of IBT and FSB. IBT's historical financial statements are included
in documents filed with the SEC; FSB's financial statements are included
elsewhere in this document. See "Where You Can Find More Information" on page
79. Amounts are in U.S. dollars. The information has been adjusted for stock
splits and stock dividends.
<TABLE>
<CAPTION>
IBT FSB
----------------------- ------------------------
PRO FORMA PRO FORMA
HISTORICAL COMBINED HISTORICAL EQUIVALENT
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE
Basic
Year Ended December 31, 1999..................... $1.38 $1.38 $2.94 $2.95
Diluted
Year Ended December 31, 1999..................... 1.38 1.38 2.94 2.95
CASH DIVIDENDS DECLARED PER SHARE
Year Ended December 31, 1999........................ 0.50 0.49 1.12 1.05
SHAREHOLDERS' EQUITY PER SHARE
December 31, 1999................................... 12.32 12.24 25.55 26.15
</TABLE>
5
<PAGE> 14
SPECIAL MEETING OF SHAREHOLDERS
DATE, TIME AND PLACE
The date, time and place of the special meeting of FSB shareholders called
to consider and vote on the Merger Agreement are:
, , 2000
a.m., local time
United Methodist Church
125 Third Street
Breckenridge, Michigan 48615
RECORD DATE
FSB's board of directors has established , 2000 as the record
date for the meeting. Only shareholders of record on that date are entitled to
attend and vote at the special meeting.
VOTE REQUIRED TO APPROVE MERGER
On the record date, there were 409,649 shares of FSB common stock
outstanding and entitled to vote at the special meeting. The holders of FSB
common stock are entitled to one vote per share. The presence, in person or by
proxy, at the special meeting of the holders of a majority of the outstanding
shares entitled to vote is necessary for a quorum. Approval of the Merger
requires the affirmative vote, in person or by proxy, of the holders of a
majority of the shares of FSB common stock outstanding on the record date.
At the record date for the special meeting, FSB's directors and executive
officers beneficially owned a total of 61,648 shares of FSB common stock,
representing approximately 15% of the shares of FSB common stock entitled to
vote at the special meeting. At the record date, IBT and its subsidiaries
beneficially owned no shares of FSB common stock.
VOTING AND REVOCATION OF PROXIES
All shares of FSB common stock represented at the special meeting by a
properly executed proxy will be voted in accordance with the instructions
indicated on the proxy, unless the proxy is revoked before a vote is taken. If
you sign and return a proxy without voting instructions, and do not revoke the
proxy, the proxy will be voted FOR the Merger.
You may revoke your proxy at any time before it is voted by (a) filing
either an instrument revoking the proxy or a duly executed proxy, in either case
bearing a later date, with the corporate secretary of FSB before or at the
special meeting or (b) voting the shares subject to the proxy in person at the
special meeting. Attendance at the special meeting will not by itself result in
your proxy being revoked.
A proxy may indicate that all or a portion of the shares represented by the
proxy are not being voted with respect to a specific proposal. This could occur,
for example, when a broker is not permitted to vote shares held in the name of a
nominee on certain proposals in the absence of instructions from the beneficial
owner. Shares that are not voted with respect to a specific proposal will be
considered as not present for that proposal, even though the shares will be
considered present for purposes of determining a quorum and voting on other
proposals. Abstentions on a specific proposal will be considered as present but
will not be counted as voting in favor of the proposal.
The proposal to approve the Merger must be approved by the holders of a
majority of the shares of FSB common stock outstanding at the record date.
Because approval of the Merger requires the affirmative vote of a specified
percentage of outstanding shares, not voting on the proposal, or failing to
instruct your broker how to vote shares held for you by the broker, will have
the same effect as voting against the proposal.
6
<PAGE> 15
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
FSB and its subsidiaries may solicit proxies from FSB shareholders, either
personally or by telephone or other form of communication. None of the foregoing
persons who solicit proxies will be specifically compensated for such services.
FSB does not anticipate that anyone will be specifically engaged to solicit
proxies or that special compensation will be paid for that purpose, but FSB
reserves the right to do so should it conclude that such efforts are necessary
or advisable.
Nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending proxy material to beneficial owners. FSB
will bear its own expenses in connection with any solicitation of proxies for
the special meeting.
OTHER MATTERS CONSIDERED AT THE MEETING
If an insufficient number of votes for the Merger is received before the
scheduled meeting date, IBT and FSB may decide to postpone or adjourn the
special meeting. If this happens, proxies that have been received that either
have been voted for the Merger or contain no instructions will be voted for
adjournment.
FSB's board of directors is not aware of any business to be brought before
the special meeting other than the proposal to approve the Merger. If other
matters are properly brought before the special meeting or any adjournments or
postponements of the meeting, the persons appointed as proxies will have
authority to vote the shares represented by properly executed proxies in
accordance with their discretion and judgment as to the best interests of FSB.
7
<PAGE> 16
THE MERGER
EFFECT OF THE MERGER
As a result of the Merger:
- IBT will exchange shares of its common stock for shares of FSB common
stock.
- FSB will be merged with and into IBT.
- IBT will acquire all of the outstanding common stock of Farmers Bank,
resulting in Farmers Bank becoming a wholly-owned subsidiary of IBT.
- FSB shareholders will become IBT shareholders, with their rights governed
by Michigan law and IBT's articles of incorporation and bylaws. See
"Comparison Of Shareholder Rights."
- The name of the surviving holding company following consummation of the
Merger will be "IBT Bancorp, Inc."
BACKGROUND OF AND REASONS FOR THE MERGER
Background of the Merger
The Merger Agreement was executed on April 7, 2000 and a press release
issued announcing the terms of the Merger on April 10, 2000.
FSB and IBT have enjoyed long histories of operating as independent
community banks. Given the geographic proximity of operations, senior management
and the boards of directors are familiar with the business strategies,
philosophies and reputations of each company. Early in the third quarter of
1999, IBT and FSB invited Austin Associates, Inc. ("AAI") to attend individual
meetings with each organization to outline the manner in which IBT and FSB could
accomplish a business combination transaction.
On August 4, 1999, AAI met with the FSB board and separately met with the
executive management of IBT to discuss the range of issues involved in this type
of transaction. Both FSB and IBT retained AAI in a joint engagement letter to
assist in evaluating and facilitating the potential acquisition of FSB by IBT.
On September 7, 1999, AAI issues its report related to the potential
transaction. The report consisted of a valuation of IBT on a minority share
level, a valuation of FSB on a sale of control level, and an exchange ratio
analysis to evaluate the pro forma impact of the transaction to FSB and IBT,
including the effect to per share earnings, book value and dividends.
On October 19, 1999, AAI met with the FSB board and IBT executive
management to review the AAI report. On December 14, AAI met with the FSB board
to further examine the report, to discuss various nonfinancial issues related to
a potential transaction, and to review additional information regarding IBT,
including its employee benefit program. The nonfinancial issues reviewed by the
board included the formal structure of the transaction, name of the resulting
company, management and control issues following the Merger and the impact of
the transaction to FSB's customers and employees.
Subsequent to the December 14, 1999 FSB board meeting, AAI facilitated
negotiation of various nonfinancial issues and on January 6, 2000, AAI met with
the IBT board to discuss these matters.
AAI met with the FSB board on February 1, 2000 to finalize the negotiation of
the substantive financial and nonfinancial issues in connection with the Merger.
Both the IBT and FSB boards of directors authorized the commencement of due
diligence of the other organization and each retained special legal counsel to
draft and negotiate the Merger Agreement.
Special legal counsel to FSB advised the FSB board to secure its own
financial fairness opinion in connection with the Merger. On February 9, 2000,
FSB retained Austin Financial Services, Inc. ("AFSI") to render such an opinion.
AFSI is not affiliated with AAI.
8
<PAGE> 17
At the FSB board of directors meeting held on April 4, 2000 and at the IBT
board of directors meeting held on February 29, 2000, the respective boards were
advised that AAI believed the financial terms of the Merger Agreement were fair,
from a financial point of view, to shareholders of both FSB and IBT. The FSB
board was also advised that AFSI believed the financial terms of the Merger
Agreement were fair, from a financial point of view, to shareholders of FSB. The
boards of directors, with legal counsel, then considered the overall terms of
the Merger Agreement and voted unanimously to approve the Merger Agreement.
FSB's Board of Directors' Reasons for the Merger
Subject to satisfaction of certain conditions contained in the Merger
Agreement, FSB's board of directors believes the Merger to be fair and in the
best interest of FSB shareholders.
The terms of the proposed Merger are the result of arm's-length
negotiations by representatives of FSB and IBT, which culminated in the signing
of the Merger Agreement as of April 7, 2000. In arriving at its decision to
approve and recommend the terms of the Merger Agreement, the board of directors
of FSB considered a number of factors, including, but not limited to, the
following:
- the potential benefits to be derived for FSB shareholders from a
combination of the two companies, including the potential for greater
stock appreciation and the efficiencies and economies provided by a
larger combined institution with greater resources and a larger customer
base;
- the strategic and financial alternatives available in the rapidly
consolidating financial services industry and the increasing cost and
difficulty for a smaller institution to meet technological changes;
- the terms of the Merger Agreement;
- the current and prospective economic, competitive and regulatory
environment facing FSB and other financial institutions;
- the fact that the transaction was structured to continue the existence of
FSB, to keep its offices open to provide that no employee would be laid
off;
- the opinions of FSB's financial advisor that, as of March 31, 2000, and
May 26, 2000 subject to the assumptions and limitations set forth in the
opinions, the Merger from a financial point of view was fair to FSB and
its shareholders;
- the likely social and economic effect of the Merger on FSB's customers
and employees and the communities in which it operates;
- the diversification which will result from joining forces with IBT, which
has a more diverse loan portfolio than does FSB, which has a substantial
amount of agricultural lending;
- the qualification of the Merger as a tax-free transaction for United
States federal income tax purposes (except for tax resulting from any
cash received for fractional shares by the holders of FSB common stock)
and the expected accounting treatment as a pooling of interests;
- our board's review, based in part on presentation by our financial
advisors and our due diligence review of IBT, of the financial condition,
results of operation, businesses and prospects of each of the
institutions before and after giving effect to the Merger and the
determination of the Merger's effect on shareholder value; and
- the current market conditions for financial institution stocks,
historical market prices of FSB and IBT common stock, price volatility
and trading information.
The President of FSB has an interest in the Merger in addition to his
interests as a shareholder generally. This additional interest relates to a
future employment agreement. Shareholders may wish to
9
<PAGE> 18
consider those interests in evaluating the recommendation of the FSB board of
directors that shareholders vote for approval of the Merger. See "Additional
Interests of FSB Management" below.
In reaching its determination to approve and recommend the Merger, the
board of directors of FSB did not assign any relative or specific weights to the
foregoing factors, and individual directors may have given different weights to
different factors.
FSB'S BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT FSB SHAREHOLDERS
APPROVE THE MERGER AGREEMENT AND THE MERGER.
OPINIONS OF FSB'S AND IBT'S FINANCIAL ADVISORS
The fairness opinions of the financial advisors, Austin Associates, Inc.
("AAI") and Austin Financial Services, Inc. ("AFSI") are described below. The
full text of the fairness opinions which set forth, among other things,
assumptions made, procedures followed, matters considered and limitations on the
review undertaken are attached to this document as Appendix C and D,
respectively. Shareholders of FSB are urged to read the fairness opinions
carefully and in their entirety. To the extent that the descriptions contain
projections, estimates and/or other forward-looking statements about the future
earnings or other measures of the future performance of IBT, you should not rely
on any of these statements as having been made or adopted by IBT unless they
have been made by IBT in a document that is incorporated by reference into this
proxy statement-prospectus. See "Where You Can Find More Information."
AUSTIN ASSOCIATES, INC. OPINION
FSB and IBT retained Austin Associates, Inc. ("AAI") pursuant to an
engagement letter dated August 4, 1999 to provide financial advisory services in
connection with facilitating a potential business combination transaction under
which IBT would acquire FSB. IBT and FSB selected AAI based on its experience,
expertise and familiarity in representing community banks in similar
transactions. AAI is a nationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and securities in connection
with mergers and acquisitions and valuations for corporate and other purposes.
AAI orally advised the FSB and IBT boards of directors that, as of April 7,
2000, the financial terms of the Merger Agreement were fair to each company and
their respective stockholders. AAI confirmed this oral opinion by delivery of a
written opinion dated April 7, 2000, the date the Merger Agreement was signed.
AAI's written opinion has been updated to , 2000, and this updated
opinion is attached as Appendix C to this Proxy Statement/Prospectus.
You should consider the following when reading the discussion of AAI's
opinion in this document:
- The summary of the AAI opinion set forth in this Proxy
Statement/Prospectus is qualified in its entirety by reference to the
full text of the opinion that is attached as Appendix C to this document.
You should read the opinion in its entirety for a full discussion of the
procedures followed, assumptions made, matters considered and
qualifications and limitations of the review undertaken by AAI in
connection with its opinion.
- The AAI opinion is addressed to both IBT and FSB and is substantially
identical to the written opinion delivered to the IBT and FSB boards
dated April 7, 2000.
- AAI expressed no opinion as to the price at which IBT common stock would
actually be trading at any time.
- The AAI opinion does not address the relative merits of the Merger and
the other business strategies considered by IBT or FSB, nor does it
address the IBT or FSB board decision to proceed with the Merger.
- The AAI opinion to the IBT and FSB boards rendered in connection with the
Merger does not constitute a recommendation to any IBT or FSB shareholder
as to how he or she should vote at the special meeting.
10
<PAGE> 19
In connection with its opinion, AAI made the following assumptions:
- that the Merger will be accounted for as a pooling in accordance with
generally accepted accounting principles;
- that all material governmental, regulatory and other consents and
approvals necessary for the consummation of the Merger would be obtained
without any adverse effect to IBT, FSB or on the anticipated benefits of
the Merger;
- that IBT and FSB had provided it with all of the information prepared by
IBT and FSB or its other representatives that might be material to AAI in
its review; and
- that the financial projections it reviewed were reasonably prepared on a
basis reflecting the best currently available estimates and judgment of
the management of IBT and FSB as to the future operating and financial
performance of IBT and FSB, respectively.
In addition, AAI:
- reviewed the Merger Agreement and publicly available business and
financial information relating to IBT and FSB that it considered
relevant;
- reviewed other information relating to IBT and FSB, including internal
financial forecasts and forecasts of cost savings to be achieved in the
merger;
- held discussions with IBT and FSB management related to the business and
prospects of the pro forma company;
- considered financial and stock market information about IBT and FSB and
compared that information with similar information about other publicly
traded financial institutions;
- considered the financial terms of other recent business combinations
among financial institutions; and
- considered such other studies, analyses, inquiries and examinations as
AAI deemed appropriate.
In connection with its review, AAI did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by AAI. AAI relied on this information being complete and accurate in
all material respects. As to the financial forecasts, including the estimates of
future cost savings and operating synergies expected to be achieved as a result
of the merger, AAI assumed that these forecasts were reasonably prepared and
reflected the best currently available estimates and judgments of the management
of IBT and FSB as to the future financial performance of IBT and FSB. In
addition, IBT and FSB did not ask AAI to make, and AAI did not make, an
independent evaluation or appraisal of the assets or liabilities, contingent or
otherwise, of IBT or FSB, nor was AAI furnished with any evaluations or
appraisals of this kind. IBT and FSB placed no limits on the scope of analysis
performed, or opinion expressed, by AAI.
In preparing its opinion, AAI performed a variety of financial and
comparative analyses, the material aspects of which are described below. The
preparation of a fairness opinion is a complex analytic process involving
various determinations as to the most appropriate and relevant methods of
financial analyses and the application of those methods to the particular
circumstances. Therefore, such an opinion is not readily susceptible to partial
analysis or summary description. In arriving at its opinion, AAI made
qualitative judgments as to the significance and relevance of each analysis and
factor considered by it. Accordingly, AAI believes that its analyses must be
considered as a whole and that selecting portions of its analyses and factors,
without considering all analyses and factors, could create a misleading or
incomplete view of the process underlying its analyses and its opinion.
The following is a summary of the material financial analyses performed by
AAI in connection with its written opinion rendered to the IBT and FSB boards of
directors as of April 7, 2000 and its updated opinion as of , 2000.
Certain of these summaries include information presented in tabular
11
<PAGE> 20
format. In order to fully understand the financial analyses used by AAI, these
tables must be read together with the accompanying narrative. The tables alone
do not constitute a complete description of the applicable financial analysis.
Summary of Financial Terms of Agreement: AAI reviewed the financial terms of the
proposed transaction, including the form of consideration and the exchange
ratio. Under the terms of the Merger Agreement, each outstanding share of FSB
common stock shall be exchanged for 2.1362 shares of IBT common stock. No
fractional shares of IBT common stock shall be issued in the Merger. Cash will
paid in lieu of fractional shares based on the value of IBT common stock.
Preparation of Financial Analysis: In connection with AAI's role as financial
advisor pursuant to the engagement letter dated August 4, 1999, AAI prepared a
financial analysis comprised of a minority share valuation of IBT, a sale of
control valuation of FSB and an exchange ratio analysis evaluating the financial
impact of the transaction to both IBT and FSB. These reports were issued on
September 7, 1999 based on June 30, 1999 financial information.
Minority Share Valuation for IBT: In the minority share valuation for IBT,
AAI determined a value range between $20.30 to $22.73 per share (adjusted
for 3.3-for-1 stock split paid February 18, 2000). AAI used the following
techniques to determine the fair market value of IBT on a minority share
basis using financial performance data as of June 30, 1999:
- Income Approach: AAI completed a discounted cash flow analysis of IBT
operated as a going concern. The calculation is based on long term
projections for assets, earnings and capital levels, among other
variables. The future projected cash flows are discounted to a present
value amount under this methodology.
- Net Asset Value Approach: Under this method, the market value of IBT's
liabilities is subtracted from the market value of its assets to
determine a net asset value. Certain adjustments are made to reflect the
going concern nature of IBT.
- Guideline Transaction Approach: Indications of value are established for
IBT based on two sets of guideline transactions, including (1) price/book
and price/earnings multiples for selected publicly traded companies; and
(2) price/book and price/earnings multiples for selected bank sale
transactions. In determining minority share indications of value for IBT,
AAI applied a minority share discount to all sale transaction multiples.
- Market Price: The most recent trading prices of IBT's common shares based
on arm's length transactions.
The following chart highlights the valuation results for IBT:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
IBT VALUATION RESULTS AS OF JUNE 30, 1999
PER SHARE
---------
<S> <C>
Income Approach............................................. $17.82
Net Asset Value Approach.................................... $15.72
Guideline Transaction Approach
Minority Share Value
Price to Tangible Book Value Ratio..................... $22.94
Price to Earnings Multiple............................. $21.16
Control Level Value with Minority Discount
Price to Tangible Book Value Ratio..................... $23.40
Price to Earnings Multiple............................. $23.60
Market Price................................................ $24.24
-------------
Fair Market Value Conclusion................................ $20.30-$22.73
=============
---------------------------------------------------------------------------
</TABLE>
12
<PAGE> 21
In determining the fair market value of IBT on a minority share basis, AAI
considered each of the valuation results. No specific formula or weighting was
utilized in AAI's appraisal to reach its fair market value conclusion.
Sale of Control Valuation for FSB: In the sale of control valuation for FSB, AAI
determined a value range between $47.62 to $51.43 per share (adjusted for 5
percent stock dividend paid October 15, 1999) or $19.4 to $20.9 million in the
aggregate. AAI used the following techniques to determine the fair market value
of FSB on a sale of control basis as of June 30, 1999:
- Income Approach: AAI completed a discounted cash flow analysis of FSB on
a sale of control basis. The calculation is based on long term
projections for assets, earnings and capital levels, among other
variables. The future projected cash flows are discounted to a present
value amount under this methodology. A control premium was added to
reflect the nature of the proposed transaction.
- Net Asset Value Approach: Under this method, the market value of FSB's
liabilities is subtracted from the market value of its assets to
determine a net asset value. A control premium was added to reflect the
nature of the proposed transaction.
- Guideline Transaction Approach: Indications of value for FSB are
established based on guideline transactions. Price/book, price/earnings
and premium over book value as a percent of total asset multiples for the
selected bank sale transactions were reviewed in this analysis.
The following chart highlights the valuation results for FSB:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
FSB VALUATION RESULTS AS OF JUNE 30, 1999
AGGREGATE
VALUE
PER SHARE ($ MILS.)
--------- ---------
<S> <C> <C>
Income Approach.......................................... $48.97 $19.9
Net Asset Value Approach................................. $47.08 $19.2
Guideline Transaction Approach
Control Level Value
Price to Tangible Book Value Ratio.................. $50.57 $20.6
Price to Earnings Multiple.......................... $51.50 $21.0
Premium over Tangible Book as a % of Assets......... $49.97 $20.3
------------- -----------
Fair Market Value Conclusion............................. $47.62-$51.43 $19.4-$20.9
============= ===========
--------------------------------------------------------------------------------------
</TABLE>
In determining the fair market value of FSB on a sale of control basis, AAI
considered each of the valuation results. No specific formula or weighting was
utilized in AAI's appraisal to reach its fair market value conclusion.
Exchange Ratio Analysis: AAI prepared an exchange ratio analysis to supplement
the individual valuations of IBT and FSB. The purpose of this analysis was to
evaluate the pro forma impact of the transaction to IBT, FSB and their
shareholders. Four individual analyses were included in this exchange ratio
analysis.
- Contribution Analysis: AAI considered the contribution of certain balance
sheet and income statement items that IBT and FSB would contribute to the
pro forma company.
- Guideline Transactions: AAI identified five transactions involving buyers
and sellers with similar balance sheet and income statement
characteristics to IBT and FSB. The financial terms of these transactions
were evaluated and considered.
13
<PAGE> 22
- Fair Market Valuations of IBT and FSB: AAI calculated pro forma exchange
ratios based on the range of values established in the individual
valuations of IBT and FSB.
- Pro Forma Merger Analysis: AAI considered the pro forma effect of the
Acquisition to IBT and FSB per share data, including book value per
share, earnings per share and dividends per share.
Contribution Analysis: AAI analyzed selective pro forma financial measures that
IBT and FSB would be contributing to the combined company, excluding any
projected cost savings, and compared this to the pro forma ownership of IBT and
FSB stockholders.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
SELECTIVE CONTRIBUTION PERCENTAGES AS OF JUNE 30, 1999
IBT FSB
--- ---
<S> <C> <C>
Book Value.................................................. 78.4% 21.6%
Tangible Book Value......................................... 76.8% 23.2%
Last 12 Month Net Income.................................... 78.1% 21.9%
Last 12 Month Cash Net Income(1)............................ 79.6% 20.4%
Total Assets................................................ 80.7% 19.3%
Total Loans................................................. 76.4% 23.6%
Total Deposits.............................................. 80.9% 19.1%
---- ----
Financial Terms of Merger Agreement......................... 77.3% 22.7%
==== ====
---------------
(1) Net income excluding goodwill amortization expense
---------------------------------------------------------------------------
</TABLE>
Guideline Transactions: AAI analyzed the pro forma ownership and contribution
results of selected bank acquisitions announced between January 1, 1998 and June
30, 1999 with similar characteristics to IBT and FSB. The criteria for the peer
transactions included: (1) all stock as the form of consideration; (2) buyers
having assets less than $1 billion; (3) sellers having assets less than $500
million; (4) buyer and seller return on average assets ("ROA") ranging from 0.9
percent to 1.5 percent; and (5) buyer and seller return on average equity
("ROE") ranging from 10 percent to 15 percent.
Based on this criterion, five transactions were evaluated. The average
buyer had $319 million in assets, while the average seller had $75 million in
total assets. AAI considered the contribution of equity and net income of the
selling institutions in comparison to their resulting pro forma ownership in the
buying company. The selling institutions received an average ownership equal to
123 percent of their contribution of net income and 115 percent their
contribution of equity.
By applying these guideline transaction multiples to the IBT and FSB
financial data, AAI calculated alternative pro forma exchange ratios. The
following table highlights the results:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
IBT VALUATION RESULTS AS OF JUNE 30, 1999
PRO
SALE OF FORMA
FSB'S 06/30/99 CONTROL PEER OWNERSHIP EXCHANGE RATIO
CATEGORY CONTRIBUTION MULTIPLE TO FSB TO FSB
-------- -------------- ------------ --------- --------------
<S> <C> <C> <C> <C>
Net Income.......................... 21.9% 123% 27.0% 2.6962
Cash Net Income..................... 20.4% 123% 25.1% 2.4462
Tangible Equity..................... 23.2% 115% 26.7% 2.6557
---- ------
Financial Terms of Merger
Agreement......................... 22.7% 2.1362
==== ======
------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 23
Fair Market Valuations of IBT and FSB: The following chart highlights the
individual appraisal results, and calculates a range of exchange ratios based on
the range of respective values for IBT and FSB.
--------------------------------------------------------------------------------
APPRAISAL RESULTS
<TABLE>
<CAPTION>
VALUATION RANGE PER SHARE
------------------------------------------
IBT FSB OWNERSHIP OWNERSHIP EXCHANGE RATIO FOR
(MINORITY VALUE) (SALE OF CONTROL VALUE) TO IBT TO FSB EACH FSB SHARE
---------------- ----------------------- --------- --------- ------------------
<S> <C> <C> <C> <C>
Low $20.30 High $51.43 74.2% 25.8% 2.5330
Midpoint $21.52 Midpoint $49.52 76.0% 24.0% 2.3018
High $22.73 Low $47.62 77.7% 22.3% 2.0952
---- ---- ------
Financial Terms of Merger Agreement 77.3% 22.7% 2.1362
==== ==== ======
</TABLE>
--------------------------------------------------------------------------------
Pro Forma Merger Analysis: AAI analyzed the pro forma effect of the merger to
the estimated earnings per share of IBT and FSB for the four years following the
merger. This analysis assumed a closing date of June 30, 2000. In performing
this analysis, AAI considered pre-tax cost savings equal to 5% of FSB's
operating expenses in the first year after the Merger, 10% in the second year,
and 15% in both the third and fourth years.
The following chart highlights the results of the pro forma merger
analysis:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROJECTED 4-YEAR AVERAGE PERCENT CHANGE TO:
-------------------------------------------
EXCHANGE RATIO TO FSB IBT'S INCREMENTAL EPS FSB'S EPS
--------------------- --------------------- ---------
<S> <C> <C>
2.5330 (11.0)% 31.7%
2.3018 (2.0)% 22.6%
2.0952 7.6% 14.0%
----- ----
Terms of Merger 5.6% 15.8%
===== ====
Agreement)
(2.1362 Exchange Ratio
</TABLE>
--------------------------------------------------------------------------------
AAI also analyzed the pro forma effect of the merger on the estimated book
value per share of IBT and FSB for the four years following the transaction.
Based on this analysis, AAI calculated that the merger would be 0.9 percent
dilutive to IBT's estimated book value per share in 2004 and the transaction
would be 8.0 percent accretive to FSB's estimated book value per share in 2004
based on a 2.1362 exchange ratio to FSB.
Interim Financial Performance since June 30, 1999: AAI evaluated the interim
financial performance of IBT and FSB between June 30, 1999 and March 31, 2000.
Balance sheet and income statement data for the six and twelve months ended
December 31, 1999 and for the three months ended March 31, 2000 were reviewed.
--------------------------------------------------------------------------------
IBT SELECTIVE FINANCIAL DATA ($000)
<TABLE>
<CAPTION>
SIX MONTH SIX MONTH THREE MONTH
PERIOD ENDING PERIOD ENDING PERIOD ENDING
CATEGORY 06/30/99 12/31/99 03/31/00
-------- ------------- ------------- -------------
<S> <C> <C> <C>
Total Assets.............................. $401,020 $402,018 $401,110
Total Loans............................... $252,255 $276,722 $280,060
Total Deposits............................ $360,680 $355,635 $357,027
Total Equity.............................. $ 36,271 $ 36,678 $ 37,604
Total Tangible Equity..................... $ 32,231 $ 32,926 $ 33,994
Net Income................................ $ 2,016 $ 2,035 $ 996
Cash Net Income........................... $ 2,205 $ 2,225 $ 1,090
ROAA...................................... 1.02% 1.01% 0.99%
ROAE...................................... 11.83% 11.16% 10.46%
</TABLE>
--------------------------------------------------------------------------------
15
<PAGE> 24
--------------------------------------------------------------------------------
FSB SELECTIVE FINANCIAL DATA ($000)
<TABLE>
<CAPTION>
SIX MONTH SIX MONTH SIX MONTH
PERIOD ENDING PERIOD ENDING PERIOD ENDING
CATEGORY 06/30/99 12/31/99 03/31/00
-------- ------------- ------------- -------------
<S> <C> <C> <C>
Total Assets.................................. $95,972 $101,579 $99,713
Total Loans................................... $77,871 $ 79,123 $82,686
Total Deposits................................ $84,957 $ 89,441 $88,069
Total Equity.................................. $ 9,998 $ 10,429 $10,771
Total Tangible Equity......................... $ 9,798 $ 10,248 $10,600
Net Income.................................... $ 556 $ 638 $ 342
Cash Net Income............................... $ 569 $ 651 $ 349
ROAA.......................................... 1.16% 1.29% 1.36%
ROAE.......................................... 11.32% 12.49% 12.91%
</TABLE>
--------------------------------------------------------------------------------
Contribution Analysis as of March 31, 2000: AAI analyzed selective pro forma
financial measures that IBT and FSB would be contributing to the combined
company, excluding any projected cost savings, and compared this to the pro
forma ownership of IBT and FSB stockholders. AAI noted that, based on the IBT
exchange ratio and the number of shares of IBT stock and FSB stock outstanding
at March 31, 2000, IBT stockholders would own approximately 77.4 percent and FSB
stockholders would own approximately 22.6 percent of the pro forma shares
outstanding. AAI compared these percentages to the following pro forma data:
--------------------------------------------------------------------------------
SELECTIVE CONTRIBUTION PERCENTAGES AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
IBT FSB
--- ---
<S> <C> <C>
Book Value.................................................. 77.7% 22.3%
Tangible Book Value......................................... 76.2% 23.8%
First Quarter 2000 Net Income............................... 74.4% 25.6%
First Quarter 2000 Cash Net Income(1)....................... 75.8% 24.3%
Last 12 Month Net Income.................................... 76.0% 24.0%
Last 12 Month Cash Net Income(1)............................ 77.2% 22.8%
Total Assets................................................ 80.0% 19.9%
Total Loans................................................. 81.2% 18.8%
Total Deposits.............................................. 80.2% 19.8%
---- ----
Financial Terms of Merger Agreement(2)...................... 77.4% 22.6%
==== ====
</TABLE>
--------------------
(1) Net income excluding goodwill amortization expense
(2) Adjusted to reflect effect of IBT Dividend Reinvestment Plan
--------------------------------------------------------------------------------
The opinion expressed by AAI was based on market, economic and other
relevant considerations as they existed and could be evaluated as of the date of
the opinion. Events occurring after the date of issuance of the opinion,
including but not limited to, changes affecting the securities markets, the
results of operations or material changes in the financial condition of either
IBT or FSB could materially affect the assumptions used in preparing this
opinion.
IBT and FSB have agreed to pay AAI customary fees for its services as
financial advisor in connection with the Merger. In addition to its fees and
regardless of whether the merger is consummated, IBT and FSB have agreed to
reimburse AAI for its reasonable out-of-pocket expenses, and to indemnify AAI
against certain liabilities, including liabilities under securities laws.
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<PAGE> 25
AUSTIN FINANCIAL, INC. OPINION
AFSI is a nationally recognized investment banking firm specializing in the
banking and financial services industry. ASFI is continually engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, private placements and valuations for estate, corporate and other
purposes. AFSI does not contemplate any future business with FSB or IBT arising
from this engagement, nor has its opinion concerning the fairness, from a
financial point of view, of the terms of the proposed Merger been subject to
indications of future business with either FSB or IBT.
AFSI rendered written opinions to FSB's Board of Directors to the effect
that the terms of the proposed merger are fair, from a financial point of view,
to the shareholders of FSB. The written opinions were delivered on March 31,
2000 and May 26, 2000. No limitations were imposed by the Board of Directors of
FSB upon AFSI with respect to the investigations made or procedures followed by
AFSI in rendering its opinion.
AFSI's opinions are directed only to the fairness, from a financial point
of view, of the terms of the proposed merger and do not constitute a
recommendation to any FSB shareholder as to how such shareholders should vote at
the special meeting of FSB shareholders or any other matter.
In connection with its opinions, AFSI reviewed material bearing upon the
financial operating conditions of FSB and IBT including, but not limited to: (1)
the Annual Reports of FSB and IBT for the year 1999; (2) Consolidated Reports of
Condition and Income of FSB and IBT for the years ending 1994-1999; (3) Uniform
Bank Performance Reports of FSB and IBT as of September 30, 1999; (4)
Consolidated Reports of Condition and Income of FSB and IBT for the period
ending March 31, 2000; (5) the interest rate schedule for FSB and IBT; (6) FSB's
and IBT's estimated depreciation schedule for the years 2000-2004; (7) other
internal financial and operating information which was provided to AFSI by FSB
and IBT; (8) publicly available information concerning certain other banks/
thrifts and bank/thrift holding companies merger and acquisition transactions;
(9) discussing the foregoing as well as other matters relevant to its inquiry,
including the past and current business operations and acquisitions, results of
regulatory examinations, financial condition, current loan quality and trends,
and future prospects of IBT with certain officers and representatives of IBT;
and (10) the Agreement. AFSI also took into account its assessment of general
economic market and financial conditions and its experience in other
transactions, as well as its experience in securities valuation and general
knowledge of the banking industry. AFSI's opinions were necessarily based upon
conditions as they existed and could be evaluated on the date of the opinions
and the information made available to AFSI through those dates.
AFSI relied upon and assumed without independent verification the accuracy
and completeness of all of the financial and other information provided to it by
FSB and IBT or from public sources. In particular, AFSI did not make an
independent evaluation of the assets and liabilities of FSB or IBT. Nor did AFSI
independently verify the aggregate allowance for loan loss set forth in the
balance sheets of FSB and IBT at March 31, 2000, and assumed on this date that
such allowances complied fully with applicable law, regulatory policy, and sound
banking practice. However, AFSI did perform the following due diligence of IBT:
(1) reviewed any pending litigation and solicited management's projected loss
related to any pending litigation; (2) reviewed IBT's "watch" loan list and
details involving the history of the loans contained within it; (3) reviewed
IBT's 1999/2000 corporate minute book including board and executive committee
meeting minutes; (4) reviewed IBT's most recent comprehensive regulatory exam;
(5) reviewed any administrative orders or other regulatory action imposed upon
IBT or its affiliate bank; and (6) posed several questions to IBT's management
concerning matters that could have a material impact on the future value of
IBT's common stock.
In its analyses, AFSI made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of FSB and IBT. Any estimates contained in AFSI's
analyses do not necessarily denote future results since many unforeseen
occurrences could affect or alter such estimates. No financial institution or
transaction utilized in AFSI's analyses was identical to FSB or IBT or the
Agreement. Accordingly, such analyses are not based solely on arithmetic
calculations; rather, they involve complex considerations and judgments by AFSI
concerning
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<PAGE> 26
differences in financial and operating characteristics of the relevant financial
institutions, the timing of the relevant transactions and prospective buyer
interest, as well as other factors that could affect the public trading markets
of the financial institution or financial institutions to which they are being
compared.
Since neither FSB's or IBT's common stock is publicly traded it was
paramount that AFSI perform an analysis of both institutions in order to derive
its opinion, from a financial point of view, as to the fairness of the Agreement
to FSB.
The following is a brief description of the analysis of FSB (based on the
written opinion delivered on May 26, 2000).
Using a discounted future cash flow analysis, AFSI projected FSB's cash
flow from April 1, 2000 through March 31, 2005. The principal behind the
discounted future cash flow analysis is that the worth of a business is equal to
the future expected cash flow discounted at a rate that reflects the riskiness
of the cash flow. Besides determining five years of future cash flows, AFSI also
estimated FSB's residual value as of March 31, 2005. The residual value
represents the value of the institution beyond the explicit forecast period.
