-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, U3gZzFrc8vxBe9krpfVhlGTcH4aOjifjWhuLB5NIk5wg0TMFjpE4yK1I8hTUsu52 PJNDPaNMcXc7eSRYnL6Piw== 0000950124-03-000933.txt : 20030328 0000950124-03-000933.hdr.sgml : 20030328 20030328083208 ACCESSION NUMBER: 0000950124-03-000933 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030429 FILED AS OF DATE: 20030328 EFFECTIVENESS DATE: 20030328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IBT BANCORP INC /MI/ CENTRAL INDEX KEY: 0000842517 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 382830092 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-18415 FILM NUMBER: 03622624 BUSINESS ADDRESS: STREET 1: 200 E BROADWAY CITY: MT PLEASANT STATE: MI ZIP: 48858 BUSINESS PHONE: 5177729471 MAIL ADDRESS: STREET 2: 200 E BRADWAY CITY: MT PLEASANT STATE: MI ZIP: 48858 DEF 14A 1 k75280def14a.txt DEFINITIVE PROXY STATEMENT OMB APPROVAL -------------------------- OMB Number: 3235-0059 Expires: August 31, 2004 Estimated average burden hours per response...14.73 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 SCHEDULE 14A Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [ ] Preliminary Proxy Statement. [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION ONLY (AS PERMITTED BY RULE 14a-6(e)(2)). [X] Definitive Proxy Statement. [ ] Definitive Additional Materials. [ ] Soliciting Material Pursuant to Section 240.14a-12 IBT BANCORP, INC - -------------------------------------------------------------------------------- (Name of Registrant as Specified In Its Charter) - -------------------------------------------------------------------------------- (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (check the appropriate box): [X] No fee required. [ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. 1) Title of each class of securities to which transaction applies: - -------------------------------------------------------------------------------- 2) Aggregate number of securities to which transaction applies: - -------------------------------------------------------------------------------- 3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): - -------------------------------------------------------------------------------- 4) Proposed maximum aggregate value of transaction: - -------------------------------------------------------------------------------- 5) Total fee paid: - -------------------------------------------------------------------------------- [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. 1) Amount Previously Paid: - -------------------------------------------------------------------------------- 2) Form, Schedule or Registration Statement No.: - -------------------------------------------------------------------------------- 3) Filing Party: - -------------------------------------------------------------------------------- 4) Date Filed: - -------------------------------------------------------------------------------- PERSONS WHO POTENTIALLY ARE TO RESPOND TO THE COLLECTION OF INFORMATION CONTAINED IN THIS FORM ARE NOT REQUIRED TO RESPOND UNLESS THE FORM DISPLAYS A CURRENTLY VALID OMB CONTROL NUMBER. SEC 1913 (02-02) IBT BANCORP, INC. 200 East Broadway Mount Pleasant, Michigan 48858 NOTICE OF THE ANNUAL MEETING OF SHAREHOLDERS To Be Held April 29, 2003 Notice is hereby given that the Annual Meeting of Shareholders of IBT Bancorp, Inc. will be held on Tuesday, April 29, 2003 At 7:00 p.m. Eastern Standard Time, at the Holiday Inn, 5665 E. Pickard Street, Mount Pleasant, Michigan. The meeting is for the purpose of considering and acting upon the following: 1. The election of four directors. 2. Such other business as may properly come before the meeting, or any adjournment or adjournments thereof. The Board of Directors has fixed March 17, 2003 as the record date for determination of shareholders entitled to notice of, and to vote at, the meeting or any adjournments thereof. Your vote is important. Even if you plan to attend the meeting, please date and sign the enclosed proxy form, indicate your choice with respect to the matters to be voted upon, and return it promptly in the enclosed envelope. Note that if stock is held in more than one name, all parties should sign the proxy form. By order of the Board of Directors /s/ Mary Ann Breuer Mary Ann Breuer, Secretary Dated: March 31, 2003 IBT BANCORP, INC. 200 EAST BROADWAY MOUNT PLEASANT, MICHIGAN 48858 PROXY STATEMENT GENERAL INFORMATION This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of IBT Bancorp, Inc. (the Corporation) a Michigan financial holding company, to be voted at the Annual Meeting of Shareholders of the Corporation to be held on Tuesday, April 29, 2003 at 7:00 p.m. at the Holiday Inn, 5665 E. Pickard Street, Mount Pleasant, Michigan, or at any adjournment or adjournments thereof, for the purposes set forth in the accompanying Notice of Annual Meeting of Shareholders and in this Proxy Statement. This Proxy Statement has been mailed on March 31, 2003 to all holders of record of common stock as of the record date. VOTING AT THE MEETING The Board of Directors of the Corporation has fixed the close of business on March 17,2003 as the record date for the determination of shareholders entitled to notice of, and to vote at, the Annual Meeting of Shareholders and any adjournment thereof. The Corporation has only one class of common stock and no preferred stock. As of March 17, 2003, there were 4,337,807 shares of common stock of the Corporation outstanding. Each outstanding share entitles the holder thereof to one vote on each separate matter presented for vote at the meeting. If the enclosed proxy is executed and returned, it may be revoked at any time before it is exercised at the meeting. All shareholders are encouraged to date and sign the enclosed proxy form, indicate their choice with respect to the matters to be voted upon, and return it to the Corporation. ELECTION OF DIRECTORS The Board of Directors is divided into three classes, with the directors in each class being elected for a term of three years. At the Annual Meeting of Shareholders, four directors will be elected for terms ending with the annual meeting of shareholders in 2006. Except as otherwise specified in the proxy, proxies will be voted for election of the four nominees named below. If a nominee becomes unable or unwilling to serve, proxies will be voted for such other person, if any, as shall be designated by the Board of Directors. However, the Corporation's management now knows of no reason to anticipate that this will occur. Directors are elected by a plurality of the votes cast, whether in person or by proxy, by holders of the Corporation's common stock at the Annual Meeting of Shareholders, provided a quorum (a majority of the shares entitled to be voted at the Annual Meeting of Shareholders) is present or represented. Thus, the four nominees for election as directors who receive the greatest number of votes cast will be elected directors. Consequently, shares not voted, whether by withholding of authority or otherwise, have no effect on the election of directors. If a proxy is returned for such shares or they are represented in person at the Annual Meeting of Shareholders, they will be counted toward the establishment of a quorum. Nominees for reelection and other current directors are listed below. Also shown for each nominee and each other current director is his principal occupation for the last five or more years, age and length of service as a director of the Corporation. 2 IBT BANCORP, INC. PROXY STATEMENT DIRECTOR NOMINEES FOR TERMS ENDING IN 2003 Frederick L. Bradford (age 68) has been a director of Isabella Bank and Trust since 1974 and the Corporation since 1988. Dr. Bradford is a dentist. William J. Strickler (age 62) was appointed director of the Corporation in 2002. He has been a director of Isabella Bank and Trust since 1995. Mr. Strickler is President of Michiwest Energy. Dean E. Walldorff (age 69) has been a director of Isabella Bank and Trust since 1982 and the Corporation since 1988. He is also a director on the board of IBT Loan Production. Mr. Walldorff was the owner of Water Care Systems and retired in the fall of 2000. Dennis P. Angner (age 47) has been a director of the Corporation since 2000. He also serves as an ex-officio member of all of the Corporation's subsidiary Boards of Directors. Mr. Angner has been President and CEO of the Corporation since December 30, 2001. Prior to his appointment as President and CEO, he served as Executive Vice President of the Corporation. CURRENT DIRECTORS WHOSE TERMS END IN 2004 James C. Fabiano (age 59) has been a director of Isabella Bank and Trust since 1979 and of the Corporation since 1988. Mr. Fabiano is President and CEO of Fabiano Brothers, Inc. David W. Hole (age 65) has been a director of Isabella Bank and Trust since 1982. He has served on the board of the Corporation since 1988. He currently is a director of IBT Loan Production and Financial Group Information Services. He retired as President and CEO of Isabella Bank and Trust and the Corporation on December 30, 2001. L. A. Johns (age 74) was a director of Isabella Bank and Trust from 1961 through 2001. He became a director of the Corporation in 1988. Mr. Johns is currently Chairman of the Corporation and has served in that capacity since 1995. He is past President and CEO of the Corporation and also of Isabella Bank and Trust. Dale Weburg (age 59) has been a director of Farmers State Bank since 1987. He has served on the board of the Corporation since 2000. Mr. Weburg is President of Weburg Farms. DIRECTOR NOMINEES FOR TERMS ENDING IN 2005 Richard J. Barz (age 54) was appointed director of the Corporation in 2002. He has been a director of Isabella Bank and Trust since 2000. Mr. Barz also serves on the Board of Farmers State Bank, IBT Loan Production, IBT Title, and Financial Group Information Services. Mr. Barz has been President and CEO of Isabella Bank and Trust since December 30, 2001. Prior to his appointment as President and CEO he served as Executive Vice President of Isabella Bank and Trust. Gerald D. Cassel (age 68) has been a director of Isabella Bank and Trust since 1980 and the Corporation since 1988. He also serves as a director of IBT Loan Production. Mr. Cassel is presently the Chairman of Isabella Bank and Trust. Mr. Cassel is a Certified Public Accountant. Ronald E. Schumacher (age 65) has been a director of Isabella Bank and Trust since 1984, and the Corporation since 1988. Mr. Schumacher is the President of A. Schumacher Sons. Herbert C. Wybenga (age 67) has been a director of Farmers State Bank since 1990. Mr. Wybenga has been a director of the Corporation since 2000. He is currently Chairman of Farmers State Bank, and a Vice President of the Corporation. He retired as President and CEO of Farmers State Bank on December 31, 2002. IBT BANCORP, INC. PROXY STATEMENT 3 Each of the directors has been engaged in their stated occupations for more than five years. The principal occupation of Dennis P. Angner is with the Corporation, and has been employed by the Corporation since 1984. Other executive officers of the Corporation include; Richard J. Barz, President of Isabella Bank and Trust, has been employed by the Bank since 1972. Herbert C. Wybenga is with Farmers State Bank of Breckenridge (retired), and has been employed by the Bank since 1985. Mary Ann Breuer (age 63), Senior Vice President and Cashier of Isabella Bank and Trust, has been employed by the Bank since 1959. All officers of the Corporation serve at the pleasure of the Board of Directors. COMMITTEES OF THE BOARD OF DIRECTORS AND MEETING ATTENDANCE The Board of Directors of the Corporation met 13 times during 2002. All incumbent directors attended 75% or more of the meetings held in 2002. The Board of Directors has an Audit Committee and a Nominating Committee. The Audit Committee is composed of independent directors who meet the requirements for independence as defined in Rule 4200(a)(15) of the National Association of Securities Dealers' listing standards. Information regarding the functions performed by the Committee, its membership, and the number of meetings held during the year, is set forth in the "Report of the Audit Committee" included elsewhere in this annual proxy statement. The Audit Committee is governed by a written charter approved by the Board of Directors. The Corporation has a standing Nominating Committee. The Committee consists of directors Fabiano, Schumacher and Weburg. Shareholders who wish to recommend nominees should submit their nominations in writing to the Secretary of the Corporation. Recommendations for the 2004 Annual Meeting of Shareholders should be delivered no later than December 2, 2003. REPORT OF THE AUDIT COMMITTEE The Audit Committee oversees the Corporation's financial reporting process on behalf of the Board of Directors. The Committee consists of directors Schumacher, Cassel, Hole, Walldorff and Weburg. The Audit Committee is responsible for pre-approving all auditing services and permitted non-audit services to be performed during 2003 or thereafter for the Corporation by its independent auditors or any other auditing or accounting firm, except as noted below. The Audit Committee will establish general guidelines for the permissible scope and nature of any permitted non-audit services in connection with its annual review of the audit plan and will review such guidelines with the Board of Directors. Pre-approval may be granted by action of the full Audit Committee or, in the absence of such Audit Committee action, by the Audit Committee Chairman whose action shall be considered to be that of the entire Committee. Pre-approval shall not be required for the provision of non-audit services if (1) the aggregate amount of all such non-audit services constitute no more than 5% of the total amount of revenues paid by the Corporation to the auditors during the fiscal year in which the non-audit services are provided, (2) such services were not recognized by the Corporation at the time of engagement to be non-audit services, and (3) such services are promptly brought to the attention of the Audit Committee and approved prior to the completion of the audit. Management has the primary responsibility for the financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Committee reviewed the audited consolidated financial statements in the Annual Report with management including a discussion of the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the consolidated financial statements. The Committee reviewed with the independent auditors, who are responsible for expressing an opinion on the conformity of those audited consolidated financial statements with auditing principles generally accepted in the United States of America, their judgments as to the quality, not just the acceptability, of the Corporation's accounting principles and such other matters as are required to be discussed with the Committee under SAS 61. In addition, the Committee has discussed with the independent auditors the auditors' independence from management and the Corporation including the matters in the written disclosures required by professional auditing standards and considered the compatibility of non-audit services with the auditors' independence. 4 IBT BANCORP, INC. PROXY STATEMENT The Committee discussed with the Corporation's internal and independent auditors the overall scope and plans for their respective audits. The Committee meets with the internal and independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Corporation's internal controls and the overall quality of the Corporation's financial reporting process. The Committee held seven meetings during the fiscal year 2002, and all directors attended 75% or more of the meetings held in 2002. In reliance on the reviews and discussions referred to above, the Committee recommended to the Board of Directors (and the Board has approved) that the audited consolidated financial statements be included in the Annual Report on Form 10-K for the year ended December 31, 2002 for filing with the Securities and Exchange Commission. The Committee and the Board have also approved the reappointment of the Corporation's independent auditors. Respectfully Submitted, Ronald E. Schumacher, Chairman Dean E. Walldorff Gerald D. Cassel Dale Weburg David W. Hole EXECUTIVE OFFICERS Executive Officers of the Corporation are compensated in accordance with their employment with the applicable entity. The executive officers of the Corporation whose annual compensation exceeded $100,000 for the periods indicated are as follows: SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY (1) COMPENSATION (2) - --------------------------- ---- --------- ---------------- Dennis P. Angner, President 2002 $204,605 $12,607 and CEO of IBT Bancorp 2001 117,600 5,843 Bancorp 2000 106,425 4,094 Richard J. Barz, Senior Vice 2002 $200,980 $13,735 President of IBT Bancorp and 2001 121,000 5,916 President and CEO of Isabella 2000 110,475 4,071 Bank and Trust Herbert C. Wybenga, Vice President 2002 $148,155 $2,832 of IBT Bancorp and Chairman 2001 113,600 2,297 and CEO of Farmers State Bank (3) 2000 104,808 7,066
(1) Includes compensation voluntarily deferred under the Corporation's 401(k) and Non-qualified Deferred Salary Agreement and Board of Directors fees, paid in cash or deferred under the Non-qualified Deferred Directors Compensation Plan. IBT BANCORP, INC. PROXY STATEMENT 5 (2) The amounts shown represent contributions by the Corporation under its Employee Stock Ownership Plan (ESOP), in which substantially all employees participate, expenses related to a nonqualified supplemental Executive Retirement Plan (ERP), and Farmers State Bank Employees Profit Sharing Plan (EPSP). The amounts contributed are as follows:
YEAR ESOP ERP EPSP Dennis P. Angner 2002 $4,262 $8,345 -- 2001 2,383 3,460 -- 2000 1,485 2,609 -- Richard J. Barz 2002 $4,353 $9,382 -- 2001 2,456 3,460 -- 2000 1,572 2,499 -- Herbert C. Wybenga 2002 $2,832 -- -- 2001 2,297 -- -- 2000 -- -- $7,066
(3) Mr. Wybenga retired as President of Farmers State Bank of Breckenridge on December 31, 2002. The Corporation believes it generally maintains a conservative level of perquisites and personal benefits. The dollar value of perquisites and personal benefits provided to the named executive officer does not exceed 10% of his annual compensation. REPORT ON EXECUTIVE COMPENSATION Dennis Angner serves as President and Chief Executive Officer of the Corporation. With the exception of Dennis Angner, services performed by other executive officers of the Corporation are incidental to their primary services as officers and employees of a subsidiary Bank, and they receive no compensation directly from the Corporation. The compensation for the President of each Bank subsidiary is reviewed and approved by the Corporation's Board of Directors based on recommendations from each Bank's Board of Directors. The entire Board of Directors of the Corporation serves as a compensation committee with Angner, Barz and Wybenga excused from the meetings where decisions with respect to their own compensation are made. The Board of Directors has the responsibility for establishing all formal employee benefit plans offered to subsidiary employees. The Board's approach to determining the annual salary of executive officers is to offer competitive salaries in comparison with other comparable financial institutions. The Board utilizes regional and national compensation surveys which provide salary ranges for banks of similar size. Based on these surveys, the Board establishes salary ranges for all job classifications. In setting salaries, the Corporation and the Banks seek to assure relative fairness in the compensation of officers and to recognize the value of their contribution to the Corporation's overall success. Specific factors used to decide where an executive officer salary should be within the established range include the historical financial performance, financial performance outlook, years of service, and job performance. The salary paid to Dennis P. Angner, President and Chief Executive Officer of the Corporation, was in the 25th to 50th percentile in 2002. The Board's primary consideration in where Angner's salary fit within the defined range was based on a discretionary evaluation of his personal performance and years of service as President and CEO, and the Corporation exceeding its financial performance goals. Respectfully submitted, Dennis P. Angner L. A. Johns Richard J. Barz Ronald E. Schumacher Frederick L. Bradford William J. Strickler Gerald D. Cassel Dean E. Walldorff James C. Fabiano Dale Weburg David W. Hole Herbert C. Wybenga 6 IBT BANCORP, INC. PROXY STATEMENT THE DEFINED BENEFIT PENSION PLAN The Corporation sponsors a defined benefit pension plan. This plan was originally adopted in 1973 and was substantially revised in 1989. Only employees who have attained the age of 21 and who have worked more than 1,000 hours in the current plan year are eligible to participate. Annual contributions are made to the plan as required by accepted actuarial principles, applicable federal tax law, and expenses of operating and maintaining the plan. The amount of contributions on behalf of any one participant cannot be separately or individually computed. Pension plan benefits are based on an average of a participant's five highest years of compensation. A participant may earn a benefit for up to 35 years of accredited service. Earned benefits are 100 percent vested after five years of service. Benefit payments normally start when a participant reaches age 65. A participant with more than five years of service may elect to take early retirement benefits anytime after reaching age 55. Benefits payable under early retirement are reduced actuarially for each month prior to age 65 in which benefits begin. The following table indicates estimated annual benefits payable upon normal retirement for various compensation levels and years of service. Additional benefits may be earned due to integration of social security benefits. The amounts that may be earned are undeterminable until retirement.
