IBT BANCORP INC /MI/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.

For the fiscal year ended December 31, 2002
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OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the transition period from to
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Commission File Number: 0-18415
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IBT BANCORP, INC.
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(Exact name of registrant as specified in its charter)

Michigan 38-2830092
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)

200 East Broadway Street, Mt. Pleasant, Michigan 48858
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(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (989) 772-9471
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Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange on which registered
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Securities registered pursuant to Section 12(g) of the Act:

Common Stock - No Par Value
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(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [X] Yes [ ] No

The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $151,823,000 as of March 3, 2003.

The number of shares outstanding of the registrant's Common Stock (no par value)
was 4,337,807 as of March 3, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

(Such documents are incorporated herein only to the extent specifically set
forth in response to an item herein.)

Documents Part of Form 10-K Incorporated into
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IBT Bancorp, Inc. Proxy Statement
for its Annual Meeting of Shareholders Part III
to be held April 29, 2003

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PART I

ITEM 1. BUSINESS

GENERAL

IBT Bancorp, Inc. (the Corporation) is a registered financial services holding
company incorporated in September 1988 under Michigan law. The Corporation has
seven subsidiaries: Isabella Bank and Trust, Farmers State Bank, IBT Financial
Services, IBT Title, IBT Loan Production, IBT Personnel, LLC, and Financial
Group Information Services. Isabella Bank and Trust has sixteen banking offices
located throughout Isabella County, northeastern Montcalm County, and southern
Clare County, all of which are located in central Michigan. Farmers State Bank
of Breckenridge has three offices located in Gratiot and Saginaw Counties. IBT
Financial Services is a full service retail brokerage and insurance agency
offering stocks, bonds, mutual funds, life insurance, casualty insurance, and
fixed and variable annuities. IBT Title provides title insurance, abstract
searches, and closes loans in Isabella, Montcalm, and Mecosta Counties. IBT Loan
Production originates residential real estate mortgages. Its principal products
are 15 and 30 year fixed rate loans. All loans originated are sold with
servicing to Isabella Bank and Trust. IBT Personnel, LLC, is an employee leasing
company. Financial Group Information Services provides computer services to the
Corporation's other subsidiaries. All employees of the Corporation are employed
by IBT Personnel and leased to each individual subsidiary. The principal city in
which the Corporation operates is Mount Pleasant, which has a population of
approximately 26,000. Markets served include Isabella, Gratiot, Mecosta,
southwestern Midland, western Saginaw, northern Montcalm, and southern Clare.
The area includes significant agricultural production, light manufacturing,
retail, gaming and tourism, and two universities with enrollment of
approximately 30,000 students. The area unemployment rate is approximately 5.0%
and average household income is $38,000.

COMPETITION

The Corporation competes with other commercial banks, many of which are
subsidiaries of other bank holding companies, savings and loan associations,
finance companies, credit unions, and retail brokerage firms. Its subsidiary
banks are community banks and focus on providing high-quality, personalized
service at a fair price. The banks offer a broad array of banking services to
businesses, institutions, and individuals. Deposit services offered include
checking accounts, savings accounts, certificates of deposit, and direct
deposits. Lending activity includes loans made pursuant to lines of credit, real
estate loans, consumer loans, student loans, and credit card loans. Other
financial related products include trust services, title insurance, stocks,
investment securities, bonds, mutual fund sales, 24 hour banking service locally
and nationally through shared automatic teller machines, and safe deposit box
rentals.

LENDING

The subsidiary banks limit lending activities to local markets and have not
purchased any loans from the secondary market. They do not make loans to fund
leveraged buyouts, they have no foreign corporate or government loans, and
limited corporate debt securities. The general lending philosophy is to avoid
concentrations to individuals and business segments. The following table sets
forth the composition of the banks loan portfolio as of December 31, 2002.

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First and second residential mortgages are the single largest category of loans
(45.5% of total loans). The Corporation, through its subsidiary banks, offers 3
and 5 year fixed rate balloon mortgages with a maximum 30 year amortization, and
15 and 30 year amortized fixed rate loans. Fixed rate loans with an amortization
greater than 15 years are sold upon origination to the Federal Home Loan
Mortgage Association. Fixed rate residential mortgage loans with an amortization
of 15 years or less may be held for future sale or sold upon origination.
Factors used in determining when to sell these mortgages include management's
judgment about the direction of interest rates, the Corporation's need for fixed
rate assets in the management of its interest rate sensitivity, and overall loan
demand. Currently all loans with a fixed maturity over 7 years are sold. The
Corporation has a policy that these loans may not exceed 10% of its total
assets.