This value is based on the cash flow during the year following the final
projected year. The steps involved in determining FSB's value utilizing the
discounted future cash flow analysis included the following: (1) the projected
earnings in excess over the amount necessary to maintain a 6.00% equity capital
to asset ratio were added to book charges such as depreciation less any
projected capital expenditures in order to determine future cash flow; (2) the
future cash flows were then converted to a present value equivalent using a
discount rate of 16.55%, which was determined from the use of the Capital Asset
Pricing Model ("CAPM"); (3) the residual value was then calculated by dividing
the projected cash flows for the year 2005 by the capitalization rate. The
capitalization rate not only includes all aspects of the CAPM but also reflects
the long-term income growth prospects of FSB, as well as specific company risk
factors; (4) the present value equivalent of the projected residual value was
calculated using the 16.55% discount rate; and (5) the present value of the cash
flows and the residual value were added together. The value per share of FSB's
common stock resulting from this analysis was $30.73 (assuming 408,237 current
shares outstanding).
AFSI also determined the fair market value of FSB utilizing the adjusted
book method as an alternative valuation method. The adjusted book value approach
requires a three-step process. First, the book value is determined. This figure
is derived from the March 31, 2000 balance sheet, and it represents the summary
measure of shareholders' claims against the assets, on a historical cost basis.
Second, assets and liabilities are restated to their fair market values. The
adjusted book value calculation considers each major asset and liability account
classification. Finally, additional "off-balance sheet" adjustments are
calculated, if necessary. The value per share of FSB's common stock resulting
from this analysis was $44.30 (assuming 408,237 current shares outstanding.)
AFSI accorded an equal weight to each of the values derived from its
analysis in order to arrive at an aggregate value of FSB. The weightings were
based on AFSI's review of the financial position, history and recent performance
of FSB. The sum of the weighted values or $37.52 per share equates to the fair
market value of FSB as of March 31, 2000.
AFSI used the same valuation methods, rates, etc., in analyzing IBT's
common stock as it did with FSB. Assuming 2,985,084 current shares outstanding,
the discounted future cash flow analysis resulted in a value per share of $17.39
and the adjusted book analysis resulted in a value per share of $19.44. AFSI, as
it did with FSB, applied an equal weighting to the two values. The sum of the
weighted values equaled $18.42 per share, which equates to the fair market value
of IBT as of March 31, 2000.
Based on the exchange rate of the Agreement, a determined fair market value
of $18.42 per share for IBT's common stock, the transaction would result in a
$39.35 per share value for FSB's shareholders. Therefore, the exchange terms of
the Agreement would be favorable, from a financial standpoint, to FSB
shareholders since the transaction would result in a positive margin of $1.83
per share in comparison to the fair market value of IBT as determined by AFSI.
18
<PAGE> 27
AFSI analyzed certain other mergers and acquisitions that have consummated
over the past fourteen months in Michigan as well as the neighboring states of
Ohio and Wisconsin, which involved target financial institutions with assets
under $700 million. AFSI compared the multiple produced by this reorganization
to the mean multiples for the transactions analyzed. See the opinion at Appendix
D for more details.
AFSI's analysis showed that the implied valuations of FSB, applying the
mean transaction multiples described above to FSB's last twelve months earnings
per share and book value per share as of March 31, 2000, were $67.56 per share
and $56.21 per share, respectively. The results produced in this analysis do not
purport to be indicative of actual value or expected value of FSB shares of
common stock.
Summarizing the contractual relationship between FSB and AFSI, the fee in
determining AFSI's opinion, is a contractual $17,500 plus out of pocket
expenses. In addition, FSB also has agreed to indemnify AFSI and its officers,
directors, shareholders, employees and agents for all of its time, expenses, and
any liability incurred as a result of AFSI's proposed engagement by means of
legal action, administrative proceedings or threat thereof, unless such action,
pending or threat thereof is caused by AFSI's own unlawful conduct, breach of
duty or negligence during the course of performing AFSI's services.
AFSI, in rendering its opinion, has assumed that the transaction will be a
tax-free reorganization with no material adverse tax consequences to any of the
parties involved. In addition, AFSI has assumed that in the course of obtaining
the necessary regulatory approvals for the transaction, no condition will be
imposed upon FSB or IBT that will have a materially adverse impact on the
contemplated benefits of the proposed transaction to FSB and IBT and their
shareholders.
Based upon AFSI's analysis and subject to the qualifications described in
its fairness opinion, considering all circumstances known to AFSI and based upon
other matters considered relevant, AFSI believes that as of May 26, 2000, the
terms of the Agreement from a financial point of view are fair to FSB and its
shareholders.
ADDITIONAL INTERESTS OF FSB MANAGEMENT
The President of FSB has an interest in the Merger that is in addition to
his interests as a shareholder of FSB generally. This additional interest is
described below. FSB's board of directors was aware of this additional interest
when it approved the Merger Agreement.
Employment Agreement
Farmers Bank and Herbert C. Wybenga will enter into an employment agreement
that will become effective on the day immediately following the Merger's closing
date. Mr. Wybenga is currently FSB's President and Farmers Bank's President and
CEO.
For a term beginning on the day immediately following the day the Merger
closes and ending three (3) years later, Farmers Bank will employ Mr. Wybenga as
a regular employee in the position of President and CEO. Mr. Wybenga will
receive an annual salary of $100,000.
Under the terms of his employment agreement, Mr. Wybenga is subject to
non-competition restrictions while employed by Farmers Bank and for a period of
two years from the date he ceases to be an employee of Farmers Bank.
DISSENTERS' RIGHTS
Each holder of FSB common stock has the right to dissent from the Merger
and receive the fair value of such shares of FSB common stock in cash if the
shareholder follows the procedures required under Sections 450.761-450.774 of
the MBCA set forth in Appendix B, the material provisions of which are
summarized below. Under the MBCA, a holder of FSB common stock may dissent and
IBT will pay to such shareholder the fair value of such shareholder's shares of
FSB common stock if such shareholder:
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<PAGE> 28
(1) files with FSB before the vote is taken, written notice of intent to demand
payment for his or her shares and (2) does not vote in favor of the Merger.
If the Merger is approved at the FSB special meeting, IBT will deliver
written dissenters' notice to those FSB shareholders who complied with their
notice requirements. This dissenters' notice will be sent no later than ten days
after the Closing Date. The dissenters' notice will (1) state where payment
demand must be sent and when certificates must be deposited; (2) supply a form
for demanding payment that includes the date of the first announcement to the
news media or to shareholders of the terms of the Merger and requires that the
shareholder certify whether he or she acquired beneficial ownership of the
shares before such date; and (3) set a date by which the payment demand must be
received, which date may be not less than thirty nor more than sixty days after
the date the dissenters' notice was delivered to shareholders.
A shareholder sent a dissenters' notice must demand payment, certify
whether he or she acquired beneficial ownership of the FSB common stock before
the date required to be set forth in the dissenters' notice and deposit his or
her certificates in accordance with the terms of the notice. FSB shareholders
who do not demand payment or deposit certificates within the time set forth in
the dissenters' notice lose all rights to payment for their FSB common stock.
Except for "after-acquired" shares, which are discussed below, at the
Closing Date or upon receipt of a payment demand, FSB will pay each dissenter
the amount IBT estimates to be the fair market value of the shares plus accrued
interest. The payment will be accompanied by FSB's most recent balance sheet,
income statement, and statement of changes in shareholder equity plus the latest
available interim financial statements, as well as IBT's estimate of the fair
value of the FSB Common Stock, an explanation of how interest was calculated,
and a statement of the dissenter's right to make a supplemental demand for
payment if dissatisfied with the payment made.
FSB common stock acquired after the date of the first announcement to the
news media or FSB shareholders of the terms of the Merger still qualify for
dissenters' rights, but the holder of the these shares may receive different and
somewhat less favorable treatment than those shares acquired before such
announcements. IBT, at its election, may withhold payment from a dissenter who
holds "after-acquired" shares, at a time when payment to other shareholders is
required. Should IBT elect to withhold payment, IBT, after the Closing Date,
will estimate the fair value of the dissenter's shares plus interest and offer
to pay this amount to each dissenter who agrees to accept it in full
satisfaction. Along with its offer, IBT will send a statement of its estimate of
the fair value of the shares, an explanation of how interest was calculated, and
a statement of the dissenter's right to make a supplemental demand for payment
if dissatisfied with the offer.
In the event a shareholder is dissatisfied with the payment received, or
with the amount offered in the case of after-acquired shares, he or she must
notify IBT in writing of his or her own estimate of the fair value of the shares
and interest due and make a supplemental demand for payment of the amount he or
she believes to be owing. This right is waived unless the dissenter makes his or
her demand within thirty days after IBT made or offered payment for his or her
shares.
If a supplemental demand remains unsettled, IBT shall commence a proceeding
within sixty days after receiving the demand, and petition the circuit court to
determine the fair value and accrued interest. Should IBT fail to do so it must
pay each dissenter whose demand remains unsettled, the amount demanded. Each
dissenter made a party to the proceeding is entitled to judgment for the amount
by which the court determined fair value of the shares plus interest exceeds the
amount paid by IBT or, in the case of after-acquired shares for which payment
was not made, the total amount of the fair value plus interest.
A PROXY OR VOTE AGAINST THE MERGER WILL NOT, BY ITSELF, BE REGARDED AS A
WRITTEN OBJECTION FOR PURPOSES OF ASSERTING DISSENTERS' RIGHTS.
THE ABOVE SUMMARY OF THE PROVISIONS REGARDING DISSENTERS' RIGHTS UNDER THE
MBCA IS QUALIFIED IN ITS ENTIRETY BY THE TEXT OF
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<PAGE> 29
SECTIONS 450.761-450.774 OF THE MBCA. THE TEXT OF SECTIONS 450.761-450.774 IS
ATTACHED HERETO AS APPENDIX B.
SHAREHOLDERS OF FSB INTENDING TO EXERCISE DISSENTERS' RIGHTS ARE URGED TO
SEEK THE ADVICE OF COUNSEL. FAILURE TO COMPLY WITH ALL REQUIREMENTS OF SECTIONS
450.761-450.774 OF THE MBCA WILL RESULT IN THE LOSS OF DISSENTERS' RIGHTS.
EXCHANGE OF CERTIFICATES
The conversion of FSB Common Stock into IBT Common Stock will occur
automatically at the Effective Time.
On the next business day after the Effective Time, Isabella Bank and Trust,
in its capacity as Exchange Agent (the "Exchange Agent"), will send to each FSB
shareholder a form of letter of transmittal (which will specify that delivery
will be effected, and risk of loss and title to certificates for shares of FSB
common stock will pass, only upon proper delivery of such certificates to the
Exchange Agent) and instructions for use in effecting the exchange of the
certificates for shares of IBT common stock and cash in lieu of fractional
shares.
FSB SHAREHOLDERS SHOULD NOT FORWARD FSB STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL FORMS. FSB SHAREHOLDERS SHOULD NOT
RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
Until the certificates representing FSB common stock are surrendered for
exchange after the consummation of the Merger, holders of such certificates will
not be paid dividends or other distributions with respect to the shares of IBT
common stock into which such shares of FSB common stock have been converted.
When such certificates are surrendered, any such unpaid dividends or other
distributions will be paid (without interest) with respect to the number of
whole shares of IBT common stock represented by such certificates. Holders of
unsurrendered certificates shall not be entitled to vote after the Effective
Time at any meeting of IBT shareholders until they have exchanged their
certificates. For all other purposes (excluding the right to vote at meetings of
IBT's shareholders), however, each certificate which represents shares of FSB
common stock outstanding immediately prior to the Effective Time will be deemed
to evidence ownership of the number of whole shares of IBT common stock into
which such shares have been converted by virtue of the Merger.
After one year following the Effective Time, the Exchange Agent will return
any cash balances and IBT stock certificates held by it to IBT. Any FSB
shareholders who have not properly surrendered their FSB certificate(s) for
exchange may then do so directly to IBT.
All shares of IBT common stock issued upon conversion of shares of FSB
common stock shall be deemed to have been issued in full satisfaction of all
rights pertaining to such shares of FSB common stock.
REGULATORY APPROVALS
The Merger is subject to the prior approval of the Board of Governors of
the Federal Reserve System.
The approval of the Federal Reserve Board is required because IBT is a
financial holding company registered under the Bank Holding Company Act. On June
1, 2000, IBT filed an application with the Federal Reserve Board requesting
approval of the Merger. As of the date of this proxy statement-prospectus, the
Federal Reserve Board had not acted on IBT's application.
The approval of an application means only that the regulatory criteria for
approval have been satisfied or waived. It does not mean that the approving
authority has determined that the consideration to be received by FSB
shareholders is fair. Regulatory approval does not constitute an endorsement or
recommendation of the Merger.
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<PAGE> 30
IBT and FSB are not aware of any governmental approvals or compliance with
banking laws and regulations that are required for the Merger to become
effective other than those described above. IBT and FSB intend to seek any other
approval and to take any other action that may be required to effect the Merger.
There can be no assurance that any required approval or action can be obtained
or taken prior to the special meeting.
The Merger cannot be completed unless all necessary regulatory approvals
are granted. In addition, either party may elect not to complete the Merger if
any condition under which any regulatory approval is granted is unreasonably
burdensome to IBT. See "The Merger Agreement -- Conditions To The Merger."
EFFECT OF MERGER ON FSB'S EMPLOYEE BENEFIT PLANS
The Merger Agreement provides that, subject to any eligibility requirements
applicable to such plans, employees of FSB will be entitled to participate in
the IBT employee benefit and welfare plans.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following is a summary of the anticipated material U.S. federal income
tax consequences of the Merger to FSB shareholders who are citizens or residents
of the United States and who, on the date of disposition of their shares of FSB
common stock, hold such shares as capital assets. This summary does not purport
to deal with all aspects of taxation that may be relevant to particular
investors in light of their personal investment circumstances, or to certain
types of investors, including insurance companies, tax-exempt organizations,
financial institutions, broker-dealers, "S" corporations, limited liability
corporations, foreign corporations and taxpayers subject to alternative minimum
tax.
The summary is based on the U.S. federal income tax laws as currently in
effect and as currently interpreted. It does not cover issues of state, local or
foreign taxation. Nor does it address all aspects of U.S. federal income
taxation that may be important to particular shareholders in light of their
personal circumstances or to shareholders subject to special rules under U.S.
federal income tax laws. Future legislation, regulations, administrative rulings
and court decisions may alter the tax consequences summarized below.
The anticipated U.S. federal income tax consequences to FSB shareholders
are as follows:
- A shareholder who receives shares of IBT common stock in exchange for
shares of FSB common stock will not recognize any gain or loss on the
receipt of the shares of IBT common stock, except for cash received in
lieu of a fractional share. The shareholder's gain or loss on the receipt
of cash in lieu of a fractional share will equal the difference between
the cash received and the basis of the fractional share exchanged.
- A shareholder's tax basis in the shares of IBT common stock received will
be the same as the shareholder's tax basis in the shares of FSB common
stock exchanged in the Merger, less any cash received in lieu of
fractional shares.
- The holding period of the shares of IBT common stock received by a
shareholder will include the holding period of the shareholder's shares
of FSB common stock exchanged in the Merger, but only if the shares of
FSB common stock were held as a capital asset at the time the Merger is
completed.
- Where a cash payment is received by a dissenting shareholder, the cash
will be treated as received by the shareholder as a distribution in
redemption of FSB common stock.
Neither party is required to complete the Merger unless it receives an
opinion of counsel that these will be the U.S. federal income tax consequences
of the Merger. The opinions may make certain assumptions and may rely on
representations of the parties to the Merger as to factual matters. It will
reflect the opinion giver's judgment as to the tax status of the Merger under
the Code and will not be binding on the Internal Revenue Service ("IRS"). There
is no assurance that the IRS will not take a
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<PAGE> 31
contrary position regarding the tax consequences of the Merger, nor is there any
assurance that the IRS would not prevail in the event the tax consequences of
the Merger were litigated.
THE U.S. FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY OR MAY NOT BE APPLICABLE DEPENDING UPON A SHAREHOLDER'S
PARTICULAR SITUATION. SHAREHOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH
RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE
EFFECTS OF CHANGES IN FEDERAL OR OTHER TAX LAW.
RESALE OF IBT COMMON STOCK ISSUED IN THE MERGER
The IBT common stock issued in the Merger will be freely transferable under
the Securities Act of 1933, except for shares issued to FSB shareholders who are
considered to be "affiliates" of FSB or IBT under Rule 145 under the Securities
Act. The definition of "affiliate" is complex and depends on the specific facts,
but generally includes directors, executive officers, 10% shareholders and other
persons with the power to direct the management and policies of the company in
question.
Affiliates of FSB may not sell the shares of IBT common stock received in
the Merger except (a) pursuant to an effective registration statement under the
Securities Act, (b) in compliance with an exemption from the registration
requirements of the Securities Act or (c) in compliance with Rule 144 and Rule
145 under the Securities Act. Generally, those rules permit resales of stock
received by affiliates so long as IBT has complied with certain reporting
requirements and the selling shareholder complies with certain volume and manner
of sale restrictions.
FSB has agreed to use its best efforts to deliver to IBT signed
representations by each person who may be deemed to be an affiliate of FSB that
the person will not sell, transfer or otherwise dispose of the shares of IBT
common stock to be received by the person in the Merger except in compliance
with the applicable provisions of the Securities Act and the rules and
regulations promulgated thereunder.
This proxy statement-prospectus does not cover any resales of IBT common
stock received by affiliates of FSB.
ACCOUNTING TREATMENT
The Merger is expected to qualify as a pooling of interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
assets and liabilities of IBT and FSB will be carried forward to the combined
corporation at their recorded amounts; income of the combined corporation will
include income of IBT and FSB for the entire fiscal year in which the
combination occurs; and the reported income of the separate corporations for
prior periods will be combined and restated as income of the combined
corporation. The unaudited pro forma condensed combined financial information
contained in this Proxy Statement/Prospectus has been prepared using the pooling
of interests method of accounting. See "Summary -- Comparative Per Common Share
Data."
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THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement. A
copy of the Merger Agreement is attached to this proxy statement-prospectus as
Appendix A and is incorporated by reference into this proxy
statement-prospectus. This summary is qualified in its entirety by reference to
the full text of the Merger Agreement. FSB shareholders are encouraged to read
the Merger Agreement carefully and in its entirety. Parenthetical references are
to the relevant section or sections of the Merger Agreement.
BASIC PLAN OF REORGANIZATION
The Merger Agreement provides that FSB will merge by statutory merger with
and into IBT, with IBT as the surviving corporation. (section 1.3).
Exchange Of IBT Shares For FSB Shares
In the Merger, each share of FSB common stock outstanding immediately
before the Merger will be exchanged for 2.1362 shares of IBT common stock
(subject to provisions with respect to fractional shares and shares for which
dissenters' rights have been effectively exercised and not withdrawn). (section
2.1(b))
Any shares of FSB common stock owned by IBT, FSB and their respective
subsidiaries (other than shares held directly or indirectly in trust accounts,
managed accounts and the like or otherwise held in a fiduciary capacity that are
beneficially owned by third parties ("Trust Account Shares")) will be canceled.
Each outstanding share of IBT common stock will remain outstanding and
unchanged as a result of the Merger.
Upon consummation of the Merger, the holders of FSB common stock will
receive, in the aggregate approximately 875,092 shares of IBT common stock
(depending on the calculation of the Exchange Ratio discussed above), except
those holders of shares of FSB common stock with respect to which the
shareholder has effectively exercised dissenter's rights and not withdrawn his
or her demand, therefor, in the manner required by the MBCA. There are currently
409,649 shares of FSB common stock issued and outstanding, and no shares are
issuable pursuant to the exercise of warrants or options, nor are any shares
issuable in conversion of any other securities. Based upon the outstanding
shares of stock of IBT and FSB as of June 15, 2000 the shareholders of FSB would
own IBT Common Stock representing approximately 22.7% of the outstanding voting
power of IBT following consummation of the Merger. For purposes of calculating
such percentage, it is assumed that no additional shares of IBT common stock
have been issued.
Adjustments For Changes In Capitalization
If before the Merger is completed the outstanding shares of IBT are
increased or decreased in number or changed into or exchanged for a different
number or kind of shares or securities as a result of a reorganization,
reclassification, recapitalization, stock dividend, stock split or other similar
change in capitalization, then an appropriate and proportionate adjustment will
be made to the Exchange Ratio. (section 2.1(a))
Cash In Lieu Of Fractional Shares
No fractional shares of IBT common stock will be issued to any FSB
shareholder upon consummation of the Merger. In lieu of the issuance of any
fractional share of IBT common stock, cash payments will be made to FSB
shareholders in respect of any fractional share of IBT common stock that would
otherwise be issuable in an amount equal to such fractional proportion of the
value of a share of IBT common stock. No interest on the cash payments to be
made in lieu of the issuance of fractional shares will accrue pending surrender
to the Exchange Agent of certificates representing FSB common stock.
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Effective Date And Time Of The Merger
The Merger will become effective upon the filing of a Certificate of Merger
with the Department of Consumer and Industry Services of the State of Michigan
(the Effective Time") or such later time as is specified in such certificate.
The filing with respect to the Merger will occur as soon as practicable on or
after the first day which is the fifth business day after satisfaction or waiver
of the latest to occur
of certain conditions to the Merger specified in the Merger Agreement, unless
another date is agreed to in writing by FSB and IBT. See "THE MERGER
AGREEMENT -- Conditions to the Merger" below. It is expected that a period of
time will elapse between the Special Meeting and the Effective Time while the
parties seek to obtain the regulatory approvals required in order to consummate
the Merger. See "THE MERGER -- Regulatory Approvals Required" below. The Merger
Agreement may be terminated by either party if, among other reasons, the Merger
has not been consummated on or before December 31, 2000. See "THE MERGER
AGREEMENT -- Termination of the Merger Agreement" below.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties by IBT and FSB concerning, among other things (a) their organization
and legal authority to engage in their respective businesses; (b) their
capitalization; (c) their corporate authority to enter into the Merger Agreement
and complete the Merger, (d) the absence of certain material changes; (e)
compliance with applicable laws; (f) benefit plans; (g) absence of certain
litigation; (h) certain environmental matters; and (i) filing of tax returns and
payment of taxes. (sections 3.1 and 3.2) Because the representations and
warranties do not survive completion of the Merger, they function primarily as a
due diligence device and a closing condition (that is, they must continue to be
true in all material respects until the Merger is completed).
MANAGEMENT AND OPERATIONS AFTER THE MERGER
Directors After the Merger. On the closing date of the Merger, FSB will be
merged with and into IBT and the separate corporate existence of FSB will cease.
IBT will be the surviving company in the Merger and will have a Board of
Directors consisting of those persons serving as directors of IBT immediately
prior to the Effective Time plus two additional members initially appointed,
prior to the Effective Time, by the FSB board of directors, with the consent of
IBT. Farmers Bank will operate with its current directors plus two additional
members to be designated by IBT. Isabella Bank and Trust will operate with its
current directors plus one additional member to be designated by FSB.
Executive Officers After the Merger. Following the Merger, it is
anticipated that (i) IBT, as the surviving corporation, will operate with IBT's
current executive officers, though the president of Farmers Bank shall be
appointed a Vice President of IBT and (ii) Farmers Bank and Isabella Bank and
Trust will operate with their current executive officers and employees.
Operations after the Merger. At and after the Closing Date:
- Farmers Bank shall remain a state-chartered commercial bank.
- The names of IBT, Farmers State Bank of Breckenridge and Isabella Bank
and Trust shall not change as a result of the Merger. In the future, the
Board of Directors of IBT will consider the possibility of a name change
which is less geographically restrictive.
- All banking offices of Farmers Bank will remain open.
- There will be no layoffs at Farmers Bank as a result of the Merger. Any
reduction in staffing levels shall be accomplished through attrition.
CERTAIN COVENANTS
The Merger Agreement has a number of covenants and agreements that govern
the actions of FSB and IBT pending completion of the Merger. Some of the
covenants and agreements are summarized below.
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Conduct of Business Pending the Merger
Pursuant to the Merger Agreement, FSB has agreed to carry on its business
in the usual, regular and ordinary course in substantially the same manner as
conducted prior to the execution of the Merger Agreement. In addition, FSB has
agreed that neither it nor its subsidiaries may, without the written consent of
IBT, among other things: (i) enter into any new material line of business; (ii)
increase or decrease the current number of FSB directors except as consistent
with FSB's current Board of Directors' retirement policy; (iii) change its
lending, investment, liability management and other material banking policies in
any material respect; (iv) incur or commit to any capital expenditures or any
obligations or liabilities in connection therewith except in the ordinary course
of business consistent with past practice; (v) declare or pay any dividends on
shares of capital stock other than regular semi-annual cash dividends not in
excess of $0.75 per share of FSB Common Stock, and dividends by FSB's wholly
owned subsidiary, or split, combine or reclassify any of its capital stock or
repurchase, redeem or otherwise acquire any shares of its capital stock; (vi)
have any of its subsidiaries issue any shares of capital stock, other than to
its parent; (vii) make any acquisition or enter into any merger or similar
transaction, provided, however, that the foregoing shall not prohibit (a)
internal reorganizations, consolidations or dissolutions involving only existing
subsidiaries of FSB, (b) foreclosures and other acquisitions related to
previously contracted debt, in each case in the ordinary course of business, or
(c) acquisitions of financial assets and merchant banking activities, in each
case in the ordinary course of business; (viii) dispose of any assets, other
than as disclosed prior to the date of the Merger Agreement, as required in
order to consummate the transactions contemplated by the Merger Agreement or in
the ordinary course of business consistent with past practices; (ix) incur any
indebtedness other than in the ordinary course of business consistent with past
practice; (x) except as contemplated by or disclosed prior to execution of the
Merger Agreement, enter into, amend or terminate any employee benefit plan or
any agreement or arrangement between it and any of its directors or officer, or
(xi) authorize or permit any of its officers, directors, employees,
representatives or agents to solicit any takeover proposal or agree to endorse
any takeover proposal (See "THE MERGER AGREEMENT -- Certain
Covenants -- Competing Transactions" below).
Pursuant to the Merger Agreement, IBT and FSB have each agreed that neither
it nor any of its subsidiaries may, without written consent of the other, among
other things: (i) amend their articles of incorporation or bylaws other than an
amendment to IBT's articles of incorporation to increase its authorized common
stock to 10.0 million shares or any other amendments required to complete the
transaction; (ii) take any action intended to result in any of the
representations or warranties to the Merger Agreement being or becoming
materially untrue or any conditions to the Merger not being satisfied or in
violation of any provision of the Merger Agreement; or (iii) take any action
which would disqualify the Merger as a "pooling of interest" for accounting
purposes or a tax-free "reorganization" for tax purposes.
Competing Transactions
Except as the FSB board of directors deems necessary, on the advice of
counsel, in the exercise of its fiduciary obligations under applicable law, the
Merger Agreement provides that FSB and its subsidiaries will not, directly or
indirectly, authorize or permit any of their respective officers, directors,
employees, representatives or agents to solicit, encourage or take any other
action to facilitate any inquiries or the making of any proposal which
constitutes, or may reasonably be expected to lead to, any "takeover proposal,"
or agree to or endorse any takeover proposal or participate in any discussions
or negotiations or provide third parties with any nonpublic information,
relating to any such inquiry or proposal. The foregoing does not restrict or
prohibit any disclosure by FSB that is required, on the advice of counsel, in
any document to be filed with a regulatory authority after the date of the
Merger Agreement or in any document or statement otherwise required under
applicable law. The Merger Agreement provides that FSB shall promptly advise IBT
(orally and in writing) of any such inquiry or proposal. For these purposes, a
"takeover proposal" is defined as any tender or exchange offer, proposal for a
merger, consolidation or other business combination involving FSB or any
subsidiary of FSB, or any proposal or offer to acquire in
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any manner a substantial equity interest in, or a substantial portion of the
assets of, FSB or any of its subsidiaries, other than the transactions
contemplated or permitted by the Merger Agreement.
Other Covenants
The Merger Agreement contains various other covenants, including covenants
relating to the preparation and distribution of this proxy statement-prospectus
and access to information. In addition, FSB has agreed to use its best efforts
to deliver to IBT prior to completion of the Merger signed representations from
each executive officer, director or shareholder of FSB who may reasonably be
deemed an "affiliate" of FSB within the meaning of such term as used in Rule 145
of the Securities Act. (sections 5.1 and 5.6) See "The Merger -- Resale Of IBT
Common Stock Issued In The Merger."
CONDITIONS TO THE MERGER
Under the Merger Agreement, various conditions are required to be met
before the parties are obligated to complete the Merger. These conditions are
customary and include such items as the receipt of shareholder and regulatory
approval, the absence of any materially burdensome requirement or condition
imposed in connection with obtaining any regulatory approval, and the receipt by
FSB and IBT of favorable tax opinions. (sections 6.1, 6.2 and 6.3) See "The
Merger -- U.S. Federal Income Tax Consequences Of The Merger."
The obligations of the parties are also subject to the continued accuracy
of the other party's representations and warranties, the performance by the
other party of its obligations under the Merger Agreement, and, subject to
certain exceptions, the absence of any changes that have had or might be
reasonably expected to have an adverse effect on FSB. Some of the conditions to
the Merger are subject to exceptions and/or a "materiality" standard. Certain
conditions to the Merger may be waived by the party seeking to assert the
condition. (sections 6.2 and 6.3)
TERMINATION OF THE MERGER AGREEMENT
Termination by Mutual Consent
IBT and FSB can agree to terminate the Merger Agreement at any time before
completion of the Merger. (section 7.1)
Termination by Either IBT or FSB
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the shareholders of FSB: (a) by mutual consent of IBT and FSB
if the Board of Directors of each so determines by a vote of a majority of the
members of its entire Board; (b) by either IBT or FSB upon written notice to the
other party if any Requisite Regulatory Approval is denied or if any
governmental entity of competent jurisdiction issues a final nonappealable order
enjoining or otherwise prohibiting the consummation of the transactions
contemplated by the Merger Agreement; (c) by either IBT or FSB if the Merger
shall not have been consummated on or before December 31, 2000; (d) by either
IBT or FSB (provided that the terminating party is not in material breach of any
of its obligations) if any approval of the shareholders of FSB required for the
consummation of the Merger shall not have been obtained by reason of the failure
to obtain the required vote at a duly held meeting of shareholders or at any
adjournment or postponement thereof; (e) by either IBT or FSB if there is a
material breach of any of the representations or warranties in the Merger
Agreement by the other party, which breach by its nature cannot be cured prior
to the Closing; or (f) by either IBT or FSB if there is a material breach of any
of the covenants or agreements in the Merger Agreement on the part of the other
party, which breach is not cured within twenty business days following receipt
by the breaching party of written notice of such breach from the other party.
In the event of termination of the Merger Agreement, the Merger Agreement
will become void and have no effect except (i) for certain specified provisions
of the Merger Agreement dealing with
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confidentiality and expenses; and (ii) that neither party will be relieved or
released from any liabilities or damages arising out of the willful breach by
the other party of any provisions of the Merger Agreement.
EFFECT OF TERMINATION
Generally, if either party terminates the Merger Agreement, it becomes void
without any liability to either party other than for willful breaches occurring
before termination; however, the provisions of the Merger Agreement governing
confidential information and expenses incurred in connection with the Merger
continue in effect after termination of the Merger Agreement. (section 7.2)
WAIVER AND AMENDMENT
Either IBT or FSB may waive any inaccuracies in the representations and
warranties of the other party or compliance by the other party with any of the
covenants or conditions contained in the Merger Agreement. (section 7.4)
IBT and FSB can amend the Merger Agreement at any time before the Merger is
completed; however, the Merger Agreement prohibits them from amending the Merger
Agreement after FSB shareholders approve the Merger if the amendment would
require further approval by FSB's shareholders, unless such further approval is
obtained. (section 7.3)
EXPENSES
Whether or not the Merger is consummated, all costs and expenses incurred
in connection with the Merger Agreement, and the transactions contemplated
thereby will be paid by the party incurring such expense, except (i) for
liabilities and damages arising out of the willful breach of the Merger
Agreement, and (ii) that expenses incurred in connection with printing and
mailing this Proxy Statement/Prospectus will be shared equally by IBT and FSB.
(section 5.8)
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COMPARISON OF SHAREHOLDER RIGHTS
The following is a summary of material differences between the rights of
FSB shareholders and the rights of IBT shareholders. It is not a complete
statement of the provisions affecting, and the differences between, the rights
of FSB shareholders and IBT shareholders. The summary is qualified in its
entirety by reference to the Michigan Business Corporation Act (MBCA), FSB's
articles of incorporation and bylaws, and IBT's articles of incorporation and
bylaws.
INTRODUCTION
Upon completion of the Merger, holders of FSB common stock will become
shareholders of IBT. There are material differences in the rights of FSB
shareholders as compared to the rights of IBT shareholders. The rights of FSB
shareholders are governed by Michigan law and FSB's articles of incorporation
and bylaws, and the rights of IBT shareholders are governed by Michigan law and
IBT's articles of incorporation and bylaws.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
IBT
IBT's articles of incorporation currently authorize the issuance of
10,000,000 shares of IBT common stock, no par value per share. At June 15, 2000,
there were 2,986,258 shares of IBT common stock outstanding.
FSB
FSB's articles of incorporation authorize the issuance of 600,000 shares of
common stock, no par value. An aggregate of 409,649 shares of common stock were
issued and outstanding as of June 15, 2000.
NUMBER AND ELECTION OF DIRECTORS
IBT
IBT's bylaws provide for a board of directors consisting of not less than
five nor more than eleven persons. The number of directors is currently nine.
The board of directors is divided into three classes, with the directors in each
class being elected for a term of three years. Directors of IBT may be removed
from office at any time, but only for cause by the affirmative vote of the
holders of a majority of the shares of IBT common stock entitled to vote
thereon. Vacancies on IBT's board of directors may be filled by majority vote of
the remaining directors or, in the event a vacancy is not so filled or if no
director remains, by the shareholders. Directors of IBT are elected by plurality
of the votes of shares of IBT common stock entitled to vote thereon present in
person or by proxy at the meeting at which directors are elected. IBT's articles
of incorporation do not currently permit cumulative voting in the election of
directors.
FSB
FSB's bylaws provide for a board of directors consisting of not less than
five nor more than twenty-five persons. The number of directors is currently
eight. The board of directors is divided into three classes, with the directors
in each class being elected for a term of three years. Directors of FSB may be
removed from office at any time, but only for cause by the affirmative vote of
the holders of a majority of the shares of FSB common stock entitled to vote
thereon. Vacancies on FSB's board of directors may be filled by majority vote of
the remaining directors. Directors of FSB are elected by plurality of the votes
of shares of FSB common stock entitled to vote thereon present in person or by
proxy at the meeting at which directors are elected. FSB's articles of
incorporation do not currently permit cumulative voting in the election of
directors.
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AMENDMENT OF GOVERNING DOCUMENTS
IBT
In general, IBT's articles of incorporation may be amended only if the
proposed amendment is approved by 66 2/3% of the outstanding IBT shares entitled
to vote thereon. IBT's bylaws may be amended by a two-thirds affirmative vote of
the board of directors or by a majority of the outstanding shares entitled to
vote thereon; provided however, the provision of the bylaws relating to the
classified board may not be amended by the board of directors.
FSB
In general, FSB's articles of incorporation may be amended only if the
proposed amendment is approved by a majority of the outstanding FSB shares
entitled to vote thereon. However, amendment of Article VII, dealing with the
Board of Directors, requires the approval of at least 80% of the outstanding FSB
shares entitled to vote thereon (and, in certain circumstances, if the amendment
is proposed by an "interested shareholder" controlling more than 20% of the
outstanding FSB shares, by 66 2/3% of the shareholders other than the
"interested shareholder"). Article VIII, dealing with business combinations, may
be amended by the affirmative vote of 66 2/3% of the outstanding FSB shares
(and, in addition, if the amendment has been proposed by an "interested
shareholder" controlling more than 20% of the outstanding FSB shares, also by a
majority of the shares held by shareholders other than the "interested
shareholder"). FSB's bylaws may be amended by the vote of the board of directors
or by the shareholders.
APPROVAL OF MERGERS AND ASSETS SALES
IBT
Except as described below, the affirmative vote of 66 2/3% of the
outstanding shares of IBT common stock entitled to vote thereon is required to
approve a merger or consolidation involving IBT or the sale, lease or exchange
of all or substantially all of IBT's corporate assets. No vote of the
shareholders is required, however, in connection with a merger in which IBT is
the surviving corporation and (a) the agreement of merger for the merger does
not amend in any respect IBT's articles of incorporation, (b) each IBT
shareholder whose shares were outstanding immediately before the effective date
of the merger will hold the same number of shares with identical descriptions,
preferences, limitations and relative rights, immediately after the merger and
(c) the number of shares of capital stock to be issued in the merger (or to be
issuable upon conversion of any convertible instruments to be issued in the
merger) does not exceed 100% of the shares of IBT capital stock outstanding
immediately before the merger.