FIVE YEAR AVERAGE YEARS OF ACCREDITED SERVICE OF HIGHEST COMPENSATION 5 15 25 35 ------------ ----- ------- ------- ------- $ 20,000 $ 900 $ 2,700 $ 4,500 $ 6,300 50,000 2,250 6,750 11,250 15,750 75,000 3,375 10,125 16,875 23,625 100,000 4,500 13,500 22,500 31,500 125,000 5,625 16,875 28,125 39,375 150,000 6,750 20,250 33,750 47,750 200,000 7,875 23,625 39,375 56,125
The amounts calculated under the plan's benefit formula assume a monthly payment for life. A married participant will generally receive an actuarially reduced monthly payment because the participant's surviving spouse will also receive monthly payments for life after the participant's death. As of December 31, 2002, Richard J. Barz had 30 years, Dennis P. Angner had 19 years, and Herbert C. Wybenga had two years of credited service under the plan. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The entire Board of Directors serves as a Compensation Committee. Director Angner was President and CEO of the Corporation, Director Barz was President and CEO of Isabella Bank and Trust, and Director Wybenga was Chairman, President and CEO of Farmers State Bank during 2002. Neither Barz nor Wybenga participated in any of the procedures which pertain to executive officers compensation and they are excused from the meetings at such times. Director Angner participated in deliberations concerning compensation of other executive officers, however, was excused from the meeting at which his compensation was set. IBT BANCORP, INC. PROXY STATEMENT 7 REMUNERATION OF DIRECTORS The Corporation paid $600 per board meeting to its directors during 2002 and $175 per committee meeting attended. Directors of Isabella Bank and Trust are paid $700 per board meeting and $175 per committee meeting they attend. Farmers State Bank paid a retainer of $2,000, $400 per board meeting, and $125 per committee meeting they attended (provided the committee meeting was on a non-board meeting day). Directors who are officers of a subsidiary are not paid for attendance at committee meetings. The Corporation sponsors a deferred compensation plan for directors (the Directors' Plan). The Directors' Plan was adopted in 1984 and was substantially revised in 1989 and 1996. Under the Directors' Plan, deferred directors' fees are converted on a quarterly basis into stock units of the Corporation's common stock. The fees are converted based on the purchase price for a share of the Corporation's common stock under the Corporation's Dividend Reinvestment Plan. Pursuant to the terms of the Directors' Plan, directors of the Corporation and its subsidiaries are required to defer at least 25% of their earned board fees. The amount deferred under the terms of the plan in 2002 was $351,000, resulting in 12,473 stock units being credited to participants' accounts. As of December 31, 2002, there were 126,956 stock units credited to participants' accounts. Stock units credited to a participant's account are eligible for cash and stock dividends as payable. All amounts deferred are unsecured claims against the Corporation's general assets. The net cost of this benefit to the Corporation was $73,000 in 2002. Distribution from the Directors' Plan occurs when the participant terminates service with the Bank and/or attains age 65. Distributions may take the form of shares of Corporation common stock equal to the number of stock units credited to the participant's account, cash equal to the value of the stock units on the date of distribution, or a combination of stock and cash. Any Corporation common stock issued under the Directors' Plan will be considered restricted stock under the Securities Act of 1933, as amended. INDEBTEDNESS OF AND TRANSACTIONS WITH MANAGEMENT Certain directors and officers of the Corporation and members of their families were loan customers of the subsidiary Banks, or have been directors or officers of corporations, or partners of partnerships which have had transactions with the subsidiary Banks. In management's opinion, all such transactions are made in the ordinary course of business and are essentially on the same terms, including collateral and interest rates, as those prevailing at the same time for similar transactions with other customers. These transactions do not involve more than a normal credit risk. Total loans to these customers were $7,721,000 as of December 31, 2002. STOCK PERFORMANCE The graph on the following page compares the cumulative total shareholder return on Corporation common stock for the last five years with the cumulative total return on (1) the NASDAQ Stock Market Index, which is comprised of all United States common shares traded on the NASDAQ and (2) the NASDAQ Bank Stock Index, which is comprised of bank and bank holding company common shares traded on the NASDAQ over the same period. The graph assumes the value of an investment in the Corporation and each index was $100 at January 1, 1998 and all dividends are reinvested. 8 IBT BANCORP, INC. PROXY STATEMENT STOCK PERFORMANCE FIVE-YEAR TOTAL RETURN [LINE GRAPH] The dollar values for total shareholder return plotted in the graph above are shown in the table below: COMPARISON OF FIVE YEAR CUMULATIVE AMONG IBT BANCORP, NASDAQ STOCK MARKET, AND NASDAQ BANK STOCKS
NASDAQ YEAR IBT BANCORP NASDAQ BANKS ---- ----------- ------ ------ 01/01/98 100.0 100.0 100.0 12/31/98 133.1 139.5 89.8 12/31/99 158.5 259.6 84.5 12/31/00 177.6 154.6 103.5 12/31/01 198.9 132.0 116.4 12/31/02 236.2 90.8 114.5
IBT BANCORP, INC. PROXY STATEMENT 9 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of March 3, 2003 as to the common stock of the Corporation owned of record or beneficially by any person who is known to the Corporation to be the beneficial owner of more than 5% of the common stock of the Corporation. AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP -----------------------
SOLE VOTING SHARED VOTING PERCENTAGE OF NAME AND INVESTMENT AND INVESTMENT COMMON STOCK OWNER POWERS POWERS OUTSTANDING - ----- -------------- -------------- ------------- James J. McGuirk 238,806 -- 5.51% P.O. Box 222 Mt. Pleasant, MI
The following table sets forth certain information as of March 3, 2003 as to the common stock of the Corporation owned beneficially by each director, by each named executive officer, and by all directors and executive officers of the Corporation as a group. AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP -----------------------
SOLE VOTING SHARED VOTING PERCENTAGE OF NAME AND INVESTMENT AND INVESTMENT COMMON STOCK OWNER POWERS POWERS OUTSTANDING - ----- -------------- -------------- ------------- Dennis P. Angner* 9,588 70 0.22% Richard J. Barz* 8,487 -- 0.20% Frederick L. Bradford 69,283 -- 1.60% Gerald D. Cassel* 7,121 -- 0.16% James C. Fabiano 177,253 -- 4.09% David W. Hole 11,756 4,023 0.35% L. A. Johns 19,746 241 0.46% Ronald E. Schumacher -- 21,773 0.50% William J. Strickler 55,083 -- 1.27% Dean E. Walldorff -- 8,150 0.19% Dale D. Weburg 44,378 -- 1.02% Herbert C. Wybenga -- 5,321 0.12% All Directors and Executive Officers as a Group 402,695 39,578 10.20%
*Trustees of the ESOP who vote ESOP stock. AS TO OTHER BUSINESS WHICH MAY COME BEFORE THE MEETING Management of the Corporation does not intend to bring any other business before the meeting for action. However, if any other business should be presented for action, it is the intention of the persons named in the enclosed form of proxy to vote in accordance with their judgment on such business. RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS The Audit Committee and Board of Directors has reappointed Rehmann Robson, P.C. as independent auditors of the Corporation for the year ending December 31, 2003. A representative of Rehmann Robson, P.C., is expected to be present at the Annual Meeting of Shareholders to respond to appropriate questions from shareholders and to make any comments they believe appropriate. 10 IBT BANCORP, INC. PROXY STATEMENT AUDIT FEES The aggregate fees billed by Rehmann Robson, P.C. for professional services rendered for the audit of the Corporation's consolidated financial statements for 2002 and the review of the financial statements included in the Corporation's quarterly Form 10-Q filings were $55,100. FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES For the year 2002, Rehmann Robson P.C. did not render to the Corporation professional services for financial information systems design and implementation. ALL OTHER FEES The aggregate fees billed by Rehmann Robson, P.C. to the Corporation and its subsidiaries in 2002 for other audit related services were $26,900 and for nonaudit related services were $84,300. The Audit Committee concluded the provisions of the nonaudit related services listed under "All Other Fees" above were compatible with maintaining Rehmann Robson, P.C.'s independence. SHAREHOLDER PROPOSALS Any proposals which shareholders of the Corporation intend to present at the next annual meeting of the Corporation must be received before December 2, 2003 to be considered for inclusion in the Corporation's proxy statement and proxy form for that meeting. Proposals should be made in accordance with Securities and Exchange Commission Rule 14a-8. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors and certain officers and persons who own more than ten percent of the Corporation's common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of the Corporation's common stock. These officers, directors, and greater than ten percent shareholders are required by SEC regulation to furnish the Corporation with copies of these reports. To the Corporation's knowledge, based solely on review of the copies of such reports furnished to the Corporation, during the year ended December 31, 2002 all Section 16(a) filing requirements were satisfied, with respect to the applicable officers, directors, and greater than 10 percent beneficial owners. OTHER MATTERS The cost of soliciting proxies will be borne by the Corporation. In addition to solicitation by mail, officers and other employees of the Corporation may solicit proxies by telephone or in person, without compensation other than their regular compensation. BY ORDER OF THE BOARD OF DIRECTORS /s/ MARY ANN BREUER MARY ANN BREUER, SECRETARY IBT BANCORP, INC. PROXY STATEMENT 11 IBT BANCORP, INC. FINANCIAL INFORMATION INDEX PAGE DESCRIPTION 13 Summary of Selected Financial Data 14 Report of Independent Auditors 15-19 Consolidated Financial Statements 20-35 Notes to Consolidated Financial Statements 36-50 IBT Financial Review 50 Common Stock and Dividend Information 51 Other Matters 12 IBT BANCORP, INC. PROXY STATEMENT SUMMARY OF SELECTED FINANCIAL DATA (1) (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
2002 2001 2000 1999 1998 -------- -------- ------- -------- -------- INCOME STATEMENT DATA Total interest income $ 38,161 $ 40,798 $ 38,754 $ 35,445 $ 33,651 Net interest income 22,905 21,538 20,352 19,224 17,601 Provision for loan losses 1,025 770 565 509 531 Net income 6,925 6,066 5,431 5,244 4,701 BALANCE SHEET DATA End of year assets $652,717 $592,143 $540,897 $503,596 $485,983 Daily average assets 623,507 566,547 516,145 493,606 451,668 Daily average deposits 549,970 494,847 452,664 441,566 405,291 Daily average loans/net 390,613 399,239 380,392 332,083 300,794 Daily average equity 59,540 54,787 50,506 45,482 41,670 PER SHARE DATA (2) Net income $ 1.61 $ 1.42 $ 1.28 $ 1.25 $ 1.14 Cash dividends 0.60 0.55 0.49 0.45 0.44 Book value (at year end) 14.63 13.30 12.19 11.13 10.75 FINANCIAL RATIOS Shareholders' equity to assets 9.71% 9.60% 9.60% 9.35% 9.09% Net income to average equity 11.63 11.07 10.75 11.53 11.28 Cash dividend payout to net income 37.33 38.36 38.30 36.80 37.94 Net income to average assets 1.11 1.07 1.05 1.06 1.04
2002 2001 ------------------------------------------ --------------------------------------------- Quarterly Operating Results: 4th 3rd 2nd 1st 4th 3rd 2nd 1st ------ ------ ------ ------ ------ ------- ------- ------- Total interest income $9,530 $9,731 $9,433 $9,467 $9,996 $10,256 $10,338 $10,208 Interest expense 3,581 3,754 3,850 4,071 4,385 4,876 4,985 5,041 Net interest income 5,949 5,977 5,583 5,396 5,638 5,380 5,353 5,167 Provision for loan losses 487 188 162 188 275 167 166 162 Noninterest income 2,750 2,213 1,572 1,568 1,990 1,558 1,464 1,186 Noninterest expenses 6,279 5,227 4,648 4,618 5,573 4,446 4,395 4,280 Net income 1,499 2,063 1,749 1,614 1,376 1,680 1,622 1,388 Per Share of Common Stock: (2) Net income $ 0.35 $ 0.48 $ 0.41 $ 0.38 $ 0.32 $ 0.39 $ 0.37 $ 0.34 Cash dividends 0.30 0.10 0.10 0.10 0.28 0.09 0.09 0.09 Book value 14.63 14.86 14.02 13.51 13.30 13.39 12.92 12.57
(1) 2000 and prior years presented were restated for the merger in August 2000 with FSB Bancorp, which was accounted for as a pooling of interests. (2) Retroactively restated for the 10% stock dividend paid on February 28, 2002. IBT BANCORP, INC. FINANCIAL STATEMENTS 13 REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders IBT Bancorp Mt. Pleasant, Michigan We have audited the accompanying consolidated balance sheets of IBT Bancorp, Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of changes in shareholders' equity, income, comprehensive income, and cash flows for the three years then ended. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of IBT Bancorp, Inc. and subsidiaries as of December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for the three years then ended in conformity with accounting principles generally accepted in the United States of America. /s/ Rehmann Robson P.C. Saginaw, Michigan January 31, 2003 14 IBT BANCORP, INC. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
DECEMBER 31 2002 2001 -------- -------- ASSETS Cash and cash equivalents $ 28,587 $ 22,562 Federal funds sold 25,850 32,900 -------- -------- CASH AND CASH EQUIVALENTS 54,437 55,462 Investment securities Securities available for sale (amortized cost of $153,499 in 2002 and $100,969 in 2001) 157,909 102,518 Securities held to maturity (fair value of $1,803 in 2002 and $3,526 in 2001) 1,736 3,454 -------- -------- TOTAL INVESTMENT SECURITIES 159,645 105,972 Loans Agricultural 53,223 48,523 Commercial 143,957 128,098 Residential real estate mortgage 152,778 167,976 Installment 54,522 53,267 -------- -------- TOTAL LOANS 404,480 397,864 Less allowance for loan losses 5,593 5,471 -------- -------- NET LOANS 398,887 392,393 Premises and equipment 14,470 13,985 Bank-owned life insurance 9,810 9,038 Accrued interest receivable, net 4,897 4,961 Acquisition intangibles and goodwill, net 3,498 2,528 Other assets 7,073 7,804 -------- -------- TOTAL ASSETS $652,717 $592,143 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest bearing $ 63,106 $ 62,020 NOW accounts 111,195 86,676 Certificates of deposit and other savings 316,845 308,120 Certificates of deposit over $100 70,310 59,425 -------- -------- TOTAL DEPOSITS 561,456 516,241 Other borrowed funds 17,793 11,632 Accrued interest and other liabilities 10,011 7,442 -------- -------- TOTAL LIABILITIES 589,260 535,315 Shareholders' equity Common stock-- no par value; 10,000,000 shares authorized; 4,336,283 shares issued and outstanding (3,884,985 shares at December 31, 2001) 45,610 31,017 Retained earnings 16,299 24,788 Accumulated other comprehensive income 1,548 1,023 -------- -------- TOTAL SHAREHOLDERS' EQUITY 63,457 56,828 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $652,717 $592,143 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. IBT BANCORP, INC. FINANCIAL STATEMENTS 15 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands)
YEAR ENDED DECEMBER 31 2002 2001 2000 ---------- ---------- ---------- NUMBER OF SHARES OF COMMON STOCK OUTSTANDING Balance at beginning of year 3,884,985 3,871,552 3,848,248 10% stock dividend 388,758 -- -- Issuance of common stock 81,326 37,434 23,304 Common stock repurchased (18,786) (24,001) -- ---------- ---------- ---------- BALANCE END OF YEAR 4,336,283 3,884,985 3,871,552 ========== ========== ========== COMMON STOCK Balance at beginning of year $ 31,017 $ 30,814 $ 30,322 10% stock dividend 12,829 -- -- Issuance of common stock 2,383 971 492 Common stock repurchased (619) (768) -- ---------- ---------- ---------- BALANCE END OF YEAR 45,610 31,017 30,814 RETAINED EARNINGS Balance at beginning of year 24,788 21,049 17,816 Net income 6,925 6,066 5,431 10% stock dividend (12,829) -- -- Cash dividends ($0.60 per share in 2002, $0.55 in 2001, and $0.49 in 2000) (2,585) (2,327) (2,198) ---------- ---------- ---------- BALANCE END OF YEAR 16,299 24,788 21,049 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance at beginning of year 1,023 67 (1,031) Unrealized gains on securities available for sale, net of income taxes and reclassification adjustment 1,887 956 1,098 Minimum pension liability adjustment, net of income taxes (1,362) -- -- ---------- ---------- ---------- BALANCE END OF YEAR 1,548 1,023 67 ---------- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY END OF YEAR $ 63,457 $ 56,828 $ 51,930 ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. 16 IBT BANCORP, INC. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share data)