Lending policies generally limit the maximum loan-to-value ratio on residential
mortgages to 95% of the lower of appraised value of the property or the purchase
price, with the condition that private mortgage insurance is required on loans
with loan-to-value ratios in excess of 80%. The majority of the loans have a
loan-to-value ratio of less than 80%. Underwriting criteria for residential real
estate loans include: evaluation of the borrower's ability to make monthly
payments, the value of the property securing the loan, the payment of principal,
interest, taxes, and hazard insurance does not exceed 28% of a borrower's gross
income, all debt servicing does not exceed 36% of income, acceptable credit
reports, verification of employment, income, and financial information.
Appraisals are performed by independent appraisers. Escrow accounts for taxes
and insurance are required on all loans with loan-to-value ratio in excess of
80%. All mortgage loan requests are reviewed by a mortgage loan committee; loans
in excess of $250,000 require the approval of either the subsidiary bank's Board
of Directors or its loan committee.

Construction and land development loans consist mostly of 1 to 4 family
residential properties. These loans have a 6 to 9 month maturity and are made
using the same underwriting criteria as residential mortgages. Loan proceeds are
disbursed in increments as construction progresses and inspections warrant.
Construction loans are either converted to permanent loans at the completion of
construction or are paid off from financing through another financial
institution.

Commercial lending, which includes loans for farmland and agricultural
production, state and political subdivisions, commercial real estate, and
commercial operating loans equaled 44.9% of the Corporation's loan portfolio at
December 31, 2002. Repayment of commercial loans is often dependent upon the
successful

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operation and management of a business; thus, these loans generally involve
greater risk than other types of lending. The Corporation minimizes its risk by
generally limiting the amount of loans to any one borrower to $5.0 million at
its subsidiary banks. Borrowers with credit needs of more than $5.0 million are
serviced through the use of loan participations with other commercial banks. All
commercial real estate loans require loan-to-value limits of less than 80%.
Depending upon the type of loan, past credit history, and current operating
results, the Corporation may require the borrower to pledge accounts receivable,
inventory, and fixed assets. Personal guarantees are generally required from the
owners of closely held corporations, partnerships, and proprietorships. In
addition, the Corporation requires annual financial statements, prepares cash
flow analysis, and reviews credit reports.

Consumer loans granted include automobile loans, secured and unsecured personal
loans, credit cards, student loans, and overdraft protection. Loan amortization
is generally for a period of up to 6 years; except home improvement loans, which
are amortized for up to 10 years. The underwriting emphasis is on a borrower's
ability to pay rather than collateral value. Except for student loans, no
installment loans are sold to the secondary market. All student loans are sold
to the secondary market upon reaching a payout status.

SUPERVISION AND REGULATION

The Corporation is subject to supervision and regulation by the Securities and
Exchange Commission under the Securities Act of 1933 and 1934 and by the Federal
Reserve Board under the Financial Services Holding Company Act of 2000. A bank
holding company and its subsidiaries are able to conduct only the business of
commercial banking and activities closely related or incidental to it. (See
Regulation below.)

Isabella Bank and Trust and Farmers State Bank are chartered by the State of
Michigan. The banks are members of the Federal Reserve System, their deposits
are insured by the Federal Deposit Insurance Corporation to the extent provided
by law. The Banks are members of the Federal Home Loan Bank of Indianapolis. The
banks and IBT Loan Production are supervised and regulated by the Michigan
Office of Financial and Insurance Services, Division of Financial Institutions
(OFIS) and the Federal Reserve Board. (See Regulation below.)

IBT Financial Services, Inc., is a registered broker-dealer and insurance agency
and subject to regulation by the Securities and Exchange Commission under
federal securities laws. This subsidiary is also subject to regulation under
state securities laws and regulation by the OFIS.

IBT Title, Inc., a non-banking subsidiary of IBT Bancorp, Inc., is a licensed
title insurance agency and is subject to regulation by the OFIS, as well as the
Federal Real Estate Settlement Procedures Act. IBT Title owns a membership
interest in a similar title insurance agency, FSSB Title, LLC.