FSB
The affirmative vote of a majority of the outstanding shares of FSB common
stock is required to approve the Merger. Under certain circumstances, not here
applicable, a higher percentage would be required. For such circumstances, see
Article VIII of FSB's articles of incorporation.
PREEMPTIVE RIGHTS
IBT
IBT's articles of incorporation do not grant shareholders preemptive rights
to subscribe to any or all issues of IBT shares or securities.
FSB
FSB's articles of incorporation do not grant shareholders preemptive rights
to subscribe to any or all issues of FSB shares or securities.
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SPECIAL MEETINGS
IBT
IBT's bylaws provide that a special meeting of shareholders may be called
by the president or the secretary and shall be called by either of them on the
request in writing or by vote of a majority of the directors or shareholders of
record.
FSB
FSB's articles of incorporation provide that a special meeting of
shareholders may be called by a resolution approved by a majority of the board
of directors.
ACTION WITHOUT A MEETING
IBT
IBT's articles of incorporation permit any action required or permitted by
the MBCA to be taken at an annual or special meeting of shareholders to be taken
without a meeting, without prior notice and without a vote, if a consent in
writing setting forth the action so taken is signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take the action at a meeting at which all shares
entitled to vote were present and voted.
Prompt notice of the taking of corporate action without a meeting by less
than unanimous written consent must be given to shareholders who did not consent
in writing.
FSB
FSB's articles of incorporation do not permit actions by FSB shareholders
to be taken by written consent. Instead, any action by shareholders must be
effected at a duly called annual or special meeting of the shareholders.
LIMITATIONS ON DIRECTORS' LIABILITY
IBT
IBT's articles of incorporation provide that a director of IBT shall not be
personally liable to IBT or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability arising out of (a) any breach
of the director's duty of loyalty to IBT or its shareholders, (b) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) violation of Section 551(1) of the MBCA relating to
distributions or (d) any transaction from which the director derived an improper
personal benefit. This provision protects IBT's directors against personal
liability for monetary damages from breaches of their duty of care. It does not
eliminate the director's duty of care and has no effect on the availability of
equitable remedies, such as an injunction or rescission, based upon a director's
breach of his duty of care.
FSB
FSB's articles of incorporation provide that a director of FSB shall not be
personally liable to FSB or its shareholders for monetary damages for breach of
fiduciary duty as a director, except for liability arising out of (a) any breach
of the director's duty of loyalty to FSB or its shareholders, (b) acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) violation of Section 551(1) of the MBCA relating to
distributions or (d) any transaction from which the director derived an improper
personal benefit. This provision protects FSB's directors against personal
liability for monetary damages from breaches of their duty of care. It does not
eliminate the director's duty of care and has no effect on the availability of
equitable remedies, such as injunction or rescission, based upon a director's
breach of his duty of care.
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INDEMNIFICATION OF OFFICERS AND DIRECTORS
IBT
IBT's articles of incorporation provide that IBT shall indemnify to the
full extent permitted by law each person who is or was or had agreed to become a
director or officer of the Corporation or who serves or served any other
enterprise at the request of the corporation. The MBCA permits such
indemnification if such individual has acted in good faith and in a manner the
person reasonably believed to be in the best interest of the corporation or its
shareholders, and, in the case of a criminal proceeding, had no reasonable cause
to believe the conduct of the person was unlawful.
FSB
FSB's articles of incorporation provide that FSB has the power to indemnify
to the full extent permitted by law each person who is or was or had agreed to
become a director or officer of the Corporation or who serves or served any
other enterprise at the request of the corporation. The MBCA permits such
indemnification if such individual has acted in good faith and in a manner the
person reasonably believed to be in the best interest of the corporation or its
shareholders, and , in the case of a criminal proceeding, has no reasonable
cause to believe the conduct of the person was unlawful.
DIVIDENDS
IBT
The holders of IBT common stock are entitled to receive dividends when and
as declared by IBT's board of directors out of funds legally available therefor.
The MBCA provides that a corporation may make a distribution to its shareholders
if after giving it effect the corporation is able to pay its debts as the debts
become due in the usual course of business, and the corporation's total assets
would equal or exceed the sum of its total liabilities plus the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. IBT is also subject to Federal Reserve Board policies regarding
payment of dividends, which generally limit dividends to operating earnings.
FSB
The holders of FSB common stock are entitled to receive dividends when and
as declared by FSB's board of directors out of funds legally available therefor.
The MBCA provides that a corporation may make a distribution to its shareholders
if after giving it effect the corporation is able to pay its debts as the debts
become due in the usual course of business, and the corporation's total assets
would equal or exceed the sum of its total liabilities plus the amount that
would be needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights are superior to those receiving the
distribution. FSB is also subject to Federal Reserve Board policies regarding
payment of dividends, which generally limit dividends to operating earnings.
CORPORATE GOVERNANCE PROCEDURES; NOMINATION OF DIRECTORS
IBT
IBT's articles of incorporation and bylaws do not contain any provision
relating to the ability of shareholders to nominate directors of IBT. However,
pursuant to applicable law, an eligible shareholder may submit a proposal to be
presented at the annual meeting of shareholders provided it is received at IBT's
principal executive offices not less than 120 calendar days in advance of the
date of IBT's proxy statement released to shareholders in connection with the
previous year's annual meeting of the shareholders.
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FSB
FSB's articles of incorporation provide that nomination for the election of
directors shall be made by the board of directors, a nominating committee
appointed by the board of directors or any shareholder entitled to vote for
directors. In the case of a shareholder nomination, certain procedures that must
be followed. Shareholders intending to nominate candidates for election must
deliver written notice of the nomination to the secretary of FSB at least 60
days but not more than 90 days prior to the anniversary date of the immediately
preceding annual meeting of shareholders. The notice must include (i) the name
and address of the shareholder who intends to make the nomination; (ii) the
name, age, business address and if known, residence address of each nominee;
(iii) the principal occupation or employment of each nominee; (iv) the number of
shares of stock of FSB which are beneficially owned by each nominee and by the
nominating shareholders; (v) any other information concerning the nominee that
must be disclosed about nominees in a proxy statement soliciting proxies for the
election of the nominee; and (vi) the executed consent of each nominee to serve
as a director, if needed. The Chairman of the meeting may refuse to acknowledge
the nomination of any person not made in compliance with the foregoing
procedures.
INFORMATION ABOUT IBT
GENERAL
IBT is a registered financial holding company incorporated under Michigan
law in September 1988. The Corporation has four subsidiaries: Isabella Bank and
Trust, IBT Financial Services, Inc., IBT Title, Inc. and IBT Loan Production.
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, Inc. is a full service retail brokerage offering stocks, bonds and
mutual funds to individuals. It is also authorized to sell life insurance,
casualty insurance, and fixed and variable annuities. IBT Title, Inc. provides
title insurance, abstract searches, and closes real estate loans. IBT Loan
Production originates residential real estate mortgages.
At March 31, 2000, IBT had consolidated total assets of $401.1 million,
consolidated total deposits of $357 million and shareholders' equity of $37.6
million.
IBT is a legal entity separate and distinct from its banking and nonbanking
subsidiaries. As a result, the right of IBT, and thus the right of IBT's
creditors, to participate in any distribution of assets or earnings of any
subsidiary, other than in its capacity as a creditor of such subsidiary, is
subject to the prior payment of claims of creditors of such subsidiary. The
principal sources of IBT's revenues are dividends and fees from its
subsidiaries. See "Regulation And Supervision Of IBT -- Dividend Restrictions"
for a discussion of the restrictions on the subsidiary bank's ability to pay
dividends to IBT.
IBT's executive offices are located at 200 East Broadway, Mt. Pleasant,
Michigan 48858, and its telephone number is (517) 772-9491.
MANAGEMENT AND ADDITIONAL INFORMATION
Information concerning executive compensation, the principal holders of
voting securities, certain relationships and related transactions, and other
related matters concerning IBT is included or incorporated by reference in its
annual report on Form 10-K for the year ended December 31, 1999. IBT's annual
report on Form 10-K is incorporated by reference into this proxy
statement-prospectus. FSB shareholders who want a copy of this annual report or
any document incorporated by reference into the report may contact IBT at the
address or phone number indicated below under "Where You Can Find More
Information."
33
<PAGE> 42
DESCRIPTION OF IBT CAPITAL STOCK
The following description contains a summary of the material features of
the capital stock of IBT but does not purport to be complete and is subject to
and qualified in its entirety by reference to the IBT articles of incorporation
which are filed as an exhibit to the Registration Statement of which
this Proxy Statement-Prospectus forms a part and are incorporated herein by
reference. The following description should be read carefully by FSB
shareholders since, at the Effective Time, each issued and outstanding share of
FSB common stock will be converted into 2.1362 shares of IBT common stock.
The authorized capital stock of IBT consists of 10,000,000 shares of common
stock no par value (of which 2,986,258 shares were issued and outstanding on
June 15, 2000.)
The holders of IBT common stock are entitled to one vote for each share
held of record on all matters submitted to a vote of shareholders. IBT's
articles of incorporation do not provide for cumulative voting of the shares of
IBT common stock. Holders of IBT common stock are entitled to receive dividends
as may be declared by the board of directors out of funds legally available for
that purpose. In the event of a liquidation, holders of IBT common stock are
entitled to share ratably in all assets of IBT available for distribution to
holders of shares of IBT common stock. Holders of IBT common stock have no
preemptive rights and have no rights to convert their IBT common stock into any
other securities. All shares of IBT common stock now issued and outstanding are
fully paid and nonassessable.
The transfer agent for IBT common stock is Isabella Bank and Trust.
34
<PAGE> 43
REGULATION AND SUPERVISION OF IBT
To the extent that the following information describes statutory and
regulatory provisions, it is qualified in its entirety by reference to the full
text of those provisions. Also, such statutes, regulations and policies are
continually under review by Congress and state legislatures and federal and
state regulatory agencies. A change in statutes, regulations or regulatory
policies applicable to IBT could have a material effect on the business of IBT.
INTRODUCTION
IBT, its banking subsidiary and its nonbanking subsidiaries are subject to
extensive regulation by federal and state agencies. The regulation of federal
financial holding companies and their subsidiaries is intended primarily for the
protection of depositors, federal deposit insurance funds and the banking system
as a whole and not for the protection of security holders.
As discussed in more detail below, this regulatory environment, among other
things, may restrict IBT's ability to diversify into certain areas of financial
services, acquire depository institutions in certain states and pay dividends on
its capital stock. It may also require IBT to provide financial support to one
or more of its banking subsidiaries, maintain capital balances in excess of
those desired by management and pay higher deposit insurance premiums as a
result of the deterioration in the financial condition of depository
institutions in general.
REGULATORY AGENCIES
Financial Holding Company
IBT, as a federal financial holding company, is subject to regulation under
the Bank Holding Company Act of 1956 and to inspection, examination and
supervision by the Board of Governors of the Federal Reserve System (Federal
Reserve Board) under the Bank Holding Company Act of 1956.
Subsidiary Bank
IBT's state-chartered banking subsidiary is subject to primary federal
regulation and examination by the FDIC and, in addition, is regulated and
examined by the Financial Institutions Bureau of the State of Michigan.
Nonbank Subsidiaries
IBT's nonbank subsidiaries also are subject to regulation by the Federal
Reserve Board and other applicable federal and state agencies. IBT's brokerage
subsidiary is regulated by the SEC, the National Association of Securities
Dealers, Inc. and state securities regulators. IBT's insurance activities are
subject to regulation by applicable state insurance regulatory agencies.
FINANCIAL HOLDING COMPANY ACTIVITIES
Banking-Related Requirement
Effective March 11, 2000, subject to certain conditions, bank holding
companies that elect to become financial holding companies may affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature. Also effective March 11, 2000, no regulatory approval will
be required for a financial holding company to acquire a company, other than a
bank or savings association, engaged in activities that are financial in nature
or incidental to activities that are financial in nature, as determined by the
Federal Reserve Board. See "Financial Modernization" below.
Interstate Banking
Under the Riegle-Neal Interstate Banking and Branching Act (Riegle-Neal
Act), a bank holding company may acquire banks in states other than its home
state, subject to any state requirement that the
35
<PAGE> 44
bank has been organized and operating for a minimum period of time, not to
exceed five years, and the requirement that the bank holding company not
control, prior to or following the proposed acquisition, more than 10% of the
total amount of deposits of insured depository institutions nationwide or,
unless the acquisition is the bank holding company's initial entry into the
state, more than 30% of such deposits in the state, or such lesser or greater
amount set by the state.
The Riegle-Neal Act also authorizes banks to merge across state lines,
thereby creating interstate branches. States may opt out of the Interstate
Banking Act and thereby prohibit interstate mergers in the state. IBT will be
unable to consolidate its banking operations in one state with those of another
state if either state in question has opted out of the Riegle-Neal Act.
Regulatory Approval
In determining whether to approve a proposed bank acquisition, federal
banking regulators will consider, among other factors, the effect of the
acquisition on competition, the public benefits expected to be received from the
acquisition, the projected capital ratios and levels on a post-acquisition
basis, and the acquiring institution's record of addressing the credit needs of
the communities it serves, including the needs of low and moderate income
neighborhoods, consistent with the safe and sound operation of the bank, under
the Community Reinvestment Act of 1977.
DIVIDEND RESTRICTIONS
IBT is a legal entity separate and distinct from its subsidiary bank and
other subsidiaries. Its principal source of funds to pay dividends on its common
stock and debt service on its debt is dividends from its subsidiaries. Various
federal and state statutory provisions and regulations limit the amount of
dividends that IBT's bank subsidiary may pay without regulatory approval.
Dividends payable by a Michigan State bank are subject to state regulations that
limit dividends.
Before Isabella Bank and Trust can declare dividends in 2000 without the
prior approval of the Michigan Financial Institutions Bureau, it must have net
income of $ plus an amount equal to or greater than the dividends
declared in 2000.
HOLDING COMPANY STRUCTURE
Transfer of Funds from Banking Subsidiaries
IBT's banking subsidiaries are subject to restrictions under federal law
that limit the transfer of funds or other items of value from these subsidiaries
to IBT and its nonbanking subsidiaries, including affiliates, whether in the
form of loans and other extensions of credit, investments and asset purchases,
or as other transactions involving the transfer of value from a subsidiary to an
affiliate or for the benefit of an affiliate. Unless an exemption applies, these
transactions by a banking subsidiary with a single affiliate are limited to 10%
of the subsidiary bank's capital and surplus and, with respect to all covered
transactions with affiliates in the aggregate, to 20% of the subsidiary bank's
capital and surplus. Also, loans and extensions of credit to affiliates
generally are required to be secured in specified amounts.
Source of Strength Doctrine
The Federal Reserve Board has a policy that a financial holding company is
expected to act as a source of financial and managerial strength to each of its
subsidiary banks and, under appropriate circumstances, to commit resources to
support each such subsidiary bank. This support may be required at times when
the financial holding company may not have the resources to provide it. Capital
loans from IBT to its subsidiary bank are subordinate in right of payment to
deposits and certain other indebtedness of the subsidiary bank. In addition, in
the event of IBT's bankruptcy, any commitment by IBT 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.
36
<PAGE> 45
Depositor Preference
The Federal Deposit Insurance Act (FDI Act) provides that, in the event of
the "liquidation or other resolution" of an insured depository institution, the
claims of depositors of the institution, including the claims of the FDIC as
subrogee of insured depositors, and certain claims for administrative expenses
of the FDIC as a receiver will have priority over other general unsecured claims
against the institution. If an insured depository institution fails, insured and
uninsured depositors, along with the FDIC, will have priority in payment ahead
of unsecured, nondeposit creditors, including IBT.
Liability of Commonly Controlled Institutions
Under the FDI Act, an insured depository institution is generally liable
for any loss incurred, or reasonably expected to be incurred, by the FDIC in
connection with (a) the default of a commonly controlled insured depository
institution or (b) any assistance provided by the FDIC to a commonly controlled
insured depository institution in danger of default. "Default" means generally
the appointment of a conservator or receiver. "In danger of default" means
generally the existence of certain conditions indicating that a default is
likely to occur in the absence of regulatory assistance.
CAPITAL REQUIREMENTS
IBT and its subsidiary bank are subject to capital adequacy requirements
and guidelines administered by the Federal Reserve Board and/or the FDIC.
The Federal Deposit Insurance Corporation Act of 1991 (FDICIA) required
that the Federal Reserve Board and the FDIC adopt regulations defining five
capital tiers for banks: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized. Failure to meet minimum capital requirements can initiate
certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a material adverse effect on IBT's business.
Quantitative measures, established by the regulators to ensure capital
adequacy, require that IBT and its bank subsidiary maintain minimum ratios of
total capital to risk-weighted assets of eight percent (8%) and of Tier 1
capital to risk-weighted assets of four percent (4%).
There are two categories of capital under the guidelines. Tier 1 capital
includes common shareholders' equity, qualifying preferred stock and, for bank
holding companies, trust preferred securities, less goodwill and certain other
deductions, including the unrealized net gains and losses, after applicable
taxes, on available-for-sale securities carried at fair value. Tier 2 capital
includes preferred stock not qualifying as Tier 1 capital, mandatory convertible
debt, subordinated debt, certain unsecured senior debt issued by IBT, the
allowance for loans losses and net unrealized gains on marketable securities,
subject to limitations established by the guidelines. At least half of total
capital must be in the form of Tier 1 capital.
Under the guidelines, capital is compared to the relative risk related to
the balance sheet. To derive the risk included in the balance sheet, one of four
risk weights (0%, 20%, 50% and 100%) is applied to different balance sheet and
off-balance sheet assets, primarily based on the relative credit risk of the
counterparty. For example, claims guaranteed by the U.S. government or one of
its agencies are risk-weighted at 0%. Off-balance sheet items, such as loan
commitments and derivative financial instruments, are also assigned one of the
above risk weights after calculating balance sheet equivalent amounts. For
example, certain loan commitments are converted at 50% and then risk-weighted at
100%. Derivative financial instruments are converted to balance sheet
equivalents based on notional values, replacement costs and remaining
contractual terms. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors. In addition, the federal banking agencies have specified minimum
"leverage ratio" (the ratio of Tier 1 capital to quarterly average total assets)
guidelines for bank holding companies and state member banks. The minimum
leverage ratio guideline is three percent (3%) for banking organizations that
meet certain specified criteria, including that they have the highest regulatory
rating. All other banking organizations
37
<PAGE> 46
and state member banks are required to maintain a leverage ratio of three
percent (3%) plus an additional cushion of at least two percent (2%).
The Federal Reserve Board's capital guidelines provide that banking
organizations experiencing internal growth or making acquisitions are expected
to maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets. Also, the guidelines
indicate that the Federal Reserve Board will consider a "tangible Tier 1
leverage ratio" in evaluating proposals for expansion or new activities. The
tangible Tier 1 leverage ratio is the ratio of a banking organization's Tier 1
capital (excluding intangibles) to total assets (excluding intangibles).
The Federal Reserve Board and the FDIC have adopted rules to incorporate
market and interest rate risk components into their risk-based capital
standards. Amendments to the risk-based capital requirements, incorporating
market risk, became effective January 1, 1998. Under the new market risk
requirements, capital will be allocated to support the amount of market risk
related to a financial institution's ongoing trading activities.
At March 31, 2000, IBT's ratio of total capital (the sum of Tier 1 and Tier
2 capital) to risk-weighted assets was 14.8% and its ratio of Tier 1 capital to
risk-weighted assets was 13.6%. IBT's leverage ratio at March 31, 2000 was 8.8%.
IBT's management believes that IBT's subsidiary bank meets all capital
requirements to which it is subject.
As an additional means to identify problems in the financial management of
depository institutions, the FDI Act requires federal bank regulatory agencies
to establish certain non-capital safety and soundness standards for institutions
for which they are the primary federal regulator. The standards relate generally
to operations and management, asset quality, interest rate exposure and
executive compensation. The agencies are authorized to take action against
institutions that fail to meet such standards.
The FDI Act requires federal bank regulatory agencies to take "prompt
corrective action" with respect to FDIC-insured depository institutions that do
not meet minimum capital requirements. A depository institution's treatment for
purposes of the prompt corrective action provisions will depend upon how its
capital levels compare to various capital measures and certain other factors, as
established by regulation.
FDIC INSURANCE
Through the Bank Insurance Fund (BIF), the FDIC insures the deposits of
IBT's depository institution subsidiary up to prescribed limits for each
depositor. The amount of FDIC assessments paid by each BIF member institution is
based on its relative risk of default as measured by regulatory capital ratios
and other factors. Specifically, the assessment rate is based on the
institution's capitalization risk category and supervisory subgroup category. An
institution's capitalization risk category is based on the FDIC's determination
of whether the institution is well capitalized, adequately capitalized or less
than adequately capitalized. An institution's supervisory subgroup category is
based on the FDIC's assessment of the financial condition of the institution and
the probability that FDIC intervention or other corrective action will be
required.
The BIF assessment rate currently ranges from zero to 27 cents per $100 of
domestic deposits. The FDIC may increase or decrease the assessment rate
schedule on a semi-annual basis. An increase in the BIF assessment rate could
have a material adverse effect on IBT's earnings, depending on the amount of the
increase. The FDIC is authorized to terminate a depository institution's deposit
insurance upon a finding by the FDIC that the institution's financial condition
is unsafe or unsound or that the institution has engaged in unsafe or unsound
practices or has violated any applicable rule, regulation, order or condition
enacted or imposed by the institution's regulatory agency. The termination of
deposit insurance for one or more of IBT's subsidiary depository institutions
could have a material adverse effect on IBT's earnings, depending on the
collective size of the particular institutions involved.
All FDIC-insured depository institutions must pay an annual assessment to
provide funds for the payment of interest on bonds issued by the Financing
Corporation, a federal corporation chartered under
38
<PAGE> 47
the authority of the Federal Housing Finance Board. The bonds, commonly referred
to as FICO bonds, were issued to capitalize the Federal Savings and Loan
Insurance Corporation. FDIC-insured depository institutions continued to pay
approximately 1.2 cents per $100 of BIF-assessable deposits until the December
31, 1999. Thereafter, they will pay an assessment rate equal to the rate
assessed on deposits insured by the Savings Association Insurance Fund.
FISCAL AND MONETARY POLICIES
IBT's business and earnings are affected significantly by the fiscal and
monetary policies of the federal government and its agencies. IBT is
particularly affected by the policies of the Federal Reserve Board, which
regulates the supply of money and credit in the United States. Among the
instruments of monetary policy available to the Federal Reserve are (a)
conducting open market operations in United States government securities, (b)
changing the discount rates of borrowings of depository institutions, (c)
imposing or changing reserve requirements against depository institutions'
deposits, and (d) imposing or changing reserve requirements against certain
borrowing by banks and their affiliates. These methods are used in varying
degrees and combinations to directly affect the availability of bank loans and
deposits, as well as the interest rates charged on loans and paid on deposits.
For that reason alone, the policies of the Federal Reserve Board have a material
effect on the earnings of IBT.
COMPETITION
The financial services industry is highly competitive. IBT's subsidiaries
compete with financial services providers, such as banks, savings and loan
associations, credit unions, finance companies, mortgage banking companies,
insurance companies, and money market and mutual fund companies. They also face
increased competition from non-banking institutions such as brokerage houses and
insurance companies, as well as from financial services subsidiaries of
commercial and manufacturing companies. Many of these competitors enjoy the
benefits of advanced technology, fewer regulatory constraints and lower cost
structures.
Under the Gramm-Leach-Bliley Act, effective March 11, 2000, securities
firms and insurance companies that elect to become financial holding companies
may acquire banks and other financial institutions. The Gramm-Leach-Bliley Act
may significantly change the competitive environment in which the Company and
its subsidiaries conduct business. See "Financial Modernization" below. The
financial services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services.
These technological advances may diminish the importance of depository
institutions and other financial intermediaries in the transfer of funds between
parties.
FINANCIAL MODERNIZATION
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act which, effective March 11, 2000, permits bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized under the FDICIA
prompt corrective action provisions, is well managed, and has at least a
satisfactory rating under the Community Reinvestment Act (CRA) by filing a
declaration that the bank holding company wishes to become a financial holding
company. No regulatory approval will be required for a financial holding company
to acquire a company, other than a bank or savings association, engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as determined by the Federal Reserve Board.
The Gramm-Leach-Bliley Act defines "financial in nature" to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Board has determined to be closely related
to banking. A national bank also may engage, subject to limitations on
investment, in activities that are financial in nature, other than insurance
underwriting, insurance company portfolio investment, real estate
39
<PAGE> 48
development and real estate investment, through a financial subsidiary of the
bank, if the bank is well capitalized, well managed and has at least a
satisfactory CRA rating. Subsidiary banks of a financial holding company or
national banks with financial subsidiaries must continue to be well capitalized
and well managed in order to continue to engage in activities that are financial
in nature without regulatory actions or restrictions, which could include
divestiture of the financial in nature subsidiary or subsidiaries. In addition,
a financial holding company or a bank may not acquire a company that is engaged
in activities that are financial in nature unless each of the subsidiary banks
of the financial holding company or the bank has CRA rating of satisfactory or
better.
INFORMATION ABOUT FSB
GENERAL
FSB is a Michigan corporation registered as a bank holding company under
the Bank Holding Company Act of 1956. FSB owns one subsidiary bank, and conducts
banking activities in Gratiot and Saginaw Counties in Michigan. FSB's subsidiary
banks provide a full range of banking services from three banking locations and
three ATMs. FSB also wholly-owns and insurance agency which conducts no business
other than obtaining insurance for FSB. FSB owns minority interests of Michigan
Bankers Title Company of Northern Michigan, LLC, and of West Shore Computers
Services, Inc.
At March 31, 2000, FSB had consolidated total assets of $99.7 million,
consolidated total deposits of $88.1 million, and shareholders' equity of $10.77
million.
FSB's executive offices are located at 316 East Saginaw Street,
Breckenridge, Michigan 48615, and its telephone number is (517) 842-3191.
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<PAGE> 49
FSB AUDITED CONSOLIDATED FINANCIAL STATEMENTS
ANDREWS HOOPER & PAVLIK P.L.C.
CERTIFIED PUBLIC ACCOUNTANTS
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
FSB Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of FSB
Bancorp, Inc. and its wholly owned subsidiary, Farmers State Bank of
Breckenridge, as of December 31, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of FSB Bancorp,
Inc. and its wholly owned subsidiary, Farmers State Bank of Breckenridge, as of
December 31, 1999 and 1998, and the consolidated results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles.
Andrews Hooper & Pavlik P.L.C.
January 19, 2000
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<PAGE> 50
FSB BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 4,549 $ 4,172
Federal funds sold.......................................... 4,550 2,450
Investment securities (Note 3):
Securities held to maturity (market value $7,520 in 1999
and $9,389 in 1998).................................... 7,573 9,317
Securities available for sale............................. 3,607 6,392
-------- -------
Total investment securities................................. 11,180 15,709
Loans (Note 4):
Commercial................................................ 8,834 8,852
Agricultural.............................................. 30,639 28,016
Real estate mortgage...................................... 29,978 26,045
Installment............................................... 9,673 9,292
-------- -------
Total loans................................................. 79,124 72,205
Less allowance for loan losses.............................. 1,412 1,435
-------- -------
Net loans................................................... 77,712 70,770
Premises and equipment (Note 5)............................. 1,229 1,252
Accrued interest receivable................................. 1,724 1,742
Other real estate and other assets.......................... 343 819
Federal Home Loan Bank stock................................ 292 286
-------- -------
TOTAL ASSETS.............................................. $101,579 $97,200
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 6):
Noninterest bearing....................................... $ 10,682 $ 8,607
Interest bearing:
Time deposits over $100................................ 2,565 2,773
Demand deposit NOW accounts............................ 8,274 7,601
Other.................................................. 67,920 67,720
-------- -------
Total interest-bearing deposits........................... 78,759 78,094
-------- -------
Total deposits.............................................. 89,441 86,701
Advances from Federal Home Loan Bank (Note 7)............... 1,000
Accrued interest payable and other liabilities.............. 628 664
Deferred federal income taxes (Note 8)...................... 81 184
-------- -------
Total liabilities......................................... 91,150 87,549
SHAREHOLDERS' EQUITY (NOTES 2, 10 AND 11):
Common stock -- no par value:
Authorized -- 600,000 shares in 1999 and 400,000 shares
in 1998; Issued and Outstanding -- 408,237 shares in
1999 and 386,567 shares in 1998
Capital surplus........................................... 4,583 3,649
Retained earnings......................................... 5,864 5,974
Accumulated other comprehensive income, net of taxes... (18) 28
-------- -------
Total shareholders' equity................................ 10,429 9,651
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................ $101,579 $97,200
======== =======
</TABLE>
See accompanying notes.
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<PAGE> 51
FSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------
1999 1998
---- ----
(DOLLARS IN THOUSANDS
EXCEPT FOR PER SHARE
AMOUNTS)
<S> <C> <C>
INTEREST INCOME
Interest and fees on loans.................................. $7,124 $6,867
Interest on investment securities:
Held to maturity (non-taxable interest $235 in 1999 and
$259 in 1998).......................................... 449 440
Available for sale........................................ 297 422
------ ------
Total interest on investment securities..................... 746 862
Interest on federal funds sold.............................. 73 124
------ ------
Total interest income....................................... 7,943 7,853
Interest on deposits........................................ 3,329 3,583
------ ------
Net interest income......................................... 4,614 4,270
Provision for loan losses................................... 200 210
------ ------
Net interest income after provision for loan losses......... 4,414 4,060
OTHER INCOME
Service charges and fees.................................... 337 335
Gain on sale of mortgage loans.............................. 20
Other....................................................... 189 143
------ ------
Total other income.......................................... 546 478
OPERATING EXPENSES
Salaries, wages and benefits................................ 1,591 1,437
Net occupancy expense....................................... 146 141
Furniture and equipment expense............................. 304 307
FDIC insurance premiums..................................... 14 13
Data processing expense..................................... 146 137
Other....................................................... 1,013 939
------ ------
Total operating expenses.................................... 3,214 2,974
------ ------
Income before federal income taxes.......................... 1,746 1,564
Federal income taxes (Note 8)............................... 553 497
------ ------
NET INCOME.................................................. $1,193 $1,067
====== ======
NET INCOME PER SHARE (NOTE 2)............................... $ 2.94 $ 2.64
====== ======
</TABLE>
See accompanying notes.
43
<PAGE> 52
FSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
COMMON CAPITAL RETAINED COMPREHENSIVE SHAREHOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
------ ------- -------- ------------- -------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998............. $2,864 $5,998 $ 8 $ 8,870
Comprehensive income:
Net income for 1998.................. 1,067 1,067
Other comprehensive income, net of
tax:
Change in unrealized gains
(losses) on securities available
for sale, net of taxes of $10... 20 20
-------
Total comprehensive income............. 1,087
Cash dividends declared -- $1.02 per
share................................ (416) (416)
Stock dividend and related transfer to
capital surplus...................... 675 (675)
Issuance of 3,192 shares of common
stock under dividend reinvestment
plan................................. 110 110
------ ------ ---- -------
Balance at December 31, 1998........... 3,649 5,974 28 9,651
Comprehensive income:
Net income for 1999.................. 1,193 1,193
Other comprehensive income, net of
tax:
Change in unrealized gains
(losses) on securities available
for sale, net of taxes of
$(24)........................... (46) (46)
-------
Total comprehensive income............. 1,147
Cash dividends declared -- $1.12 per
share................................ (462) (462)
Stock dividend and related transfer to
capital surplus...................... 841 (841)
Issuance of 2,410 shares of common
stock under dividend reinvestment
plan................................. 93 93
------ ------ ---- -------
Balance at December 31, 1999........... $4,583 $5,864 $(18) $10,429
====== ====== ==== =======
</TABLE>
See accompanying notes.
44
<PAGE> 53
FSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------------
1999 1998
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 1,193 $ 1,067
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 214 246
Deferred federal income tax credit........................ (80) (75)
Provision for loan losses................................. 200 210
Net loss (gain) on sale of other real estate.............. (31) 2
Net amortization on investment securities................. 73 68
Gain on sale of mortgage loans............................ (20)
Proceeds from sales of mortgage loans..................... 1,955
Loans originated for sale................................. (1,935)
(Increase) decrease in accrued interest receivable........ 17 (239)
(Increase) decrease in other real estate and other
assets................................................. 469 (276)
Increase (decrease) in accrued interest payable and other
liabilities............................................ (35) 137
------- -------
Net cash provided by operating activities.............. 2,020 1,140
INVESTING ACTIVITIES
Proceeds from maturities of investment securities held to
maturity.................................................. 3,308 3,095
Purchases of investment securities held to maturity......... (1,872) (5,987)
Proceeds from maturities of investment securities available
for sale.................................................. 4,750 5,260
Purchases of investment securities available for sale....... (2,056) (2,964)
Principal collected on Collateralized Mortgage
Obligations............................................... 256 203
Net increase in loans....................................... (7,142) (3,140)
Proceeds from sale of premises and equipment................ 22
Purchases of premises and equipment......................... (152) (165)
Purchase of Federal Home Loan Bank stock.................... (6) (13)
------- -------
Net cash used by investing activities.................. (2,914) (3,689)
FINANCING ACTIVITIES
Net increase in deposits.................................... 2,740 983
Advances from Federal Home Loan Bank........................ 4,500
Repayment of Federal Home Loan Bank advances................ (3,500)
Cash dividends declared..................................... (462) (417)
Proceeds from issuance of common stock under dividend
reinvestment plan......................................... 93 110
------- -------
Net cash provided by financing activities................... 3,371 676
------- -------
Increase (decrease) in cash and cash equivalents............ 2,477 (1,873)
Cash and cash equivalents at beginning of year.............. 6,622 8,495
------- -------
Cash and cash equivalents at end of year.................... $ 9,099 $ 6,622
======= =======
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest...................... $ 3,347 $ 3,565
Cash paid during the year for income taxes.................. 621 584
</TABLE>
See accompanying notes.
45
<PAGE> 54
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1. ACCOUNTING POLICIES
Organization and Consolidation
FSB Bancorp, Inc. (the Corporation) is the parent of its 100% wholly owned
subsidiary, Farmers State Bank of Breckenridge (the Bank). Significant
intercompany transactions and accounts have been eliminated upon consolidation.
Nature of Operations
The Bank provides a variety of financial services to individuals and
corporate customers through its three offices in Breckenridge, Hemlock and
Ithaca, Michigan, which are primarily agricultural areas. The Bank's primary
deposit products are interest-bearing checking and saving accounts and
certificates of deposit. Its primary lending products are residential-mortgage
loans, installment loans and commercial loans. Agricultural loans represent
approximately 39% of the Bank's loan portfolio.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of other real estate acquired in connection with foreclosures or in satisfaction
of loans. In connection with the determination of the allowance for losses on
loans and foreclosed real estate, management obtains independent appraisals for
significant properties. While management uses available information to recognize
loan losses, further reductions in the carrying amounts of loans may be
necessary based on changes in local economic conditions. In addition, regulatory
agencies, as an integral part of their examination process, periodically review
the estimated loan losses. Such agencies may require the Bank to recognize
additional losses based on their judgments about information available to them
at the time of their examination. Because of these factors, it is possible that
the estimated loan losses may change in the near term. However, the amount of
the change cannot be estimated.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest-bearing deposits with other banks
and federal funds sold. The Bank reports customer loan and deposit transactions
on a net cash flow basis.
Investment Securities
The Bank has classified its investment securities as trading (none),
available-for-sale or held-to-maturity securities.
Investment securities held to maturity are those securities for which the
Bank has the positive intent and ability to hold to maturity. These securities
are reported at cost, adjusted for premiums and discounts that are recognized in
interest income using the straight-line method over the period to maturity.
Investment securities available for sale are those securities not
classified as trading or held-to-maturity securities. Unrealized holding gains
and losses, net of tax, are reported as a net amount in a separate component of
shareholders' equity until realized. Gains and losses on the sale of
available-for-sale
46
<PAGE> 55
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. ACCOUNTING POLICIES -- CONTINUED
securities are determined using the specific-identification method. Premiums and
discounts are recognized in interest income using the straight-line method over
the period to maturity.
Federal Home Loan Bank Stock
Federal Home Loan Bank (FHLB) stock is recorded and traded at cost and can
only be sold to the FHLB or another member institution. The Bank is required to
maintain an investment in FHLB stock equal to one percent of the net permanent
home mortgage loan portfolio. At December 31, 1999 and 1998, the Bank's
investment in FHLB stock exceeded the required amount.