YEAR ENDED DECEMBER 31 2002 2001 2000 ------- ------- ------- INTEREST INCOME Loans, including fees $31,527 $35,091 $33,470 Investment securities Taxable 4,362 3,173 3,839 Tax exempt 1,849 1,637 1,275 Federal funds sold and other 423 897 170 ------- ------- ------- TOTAL INTEREST INCOME 38,161 40,798 38,754 ------- ------- ------- INTEREST EXPENSE Deposits 14,578 18,678 17,927 Borrowings 678 582 475 ------- ------- ------- TOTAL INTEREST EXPENSE 15,256 19,260 18,402 ------- ------- ------- NET INTEREST INCOME 22,905 21,538 20,352 Provision for loan losses 1,025 770 565 ------- ------- ------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 21,880 20,768 19,787 NONINTEREST INCOME Trust fees 597 548 535 Service charges on deposit accounts 277 288 327 Other service charges and fees 1,807 1,686 1,530 Gain on sale of mortgage loans 1,762 1,051 98 Title insurance revenue 2,221 1,578 1,039 Other 1,439 1,047 876 ------- ------- ------- TOTAL NONINTEREST INCOME 8,103 6,198 4,405 NONINTEREST EXPENSES Salaries, wages, and employee benefits 11,307 9,790 8,594 Occupancy 1,422 1,201 1,025 Furniture and equipment 2,277 2,037 1,943 Amortization of acquisition intangibles 94 655 568 Charitable donations 815 490 130 Other 4,857 4,522 4,417 ------- ------- ------- TOTAL NONINTEREST EXPENSES 20,772 18,695 16,677 ------- ------- ------- INCOME BEFORE FEDERAL INCOME TAXES 9,211 8,271 7,515 Federal income taxes 2,286 2,205 2,084 ------- ------- ------- NET INCOME $ 6,925 $ 6,066 $ 5,431 ======= ======= ======= Net income per basic share of common stock $ 1.61 $ 1.42 $ 1.28 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. IBT BANCORP, INC. FINANCIAL STATEMENTS 17 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands)
YEAR ENDED DECEMBER 31 2002 2001 2000 ---- ---- ---- NET INCOME $ 6,925 $ 6,066 $ 5,431 ------- ------- ------- Other comprehensive income before income taxes Unrealized gains (losses) on securities available for sale Unrealized holding gains arising during year 2,861 1,440 1,661 Reclassification adjustment for realized (gain) loss included in net income (2) 8 4 Minimum pension liability adjustment (2,063) -- -- ------- ------- ------- Other comprehensive income before income taxes 796 1,448 1,665 Income taxes related to other comprehensive income 271 492 567 ------- ------- ------- OTHER COMPREHENSIVE INCOME 525 956 1,098 ------- ------- ------- COMPREHENSIVE INCOME $ 7,450 $ 7,022 $ 6,529 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 18 IBT BANCORP, INC. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
YEAR ENDED DECEMBER 31 2002 2001 2000 --------- --------- -------- OPERATING ACTIVITIES Net income $ 6,925 $ 6,066 $ 5,431 Reconciliation of net income to net cash provided by operations Provision for loan losses 1,025 770 565 Provision for depreciation 1,647 1,197 1,155 Net amortization on investment securities 1,006 295 211 Amortization and impairment of mortgage servicing rights 994 390 139 Increase in cash surrender value of life insurance (472) (205) (166) Amortization of acquisition intangibles 94 655 568 Deferred income tax benefit (276) (277) (272) Gain on sale of mortgage loans (1,762) (1,051) (98) Proceeds from sale of mortgage loans 192,407 126,814 12,360 Loans originated for sale (195,776) (132,875) (12,261) Decrease (increase) in accrued interest receivable 64 92 (741) Increase in other assets (1,959) (1,461) (463) Increase in accrued interest and other liabilities 2,207 1,735 404 --------- --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,124 2,145 6,832 INVESTING ACTIVITIES Activity in available-for-sale securities Maturities, calls, and sales 40,019 24,935 23,341 Purchases (93,225) (48,479) (9,702) Activity in held-to-maturity securities Maturities and calls 1,386 4,537 5,832 Purchases -- -- (2,355) Net decrease (increase) in loans (2,388) 12,466 (50,575) Purchases of premises and equipment (2,107) (3,921) (2,025) Acquisition of title office (25) -- -- Purchase of cash value life insurance (300) (7,135) -- --------- --------- -------- NET CASH USED IN INVESTING ACTIVITIES (56,640) (17,597) (35,484) FINANCING ACTIVITIES Net increase in noninterest bearing deposits 1,086 1,222 913 Net increase in interest bearing deposits 44,129 38,203 30,827 Net increase in borrowings 5,897 5,188 334 Cash dividends (2,585) (2,327) (2,198) Proceeds from issuance of common stock 1,583 971 492 Common stock repurchase (619) (768) -- --------- --------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 49,491 42,489 30,368 (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,025) 27,037 1,716 Cash and cash equivalents beginning of year 55,462 28,425 26,709 --------- --------- -------- CASH AND CASH EQUIVALENTS END OF YEAR $ 54,437 $ 55,462 $ 28,425 ========= ========= ======== Supplemental cash flow information: Federal income taxes paid $ 2,774 $ 2,670 $ 2,254 Interest paid 15,312 19,357 18,228
The accompanying notes are an integral part of these consolidated financial statements. IBT BANCORP, INC. FINANCIAL STATEMENTS 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except per share amounts) NOTE A - BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION: The consolidated financial statements include the accounts of IBT Bancorp (the "Corporation"), a Financial Services Holding company, and its wholly owned subsidiaries, Isabella Bank and Trust, Farmers State Bank of Breckenridge, IBT Title, IBT Financial Services, IBT Loan Production, and its majority owned subsidiary, IBT Personnel, LLC (79%). All intercompany transactions and accounts have been eliminated. NATURE OF OPERATIONS: IBT Bancorp is a Financial Service Holding Company offering a wide array of financial products and services in mid-Michigan. Its banking subsidiaries, Isabella Bank and Trust and Farmers State Bank of Breckenridge, offer banking services through 19 locations, 24-hour banking services locally and nationally through shared automatic teller machines, and direct deposits to businesses, institutions, and individuals. Lending services offered include commercial real estate loans and lines of credit, residential real estate loans, consumer loans, student loans, and credit cards. Deposit services include interest and noninterest bearing checking accounts, savings accounts, money market accounts, and certificates of deposit. Other related financial products include trust services, safe deposit box rentals, and credit life insurance. Active competition, principally from other commercial banks, savings banks and credit unions, exists in all of the Banks' principal markets. The Corporation's results of operations can be significantly affected by changes in interest rates or changes in the local economic environment. IBT Title does business under the names Isabella County Abstract and Title, Mecosta County Abstract and Title, IBT Title Clare, and Benchmark Title of Greenville. IBT Title provides title insurance, abstract searches, and closes real estate loans. IBT Financial Services is a full service retail brokerage company offering stocks, bonds, and mutual fund sales to individuals. IBT Loan Production is a mortgage loan origination company. Principal loan products include 15 and 30 year fixed rate mortgage loans. All loans originated are sold to Isabella Bank and Trust. IBT Personnel provides payroll services, benefit administration, and other human resource services to IBT Bancorp's subsidiaries. USE OF ESTIMATES: The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and foreclosed real estate, management obtains independent appraisals for significant properties. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK. Most of the Corporation's activities are with customers located within the central Michigan area. A significant amount of its outstanding loans are secured by real estate or are made to finance agricultural production. Other than these types of loans, there is no significant concentration to any other industry or customer. CASH AND CASH EQUIVALENTS: For purposes of the consolidated statements of cash flows, the Corporation considers cash on hand, demand deposits due from banks, and federal funds sold as cash and cash equivalents. Generally, federal funds are sold for a one day period. The Corporation maintains deposit accounts in various financial institutions which at times may exceed FDIC insured limits or are not insured. Management believes the Corporation is not exposed to any significant interest rate or other financial risk as a result of these deposits. SECURITIES: Management determines the appropriate classification of debt securities at the time of purchase. Debt securities are 20 IBT BANCORP, INC. FINANCIAL STATEMENTS classified as held to maturity when the Corporation has the positive intent and ability to hold the securities to maturity. Securities held to maturity are stated at amortized cost. Debt securities not classified as held to maturity are classified as available for sale and are stated at fair value with the unrealized gains and losses net of taxes excluded from earnings and reported in other comprehensive income. The amortized cost of debt securities classified as either held to maturity or available for sale is adjusted for amortization of premiums and accretion of discounts to maturity and is computed using a method that approximates the level yield method. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are determined to be other than temporary are reflected in earnings as realized losses. Gains or losses on the sale of securities available for sale are calculated using the adjusted cost for the specific securities sold. ALLOWANCE FOR LOAN LOSSES: Management determines the adequacy of the allowance for loan losses based on evaluations of the loan portfolio, past and recent loan loss experience, current economic conditions and other pertinent factors. The allowance is increased by a charge to income for provisions for loan losses. Loans deemed to be uncollectible are charged against the allowance for loan losses and subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses on loans classified as impaired is based on discounted cash flows using the loans initial interest rate or the fair value of the collateral for certain collateral dependent loans. LOANS AND RELATED INCOME: Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal balance adjusted for any charge offs, the allowance for loans losses, and any deferred fees or costs on originated loans. Interest income on loans is accrued over the term of the loan based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in the opinion of management, the borrower may be unable to meet payments as scheduled. When the accrual of interest is discontinued, all uncollected accrued interest is reversed against interest income. The interest income on such loans is subsequently recognized only to the extent cash payment is received. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured. For impaired loans not classified as nonaccrual, interest income continues to be accrued over the term of the loan based on the principal amount outstanding. Loan origination fees and certain direct loan origination costs are capitalized and recognized as a component of interest income over the term of the loan using the constant yield method. MORTGAGE BANKING ACTIVITIES: Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. Gains or losses on sales of such loans are recognized at the time of sale and are determined by the difference between the net sales proceeds and the unpaid principal balance of the loans sold, adjusted for any yield differential, servicing fee, and servicing costs applicable to future years. Net unrealized losses, if any, are recognized in a valuation allowance by charges to income. Mortgage servicing rights ("MSR") are amortized in proportion to, and over the period of, estimated net servicing income. To determine the fair value of MSR, the Corporation estimates the present value of future cash flows incorporating a number of assumptions including servicing income, cost of servicing, discount rates, and prepayment rates. The Corporation has established a valuation allowance for the excess of the book value of the capitalized MSR over the estimated fair value. For purposes of measuring impairment, the rights are stratified based on their predominant risk characteristics, primarily period of origination, interest rate, and current prepayment rates. PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less accumulated depreciation. For financial reporting purposes, the provision for depreciation is computed principally by the straight line method based upon the useful lives of the assets which generally range from 5 to 30 years. Maintenance, repairs and minor alterations are charged to current operations as expenditures occur and major improvements are capitalized. Management annually reviews these assets to determine whether carrying values have been impaired. A summary of premises and equipment at December 31 follows:
2002 2001 ------- ------- Premises $12,194 $10,957 Equipment 15,479 14,585 ------- ------- 27,673 25,542 Less accumulated depreciation 13,203 11,557 ------- ------- NET PREMISES AND EQUIPMENT $14,470 $13,985
IBT BANCORP, INC. FINANCIAL STATEMENTS 21 RESTRICTED INVESTMENTS: Included in other assets are restricted securities of $2,648 in 2002 and $2,582 in 2001. Restricted securities include the stock of the Federal Reserve Bank and the Federal Home Loan Bank and have no contractual maturity. BANK OWNED LIFE INSURANCE: The Corporation has purchased life insurance policies on key members of management. In the event of death of one of these individuals, the Corporation would receive a specified cash payment equal to the face value of the policy. Such policies are recorded at their cash surrender value. Increases in cash surrender value are reported as other noninterest income. CREDIT RELATED FINANCIAL INSTRUMENTS: In the ordinary course of business, the Corporation has entered into commitments to extend credit, including commitments under credit card arrangements, home equity lines of credit, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when funded. FEDERAL INCOME TAXES: Federal income taxes are provided for the tax effects of transactions reported in the consolidated financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognized for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred income tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets or liabilities are recorded or settled. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As changes in income tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. PER SHARE AMOUNTS: Net income per share amounts were computed by dividing net income by the weighted average number of shares outstanding. The weighted average number of common shares outstanding were 4,292,467 in 2002; 4,266,174 in 2001; and 4,247,073 in 2000. ACQUISITION INTANGIBLES: Isabella Bank and Trust previously acquired branch facilities and related deposits in a business combination accounted for as a purchase. The acquisition of the branches included amounts related to the valuation of customer deposit relationships (core deposit intangibles). The deposit intangible is being amortized on the straight line basis over nine years, the expected life of the acquired relationship. RECLASSIFICATIONS: Certain amounts reported in the 2001 and 2000 consolidated financial statements have been reclassified to conform with the 2002 presentation. RECENT ACCOUNTING PRONOUNCEMENTS: In April 2002, the Financial Accounting Standard Board (SFAS) issued Statement of Financial Accounting Standards No. 145. Statement No. 145 requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they meet the criteria defined in APB Opinion No. 30 which are that the event or transaction is both unusual in nature and infrequent in occurrence. Events considered unusual should have a high degree of abnormality and be clearly unrelated to the company's normal operations and infrequency is defined as not expected to recur in the foreseeable future. It is not expected that provisions of Statement No. 145 will have a material impact on the financial position or results of operations of the Corporation. In June 2002, FASB issued Statement of Financial Accounting Standards No. 146 which nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" and as a result modified the criteria for measurement and recognition of costs associated with exiting an activity. The provisions of this Statement are effective for exit or disposal activities initiated after December 31, 2002. It is not expected that provisions of Statement No. 146 will have a material impact on the financial position or results of operations of the Corporation. In October 2002, FASB issued Statement of Financial Accounting Standards No. 147 which amends FASB Statements No. 72 and 144, "Accounting for Certain Acquisitions of Banking or Thrift Institutions" and "Accounting for the Impairment or Disposal of Long-Lived Assets," respectively and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution is Acquired in a Business Combination Accounted for by the Purchase Method." The provisions of this standard generally became effective October 1, 2002. IBT Bancorp adopted SFAS No. 142 on January 1, 2002. As a result, goodwill and other intangible assets were separately disclosed on the consolidated balance sheet and amortization of the goodwill ceased. Adoption of SFAS No. 147 did not have a significant impact on the Corporation's financial reporting. 