PERSONNEL

As of December 31, 2002, the Corporation had two full-time employees, Isabella
Bank and Trust had 167, Farmers State Bank of Breckenridge had 51, IBT Financial
Services had two, IBT Title had nineteen, IBT Loan Production had one, and
Financial Group Information Services had ten. The Corporation provides group
life, health, accident, disability and other insurance programs for employees
and a number of other employee benefit programs. The Corporation believes its
relationship with its employees to be good.

LEGAL PROCEEDINGS

There are various claims and lawsuits in which the Corporation's subsidiary
banks are periodically involved, such as claims to enforce liens, condemnation
proceedings on making and servicing of real property loans and other

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issues incidental to the bank's business. However, neither the Corporation nor
the banks are involved in any material pending litigation.

AVAILABLE INFORMATION

The Corporation does not maintain a website. Consequently, the Corporation's
Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Definitive Proxy
Statements, Current Reports on Form 8-K and amendments to those reports are not
available on a Corporation website. The Corporation will provide paper copies of
its reports to the SEC free of charge upon request of a shareholder.

The SEC maintains an internet site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding the Corporation
(CIK #0000842517) and other issuers that file electronically with the SEC.

REGULATION

The earnings and growth of the banking industry and therefore the earnings of
the Corporation and of the Banks are affected by the credit policies of monetary
authorities, including the Federal Reserve System. An important function of the
Federal Reserve System is to regulate the national supply of bank credit in
order to combat recession and curb inflationary pressures. Among the instruments
of monetary policy used by the Federal Reserve to implement these objectives are
open market operations in U.S. Treasury securities, changes in the discount rate
on member bank borrowing, and changes in reserve requirements against member
bank deposits. These methods are used in varying combinations to influence
overall growth of bank loans, investments and deposits and may also affect
interest rates charged on loans or paid for deposits. The monetary policies of
the Federal Reserve System have had a significant effect on the operating
results of commercial banks and related financial service providers in the past
and are expected to continue to do so in the future. The effect of such policies
upon the future business and earnings of the Corporation and the banks cannot be
predicted.

THE CORPORATION

The Corporation, as a financial services holding company, is regulated under the
Bank Holding Company Act of 1956, as amended ("BHC Act"), and is subject to the
supervision of the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). The Corporation is registered as a financial services holding
company with the Federal Reserve Board and is required to file with the Federal
Reserve Board an annual report and such additional information as the Federal
Reserve Board requires. The Federal Reserve Board may also make inspections and
examinations of the Corporation and its subsidiaries.

Prior to March 13, 2000, a bank holding company generally was prohibited under
the BHC Act from acquiring the beneficial ownership or control of more than 5%
of the voting shares or substantially all the assets of any company, including a
bank, without the Federal Reserve Board's prior approval. Also, prior to March
13, 2000, a bank holding company generally was limited to engaging in banking
and such other activities as determined by the Federal Reserve Board to be
closely related to banking.

Under the Gramm-Leach-Bliley Act of 1999 ("GLB Act"), beginning March 13, 2000,
an eligible bank holding company may elect to become a financial holding company
and thereafter affiliate with securities firms and insurance companies and
engage in other activities that are financial in nature. The GLB Act defines
"financial in nature" to include securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; activities that the Federal Reserve
Board has determined to be closely related to banking; and other activities that
the Federal Reserve Board, after consultation with the Secretary of the
Treasury, determines by regulation or order to be

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financial in nature or incidental to a financial activity. No Federal Reserve
Board approval is required for a financial holding company to acquire a company,
other than a bank holding company, bank or savings association, engaged in
activities that are financial in nature or incidental to activities that are
financial in nature, as defined in the GLB Act or as determined by the Federal
Reserve Board.

A bank holding company is eligible to become a financial holding company if each
of its subsidiary banks and savings associations is well capitalized under the
prompt corrective action provisions of the Federal Deposit Insurance Act ("FDI
Act"), is well managed and has a rating under the Community Reinvestment Act
(CRA) of satisfactory or better. If any bank or savings association subsidiary
of a financial holding company ceases to be well capitalized or well managed,
the Federal Reserve Board may require the financial holding company to divest
the subsidiary. Alternatively, the financial holding company may elect to
conform its activities to those permissible for bank holding companies that do
not elect to become financial holding companies. If any bank or savings
association subsidiary of a financial holding company receives a CRA rating of
less than satisfactory, the financial holding company will be prohibited from
engaging in new activities or acquiring companies other than bank holding
companies, banks or savings associations.

