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.

16

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:

18

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
(Dollars in thousands except per share data)

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

31

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)

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

32

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

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

33

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.

34

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 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.

35

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:

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.

36

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
Standards 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.

37

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 Corporation's 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.

38

NOTE C - INVESTMENT SECURITIES

The following is a summary of securities available for sale and held to
maturity:

The following table summarizes the fair value, realized gains, and realized
losses on sales of securities available for sale.

39

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.

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:

The following is a summary of information pertaining to impaired loans at
December 31:

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.

40

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:

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.

41

The following sets forth the estimated fair value and recorded book balance of
the Corporation's financial instruments as of December 31.

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:

Components of the consolidated provision for income taxes are as follows for the
year ended December 31:

42

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:

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:

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.

43

Net pension expense consists of the following components for the year ended
December 31:

Actuarial assumptions used in determining the projected benefit obligation and
the net periodic pension cost are as follows for the year ended December 31:

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:

44

NOTE I - BORROWED FUNDS

Borrowed funds at December 31 consist of the following obligations:

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:

45

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 year 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.

46

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 $4,881at 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:

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.

47

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.

48

NOTE N - PARENT COMPANY ONLY FINANCIAL INFORMATION

CONDENSED BALANCE SHEET

CONDENSED STATEMENTS OF INCOME

CONDENSED STATEMENTS OF CASH FLOWS

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:

The core deposit intangibles are being amortized on a straight-line basis over
nine years.

50

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

For information concerning directors and certain executive officers of the
Corporation, see "Election of Directors" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Corporation's 2003 Annual Meeting Proxy Statement
("Proxy Statement") which is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

For information concerning executive compensation, see "Executive Officers,"
"Report on Executive Compensation," "The Defined Benefit Pension Plan,"
"Compensation Committee Interlocks and Insider Participation," "Remuneration of
Directors," and "Stock Performance" in the Proxy Statement which is incorporated
herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS

For information concerning the security ownership of certain owners and
management, see "Security Ownership of Certain Beneficial Owners and Management"
in the Proxy Statement which is incorporated herein by reference.

EQUITY COMPENSATION PLAN INFORMATION

The following table provides information as of December 31, 2002, with respect
to compensation plans under which common shares of the Corporation are
authorized for issuance to directors, officers or employees in exchange for
consideration in the form of goods or services.

51

(1) Pursuant to the terms of the Deferred Director fee plan, directors of the
Corporation and its subsidiaries are required to defer at least 25% of their
earned board fees. Deferred fees are converted on a quarterly basis into stock
units of the Corporation's common stock. The fees are converted to stock units
based on the purchase price for a share of common stock under the Corporation's
Dividend Reinvestment Plan. Stock units credited to a participant's account are
eligible for stock and cash dividend as payable. Upon retirement from the board,
a participant can convert one stock unit into one share of common stock. All
authorized but unissued shares of common stock are eligible for issuance under
this Plan.

(2) The Executive Officer Deferred Salary Plan allows executive officers of the
Corporation and its subsidiaries to defer up to 5% of their annual salary to
purchase stock units. The mechanics of the plan operate exactly the same as the
Deferred Director Fee Plan as discussed in (1) above.

PART IV

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

For information concerning certain relationships and related transactions, see
"Indebtedness of and Transactions with Management" in the Proxy Statement, which
is incorporated herein by reference.

ITEM 14. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Within ninety days prior to the filing date of this Annual Report on Form 10-K,
the Corporation under the supervision and with the participation of its
management, including its Chief Executive Officer/Chief Financial Officer,
performed an evaluation of the Corporation's disclosure controls and procedures,
in accordance with Rules 13a-14 and 13a-15 of the Securities Exchange Act of
1934. Based on that evaluation, the Chief Executive Officer/Chief Financial
Officer concluded that such disclosure controls and procedures are effective to
ensure that material information relating to the Corporation, including its
consolidated subsidiaries, is made known to him, particularly during the period
for which the periodic reports are being prepared.

CHANGES IN INTERNAL CONTROLS

No significant changes were made in the Corporation's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation performed pursuant to Rule 13a-15 of the Securities Act
of 1934, referred to above.

ITEMS 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) 1. Financial Statements:

The following consolidated financial statements of IBT Bancorp are
incorporated by reference in Item 8:

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

52

2. Financial Statement Schedules:

All schedules are omitted because they are neither applicable
nor required, or because the required information is included
in the consolidated financial statements or related notes.

3. Exhibits:

3(a) Amended Articles of Incorporation(1)

3(b) Amendment to the Articles of Incorporation(3)

3(c) Amendment to the Articles of Incorporation(5)

3(d) Amendment to the Articles of Incorporation(5)

3(e) Amended Bylaws(1)

3(f) Amendment to the Bylaws(2)

3(g) Amendment to the Bylaws(3)

3(h) Amendment to the Bylaws(6)

3(i) Amendment to the Bylaws(7)

3(j) Amendments to the Bylaws

10(a) Isabella Bank & Trust Executive Supplemental Income
Agreement(3)*

10(b) Isabella Bank & Trust Deferred Compensation Plan(6)*

10(c) IBT Bancorp, Inc. and Related Companies Deferred
Compensation Plan for Directors(6)*

10(d) Isabella Bank and Trust Death Benefit Only
Agreement(7)*

21 Subsidiaries of the Registrant

23 Consent of Rehmann Robson, P.C. Independent Auditors

99.01 Certification of Chief Executive Officer and Chief
Financial Officer

(b) During the three months ended December 31, 2002, the
Corporation filed the following current report on
Form 8-K: None

(c) Exhibits: The response to this portion of Item 15 is
submitted as a separate section of this report
entitled, "Index to Exhibits"

(d) Financial Statement Schedules: None

53

ITEM 15 (CONTINUED)

(1) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K,
dated March 12, 1991, and incorporated herein by reference.

(2) Previously filed as an Exhibit to the IBT Bancorp, Inc. Form 10-K,
dated March 13, 1990, and incorporated herein by reference.

(3) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 26, 1994, and incorporated herein by reference.

(4) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 26, 1996, and incorporated herein.

(5) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 22, 2000, and incorporated herein.

(6) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 27, 2001, and incorporated herein.

(7) Previously filed as an Exhibit to IBT Bancorp, Inc. Form 10-K, dated
March 25, 2002, and incorporated herein.

* Management's Contract or Compensatory Plan or Arrangement.

54

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this annual report to be signed on
its behalf by the undersigned, thereunto duly authorized.

IBT BANCORP, INC.
(Registrant)

by: /s/ Dennis P. Angner Date: March 24, 2003
------------------------------------- ----------------
Dennis P. Angner
President and Chief Executive Officer

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

56

CERTIFICATIONS

I, Dennis P. Angner, certify that:

1. I have reviewed this annual report on Form 10-K of IBT Bancorp, Inc.

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report.

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within those
entities, particularly during the period in which this annual report is
being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and

c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.

Date: March 24, 2003 /s/ Dennis P. Angner
---------------- -----------------------------------------
President and CEO, Principal Executive
Officer and Principal Financial Officer

57

IBT Bancorp
FORM 10-K

Index to Exhibits