22 IBT BANCORP, INC. FINANCIAL STATEMENTS In November 2002, FASB issued Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" which addresses the disclosure to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN 45 requires the guarantor to recognize a liability for the non-contingent component of the guarantee. This is the obligation to stand ready to perform in the event that specified triggering events or conditions occur. The initial measurement of this liability is the fair value of the guarantee at inception. The recognition of the liability is required even if it is not probable that payments will be required under the guarantee or if the guarantee was issued with a premium payment or as part of a transaction with multiple events. The initial recognition and measurement provisions are effective for all guarantees within the scope of FIN 45 issued or modified after December 31, 2002. The impact of adoption is not expected to have a significant impact on the Corporation's financial reporting. In December 2002, the FASB issued SFAS 148 "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123," which is effective for years beginning after December 15, 2002. This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock based employee compensation and the effect of the method used on reporting results. The Corporation has no stock-based compensation, and thus the adoption of SFAS 148 will have no impact on the Corporations financial reporting. NOTE B - BUSINESS COMBINATION On July 1, 2002, the Corporation's subsidiary IBT Title completed the purchase of Benchmark Abstract and Title of Greenville, Michigan. The purchase was accounted for according to the FASB Statement No. 141. The purchase price of Benchmark was approximately $1.1 million, which was funded through the issuance of $800 of IBT Bancorp stock, $25 cash, and a note payable in the amount of $264. The purchase price was allocated $25 to premises and equipment and $1,064 to goodwill. Results of operations have not been significant. IBT BANCORP, INC. FINANCIAL STATEMENTS 23 NOTE C - INVESTMENT SECURITIES The following is a summary of securities available for sale and held to maturity:
Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ------ ----- -------- DECEMBER 31, 2002 Securities available for sale U.S. Treasury and U.S. government agencies $ 88,546 $2,428 $ -- $ 90,974 Corporate 2,284 44 -- 2,328 States and political subdivisions 62,669 1,960 (22) 64,607 -------- ------ ----- -------- TOTAL $153,499 $4,432 $ (22) $157,909 ======== ====== ===== ======== Securities held to maturity U.S. Treasury and U.S. government agencies $ 74 $ 1 $ -- $ 75 States and political subdivisions 1,662 66 -- 1,728 -------- ------ ----- -------- TOTAL $ 1,736 $ 67 $ -- $ 1,803 ======== ====== ===== ======== Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- ------ ----- -------- DECEMBER 31, 2001 Securities available for sale U.S. Treasury and U.S. government agencies $ 52,209 $ 908 $ (70) $ 53,047 States and political subdivisions 46,450 773 (82) 47,141 Commercial paper 2,310 20 -- 2,330 -------- ------ ----- -------- TOTAL $100,969 $1,701 $(152) $102,518 ======== ====== ===== ======== Securities held to maturity U.S. Treasury and U.S. government agencies $ 148 $ 3 $ -- $ 151 States and political subdivisions 3,306 71 (2) 3,375 -------- ------ ----- -------- TOTAL $ 3,454 $ 74 $ (2) $ 3,526 ======== ====== ===== ========
The following table summarizes the fair value, realized gains, and realized losses on sales of securities available for sale.
2002 2001 2000 ------ ------ ------ Fair value of securities sold on the date of sale $2,066 $3,165 $4,354 Gross realized gains U.S. Treasury and U.S. government agencies 2 4 -- Municipals -- -- 1 Gross realized losses U.S. Treasury and U.S. government agencies -- -- 5 Municipals -- 12 --
24 IBT BANCORP, INC. FINANCIAL STATEMENTS The following table shows the amortized cost and estimated fair value of securities owned at December 31, 2002 by contractual maturity. Expected maturities will differ from contractual maturities because the issuers of securities may have the right to prepay obligations without prepayment penalty.
Available for Sale Held to Maturity Amortized Fair Amortized Fair Cost Value Cost Value -------- -------- --------- ------ Due within one year or less $ 27,957 $ 28,382 $ 495 $ 501 Due after 1 year thru 5 years 88,958 91,734 1,167 1,227 Due after 5 years thru 10 years 21,409 22,131 -- -- Due after 10 years 4,681 4,735 -- -- -------- -------- ------ ------ Subtotal 143,005 146,982 1,662 1,728 Mortgage backed securities 10,494 10,927 74 75 -------- -------- ------ ------ TOTAL $153,499 $157,909 $1,736 $1,803 ======== ======== ====== ======
Investment securities with a carrying value of approximately $10,359 and $8,537 were pledged to secure public deposits and for other purposes as necessary or required by law at December 31, 2002 and 2001, respectively. NOTE D - LOANS An analysis of changes in the allowance for loan losses follows:
2002 2001 2000 ------- ------ ------ Balance at beginning of year $ 5,471 $5,162 $4,622 Loans charged off (1,202) (692) (418) Recoveries 299 231 393 Provision charged to income 1,025 770 565 ------- ------ ------ BALANCE AT END OF YEAR $ 5,593 $5,471 $5,162 ======= ====== ======
The following is a summary of information pertaining to impaired loans at December 31:
2002 2001 ------ ------ Impaired loans without a valuation allowance $1,085 $ -- Impaired loans with a valuation allowance 1,639 544 ------ ------ Total impaired loans $2,724 $ 544 ====== ====== Valuation allowance related to impaired loans $ 103 $ 56 ------ ------ Average investment in impaired loans $2,968 $ 544 ====== ======
The average investment in impaired loans for the year ended December 31, 2000 was not significant. Interest income recognized on impaired loans was not significant during any of the three years ended December 31, 2002. No additional funds are committed to be advanced in connection with impaired loans. Certain directors and executive officers (including their families and companies in which they have 10% or more ownership) of the Corporation and the Banks were loan customers of the Banks. Total loans to these customers aggregated $7,721 and $9,248 at December 31, 2002 and 2001, respectively. During 2002, $5,858 of new loans were made and repayments totaled $7,385. IBT BANCORP, INC. FINANCIAL STATEMENTS 25 Residential mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgages serviced for others was $208,432 and $153,136 at December 31, 2002 and 2001, respectively. Servicing loans for others generally consists of collecting mortgage payments, maintaining escrow accounts, disbursing payments to investors and taxing authorities, and foreclosure processing. The following table summarizes the fair value of mortgage servicing rights included in other assets as of December 31:
2002 2001 2000 ------- ------ ------ Balance at beginning of year $ 402 $ 271 $ 140 Mortgage servicing rights capitalized 1,632 660 270 Accumulated amortization (885) (358) (139) Impairment valuation allowance (638) (171) -- ------- ------ ------ BALANCE AT END OF YEAR $ 511 $ 402 $ 271 ======= ====== ======
Residential mortgages committed for sale were $13,392 as of December 31, 2002 and $8,261 as of December 31, 2001. NOTE E - FAIR VALUE OF FINANCIAL INSTRUMENTS The Corporation utilizes quoted market prices, where available, to compute the fair value of its financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from the disclosure requirements. Accordingly, the aggregate of the fair value amounts presented are not necessarily indicative of the underlying value of the Corporation. The following methods and assumptions were used by the Corporation in estimating fair value disclosures for financial instruments. Cash and cash equivalents: The carrying amounts reported in the balance sheets for cash and demand deposits due from banks and federal funds sold approximate those assets' fair value. Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are unavailable, fair values are based on quoted market prices of comparable instruments. Loans: Fair values for variable rate loans that reprice at least quarterly and have no significant change in credit risk are assumed to equal recorded book value. Fixed rate loans are valued using present value discounted cash flow techniques. The discount rate used in these calculations was the U.S. government bond rate for securities with similar maturities adjusted for servicing costs, credit loss, and prepayment risk. Deposit liabilities: Demand, savings, and money market deposits have no stated maturities and are payable on demand; thus their estimated fair value is equal to their recorded book balance. Fair values for variable rate certificates of deposit approximate their recorded book balance. Fair values for fixed rate certificates of deposit are determined using discounted cash flow techniques that apply interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties' credit standings. The Corporation does not charge fees for lending commitments; thus it is not practicable to estimate the fair value of these instruments. 26 IBT BANCORP, INC. FINANCIAL STATEMENTS The following sets forth the estimated fair value and recorded book balance of the Corporation's financial instruments as of December 31.
2002 2001 ------------------------------- ------------------------------ Estimated Fair Recorded Book Estimated Fair Recorded Book Value Balance Value Balance -------------- ------------- -------------- ------------- ASSETS Cash and demand deposits due from banks $ 28,587 $ 28,587 $ 22,562 $ 22,562 Federal funds sold 25,850 25,850 32,900 32,900 Investment securities 159,712 159,645 106,044 105,972 Net loans 400,416 398,887 395,328 392,393 Accrued interest receivable 4,897 4,897 4,961 4,961 LIABILITIES Deposits with no stated maturities 310,194 310,194 275,800 275,800 Deposits with stated maturities 256,755 251,262 243,799 240,441 Borrowed funds 18,507 17,793 11,904 11,632 Accrued interest payable 1,037 1,037 1,093 1,093
NOTE F - FEDERAL INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Corporation's deferred tax assets and liabilities, included in other assets, as of December 31 are as follows:
2002 2001 -------- -------- Deferred tax assets Allowance for loan losses $ 1,175 $ 1,156 Deferred directors' fees 664 565 Employee benefit plans 608 424 Core deposit premium and acquisition expenses 245 362 Net unrealized loss on minimum pension liability 701 -- Other 225 154 -------- -------- TOTAL DEFERRED TAX ASSETS 3,618 2,661 Deferred tax liabilities Premises and equipment 222 278 Accretion on securities 73 56 Prepaid pension expense -- 639 Net unrealized gain on available-for-sale securities 1,498 526 Other 80 61 -------- -------- TOTAL DEFERRED TAX LIABILITIES 1,873 1,560 -------- -------- NET DEFERRED TAX ASSETS $ 1,745 $ 1,101 ======== ========
Components of the consolidated provision for income taxes are as follows for the year ended December 31:
2002 2001 2000 ------- ------- ------- Current $ 2,562 $ 2,482 $ 2,356 Deferred benefit (276) (277) (272) ------- ------- ------- PROVISION FOR FEDERAL INCOME TAXES $ 2,286 $ 2,205 $ 2,084 ======== ======= =======
IBT BANCORP, INC. FINANCIAL STATEMENTS 27 The reconciliation of the provision for federal income taxes and the amount computed at the federal statutory tax rate of 34% of income before federal income taxes is as follows for the year ended December 31:
2002 2001 2000 ------- ------- ------- Income tax on pretax income $ 3,132 $ 2,812 $ 2,555 Effect of nontaxable interest income and expenses (846) (607) (471) ------- ------- ------- PROVISION FOR FEDERAL INCOME TAXES $ 2,286 $ 2,205 $ 2,084 ======= ======= =======
NOTE G - BENEFIT PLANS The Corporation has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employees' average compensation over their best five years of service. The funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to services to date but also for those expected to be earned in the future. The defined pension plan's assets are invested primarily in common stocks. Changes in the projected benefit obligation and plan assets during each year, the funded status of the plan and a reconciliation to the amount recognized in the Corporation's consolidated balance sheets are summarized as follows at December 31:
2002 2001 2000 ------- ------ ------ Change in projected benefit obligation Benefit obligation, January 1 $ 5,870 $5,130 $4,839 Service cost 297 271 188 Interest cost 425 384 352 Actuarial loss (gain) 634 305 (34) Benefits paid (277) (220) (215) ------- ------ ------ BENEFIT OBLIGATION, DECEMBER 31 $ 6,949 $5,870 $5,130 ======= ====== ====== Change in plan assets Fair value of plan assets, January 1 $ 5,259 $5,446 $5,230 Investment return (loss) (509) (439) (112) Corporation contribution 357 472 543 Benefits paid (277) (220) (215) ------- ------ ------ FAIR VALUE OF PLAN ASSETS, DECEMBER 31 $ 4,830 $5,259 $5,446 ======= ====== ====== Reconciliation of funded status Funded status $(2,119) $ (611) $ 316 Unrecognized net transition asset (22) (44) (66) Unrecognized prior service cost 113 125 143 Unrecognized net loss from experience different than that assumed and effects of changes in assumptions 3,843 2,409 1,268 Adjustment to recognize additional minimum pension liability (2,176) -- -- ------- ------ ------ (ACCRUED LIABILITY) PREPAID PENSION COST $ (361) $1,879 $1,661 ======= ====== ======
An adjustment to record the additional minimum pension liability as of December 31, 2002 was established by the recording of an intangible pension asset of $113 and a charge to other comprehensive income of $2,063 in 2002. 28 IBT BANCORP, INC. FINANCIAL STATEMENTS Net pension expense consists of the following components for the year ended December 31:
2002 2001 2000 -------- -------- -------- Service cost on benefits earned for services rendered during the year $ 297 $ 271 $ 188 Interest cost on projected benefit obligation 425 384 352 Expected return on plan assets (409) (445) (436) Amortization of unrecognized transition asset (22) (22) (22) Amortization of unrecognized prior service cost 18 18 18 Amortization of unrecognized actuarial net loss 113 48 12 -------- -------- -------- NET PENSION EXPENSE $ 422 $ 254 $ 112 ======== ======== ========
Actuarial assumptions used in determining the projected benefit obligation and the net periodic pension cost are as follows for the year ended December 31:
2002 2001 2000 -------- -------- -------- Weighted average discount rate 6.75% 7.50% 7.50% Rate of increase in future compensation 4.50% 4.50% 4.50% Expected long-term rate of return 8.00% 8.00% 8.00%
The Corporation maintains a nonqualified supplementary retirement plan for officers to provide supplemental retirement benefits and death benefits to each participant. Insurance policies, designed primarily to fund death benefits, have been purchased on the life of each participant with the Corporation as the sole owner and beneficiary of the policies. Expenses related to this program for 2002, 2001, and 2000 were $41, $84, and $20, respectively, and are being recognized over the participants' expected years of service. The Corporation maintains an employee stock ownership plan (ESOP) and a profit sharing plan which cover substantially all of its employees. Contributions to the Plans are discretionary and are approved by the Board of Directors and recorded as compensation expense. Compensation expense related to the Plans for 2002, 2001, and 2000 was $196, $146, and $200, respectively. Total shares outstanding related to the ESOP at December 31, 2002 and 2001 were 166,139 and 152,107, respectively, and were included in the computation of dividends and earnings per share in each of the respective years. NOTE H - DEPOSITS At December 31, 2002, the scheduled maturities of time deposits were as follows:
YEAR AMOUNT ---- -------- 2003 $132,003 2004 32,912 2005 37,852 2006 26,984 2007 21,452 Thereafter 59
IBT BANCORP, INC. FINANCIAL STATEMENTS 29 NOTE I - BORROWED FUNDS Borrowed funds at December 31 consist of the following obligations:
2002 2001 -------- -------- Federal Home Loan Bank advances $ 14,360 $ 11,381 Securities sold under agreements to repurchase 3,169 251 Unsecured note payable 264 -- -------- -------- $ 17,793 $ 11,632 ======== ========