The Corporation became a financial holding company effective March 13, 2000. It
continues to maintain its status as a bank holding company for purposes of other
Federal Reserve Board regulations.

Under Federal Reserve Board policy, the Corporation is expected to act as a
source of financial strength to its subsidiary banks and to commit resources to
support its subsidiaries. This support may be required at times when, in the
absence of such Federal Reserve Board policy, the Corporation would not
otherwise be required to provide it.

Under Michigan law, if the capital of a Michigan state chartered bank (such as
the Corporation's bank subsidiaries) has become impaired by losses or otherwise,
the Commissioner of the Office of Financial and Insurance Services may require
that the deficiency in capital be met by assessment upon the Bank's stockholders
pro rata on the amount of capital stock held by each, and if any such assessment
is not paid by any stockholder within 30 days of the date of mailing of notice
thereof to such stockholder, cause the sale of the stock of such stockholder to
pay such assessment and the costs of sale of such stock.

Any capital loans by a bank holding company to any of its subsidiary banks are
subordinate in right of payment to deposits and to certain other indebtedness of
such subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment. This priority would apparently
apply to guarantees of capital plans under the Federal Deposit Insurance
Corporation Improvement Act of 1991.

On July 30, 2002, the President of the United States signed the Sarbanes-Oxley
Act of 2002 (the "Sarbanes-Oxley Act") into law. The Sarbanes-Oxley Act provides
for sweeping changes dealing with corporate governance, accounting policies and
disclosure requirements for public companies, and also for their directors and
officers. Section 302 of the Sarbanes-Oxley Act, entitled "Corporate
Responsibility for Financial Reports" required the SEC to adopt numerous new
rules to implement the requirements of the Sarbanes-Oxley Act. These
requirements include new financial reporting requirements and rules concerning
corporate governance, among other new requirements. New rules, which took effect
August 29, 2002, require a company's chief executive and chief financial
officers to certify certain financial and other information included in the
company's quarterly and annual reports. The rules also require these officers to
certify that they are responsible for establishing, maintaining and regularly
evaluating the effectiveness of the company's disclosure controls and
procedures; that they have made certain disclosures to the auditors and to the
audit committee of the board of directors about

6

the company's controls and procedures; and that they have included information
in their quarterly and annual filings about their evaluation and whether there
have been significant changes to the controls and procedures or other factors
which would significantly impact these controls subsequent to their evaluation.
See Certifications on page 62 for such certifications of the financial
statements and other information for this 2002 Form 10-K. See Item 14, "Controls
and Procedures" for the Corporation's evaluation of disclosure controls and
procedures. The Corporation is also filing as an exhibit to this report a
certificate called for under Section 906 of the Sarbanes-Oxley Act.

Certain additional information concerning regulatory guidelines for capital
adequacy and other regulatory matters is presented herein under the caption
"Capital" on pages 22-23 and "Note K - Commitments and Other Matters" and "Note
M - Regulatory Capital Matters" on pages 46, 47, and 48, respectively.

SUBSIDIARY BANKS

The banks are subject to regulation and examination primarily by the Office of
Financial and Insurance Services. As insured state banks, which are members of
the Federal Reserve Bank of Chicago, the subsidiaries are also subject to
regulation and examination by the FDIC and the Federal Reserve.

The agencies and federal and state laws extensively regulate various aspects of
the banking business including, among other things, permissible types and
amounts of loans, investments and other activities, capital adequacy, branching,
interest rates on loans and on deposits and the safety and soundness of banking
practices.

Banking laws and regulations also restrict transactions by insured banks owned
by a bank holding company, including loans to and certain purchases from the
parent holding company, non-bank and bank subsidiaries of the parent holding
company, principal shareholders, officers, directors and their affiliates, and
investments by the subsidiary banks in the shares or securities of the parent
holding company (or any of the other non-bank or bank affiliates), acceptance of
such share or securities as collateral security for loans to any borrower.