Allowance for Loan Losses
An allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb losses on loans. Management
determines the adequacy of the allowance for loan losses based on an evaluation
of the loan portfolio, past and recent loan loss experience, current economic
conditions, including agricultural land and equipment values, current commodity
prices, and other pertinent factors.
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.
Other Real Estate
Other real estate includes assets that have been acquired in satisfaction
of debt. Recorded values of other real estate are periodically reviewed and
carried at the lower of cost or fair market value less estimated costs to sell.
Interest on Loans
Interest on loans is generally accrued based upon the principal amount
outstanding. Loans are placed on nonaccrual status whenever the collectibility
of principal or interest is considered doubtful. When this occurs, previously
accrued but unpaid interest is reversed from current earnings and such loans are
placed on a cash basis for future recognition of interest income. Cash-basis
loans are restored to an accrual basis whenever interest and principal payments
are current and it is believed that the financial condition of the borrower has
improved to the extent that future principal and interest payments will be met.
Mortgage Banking Activities
The Bank originates and sells all mortgage loans with fixed rates and
maturities of 15 and 30 years and retains the servicing rights. The Bank
estimates the cost of servicing to approximate the servicing income received.
The Bank does not have any loans available for sale at December 31, 1999.
Employee Benefits
The profit sharing plan of the Bank covers substantially all employees.
Contributions to the plan, which are discretionary, totaled $95 in 1999 and $75
in 1998.
47
<PAGE> 56
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
1. ACCOUNTING POLICIES -- CONTINUED
Federal Income Taxes
The provision for federal income taxes is based on amounts reported in the
consolidated financial statements (after exclusion of nontaxable interest
income) and reflects deferred federal income taxes on temporary differences
between financial statement and income tax accounting.
Net Income Per Share
Net income per share of common stock has been computed on the basis of the
weighted average number of shares of common stock outstanding and reflects a 5%
stock dividend in the current year (See Note 2).
Advertising Costs
The Bank expenses advertising costs as incurred. The total amount of
advertising costs charged to expense during 1999 and 1998 was approximately $75
and $76, respectively. The Bank has no direct-response advertising.
2. SHAREHOLDERS' EQUITY
On October 15, 1999 and September 15, 1998, the Corporation distributed
shares of common stock in connection with 5% stock dividends. As a result of the
stock dividends, capital surplus was increased by $841 in 1999 and $675 in 1998
and retained earnings was decreased by the same amounts. All per share amounts
have been restated to reflect the stock dividends.
During 1999 and 1998, the Corporation issued 2,410 and 3,192 shares of
common stock in conjunction with the Corporation's dividend reinvestment plan.
3. INVESTMENT SECURITIES
Investment securities have been classified in the consolidated financial
statements according to management's intent. The carrying amount of investment
securities and their approximate market values at December 31, are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
SECURITIES HELD TO MATURITY
1999
States and political subdivisions............ $4,650 $10 $(34) $4,626
Corporate and other securities............... 1,851 (12) 1,839
Collateralized mortgage obligations.......... 1,072 (17) 1,055
------ --- ---- ------
$7,573 $10 $(63) $7,520
====== === ==== ======
1998
States and political subdivisions............ $5,210 $65 $ (3) $5,272
Corporate and other securities............... 2,781 9 2,790
Collateralized mortgage obligations.......... 1,326 3 (2) 1,327
------ --- ---- ------
$9,317 $77 $ (5) $9,389
====== === ==== ======
</TABLE>
48
<PAGE> 57
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
3. INVESTMENT SECURITIES -- CONTINUED
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
1999
U.S. Treasury, U.S. agency, States and
political subdivisions and corporate
securities................................. $3,556 $(28) $3,528
Federal Reserve stock........................ 79 79
------ --- ---- ------
$3,635 $(28) $3,607
====== === ==== ======
1998
U.S. Treasury, U.S. agency and corporate
securities................................. $6,271 $43 $ (1) $6,313
Federal Reserve stock........................ 79 79
------ --- ---- ------
$6,350 $43 $ (1) $6,392
====== === ==== ======
</TABLE>
The amortized cost and approximate market value of debt securities at
December 31, 1999 by contractual maturity are shown below. Actual maturities
could differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
------------------ ------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
--------- ------ --------- ------
<S> <C> <C> <C> <C>
Due in one year or less......................... $2,840 $2,833 $1,581 $1,579
Due after one year through five years........... 2,898 2,877 2,054 2,028
Due after five years............................ 763 755
------ ------ ------ ------
6,501 6,465 3,635 3,607
Collateralized mortgage obligations............. 1,072 1,055
------ ------ ------ ------
$7,573 $7,520 $3,635 $3,607
====== ====== ====== ======
</TABLE>
Investment securities with a carrying value of approximately $1,003 at
December 31, 1999 and $2,008 at December 31, 1998 were pledged to secure
overnight investments.
4. LOANS
The following summarizes the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year................................ $1,435 $1,435
Charge-offs and recoveries:
Losses (deduction)........................................ (283) (355)
Recoveries................................................ 60 145
------ ------
Net charge-offs............................................. (223) (210)
Provision for loan losses................................... 200 210
------ ------
Balance at end of year...................................... $1,412 $1,435
====== ======
</TABLE>
49
<PAGE> 58
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
4. LOANS -- CONTINUED
Certain directors and executive officers of the Corporation and the Bank
(including their immediate families and companies in which they have 10% or more
ownership) were loan customers during 1999 and 1998. Such loans were made in the
ordinary course of business at normal credit terms, including interest rates and
collateralization, and do not represent more than a normal risk of collection.
Total loans to these customers aggregated $1,512 and $1,335 at December 31, 1999
and 1998, respectively.
Nonperforming loans include nonaccrual loans, restructured loans and loans
past due 90 days or more. These loans aggregated $779 and $458 at December 31,
1999 and 1998, respectively. Additional interest income that would have been
recorded on nonaccrual loans, if the loans had been current in accordance with
their original terms, was approximately $48 in 1999 and $56 in 1998.
The Bank grants loans to customers generally in their geographic area.
Although the Bank has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their loan agreements is dependent upon the
agriculture industry. These loans are primarily secured by residential and farm
real estate, equipment and crops.
5. PREMISES AND EQUIPMENT
A summary of premises and equipment at December 31 follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Premises.................................................... $1,277 $1,258
Equipment................................................... 1,766 1,636
------ ------
3,043 2,894
Less accumulated depreciation............................... 1,814 1,642
------ ------
$1,229 $1,252
====== ======
</TABLE>
6. DEPOSITS
Deposit account balances at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Noninterest bearing......................................... $10,682 $ 8,607
Interest bearing:
NOW....................................................... 8,274 7,601
Savings................................................... 10,644 10,518
Certificates of deposit................................... 43,096 44,881
Money market.............................................. 16,745 15,094
------- -------
Total interest bearing............................ 78,759 78,094
------- -------
$89,441 $86,701
======= =======
</TABLE>
50
<PAGE> 59
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
6. DEPOSITS -- (CONTINUED)
Certificates of deposit maturing in years ending December 31 are as
follows:
<TABLE>
<S> <C>
2000....................................................... $21,432
2001....................................................... 10,902
2002....................................................... 6,533
2003....................................................... 3,213
2004 and thereafter........................................ 1,016
-------
$43,096
=======
</TABLE>
The Bank held related party deposits of approximately $2,900 at December
31, 1999.
7. ADVANCES FROM FEDERAL HOME LOAN BANK (FHLB)
During 1999, the Bank received $4,500 in advances from the FHLB and repaid
$3,500 leaving $1,000 outstanding at December 31, 1999. Pursuant to collateral
agreements with the FHLB, advances are secured by the FHLB stock and qualifying
first year mortgage loans. The outstanding balance was paid in full in January
2000.
8. FEDERAL INCOME TAXES
The components of federal income tax expense are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current..................................................... $633 $572
Deferred credit............................................. (80) (75)
---- ----
$553 $497
==== ====
</TABLE>
A reconciliation between federal income taxes and the amount computed by
applying the statutory federal income tax rate (34%) to income before federal
income taxes is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income tax on pretax income................................. $594 $531
Effect of nontaxable interest income........................ (44) (40)
Other....................................................... 3 6
---- ----
$553 $497
==== ====
</TABLE>
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 federal income
51
<PAGE> 60
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
8. FEDERAL INCOME TAXES -- (CONTINUED)
tax purposes. Significant temporary differences which comprise the deferred tax
assets and liabilities of the Bank as of December 31 are approximately as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Other real estate tax gains in excess of book gains....... $ 4 $ 4
Net unrealized depreciation on investment securities
available for sale..................................... 9
Other..................................................... 32 27
---- ----
Total deferred tax assets.............................. 45 31
Deferred tax liabilities:
Allowance for loan losses................................. 10 78
Tax over book depreciation................................ 79 73
Net unrealized appreciation on investment securities
available for sale..................................... 14
Other..................................................... 37 50
---- ----
Total deferred tax liabilities......................... 126 215
---- ----
Net deferred tax liability........................ $ 81 $184
==== ====
</TABLE>
9. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are various outstanding commitments
and contingent liabilities, such as commitments to extend credit and guarantees,
which are not reflected in the accompanying financial statements. Commitments to
extend credit 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. Historically, the
majority of the commitments have not been drawn upon, and therefore do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon 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
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank
generally to guarantee the performance of a customer to a third party. These
arrangements have credit risk essentially the same as that involved in extending
loans to customers and are subject to the Bank's normal credit policies.
Outstanding loan commitments, lines of credit and standby letters of credit
aggregated $7,814, $701, and $493, respectively at December 31, 1999. Management
does not anticipate any losses as a result of these transactions.
10. OTHER MATTERS
The Bank is subject to limitations under the Federal Reserve Act on the
amount of loans or advances to the parent corporation and on the amount of
dividends that can be paid to the parent corporation. Approval is needed if
total dividends declared in any calendar year exceed the retained "net profit"
(as defined in the Federal Reserve Act) of that year plus the retained "net
profit" of the preceding two years. The amount that was not subject to this
restriction was $1,358 at January 1, 2000.
Banking regulations require that banks maintain cash reserves and cash
balances with the Federal Reserve or certain other qualifying banks. At December
31, 1999, the average cash reserve requirement was $269.
There were no material noncancelable lease commitments outstanding at
December 31, 1999.
52
<PAGE> 61
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
11. CAPITAL REQUIREMENTS
The Bank is subjected to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct,
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
adjusted assets (as defined). Management believes that as of December 31, 1999
the Bank meets all capital adequacy requirements to which it is subject.
As of January 1999, the most recent notification from the Federal Reserve
Bank of Chicago, the Bank was categorized as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the Bank's
category.
The Bank's actual capital amounts and ratios are also presented in the
following tables:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE ACTION
ACTUAL PURPOSES PROVISIONS
--------------- -------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Total risk-based Capital (to risk-weighted
assets)..................................... $11,174 15.5% $5,771 8.0% $7,214 10.0%
Tier I Capital (to risk-weighted assets)...... 10,266 14.2% 2,886 4.0% 4,328 6.0%
Tier I Capital (to average adjusted assets)... 10,266 10.4% 3,933 4.0% 4,917 5.0%
DECEMBER 31, 1998
Total risk-based Capital (to risk-weighted
assets)..................................... $10,273 14.7% $5,608 8.0% $7,010 10.0%
Tier I Capital (to risk-weighted assets)...... 9,390 13.4% 2,804 4.0% 4,206 6.0%
Tier I Capital (to average adjusted assets)... 9,390 9.7% 3,862 4.0% 4,828 5.0%
</TABLE>
12. FAIR VALUE DISCLOSURES
In 1999, the Corporation adopted Financial Accounting Standards Board
(FASB) Statement No. 107, Disclosures About Fair Value of Financial Instruments,
which requires disclosures about the estimated fair value of the Bank's
financial instruments. The following table presents the carrying amount and
estimated fair values of the Bank's financial instruments as of December 31,
1999. These estimates of fair value are significantly affected by the
assumptions made, and accordingly, do not necessarily indicate amounts which
could be realized in a current market exchange. It is also the Bank's general
practice and intent to hold the majority of its financial instruments until
maturity; therefore, the Bank does not expect to realize the estimated amount
below. In addition, the estimated fair values shown below do not include any
value for
53
<PAGE> 62
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. FAIR VALUE DISCLOSURES -- (CONTINUED)
assets and liabilities which are not financial instruments as defined by FASB
Statement No. 107, such as the value of property and equipment, other assets,
the Bank's customer base or anticipated future business.
<TABLE>
<CAPTION>
1999
------------------
CARRYING FAIR
AMOUNT VALUE
-------- -----
<S> <C> <C>
FINANCIAL ASSETS
Cash and due from banks..................................... $ 4,549 $ 4,549
Federal funds sold.......................................... 4,550 4,550
Securities held to maturity................................. 7,573 7,520
Securities available for sale............................... 3,607 3,607
Net loans................................................... 77,712 78,954
Accrued interest receivable................................. 1,724 1,724
FHLB stock.................................................. 292 292
FINANCIAL LIABILITIES
Deposits.................................................... 89,441 89,623
Advance from FHLB........................................... 1,000 1,000
Accrued interest payable.................................... 288 288
</TABLE>
The following are the major methods and assumptions used in estimating the
fair value of financial instruments.
Cash and due from banks, federal funds sold, accrued interest receivable, FHLB
stock, advance from FHLB, and accrued interest payable
For these short-term instruments the fair value approximates their carrying
amount.
Investment securities
The fair values of investment securities are based on quoted market prices.
Net loans
For variable rate loans that reprice frequently with no significant change
in credit risk, fair values are based on carrying values. The fair values for
all other loans are estimated using discounted cash flow analysis at interest
rates currently offered for loans with similar terms to borrowers of similar
credit quality.
Deposits
The fair values disclosed for deposit accounts with no defined maturities
are, by definition, equal to the amount payable on demand at the reporting date.
Fair values for certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
54
<PAGE> 63
FSB BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
13. FSB BANCORP, INC. (PARENT ONLY) STATEMENTS
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Investment in bank subsidiary............................... $10,429 $9,637
Receivable from bank........................................ 14
------- ------
Total assets...................................... $10,429 $9,651
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Capital surplus............................................. $ 4,583 $3,649
Retained earnings........................................... 5,864 5,974
Unrealized net gain (loss) on securities available for
sale...................................................... (18) 28
------- ------
Total liabilities and shareholders' equity........ $10,429 $9,651
======= ======
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
1999 1998
---- ----
<S> <C> <C>
Cash dividends from bank subsidiary......................... $ 355 $ 315
Equity in undistributed earnings of bank subsidiary......... 838 752
------ ------
Net income........................................ $1,193 $1,067
====== ======
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31
----------------
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $1,193 $1,067
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in undistributed earnings of bank subsidiary....... (838) (752)
(Increase) decrease in receivable from bank............... 14 (9)
------ ------
Net cash provided by operating activities.............. 369 306
FINANCING ACTIVITIES
Dividends declared.......................................... (462) (416)
Proceeds from issuance of common stock under dividend
reinvestment plan......................................... 93 110
------ ------
Net cash used by financing activities.................. (369) (306)
Change in cash..............................................
Cash at beginning of year...................................
------ ------
Cash at end of year.........................................
====== ======
</TABLE>
55
<PAGE> 64
FSB MANAGEMENT'S DISCUSSION AND ANALYSIS
The following is management's discussion and analysis of the major factors
that influenced FSB Bancorp's ("FSB") financial performance as of the dates and
for the periods indicated. This analysis should be read in conjunction with
FSB's 1999 annual report and other financial information appearing elsewhere in
this document.
The data contained in this management discussion and analysis that are not
historical facts are forward looking statements subject to the safe harbor
created by the Private Securities Litigation Act of 1995. Forward looking
statements, which are based on certain assumptions and describe future plans,
strategies, and expectations of FSB, are generally identifiable by use of the
words "believe", "intend", "anticipate", "estimate", "project", or similar
expressions. FSB's ability to predict results or the actual effect of future
plans or strategies is inherently uncertain. Factors which could have an adverse
impact on the operations and future prospects of FSB include, but are not
limited to, changes in interest rates, general economic conditions, legislation,
regulations, fiscal policy of the United States government, monetary policy of
the Federal Reserve Board, competition from both other financial institutions
and nonfinancial institutions, and accounting principles. These risks and
uncertainties should be considered in evaluating forward looking statements and
undue reliance should not be placed on such statements.
RESULTS OF OPERATIONS
Net income equaled $1.19 million for the year ended December 31, 1999
compared to $1.07 million for the same period in 1998, an 11.8% increase. The
increase in net income was due primarily to higher net interest income. Return
on average assets, which measures the ability of FSB to profitably and
efficiently employ its resources, equaled 1.24% during 1999 and 1.14% in 1998.
Return on average equity, which indicates how effectively FSB is able to
generate earnings on shareholder invested capital, equaled 11.79% in 1999 versus
11.45% for the same period in 1998.
Net income for the first quarter of 2000 was $343,000, an $90,000 or 35.6%
increase when compared to the same period in 1999. Return on average assets was
1.39% and return on average equity was 12.9%. The increase in net income was
principally a result of a $223,000 increase in net interest income.
NET INTEREST INCOME
Net interest income equals interest income less interest expense and is the
primary source of income for FSB. 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.
Average assets for the first quarter were $98.6 million, a $2.2 million
increase since December 31, 1999 and a $5.1 million increase since December 31,
1998. Since 1998, average loans outstanding have increased $9.2 million to $80.0
million, investments have decreased $4.0 million, and other assets have
decreased $150,000. Average asset growth since 1998 has been funded primarily by
a $2.3 million increase in interest bearing deposits and a $1.3 million increase
in shareholders' equity. FTE net interest income yield to average earning assets
equaled 5.67% during the first quarter of 2000 versus 5.12% during 1999. The
entire increase in the FTE yield was a result of $63,000 in interest recoveries
on loans previously charged off.
As shown in Tables 1 and 2, when comparing the twelve month period ending
December 31, 1999 to the same period in 1998, fully taxable earnings assets
provided $398,000 of FTE interest income. A 1.9% increase in interest bearing
liabilities resulted in $35,000 of additional interest expense. Overall, changes
in volume resulted in a $363,000 of additional FTE interest income. The average
FTE interest rate earned on assets decreased by 0.21%, decreasing FTE interest
income by $300,000 and the average rate paid on deposits decreased by 0.41%,
decreasing interest expense by $289,000. The decreased interest rates earned and
paid reduced FTE net interest income by $11,000.
56
<PAGE> 65
FSB's FTE net interest yield as a percentage of average earning assets
during 1999 increased by 0.21% to 5.12%. The increase is primarily a result of
three factors; an increase in the average loan to average deposit ratio from
85.1% in 1998 to 89.7% in 1999, the ratio of noninterest bearing liabilities and
equity to average earning assets increased by 1.0%, and the average earning
assets as a percent of total earning assets increased by 0.5% to 95.1%.
TABLE 1. AVERAGE BALANCES, INTEREST INCOME AND EXPENSE, AND AVERAGE RATES
(DOLLARS IN THOUSANDS)
The following schedules present the daily average amount outstanding for
each major category of interest earning assets, nonearning assets, interest
bearing liabilities, and noninterest bearing liabilities. This schedule also
presents an analysis of interest income and interest expense for the periods
indicated. All interest income is reported on a fully taxable equivalent (FTE)
basis using a 34% tax rate. Nonaccruing loans, for the purpose of the following
computations, are included in the average loan amounts outstanding.
<TABLE>
<CAPTION>
1999 2000
-------------------------------- --------------------------------
TAX AVERAGE TAX AVERAGE
AVERAGE EQUIVALENT YIELD/ AVERAGE EQUIVALENT YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
------- ---------- ------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans................................ $76,176 $7,126 9.35% $70,828 $6,869 9.70%
Taxable investment securities........ 9,987 564 5.65 11,986 695 5.80
Non-taxable investment securities.... 3,592 235 6.54 3,076 212 6.89
Federal funds sold................... 1,498 72 4.81 2,205 124 5.62
Other................................ 462 28 6.06 362 27 7.46
------- ------ ---- ------- ------ ----
Total earning assets......... 91,715 8,025 8.75 88,457 7,927 8.96
NON EARNING ASSETS:
Allowance for loan losses............ (1,437) (1,436)
Cash and due from banks.............. 2,526 2,649
Premises and equipment............... 1,245 1,294
Accrued income and other assets...... 2,363 2,497
------- -------
Total assets................. $96,412 $93,461
======= =======
INTEREST BEARING LIABILITIES:
Interest-bearing demand deposits..... $ 6,916 142 2.05 $ 6,315 140 2.22
Savings deposits..................... 26,271 785 2.99 25,278 858 3.39
Time deposits........................ 44,161 2,368 5.36 44,843 2,580 5.75
Other borrowed funds................. 681 34 4.99 109 5 4.59
------- ------ ---- ------- ------ ----
Total interest bearing
liabilities................ 78,029 3,329 4.27 76,545 3,583 4.68
NONINTEREST BEARING LIABILITIES AND
EQUITY:
Demand deposits...................... 7,622 6,832
Other................................ 635 763
Shareholders' equity................. 10,126 9,321
------- -------
Total liabilities and
equity..................... $96,412 $93,461
======= =======
Net interest income (FTE).............. $4,696 $4,344
====== ======
Net yield on interest earning assets
(FTE)................................ 5.12% 4.91%
==== ====
</TABLE>
57
<PAGE> 66
TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS
(DOLLARS IN THOUSANDS)
The following table details the dollar amount of changes in FTE net
interest income for each major category of interest earning assets and interest
bearing liabilities, and the amount of change attributable to changes in average
balances (volume) or average rates. The change in interest due to both volume
and rate, has been allocated to volume and rate changes in proportion to the
relationship of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
1999 COMPARED TO 1998
------------------------------
INCREASE DECREASE DUE TO
-------- -------- ------
VOLUME RATE NET
------ ---- ---
<S> <C> <C> <C>
CHANGES IN INTEREST INCOME:
Loans..................................................... $ 506 $(249) $ 257
Taxable investment securities............................. (113) (18) (131)
Nontaxable investment securities.......................... 34 (11) 23
Federal funds sold........................................ (36) (16) (52)
Other..................................................... 7 (6) 1
----- ----- -----
Total changes in interest income.................. 398 (300) 98
CHANGES IN INTEREST EXPENSE:
Interest bearing demand deposits.......................... 13 (11) 2
Savings deposits.......................................... 33 (106) (73)
Time deposits............................................. (39) (173) (212)
Other borrowed funds...................................... 28 1 29
----- ----- -----
Total changes in interest expense................. 35 (289) (254)
----- ----- -----
Net changes in net interest income (FTE).................... $ 363 $ (11) $ 352
===== ===== =====
</TABLE>
In addition to changes in asset and liability mix, changes in rates have an
impact on FSB's interest income. Management expects short term interest rates to
increase during 2000. Based on this expectation, and assets and liability
repricing characteristics, management projects that the FTE net interest margin
as a percentage of average assets will increase slightly in 2000. Due to the
many factors that can affect net interest income, interest income earned cannot
be predicted with any certainty.
PROVISION FOR LOAN LOSSES
The viability of any financial institution is ultimately determined by its
management of credit risk. Net loans outstanding represents 81% of the
Corporation's total assets and is the single largest concentration of risk as of
March 31, 2000. The allowance for loan losses is management's estimation of
potential future losses inherent in the existing loan portfolio. Factors used to
evaluate the loan portfolio, and thus to determine the current charge to
expense, include recent loan loss history, financial condition of borrowers,
amount of nonperforming and 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 and may be
subject to significant change.
As shown in Table 3, net loan charge offs were $223,000 in 1999, a $13,000
increase from 1998. Net charged off loans were 0.29% of average loans in 1999
and 0.30% in 1998. The allowance for loan losses as a percentage of loans
equaled 1.79% and 1.99% as of December 31, 1999 and 1998 respectively.
58
<PAGE> 67
TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1999 1998
---- ----
<S> <C> <C>
Amount of loans outstanding at the end of period............ $79,123 $72,206
======= =======
Average amount of loans outstanding for the period.......... $76,176 $70,828
======= =======
Summary of changes in allowance:
Allowance for loan losses -- January 1.................... $ 1,435 $ 1,435
Loans charged off:
Commercial and agricultural.......................... 128 210
Real estate mortgage................................. 16 --
Installment.......................................... 139 145
------- -------
Total loans charged off........................... 283 355
Recoveries:
Commercial and agricultural.......................... 29 127
Real estate mortgage................................. 0 --
Installment.......................................... 31 18
------- -------
Total recoveries.................................. 60 145
------- -------
Net charge-offs................................... 223 210
Provision charged to income............................... 200 210
------- -------
Allowance for loan losses -- December 31.................. $ 1,412 $ 1,435
======= =======
Ratio of net charge-offs during the year to average loans
outstanding............................................ 0.29% 0.30%
======= =======
Ratio of the allowance for loan losses to loans
outstanding at year end................................ 1.79% 1.99%
======= =======
</TABLE>
As shown in Table 4, loans classified as nonperforming plus other real
estate were $819,000 as of March 31, 2000, an increase of $14,000 since December
31, 1999 and a decrease of $133,000 since December 31, 1998. Nonperforming loans
as a percentage of outstanding loans were 0.99%, 1.02% and 1.32% as of March 31,
2000, and December 31, 1999 and 1998 respectively. During the first quarter of
2000, net charged off loans were $16,000 and the provision for loan losses was
$75,000, a $45,000 increase over the first quarter of 1999. Average loans
outstanding increased during 1999 by 7.6% and the provision for loan losses was
decreased 4.8% to $200,000. The policy of FSB is to transfer a loan, including
impaired loans, to nonaccrual status whenever it is determined that the interest
should be recorded on a cash basis instead of the accrual basis because of a
deterioration in the financial position of the borrower, it is determined that
the payment in full of principal or interest 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 for deferral of interest or principal because of a
borrower's deterioration in their financial position.
59
<PAGE> 68
TABLE 4. NONPERFORMING LOANS
(DOLLARS IN THOUSANDS)
RISK ELEMENTS
The following loans are all the credits which require classification for
state or federal regulatory purposes. Nonperforming loans, including other real
estate acquired in satisfaction of loans, were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
MARCH 31 -----------
2000 1999 1998
-------- ---- ----
<S> <C> <C> <C>
Nonaccrual loans............................................ $ 37 $666 $175
Accruing loans past due 90 days or more..................... 714 113 283
Restructured loans.......................................... -- -- --
Other real estate........................................... 68 26 494
---- ---- ----
$819 $805 $952
==== ==== ====
</TABLE>
As of March 31, 2000, there were no other interest bearing assets which
would require classification. Management is not aware of any recommendations by
regulatory agencies which, if implemented, would have a significant impact on
liquidity, capital, or operations.
In management's opinion, the allowance for loan losses is adequate as of
December 31, 1999. Management has allocated, as shown in Table 5, the allowance
for loan losses to the following categories: commercial and agricultural, 29.4%;
real estate mortgages, 22.8%; installment loans, 42.4%; and unallocated, 5.4%.
TABLE 5. ALLOCATION ON THE ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
The allowance for loan losses has been allocated according to the amount
deemed to be reasonable necessary to provide for the possibility of losses being
incurred within the following categories:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1999 1998
--------------------- ---------------------
% OF EACH % OF EACH
CATEGORY CATEGORY
ALLOWANCE TO TOTAL ALLOWANCE TO TOTAL
AMOUNT LOANS AMOUNT LOANS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Commercial and agricultural.................. $ 415 49.9% $ 442 51.1%
Real estate mortgage......................... 322 37.9 312 36.1
Installment.................................. 599 12.2 610 12.8
Impaired loans............................... -- --
Unallocated loans............................ 76 71
------ ----- ------ -----
Total.............................. $1,412 100.0% $1,435 100.0%
====== ===== ====== =====
</TABLE>
NONINTEREST INCOME
Noninterest income consists of deposit service charges, fees for other
financial services, and gain on the sale of real estate mortgages. There were no
significant changes in noninterest income during the first quarter of 2000 when
compared to 1999. Total income earned from these sources declined $5,000 in
2000. During 1999, noninterest income earned increased $68,000. The most
significant changes were a $33,000 increase in the gain on the sale of other
real estate, a $15,000 increase in insurance premium revenue, and a $20,000
increase in gains on the sale of residential real estate mortgages.
60
<PAGE> 69
NONINTEREST EXPENSE
Total noninterest expense for the first three months of 2000 increased
$32,000 or 3.9%. Salary and benefits increased $22,000, equipment and occupancy
expense decreased $24,000 and all other expenses increased $34,000. These
expenses increased $240,000 or 8.1% during 1999 when compared to 1998. The
largest component of noninterest expense is salaries and employee benefits,
which increased $154,000 or 10.7%. The majority of this increase is related to
normal merit salary increases and increased benefit costs. Occupancy and
furniture and equipment expenses increased $2,000. The increase is associated
with an increase in equipment and building repairs. Other noninterest expenses
increased $84,000 or 7.7%. The most significant changes were increases in legal
expenses, ATM expenses, armored car transportation, director fees, and auditing
fees.
FEDERAL INCOME TAXES
Federal income tax expense in 1999 was $553,000 or 31.7% of pretax income
and in 1998 $497,000 or 31.8%. The effective rate during the first quarter of
2000 was 31.5%. The difference between the statutory rate of 34% and actual
rates paid is primarily due to the exclusion of interest income earned on tax
exempt municipal bonds from taxable income.
ANALYSIS OF CHANGES IN FINANCIAL CONDITION
When comparing year to date 1998 average balances to the average for the
first quarter of 2000, total average assets increased $5.1 million to $98.6
million. During this period average loans outstanding increased $9.2 million,
average fed funds sold and investment securities decreased $4.0 million. Changes
in the average balances of funding sources include a $1.2 million increase in
noninterest liabilities, a $2.6 million increase in interest bearing deposits,
and a $1.3 million increase in shareholders' equity.
INVESTMENT SECURITIES
The primary objective of investing activities is to provide for safety of
the principal invested. Secondary considerations include the need for earnings
and liquidity. During 1999 FSB's net holdings of investment securities decreased
$4.5 million. Table 6 shows the carrying value of investment securities
available for sale and held to maturity. Securities held to maturity are stated
at amortized cost. Securities not classified by management as held to maturity
are classified as available for sale and are stated at fair value. At December
31, 1999, FSB held no securities of any single issue that exceeded 10% of
shareholder equity.
61
<PAGE> 70
TABLE 6. INVESTMENT PORTFOLIO
(DOLLARS IN THOUSANDS)
The following is a schedule of the carrying value of investment securities
available for sale and held to maturity:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1999 1998
---- ----
<S> <C> <C>
Available for sale:
U.S. Treasury and U.S. Government agencies................ $2,882 $6,313
State and political subdivisions.......................... 297 79
Corporate and other securities............................ 428 --
------ ------
Total investment securities....................... $3,607 $6,392
====== ======
Held to maturity:
Collateralized mortgage obligations....................... $1,072 $1,326
State and political subdivisions.......................... 4,650 5,210
Corporate securities...................................... 1,851 2,781
------ ------
Total investment securities....................... $7,573 $9,317
====== ======
</TABLE>
TABLE 7. SCHEDULE OF MATURITIES OF INVESTMENT SECURITIES AND WEIGHTED AVERAGE
YIELD
(DOLLARS IN THOUSANDS)
The following table shows the relative maturities of securities available
for sale at fair value and held to maturity at book value and their weighted
average interest rate for each maturity range as of December 31, 1999. There
were no investments with a stated maturity date greater than 5 but less than 10
years. All interest rates are reported on a fully taxable equivalent (FTE) basis
using a 34% tax rate.
<TABLE>
<CAPTION>
MATURING
--------------------------------------------------
AFTER ONE YEAR
BUT WITHIN AFTER
WITHIN ONE YEAR FIVE YEARS TEN YEARS
---------------- -------------- --------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. treasury and U.S government agencies.... $1,579 5.80% $1,382 5.20% $ -- --%
State and political subdivisions............. -- -- 297 6.88 -- --
Corporate and other securities............... -- 349 5.76
------ ------ ------
Total................................ $1,579 5.80% $2,028 5.55% $ -- --%
====== ====== ======
Held to maturity:
Collateralized mortgage obligations.......... $ -- --% $ 572 5.80% $ 500 5.66%
State and political subdivisions............. 1,757 6.15 2,130 6.68 763 6.66
Corporate securities......................... 1,083 5.13 768 5.74 -- --
------ ------ ------
Total................................ $2,840 5.78% $3,470 6.32% $1,263 6.26%
====== ====== ======
</TABLE>
LOANS
Loans are the largest component of earning assets. As a percentage of
assets, gross loans outstanding increased 3.7% to 77.9% as of December 31, 1999.
The proper management of credit risk and market risk is critical to the
financial well being of FSB. To control these risks, FSB has adopted strict
underwriting standards. The standards include limits against lending outside
FSB's defined market area, lending limits to a single borrower, and loan to
collateral value limits. FSB 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.
62
<PAGE> 71
TABLE 8. LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
As shown in the following table, total loans increased 9.5% in 1999 to
$79.1 million. The increase was primarily in the residential real estate and
agricultural related loan categories.
<TABLE>
<CAPTION>
DECEMBER
-----------------
1999 1998
---- ----
<S> <C> <C>
Commercial.................................................. $ 8,834 $ 8,852
Agricultural................................................ 30,639 28,016
Real estate mortgage........................................ 29,978 26,045
Installment................................................. 9,672 9,293
------- -------
Total loans....................................... $79,123 $72,206
======= =======
</TABLE>
TABLE 9. LOAN MATURITY AND INTEREST SENSITIVITY
(DOLLARS IN THOUSANDS)
The following table shows the maturity of commercial and agricultural loans
outstanding at December 31, 1999. Also provided are the amounts due after one
year, classified according to the sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
DUE IN
------------------------------------
1 YEAR 1 TO 5 OVER 5
OR LESS YEARS YEARS TOTAL
------- ------ ------ -----
<S> <C> <C> <C> <C>
Commercial and agricultural...................... $26,245 $13,228 $-- $39,473
======= ======= === =======
Interest Sensitivity:
Loans maturing after one year which have:
Fixed interest rates........................... $13,228 $--
Variable interest rates........................ -- --
------- ---
Total..................................... $13,228 $--
======= ===
</TABLE>
DEPOSITS
Deposits are the largest source of funds for financing asset growth. As
shown in Table 10, average deposits increased $1.7 million in 1999 or 2.0%.
Within the banking industry there is agreement that competition from equity
investments, the bond market, and other financial intermediaries has had a
significant impact on deposit growth. The result of this competition is a
general slowing of deposit growth. To fund asset growth in the future, it is
likely that FSB is going to have to obtain funds from other sources such as the
Federal Home Loan Bank.
TABLE 10. AVERAGE DEPOSITS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
AMOUNT RATE AMOUNT RATE
------ ---- ------ ----
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits................. $ 7,622 $ 6,832
Interest-bearing demand deposits..................... 6,916 2.05% 6,315 2.22%
Savings deposits..................................... 26,271 2.99 25,278 3.39
Time deposits........................................ 44,161 5.36 44,843 5.75
------- -------
Total...................................... $84,970 $83,268
======= =======
</TABLE>
63
<PAGE> 72
TABLE 11. MATURITIES OF TIME CERTIFICATES OF DEPOSITS OVER $100,000
(DEPOSITS IN THOUSANDS)
The following table shows the maturity schedule and amounts of time
deposits of more than $100,000 for the dates indicated. These deposits represent
4.3% of the total deposits in 1999 and 5.8% in 1998.
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1999 1998
---- ----
<S> <C> <C>
Maturity:
Within 3 months........................................... $ 839 $ 586
Within 3 to 6 months...................................... 352 2,190
Within 6 to 12 months..................................... 2,254 227
Over 12 months............................................ 394 1,984
------ ------
Total............................................. $3,839 $4,987
====== ======
</TABLE>
CAPITAL
The capital of FSB consists solely of common stock, capital surplus,
retained earnings, and accumulated other comprehensive income. Total capital
increased $779,000 in 1999. FSB offers a dividend reinvestment plan. Under the
terms of the plan, 2,410 shares of common stock were issued in 1999.
The Federal Reserve Board's current recommended minimum primary capital to
assets requirement is 6.0%. FSB's primary capital to assets, which consists of
Shareholder's equity plus allowance for loan losses less acquisition intangibles
was 11.5% as of December 31, 1999.