The Federal Home Loan Bank borrowings are collateralized by a blanket lien on all qualified 1 to 4 family residential mortgage loans and U.S. Treasury and government agency securities equal to at least 160% of outstanding advances. Advances are also secured by FHLB stock owned by the Banks. The unsecured note payable has an imputed interest rate of 4.16% and is payable in annual installments of $60,000, including interest, through July 2007. Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreement to repurchase are reflected at the amount of cash received in connection with the transaction. The U.S. government agency securities underlying the agreements have a carrying value and a fair value of approximately $3,625 and $1,030 at December 31, 2002 and 2001, respectively. Such securities remain under the control of the Corporation. The Corporation may be required to pledge additional collateral based on the fair value of the underlying securities. The maturity and weighted average interest rates of FHLB advances at December 31 follow:
2002 ---- AMOUNT RATE -------- -------- Fixed rate advance due 2004 $ 1,000 5.05% Two year putable advance due 2006 5,000 5.08 Fixed rate advance due 2009 1,000 4.19 Fixed rate advance due 2010 2,360 6.62 One year putable advance due 2010 3,000 4.98 Fixed rate advance due 2012 2,000 4.90 -------- ---- TOTAL ADVANCES $ 14,360 5.22% ======== ==== 2001 ---- AMOUNT RATE -------- -------- Fixed rate advance due 2004 $ 1,000 5.05% Two year putable advance due 2006 5,000 5.08 Fixed rate advance due 2010 2,381 6.62 One year putable advance due 2010 3,000 4.98 -------- ---- TOTAL ADVANCES $ 11,381 5.26% ======== ====
30 IBT BANCORP, INC. FINANCIAL STATEMENTS NOTE J - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Corporation is party to financial instruments with off-balance-sheet risk. These instruments are entered into in the normal course of business to meet the financing needs of its customers. These financial instruments, which include commitments to extend credit and standby letters of credit, involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Corporation has in a particular class of financial instruments. The Corporation's exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Corporation uses the same credit policies in deciding to make these commitments as it does for extending loans to customers. Commitments to extend credit, which totaled $60,800 at December 31, 2002, are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have variable interest rates, fixed expiration dates, or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support private borrowing arrangements, including commercial paper, bond financing, and similar transactions. At December 31, 2002, the Corporation had a total of $506 in outstanding standby letters of credit. Generally, these commitments to extend credit and letters of credit mature within one year. The credit risk involved in these transactions is essentially the same as that involved in extending loans to customers. The Corporation evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation upon the extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and other income producing commercial properties. NOTE K - COMMITMENTS AND OTHER MATTERS There were no material noncancelable lease commitments outstanding at December 31, 2002. Banking regulations require banks to maintain cash reserve balances in currency or as deposits with the Federal Reserve Bank. The Corporation's requirement was approximately $11,031 at December 31, 2002, and $8,709 at December 31, 2001. Banking regulations also limit the transfer of assets in the form of dividends, loans, or advances from the subsidiary Banks to the Corporation. At December 31, 2002, substantially all of the subsidiary Banks' assets were restricted from transfer to the Corporation in the form of loans or advances. Consequently, bank dividends are the principal source of funds for the Corporation. Payment of dividends without regulatory approval is limited to the current years retained net income plus retained net income for the preceding two years, less any required transfers to capital surplus. At January 1, 2003, the amount available for dividends without regulatory approval was approximately $1,373. The Corporation maintains a self-funded medical plan under which the Corporation is responsible for the first $50 per year of claims made by a covered individual. Medical claims are subject to a lifetime maximum of $2,000 per covered individual. Expenses are accrued based on estimates of the aggregate liability for claims incurred and the Corporation's experience. Expenses were $1,370 in 2002, $1,063 in 2001 and $634 in 2000. IBT BANCORP, INC. FINANCIAL STATEMENTS 31 The Corporation offers a dividend reinvestment and employee stock purchase plan. The dividend reinvestment plan allows shareholders to purchase previously unissued IBT Bancorp common shares. The employee stock purchase plan allows employees to purchase IBT Bancorp common stock through payroll deduction. The number of shares authorized for issuance under these plans are 150,000 with 14,538 shares unissued at December 31, 2002. During 2002, 2001 and 2000, 52,473 shares were issued for $1,524, 37,434 shares were issued for $971, and 23,304 shares were issued for $492, respectively, in cash pursuant to these plans. The subsidiary Banks of the Corporation have obtained approval to borrow up to $30,000 from the Federal Home Loan Bank (FHLB) of Indianapolis. Under the terms of the agreement, the Banks may obtain advances at the stated rate at the time of the borrowings. The Banks have agreed to pledge eligible mortgage loans and U.S. Treasury and governmental agencies as collateral for any such borrowings. Certain directors and executive officers and their related interests of the Corporation and the Banks were deposit customers of the Banks. Total deposits of these customers aggregate approximately $6,956 and $4,881 at December 31, 2002 and December 31, 2001, respectively. NOTE L - OPERATING SEGMENTS The Corporation's reportable segments are based on legal entities that account for at least 10% of operating results. The accounting policies are the same as those discussed in Note A to the Consolidated Financial Statements. The Corporation evaluates performance based principally on net income and asset quality of the respective segments. A summary of selected financial information for the Corporation's reportable segments follows:
All Others Isabella Bank Farmers (Including and Trust State Bank Parent) Total ----------- ---------- ---------- -------- 2002 Total assets $515,831 $126,850 $ 11,038 $653,719 Interest income 29,689 8,353 119 38,161 Net interest income 17,559 5,135 211 22,905 Provision for loan losses 650 375 -- 1,025 Net income 5,516 1,206 203 6,925 2001 Total assets $469,408 $116,903 $ 5,832 $592,143 Interest income 31,718 8,987 93 40,798 Net interest income 16,292 5,003 243 21,538 Provision for loan losses 500 270 -- 770 Net income (loss) 4,824 1,269 (27) 6,066 2000 Total assets $430,060 $106,699 $ 4,138 $540,897 Interest income 29,554 9,135 65 38,754 Net interest income 15,002 5,199 151 20,352 Provision for loan losses 265 300 -- 565 Net income (loss) 4,223 1,439 (231) 5,431
NOTE M - REGULATORY CAPITAL MATTERS The Corporation (on a consolidated basis) and its subsidiary banks, Isabella Bank and Trust and Farmers State Bank of Breckenridge ("Banks") are subject to various regulatory capital requirements administered by their primary regulator, the Federal Reserve Bank. Failure to meet minimum capital requirements can initiate mandatory and/or discretionary actions by the Federal Reserve. These actions could have a material effect on the Corporation's and Banks' financial statements. 32 IBT BANCORP, INC. FINANCIAL STATEMENTS Under the Federal Reserve's capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Banks must meet specific capital guidelines that include quantitative measures of their assets, certain off-balance-sheet items, and capital, as calculated under regulatory accounting standards. The Banks' required capital is also subject to regulatory qualitative judgment regarding the Banks' interest rate risk exposure and credit risk. Prompt corrective action provisions are not applicable to bank holding companies. Measurements established by regulation to ensure capital adequacy require the Corporation and the Banks to maintain minimum total capital to risk weighted assets (as defined in the regulations), Tier 1 capital to risk weighted assets (as defined), and Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2002 and 2001, that the Corporation and the Banks met all capital adequacy requirements to which they are subject. As of December 31, 2002, the most recent notifications from the Federal Reserve Bank categorized the Banks as well capitalized. To be categorized as well capitalized, a bank must maintain total risk based capital, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There have been no conditions or events since the notifications that management believes has changed the Banks' category. The Corporation's and each Bank's actual capital amounts (in thousands) and ratios are also presented in the table.
Minimum To Be Well Capitalized Minimum Capital Under Prompt Corrective Actual Requirements Action Provisions Amount Ratio Amount Ratio Amount Ratio -------- ----- ------- ----- ------- ----- AS OF DECEMBER 31, 2002 Total capital to risk weighted assets Isabella Bank and Trust $ 40,385 12.9% $24,998 8.0% $31,247 10.0% Farmers State Bank of Breckenridge 12,957 14.2 7,284 8.0 9,106 10.0 Consolidated 62,030 15.2 32,670 8.0 N/A N/A Tier 1 capital to risk weighted assets Isabella Bank and Trust 36,525 11.7 12,499 4.0 18,748 6.0 Farmers State Bank of Breckenridge 11,811 13.0 3,642 4.0 5,463 6.0 Consolidated 56,919 13.9 16,335 4.0 N/A N/A Tier 1 capital to average assets Isabella Bank and Trust 36,525 7.4 19,856 4.0 24,820 5.0 Farmers State Bank of Breckenridge 11,811 9.6 4,912 4.0 6,140 5.0 Consolidated 56,919 9.2 24,795 4.0 N/A N/A AS OF DECEMBER 31, 2001 Total capital to risk weighted assets Isabella Bank and Trust $ 37,154 12.5% $23,867 8.0% $29,834 10.0% Farmers State Bank of Breckenridge 12,294 14.9 6,593 8.0 8,241 10.0 Consolidated 58,065 15.1 30,831 8.0 N/A N/A Tier 1 capital to risk weighted assets Isabella Bank and Trust 33,425 11.2 11,933 4.0 17,900 6.0 Farmers State Bank of Breckenridge 11,255 13.7 3,296 4.0 4,945 6.0 Consolidated 53,240 13.8 15,415 4.0 N/A N/A Tier 1 capital to average assets Isabella Bank and Trust 33,425 7.4 17,979 4.0 22,474 5.0 Farmers State Bank of Breckenridge 11,255 10.3 4,371 4.0 5,464 5.0 Consolidated 53,240 9.4 22,553 4.0 N/A N/A
IBT BANCORP, INC. FINANCIAL STATEMENTS 33 NOTE N - PARENT COMPANY ONLY FINANCIAL INFORMATION CONDENSED BALANCE SHEET
December 31 2002 2001 -------- -------- ASSETS Cash on deposit at subsidiary Banks $ 4,690 $ 5,861 Securities available for sale 1,497 588 Investments in subsidiaries 58,949 51,912 Premises and equipment 98 113 Other assets 1,722 1,157 -------- -------- TOTAL ASSETS $ 66,956 $ 59,631 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Other liabilities $ 3,553 $ 2,803 Shareholders' equity 63,403 56,828 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 66,956 $ 59,631 ======== ========
CONDENSED STATEMENTS OF INCOME
Year Ended December 31 2002 2001 2000 -------- ------- ------- Income Dividends from subsidiaries $ 3,325 $ 3,115 $ 4,700 Interest income 122 154 105 Management fee and other 292 245 6 -------- ------- ------- TOTAL INCOME 3,739 3,514 4,811 Expenses 824 680 563 -------- ------- ------- Income before income tax benefit and equity in undistributed earnings of subsidiaries 2,915 2,834 4,248 Federal income tax benefit 152 103 166 -------- ------- ------- 3,067 2,937 4,414 Undistributed earnings of subsidiaries 3,858 3,129 1,017 -------- ------- ------- NET INCOME $ 6,925 $ 6,066 $ 5,431 ======== ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31 2002 2001 2000 -------- ------- ------- OPERATING ACTIVITIES Net income $ 6,925 $ 6,066 $ 5,431 Adjustments to reconcile net income to cash provided by operations Undistributed earnings of subsidiaries (3,858) (3,129) (1,017) Net amortization of securities -- 1 3 (Increase) decrease in interest receivable (2) 1 20 (Increase) decrease in other assets (1,947) (240) 3 Increase in accrued expenses 389 1,353 1,440 Provision for depreciation 20 19 19 Deferred income taxes (benefit) 328 (401) (512) -------- ------- ------- NET CASH PROVIDED BY OPERATIONS 1,855 3,670 5,387
34 IBT BANCORP, INC. FINANCIAL STATEMENTS
Year Ended December 31 2002 2001 2000 -------- ------- ------- INVESTING ACTIVITIES Proceeds from the maturities of investments securities available for sale 175 75 867 Purchases of investment securities available for sale (1,080) -- -- Investment in subsidiaries (495) -- (2,924) Purchases of equipment and premises (5) (39) (19) -------- ------- ------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (1,405) 36 (2,076) FINANCING ACTIVITIES Cash dividends (2,585) (2,327) (2,198) Issuance of common stock 1,583 971 492 Repurchase of common stock (619) (768) -- -------- ------- ------- NET CASH USED IN FINANCING ACTIVITIES (1,621) (2,124) (1,706) -------- ------- ------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,171) 1,582 1,605 Cash and cash equivalents at beginning of year 5,861 4,279 2,674 -------- ------- ------- CASH AND CASH EQUIVALENTS AT YEAR END $ 4,690 $ 5,861 $ 4,279 ======== ======= =======
NOTE O - GOODWILL AND OTHER INTANGIBLE ASSETS On January 1, 2002, the Corporation adopted the FASB Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets." Statement No. 142 addresses the reporting and other intangible assets subsequent to their acquisition. This Statement requires that goodwill be separately disclosed if material from other intangible assets on the consolidated balance sheet and that goodwill and intangible assets with indefinite useful lives no longer be amortized, but, instead, tested for impairment at least annually. The adoption of Statement No. 142 resulted in the reduction of goodwill amortization of $392 or $0.09 per share for 2002. As required by the Statement, intangible assets that do not meet the criteria for recognition apart from goodwill must be reclassified. As a result of the Corporation's analysis, no reclassifications were required as of December 31, 2002. Included in other assets on the accompanying consolidated balance sheets are the following amounts as of December 31:
2002 2001 ------- ------- Branch acquisition goodwill $ 2,036 $ 2,036 Title company goodwill 1,064 -- ------- ------- Total goodwill 3,100 2,036 Core deposit intangibles 398 492 ------- ------- $ 3,498 $ 2,528 ======= =======
The core deposit intangibles are being amortized on a straight-line basis over nine years. IBT BANCORP, INC. FINANCIAL STATEMENTS 35 IBT BANCORP FINANCIAL REVIEW (All dollars in thousands) The following is management's discussion and analysis of the financial condition and results of operations for IBT Bancorp (the Corporation). This discussion and analysis is intended to provide a better understanding of the financial statements and statistical data included elsewhere in the Annual Report. CRITICAL ACCOUNTING POLICIES: The Corporation's significant accounting policies are set forth in Note 1 of the Consolidated Financial Statements. Of these significant accounting policies, the Corporation considers its policies regarding the allowance for loan losses and servicing assets to be its most critical accounting policies. The allowance for loan losses requires management's most subjective and complex judgment. Changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporation's assessments may be impacted in future periods by changes in economic conditions, the impact of regulatory examinations, and the discovery of information with respect to borrowers which is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporation's allowance for loan losses and related matters, see Provision for Loan Losses and Allowance for Loan Losses. Servicing assets are recognized when loans are sold with servicing retained. Servicing assets are amortized in proportion to and over the period of estimated future net servicing income. The fair value of servicing assets is estimated by discounting the future cash flows at estimated future current market rates for the expected life of the loans. The Corporation uses industry prepayment statistics in estimating the expected life of the loan. Management periodically evaluates servicing assets for impairment. For purposes of measuring impairment, the rights are stratified based on original term to maturity. The amount of impairment recognized is the amount by which the servicing asset for a stratum exceeds its fair value. 36 IBT BANCORP, INC. FINANCIAL STATEMENTS TABLE 1. DISTRIBUTION OF ASSETS, LIABILITIES, AND SHAREHOLDERS' EQUITY; INTEREST RATE AND INTEREST DIFFERENTIAL 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. Federal Reserve and Federal Home Loan Bank Equity holdings are included in Other Investments.