The banks are also subject to legal limitations on the frequency and amount of
dividends that can be paid to the Corporation. For example, a Michigan state
bank may not declare a cash dividend or a dividend in kind except out of net
profits then on hand after deducting all losses and bad debts, and then only if
it will have a surplus amounting to not less than 20% of its capital after the
payment of the dividend. Moreover, a Michigan state bank may not declare or pay
any cash dividend or dividend in kind until the cumulative dividends on its
preferred stock, if any, have been paid in full. Further, if the surplus of a
Michigan state bank is at any time less than the amount of its capital, before
the declaration of a cash dividend or dividend in kind, it must transfer to
surplus not less than 10% of its net profits for the preceding half-year (in the
case of quarterly or semi-annual dividends) or the preceding two consecutive
half-year periods (in the case of annual dividends).

The payment of dividends by the Corporation and the banks is also affected by
various regulatory requirements and policies, such as the requirement to
maintain adequate capital above regulatory guidelines. Federal laws impose
further restrictions on the payment of dividends by insured banks which fail to
meet specified capital levels. The FDIC may prevent an insured bank from paying
dividends if the bank is in default of payment of any assessment due to the
FDIC. In addition, payment of dividends by a bank may be prevented by the
applicable federal regulatory authority if such payment is determined, by reason
of the financial condition of such bank, to be an unsafe and unsound banking
practice. The Federal Reserve Board and the FDIC have issued policy statements
providing that bank holding companies and insured banks should generally only
pay dividends out of current operating earnings.

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These regulations and restrictions may limit the Corporation's ability to obtain
funds from its subsidiary banks for its cash needs, including payment of
dividends and operating expenses.

The activities and operations of the banks are also subject to other federal and
state laws and regulations, including usury and consumer credit laws, the
Federal Truth-in-Lending Act, Truth-in-Saving and Regulation Z of the Federal
Reserve Board and the Federal Bank Merger Act.

ITEM 2. PROPERTIES

The Corporation's offices are located in the main office building of the
Isabella Bank and Trust. Isabella Bank and Trust owns 15 branches and leases one
and Farmers State Bank owns three branches. IBT Title owns one office, and
leases one. The Corporation's facilities current, planned, and best use is for
conducting its current activities with the exception of approximately 8% of the
main office, and 45% of the Clare office, which is leased to tenants. In
management's opinion, each facility has excess capacity and is in good
condition. The following table sets forth the location of the Corporation's
offices, as well as certain additional information relating to those offices as
of December 31, 2002.

(1) includes land and buildings

(2) remodeled in 2001

(3) substantially remodeled in 1990

(4) partially remodeled in 1986 and 1988

(5) substantially remodeled in 1976 and partially remodeled in 1986

(6) substantially remodeled in 1992 and 1996

(7) substantially remodeled in 1985 and 1993

(8) leased facilities

(9) substantially remodeled in 2002

3. LEGAL PROCEEDINGS

The Corporation and its banks are not involved in any material pending legal
proceedings. The banks, because of the nature of their business, are at times
subject to numerous pending and threatened legal actions which arises out of the
normal course of their business.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted during the fourth quarter of 2002 to a vote of
security holders through the solicitation of proxies or otherwise.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERS' MATTERS

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 the 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 Bank'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 on February 28, 2002.

The following table sets forth the cash dividends paid for the following
quarters, adjusted for the 10% stock dividend paid on February 28, 2002.

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 1,700 shareholders of record.

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ITEM 6. SELECTED FINANCIAL DATA

SUMMARY OF SELECTED FINANCIAL DATA (1)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)

(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.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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.

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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.

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.

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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.

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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.

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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.

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.

17

TABLE 4. NONPERFORMING LOANS

The following loans are all the credits which require classification for state
or federal regulatory purposes:

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:

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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 expense
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.

19

Noninterest expense 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:

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.

20

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

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

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%.

21

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

TABLE 10. MATURITIES OF TIME CERTIFICATES OF DEPOSIT OVER $100,000

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.

22

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:

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.

23

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.

24

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.

ITEM 7a. 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 is estimated based on
historical experience. Time deposits have penalties which discourage early
withdrawals.

25

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

26

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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The following consolidated financial statements of the registrant and report of
independent auditors are set forth on pages 30 through 52 of this report:

Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements

The supplementary data regarding quarterly results of operations set forth under
the table named "Summary of Selected Financial Data" on Page 13 of this report.

27

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.

REHMANN ROBSON P.C.
Saginaw, Michigan
January 31, 2003

28

CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

The accompanying notes are an integral part of these consolidated financial
statements.

29

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Dollars in thousands)

The accompanying notes are an integral part of these consolidated financial
statements.

30

CONSOLIDATED STATEMENTS OF INCOME