The Federal Reserve has also established minimum capital requirements for
banks. Table 12 shows the minimum regulatory capital requirement to be
considered well capitalized and FSB's wholly owned subsidiary bank, Farmers
State Bank, ratios. Tier 1 capital consists of shareholders' equity, excluding
unrealized gains and losses on securities available for sale less intangible
assets. Total capital is comprised of Tier 1 capital plus the allowance for loan
losses. At March 31, 2000, the Bank continued to be well capitalized under the
prompt corrective action regulatory criteria, as shown below.
TABLE 12. CAPITAL RATIOS
<TABLE>
<CAPTION>
REGULATORY
FARMERS MINIMUM TO BE
STATE BANK WELL CAPITALIZED
---------- ----------------
<S> <C> <C>
Tier 1 capital to average assets........................... 11.0% 5.0%
Tier 1 capital to risk weighted assets..................... 14.5% 6.0%
Total capital to risk weighted assets...................... 15.7% 10.0%
</TABLE>
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 the payment
of cash dividends. The primary sources of FSB's liquidity are cash, cash
equivalents, and investment securities available for sale.
As of March 31, 2000, cash and cash equivalents as a percentage of total
assets equaled 3.3%, versus 9.0% as of December 31, 1999. During the first three
months of 2000, $634,000 in net cash was provided from operations. Investing
activities used $4.1 million and financing activities resulted in a $2.4 million
decrease in cash and cash equivalents. The accumulated effect of operating,
investing, and financial activities was a $5.9 million decrease in cash and cash
equivalents during the first three months of 2000.
Investment securities available for sale are another source of liquidity.
Securities available for sale equaled $4.1 million as of March 31, 2000 and $3.6
million as of December 31, 1999. Additionally, FSB
64
<PAGE> 73
has the ability to borrow in the federal funds market and from the Federal Home
Loan Bank. FSB's liquidity is considered adequate by management.
ASSET AND LIABILITY MANAGEMENT
Asset and liability management aims at achieving reasonable stability in
the net interest margins through periods of changing interest rates. One method
to measure the exposure to changes in interest rates is gap analysis. GAP
analysis measure the cash flows and/or the earliest repricing of the
Corporation's interest bearing assets and liabilities. The analysis is useful
for measuring trends in the repricing characteristics of the balance sheet. As
shown in Table 13, 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. Time deposits
are scheduled according to their contractual maturity. Money market, NOW, and
savings accounts have no contractual maturity and are believed to be
predominantly noninterest sensitive by management. For purposes of gap analysis,
these deposits are included in the 0-3 month repricing time frame.
FSB has no foreign exchange risk, holds no trading account assets, nor does
it utilize interest rate swaps or derivatives in the management of its interest
rate risk. FSB does have a significant portion of its assets in agricultural
loans. Changes in farm commodity prices could have a significant impact on cash
flow, credit quality, and profitability.
TABLE 13. 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 March 31, 2000. For
purposes of this analysis, nonaccrual loans and the allowance for loan losses
are excluded.
<TABLE>
<CAPTION>
0-3 4-12 1 TO 5 OVER 5
MONTHS MONTHS YEARS YEARS
------ ------ ------ ------
<S> <C> <C> <C> <C>
Interest Sensitive Assets:
Federal funds sold.............................. $ 1,300 $ -- $ -- $ --
Investment securities........................... 2,932 3,800 3,911 1,015
Loans........................................... 24,893 6,256 48,724 2,776
-------- -------- ------- -------
Total................................... $ 29,125 $ 10,056 $52,635 $ 3,791
Interest Sensitive Liabilities:
Time deposits................................... $ 9,206 $ 14,494 $22,965 $ --
Money markets................................... 15,581 -- -- --
Savings......................................... 10,936 -- -- --
Interest bearing demand......................... 7,007 -- -- --
-------- -------- ------- -------
Total................................... $ 42,730 $ 14,494 $22,965 $ --
Cumulative gap.................................... $(13,605) $(18,043) $11,627 $15,418
Cumulative gap as a % of assets................... (13.6)% (18.1)% 11.7% 15.5%
</TABLE>
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 FSB 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.
65
<PAGE> 74
FSB CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FSB BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
2000 1999
-------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and demand deposits due from banks..................... $ 1,917 $ 4,549
Federal funds sold.......................................... 1,300 4,550
Securities available for sale............................... 4,146 3,607
Securities held to maturity................................. 7,512 7,573
Loans, less allowance for loan losses of $1,471 in 2000 and
$1,412 in 1999............................................ 81,215 77,712
Property and equipment, net................................. 1,256 1,229
Accrued interest receivable................................. 1,677 1,724
Acquisition intangibles, net................................ 171 181
Other assets................................................ 519 454
------- --------
Total assets...................................... $99,713 $101,579
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits.................................................... $88,069 $ 89,441
Short term borrowing........................................ 0 1,000
Accrued interest and other liabilities...................... 873 709
------- --------
Total liabilities................................. 88,942 91,150
Shareholders' Equity
Common stock -- no par value; authorized -- 600,000
shares; issued and outstanding -- 408,237.............. 4,583 4,583
Retained earnings......................................... 6,207 5,864
Accumulated other comprehensive loss...................... (19) (18)
------- --------
Total shareholders' equity........................ 10,771 10,429
------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $99,713 $101,579
======= ========
</TABLE>
See notes to unaudited condensed consolidated financial statements
66
<PAGE> 75
FSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Interest income
Loans, including fees..................................... $1,953 $1,665
Investment securities
Taxable................................................ 120 178
Nontaxable............................................. 38 44
Federal funds sold and other.............................. 31 36
------ ------
Total interest income............................. 2,142 1,923
Interest expense on deposits.............................. 834 838
------ ------
Net interest income............................... 1,308 1,085
Provision for loan losses................................... 75 30
------ ------
Net interest income after provision for loan
losses........................................... 1,233 1,055
Noninterest income
Service charge fees....................................... 112 108
Other..................................................... 6 15
------ ------
Total noninterest income.......................... 118 123
------ ------
Noninterest expenses
Salaries and benefits..................................... 405 383
Occupancy and equipment expenses.......................... 114 138
Other..................................................... 331 297
------ ------
Total noninterest expenses........................ 850 818
------ ------
Income before federal income tax.................. 501 360
Federal income taxes........................................ 158 107
------ ------
$ 343 $ 253
====== ======
Basic net income per common share........................... $ 0.84 $ 0.65
====== ======
</TABLE>
See notes to unaudited condensed consolidated financial statements
67
<PAGE> 76
FSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Net income.................................................. $343 $253
Other comprehensive loss before income taxes
Unrealized losses on securities available for sale
Unrealized holding losses arising during period........ (1) (18)
---- ----
Other comprehensive loss before income taxes................ (1) (18)
Income tax benefit related to comprehensive loss............ 0 (6)
---- ----
Other comprehensive loss net of income taxes................ (1) (12)
---- ----
Comprehensive income........................................ $342 $241
==== ====
</TABLE>
See notes to unaudited condensed consolidated financial statements
68
<PAGE> 77
FSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
MARCH 31
-----------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Number of shares of common stock outstanding
Balance at beginning and end of period.................... 408,237 386,567
======== ========
Common stock:
Balance at beginning and end of period.................... $ 4,583 $ 3,649
-------- --------
Retained earnings:
Balance at beginning of period............................ 5,864 5,974
Net income................................................ 343 253
-------- --------
Balance end of period..................................... 6,207 6,227
Accumulated other comprehensive (loss) income:
Balance at beginning of period............................ (18) 28
Unrealized loss on securities available for sale, net of
income taxes and reclassification adjustment........... (1) (12)
-------- --------
Balance end of period (19) 16
-------- --------
Total shareholders' equity end of period.......... $ 10,771 $ 9,892
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements
69
<PAGE> 78
FSB BANCORP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
-----------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 343 $ 253
Adjustments to reconcile net income to cash provided by
operations:
Provision for loan losses.............................. 75 30
Provision for depreciation............................. 49 60
Net amortization of securities......................... 10 26
Amortization of intangibles............................ 10 10
Gain on sale of mortgage loans......................... (2) (20)
Proceeds from sales of mortgage loans.................. 323 1,847
Mortgage loans originated for sale..................... (321) (1,827)
Decrease in interest receivable........................ 47 18
(Increase) decrease in other assets.................... (65) 21
Increase (decrease) in accrued interest and other
expenses.............................................. 165 (214)
------- -------
Net cash provided by operations................... 634 204
INVESTING ACTIVITIES
Activity in available for sale securities
Maturities calls, and sales............................ -- 1,500
Purchases.............................................. (543) (1,753)
Activity in held to maturity securities
Maturities calls, and sales............................ 54 904
Purchases.............................................. -- (1,272)
Net increase in loans..................................... (3,578) 526
Purchases of equipment and premises....................... (77) (94)
------- -------
Net cash used in investing activity............... (4,144) (189)
FINANCING ACTIVITIES
Net decrease in noninterest bearing deposits.............. (2,802) (2,034)
Net increase in interest bearing deposits................. 1,430 660
Net decrease in borrowed funds............................ (1,000) --
------- -------
Net cash used in financing activities............. (2,372) (1,374)
------- -------
(Decrease) in cash and cash equivalents..................... (5,882) (1,359)
Cash and cash equivalents at beginning of period............ 9,099 6,622
------- -------
Cash and cash equivalents end of period..................... $ 3,217 $ 5,263
======= =======
</TABLE>
70
<PAGE> 79
FSB BANCORP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period ended March 31,
2000 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000. For further information, refer to the consolidated
financial statements and footnotes thereto included in FSB's annual report for
the year ended December 31, 1999.
71
<PAGE> 80
IBT BANCORP, INC. AND FSB BANCORP, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as of
March 31, 2000 and the unaudited pro forma condensed combined statements of
income for the three month period ending March 31, 2000 for each of the three
year periods covering December 31, 1999, 1998, and 1997 give effect to the
pending merger, accounted for as a pooling of interests.
The unaudited pro forma condensed combined financial information is based
on the historical consolidated statements of IBT and FSB under the assumptions
and adjustments set forth below and in the accompanying notes to the unaudited
pro forma condensed combined financial statements. The audited pro forma
condensed combined financial information does not give effect to any cost
savings that may occur in connection with the merger. Estimated merger costs are
reflected as a pro forma adjustment in the unaudited pro forma condensed
combined balance sheet. The nonrecurring expenses have been excluded from the
unaudited pro forma condensed combined statements of income.
Under generally accepted accounting principles, the transaction will be
accounted for as a pooling of interests and, as such, the assets of FSB will be
combined with those of IBT at book value. The statements of income of FSB will
be combined with those of IBT for all periods presented. The unaudited pro forma
condensed statements of income give effect to the merger as if the merger had
occurred at the beginning of the earliest period presented. The unaudited pro
forma condensed combined balance sheet assumes the merger was consummated on
March 31, 2000.
The accounting policies of both companies are in the process of being
reviewed for consistency. As a result of this review, certain conforming
accounting adjustments may be necessary. The nature and extent of these
adjustments have not been determined but are not expected to be significant.
72
<PAGE> 81
IBT BANCORP AND FSB BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------------
IBT FSB
BANCORP BANCORP ADJUSTMENTS COMBINED
------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and demand deposits due from banks.......... $ 15,519 $ 1,917 $ 0 $ 17,436
Federal funds sold............................... 0 1,300 0 1,300
Securities available for sale.................... 80,737 4,146 0 84,883
Securities held to maturity...................... 6,772 7,512 0 14,284
Loans, net of allowance for loan losses.......... 276,724 81,215 0 357,939
Property and equipment, net...................... 8,919 1,256 0 10,175
Accrued interest receivable...................... 2,551 1,677 0 4,228
Acquisition intangibles, net..................... 3,610 171 0 3,781
Other assets..................................... 6,278 519 10,771(a)
(10,771)(b) 6,797
-------- ------- -------- --------
Total Assets........................... $401,110 $99,713 $ 0 $500,823
======== ======= ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits......................................... $357,027 $88,069 $ 0 $445,096
Federal funds purchased and short term
borrowing...................................... 2,000 0 0 2,000
Accrued interest and other liabilities........... 4,479 873 132(c) 5,484
-------- ------- -------- --------
Total liabilities...................... 363,506 88,942 132 452,580
-------- ------- -------- --------
Shareholders' Equity
Common stock -- no par value................... 25,894 4,583 4,583(a)
(4,583)(b) 30,477
Retained earnings.............................. 12,675 6,207 6,207(a)
(6,207)(b)
(132)(c) 18,750
Accumulated other comprehensive loss........... (965) (19) (19)(b)
19(c) (984)
-------- ------- -------- --------
Total shareholders' equity............. 37,604 10,771 (132) 48,243
-------- ------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................... $401,110 $99,713 $ 0 $500,823
======== ======= ======== ========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements
73
<PAGE> 82
IBT BANCORP AND FSB BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA
IBT FSB ------------------------
BANCORP BANCORP ADJUSTMENTS COMBINED
------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees........................ $ 5,740 $ 1,953 $ 0 $ 7,693
Investment securities
Taxable................................... 952 120 0 1,072
Nontaxable................................ 289 38 0 327
Federal funds sold and other................. 40 31 0 71
---------- -------- -------- ----------
Total interest income................ 7,021 2,142 0 9,163
Interest expense
Deposits..................................... 3,275 834 0 4,109
Federal funds purchased...................... 19 0 0 19
---------- -------- -------- ----------
Total interest expense............... 3,294 834 0 4,128
---------- -------- -------- ----------
Net interest income.................. 3,727 1,308 0 5,035
Provision for loan losses...................... 50 75 125
---------- -------- -------- ----------
Net interest income after provision
for loan losses.................... 3,677 1,233 0 4,910
Noninterest income............................. 910 118 0 1,028
Noninterest expenses........................... 3,247 850 0 4,097
---------- -------- -------- ----------
Income before federal income tax............... 1,340 501 0 1,841
Federal income taxes........................... 344 158 0 502
---------- -------- -------- ----------
Net income........................... $ 996 $ 343 $ 0 $ 1,339
========== ======== ======== ==========
Weighted average common shares outstanding..... 2,980,169 408,237 463,839 3,852,245
Net income per basic share of common stock..... $ 0.33 $ 0.35
========== ==========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements
74
<PAGE> 83
IBT BANCORP AND FSB BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
IBT FSB ------------------------
BANCORP BANCORP ADJUSTMENTS COMBINED
------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees........................ $ 21,364 $ 7,124 $ 0 $ 28,488
Investment securities
Taxable................................... 4,488 591 0 5,079
Nontaxable................................ 987 155 0 1,142
Federal funds sold and other................. 662 73 0 735
---------- -------- -------- ----------
Total interest income................ 27,501 7,943 0 35,444
Interest expense
Deposits..................................... 12,868 3,300 0 16,168
Federal funds purchased...................... 30 29 0 59
---------- -------- -------- ----------
Total interest expense............... 12,898 3,329 0 16,227
---------- -------- -------- ----------
Net interest income.................. 14,603 4,614 0 19,217
Provision for loan losses...................... 309 200 0 509
---------- -------- -------- ----------
Net interest income after provision
for loan losses.................... 14,294 4,414 0 18,708
Noninterest income............................. 3,844 546 0 4,390
Noninterest expenses........................... 12,597 3,214 0 15,811
---------- -------- -------- ----------
Income before federal income tax............... 5,541 1,746 0 7,287
Federal income taxes........................... 1,490 553 0 2,043
---------- -------- -------- ----------
Net income........................... $ 4,051 $ 1,193 $ 0 $ 5,244
========== ======== ======== ==========
Weighted average common shares outstanding..... 2,942,422 406,026 461,327 3,809,775
Net income per basic share of common stock..... $ 1.38 $ 1.38
========== ==========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements
75
<PAGE> 84
IBT BANCORP AND FSB BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRO FORMA
IBT FSB ------------------------
BANCORP BANCORP ADJUSTMENTS COMBINED
------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees........................ $ 19,986 $ 6,867 $ 0 $ 26,853
Investment securities
Taxable................................... 4,422 603 0 5,025
Nontaxable................................ 871 259 0 1,130
Federal funds sold and other................. 520 124 0 644
---------- -------- -------- ----------
Total interest income................ 25,799 7,853 0 33,652
Interest expense
Deposits..................................... 12,466 3,578 0 16,044
Federal funds purchased...................... 16 5 0 21
---------- -------- -------- ----------
Total interest expense............... 12,482 3,583 0 16,065
---------- -------- -------- ----------
Net interest income.................. 13,317 4,270 0 17,587
Provision for loan losses...................... 321 210 0 531
---------- -------- -------- ----------
Net interest income after provision
for loan losses.................... 12,996 4,060 0 17,056
Noninterest income............................. 2,951 478 0 3,429
Noninterest expenses........................... 10,942 2,974 0 13,916
---------- -------- -------- ----------
Income before federal income tax............... 5,005 1,564 0 6,569
Federal income taxes........................... 1,371 497 0 1,868
---------- -------- -------- ----------
Net income........................... $ 3,634 $ 1,067 $ 0 $ 4,701
========== ======== ======== ==========
Weighted average common shares outstanding..... 2,890,444 404,108 459,147 3,753,699
Net income per basic share of common stock..... $ 1.26 $ 1.25
========== ==========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements
76
<PAGE> 85
IBT BANCORP AND FSB BANCORP
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRO FORMA
IBT FSB -------------------------
BANCORP BANCORP ADJUSTMENTS COMBINED
------- ------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest income
Loans, including fees......................... $ 18,772 $ 6,524 $ 0 $ 25,296
Investment securities
Taxable.................................... 2,796 809 0 3,605
Nontaxable................................. 638 199 0 837
Federal funds sold and other.................. 524 135 0 659
---------- -------- -------- ----------
Total interest income................. 22,730 7,667 0 30,397
Interest expense
Deposits...................................... 10,534 3,666 0 14,200
Federal funds purchased....................... 0 0 0 0
---------- -------- -------- ----------
Total interest expense................ 10,534 3,666 0 14,200
---------- -------- -------- ----------
Net interest income................... 12,196 4,001 0 16,197
Provision for loan losses....................... 386 90 0 476
---------- -------- -------- ----------
Net interest income after provision
for loan losses..................... 11,810 3,911 0 15,721
Noninterest income.............................. 2,100 477 0 2,577
Noninterest expenses............................ 8,811 2,886 0 11,697
---------- -------- -------- ----------
Income before federal income tax................ 5,099 1,502 0 6,601
Federal income taxes............................ 1,490 462 0 1,952
---------- -------- -------- ----------
Net income............................ $ 3,609 $ 1,040 $ 0 $ 4,649
========== ======== ======== ==========
Weighted average common shares outstanding...... 2,857,939 400,130 454,628 3,712,697
Net income per basic share of common stock...... $ 1.26 $ 1.25
========== ==========
</TABLE>
See notes to unaudited pro forma condensed combined financial statements
77
<PAGE> 86
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1
FSB is the sole shareholder of Farmers State Bank. The transaction will
result in FSB merging with and into IBT and Farmers State Bank of Breckenridge
becoming a wholly owned subsidiary of IBT. It is intended that the merger be
accounted for as a "pooling of interest." FSB shareholders will receive 2.1362
shares of IBT common stock for each share of FSB.
NOTE 2
The following are the pro forma adjustments to the condensed combined
balance sheet dated March 31, 2000.
(a) To reflect the issuance of 875,075 shares of IBT common stock to
acquire all outstanding shares of FSB common stock. The number of shares
issued is based on an exchange ratio of 2.1362 applied to shares
outstanding at March 31, 2000.
(b) To eliminate IBT investment in FSB for consolidation purposes.
(c) To reflect accrued and unpaid merger expenses. Reflects
management's estimate of accrued and unpaid nonrecurring legal, accounting,
consultant, and other costs associated with the merger and is recorded net
of taxes. These nonrecurring charges are a preliminary estimate and are
subject to change as more information is made available.
NOTE 3
Earnings per share for IBT is based on the historical average number of
common shares outstanding during the period. For purposes of the pro forma
earnings per share computation, the common shares for FSB have been adjusted by
the exchange ratio.
EXPERTS
IBT'S INDEPENDENT ACCOUNTANTS
The consolidated financial statements of IBT and subsidiaries as of
December 31, 1999 and 1998, and for each of the years in the three-year period
ended December 31, 1999, incorporated by reference herein, have been
incorporated herein in reliance upon the report of Rehmann Robson, P.C.,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
FSB'S INDEPENDENT ACCOUNTANTS
The consolidated financial statements of FSB Bancorp, Inc. and subsidiary
as of December 31, 1999 and 1998, and for each of the years in the two-year
period ended December 31, 1999, included herein, have been audited by Andrews,
Hooper & Pavlik P.L.C., independent certified public accountants. Such financial
statements have been so included in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
OPINIONS
SHARE ISSUANCE
Foster, Swift, Collins & Smith, P.C., counsel for IBT, has rendered a legal
opinion that the shares of IBT common stock offered hereby, when issued in
accordance with the Merger Agreement, will be validly issued, fully paid and
nonassessable.
78
<PAGE> 87
TAX MATTERS
Foster, Swift, Collins & Smith, P.C. and Bodman, Longley & Dahling LLP have
each given an opinion regarding the material U.S. federal income tax
consequences of the Merger. See "The Merger -- U.S. Federal Income Tax
Consequences Of The Merger."
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
IBT's articles of incorporation provide for indemnification of directors
and officers. IBT believes that such indemnification will assist IBT in
continuing to attract and retain talented directors and officers in light of the
growing risk of litigation directed against directors and officers of publicly
held corporation. IBT's articles of incorporation provide that IBT shall
indemnify to the full extent permitted by law each person who is or was or had
agreed to become a director or officer of the Corporation or who serves or
served any other enterprise at the request of the corporation. The MBCA permits
such indemnification if such individual corporation or its shareholders, and, in
the case of a criminal proceeding, had no reasonable cause to believe the
conduct of the person was unlawful.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling IBT
pursuant to the foregoing provisions, IBT has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
WHERE YOU CAN FIND MORE INFORMATION
SEC FILINGS
IBT files annual, quarterly and current reports, proxy statements and other
information with the SEC. SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You can also read and copy
any document filed by IBT with the SEC at the SEC's public reference rooms
located at 450 Fifth Street, N.W., Washington, D.C. 20549, 7 World Trade Center,
Suite 1300, New York, New York 10048 and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Please call the SEC at
1-800-SEC-0330 for further information on the public reference rooms. You can
also obtain copies of IBT's SEC filings at prescribed rates by writing to the
Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C.
20549.
IBT's SEC filings are also available from commercial document retrieval
services.
REGISTRATION STATEMENT
IBT filed a registration statement on Form S-4 to register with the SEC the
IBT common stock to be issued to FSB shareholders in the Merger. This proxy
statement-prospectus is part of that registration statement. As allowed by SEC
rules, this proxy statement-prospectus does not contain all of the information
you can find in the registration statement or the exhibits to the registration
statement.
DOCUMENTS INCORPORATED BY REFERENCE
Some of the information you may want to consider in deciding how to vote on
the Merger is not physically included in this proxy statement-prospectus.
Instead, the information is "incorporated by reference" to documents filed as
appendixes to this proxy statement-prospectus or to documents that have been
filed by IBT with the SEC.
79
<PAGE> 88
IBT Documents
This proxy statement-prospectus incorporates by reference the IBT SEC
documents set forth below. All of the documents were filed under SEC File No.
0-18415.
- Annual Report on Form 10-K for the year ended December 31, 1999,
including information specifically incorporated by reference into the
Form 10-K from IBT's 1999 Annual Report to Shareholders and IBT's
definitive Notice and Proxy Statement for IBT's 2000 Annual Meeting of
Shareholders;
- Quarterly Reports on Form 10-Q for the quarter ended March 31, 2000;
- Current Report on Form 8-K filed April 18, 2000;
- All other reports of IBT filed pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 since December 31, 1999;
- All reports and definitive proxy or information statements filed by IBT
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934 after the date of this proxy statement-prospectus and before
completion of the Merger and the exchange of IBT common stock for FSB
common stock.
DOCUMENTS AVAILABLE WITHOUT CHARGE
IBT will provide, without charge, copies of any report incorporated by
reference into this proxy statement-prospectus, excluding exhibits other than
those that are specifically incorporated by reference in this proxy
statement-prospectus. You may obtain a copy of any document incorporated by
reference by writing or calling IBT as follows:
Corporate Secretary
IBT Bancorp, Inc.
200 East Broadway
Mt. Pleasant, Michigan 48858
(517) 772-9471
TO ENSURE DELIVERY OF THE COPIES IN TIME FOR THE SPECIAL MEETING, YOUR
REQUEST SHOULD BE RECEIVED BY , 2000.
IN DECIDING HOW TO VOTE ON THE MERGER, YOU SHOULD RELY ONLY ON THE
INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROXY
STATEMENT-PROSPECTUS. NEITHER IBT NOR FSB HAS AUTHORIZED ANY PERSON TO PROVIDE
YOU WITH ANY INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS PROXY
STATEMENT-PROSPECTUS. THIS PROXY STATEMENT-PROSPECTUS IS DATED ,
2000. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT-PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN SUCH DATE, AND
NEITHER THE MAILING TO YOU OF THIS PROXY STATEMENT-PROSPECTUS NOR THE ISSUANCE
TO YOU OF SHARES OF IBT COMMON STOCK WILL CREATE ANY IMPLICATION TO THE
CONTRARY.
FORWARD-LOOKING STATEMENTS
This proxy statement-prospectus, including information incorporated by
reference into this document, may contain forward-looking statements about IBT
and FSB, including one or more of the following:
- projections of revenues, income, earnings per share, capital
expenditures, dividends, capital structure or other financial items;
- descriptions of plans or objectives of management for future operations,
products or services;
- forecasts of future economic performance;
- descriptions of assumptions underlying or relating to any of the
foregoing.
80
<PAGE> 89
Forward-looking statements can be identified by the fact that they do not
relate strictly to historical or current facts. They often include words such as
"believe," "expect," "anticipate," "intend," "plan," "estimate," or words of
similar meaning, or future or conditional verbs such as "will," "would,"
"should," "could" or "may."
Forward-looking statements consist of expectations or predictions of future
conditions, events or results. They are not guarantees of future performance. By
their nature, forward-looking statements are subject to risks and uncertainties.
There are a number of factors -- many of which are beyond the control of IBT and
FSB -- that could cause actual conditions, events or results to differ
significantly from those described in the forward-looking statements.
There are other factors besides these that could cause actual conditions,
events or results to differ significantly from those described in the
forward-looking statements or otherwise affect in the future IBT's and/or FSB's
business, results of operations and financial condition.
81
<PAGE> 90
APPENDIX A
AGREEMENT AND PLAN OF MERGER
<PAGE> 91
AGREEMENT AND PLAN OF MERGER
DATED AS OF APRIL 7, 2000
BETWEEN
IBT BANCORP, INC.
AND
FSB BANCORP, INC.
<PAGE> 92
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I................................................... A-1
THE MERGER................................................ A-1
1.1 Effective Time of the Merger....................... A-1
1.2 Closing............................................ A-1
1.3 Effects of the Merger.............................. A-1
1.4 Materiality........................................ A-2
ARTICLE II.................................................. A-2
EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES...... A-2
2.1 Effect on Capital Stock............................ A-2
2.2 Exchange of Certificates........................... A-3
ARTICLE III................................................. A-5
REPRESENTATIONS AND WARRANTIES............................ A-5
3.1 Representations and Warranties of FSB.............. A-5
3.2 Representations and Warranties of IBT.............. A-12
ARTICLE IV.................................................. A-16
COVENANTS RELATING TO CONDUCT OF BUSINESS................. A-16
4.1 Covenants of FSB................................... A-16
4.2 Covenants of FSB and IBT........................... A-18
ARTICLE V................................................... A-19
ADDITIONAL AGREEMENTS..................................... A-19
5.1 Regulatory Matters................................. A-19
5.2 Letter of Accounts................................. A-20
5.3 Access to Information.............................. A-20
5.4 Shareholder Meeting................................ A-20
5.5 Legal Conditions to Merger......................... A-20
5.6 Affiliates......................................... A-20
5.7 Employee Benefit Plans............................. A-20
5.8 Expenses........................................... A-21
5.9 Additional Agreements; Best Efforts................ A-21
5.10 Employment Agreement............................... A-21
5.11 Governance......................................... A-21
5.12 Post-Closing Operations............................ A-21
ARTICLE VI.................................................. A-22
CONDITIONS PRECEDENT...................................... A-22
6.1 Conditions to Each Party's Obligation to Effect the
Merger................................................. A-22
6.2 Conditions to Obligations of IBT................... A-22
6.3 Conditions to Obligations of FSB................... A-23
ARTICLE VII................................................. A-24
TERMINATION AND AMENDMENT................................. A-24
7.1 Termination........................................ A-24
7.2 Effect of Termination.............................. A-24
7.3 Amendment.......................................... A-25
7.4 Extension; Waiver.................................. A-25
ARTICLE VIII................................................ A-25
GENERAL PROVISIONS........................................ A-25
8.1 Nonsurvival of Representations, Warranties and
Agreements............................................. A-25
8.2 Notices............................................ A-25
8.3 Interpretation..................................... A-26
8.4 Counterparts....................................... A-26
8.5 Entire Agreement; No Third Party Beneficiaries;
Rights of Ownership.................................... A-26
8.6 Governing Law...................................... A-26
8.7 Enforcement of Agreement........................... A-26
8.8 Severability....................................... A-26
8.9 Publicity.......................................... A-26
8.10 Assignment......................................... A-26
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of April 7, 2000 (the "Agreement"),
by and between IBT Bancorp, Inc., a Michigan bank holding company ("IBT") and
FSB Bancorp, Inc., a Michigan bank holding company ("FSB").
WHEREAS, the Boards of Directors of IBT and FSB have approved, and deem it
advisable and in the best interests of their respective companies and their
shareholders to consummate the business combination transaction provided for
herein in which FSB will, subject to the terms and conditions set forth herein,
merge with and into IBT (the "Merger");
WHEREAS, IBT and FSB desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe various
conditions to the Merger;
WHEREAS, for Federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, for accounting purposes, it is intended that the Merger shall be
accounted for as a "pooling of interests"; and
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
1.1 Effective Time of the Merger. Subject to the provisions of this
Agreement, a certificate of merger (the "Certificate of Merger") shall be duly
prepared, executed and acknowledged by the Surviving Corporation (as defined in
Section 1.3(b)) and thereafter delivered for filing to the Department of
Consumer and Industry Services, Corporation Securities and Land Development
Bureau of the State of Michigan, as provided in the Michigan Business
Corporation Act (the "MBCA"), as soon as practicable on or after the Closing
Date (as defined in Section 1.2). The Merger shall become effective upon the
filing of the Certificate of Merger with the Department of Consumer and Industry
Services, Corporation Securities and Land Development Bureau of the State of
Michigan or at such time thereafter as IBT and FSB may agree in writing to
provide in the Certificate of Merger (the "Effective Time").
1.2 Closing. Subject to the terms and conditions hereof, the closing of
the Merger (the "Closing") will take place at 5:00 p.m. on a date to be
specified by the parties, which shall be the fifth business day after the
satisfaction or waiver (subject to applicable law) of the latest to occur of the
conditions set forth in Section 6.1, 6.2(c) and 6.3(c) hereof (the "Closing
Date"), at the offices of IBT in Mt. Pleasant, Michigan, unless another time,
date or place is agreed to in writing by the parties hereto.
1.3 Effects of the Merger.
(a) At the Effective Time, (i) the separate existence of FSB shall
cease and FSB shall be merged with and into IBT, (ii) the Articles of
Incorporation of IBT, as in effect immediately prior to the Effective Time
shall be the Articles of Incorporation of the Surviving Corporation until
duly amended in accordance with applicable law, and (iii) the By-laws of
IBT, as in effect immediately prior to the Effective Time shall be the
By-laws of the Surviving Corporation until amended in accordance with
applicable law.
(b) As used in this Agreement, the term "Constituent Corporations"
shall mean IBT and FSB and the term "Surviving Corporation" shall mean IBT.
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(c) At and after the Effective Time, the Merger will have the effects
set forth in Sections 701 through 774 of the MBCA.
1.4 Materiality. As used in this Agreement, (i) any reference to any
event, change or effect being "material" with respect to any entity means an
event, change or effect which is material in relation to the financial
condition, properties, assets, liabilities, business or operations of such
entity and its Subsidiaries taken as a whole and (ii) the term "material adverse
effect" means, with respect to FSB, IBT or the Surviving Corporation, as the
case may be, a material adverse effect on the business, assets, results of
operations or financial condition of such party and its Subsidiaries taken as a
whole or on the ability of such party to perform its obligations hereunder or to
consummate the transactions contemplated hereby; it being understood that a
material adverse effect on any party shall not include a change with respect to
such party resulting from any change in law, rule or regulation or generally
accepted accounting principles which impairs both FSB and IBT in a substantially
similar manner.
ARTICLE II
EFFECT OF THE MERGER ON THE CAPITAL STOCK
OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES
2.1 Effect on Capital Stock.
(a) Conversion. At the Effective Time, by virtue of the Merger and
without any action on the part of the holder of any shares of FSB's common
stock no par value ("FSB Common Stock"), subject to Section 2.2(e), each
issued and outstanding share of FSB's Common Stock shall be converted into
validly issued, fully paid and nonassessable shares of IBT common stock, no
par value ("IBT Common Stock"). The number of shares of IBT Common Stock
exchanged for shares of FSB Common Stock (the "Exchange Rate") shall be
calculated in accordance with Section 2.1(b). All such shares of FSB Common
Stock shall no longer be outstanding and shall automatically be canceled
and retired and shall cease to exist. Each FSB shareholder's certificate or
certificates previously representing shares of FSB Common Stock (each a
"Certificate") shall be aggregated (if a single shareholder holds more than
one Certificate) and exchanged for a certificate representing whole shares
of IBT Common Stock and cash in lieu of any fractional share issued in
consideration therefor upon the surrender of such Certificate or
Certificates in accordance with Section 2.2, without any interest thereon.
Subject to Section 4.1, in the event that, subsequent to the date of this
Agreement but prior to the Effective Time, the outstanding shares of IBT
Common Stock shall have been increased, decreased, changed into or
exchanged for a different number or kind of shares or securities through a
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, or other similar change in IBT's
capitalization, or exchanged or converted into shares or securities of
another corporation, then an appropriate and proportionate adjustment shall
be made to the Exchange Rate.
(b) Conversion Rate. The Exchange Rate for purposes hereof shall be
2.1362 shares of IBT Common Stock for each outstanding share of FSB Common
Stock, based on 408,237 shares of FSB Common Stock outstanding and
2,966,973 shares of IBT Common Stock outstanding. Calculations will be
rounded to three decimal places. Any fractional share will be paid in cash
in accordance with Section 2.2(e).
(c) Cancellation of IBT-Owned Stock. All shares of FSB Common Stock
that are owned by IBT or any direct or indirect wholly owned Subsidiary of
IBT, other than shares of common stock held directly or indirectly in trust
accounts, managed accounts and the like or otherwise held in a fiduciary
capacity that are beneficially owned by third parties ("trust account
shares") shall be canceled and retired and shall cease to exist and no
stock of IBT or other consideration shall be delivered in exchange
therefor. All shares of IBT Common Stock that are owned by FSB (other than
trust account shares) shall become authorized but unissued shares of IBT.
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(d) Shareholders' Right of Dissent. Any holder of shares of FSB's
Common Stock who does not vote in favor of the Merger at the meeting of
shareholders of FSB and has given notice in writing to the presiding
officer prior to the Merger vote that he or she intends to demand payment
for his or her shares of FSB Common Stock if the Merger is effectuated,
shall be entitled to receive the value of the FSB Common Stock so held by
him or her in accordance with Sections 761 through 774 of the MBCA.
2.2 Exchange of Certificates.
(a) Exchange Agent. As of the Effective Time, IBT shall deposit with
Isabella Bank and Trust or such other bank or trust company acceptable to
the parties (the "Exchange Agent"), for the benefit of the holders of
shares of FSB Common Stock, certificates dated the Effective Time
representing the shares of IBT Common Stock and the cash in lieu of
fractional shares (such cash and certificates for shares of IBT Common
Stock together with any dividends or distributions with respect thereto,
being hereinafter referred to as the "Exchange Fund") to be issued pursuant
to Section 2.1 and paid pursuant to Section 2.2(b) in exchange for
outstanding shares of FSB Common Stock.