2002 2001 2000 ----------------------------- ---------------------------- ---------------------------- Tax Average Tax Average Tax Average Average Equivalent Yield/ Average Equivalent Yield/ Average Equivalent Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate -------- --------- ------- -------- --------- ------- ------- --------- ------- INTEREST EARNING ASSETS Loans $396,234 $31,554 7.96% $404,586 $35,118 8.68% $380,392 $33,333 8.76% Taxable investment securities 94,383 4,197 4.45 54,171 2,993 5.53 62,581 3,666 5.86 Nontaxable investment securities 45,663 2,864 6.27 34,748 2,481 7.14 29,914 2,194 7.33 Federal funds sold 26,364 423 1.60 23,827 897 3.76 2,731 170 6.22 Other investments 2,735 165 6.03 2,626 180 6.85 2,256 173 7.67 -------- ------- ---- -------- ------- ---- -------- ------- ---- TOTAL EARNING ASSETS 565,379 39,203 6.93 519,958 41,669 8.01 477,874 39,536 8.27 NONEARNING ASSETS Allowance for loan losses (5,621) (5,347) (4,939) Cash and due from banks 24,236 21,052 18,253 Premises and equipment 14,983 12,461 10,385 Accrued income and other assets 24,530 18,423 14,572 -------- -------- -------- TOTAL ASSETS $623,507 $566,547 $516,145 ======== ======== ======== INTEREST BEARING LIABILITIES Interest bearing demand deposits $ 98,478 1,406 1.43 $ 81,260 1,955 2.41 $ 68,017 1,987 2.92 Savings deposits 135,792 2,201 1.62 121,202 3,258 2.69 122,610 3,908 3.19 Time deposits 247,182 10,971 4.44 235,481 13,465 5.72 206,849 12,032 5.82 Borrowed funds 13,960 678 4.86 10,712 582 5.43 7,158 475 6.64 -------- ------- ---- -------- ------- ---- -------- ------- ---- TOTAL INTEREST BEARING LIABILITIES 495,412 15,256 3.08 448,655 19,260 4.29 404,634 18,402 4.55 NONINTEREST BEARING LIABILITIES AND SHAREHOLDERS' EQUITY Demand deposits 59,518 56,904 55,188 Other 9,037 6,201 5,817 Shareholders' equity 59,540 54,787 50,506 -------- -------- -------- TOTAL LIABILITIES AND EQUITY $623,507 $566,547 $516,145 ======== ======== ======== NET INTEREST INCOME (FTE) $23,947 $22,409 $21,134 ======= ======= ======= NET YIELD ON INTEREST EARNING ASSETS (FTE) 4.24% 4.31% 4.42% ==== ==== ====
RESULTS OF OPERATIONS The Corporation achieved record net income for the sixteenth consecutive year in 2002 with net earnings of $6,925 versus $6,066 in 2001. Two key measures of earnings performance commonly used in the banking industry are return on average assets and return on average shareholders' equity. Return on average assets measures the ability of a corporation to profitably and efficiently employ its resources. The Corporation's return on average assets was 1.11% in 2002, 1.07% in 2001, and 1.05% in 2000. Return on average equity indicates how effectively a corporation is able to generate earnings on capital invested by its shareholders. The Corporation's return on average shareholders' equity was 11.63% in 2002, 11.07% in 2001, and 10.75% in 2000. IBT BANCORP, INC. FINANCIAL STATEMENTS 37 NET INTEREST INCOME The Corporation derives the majority of its gross income from interest earned on loans and investments, while its most significant expense is the interest cost incurred for funds used. Net interest income is the amount by which interest income on earning assets exceeds the interest cost of deposits and borrowings. Net interest income is influenced by changes in the balance and mix of assets and liabilities and market interest rates. Management exerts some control over these factors, however, Federal Reserve monetary policy and competition have a significant impact. Interest income includes loan fees of $1,524 in 2002, $1,425 in 2001, and $957 in 2000. For analytical purposes, net interest income is adjusted to a "taxable equivalent" basis by adding the income tax savings from interest on tax-exempt loans and securities, thus making year-to-year comparisons more meaningful. TABLE 2. VOLUME AND RATE VARIANCE ANALYSIS 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.
2002 Compared to 2001 2001 Compared to 2000 Increase (Decrease) Due to Increase (Decrease) Due to ----------------------------------- ----------------------------------- Volume Rate Net Volume Rate Net ------ ------- ------- ------ ------- ------ CHANGES IN INTEREST INCOME Loans $ (713) $(2,851) $(3,564) $2,103 $ (318) $1,785 Taxable investment securities 1,878 (674) 1,204 (473) (200) (673) Nontaxable investment securities 711 (328) 383 346 (59) 287 Federal funds sold 87 (561) (474) 819 (92) 727 Other investments 7 (22) (15) 27 (20) 7 ------ ------- ------- ------ ------- ------ TOTAL CHANGES IN INTEREST INCOME 1,970 (4,436) (2,466) 2,822 (689) 2,133 CHANGES IN INTEREST EXPENSE Interest bearing demand deposits 357 (906) (549) 351 (383) (32) Savings deposits 356 (1,413) (1,057) (44) (606) (650) Time deposits 642 (3,136) (2,494) 1,640 (207) 1,433 Other borrowings 163 (67) 96 205 (98) 107 ------ ------- ------- ------ ------- ------ TOTAL CHANGES IN INTEREST EXPENSE 1,518 (5,522) (4,004) 2,152 (1,294) 858 NET CHANGE IN FTE NET INTEREST INCOME $ 452 $ 1,086 $ 1,538 $ 670 $ 605 $1,275 ====== ======= ======= ====== ======= ======
38 IBT BANCORP, INC. FINANCIAL STATEMENTS As shown in Tables 1 and 2, when comparing year ending December 31, 2002 to 2001, fully taxable equivalent (FTE) net interest income increased $1,538 or 6.9%. An increase of 8.7% in average interest earning assets provided $1,970 of FTE interest income. The majority of this growth was funded by a 10.4% increase in interest bearing liabilities, resulting in $1,518 of additional interest expense. Overall, changes in volume resulted in $452 in additional FTE interest income. The average FTE interest rate earned on assets decreased by 1.08%, decreasing FTE interest income by $4,436, and the average rate paid on deposits decreased by 1.21%, decreasing interest expense by $5,522. The net change related to interest rates earned and paid was a $1,086 increase in FTE net interest income. The Corporation's FTE net yield as a percentage of average earning assets decreased 0.07%. The decrease was primarily the result of a significant change in the mix of assets and funding sources. Average investment securities as a percentage of total earning assets, increased 7.7% to 24.8% in 2002, while loans, the Corporation's highest yielding assets, decreased 7.7% to 70.1%. The change in mix resulted in a 0.23% decrease in the FTE net yield on interest earning assets. The funding of interest earning assets was done primarily through a 10.4% increase in the percentage of average earning assets funded by interest bearing liabilities. The increased utilization of interest bearing liabilities in funding earning assets resulted in a 0.04% decrease in the FTE net yield on interest earning assets. Net interest income increased $1,275 to $22,409 in 2001 from $21,134 in 2000. As shown in Tables 1 and 2, in 2001 (FTE) interest income increased $2,822, from an 8.8% increase in the volume of average earning assets. The growth of interest earning assets was funded primarily by a 10.9% increase in interest bearing liabilities that resulted in additional interest expense of $2,152. Overall, the Corporation earned an additional $670 in FTE interest income as a result of increased volume. The average rate earned in 2001 decreased by 0.26%, decreasing FTE interest income by $689, and the average rate paid on deposits decreased by 0.26%, decreasing interest expense by $1,294. The net change related to interest rates earned and paid was a $605 increase in FTE net interest income. PROVISION FOR LOAN LOSSES The viability of any financial institution is ultimately determined by its management of credit risk. Total loans outstanding represent 72.0% of the Corporation's total year end deposits and is the Corporation's single largest concentration of risk. Inevitably, poor operating performance may result from the failure to control credit risk. Given the importance of maintaining sound underwriting practices, the Banks' Boards of Directors and senior management teams spend a large portion of their time and effort in loan review. The provision for loan losses is the amount added to the allowance for loan losses on a monthly basis. The allowance for loan losses is management's estimation of potential future losses inherent in the loan portfolio, and is maintained at a level considered by management to be adequate to absorb potential future losses. Evaluation of the allowance for loan losses and the provision for loan losses is based on a continuous review of the changes in the type and volume of the loan portfolio, reviews of specific loans to evaluate their collectibility, past and recent loan loss history, financial condition of borrowers, the amount of impaired loans, overall economic conditions, and other factors. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans, that may be subject to significant change. As shown in Table 3, total loans outstanding increased 1.7% in 2002 and decreased 1.4% in 2001. The provision for loan losses in 2002 was $1,025, a $255 increase from 2001 and a $460 increase from 2000. The 2002 provision for loan losses was increased as a result of increases in net charged-off loans of $442 and loans classified as nonperforming of $2,484. The majority of the increase in nonperforming loans is related to one farm credit which was in the process of liquidation at year end. Management does not expect any significant additional losses related to this credit. The allowance for loan losses as a percentage of total outstanding loans was 1.38% at both December 31, 2002, and 2001. The Corporation's net charged off loans as a percentage of average loans was 0.23% in 2002 and 0.11% in 2001. IBT BANCORP, INC. FINANCIAL STATEMENTS 39 TABLE 3. SUMMARY OF LOAN LOSS EXPERIENCE The following is a summary of loan balances at the end of each year and their daily average balances, changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off, and additions to the allowance which have been expensed.