(b) Exchange Procedures. On the next business day after the Effective
Time, IBT shall cause the Exchange Agent to mail to each holder of record
of a Certificate or Certificates (i) a letter of transmittal which shall
specify that delivery shall be effective, and risk of loss and title to the
Certificate(s) shall pass, only upon delivery of the Certificate(s) to the
Exchange Agent and shall be in such form and have such other provisions as
IBT and FSB may reasonably specify and (ii) instructions for use in
effecting the surrender of the Certificate(s) in exchange for a certificate
representing shares of IBT Common Stock and cash in lieu of a fractional
share. Upon surrender of a shareholder's Certificate or Certificates for
cancellation to the Exchange Agent together with such letter of
transmittal, duly executed, the holder of such Certificate(s) shall be
entitled to receive in exchange therefor (1) a certificate representing the
number of whole shares of IBT Common Stock and (2) a check representing the
amount of cash in lieu of a fractional share, if any, and unpaid dividends
and distributions, if any, which such holder has the right to receive in
respect of the Certificate(s) surrendered, and the Certificate(s) so
surrendered shall forthwith be canceled. No interest will be paid or
accrued on the cash in lieu of fractional shares and unpaid dividends and
distributions, if any, payable to holders of Certificates. In the event of
a transfer of ownership of FSB Common Stock which is not registered in the
transfer records of FSB, a Certificate representing the proper number of
shares of IBT Common Stock, together with a check for the cash to be paid
in lieu of any fractional share, may be issued to such a transferee if the
Certificate representing such FSB Common Stock is presented to the Exchange
Agent, accompanied by all documents required to evidence and effect such
transfer and to evidence that any applicable stock transfer taxes have been
paid.
(c) Distributions with Respect to Unexchanged Shares; Voting. The
Exchange Agent shall receive and hold, for distribution without interest to
the first record holder of the certificate or certificates representing
shares of FSB Common Stock, all dividends and other distributions paid on
shares of IBT Common Stock held in the Exchange Agent's name as agent.
Holders of unsurrendered Certificates shall not be entitled to vote after
the Effective Time at any meeting of IBT shareholders until they have
exchanged their Certificates.
(d) Transfers. After the Effective Time, there shall be no transfers
on the stock transfer books of FSB of the shares of FSB Common Stock which
were outstanding immediately prior to the Effective Time. If after the
Effective Time, Certificates are presented to the Surviving Corporation,
they shall be canceled and exchanged for the shares of IBT Common Stock and
cash in lieu of fractional shares, if any, deliverable in respect thereof
pursuant to this Agreement. Certificates surrendered for exchange by any
person constituting an "affiliate" of FSB for purposes of Rule 145 under
the Securities Act of 1933, as amended (the "Securities Act"), shall not be
exchanged until IBT has received a written agreement from such person as
provided in Section 5.6.
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(e) Fractional Shares. No fractional shares of IBT Common Stock shall
be issued pursuant hereto. In lieu of the issuance of any fractional share,
cash adjustments will be paid to holders in respect of any fractional share
of IBT Common Stock that would otherwise be issuable, and the amount of
such cash adjustment shall be equal to such fractional proportion of the
Trading Value of a share of IBT Common Stock. For purposes of calculating
fractional shares, a holder of FSB Common Stock with more than one
Certificate shall receive cash only for the fractional share remaining
after aggregating all of his or her FSB Common Stock to be exchanged.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
(including the proceeds of any investments thereof and any IBT Common
Stock) that remains unclaimed by the shareholders of FSB for twelve months
after the Effective Time shall be paid to IBT. Any shareholders of FSB who
have not theretofore complied with this Article II shall thereafter look
only to IBT for payment of their shares of IBT Common Stock, cash in lieu
of fractional shares and unpaid dividends and distributions on the IBT
Common Stock deliverable without any interest thereon. Notwithstanding the
foregoing, IBT, the Exchange Agent nor any other person shall be liable to
any former holder of shares of FSB Common Stock for any amount properly
delivered to a public official pursuant to applicable abandoned property,
escheat or similar laws.
(g) Lost or Destroyed Shares. In the event any Certificate shall have
been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming such Certificate to be lost, stolen or
destroyed and, if required by the Exchange Agent, the posting by such
person of a bond in such amount as IBT may direct as indemnity against any
claim that may be made against it with respect to such Certificate, the
Exchange Agent will issue in exchange for such lost, stolen or destroyed
Certificate the shares of IBT Common Stock and cash in lieu of fractional
shares deliverable in respect thereof pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of FSB. FSB represents and warrants to
IBT as follows:
(a) Organization, Standing and Power. FSB is a bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHC
Act"). Farmers State Bank of Breckenridge is a wholly-owned subsidiary of
FSB and a state bank organized under the laws of the State of Michigan.
Each of FSB and its Subsidiaries is a corporation or state bank duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation, has all requisite power and authority to
own, lease and operate its properties and to carry on its business as now
being conducted and is duly qualified and in good standing to do business
in each jurisdiction in which the failure to do so would have a material
adverse effect on FSB. FSB has furnished IBT true and correct copies of its
and its Subsidiaries' articles of incorporation and by-laws, as amended.
(b) Capital Structure.
(i) As of the date hereof, the authorized capital stock of FSB
consisted of 600,000 shares of FSB Common Stock, and 408,237 shares of
FSB Common Stock were outstanding. The maximum number of shares of FSB
Common Stock that would be outstanding as of the Effective Time if all
options, warrants, conversion rights and other rights with respect
thereto were exercised is 408,237. All outstanding shares of FSB Common
Stock are validly issued, fully paid and nonassessable and not subject
to any preemptive rights.
(ii) As of the date hereof, FSB does not have outstanding any
bonds, debentures, notes or other indebtedness the holders of which have
the right to vote (or convertible into or exercisable for securities
having the right to vote) with the shareholders of FSB on any matter
("Voting Debt").
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(iii) As of the date of this Agreement, except as set forth in
Section 3.1(b)(iii) of the disclosure schedule of FSB (the "FSB
Disclosure Schedule") delivered to IBT prior to the execution of this
Agreement and except for this Agreement, FSB does not have outstanding
any options, warrants, calls, rights, commitments or agreements of any
character to which FSB or any of its Subsidiaries is a party or is bound
obligating FSB or any of its Subsidiaries to issue, deliver or sell
additional shares of capital stock or any Voting Debt of FSB or of any
of its Subsidiaries or obligating FSB or any of its Subsidiaries to
grant, extend or enter into any such options, warrant, call, right,
commitment or agreement. From and after the Effective Time, there will
be no option, warrant, call, right or agreement obligating FSB or any of
its Subsidiaries to issue, deliver or sell any shares of capital stock
or any Voting Debt of FSB or any of its Subsidiaries, or obligating FSB
or any of its Subsidiaries to grant, extend or enter into any such
option, warrant, call, right or agreement. As of the date hereof, except
as set forth in Section 3.1(b)(iii) of the FSB Disclosure Schedule,
there are no outstanding contractual obligations of FSB or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of FSB or any of its Subsidiaries.
(iv) Since December 31, 1999, neither FSB nor any of its
Subsidiaries have (A) issued or permitted to be issued any shares of
capital stock, or securities exercisable for or convertible into shares
of capital stock of FSB or any of its Subsidiaries; (B) repurchased,
redeemed or otherwise acquired, directly or indirectly through one or
more FSB Subsidiaries, any shares of capital stock of FSB or any of its
Subsidiaries (other than the acquisition of trust account shares) except
in connection with internal reorganizations, consolidations,
liquidations or mergers and in connection with the items set forth in
Section 3.1(b)(iv) of the FSB Disclosure Schedule; or (C) in the case of
FSB, declared, set aside, made or paid to the shareholders of FSB
dividends or other distributions on the outstanding shares of capital
stock of FSB, other than regular semi-annual cash dividends on the FSB
Common Stock at a rate not in excess of the regular semi-annual cash
dividends most recently declared by FSB prior to the date of this
Agreement.
(c) Authority.
(i) FSB has all requisite corporate power and authority to enter
into this Agreement and, subject to approval of this Agreement by the
shareholders of FSB, to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transaction contemplated hereby have been duly authorized by all
necessary corporate action on the part of FSB subject to approval by the
shareholders of FSB. This Agreement has been duly executed and delivered
by FSB and constitutes a valid and binding obligation of FSB enforceable
in accordance with its terms except as enforcement may be limited by
general principles of equity, whether applied in a court of law or a
court of equity, and bankruptcy, insolvency and similar laws, affecting
creditors' rights and remedies generally.
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict
with or result in any violation of, or default (with or without notice
or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or the loss
of a material benefit under or the creation of a lien, pledge, security
interest, charge or other encumbrance on assets (any such conflict,
violation, default, right, loss or creation being referred to herein as
a "Violation") pursuant to, any provision of the Articles of
Incorporation (the "FSB Articles") or By-laws of FSB, or the articles of
incorporation, by-laws or other governing document of Farmers State Bank
of Breckenridge or any other Subsidiary of FSB or, except as disclosed
in writing in Section 3.1(c)(ii) of the FSB Disclosure Schedule and
subject to obtaining or making the consents, approvals, orders,
registrations, declarations and filings referred to in paragraph (iii)
below, be or result in any Violation pursuant to any loan or credit
agreement, note, mortgage, indenture, lease, FSB Benefit Plan or other
agreement, obligation, instrument, permit, franchise, license, judgment,
order, statute, law, rule or regulation applicable to FSB, Farmers
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State Bank of Breckenridge or any other Subsidiary of FSB or their
respective properties or assets which Violations would in the aggregate
have a material adverse effect on FSB.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative
agency or commission or other governmental authority or instrumentality,
domestic or foreign (each a "Governmental Entity"), is required by or
with respect to FSB, Farmers State Bank of Breckenridge or any other
Subsidiary of FSB in connection with the execution and delivery of this
Agreement by FSB or the consummation by FSB of the transactions
contemplated hereby, the failure of which to obtain or make would in the
aggregate have a material adverse effect on FSB or on its ability to
perform its obligations hereunder, except for (A) the filing of an
application and notice with the Board of Governors of the Federal
Reserve System (the"Federal Reserve") under the BHC Act, and approval of
same, (B) the filing with the Securities and Exchange Commission (the
"SEC") of any required proxy statement relating to the meeting of FSB
shareholders to be held in connection with this Agreement and the
transactions contemplated hereby (the "Proxy Statement"), (C) the filing
of the Certificate of Merger with the State of Michigan, and (D) the
filing of an application/notice with the State of Michigan Financial
Institutions Bureau.
(d) Compliance with Banking Regulations. FSB and its Subsidiaries have
(1) continuously complied with all material federal and state banking laws
and regulations, including all required filings, except for minor
compliance matters, which do not, in the aggregate, have a material adverse
effect on FSB; (2) timely filed using complete and accurate information,
all documents required by Federal Reserve Regulation Y, all call reports,
all documents required for Federal Deposit Insurance, all documents
required by the Michigan Financial Institutions Bureau, and all other
required filings, except for minor filing omissions or inaccuracies which
do not, in the aggregate, have a material adverse effect on FSB; and, (3)
have cooperated in all regulatory audits without concealing any material
information.
(e) Information Supplied. None of the information supplied or to be
supplied by FSB or its Subsidiaries for inclusion or incorporation by
reference in (i) the Registration Statement on Form S-4 to be filed with
the SEC by IBT in connection with the issuance of shares of IBT Common
Stock in the Merger (including the Proxy Statement and prospectus
constituting a part thereof, the "S-4") will, at the time the S-4 becomes
effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and
(ii) the Proxy Statement and any amendment or supplement thereto will, at
the date of mailing to FSB shareholders and at the time of the meeting of
shareholders of FSB to be held in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading. The Proxy Statement (except for such portions
thereof that relate only to IBT) will comply in all material respects with
the provisions of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and the rules and regulations thereunder, and the S-4
(except for such portions thereof that relate only to IBT) will comply in
all material respects with the provisions of the Securities Act and the
rules and regulations thereunder.
(f) Compliance with Applicable Laws. FSB and its Subsidiaries hold all
permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities which are necessary for the operation of the business
of FSB and its Subsidiaries (the "FSB Permits"), except permits, licenses,
variances, exemptions, orders or approvals for which the failure to hold
would not, individually or in the aggregate, have a material adverse effect
on FSB. FSB and its Subsidiaries are in compliance in all material respects
with the terms of the FSB Permits and all applicable laws and regulations,
except for possible violations which, individually or in the aggregate,
would not have a material adverse effect on FSB. Except as set forth in
Section 3.1(f) of the FSB Disclosure Schedule, the businesses of FSB and
its Subsidiaries are not being conducted in violation of any law,
ordinance, regulation, order, writ, rule or decree of any Governmental
Entity, except for possible violations which individually or in the
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aggregate would not have a material adverse effect on FSB. As of the date
of this Agreement, to the knowledge of FSB, no investigations by any
Governmental Entity with respect to FSB or any of its Subsidiaries is
pending or threatened, other than investigations listed in Section 3.1(f)
of the FSB Disclosure Schedule.
(g) Litigation. FSB has furnished IBT copies of (i) all attorney
responses to the request of the independent auditors for FSB with respect
to loss contingencies as of December 31, 1999, and (ii) a written list of
legal and regulatory proceedings filed and served against FSB or any FSB
Subsidiary since said date. Except as set forth in Section 3.1(g) of the
FSB Disclosure Schedule and except for any broad or national litigation
that does not name FSB, and that affects all financial institutions
generally, there is no suit, action or proceeding pending that has been
served upon FSB or, to the knowledge of FSB, threatened against or
affecting FSB or any of its Subsidiaries, nor is there any judgment,
decree, injunction, or order of any Governmental Entity or arbitrator
outstanding against FSB or any of its Subsidiaries.
(h) Taxes. FSB and each of its Subsidiaries have filed all tax returns
required to be filed by any of them, which tax returns are true, correct
and complete in all material respects, and have paid all taxes required to
be paid as shown on such returns. Except as set forth in Section 3.1(h) of
the FSB Disclosure Schedule, no deficiencies for any taxes have been
proposed, asserted or assessed against FSB or any of its Subsidiaries.
Except with respect to claims for refund, the Federal income tax returns of
FSB and each of its Subsidiaries consolidated in such returns have been
examined by and settled with the United States Internal Revenue Service
(the "IRS"), or the statute of limitations has expired (and no waiver
extending the statute of limitations has been requested or granted), for
all taxable years ending on or before December 31, 1995. For the purpose of
this Agreement, (1) the term "tax" (including, with correlative meaning,
the terms "taxes" and "taxable"), includes all Federal, state, local and
foreign income, profits, franchise, gross receipts, payroll, sales,
employment, use, property, withholding, excise, occupancy and other taxes,
duties or assessments of any nature whatsoever, together with all interest,
penalties and additions imposed with respect to such amounts; and (2) the
term "tax return" includes all returns and reports (including elections,
declarations, disclosures, schedules, estimates and information returns)
required to be supplied to a tax authority relating to taxes.
(i) Certain Agreements. Except as set forth in Section 3.1(i) of the
FSB Disclosure Schedule, as of the date of this Agreement, neither FSB nor
any of its Subsidiaries is a party to any oral or written (i) consulting
agreement (other than data processing, software programming and licensing
contracts entered into in the ordinary course of business) not terminable
on 90 days or less notice, or any union, guild or collective bargaining
agreement, (ii) agreement with any executive officer or other key employee
of FSB or any of its Subsidiaries the benefits of which are contingent, or
the terms of which are materially altered, upon the occurrence of a
transaction involving FSB or any Subsidiary of the nature contemplated by
this Agreement, (iii) agreement with respect to any executive officer of
FSB or any Subsidiary of FSB providing any term of employment or
compensation guarantee extending for a period longer than three (3) years,
or (iv) agreement or plan, including any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan, any
of the benefits of which will be increased, or the vesting of the benefits
of which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement.
(j) Benefit Plans.
(i) Section 3.1(j)(i) of the FSB Disclosure Schedule lists each
employee benefit plan, whether the plan be written or oral, (including,
without limitation, any "employee benefit plan," as defined in Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and any plan for retirees that provides medical insurance or
other form of benefit described in Section 3(1) of ERISA) (all the
foregoing being herein called "Benefit Plans"), maintained or
contributed to by FSB, Farmers State Bank of Breckenridge or any other
Subsidiary of FSB (the "FSB Benefit Plans"). For each FSB Benefit Plan,
FSB has made
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available to IBT a true and correct copy of (A) the most recent annual
report (Form 5500) filed with the IRS, (B) such FSB Benefit Plan, (C)
each trust agreement relating to such FSB Benefit Plan, (D) the most
recent summary plan description for each FSB Benefit Plan for which a
summary plan description is required, (E) the most recent actuarial
report or valuation relating to a FSB Benefit Plan subject to Title IV
of ERISA, and (F) the most recent determination letter issued by the IRS
with respect to any FSB Benefit Plan qualified under Section 401(a) of
the Code.
(ii) The current value of the assets of each of the FSB Benefit
Plans subject to Title IV of ERISA exceeds that plan's "Benefit
Liabilities," as that term is defined in Section 4001(a)(16) of ERISA,
when determined under actuarial factors that would apply if that plan
terminated in accordance with all applicable legal requirements.
(iii) Except as set forth in Section 3.1(j)(iii) of the FSB
Disclosure Schedule, to the best knowledge of FSB and its Subsidiaries,
each of the FSB Benefit Plans has been administered in compliance with
its terms in all material respects and is in compliance in all material
respects with the applicable provisions of ERISA (including, but not
limited to, the funding and prohibited transactions provisions thereof),
the Code and other applicable laws.
(iv) There has been no reportable event within the meaning of
Section 4043(b) of ERISA (for which a waiver did not apply) or any
accumulated funding deficiency (whether or not waived) within the
meaning of Section 412 of the Code with respect to any FSB Benefit Plan.
(v) All contributions to the FSB Benefit Plans required thereunder
have been made or provided for.
(vi) Since September 2, 1974, no contributions have been made by
FSB, Farmers State Bank of Breckenridge or any Subsidiary of FSB to any
"Multiemployer Plan," as such term is defined in Section 3(37) of ERISA.
(vii) To the best knowledge of FSB and Farmers State Bank of
Breckenridge, each of the FSB Benefit Plans which is intended to be a
qualified plan within the meaning of Section 401(a) of the Code is so
qualified, and FSB is not aware of any fact or circumstances which would
adversely affect the qualified status of any such plan.
(viii) With respect to the FSB Benefit Plans, individually and in
the aggregate, no event has occurred and, to the knowledge of FSB or
Farmers State Bank of Breckenridge, there exists no condition or set of
circumstances in connection with which FSB or any of its Subsidiaries
could be subject to any liability that is reasonably likely to have a
material adverse effect on FSB (except liability for benefits claims and
funding obligations payable in the ordinary course) under ERISA, the
Code or any other applicable law.
(k) Subsidiaries. Section 3.1(k) of the FSB Disclosure Schedule sets
forth all of the subsidiaries of FSB as of the date of this Agreement (each
a "Subsidiary" and together the "Subsidiaries") and indicates for each such
Subsidiary, as of such date, the jurisdiction of organization. FSB owns,
either directly or indirectly, all shares of the outstanding capital stock
of each such Subsidiary, except as otherwise set forth in Section 3.1(k) of
the FSB disclosure schedule. Each of FSB's Subsidiaries that is a bank (as
defined in the BHC Act) is an "insured bank" as defined in the FDIA and
applicable regulations thereunder. All of the shares of capital stock of
each of the Subsidiaries held by FSB or by another Subsidiary of FSB are
fully paid and nonassessable and are owned by FSB or a Subsidiary of FSB
free and clear of any material claim, lien or encumbrance.
(l) Agreements with Bank Regulators. Except as previously disclosed in
writing, neither FSB nor any of its Subsidiaries is a party to any written
agreement or memorandum of understanding with, or a party to any commitment
letter or similar undertaking to, or is subject to any order or directive
by, or is a recipient of any extraordinary supervisory letter from, or has
adopted any board resolutions at the request of, Federal or state
Governmental Entities charged with the supervision or regulation of
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banks or bank holding companies or engaged in the insurance of bank
deposits ("Bank Regulators"), nor has FSB been advised by any Bank
Regulator that it is contemplating issuing or requesting any such order,
directive, written agreement, memorandum of understanding, extraordinary
supervisory letter, commitment letter, board resolutions or similar
undertaking.
(m) Absence of Certain Changes or Events. Since December 31, 1999, and
except as set forth in Section 3.1(m) of the FSB Disclosure Schedule, FSB
and its Subsidiaries have not incurred any material liability, except in
the ordinary course of their business consistent with their past practices,
nor has there been any change, or any event involving a prospective change,
in the business, financial condition or result of operations of FSB or any
of its Subsidiaries which has had, or is reasonably likely to have, a
material adverse effect on FSB (other than as a result of changes in
banking laws or regulations of general applicability or interpretations
thereof).
(n) Environmental Matters. There is no legal, administrative, or
other proceeding, claim, or action that has been served on FSB of any
nature seeking to impose, or that could result in the imposition of, on FSB
or any FSB Subsidiary, any liability relating to the release of hazardous
substances as defined under any local, state or federal environmental
statute, regulation or ordinance including, without limitation, the
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), pending or to the best of FSB's knowledge,
threatened against FSB or any FSB Subsidiary the result of which has had or
could reasonably be expected to have a material adverse effect upon FSB and
FSB's Subsidiaries taken as a whole; to the best of FSB's knowledge there
is no reasonable basis for any such proceeding, claim or action; and to the
best of FSB's knowledge neither FSB nor any FSB Subsidiary is subject to
any agreement, order, judgment, or decree by or with any court,
governmental authority or third party imposing any such environmental
liability. FSB has provided IBT with copies of all environmental
assessments, reports, studies and other related information in its
possession with respect to each bank facility and each nonresidential OREO
property.
(o) Approvals. FSB knows of no reason why all Requisite Regulatory
Approvals (as defined in Section 6.1(b)) should not be obtained without the
imposition of any condition or restriction of the type referred to in
Section 6.1(f).
(p) Brokers and Finders. Except for the retention by FSB of Austin
Associates, Inc., none of FSB's or any of its Subsidiaries' nor any of
their respective directors, officers or employees has employed any broker
or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or similar payments in connection with the
transactions contemplated by this Agreement.
(q) Labor Matters. Except as set forth in Section 3.1(q) of the FSB
Disclosure Schedule, neither FSB nor any of its Subsidiaries is a party to,
or bound by, any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is
it or any of its Subsidiaries the subject of any material proceeding
asserting that it or any Subsidiary has committed an unfair labor practice
or seeking to compel it to bargain with any labor organization as to wages
or conditions of employment nor is there any strike or other labor dispute
involving it or any of its Subsidiaries pending or, to its knowledge,
threatened.
(r) Loan Portfolio. Section 3.1(r) of the FSB Disclosure Schedule
completely and accurately lists all loans of Farmers State Bank of
Breckenridge in force as of the date of this Agreement (the "Loans"), and
as to each Loan accurately describes: (i) the nature of the loan (i.e.,
whether consumer, commercial or participation), (ii) whether the loan is
current or in default more than 30 days, and if in default more than 30
days, FSB's estimate of the likelihood of recovery, (iii) whether any
federal or state regulatory agency has listed the loan as an adversely
classified asset in any report, examination or other document provided to
FSB, and (iv) whether to the knowledge of FSB the borrower has asserted or
threatened to assert any lender liability claims resulting from the Loans.
FSB warrants that each Loan is legally enforceable under its terms. FSB
makes no warranty regarding the credit quality of any Loan or the adequacy
of collateral securing any Loan.
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(s) Insurance. FSB and each FSB Subsidiary is presently insured, and
during each of the past five calendar years (or during such lesser period
of time as FSB has owned such FSB Subsidiary) has been insured, for
reasonable amounts with financially sound and reputable insurance companies
against such risks as companies engaged in a similar business would, in
accordance with good business practice, customarily be insured and has
maintained all insurance required by applicable law and regulation.
(t) FSB Financial Statements. The consolidated balance sheets of FSB
and FSB's Subsidiaries as of December 31, 1999 and 1998 and related
consolidated statements of income, comprehensive income, changes in
shareholders' equity and cash flows for the three years ended December 31,
1999, together with the notes thereto, certified by Andrews Hooper & Pavlik
P.L.C. (collectively, the "FSB Financial Statements") have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis and present fairly the consolidated financial position of
FSB and FSB's Subsidiaries at the dates and the consolidated results of
operations and cash flows of FSB and FSB's Subsidiaries for the periods
stated therein.
(u) Properties and Leases. Except as may be reflected in the FSB
Financial Statements and except for any lien for current taxes not yet
delinquent, FSB and each FSB Subsidiary have good title free and clear of
any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in FSB's
consolidated balance sheet as of December 31, 1999 and all real and
personal property acquired since such date, except such real and personal
property as has been disposed of in the ordinary course of business. All
leases of real property and all other leases material to FSB or any FSB
Subsidiary pursuant to which FSB or such FSB Subsidiary, as lessee, leases
real or personal property, which leases are described in Section 3.1(u) of
the FSB Disclosure Schedule, are valid and effective in accordance with
their respective terms, and there is not, under any such lease, any
material existing default by FSB or such FSB Subsidiary or any event which,
with notice or lapse of time or both, would constitute such a material
default. Substantially all FSB's and each FSB Subsidiary's buildings and
equipment in regular use have been well maintained and are in good and
serviceable condition, reasonable wear and tear excepted.
(v) Material Interests of Certain Persons. Except as set forth in
Section 3.1(v) of the FSB Disclosure Schedule, to the best knowledge of FSB
no officer or director of FSB or any FSB Subsidiary, or any "associate" (as
such term is defined in Rule 14a-1 under the Exchange Act) of any such
officer or director, has any interest in any material contract or property
(real or personal), tangible or intangible, used in or pertaining to the
business of FSB or any FSB Subsidiary.
Section 3.1(v) of the FSB Disclosure Schedule sets forth a correct and
complete list of any loan from FSB or any FSB Subsidiary to any present
officer, director, employee or any associate or related interest of any
such person which was required under Regulation O of the Federal Reserve
Board to be approved by or reported to FSB's or such FSB Subsidiary's Board
of Directors.
(w) Administration of Trust Accounts. FSB and each FSB Subsidiary has
properly administered in all respects material and which could reasonably
be excepted to be material to the financial condition of FSB and the FSB
Subsidiaries taken as a whole, all accounts for which it acts as a
fiduciary, including but not limited to accounts for which it serves as a
trustee, agent, custodian, personal representative, guardian, conservator
or investment advisor, in accordance with the terms of the governing
documents and applicable state and federal law and regulation and common
law. Neither FSB, any FSB Subsidiary, nor any director, officer or employee
of FSB or any FSB Subsidiary has committed any breach of trust with respect
to any such fiduciary account which is material to or could reasonably be
expected to be material to the financial condition of FSB and the FSB
Subsidiaries taken as a whole, and the accountings for each such fiduciary
account are true and correct in all material respects and accurately
reflect the assets of such fiduciary account.
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(x) Required Shareholder Approval. The affirmative vote of a majority
in outstanding shares and qualified to vote of FSB is sufficient to approve
the Merger and this Agreement and the transactions contemplated hereby
pursuant to the MBCA and pursuant to the articles and bylaws of FSB.
(y) Accounting Matters. Neither FSB nor any of its Subsidiaries or
affiliates has taken or agreed to take any action that would prevent IBT
from accounting for the business combination to be effected by the Merger
as a "pooling of interests."
3.2 Representations and Warranties of IBT. IBT represents and warrants to
FSB as follows:
(a) Organization Standing and Power. IBT is a bank holding company
registered under the BHC Act and has filed application with the Federal
Reserve Board to become a Financial Holding Company under the
Gramm-Leach-Bliley Act of 1999. Each of IBT and its Subsidiaries is a
corporation or state bank duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation or
organization, has all requisite power and authority to own, lease and
operate its properties and to carry on its business as now being conducted
and is duly qualified and in good standing to do business in each
jurisdiction in which the failure to do so would have a material adverse
effect on IBT.
(b) Capital Structure. As of the date hereof, the authorized capital
stock of IBT consisted of 4,000,000 shares of IBT Common Stock, and
2,966,973 shares of IBT Common Stock were outstanding.
(c) Authority.
(i) IBT has all requisite corporate power and authority to enter
into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by IBT and
constitutes a valid and binding obligation of IBT, enforceable in
accordance with its terms, except as enforcement may be limited by
general principles of equity, whether applied in a court of law or a
court of equity, and bankruptcy, insolvency and similar laws affecting
creditors' rights and remedies generally.
(ii) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby will not conflict
with or result in any Violation pursuant to any provision of the IBT
Articles of Incorporation or By-laws, or the articles of incorporation,
by-laws or other governing document of any other Subsidiary of IBT, or,
except as disclosed in writing in Section 3.2(c)(ii) of the disclosure
schedule of IBT (the "IBT Disclosure Schedule") and subject to obtaining
or making the consents, approvals, orders, registrations, declarations
and filings referred to in paragraph (iii) below, be or result in any
Violation pursuant to any loan or credit agreement, note, mortgage,
indenture, lease, IBT Benefit Plan or other agreement, obligation,
instrument, permit, franchise, license, judgment, order, statute, law,
rule or regulation applicable to IBT or any Subsidiary of IBT or their
respective properties or assets which Violations would in the aggregate
have a material adverse effect on IBT.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity is
required by or with respect to IBT or any Subsidiary of IBT in
connection with the execution and delivery of this Agreement by IBT or
the consummation by IBT or any Subsidiary of IBT, as the case may be, of
the transactions contemplated hereby, the failure of which to obtain or
make would in the aggregate have a material adverse effect on IBT or on
its ability to perform its obligations hereunder, except for (A) the
filing of applications and notices with the Federal Reserve under the
BHC Act, and approval of same, (B) the filing with the SEC of the Proxy
Statement and the S-4, (C) such filings and approvals as are required to
be made or obtained under the securities or "Blue Sky" laws of various
states in connection with the issuance of IBT Common Stock contemplated
by this Agreement, (D) the filing of the
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Certificate of Merger with the State of Michigan, and (E) the filing of
an application/notice with the State of Michigan Financial Institutions
Bureau.
(d) Compliance with Banking Regulations. IBT and its Subsidiaries have
(1) continuously complied with all material federal and state banking laws
and regulations, including all required filings, except for minor
compliance matters, which do not, in the aggregate, have a material adverse
effect on IBT; (2) timely filed using complete and accurate information,
all documents required by Federal Reserve Regulation Y, all call reports,
all documents required for Federal Deposit Insurance, all documents
required by the Michigan Financial Institutions Bureau, and all other
required filings, except for minor filing omissions or inaccuracies which
do not, in the aggregate, have a material adverse effect on IBT; and, (3)
have cooperated in all regulatory audits without concealing any material
information.
(e) Information Supplied. None of the information supplied or to be
supplied by IBT or its Subsidiaries for inclusion or incorporation by
reference in (i) the S-4 will, at the time the S-4 becomes effective under
the Securities Act, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to
make the statements therein not misleading and (ii) the Proxy Statement and
any amendment or supplement thereto will, at the date of mailing to FSB
shareholders and at the time of the meeting of shareholders of FSB to be
held in connection with the Merger, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading. The Proxy Statement (except for such portions thereof that
relate only to FSB) will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder,
and the S-4 (except for such portions thereof that relate only to FSB) will
comply in all material respects with the provisions of the Securities Act
and the rules and regulations thereunder.
(f) Compliance With Applicable Laws. IBT and its Subsidiaries hold all
permits, licenses, variances, exemptions, orders and approvals of all
Governmental Entities which are necessary for the operation of the
businesses of IBT and its Subsidiaries (the "IBT Permits"), except for IBT
Permits the failure of which to hold would not, individually or in the
aggregate, have a material adverse effect on IBT. IBT and its Subsidiaries
are in compliance in all material respects with the terms of the IBT
Permits and all applicable laws and regulations, except for possible
violations which, individually or in the aggregate, would not have a
material adverse effect on IBT. Except as set forth on Section 3.2(f) of
the IBT Disclosure Schedule, the businesses of IBT and its Subsidiaries are
not being conducted in violation of any law, ordinance, regulation, order,
writ, rule or decree of any Governmental Entity, except for possible
violations which, individually or in the aggregate, would not have a
material adverse effect on IBT. As of the date of this Agreement, no
investigation by any Governmental Entity with respect to IBT, or any of its
Subsidiaries is pending or threatened, other than, in each case, those the
outcome of which, as far as reasonably can be foreseen, will not have a
material adverse effect on IBT.
(g) Litigation. Except as set forth in Section 3.2(g) of the IBT
Disclosure Schedule and except for any broad or national litigation that
does not name IBT, and that affects all financial institutions generally,
there is no suit, action or proceeding pending or, to the knowledge of IBT,
threatened against or affecting IBT or any of its Subsidiaries, nor is
there any judgment, decree, injunction, or order of any Governmental Entity
or arbitrator outstanding against IBT or any of its Subsidiaries.
(h) Taxes. IBT and each of its Subsidiaries have filed all tax returns
required to be filed by any of them, which tax returns are true, correct
and complete in all material respects, and have paid all taxes required to
be paid as shown on such returns. Except as set forth in Section 3.2(h) of
the IBT Disclosure Schedule, no deficiencies for any taxes have been
proposed, asserted or assessed against IBT or any of its Subsidiaries.
Except with respect to claims for refund, the Federal income tax returns of
IBT and each of its Subsidiaries consolidated in such returns have been
examined by and settled with the IRS, or the statute of limitations has
expired (and no waiver extending the statute of limitations has been
requested or granted), for all taxable years ending on or before
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December 31, 1995. For the purpose of this Agreement, (1) the term "tax"
(including, with correlative meaning, the terms "taxes" and "taxable"),
includes all Federal, state, local and foreign income, profits, franchise,
gross receipts, payroll, sales, employment, use, property, withholding,
excise, occupancy and other taxes, duties or assessments of any nature
whatsoever, together with all interest, penalties and additions imposed
with respect to such amounts; and (2) the term "tax return" includes all
returns and reports (including elections, declarations, disclosures,
schedules, estimates and information returns) required to be supplied to a
tax authority relating to taxes.
(i) Benefit Plans.
(i) Section 3.2(i)(i) of the IBT Disclosure Schedule lists each
employee benefit plan, whether the plan be written or oral, (including,
without limitation, any "employee benefit plan," as defined in Section
3(3) of ERISA and any plan for retirees that provides medical insurance
or other form of benefit described in Section 3(1) of ERISA) (all the
foregoing being herein called "Benefit Plans"), maintained or
contributed to by IBT or any other Subsidiary of IBT (the "IBT Benefit
Plans"). For each Benefit Plan, IBT has made available to FSB a true and
correct copy of (A) the most recent annual report (Form 5500) filed with
the IRS, (B) such IBT Benefit Plan, (C) each trust agreement relating to
such IBT Benefit Plan, (D) the most recent summary plan description for
each IBT Benefit Plan for which a summary plan description is required,
(E) the most recent actuarial report or valuation relating to a IBT
Benefit Plan subject to Title IV of ERISA, and (F) the most recent
determination letter issued by the IRS with respect to any IBT Benefit
Plan qualified under Section 401(a) of the Code.
(ii) The current value of the assets of each of the IBT Benefit
Plans subject to Title IV of ERISA exceeds that plan's "Benefit
Liabilities," as that term is defined in Section 4001(a)(16) of ERISA,
when determined under actuarial factors that would apply if that plan
terminated in accordance with all applicable legal requirements.
(iii) Except as set forth in Section 3.2(i)(iii) of the IBT
Disclosure Schedule, to the best knowledge of IBT and its Subsidiaries,
each of the IBT Benefit Plans has been administered in compliance with
its terms in all material respects and is in compliance in all material
respects with the applicable provisions of ERISA (including, but not
limited to, the funding and prohibited transactions provisions thereof),
the Code and other applicable laws.
(iv) There has been no reportable event within the meaning of
Section 4043(b) of ERISA (for which a waiver did not apply) or any
accumulated funding deficiency (whether or not waived) within the
meaning of Section 412 of the Code with respect to any IBT Benefit Plan.
(v) All contributions to the IBT Benefit Plans required thereunder
have been made or provided for.
(vi) Since September 2, 1974, no contributions have been made by
IBT or any Subsidiary of IBT to any "Multiemployer Plan," as such term
is defined in Section 3(37) of ERISA.
(vii) To the best knowledge of IBT, each of the IBT Benefit Plans
which is intended to be a qualified plan within the meaning of Section
401(a) of the Code is so qualified, and IBT is not aware of any fact or
circumstances which would adversely affect the qualified status of any
such plan.
(viii) With respect to the IBT Benefit Plans, individually and in
the aggregate, no event has occurred and, to the knowledge of IBT, there
exists no condition or set of circumstances in connection with which IBT
or any of its Subsidiaries could be subject to any liability that is
reasonably likely to have a material adverse effect on IBT (except
liability for benefits claims and funding obligations payable in the
ordinary course) under ERISA, the Code or any other applicable law.
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(j) Subsidiaries. Section 3.2(j) of the IBT Disclosure Schedule sets
forth all of the Subsidiaries of IBT as of the date of this Agreement (each
a "Subsidiary" and together the "Subsidiaries") and indicates for each such
Subsidiary, as of such date, the jurisdiction of organization. IBT owns,
either directly or indirectly, all shares of the outstanding capital stock
of each such Subsidiary. Each of IBT's Subsidiaries that is a bank (as
defined in the BHC Act) is an "insured bank" as defined in the FDIA and
applicable regulations thereunder. All of the shares of capital stock of
each of the Subsidiaries held by IBT or by another Subsidiary of IBT are
fully paid and nonassessable and are owned by IBT or a Subsidiary of IBT
free and clear of any material claim, lien or encumbrance.
(k) Agreements with Bank Regulators. Except as previously disclosed in
writing, neither IBT nor any of its Subsidiaries is a party to any written
agreement or memorandum of understanding with, or a party to any commitment
letter or similar undertaking to, or is subject to any order or directive
by, or is a recipient of any extraordinary supervisory letter from, or has
adopted any board resolutions at the request of Bank Regulators, nor has
IBT been advised by any Bank Regulator that it is contemplating issuing or
requesting any such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
(l) Absence of Certain Changes or Events. Since December 31, 1999, and
except as set forth in Section 3.2(l) of the IBT Disclosure Schedule, IBT
and its Subsidiaries have not incurred any material liability, except in
the ordinary course of their business consistent with their past practices,
nor has there been any change, or any event involving a prospective change,
in the business, financial condition or result of operations of IBT or any
of its Subsidiaries which has had, or is reasonably likely to have, a
material adverse effect on IBT (other than as a result of changes in
banking laws or regulations of general applicability or interpretations
thereof).
(m) Capital Stock. At the Effective Time, IBT's Common Stock issued
pursuant to the Merger will be duly authorized, validly issued, fully paid
and nonassessable and not subject to preemptive rights.
(n) Environmental Matters. There is no legal, administrative, or other
proceeding, claim, or action of any nature seeking to impose, or that could
result in the imposition of, on IBT or any IBT Subsidiary, any liability
relating to the release of hazardous substances as defined under any local,
state or federal environmental statute, regulation or ordinance including,
without limitation, CERCLA, pending or to the best of IBT's knowledge,
threatened against IBT or any IBT Subsidiary the result of which has had or
could reasonably be expected to have a material adverse effect upon IBT and
IBT's Subsidiaries taken as a whole; to the best of IBT's knowledge there
is no reasonable basis for any such proceeding, claim or action; and to the
best of IBT's knowledge neither IBT nor any IBT Subsidiary is subject to
any agreement, order, judgment, or decree by or with any court,
governmental authority or third party imposing any such environmental
liability.
(o) Approvals. IBT knows of no reason why all Requisite Regulatory
Approvals (as defined in Section 6.1(b)) should not be obtained without the
imposition of any condition or restriction of the type referred to in
Section 6.1(f).
(p) Brokers and Finders. Except for the retention by IBT of Austin
Associates, Inc., none of IBT's or any of its Subsidiaries' nor any of
their respective directors, officers or employees has employed any broker
or finder or incurred any liability for any financial advisory fees,
brokerage fees, commissions or similar payments in connection with the
transactions contemplated by this Agreement.
(q) IBT Financial Statements. The consolidated balance sheets of IBT
and IBT's Subsidiaries as of December 31, 1999 and 1998 and related
consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for the three years ended December 31,
1999, together with the notes thereto, certified by Rehmann Robson P.C. and
included in IBT's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (the "IBT 10-K") as filed with the SEC, and the unaudited
consolidated balance sheets of IBT and its
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Subsidiaries as of September 30, 1999 and the related unaudited
consolidated statements of income, changes in shareholders' equity and
comprehensive income, and cash flows for the nine (9) months then ended
included in IBT's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1999, as filed with the SEC (collectively, the "IBT
Financial Statements"), have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis and present
fairly (subject, in the case of financial statements for interim periods,
to normal recurring adjustments) the consolidated financial position of IBT
and its Subsidiaries at the dates and the consolidated results of
operations, changes in financial position and cash flows of IBT and its
Subsidiaries for the periods stated therein.
(r) Properties and Leases. Except as may be reflected in the IBT
Financial Statements and except for any lien for current taxes not yet
delinquent, IBT and each IBT Subsidiary has good title free and clear of
any material liens, claims, charges, options, encumbrances or similar
restrictions to all the real and personal property reflected in IBT's
consolidated balance sheet as of September 30, 1999 included in IBT's
Quarterly Report on Form 10-Q for the period then ended, and all real and
personal property acquired since such date, except such real and personal
property as has been disposed of in the ordinary course of business. All
leases of real property and all other leases material to IBT or any IBT
Subsidiary pursuant to which IBT or such IBT Subsidiary, as lessee, leases
real or personal property, are valid and effective in accordance with their
respective terms, and there is not, under any such lease, any material
existing default by IBT or such IBT Subsidiary or any event which, with
notice or lapse of time or both, would constitute such a material default.
Substantially all IBT's and each IBT Subsidiary's buildings and equipment
in regular use have been well maintained and are in good and serviceable
condition, reasonable wear and tear excepted.
(s) Accounting Matters. Neither IBT nor any of its Subsidiaries or
affiliates, has taken or agreed to take any action that would prevent IBT
from accounting for the business combination to be effected by the Merger
as a "pooling of interests".
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
4.1 Covenants of FSB. During the period from the date of this Agreement
and continuing until the Effective Time, FSB agrees as to itself and its
Subsidiaries that, except as expressly contemplated or permitted by this
Agreement, or to the extent that IBT shall otherwise consent in writing:
(a) Ordinary Course. FSB and its Subsidiaries shall carry on their
respective businesses in the usual, regular and ordinary course in
substantially the same manner as heretofore conducted and use all
reasonable efforts to preserve intact their present business organizations,
maintain their rights and franchises and preserve their relationships with
customers, suppliers and others having business dealings with them to the
end their goodwill and ongoing businesses shall not be impaired in any
material respect. FSB shall not, nor shall permit any of its Subsidiaries
to (i) enter into any new material line of business, (ii) increase or
decrease the current number of their directors, except as consistent with
FSB's current Board of Directors' retirement policy, (iii) change its or
its Subsidiaries lending, investment, liability management and other
material banking policies in any respect which is material to such party;
or (iv) incur or commit to any capital expenditures or any obligations or
liabilities in connection therewith other than capital expenditures and
obligations or liabilities incurred or committed to in the ordinary course
of business consistent with past practices and the items shown in Section
4.1(a) of the FSB Disclosure Schedule.
(b) Dividends; Changes in Stock. FSB shall not, nor shall permit any
of its Subsidiaries to, nor shall propose to (i) declare or pay any
dividends on or make other distributions in respect of any of its capital
stock, except for (A) the declaration and payment of regular semi-annual
cash dividends by FSB in any amount not in excess of $0.75 per share of FSB
Common Stock with usual record and payment dates for such dividends in
accordance with FSB's past dividend practice, provided further,
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however, that FSB shareholders shall be entitled to a dividend on FSB
Common Stock or IBT Common Stock, but not both, in the calendar quarter in
which the Closing shall occur, and (B) dividends or distributions by a
wholly owned Subsidiary of FSB; (ii) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance of any
other securities in respect of, in lieu of or in substitution for shares of
its capital stock; or (iii) repurchase, redeem or otherwise acquire, or
permit any Subsidiary to purchase or otherwise acquire (other than as agent
for shareholders reinvesting dividends pursuant to any dividend
reinvestment plan and except for the acquisition of trust account shares),
any shares of FSB's capital stock or any securities convertible into or
exercisable for any shares of its capital stock.
(c) Issuance of Securities. Except as set forth on Section 4.1(c) of
the FSB Disclosure Schedule, FSB shall not, nor shall it permit any of its
Subsidiaries to, issue, deliver or sell, or authorize or propose the
issuance, delivery or sale of, any shares of its capital stock of any
class, any Voting Debt or any securities convertible into or exercisable
for, or any rights, warrants or options to acquire, any such shares or
Voting Debt, or enter into any agreement with respect to any of the
foregoing, other than issuance by a wholly owned Subsidiary of its capital
stock to its parent, except that FSB may issue shares of FSB Common Stock
upon the exercise of outstanding stock options as described in Section
4.1(c) of the FSB Disclosure Schedule.
(d) No Solicitations. Except as the Board of Directors of FSB deems
necessary, on the advice of outside counsel, in the exercise of its
fiduciary obligations under applicable law; and provided, however, that
nothing contained in this Section 4.1(d) shall restrict or prohibit any
disclosure by FSB that is required, on the advice of outside counsel, (i)
in any document to be filed with a regulatory authority after the date of
this Agreement or (ii) in any document or statement otherwise required
under applicable law, FSB shall not permit any of its Subsidiaries to, nor
shall authorize or permit any of its officers, directors or employees or
any investment banker, financial advisor, attorney, accountant or other
representative or agent retained by it or any of its Subsidiaries to,
solicit or encourage (including by way of furnishing nonpublic
information), or take any other action to facilitate, any inquiries or the
making of any proposal which constitutes, or may reasonably be expected to
lead to, any takeover proposal (as defined below), or agree or endorse any
takeover proposal, or participate in any discussions or negotiations, or
provide third parties with any nonpublic information, relating to any such
inquiry or proposal. FSB shall promptly advise IBT orally and in writing of
any such inquiries or proposals, including all of the material terms
thereof. As used in this Agreement, "takeover proposal" shall mean any
tender or exchange offer, proposal for a merger, consolidation or other
business combination involving FSB or any Subsidiary of FSB or any proposal
or offer to acquire in any manner a substantial equity interest in, or a
substantial portion of the assets of FSB or any Subsidiary of FSB other
than the transactions contemplated or permitted by this Agreement
(including, without limitation, Section 4.1(f) hereof).
(e) No Acquisitions. FSB shall not, nor shall permit any of its
Subsidiaries to, acquire or agree to acquire, by merging or consolidating
with, or by purchasing a substantial equity interest in or a substantial
portion of the assets of, or by any other manner, any business or any
corporation, partnership, association or division thereof or otherwise
acquire or agree to acquire any assets in each case; provided, however,
that the foregoing shall not prohibit (i) internal reorganization,
consolidations or dissolutions involving only existing Subsidiaries as
permitted or directed by this Agreement, (ii) foreclosures and other
acquisitions related to previously contracted debt, in each case in the
ordinary course of business, or (iii) acquisitions of financial assets and
merchant banking activities, in each case in the ordinary course of
business.
(f) No Dispositions. Other than dispositions permitted or required by
this Agreement, dispositions described in Section 4.1(f) of the FSB
Disclosure Schedule or dispositions in the ordinary course of business
consistent with past practices, FSB shall not, nor shall permit any of its
Subsidiaries to, sell, lease, encumber or otherwise dispose of, or agree to
sell, lease, encumber or otherwise dispose of, any of its assets (including
capital stock of Subsidiaries).
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(g) Indebtedness. Other than in the ordinary course of business
consistent with past practice, FSB shall not, nor shall permit any of its
Subsidiaries to incur any indebtedness for borrowed money, assume,
guarantee, endorse or otherwise as an accommodation become responsible for
the obligations of any other individual, corporation or other entity, or
make any loan or advance other than in the ordinary course of business
consistent with past practice.
(h) Benefit Plans. Except as set forth in Section 4.1(h) of the FSB
Disclosure Schedule, FSB agrees as to itself and its Subsidiaries that it
will not, without the prior written consent of IBT, (i) enter into, adopt,
amend (except as may be required by law) or terminate any FSB Benefit Plan,
as the case may be, or any other employee benefit plan or any agreement,
arrangement, plan or policy between FSB and one or more of its directors or
officers, (ii) make any contributions to any FSB Benefit Plan except as
required by the terms of such plan in effect as of the date hereof, (iii)
except for normal increases in the ordinary course of business consistent
with past practice that in the aggregate do not result in a material
increase in benefits or compensation expense to FSB, increase in any manner
the compensation or fringe benefits of any director, officer, or employee
or pay any benefit not required by any plan or arrangement as in effect as
of the date hereof (including, without limitation, the granting of stock
options, stock appreciation rights, restricted stock, restricted stock
units or performance units or shares) or enter into any contract,
agreement, commitment or arrangement to do any of the foregoing, or (iv)
enter into or renew any contract, agreement, commitment or arrangement
providing for the payment of any director, officer or employee of such
party of compensation or benefits contingent, or the terms of which are
materially altered, upon the occurrence of any of the transactions
contemplated by this Agreement.
(i) Insurance. FSB and its subsidiaries shall maintain the insurance
coverage referenced in Section 3.1(s) through the Effective Time.
4.2 Covenants of FSB and IBT. During the period from the date of this
Agreement and continuing until the Effective Time, FSB and IBT agree as to
themselves and their Subsidiaries that, except as expressly contemplated or
permitted by this Agreement, or to the extent that the parties shall otherwise
consent in writing:
(a) Governing Documents. Except in accordance with this Agreement, no
party shall amend or propose publicly to amend, or shall permit any of its
Subsidiaries to amend, the articles of incorporation, by-laws or other
governing document of such party in any way adverse to IBT, the holders of
IBT Common Stock or IBT's ability to consummate the transactions
contemplated hereby. Notwithstanding the foregoing, IBT shall be permitted
to amend its articles of incorporation to increase its authorized common
stock to 10.0 million shares.
(b) Other Actions. No party shall, or shall permit any of its
Subsidiaries to, take any action that is intended to result in any of its
representations and warranties set forth in this Agreement being or
becoming untrue in any material respect, or in any of the conditions to the
Merger set forth in Article VI not being satisfied or in a violation of any
provision of this Agreement, or (unless such action is required by
applicable law or sound banking practice) which would adversely affect the
ability of any of them to obtain any of the Requisite Regulatory Approvals
(as defined in Section 6.1(b)) without imposition of a condition or
restriction of the type referred to in Section 6.1(f) hereof except, in
every case, as may be required by applicable law.
(c) Advice of Changes; Government Filings. Each party shall promptly
advise the other orally and in writing of any change or event having, or
which could cause or constitute a material breach of any of the
representations, warranties or covenants of such party contained herein.
IBT and FSB shall file all reports required to be filed by each of them
with the SEC between the date of this Agreement and the Effective Time and
shall deliver to the other party copies of all such reports promptly after
the same are filed. IBT, FSB and each Subsidiary of IBT or FSB that is a
bank shall file all call reports with the appropriate Bank Regulators and
all other reports, applications and other documents required to be filed
with the appropriate Bank Regulators between the date hereof and the
Effective
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Time and shall make available to the other party copies of all such reports
promptly after the same are filed.
(d) Pooling and Tax-Free Reorganization Treatment. Neither IBT nor FSB
shall take or cause to be taken any action, whether before or after the
Effective Time, which would disqualify the Merger as a "pooling of
interests" for accounting purposes or the Merger as a "reorganization"
within the meaning of Section 368(a) of the Code.
(e) Accounting Methods. Neither IBT nor FSB shall change its methods
of accounting in effect at December 31, 1999, except as required by changes
in generally accepted accounting principles as concurred to by such party's
independent auditors.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Regulatory Matters.
(a) IBT has primary responsibility for the preparation and filing with
the SEC of the Proxy Statement. IBT, with the assistance of FSB, shall
promptly prepare and file with the SEC the S-4, in which the Proxy
Statement will be included. IBT and FSB shall use all reasonable efforts to
have the S-4 declared effective under the Securities Act as promptly as
practicable after such filing, and thereafter mail the Proxy Statement to
the shareholders of FSB. IBT and FSB shall use their best efforts to obtain
all necessary state securities law or "Blue Sky" permits and approvals
required to carry out the transactions contemplated by this Agreement, and
FSB shall furnish to IBT all information concerning FSB and the holders of
FSB Common Stock as may be reasonably requested in connection with any such
action.
(b) The parties hereto shall cooperate with each other and use their
best efforts to promptly prepare and file all necessary documentation, to
effect all necessary application, notices, petitions, filings and other
documents, and to obtain as promptly as practicable all necessary permits,
consents, and authorizations of all third parties and Governmental Entities
necessary or advisable to consummate the transactions contemplated by this
Agreement. FSB and IBT shall have the right to review in advance, and to
the extent practicable each will consult the other on, subject to
applicable laws relating to the exchange of information, all the
information relating to FSB or IBT, as the case may be, and any of their
respective Subsidiaries, which appear in any filing made with, or written
materials submitted to, any third party or any Governmental Entity in
connection with the transactions contemplated by this Agreement. In
exercising the foregoing right, each of the parties hereto shall act
reasonably and as promptly as practicable. The parties hereto agree that
they will consult with each other with respect to the obtaining of all
permits, consents, approvals and authorizations by this Agreement and each
party will keep the other appraised of the status of matters relating to
completion of the transactions contemplated herein.
(c) FSB and IBT shall, upon request, furnish each other with all
information concerning themselves, their Subsidiaries, directors, officers
and shareholders and other such matters as may be reasonably necessary or
advisable in connection with the Proxy Statement, the S-4 or any other
statement, filing, notice or application made by or on behalf of FSB, IBT
or any of their respective Subsidiaries to any Governmental Entity in
connection with the Merger and the other transactions contemplated by this
Agreement.
(d) FSB and IBT shall promptly furnish each other with copies of
written communications received by FSB or IBT, as the case may be, or any
of their respective Subsidiaries, Affiliates or Associates (as such items
are defined in Rule 12b-2 under the Exchange Act as in effect on the date
hereof) from, or delivered by any of the foregoing to, any Governmental
Entity in respect of the transactions contemplated hereby.
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5.2 Letter of Accountants. FSB shall use its best efforts to cause to be
delivered to IBT a letter of Andrews Hooper & Pavlik P.L.C., FSB's independent
auditor in substantially the form shown on Exhibit 5.2 dated (i) the date of
which the Form S-4 shall become effective and (ii) the business day prior to the
Effective Time, and addressed to IBT.
5.3 Access to Information. Upon reasonable notice and subject to
applicable laws relating to the exchange of information, FSB shall (and cause
each of its Subsidiaries to) afford to the officers, employees, accountants,
counsel and other representatives of IBT, access during normal business hours
during the period prior to the Effective Time, to all its properties, books,
contracts, commitments and records and, during such period, FSB shall (and shall
cause each of its Subsidiaries to) make available to IBT (a) a copy of each
report, schedule, registration statement and other document filed or received by
it during such period pursuant to the requirements of federal or state
securities laws or federal or state banking laws (other than reports or
documents which FSB is not permitted to disclose under applicable law) and (b)
all other information concerning its business, properties and personnel as IBT
may reasonably request. IBT will hold all such information in confidence to the
extent required by, and in accordance with, the provisions of the
confidentiality agreement dated February 17, 2000, between IBT and FSB. No
investigation by IBT shall affect the representations and warranties of FSB set
forth herein.
5.4 Shareholder Meeting. FSB shall take all steps necessary to duly call,
give notice of, convene and hold a meeting of its shareholders to be held as
soon as is reasonably practicable after the date on which the S-4 becomes
effective for the purpose of voting upon the approval of this Agreement. FSB
will, through its Board of Directors, subject to their respective fiduciary
obligations as determined by the Board of Directors after consultation with
outside counsel, recommend to its shareholders approval of such matters.
5.5 Legal Conditions to Merger. IBT and FSB shall, and shall cause its
Subsidiaries to, use their best efforts (i) to take, or cause to be taken, all
actions necessary to comply promptly with all legal requirements which may be
imposed on such party or its Subsidiaries with respect to the Merger and,
subject to the conditions set forth in Article VI hereof to consummate the
transactions contemplated by this Agreement, and (ii) to obtain (and to
cooperate with the other party to obtain) any consent, order or approval of, or
any exemption by any Governmental Entity and any other public or private third
party which is required to be obtained or made by such party or any of its
Subsidiaries in connection with the Merger, and the transactions contemplated by
this Agreement.
5.6 Affiliates. FSB shall use its best efforts to cause each director,
executive officer and other person who is an "affiliate" (for purposes of Rule
145 under the Securities Act and for purposes of qualifying for "pooling of
interests" treatment) of FSB to deliver to IBT, as soon as practicable after the
date hereof, and prior to the date of the FSB shareholders meeting called to
approve this Agreement: a written agreement, substantially in the form of
Exhibit 5.6, providing that such person will not sell, pledge, transfer or
otherwise dispose of any shares of FSB Common Stock held by such "affiliate" and
the shares of IBT Common Stock to be received by such "affiliate" in the Merger:
(1) except in compliance with the applicable provisions of the Securities Act
and the rules and regulations thereunder, and (2) during the period commencing
30 days prior to the Merger and ending at the time of the publication of
financial results covering at least 30 days of combined operations of FSB and
IBT.
5.7 Employee Benefit Plans.
(a) Except as otherwise provided in Sections 4.1(h) hereof, IBT and
FSB agree that, the IBT Benefit Plans in effect at the date of this
Agreement shall be adopted by FSB's Subsidiaries for their employees
following the Merger.
(b) In the case of FSB Benefit Plans under which the employees'
interests are based upon FSB Common Stock, IBT and FSB agree that such
interests shall be based on IBT Common Stock in accordance with the terms
of the FSB Benefit Plans and in an equitable manner.
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5.8 Expenses. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement, and the transactions
contemplated hereby shall be paid by the party incurring such expense, except as
may be permitted by Section 7.2 and except that expenses incurred in connection
with printing and mailing the Proxy Statement and the Form S-4 shall be shared
equally by IBT and FSB.
5.9 Additional Agreements; Best Efforts. Subject to the terms and
conditions of this Agreement, each of the parties hereto agrees to use its best
efforts to take all action and to do all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement, including, without limitation,
cooperating fully with the other party hereto, providing the other party hereto
with any appropriate information and making all necessary filings in connection
with the Requisite Regulatory Approvals. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, or to vest the Surviving Corporation with full title to all
properties, assets, rights, approvals, immunities and franchises of either of
the Constituent Corporations, the proper officers and directors of each party to
this Agreement shall take all such necessary action.
5.10 Employment Agreement. As of the Closing Date, Farmers State Bank of
Breckenridge shall enter into a three year employment agreement with its current
President in the form attached hereto as Exhibit 5.10.
5.11 Governance. At the Effective Time:
(a) The board of directors of the Surviving Corporation shall be
expanded by two (2) members, with said positions to be initially filled by
designees appointed, prior to the Effective Time, by the FSB board of
directors, with the consent of IBT.
(b) The Farmers State Bank of Breckenridge board of directors shall
consist of its existing members plus two (2) members to be designated by
IBT.
(c) The Isabella Bank and Trust board of directors shall consist of
its existing members, plus one (1) member to be designated by FSB.
(d) The president of Farmers State Bank of Breckenridge shall be
appointed a vice president of IBT.
5.12 Post-Closing Operations. At and after the Closing Date:
(a) The Farmers State Bank of Breckenridge shall remain a
state-chartered commercial bank.
(b) The names of IBT, Farmers State Bank of Breckenridge and Isabella
Bank and Trust shall not change as a result of the Merger. In the future,
the Board of Directors of IBT will consider the possibility of a name
change which is less geographically restrictive.
(c) All banking offices of Farmers State Bank of Breckenridge will
remain open.
(d) There will be no layoffs at Farmers State Bank of Breckenridge as
a result of the Merger. Any reduction in staffing levels shall be
accomplished through attrition.
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ARTICLE VI
CONDITIONS PRECEDENT
6.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger shall be subject to the
satisfaction prior to the Effective Time of the following conditions:
(a) Shareholder Approval. This Agreement shall have been approved and
adopted by the affirmative vote of a majority of the outstanding shares of
FSB Common Stock entitled to vote thereon.
(b) Other Approvals. Other than the filing provided for by Section 1.1
all consents, orders or approvals of, or declarations or filings with, and
all expirations of waiting periods imposed by, any Governmental Entity
(collectively, the "Requisite Regulatory Approvals") which are prescribed
by law as necessary for the consummation of the Merger and the other
transactions contemplated hereby other than immaterial consents shall have
been filed, occurred or been obtained and all such Requisite Regulatory
Approvals shall be in full force and effect.
(c) S-4. The S-4 shall have become effective under the Securities Act
and no stop order suspending the effectiveness of the S-4 shall have been
issued and no proceedings for that purpose shall have been initiated or
threatened by the SEC.
(d) No Injunctions or Restraints; Illegality. No order, injunction or
decree issued by any court or agency of competent jurisdiction or other
legal restraint or prohibition (an "Injunction") preventing the
consummation of the Merger or any of the transactions contemplated hereby
shall be in effect, nor shall any proceeding by any Governmental Entity
seeking any such Injunction be pending. No statute, rule, regulation,
order, inunction or decree shall have been enacted, entered, or enforced by
any Governmental Entity which prohibits, restricts or makes illegal
consummation of the Merger.
(e) Financial Statements. FSB shall prepare or have prepared, file,
and submit to IBT all annual and quarterly audited and management prepared
financial statements for any periods ending at least 30 days before the
Effective Time, each prepared in accordance with GAAP principles.
(f) No Burdensome Condition. There shall not be any action taken, or
any statute, rule, regulation or order enacted, entered, enforced or deemed
applicable to the Merger or any of the transactions contemplated hereby, by
any Governmental Entity which, in connection with the grant of a Requisite
Regulatory Approval, imposes any condition or restriction upon IBT, FSB, or
any of their Subsidiaries which would so materially adversely impact the
economic or business benefits of the transactions contemplated by this
Agreement as to render inadvisable, in the reasonable judgment of the Board
of Directors of either IBT or FSB, the consummation of the Merger.
6.2 Conditions to Obligations of IBT. The obligation of IBT to effect the
Merger are also subject to the satisfaction or waiver by IBT prior to the
Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties
of FSB set forth in this Agreement shall be true and correct in all
material respects as of the date of the Agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the
Closing Date as though made on the Closing Date, except as otherwise
contemplated by this Agreement, and IBT shall have received a certificate
signed on behalf of FSB by the Chairman and Chief Executive Officer and by
the Chief Financial Officer of FSB to such effect.
(b) Performance of Obligations of FSB. FSB shall have performed in all
materials respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date, and IBT shall have received
a certificate signed on behalf of FSB by the Chairman and Chief Executive
Officer and by the Chief Financial Officer of FSB to such effect.
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(c) Consents Under Agreements. FSB shall have obtained the consent or
approval of each person (other than the Governmental Entities referred to
in Section 6.1(b)) whose consent or approval shall be required in order to
permit the succession by the Surviving Corporation pursuant to the Merger
to any obligation, right or interest of FSB's or any Subsidiary of FSB
under any loan or credit agreement, note, mortgage, indenture, lease,
license or other agreement or instrument, except those for which failure to
obtain such consents and approvals would not, in the reasonable opinion of
IBT, individually or in the aggregate, have a material adverse effect on
FSB or upon the consummation of the transaction contemplated hereby.
(d) Tax Opinion. IBT shall have received the opinion of Foster, Swift,
Collins & Smith, P.C., counsel to IBT, dated the Closing Date, in
substantially the form shown on Exhibit 6.2(d) to the effect that the
Merger will be treated for Federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and that IBT and FSB will
each be a party to that reorganization within the meaning of Section 368(b)
of the Code and that shareholders of FSB who exchange their shares of FSB
Common Stock for shares of IBT Common Stock will not recognize gain or
loss, for purposes of federal income tax, except to the extent of cash
received in lieu of fractional shares.
(e) Legal Opinion. IBT shall have received the opinion of Bodman,
Longley & Dahling LLP, counsel to FSB, dated the Closing Date, in
substantially the form shown on Exhibit 6.2(e).
(f) Subsequent Events. Since December 31, 1999, no change shall have
occurred and no circumstances shall exist which has had or might reasonably
be expected to have a material adverse effect on the financial condition,
results of operations, business or prospects of FSB and the FSB
Subsidiaries taken as a whole (other than changes in banking laws or
regulations, or interpretations thereof, that affect the banking industry
generally or changes in the general level of interest rates).
(g) Material Loss. FSB and the FSB Subsidiaries considered as a whole
shall not have sustained since December 31, 1999 any material loss or
interference with their business from any civil disturbance or any fire,
explosion, flood or other calamity, whether or not covered by insurance.
(h) Employment Agreement. The employment agreement between Farmers
State Bank of Breckenridge and its president as required under Section 5.10
hereof shall be in full force and effect.
(i) Pooling of Interests. IBT shall have received a letter from its
independent auditors to the effect that the Merger will qualify for
"pooling of interests" accounting treatment.
6.3 Conditions to Obligations of FSB. The obligation of FSB to effect the
Merger is also subject to the satisfaction or waiver by FSB prior to the
Effective Time of the following conditions:
(a) Representations and Warranties. The representations and warranties
of IBT set forth in this Agreement shall be true and correct in all
material respects as of the date of this Agreement and (except to the
extent such representations and warranties speak as of an earlier date) as
of the Closing Date as though made on the Closing Date, except as otherwise
contemplated by this Agreement, and FSB shall have received a certificate
signed on behalf of IBT by the Chairman and Chief Executive Officer and by
the Chief Financial Officer of IBT to such effect.
(b) Performance of Obligations of IBT. IBT shall have performed in all
material respects all obligations required to be performed by it under this
Agreement at or prior to the Closing Date, and FSB shall have received a
certificate signed on behalf of IBT by the Chairman and Chief Executive
Officer and by the Chief Financial Officer of IBT to such effect.
(c) Consents Under Agreements. IBT shall have obtained the consent or
approval of each person (other than the Governmental Entities referred to
in Section 6.1(b)) whose consent or approval shall be required in
connection with the transactions contemplated hereby under any loan or
credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument to which
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IBT or any of its Subsidiaries is a party or is otherwise bound, except
those for which failure to obtain such consents and approvals would not, in
the reasonable opinion of FSB, individually or in the aggregate, have a
material adverse effect on IBT or upon the consummation of the transactions
contemplated hereby.
(d) Legal Opinion. FSB shall have received the opinion of Foster,
Swift, Collins & Smith, P.C., counsel to IBT, dated the Closing Date, in
substantially the form shown on Exhibit 6.3(d).
(e) Tax Opinion. FSB shall have received the opinion of Bodman,
Longley & Dahling LLP, counsel to FSB, dated the Closing Date, in
substantially the form shown on Exhibit 6.3(e) to the effect that the
Merger will be treated for Federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code, and that IBT and FSB will
each be a party to that reorganization within the meaning of Section 368(b)
of the Code and that shareholders of FSB who exchange their shares of FSB
Common Stock for shares of IBT Common Stock will not recognize gain or
loss, for purposes of federal income tax, except to the extent of cash
received in lieu of fractional shares.
(f) Subsequent Events. Since December 31, 1999, no change shall have
occurred and no circumstances shall exist which has had or might reasonably
be expected to have a material adverse effect on the financial conditions,
results of operations, business or prospects of IBT and the IBT
Subsidiaries taken as a whole (other than changes in banking laws or
regulations, or interpretations thereof, that affect the banking industry
generally or changes in the general level of interest rates).
ARTICLE VII
TERMINATION AND AMENDMENT
7.1 Termination. This Agreement may be terminated in writing at any time
prior to the Effective Time, whether before or after approval of the Merger by
the shareholders of FSB, only in the following circumstances:
(a) by mutual consent of IBT and FSB in a written instrument, if the
Board of Directors of each so determines by a vote of a majority of the
members of its entire Board;
(b) by either IBT or FSB if (i) any Requisite Regulatory Approval
shall have been denied or (ii) any Governmental Entity of competent
jurisdiction shall have issued a final nonappealable order enjoining or
otherwise prohibiting the consummation of the transactions contemplated by
this Agreement;
(c) by either IBT or FSB if the Merger shall not have been consummated
on or before December 31, 2000;
(d) by either IBT or FSB (provided that the terminating party is not
in material breach of any of its obligations) if any approval of the
shareholders of FSB required for the consummation of the Merger shall not
have been obtained by reason of the failure to obtain the required vote at
a duly held meeting of shareholders or at any adjournment or postponement
thereof;
(e) by either IBT or FSB if there shall have been a material breach of
any of the representations or warranties set forth in this Agreement on the
part of the other party; which breach by its nature cannot be cured prior
to the Closing; or
(f) by either IBT or FSB if there shall have been a material breach of
any of the covenants or agreements set forth in this Agreement on the part
of the other party, which breach shall not have been cured before closing
or within twenty (20) business days following receipt by the breaching
party of written notice of such breach from the other party, whichever
occurs first.
7.2 Effect of Termination. In the event of termination of this Agreement
by either IBT or FSB as provided in Section 7.1, this Agreement shall forthwith
become void and have no effect except (i) with
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respect to the second to the last sentence of Section 5.3, and Sections 5.8 and
7.2, and (ii) no party shall be relieved or released from any liabilities or
damages arising out of the willful breach by the other party of any provision of
this Agreement.
7.3 Amendment. This Agreement may be amended by the parties hereto, by
action taken or authorized by their respective Boards of Directors, at any time
before or after approval of the matters presented in connection with the Merger
by the shareholders of FSB, provided, however, that after any such approval, no
amendment shall be made which by law requires further approval by such
shareholders, without such further approval. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
7.4 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken or authorized by their respective Board of
Directors, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties hereto,
(ii) waive any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive compliance
with any of the agreements or conditions contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in a written instrument signed on behalf of such party.
ARTICLE VIII
GENERAL PROVISIONS
8.1 Nonsurvival of Representations, Warranties and Agreements. None of the
representations, warranties, covenants and agreements in this Agreement shall
survive the Effective Time, except for those covenants and agreements contained
herein which by their terms apply in whole or in part after the Effective Time,
including without limitation, Sections 2.2, 5.7, 5.8, 5.10, 5.11, 8.1, 8.5, 8.6,
8.7 and 8.8.
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally, telecopies (with
confirmation) or mailed by registered or certified mail (return receipt
requested) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
(a) if to IBT, to:
David W. Hole, President
IBT Bancorp, Inc.
200 East Broadway
Mt. Pleasant, MI 48858
with copies to:
Foster, Swift, Collins & Smith, P.C.
c/o Matt G. Hrebec
313 S. Washington Square
Lansing, MI 48933
and
(b) if to FSB, to:
Herbert C. Wybenga, President
FSB Bancorp, Inc.
316 East Saginaw Street
Breckenridge, MI 48615
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with copies to:
Bodman, Longley & Dahling LLP
c/o Lloyd C. Fell
229 Court Street
P.O. Box 405
Cheboygan, MI 49721
8.3 Interpretation. When a reference is made in this Agreement to
Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement unless otherwise indicated. The table of
contents and headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Whenever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
8.4 Counterparts. This Agreement may be executed in counterparts, all of
which shall be considered one and the same agreement and shall become effective
when counterparts have been signed by each of the parties and delivered to the
other parties, it being understood that all parties need not sign the same
counterpart.
8.5 Entire Agreement; No Third Party Beneficiaries; Rights of
Ownership. This Agreement (including the documents and the instruments referred
to herein) constitutes the entire agreement and supersedes all prior agreements
(except for the confidentiality agreements between IBT and FSB dated February
17, 2000, which shall remain in full force and effect and survive the execution
of this Agreement) and understandings, both written and oral, among the parties
with respect to the subject matter hereof, and is not intended to confer upon
any person other than the parties hereto any rights or remedies hereunder. No
party shall have the right to acquire or shall be deemed to have acquired shares
of common stock of the other party pursuant to the Merger until consummation
thereof.
8.6 Governing Law: This Agreement shall be governed and construed in
accordance with the laws of the State of Michigan.
8.7 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement was
not performed in accordance with its specific terms or was otherwise breached.
The parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof in any court of the United States or any state having jurisdiction, this
being in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Severability. Any term or provision of this Agreement which is invalid
or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provisions of
this Agreement is so broad as to be unenforceable, the provisions shall be
interpreted to be only so broad as is enforceable.