December 31 ------------------------------------------------------------ 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Amount of loans outstanding at the end of year $404,480 $397,864 $403,679 $355,846 $318,914 ======== ======== ======== ======== ======== Average gross loans outstanding for the year $396,234 $404,586 $380,392 $332,083 $300,794 ======== ======== ======== ======== ======== Summary of changes in allowance Allowance for loan losses - January 1 $ 5,471 $ 5,162 $ 4,622 $ 4,412 $ 4,112 Loans charged off Commercial and agricultural 506 271 65 221 252 Real estate mortgage 236 70 58 78 70 Personal 460 351 295 347 297 -------- -------- -------- -------- -------- TOTAL LOANS CHARGED OFF 1,202 692 418 646 619 Recoveries Commercial and agricultural 140 35 172 86 255 Real estate mortgage 18 41 64 92 13 Personal 141 155 157 169 120 -------- -------- -------- -------- -------- TOTAL RECOVERIES 299 231 393 347 388 Net charge offs 903 461 25 299 231 Provision charged to income 1,025 770 565 509 531 -------- -------- -------- -------- -------- ALLOWANCE FOR LOAN LOSSES - DECEMBER 31 $ 5,593 $ 5,471 $ 5,162 $ 4,622 $ 4,412 ======== ======== ======== ======== ======== Ratio of net charge offs during the year to average loans outstanding 0.23% 0.11% 0.01% 0.09% 0.08% ======== ======== ======== ======== ======== Ratio of the allowance for loan losses to loans outstanding at year end 1.38% 1.38% 1.28% 1.30% 1.38% ======== ======== ======== ======== ========
As shown in Table 4, the percentage of loans classified as nonperforming by the Corporation as of December 31, 2002 and 2001 was 1.19% and 0.64% of total loans, respectively. Average nonperforming loans for the peer group was 0.87%. The peer group is a composite of financial information of all bank holding companies with assets between $500 million and $1 billion; there were 330 bank holding companies in the Corporation's peer group for the period indicated. The Banks' policies, including a loan considered impaired under Statement of Financial Accounting Standards (SFAS) No. 118, are to transfer a loan to nonaccrual status whenever it is determined that interest should be recorded on the cash basis instead of the accrual basis because of a deterioration in the financial position of the borrower, or a determination that payment in full of interest or principal cannot be expected, or the loan has been in default for a period of 90 days or more, unless it is both well secured and in the process of collection. 40 IBT BANCORP, INC. FINANCIAL STATEMENTS TABLE 4. NONPERFORMING LOANS The following loans are all the credits which require classification for state or federal regulatory purposes:
December 31 ------------------------------------------------------ 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ Nonaccrual loans $2,484 $1,346 $ 382 $ 945 $ 274 Accruing loans past due 90 days or more 1,840 1,219 1,484 618 1,130 Restructured loans 479 -- -- -- -- ------ ------ ------ ------ ------ TOTAL NONPERFORMING LOANS $4,803 $2,565 $1,866 $1,563 $1,404 ====== ====== ====== ====== ====== NONPERFORMING LOANS AS % OF LOANS 1.19% 0.64% 0.46% 0.44% 0.44% ====== ====== ====== ====== ======
As of December 31, 2002, there were no other interest bearing assets which required classification. Management is not aware of any recommendations by regulatory agencies which, if implemented, would have a material impact on the Corporation's liquidity, capital, or operations. Management's internal analysis of the estimated range for the allowance was $2,900 to $7,300 as of December 31, 2002. In management's opinion, the allowance for loan losses of $5,593 is adequate as of December 31, 2002. Management has allocated, as reflected in Table 5, the allowance for loan losses to the following categories: 33.4% to commercial and agricultural loans; 29.5% to real estate loans; 30.0% to installment loans; and 7.1% unallocated. The above allocation is not intended to imply limitations on usage of the allowance. The entire allowance is available to fund loan loss without regard to loan type. TABLE 5. ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES The allowance for loan losses has been allocated according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within the following categories:
December 31 2002 2001 2000 --------------------- --------------------- --------------------- % of Each % of Each % of Each Category Category Category Allowance to Total Allowance to Total Allowance to Total Amount Loans Amount Loans Amount Loans --------- --------- --------- --------- --------- --------- Commercial and agricultural $1,868 29.5% $2,081 26.9% $1,301 26.6% Real estate mortgage 1,649 57.0 1,408 59.7 1,559 60.0 Installment 1,679 13.5 1,577 13.4 1,923 13.4 Unallocated 397 -- 405 -- 379 -- ------ ------ ------ ------ ------ ------ TOTAL $5,593 100.0% $5,471 100.0% $5,162 100.0% ====== ====== ====== ====== ====== ====== 1999 1998 --------------------- --------------------- % of Each % of Each Category Category Allowance to Total Allowance to Total Amount Loans Amount Loans --------- --------- --------- --------- Commercial and agricultural $1,502 26.9% $1,473 27.3% Real estate mortgage 1,232 59.8 1,171 58.4 Installment 1,555 13.3 1,467 14.3 Unallocated 333 -- 301 -- ------ ------ ------ ------ TOTAL $4,622 100.0% $4,412 100.0% ====== ====== ====== ======
IBT BANCORP, INC. FINANCIAL STATEMENTS 41 NONINTEREST INCOME Noninterest income consists of trust fees, service charges on deposit accounts, fees for other financial services, gain on the sale of mortgage loans, title insurance revenue, and other. As is the case for many financial institutions, management believes fee income is increasingly important as a source of net earnings and expects this trend to continue. There was a $1,905 or 30.7% increase in fees earned from these sources during 2002. Significant changes during 2002 include a $643 increase from the sale of title insurance and related services, a $161 increase in overdraft fees, a $138 increase in mortgage servicing fees, and a $711 increase in gains on the sale of real estate mortgages. During 2002, the Corporation had an average investment of $9.5 million in bank-owned life insurance, a $5.0 million increase over 2001. The average net rate earned on the investment was approximately 5.0% and, because of their tax free accumulation of earnings, they have a taxable equivalent rate of 7.6%. The rates on these contracts are adjustable annually on their anniversary date. The investment is placed with five separate insurance companies with S&P ratings of AA+ or better. The increase in other income due to this investment was $245. Included in noninterest income is a $1,762 gain from the sale of $192,407 in mortgages during 2002 versus a $1,051 gain on the sale of $126,814 during 2001. The Corporation has established a policy that all 30-year fixed rate mortgage loans will be sold. During 2002, most 15-year fixed rate mortgage loans granted were sold on the secondary market. These loans were sold without recourse, with servicing retained. Noninterest income increased $1,793 in 2001 when compared to 2000. Significant changes in 2001 include a $539 increase in revenue from IBT Title, a $162 increase in overdraft fees, a $36 increase in mortgage servicing fees, a $953 increase in gains on the sale of residential real estate mortgages, a $39 decrease in service charges on deposit accounts, and a $41 decrease in brokerage commissions. NONINTEREST EXPENSES Noninterest expenses increased $2,077 or 11.1% during 2002. Noninterest expenses net of noninterest income divided by average total assets equalled 2.03% in 2002, 2.21% in 2001, and 2.38% in 2000. The decrease in the 2002 ratio was primarily a result of the $711 increase in the gains on the sale of real estate mortgages, and a $561 decline in the amortization of intangibles. The largest component of noninterest expenses is salaries and employee benefits, which increased $1,517 or 15.5%. Salaries increased $916 due to increases in staffing and normal merit and promotional salary increases. Employee benefits increased $601 in 2002. A significant portion of the increase was related to a 28.7% increase in medical insurance expenses, an 86.6% increase in pension expense, and a 33.8% increase in the Corporation's voluntary contribution to the ESOP. Footnote G in the Corporation's Notes to Consolidated Financial Statements include the required disclosures regarding the benefit obligations, plan assets, and funding status of the Corporation's Defined Pension Benefit Plan. Over the last three years the plan has experienced an accumulated loss of $1,060 on the Plan's investments. The entire loss is related to the general decline in market value of stock equity investments. Over the same time period, the actuarial assumption for the long term rate of return on the assets held by the Plan should have produced a return of $1,161. Essentially, the actual loss combined with the change in actuarial assumptions related to the benefit obligation has produced a $2,119 underfunding of the Plan's assets as of December 31, 2002. This shortfall will significantly increase the Corporation's pension expense in future periods. The Corporation's Board of Directors has been discussing its options and plans to make a decision on how to address the shortfall in 2003. Occupancy and furniture and equipment expenses increased $461 or 14.2% in 2002. The majority of this increase is related to building depreciation, property taxes, service contracts and equipment depreciation. The amortization of acquisition intangibles decreased $561 as a result of the adoption of SFAS No. 142. All other operating expenses increased $660. The most significant increases are related to director fees, audit and examiner fees, and donations. The Corporation contributed approximately $750 to the Isabella Bank and Trust Community Foundation. 42 IBT BANCORP, INC. FINANCIAL STATEMENTS Noninterest expenses increased $2,018 or 12.1% in 2001. During 2001, salaries and benefits increased $1,196, occupancy and furniture and equipment expenses increased $270, all other operating expenses increased $465, and the amortization of the deposit based intangible increased by $87. FEDERAL INCOME TAXES Federal income tax expense for 2002 was $2,286 or 24.8% of pre-tax income compared to $2,205 or 26.7% of pre-tax income in 2001 and $2,084 or 27.7% in 2000. The decrease in income tax expense as a percentage of income in 2002 is attributable to an increase in nontaxable municipal income as a percentage of the Corporation's pretax net income. A reconcilement of federal income tax expense and the amount computed at the federal statutory rate of 34% is found in Note F, Federal Income Taxes, in the accompanying consolidated financial statements. ANALYSIS OF CHANGES IN THE STATEMENT OF FINANCIAL CONDITION Total assets were $652,717 at December 31, 2002, an increase of $60,574 or 10.2% over year end 2001. Asset growth was primarily funded by a $45,215 increase in deposits, a $6,161 increase in borrowings, and a $6,629 increase in shareholders' equity. A discussion of changes in balance sheet amounts by major categories follows. INVESTMENT SECURITIES The primary objective of the Corporation's investing activities is to provide for safety of the principal invested. Secondary considerations include the need for earnings, liquidity, and the Corporation's overall exposure to changes in interest rates. During 2002, the Corporation's net holdings of investment securities increased $53,673. Table 6 shows the carrying value of investment securities available for sale and held to maturity. Securities held to maturity, which are stated at amortized cost, consist mostly of local municipal bond issues, and U.S. Agencies. Securities not classified by management as held to maturity are classified as available for sale and are stated at fair value. TABLE 6. INVESTMENT PORTFOLIO The following is a schedule of the carrying value of investment securities available for sale and held to maturity:
December 31 2002 2001 2000 -------- -------- ------- Available for sale U.S. Treasury and U.S. government agencies $ 90,974 $ 53,047 $40,978 States and political subdivisions 64,607 47,141 36,186 Commercial paper 2,328 2,330 350 -------- -------- ------- TOTAL $157,909 $102,518 $77,514 ======== ======== ======= Held to maturity U.S. Treasury and U.S. government agencies $ 74 $ 148 $ 1,060 States and political subdivisions 1,662 3,306 6,637 Other securities -- -- 602 -------- -------- ------- TOTAL $ 1,736 $ 3,454 $ 8,299 ======== ======== =======
Excluding those holdings of the investment portfolio in U.S. Treasury and U.S. government agency securities, there were no investments in securities of any one issuer which exceeded 10% of shareholders' equity. The Corporation has a policy prohibiting investments in securities that it deems are unsuitable due to their inherent credit or market risks. Prohibited investments include stripped mortgage backed securities, zero coupon bonds, nongovernment agency asset backed securities, and structured notes. IBT BANCORP, INC. FINANCIAL STATEMENTS 43 The following is a schedule of maturities of each category of investment securities (at carrying value) and their weighted average yield as of December 31, 2002: TABLE 7. SCHEDULE OF MATURITIES OF INVESTMENT SECURITIES AND WEIGHTED AVERAGE YIELDS
Maturing --------------------------------------------------------------------------------------- After One After Five Year But Years But Within Within Within After One Year Five Years Ten Years Ten Years Amount Yield Amount Yield Amount Yield Amount Yield ------- ---- ------- ---- ------- ---- ------- ---- Available for sale U.S. Treasury and U.S. government agencies $18,198 4.44% $61,849 3.55% $ -- --% $ -- --% States and political subdivisions 10,860 3.13 28,091 3.97 20,921 4.48 4,735 4.41 Mortgage backed 267 5.93 270 5.94 4,459 5.35 5,931 9.63 Corporate & other securities 1,017 4.71 1,311 4.62 -- -- -- -- ------- ---- ------- ---- ------- ---- ------- ---- TOTAL $30,342 3.99% $91,521 3.70% $25,380 4.63% $10,666 7.30% ======= ==== ======= ==== ======= ==== ======= ==== Held to maturity States and political subdivisions $ 50 4.50% $ 1,612 4.79% $ -- --% $ -- --% Mortgage backed -- -- 74 5.76 -- -- -- -- ------- ---- ------- ---- ------- ---- ------- ---- TOTAL $ 50 4.50% $ 1,686 4.83% $ -- --% $ -- --% ======= ==== ======= ==== ======= ==== ======= ====
LOANS The largest component of earning assets is loans. The proper management of credit and market risk inherent in loans is critical to the financial well-being of the Corporation. To control these risks, the Corporation has adopted strict underwriting standards. The standards include prohibitions against lending outside the Corporation's defined market area, lending limits to a single borrower, and strict loan to collateral value limits. The Corporation also monitors and limits loan concentrations extended to volatile industries. The Corporation has no foreign loans and there were no concentrations greater than 10% of total loans that are not disclosed as a separate category in Table 8. TABLE 8. LOAN PORTFOLIO
December 31 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- Commercial $ 66,326 $ 58,424 $ 60,301 $ 55,247 $ 48,204 Agricultural 53,223 48,523 47,298 40,449 38,766 Real estate mortgage 230,409 237,650 242,042 212,724 186,413 Installment 54,522 53,267 54,038 47,426 45,531 -------- -------- -------- -------- -------- TOTAL LOANS $404,480 $397,864 $403,679 $355,846 $318,914 ======== ======== ======== ======== ========
Total loans increased $6,616 in 2002. The increase was primarily in commercial and agricultural loans. As of December 31, 2002, as a percentage of total loans, commercial loans were 16.4%, agricultural were 13.1%, real estate mortgages were 57.0%, and installments were 13.5%. 44 IBT BANCORP, INC. FINANCIAL STATEMENTS DEPOSITS Total deposits increased $45,215 and were $561,456 at year end 2002, an 8.8% increase over 2001. Average deposits increased 9.3% in 2002 and in 2001. During 2002, average noninterest bearing deposits increased 4.6%, interest bearing demand deposits increased 21.2%, savings deposits increased 12.0%, and time deposits increased 5.0%. Time deposits over $100 as a percentage of total deposits equaled 12.5% and 11.5% as of December 31, 2002 and 2001, respectively. TABLE 9. AVERAGE DEPOSITS
2002 2001 2000 ---------------- ---------------- ---------------- Amount Rate Amount Rate Amount Rate ------- ---- ------- ---- ------- ---- Noninterest bearing demand deposits $ 59,518 $ 56,904 $ 55,188 Interest bearing demand deposits 98,478 1.43% 81,260 2.41% 68,017 2.92% Savings deposits 135,792 1.62 121,202 2.69 122,610 3.19 Time deposits 247,182 4.44 235,481 5.72 206,849 5.82 -------- -------- -------- TOTAL $540,970 $494,847 $452,664 ======== ======== ========
TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000
December 31 2002 2001 2000 -------- -------- -------- Maturity Within 3 months $ 21,900 $ 22,259 $ 13,217 Within 3 to 6 months 15,928 11,418 7,250 Within 6 to 12 months 18,624 11,496 7,418 Over 12 months 13,858 14,252 10,627 -------- -------- -------- TOTAL $ 70,310 $ 59,425 $ 38,512 ======== ======== ========
Within the banking industry there is agreement that competition from mutual funds and annuities has had a significant impact on deposit growth. In response, the Corporation's subsidiaries now offer mutual funds and annuities to its customers. The Corporation's trust department also offers a variety of financial products in addition to traditional estate services. CAPITAL The capital of the Corporation consists solely of common stock, capital surplus, retained earnings, and accumulated other comprehensive income. Total capital increased approximately $6,629 in 2002. The Corporation offers a dividend reinvestment and employee stock purchase plan. Under the provisions of these Plans, the Corporation issued 52,473 shares of common stock generating $1,524 of capital during 2002, and 32,623 shares of common stock generating $971 of capital in 2001. The Board of Directors authorized management to repurchase up to $2.0 million of common stock shares. A total of 18,786 shares were repurchased in 2002 at an average price of $32.95 per share. Accumulated other comprehensive income increased $525 and consists of $1,887 increase in unrealized gain on available for sale investment securities reduced by a loss of $1,362 related to the recognition of an additional minimum pension liability. The Federal Reserve Board's current recommended minimum primary capital to assets requirement is 6.0%. The Corporation's primary capital to assets, which consists of shareholders' equity plus the allowance for loan losses less acquisition intangibles, was 10.0% at year end 2002. There are no commitments for significant capital expenditures. IBT BANCORP, INC. FINANCIAL STATEMENTS 45 The Federal Reserve Board has established a minimum risk based capital standard. Under this standard, a framework has been established that assigns risk weights to each category of on and off-balance-sheet items to arrive at risk adjusted total assets. Regulatory capital is divided by the risk adjusted assets with the resulting ratio compared to the minimum standard to determine whether a corporation has adequate capital. The minimum standard is 8%, of which at least 4% must consist of equity capital net of goodwill. The following table sets forth the percentages required under the Risk Based Capital guidelines and the Corporation's values at December 31, 2002: Percentage of Capital to Risk Adjusted Assets:
Required IBT Bancorp -------- ----------- Equity Capital 4.00% 13.94% Secondary Capital 4.00 1.25 ---- ----- Total Capital 8.00% 15.19% ==== =====
IBT Bancorp's secondary capital includes only the allowance for loan losses. The percentage for the secondary capital under the required column is the maximum amount allowed from all sources. The Federal Reserve also prescribes minimum capital requirements for the Corporation's subsidiary Banks. At December 31, 2002, the Banks exceeded these minimums. For further information regarding the Banks' capital requirements, refer to Note M of the Financial Statements, Regulatory Capital Matters. LIQUIDITY Liquidity management is designed to have adequate resources available to meet depositor and borrower discretionary demands for funds. Liquidity is also required to fund expanding operations, investment opportunities, and payment of cash dividends. The primary sources of the Corporation's liquidity are cash and cash equivalents and available for sale investment securities. As of December 31, 2002 and 2001, cash and cash equivalents equaled 8.3% and 9.4%, respectively, of total assets. Net cash provided from operations was $6,124 in 2002 and $2,145 in 2001. Net cash provided by financing activities equaled $49,491 in 2002 and $42,489 in 2001. The Corporation's investing activities used cash amounting to $56,640 in 2002 and $17,597 in 2001. The accumulated effect of the Corporation's operating, investing, and financing activities on cash and cash equivalents was a $1,025 decrease in 2002 and a $28,425 increase in 2001. In addition to cash and cash equivalents, investment securities available for sale are another source of liquidity. Securities available for sale equaled $157,909 as of December 31, 2002 and $102,518 as of December 31, 2001. In addition to these primary sources of liquidity, the Corporation has the ability to borrow in the federal funds market and at both the Federal Reserve Bank and the Federal Home Loan Bank. The Corporation's liquidity is considered adequate by the management of the Corporation. INTEREST RATE SENSITIVITY Interest rate sensitivity management aims at achieving reasonable stability in the net interest margin through periods of changing interest rates. Interest rate sensitivity is determined by the amount of earning assets and interest bearing liabilities repricing within a specific time period, and their relative sensitivity to a change in interest rates. One tool used by management to measure interest rate sensitivity is gap analysis. As shown in Table 11, the gap analysis depicts the Corporation's position for specific time periods and the cumulative gap as a percentage of total assets. 46 IBT BANCORP, INC. FINANCIAL STATEMENTS Investment securities and other investments are scheduled according to their contractual maturity. Nonvariable rate loans are included in the appropriate time frame based on their scheduled amortization. Variable rate loans are included in the time frame of their earliest repricing. Of the $404,480 in total loans, $67,424 are variable rate loans. Time deposit liabilities are scheduled based on their contractual maturity except for variable rate time deposits in the amount of $1,588 which are included in the 0 to 3 month time frame. Money market accounts reprice monthly and are included in the 0 to 3 month time frame. Passbook savings, statement savings, and NOW accounts have no contractual maturity date and are believed to be predominantly noninterest rate sensitive by management. These accounts have been classified in the gap table according to their estimated withdrawal rates based upon management's analysis of deposit runoff over the past five years. Management believes this runoff experience is consistent with its expectation for the future. As of December 31, 2002, the Corporation had $64,704 more in liabilities than assets maturing within one year. A negative gap position results when more liabilities, within a specified time frame, mature or reprice than assets. TABLE 11. INTEREST RATE SENSITIVITY The following table shows the time periods and the amount of assets and liabilities available for interest rate repricing as of December 31, 2002. For purposes of this analysis, nonaccrual loans and the allowance for loan losses are excluded.
0 to 3 4 to 12 1 to 5 Over 5 Months Months Years Years -------- -------- -------- ------- Interest Sensitive Assets Fed funds sold $ 25,850 $ -- $ -- $ -- Investment securities 4,892 25,500 93,208 36,045 Loans 115,153 50,299 215,889 20,655 -------- -------- -------- ------- TOTAL $145,895 $ 75,799 $309,097 $56,700 ======== ======== ======== ======= Interest Sensitive Liabilities Borrowed funds $ 3,169 $ 94 $ 6,375 $ 8,155 Time deposits 49,905 82,822 118,476 59 Savings 80,993 4,373 36,772 13,755 Interest bearing demand 58,000 7,042 41,446 4,707 -------- -------- -------- ------- TOTAL $192,067 $ 94,331 $203,069 $26,676 ======== ======== ======== ======= Cumulative gap $(46,172) $(64,704) $ 41,324 $71,348 Cumulative gap as a % of assets (7.07%) (9.91%) 6.33% 10.98%
IBT BANCORP, INC. FINANCIAL STATEMENTS 47 TABLE 12. LOAN MATURITY AND INTEREST RATE SENSITIVITY The following table shows the maturity of commercial and agricultural loans outstanding at December 31, 2002. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates.
Due in 1 Year 1 to 5 Over 5 or Less Years Years Total ------- -------- ------ -------- Commercial and agricultural $57,089 $ 58,884 $3,576 $119,549 ======= ======== ====== ======== Interest Sensitivity: Loans maturing after one year which have: Fixed interest rates $ 45,050 $3,385 Variable interest rates 13,834 191 TOTAL $ 58,884 $3,576 ======== ======
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Corporation's primary market risks are interest rate risk and, to a lesser extent, liquidity risk. The Corporation has no foreign exchange risk, holds limited loans outstanding to oil and gas concerns, holds no trading account assets, nor does it utilize interest rate swaps or derivatives in the management of its interest rate risk. Any changes in foreign exchange rates or commodity prices would have an insignificant impact, if any, on the Corporation's interest income and cash flows. Interest rate risk ("IRR") is the exposure of the Corporation's net interest income, its primary source of income, to changes in interest rates. IRR results from the difference in the maturity or repricing frequency of a financial institution's interest earning assets and its interest bearing liabilities. IRR is the fundamental method in which financial institutions earn income and create shareholder value. Excessive exposure to IRR could pose a significant risk to the Corporation's earnings and capital. The Federal Reserve, the Corporation's primary Federal regulator, has adopted a policy requiring the Board of Directors and senior management to effectively manage the various risks that can have a material impact on the safety and soundness of the Corporation. The risks include credit, interest rate, liquidity, operational, and reputational. The Corporation has policies, procedures and internal controls for measuring and managing these risks. Specifically, the IRR policy and procedures include defining acceptable types and terms of investments and funding sources, liquidity requirements, limits on investments in long term assets, limiting the mismatch in repricing opportunity of assets and liabilities, and the frequency of measuring and reporting to the Board of Directors. The Corporation uses several techniques to manage IRR. The first method is gap analysis. Gap analysis measures the cash flows and/or the earliest repricing of the Corporation's interest bearing assets and liabilities. This analysis is useful for measuring trends in the repricing characteristics of the balance sheet. Significant assumptions are required in this process because of the imbedded repricing options contained in assets and liabilities. A substantial portion of the Corporation's assets are invested in loans and mortgage backed securities. These assets have imbedded options that allow the borrower to repay the balance prior to maturity without penalty. The amount of prepayments is dependent upon many factors, including the interest rate of a given loan in comparison to the current interest rate for residential mortgages, the level of sales of used homes, and the overall availability of credit in the market place. Generally, a decrease in interest rates will result in an increase in the Corporation's cash flows from these assets. Investment securities, other than those that are callable, do not have any significant imbedded options. Savings and checking deposits may generally be withdrawn on request without prior notice. The timing of cash flow from these deposits are estimated based on historical experience. Time deposits have penalties which discourage early withdrawals. 48 IBT BANCORP, INC. FINANCIAL STATEMENTS The second technique used in the management of IRR is to combine the projected cash flows and repricing characteristics generated by the gap analysis, the interest rates associated with those cash flows to project future interest income. By changing the amount and timing of the cash flows and the repricing interest rates of those cash flows, the Corporation can project the effect of changing interest rates on its interest income. Based on the projections prepared for the year ended December 31, 2002 the Corporation's net interest income would decrease during a period of decreasing interest rates. The following tables provide information about the Corporation's assets and liabilities that are sensitive to changes in interest rates as of December 31, 2002 and 2001. The Corporation has no interest rate swaps, futures contracts, or other derivative financial options. The principal amounts of assets and time deposits maturing were calculated based on the contractual maturity dates. Savings and NOW accounts are based on management's estimate of their future cash flows. QUANTITATIVE DISCLOSURES OF MARKET RISK
Fair Value 2003 2004 2005 2006 2007 Thereafter Total 12/31/02 -------------------------------------------------------------------------------------------- Rate sensitive assets Other interest bearing assets $ 25,950 -- -- -- -- -- $25,950 $ 25,950 Average interest rates 1.25% -- -- -- -- -- 1.25% Fixed interest rate securities $ 30,393 $50,671 $23,853 $12,169 $ 6,514 $36,045 $159,645 $159,712 Average interest rates 4.00% 3.77% 3.32% 4.06% 4.17% 4.76% 4.01% Fixed interest rate loans $ 98,028 $86,180 $83,675 $27,107 $21,906 $20,160 $337,056 $338,585 Average interest rates 7.80% 7.69% 7.40% 7.57% 7.07% 5.89% 7.49% Variable interest rate loans $ 45,756 $ 9,646 $ 4,541 $ 3,297 $ 3,689 $ 495 $ 67,424 $ 67,424 Average interest rates 6.13% 6.11% 5.95% 5.95% 5.52% 5.30% 6.07% Rate sensitive liabilities Borrowed funds $ 3,263 $ 1,094 $ 94 $ 5,094 $ 93 $ 8,155 $ 17,793 $ 18,507 Average interest rates 0.88% 5.07% 5.23% 5.08% 5.20% 5.30% 4.41% Savings and NOW accounts $150,280 $20,646 $16,779 $13,749 $12,706 $32,928 $247,088 $247,088 Average interest rates 1.42% 1.25% 1.49% 1.57% 1.15% 0.91% 1.34% Fixed interest rate time deposits $131,911 $32,404 $37,843 $26,984 $20,473 $ 59 $249,674 $255,167 Average interest rates 3.08% 4.85% 5.79% 4.89% 4.61% 7.20% 4.04% Variable interest rate time deposits $ 816 $ 449 $ 9 -- $ 314 -- $ 1,588 $ 1,588 Average interest rates 2.03% 2.03% -- -- 3.82% -- 2.37% Fair Value 2002 2003 2004 2005 2006 Thereafter Total 12/31/01 -------------------------------------------------------------------------------------------- Rate sensitive assets Other interest bearing assets $ 32,900 $ 100 -- -- -- -- $ 33,000 $ 33,000 Average interest rates 1.50% 1.85% -- -- -- -- 1.50% Fixed interest rate securities $ 31,156 $17,566 $17,533 $ 3,612 $ 8,209 $27,896 $105,972 $106,044 Average interest rates 4.57% 4.98% 4.55% 4.22% 4.68% 4.91% 4.72% Fixed interest rate loans $104,468 $75,855 $93,477 $34,622 $21,839 $15,776 $346,037 $343,501 Average interest rates 9.37% 8.42% 8.13% 8.30% 8.28% 7.53% 8.57% Variable interest rate loans $ 49,117 $ 2,158 $ 235 $ 186 $ 131 -- $ 51,827 $ 51,827 Average interest rates 7.25% 9.76% 7.41% 7.27% 7.00% -- 7.36% Rate sensitive liabilities Borrowed funds $ 251 -- $ 1,000 -- $ 5,000 $ 5,381 $ 11,632 $ 11,904 Average interest rates 2.00% -- 5.05% -- 5.08% 5.72% 5.31% Savings and NOW accounts $122,022 $19,950 $16,209 $13,170 $12,153 $30,276 $213,780 $213,780 Average interest rates 1.72% 1.85% 1.80% 2.32% 1.50% 1.39% 1.72% Fixed interest rate time deposits $141,602 $33,814 $19,952 $28,412 $15,406 $ 7 $239,193 $241,551 Average interest rates 5.37% 6.04% 5.95% 6.35% 6.67% 5.85% 5.71% Variable interest rate time deposits $ 900 $ 348 -- -- -- -- $ 1,248 $ 1,248 Average interest rates 4.09% 4.09% -- -- -- -- 4.09%
IBT BANCORP, INC. FINANCIAL STATEMENTS 49 FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Corporation intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking contained in the Private Securities Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Corporation, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Corporation's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of the Corporation and the subsidiaries include, but are not limited to, changes in interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Corporation's market area, and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Corporation and its business, including additional factors that could materially affect the Corporation's financial results, is included in the Corporation's filings with the Securities and Exchange Commission. COMMON STOCK AND DIVIDEND INFORMATION There is no established market for the Corporation's common stock or public information with respect to its market price. There are occasional sales by shareholders of which management of the Corporation is aware. From January 1, 2001 through December 31, 2002 there were, so far as management knows, 196 sales of the Corporation's common stock. These sales involved 103,587 shares. The prices were reported to management in only some of the transactions and management cannot confirm the prices which were reported during this period. The highest known price paid for the Corporation's stock was $35.00 per share in the fourth quarter of 2002, and the lowest price was $27.27 per share in the first quarter of 2001. The following is a summary of all known transfers since January 1, 2001. All of the information has been adjusted to reflect the 10% stock dividend paid February 28, 2002.
Number of Number of Period Sales Shares Low High ------ --------- --------- --- ---- 2001 First Quarter 28 14,972 $27.27 $30.91 Second Quarter 21 14,019 28.18 29.09 Third Quarter 22 10,472 29.09 29.09 Fourth Quarter 12 11,081 29.09 30.45 2002 First Quarter 27 6,022 $32.00 $34.00 Second Quarter 31 29,213 33.00 33.00 Third Quarter 31 11,538 33.00 33.00 Fourth Quarter 24 6,270 33.00 35.00
The following table sets forth the cash dividends paid for the following quarters, adjusted for the 10% stock dividend paid on February 28,2002.
2002 2001 ----- ---- First Quarter $0.10 $0.09 Second Quarter 0.10 0.09 Third Quarter 0.10 0.09 Fourth Quarter 0.30 0.28 ----- ----- TOTAL $0.60 $0.55 ===== =====
50 IBT BANCORP, INC. FINANCIAL STATEMENTS IBT Bancorp's authorized common stock consists of 10,000,000 shares, of which 4,336,283 shares are issued and outstanding as of December 31, 2002. As of year end 2002, there were approximately 1,700 shareholders of record. SUPERVISION AND REGULATION IBT Bancorp is subject to supervision and regulation by the Federal Reserve Board, under the Bank Holding Company Act of 1956, as amended. A bank holding company and its subsidiaries are able to conduct only the business of commercial banking and activities closely related or incidental to it. Isabella Bank and Trust and Farmers State Bank of Breckenridge are chartered by the State of Michigan and are supervised and regulated by the Michigan Office of Financial and Insurance Services, Division of Financial Institutions. The Banks are members of the Federal Reserve System and their deposits are insured by the Federal Deposit Insurance Corporation to the extent provided by law. IBT Title and IBT Financial Services are licensed and supervised by the State of Michigan. IMPACT OF INFLATION The majority of assets and liabilities of financial institutions are monetary in nature. Generally, changes in interest rates have a more significant impact on earnings of the Corporation than inflation. Although influenced by inflation, changes in rates do not necessarily move in either the same magnitude or direction as changes in the price of goods and services. Inflation does impact the growth of total assets, creating a need to increase equity capital at a higher rate to maintain an adequate equity to assets ratio, which in turn reduces the amount of earnings available for cash dividends. SHAREHOLDERS' INFORMATION ANNUAL MEETING The Annual Meeting of Shareholders will be held at 7:00 p.m., Tuesday, April 29, 2003, Holiday Inn, 5665 E. Pickard Street, Mt. Pleasant, Michigan. FINANCIAL INFORMATION AND FORM 10-K Copies of the 2002 Annual Report, IBT Bancorp Form 10-K, and other financial information not contained herein may be obtained by writing to: Mary Ann Breuer Secretary/Treasurer IBT Bancorp 200 East Broadway Mt. Pleasant, Michigan 48858 MISSION STATEMENT The mission of IBT Bancorp shall be: To create an operating environment that will provide shareholders with sustained growth in their investment while maintaining our independence and subsidiaries' autonomy. EQUAL EMPLOYMENT OPPORTUNITY The equal employment opportunity clauses in Section 202 of the Executive Order 11246, as amended; 38 USC 2012, Vietnam Era Veterans Readjustment Act of 1974; Section 503 of the Rehabilitation Act of 1973, as amended; relative to equal employment opportunity and implementing rules and regulations of the Secretary of Labor are adhered to and supported by IBT Bancorp, and its subsidiaries. IBT BANCORP, INC. FINANCIAL STATEMENTS 51 IBT BANCORP PROXY 200 EAST BROADWAY MT. PLEASANT, MI 48858 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Gerald D. Cassel, James C. Fabiano, and Ronald E. Schumacher, as Proxies, each with the power to appoint his/her substitute, and hereby authorizes them to represent and to vote as designated below, all the shares of Common Stock of IBT Bancorp held of record by the undersigned on March 17, 2003 at the annual meeting of shareholders to be held April 29, 2003 or any adjournments thereof. ELECTION OF DIRECTORS: FOR ALL NOMINEES LISTED BELOW [ ] WITHHOLD AUTHORITY TO VOTE [ ] EXCEPT AS MARKED TO THE FOR ALL NOMINEES LISTED CONTRARY BELOW (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, CIRCLE THE NOMINEE'S NAME IN THE LIST BELOW.) DENNIS P. ANGNER WILLIAM J. STRICKLER FREDERICK L. BRADFORD DEAN E. WALLDORFF (CONTINUED AND TO BE SIGNED ON OTHER SIDE) This proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED TO ELECT ALL NOMINEES. The shares represented by this proxy will be voted in the discretion of the proxies on any other matters which may come before the meeting. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign full corporate name by the President or other authorized officer. If a partnership, please sign in partnership name by authorized person. Dated:__________________________, 2003 _________________________________ Please mark, sign, date and return Signature Proxy card promptly using the enclosed envelope. _________________________________ Signature (if held jointly) -----END PRIVACY-ENHANCED MESSAGE-----