8.9 Publicity. Except as otherwise required by law, so long as this
Agreement is in effect, neither IBT nor FSB shall, or shall permit any of its
Subsidiaries to, issue or cause the publication of any press release or other
public announcement with respect to the transactions contemplated by this
Agreement without the consent of the other party, which consent shall not be
unreasonably withheld.
8.10 Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding upon,
inure to the benefit of and be enforceable by the parties and their respective
successors and assigns.
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IN WITNESS WHEREOF, IBT and FSB have caused this Agreement to be signed by
their respective officers thereunto duly authorized as of the date first above
written.
IBT BANCORP, INC.
By: /s/ DAVID W. HOLE
----------------------------------
David W. Hole
Its: President and CEO
Attest:
/s/ DENNIS P. ANGNER
------------------------------------
Name: Dennis P. Angner
Title: Executive Vice President
FSB BANCORP, INC.
By: /s/ HERBERT C. WYBENGA
----------------------------------
Herbert C. Wybenga
Its: President and CEO
Attest:
/s/ MARY ANN BREUER
------------------------------------
Name: Mary Ann Breuer
Title: Secretary
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APPENDIX B
MBCA PROVISIONS ON DISSENTER'S RIGHTS
450.1761 DEFINITIONS. [M.S.A. 21.200(761)]
Sec. 761. As used in sections 762 to 774: (a) "Beneficial shareholder"
means the person who is a beneficial owner of shares held by a nominee as the
record shareholder.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving corporation by merger of that issuer.
(c) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 762 and who exercises that right when and in the
manner required by sections 764 through 772.
(d) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
(e) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
(f) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
(g) "Shareholder" means the record or beneficial shareholder.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1988, Act 58, Eff. Apr. 1,
1988; --Am. 1989, Act 121, Eff. Oct. 1, 1989; --Am. 1993, Act 91, Eff. Oct. 1,
1993.
COMPILER'S NOTE: Section 2 of Act 58 of 1988 provides: "This amendatory act
shall not apply to any domestic corporation before June 1, 1989, unless the
corporation's board of directors adopts a resolution, pursuant to this section,
electing to have this act apply to the corporation. The resolution shall specify
the date after January 1, 1988 and before June 1, 1989 on which this act will
apply to the corporation. The resolution shall be filed with the department of
commerce, corporation and securities bureau, on or before the date that the act
will apply to the corporation."
450.1762 RIGHT OF SHAREHOLDER TO DISSENT AND OBTAIN PAYMENT FOR SHARES.
Sec. 762. (1) A shareholder is entitled to dissent from, and obtain payment
of the fair value of his or her shares in the event of, any of the following
corporate actions: (a) Consummation of a plan of merger to which the corporation
is a party if shareholder approval is required for the merger by section 703a or
736(5) or the articles of incorporation and the shareholder is entitled to vote
on the merger, or the corporation is a subsidiary that is merged with its parent
under section 711.
(b) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan.
(c) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution but not including a sale pursuant to court
order.
(d) An amendment of the articles of incorporation giving rise to a right to
dissent pursuant to section 621.
(e) A transaction giving rise to a right to dissent pursuant to section
754.
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(f) Any corporate action taken pursuant to a shareholder vote to the extent
the articles of incorporation, bylaws, or a resolution of the board provides
that voting or nonvoting shareholders are entitled to dissent and obtain payment
for their shares.
(g) The approval of a control share acquisition giving rise to a right to
dissent pursuant to section 799.
(2) Unless otherwise provided in the articles of incorporation, bylaws, or
a resolution of the board, a shareholder may not dissent from any of the
following: (a) Any corporate action set forth in subsection (1)(a) to (e) as to
shares that are listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
national association of securities dealers, on the record date fixed to vote on
the corporate action or on the date the resolution of the parent corporation's
board is adopted in the case of a merger under section 711 not requiring
shareholder vote under section 713.
(b) A transaction described in subsection (1)(a) in which shareholders
receive cash or shares that satisfy the requirements of subdivision (a) on the
effective date of the merger or any combination thereof.
(c) A transaction described in subsection (1)(b) in which shareholders
receive cash or shares that satisfy the requirements of subdivision (a) on the
effective date of the share exchange or any combination thereof.
(d) A transaction described in subsection (1)(c) that is conducted pursuant
to a plan of dissolution providing for distribution of substantially all of the
corporation's net assets to shareholders in accordance with their respective
interests within 1 year after the date of closing of the transaction, where the
transaction is for cash or shares that satisfy the requirements of subdivision
(a) on the date of closing or any combination thereof.
(3) A shareholder entitled to dissent and obtain payment for his or her
shares pursuant to subsection (1)(a) to (e) may not challenge the corporate
action creating his or her entitlement unless the action is unlawful or
fraudulent with respect to the shareholder or the corporation.
(4) A shareholder who exercises his or her right to dissent and seek
payment for his or her shares pursuant to subsection (1)(f) may not challenge
the corporate action creating his or her entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1988, Act 58, Eff. Apr. 1,
1988; --Am. 1989, Act 121, Eff. Oct. 1, 1989; --Am. 1997, Act 118, Imd. Eff.
Oct. 24, 1997.
COMPILER'S NOTE: Section 2 of Act 58 of 1988 provides: "This amendatory act
shall not apply to any domestic corporation before June 1, 1989, unless the
corporation's board of directors adopts a resolution, pursuant to this section,
electing to have this act apply to the corporation. The resolution shall specify
the date after January 1, 1988 and before June 1, 1989 on which this act will
apply to the corporation. The resolution shall be filed with the department of
commerce, corporation and securities bureau, on or before the date that the act
will apply to the corporation."
450.1763 RIGHTS OF PARTIAL DISSENTER; ASSERTION OF DISSENTERS' RIGHTS BY
BENEFICIAL SHAREHOLDER. [M.S.A. 21.200(763)]
Sec. 763. (1) A record shareholder may assert dissenters' rights as to
fewer than all the shares registered in his or her name only if he or she
dissents with respect to all shares beneficially owned by any 1 person and
notifies the corporation in writing of the name and address of each person on
whose behalf he or she asserts dissenters' rights. The rights of a partial
dissenter under this subsection are determined as if the shares as to which he
or she dissents and his or her other shares were registered in the names of
different shareholders.
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(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his or her behalf only if all of the following apply: (a) He or she
submits to the corporation the record shareholder's written consent to the
dissent not later than the time the beneficial shareholder asserts dissenters'
rights.
(b) He or she does so with respect to all shares of which he or she is the
beneficial shareholder or over which he or she has power to direct the vote.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1989, Act 121, Eff. Oct. 1,
1989.
450.1764 CORPORATE ACTION CREATING DISSENTERS' RIGHTS; VOTE OF SHAREHOLDERS;
NOTICE. [M.S.A. 21.200(764)]
Sec. 764. (1) If proposed corporate action creating dissenters' rights
under section 762 is submitted to a vote at a shareholders' meeting, the meeting
notice must state that shareholders are or may be entitled to assert dissenters'
rights under this act and shall be accompanied by a copy of sections 761 to 774.
(2) If corporate action creating dissenters' rights under section 762 is
taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in section 766. A shareholder who
consents to the corporate action is not entitled to assert dissenters' rights.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1989, Act 121, Eff. Oct. 1,
1989; --Am. 1993, Act 91, Eff. Oct. 1, 1993.
450.1765 NOTICE OF INTENT TO DEMAND PAYMENT FOR SHARES. [M.S.A. 21.200(765)]
Sec. 765. (1) If proposed corporate action creating dissenters' rights
under section 762 is submitted to a vote at a shareholders' meeting, a
shareholder who wishes to assert dissenters' rights must deliver to the
corporation before the vote is taken written notice of his or her intent to
demand payment for his or her shares if the proposed action is effectuated and
must not vote his or her shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
is not entitled to payment for his or her shares under this act.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1989, Act 121, Eff. Oct. 1,
1989.
450.1766 DISSENTERS' NOTICE; DELIVERY TO SHAREHOLDERS; CONTENTS. [M.S.A.
21.200(766)]
Sec. 766. (1) If proposed corporate action creating dissenters' rights
under section 762 is authorized at a shareholders' meeting, the corporation
shall deliver a written dissenters' notice to all shareholders who satisfied the
requirements of section 765.
(2) The dissenters' notice must be sent no later than 10 days after the
corporate action was taken, and must provide all of the following: (a) State
where the payment demand must be sent and where and when certificates for shares
represented by certificates must be deposited.
(b) Inform holders of shares without certificates to what extent transfer
of the shares will be restricted after the payment demand is received.
(c) Supply a form for the payment demand that includes the date of the
first announcement to news media or to shareholders of the terms of the proposed
corporate action and requires that the person asserting dissenters' rights
certify whether he or she acquired beneficial ownership of the shares before the
date.
(d) Set a date by which the corporation must receive the payment demand,
which date may not be fewer than 30 nor more than 60 days after the date the
subsection (1) notice is delivered.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1989, Act 121, Eff. Oct. 1,
1989.
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450.1767 DUTIES OF SHAREHOLDER SENT DISSENTER'S NOTICE; RETENTION OF RIGHTS;
FAILURE TO DEMAND PAYMENT OR DEPOSIT SHARE CERTIFICATES. [M.S.A. 21.200(767)]
Sec. 767. (1) A shareholder sent a dissenter's notice described in section
766 must demand payment, certify whether he or she acquired beneficial ownership
of the shares before the date required to be set forth in the dissenters' notice
pursuant to section 766(2)(c), and deposit his or her certificates in accordance
with the terms of the notice.
(2) The shareholder who demands payment and deposits his or her share
certificates under subsection (1) retains all other rights of a shareholder
until these rights are canceled or modified by the taking of the proposed
corporate action.
(3) A shareholder who does not demand payment or deposit his or her share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his or her shares under this act.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1985, Act 76, Imd. Eff. July 5,
1985; --Am. 1989, Act 121, Eff. Oct. 1, 1989.
450.1768 RESTRICTION ON TRANSFER OF SHARES WITHOUT CERTIFICATES; RETENTION OF
RIGHTS. [M.S.A. 21.200(768)]
Sec. 768. (1) The corporation may restrict the transfer of shares without
certificates from the date the demand for their payment is received until the
proposed corporate action is taken or the restrictions released under section
770.
(2) The person for whom dissenters' rights are asserted as to shares
without certificates retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1985, Act 76, Imd. Eff. July 5,
1985; --Am. 1989, Act 121, Eff. Oct. 1, 1989.
450.1768a REPEALED. 1989, ACT 121, EFF. OCT. 1, 1989. [M.S.A. 21.200(768a)]
COMPILER'S NOTE: The repealed section pertained to referees.
450.1769 PAYMENT BY CORPORATION TO DISSENTER; ACCOMPANYING DOCUMENTS. [M.S.A.
21.200(769)]
Sec. 769. (1) Except as provided in section 771, within 7 days after the
proposed corporate action is taken or a payment demand is received, whichever
occurs later, the corporation shall pay each dissenter who complied with section
767 the amount the corporation estimates to be the fair value of his or her
shares, plus accrued interest.
(2) The payment must be accompanied by all of the following: (a) The
corporation's balance sheet as of the end of a fiscal year ending not more than
16 months before the date of payment, an income statement for that year, a
statement of changes in shareholders' equity for that year, and if available the
latest interim financial statements.
(b) A statement of the corporation's estimate of the fair value of the
shares.
(c) An explanation of how the interest was calculated.
(d) A statement of the dissenter's right to demand payment under section
772.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1989, Act 121, Eff. Oct. 1,
1989; --Am. 1993, Act 91, Eff. Oct. 1, 1993.
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450.1770 RETURN OF DEPOSITED CERTIFICATES AND RELEASE OF TRANSFER RESTRICTIONS;
EFFECT OF CORPORATION TAKING PROPOSED ACTION. [M.S.A. 21.200(770)]
Sec. 770. (1) If the corporation does not take the proposed action within
60 days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on shares without certificates.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 766 and repeat the payment demand procedure.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1989, Act 121, Eff. Oct. 1,
1989.
450.1771 ELECTION TO WITHHOLD PAYMENT FROM DISSENTER; OFFER TO PAY ESTIMATED
FAIR VALUE OF SHARES, PLUS ACCRUED INTEREST; STATEMENTS; EXPLANATION. [M.S.A.
21.200(771)]
Sec. 771. (1) A corporation may elect to withhold payment required by
section 769 from a dissenter unless he or she was the beneficial owner of the
shares before the date set forth in the dissenters' notice pursuant to section
766(2)(c).
(2) To the extent the corporation elects to withhold payment under
subsection (1), after taking the proposed corporate action, it shall estimate
the fair value of the shares, plus accrued interest, and shall offer to pay this
amount to each dissenter who shall agree to accept it in full satisfaction of
his or her demand. The corporation shall send with its offer a statement of its
estimate of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under
section 772.
HISTORY: 1972, Act 284, Eff. Jan. 1, 1973; --Am. 1989, Act 121, Eff. Oct. 1,
1989.
450.1772 DEMAND FOR PAYMENT OF DISSENTER'S ESTIMATE OR REJECTION OF
CORPORATION'S OFFER AND DEMAND FOR PAYMENT OF FAIR VALUE AND INTEREST DUE;
WAIVER. [M.S.A. 21.200(772)]
Sec. 772. (1) A dissenter may notify the corporation in writing of his or
her own estimate of the fair value of his or her shares and amount of interest
due, and demand payment of his or her estimate, less any payment under section
769, or reject the corporation's offer under section 771 and demand payment of
the fair value of his or her shares and interest due, if any 1 of the following
applies: (a) The dissenter believes that the amount paid under section 769 or
offered under section 771 is less than the fair value of his or her shares or
that the interest due is incorrectly calculated.
(b) The corporation fails to make payment under section 769 within 60 days
after the date set for demanding payment.
(c) The corporation, having failed to take the proposed action, does not
return the deposited certificates or release the transfer restrictions imposed
on shares without certificates within 60 days after the date set for demanding
payment.
(2) A dissenter waives his or her right to demand payment under this
section unless he or she notifies the corporation of his or her demand in
writing under subsection (1) within 30 days after the corporation made or
offered payment for his or her shares.
HISTORY: Add. 1989, Act 121, Eff. Oct. 1, 1989.
450.1773 PETITIONING COURT TO DETERMINE FAIR VALUE OF SHARES AND ACCRUED
INTEREST; FAILURE OF CORPORATION TO COMMENCE PROCEEDING; VENUE; PARTIES;
SERVICE; JURISDICTION; APPRAISERS; DISCOVERY RIGHTS; JUDGMENT. [M.S.A.
21.200(773)]
Sec. 773. (1) If a demand for payment under section 772 remains unsettled,
the corporation shall commence a proceeding within 60 days after receiving the
payment demand and petition the court to determine the fair value of the shares
and accrued interest. If the corporation does not commence the
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proceeding within the 60-day period, it shall pay each dissenter whose demand
remains unsettled the amount demanded.
(2) The corporation shall commence the proceeding in the circuit court of
the county in which the corporation's principal place of business or registered
office is located. If the corporation is a foreign corporation without a
registered office or principal place of business in this state, it shall
commence the proceeding in the county in this state where the principal place of
business or registered office of the domestic corporation whose shares are to be
valued was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties shall be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) is plenary and exclusive. The court may appoint 1 or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment
for the amount, if any, by which the court finds the fair value of his or her
shares, plus interest, exceeds the amount paid by the corporation or for the
fair value, plus accrued interest, of his or her after-acquired shares for which
the corporation elected to withhold payment under section 771.
HISTORY: Add. 1989, Act 121, Eff. Oct. 1, 1989.
450.1773a REFEREE; APPOINTMENT; POWERS; COMPENSATION; DUTIES; OBJECTIONS TO
REPORT; APPLICATION TO COURT FOR ACTION; ADOPTION, MODIFICATION, OR RECOMMITMENT
OF REPORT; FURTHER EVIDENCE; JUDGMENT; REVIEW. [M.S.A. 21.200(773a)]
Sec. 773a. (1) In a proceeding brought pursuant to section 773, the court
may, pursuant to the agreement of the parties, appoint a referee selected by the
parties and subject to the approval of the court. The referee may conduct
proceedings within the state, or outside the state by stipulation of the parties
with the referee's consent, and pursuant to the Michigan court rules. The
referee shall have powers that include, but are not limited to, the following:
(a) To hear all pretrial motions and submit proposed orders to the court. In
ruling on the pretrial motion and proposed orders, the court shall consider only
those documents, pleadings, and arguments that were presented to the referee.
(b) To require the production of evidence, including the production of all
books, papers, documents, and writings applicable to the proceeding, and to
permit entry upon designated land or other property in the possession or control
of the corporation.
(c) To rule upon the admissibility of evidence pursuant to the Michigan
rules of evidence.
(d) To place witnesses under oath and to examine witnesses.
(e) To provide for the taking of testimony by deposition.
(f) To regulate the course of the proceeding.
(g) To issue subpoenas, when a written request is made by any of the
parties, requiring the attendance and testimony of any witness and the
production of evidence including books, records, correspondence, and documents
in the possession of the witness or under his or her control, at a hearing
before the referee or at a deposition convened pursuant to subdivision (e). In
case of a refusal to comply with a subpoena, the party on whose behalf the
subpoena was issued may file a petition in the court for an order requiring
compliance.
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(2) The amount and manner of payment of the referee's compensation shall be
determined by agreement between the referee and the parties, subject to the
court's allocation of compensation between the parties at the end of the
proceeding pursuant to equitable principles, notwithstanding section 774.
(3) The referee shall do all of the following: (a) Make a record and
reporter's transcript of the proceeding.
(b) Prepare a report, including proposed findings of fact and conclusions
of law, and a recommended judgment.
(c) File the report with the court, together with all original exhibits and
the reporter's transcript of the proceeding.
(4) Unless the court provides for a longer period, not more than 45 days
after being served with notice of the filing of the report described in
subsection (3), any party may serve written objections to the report upon the
other party. Application to the court for action upon the report and objections
to the report shall be made by motion upon notice. The court, after hearing, may
adopt the report, may receive further evidence, may modify the report, or may
recommit the report to the referee with instructions. Upon adoption of the
report, judgment shall be entered in the same manner as if the action had been
tried by the court and shall be subject to review in the same manner as any
other judgment of the court.
HISTORY: Add. 1989, Act 121, Eff. Oct. 1, 1989.
450.1774 COSTS OF APPRAISAL PROCEEDING. [M.S.A. 21.200(774)]
Sec. 774. (1) The court in an appraisal proceeding commenced under section
773 shall determine all costs of the proceeding, including the reasonable
compensation and expenses of appraisers appointed by the court. The court shall
assess the costs against the corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable, to
the extent the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 772.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable in the
following manner: (a) Against the corporation and in favor of any or all
dissenters if the court finds the corporation did not substantially comply with
the requirements of sections 764 through 772.
(b) Against either the corporation or a dissenter, in favor of any other
party, if the court finds that the party against whom the fees and expenses are
assessed acted arbitrarily, vexatiously, or not in good faith with respect to
the rights provided by this act.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to those counsel reasonable fees paid out of the amounts awarded the
dissenters who were benefitted.
HISTORY: Add. 1989, Act 121, Eff. Oct. 1, 1989.
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<PAGE> 126
APPENDIX C
OPINION OF AUSTIN ASSOCIATES, INC.
, 2000
Board of Directors
IBT Bancorp, Inc.
200 East Broadway
Mt. Pleasant, MI 48858
and
Board of Directors
FSB Bancorp, Inc.
316 E. Saginaw Street
Breckenridge, MI 48615
Members of the Board:
You have requested our opinion as to the fairness, from a financial point
of view, to IBT Bancorp, Inc. ("IBT") and FSB Bancorp, Inc. ("FSB") and their
respective shareholders of the terms of the Agreement and Plan of Merger dated
as of April 7, 2000 ("Agreement") between IBT and FSB. The terms of the
Agreement provide for the acquisition of FSB by IBT (the "Acquisition"). The
Acquisition will be completed through a merger of FSB with and into IBT.
The terms of the Agreement provide for each outstanding share of FSB common
stock to be converted into shares of IBT common stock. The number of shares of
IBT stock into which each FSB share will be converted shall be equal to 2.1362
shares of IBT for each share of FSB. IBT will not issue fractional shares in
connection with the Acquisition; instead, fractional shares shall be settled in
cash.
In carrying out our engagement, we have reviewed and analyzed material
bearing upon the financial and operating condition of IBT and FSB, including but
not limited to the following: (i) the Proxy Statement/Prospectus, (ii) the
Agreement; (iii) the financial statements of IBT and FSB for the period 1995
through March 31, 2000; (iv) certain other publicly available information
regarding IBT and FSB; (v) publicly available information regarding the
performance of certain other companies whose business activities were believed
by Austin Associates to be generally comparable to those of IBT and FSB; (vi)
the financial terms, to the extent publicly available, of certain comparable
transactions; and (vii) such other analysis and information as we deemed
relevant.
In our review and analysis, we relieve upon and assumed the accuracy and
completeness of the financial and other information provided to us or publicly
available, and have not attempted to verify the same. We have made no
independent verification as to the status of individual loans made by IBT or
FSB, and have instead relied upon representations and information concerning
loans of IBT and FSB in the aggregate. In rendering our opinion, we have assumed
that the transaction will be a tax-free reorganization with no material adverse
tax consequences to IBT or FSB, or to FSB shareholders receiving IBT stock. In
addition, we have assumed in the course of obtaining the necessary approvals for
the transaction, no condition will be imposed that will have a material adverse
effect on the contemplated benefits of the transaction to IBT or FSB.
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<PAGE> 127
Based upon our analysis and subject to the qualifications described herein,
we believe that as of the date of this letter the terms of the Agreement are
fair, from a financial point of view, to IBT and FSB and their respective
shareholders.
For our services in rendering this opinion, IBT and FSB will pay us a fee
and indemnify us against certain liabilities.
Austin Associates, Inc.
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<PAGE> 128
APPENDIX D
OPINION OF AUSTIN FINANCIAL SERVICES, INC.
AUSTIN FINANCIAL SERVICES, INC.
May 26, 2000
Board of Directors
FSB Bancorp, Inc.
316 E. Saginaw Street
Breckenridge, Michigan 48615
Members of the Board:
You have requested our opinion, from a financial point of view, as to the
fairness to FSB Bancorp, Inc., Breckenridge, Michigan (hereinafter referred to
as "FSB") and its shareholders of the terms of the executed Agreement and Plan
of Merger ("Agreement"), between IBT Bancorp, Inc., Mount Pleasant, Michigan
(hereinafter referred to as "IBT") and FSB. Under the terms of the Agreement
between FSB and IBT, each share of FSB common stock outstanding immediately
prior to consummation of the reorganization will be cancelled and exchanged for
2.1362 shares of IBT common stock. Any fractional share will be paid in cash
according to the Agreement. The reorganization will result in FSB merging with
and into IBT, the separate corporate existence of FSB shall cease, and IBT shall
continue as the successor corporation. IBT will continue to carry on its banking
business in substantially the same manner as before the reorganization.
Austin Financial Services, Inc., ("AFSI") is a nationally recognized
investment banking firm specializing in the banking and financial services
industry. AFSI is continually engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, private placements and
valuations for estate, corporate and other purposes. AFSI does not contemplate
any future business with FSB and/or IBT arising from this engagement, nor has
its opinion concerning the fairness, from a financial point of view of the terms
of the Agreement been subject to indications of future business with either FSB
or IBT.
In connection with its opinion, AFSI reviewed material bearing upon the
financial operating condition of FSB and IBT including, but not limited to: (1)
the Annual Reports of FSB and IBT for the year 1999; (2) Consolidated Reports of
Condition and Income of FSB and IBT for the years ending 1994-1999; (3)
Consolidated Reports of Condition and Income of FSB and IBT at March 31, 2000;
(4) the Uniform Bank Performance Report of FSB and IBT as of September 30, 1999;
(5) the interest rate schedule for FSB and IBT; (6) FSB's and IBT's estimated
depreciation schedule for the years 2000-2004; (7) other internal financial and
operating information which was provided to AFSI by FSB and IBT; (8) publicly
available information concerning certain other banks/thrifts and bank/thrift
holding companies merger and acquisition transactions; (9) discussed the
foregoing as well as other matters relevant to its inquiry, including the past
and current business operations and acquisitions, results of regulatory
examinations, financial condition, current loan quality and trends, and future
prospects of IBT with certain officers and representatives of IBT; and (10) the
Agreement signed April 7, 2000. AFSI also took into account its assessment of
general economic, market and financial conditions and its experience in other
transactions, as well as its experience in securities valuation and general
knowledge of the banking industry. AFSI's opinion was necessarily based upon
conditions as they existed and could be evaluated on the date of the opinion and
the information available to AFSI through that date.
AFSI relied upon and assumed without the accuracy and completeness of all
of the financial and other information provided to it by FSB and IBT or from
public sources. In particular, AFSI did not make an independent evaluation of
the assets and liabilities of FSB or IBT. Nor did AFSI independently verify the
aggregate allowance for loan loss set forth in the balance sheets of FSB and IBT
at March 31, 2000, and assumed on this date that such allowances complied fully
with applicable law, regulatory policy, and sound banking practice. However,
AFSI did perform the following due diligence of IBT: (1) reviewed any
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<PAGE> 129
pending litigation and solicited management's projected loss related to any
pending litigation; (2) reviewed IBT's "watch" loan list and details involving
the history of the loans contained within it; (3) reviewed IBT's 1999/2000
corporate minute book including board and executive meeting minutes; (4)
reviewed IBT's most recent comprehensive regulatory exam; (5) reviewed any
administrative orders or other regulatory action imposed upon IBT or its
affiliate bank; and (6) posed several questions to IBT's management concerning
matters that could have a material impact on the future value of IBT's common
stock.
In its analyses, AFSI made numerous assumptions with respect to industry
performance, business and economic conditions, and other matters, many of which
are beyond the control of FSB and IBT. Any estimates contained in AFSI's
analyses do not necessarily denote future results since many unforeseen
occurrences could affect or alter such estimates. No financial institution or
transaction utilized in AFSI's analyses was identical to FSB or IBT or the
Agreement. Accordingly, such analyses are not based solely on arithmetic
calculations; rather, they involve complex considerations and judgments by AFSI
concerning differences in financial and operating characteristics of the
relevant financial institutions, the timing of the relevant transactions and
prospective buyer interest, as well as other factors that could affect the
public trading markets of the financial institution or financial institutions to
which they are being compared.
Since neither FSB's or IBT's common stock is publicly traded, it was
paramount that AFSI perform an analysis of both institutions in order to derive
its opinion, from a financial point of view, as to the fairness of the Agreement
to FSB.
The following is a brief description of the analysis of FSB:
Using a discounted future cash flow analysis, AFSI projected FSB's cash
flow from April 1, 2000, through March 31, 2005. The principle behind the
discounted future cash flow analysis is that the worth of a business is equal to
the future expected cash flow discounted at a rate that reflects the riskiness
of the cash flow. Besides determining five years of future cash flows, AFSI also
estimated FSB's residual value as of March 31, 2005. The residual value
represents the value of the institution beyond the explicit forecast period.
This value is based on the cash flow during the year following the final
projected year. The steps involved in determining FSB's value utilizing the
discounted future cash flow analysis included the following: (1) the projected
earnings in excess over the amount necessary to maintain a 6.00% equity capital
to asset ratio were added to book charges such as depreciation less any
projected capital expenditures in order to determine future cash flows; (2) the
future cash flows were then converted to a present value equivalent using a
discount rate of 16.55%, which was determined from the use of the Capital Asset
Pricing Model ("CAPM"); (3) the residual value was then calculated by dividing
the projected cash flows for the year 2005 by the capitalization rate. The
capitalization rate not only includes all aspects of the CAPM but also reflects
the long-term income growth prospects of FSB, as well as specific company risk
factors; (4) the present value equivalent of the projected residual value was
calculated using the 16.55% discount rate; and (5) the present value of the cash
flows and the residual value were added together. The value per share of FSB's
common stock resulting from this analysis was $30.73 (assumes 408,237 current
shares outstanding).
AFSI also determined the fair market value of FSB utilizing the adjusted
book method as an alternative valuation method. The adjusted book value approach
requires a three-step process. First, the book value is determined. This figure
is derived from the March 31, 2000, balance sheet, and it represents the summary
measure of stockholders' claims against the assets, on a historical cost basis.
Second, assets and liabilities are restated to their fair market values. The
adjusted book value calculation considers each major asset and liability account
classification. Finally, additional "off-balance sheet" adjustments are
calculated, if necessary. The value per share of FSB's common stock resulting
from this analysis was $44.30 (assumes 408,237 current shares outstanding).
AFSI accorded an equal weight to each of the values derived from its
analysis in order to arrive at an aggregate value of FSB. The weightings were
based on AFSI's review of the financial position, history and recent performance
of FSB. The sum of the weighted values or $37.52 per share equates to the fair
market value of FSB as of March 31, 2000.
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<PAGE> 130
AFSI used the same valuation methods, rates, etc. in analyzing IBT's common
stock as it did with FSB. Assuming 2,985,084 current shares outstanding, the
discounted future cash flow analysis resulted in a value per share of $17.39 and
the adjusted book analysis resulted in a value per share of $19.44. AFSI, as it
did with FSB, applied an equal weighting to the two values. The sum of the
weighted values equaled $18.42 per share, which equates to the fair market value
of IBT as of March 31, 2000.
Based on the exchange rate of the Agreement, a determined fair market value
of $18.42 per share for IBT's common stock, the transactions would result in a
$39.35 per share value for FSB's shareholders. Therefore, the exchange terms of
the Agreement would be favorable, from a financial standpoint, to FSB
shareholders since the transaction would result in a positive margin of $1.83
per share in comparison to the fair market value of IBT as determined by AFSI.
AFSI analyzed certain other mergers and acquisitions that have consummated
over the past fourteen months in Michigan as well as the neighboring states of
Ohio and Wisconsin, which involved target financial institutions with assets
under $700 million. AFSI compared the multiple produced by this reorganization
to the mean multiples for the transactions analyzed. Set forth below are the
mean transaction multiples:
<TABLE>
<CAPTION>
SELECTED
BANK/THRIFT
MERGER/ACQ. FSB
----------- ---
<S> <C> <C>
Price/Earnings Multiple..................................... 21.48 12.51
Price/Book Value Multiple................................... 2.13 1.49
</TABLE>
The financial institution acquisition transactions announced for the
three-state area during the past fourteen months included in the above multiples
are:
<TABLE>
<CAPTION>
TARGET INSTITUTION ST
------------------ --
<S> <C>
FCB Financial Corp.......................................... WI
Westwood Homestead Financial................................ OH
Dairy State Financial Services Inc. ........................ WI
Ravenna Savings Bank........................................ OH
Empire Banc Corporation..................................... OH
Pyramid Bancorp Inc. ....................................... WI
Towne Financial Corporation................................. OH
Northwest Equity Corporation................................ WI
U.B. Bancshares Inc. ....................................... OH
SNB Corporation............................................. OH
OHSL Financial Corp. ....................................... OH
Sturgis Bank & Trust Company................................ MI
Elcho Bancorporation Inc. .................................. WI
</TABLE>
AFSI's analysis showed that the implied valuations of FSB, applying the
mean transaction multiples described above to FSB's last twelve months earnings
per share and book value per share as of March 31, 2000, were $67.56 per share
and $56.21 per share, respectively. The results produced in this analysis do not
purport to be indicative of actual value or expected value of FSB shares of
common stock.
Summarizing the contractual relationship between FSB and AFSI, the fee in
determining AFSI's opinion is a contractual $17,500 plus out of pocket expenses.
In addition, FSB also has agreed to indemnify AFSI and its officers, directors,
shareholders, employees and agents for all of its time, expenses, and any
liability incurred as a result of AFSI's proposed engagement by means of legal
action, administrative proceedings or threat thereof, unless such action,
pending or threat thereof is caused by AFSI's own unlawful conduct, breach of
duty or negligence during the course of performing AFSI's services.
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<PAGE> 131
AFSI, in rendering its opinion, has assumed that the transaction will be a
tax-free reorganization with no material adverse tax consequences to any of the
parties involved. In addition, AFSI has assumed that, in the course of obtaining
the necessary regulatory approvals for the transaction, no condition will be
imposed upon FSB or IBT that will have a materially adverse impact on the
contemplated benefits of the proposed transaction to FSB and IBT and their
shareholders.
Based upon AFSI's analysis and subject to the qualifications described
herein, considering all circumstances known to us and based upon other matters
considered relevant, AFSI believes that as of the date of this letter, the terms
of the Agreement from a financial point of view are fair to FSB and its
shareholders.
On behalf of Austin Financial
Services, Inc.
/s/ DR. DOUGLAS V. AUSTIN
------------------------------------
Dr. Douglas V. Austin
President and CEO
D-4
<PAGE> 132
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 561 of the Michigan Business Corporation Act authorizes
indemnification of directors and officers of a corporation under certain
circumstances against expenses, judgments and the like in connection with an
action, suit or proceeding. Article IX of the Registrant's Articles of
Incorporation provides for broad indemnification of directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits. See Exhibit Index.
(b) Financial Statement Schedules. No financial schedules are required to
be filed herewith.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) (sec. 230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price represent
no more than 20% change in the maximum offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by
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<PAGE> 133
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(d) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(f) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(g) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Mt. Pleasant, state of
Michigan, on June 20, 2000.
IBT BANCORP, INC.
By: /s/ DAVID W. HOLE
----------------------------------
David W. Hole
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed on June 20, 2000 by the following persons
in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ DAVID W. HOLE President and Chief Executive Officer
----------------------------------------------------- (Principal Executive Officer)
David W. Hole
/s/ DENNIS P. ANGNER Treasurer (Principal Financial and Accounting
----------------------------------------------------- Officer)
Dennis P. Angner
</TABLE>
<TABLE>
<S> <C> <C>
L. A. JOHNS ) DAVID W. HOLE )
JAMES C. FABIANO ) RONALD E. SCHUMACHER ) A majority of the
FREDERICK L. BRADFORD, DDS ) ROBERT O. SMITH ) Board of Directors*
GERALD D. CASSEL ) DEAN E. WALLDORFF )
DENNIS P. ANGNER )
</TABLE>
---------------
* David W. Hole, by signing his name hereto, does hereby sign this document on
behalf of each of the directors named above pursuant to powers of attorney
duly executed by such persons.
/s/ DAVID W. HOLE
------------------------------------
David W. Hole
Attorney-in-Fact
II-3
<PAGE> 135
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of April 7, 2000, by
and between FSB Bancorp, Inc. and IBT Bancorp, Inc.,
included as Appendix A to the accompanying proxy
statement-prospectus.
3.1(a) Articles of Incorporation of IBT Bancorp, Inc., incorporated
by reference to Exhibit 3(a) to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1990.
Certificates of Amendment of Articles of Incorporation,
incorporated by reference to Exhibit 3(b) to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994, and Exhibit 3(c) to the Registrant's
Annual Report on Form 10-K for the year ended December 31,
1999.
3.1(b) Certificate of Amendment of Articles of Incorporation of IBT
Bancorp, Inc., dated April 24, 2000.
3.2 By-Laws of IBT Bancorp, Inc.
4.1 See Exhibits 3.1 and 3.2.
5.1 Opinion of Foster, Swift, Collins & Smith, P.C. as to the
legality of the shares to be issued (including consent).
8.1 Opinion of Foster, Swift, Collins & Smith, P.C. regarding
the U.S. federal income tax consequences of the merger
(including consent).
8.2 Opinion of Bodman, Longley & Dahling, L.L.P. regarding the
U.S. federal income tax consequences of the merger
(including consent).
21.1 Subsidiaries of IBT Bancorp, Inc.
23.1 Consent of Foster, Swift, Collins & Smith, P.C. (included in
Exhibit 5.1).
23.2 Consent of Rehmann Robson, P.C. relating to the audited
financial statements of IBT Bancorp, Inc.
23.3 Consent of Andrews, Hooper & Pavlik, P.L.C. relating to the
audited financial statements of FSB Bancorp, Inc.
23.4 Consent of Foster, Swift, Collins & Smith, P.C. regarding
its tax opinion (included in Exhibit 8.1).
23.5 Consent of Bodman, Longley & Dahling, L.L.P. regarding its
tax opinion (included in Exhibit 8.2).
23.6 Consent of Austin Associates, Inc.
23.7 Consent of Austin Financial Services, Inc.
24.1 Powers of Attorney.
99.1 Form of proxy for special meeting of shareholders of FSB
Bancorp, Inc.
</TABLE>
